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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, 2008
| 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 0-21923
Wintrust Financial Corporation
(Exact name of registrant as specified in its charter)
| Illinois | 36-3873352 | |
| (State of incorporation or organization) | (I.R.S. Employer Identification No.) |
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 | The Nasdaq Stock Market LLC |
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.
o Yes þ 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.
oYes 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 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
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 the definitions of “large
accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
| 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,
2008 (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 $23.85, as reported by the Nasdaq
National Market, was $549,739,566.
As of
February 26, 2009, the registrant had 23,876,870 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
28, 2009 are incorporated by reference into Part III.
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PART I
ITEM I. BUSINESS
Wintrust Financial Corporation, an Illinois corporation (“Wintrust” or “the Company”), which was
incorporated in 1992, is a financial holding company based in Lake Forest, Illinois, with total
assets of approximately $10.7 billion at December 31, 2008. The Company engages in the business of
providing traditional community banking services, wealth management services, commercial insurance
premium financing, short-term accounts receivable financing and certain administrative services,
such as data processing of payrolls, billing and cash management services.
The Company provides community-oriented, personal and commercial banking services to customers
located in the greater Chicago, Illinois and southern Wisconsin metropolitan areas through its
fifteen wholly-owned banking subsidiaries (collectively, the “Banks”). The Company owns nine
Illinois-chartered banks, Lake Forest Bank and Trust Company (“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, the Company has one Wis-consin-chartered bank, Town Bank, and five nationally chartered
banks, Barrington Bank and Trust Company, N.A. (“Bar-rington Bank”), Crystal Lake Bank & Trust
Company, N.A. (“Crystal Lake Bank”), Advantage National Bank (“Advantage Bank”), Beverly Bank &
Trust Company, N.A. (“Beverly Bank”) and Old Plank Trail Community Bank, N.A. (“Old Plank Trail
Bank”).
The Company provides a full range of wealth management services through three separate
subsidiaries, including Wayne Hummer Trust Company, N.A. (“WHTC”), Wayne Hummer Investments, LLC
(“WHI”), a broker-dealer and subsidiary of North Shore Bank and Wayne Hummer Asset Management
Company (“WHAMC”), a registered investment adviser. The Company acquired WHI and WHAMC in February
2002. WHTC, WHI and WHAMC are referred to collectively as “the Wayne Hummer Companies.”
The Company provides financing for the payment of commercial insurance premiums (“premium finance
receivables”), on a national basis, through First Insurance Funding Corporation (“FIFC”), a
wholly-owned subsidiary of Lake Forest Bank. On November 1, 2007, the Company expanded its
insurance premium finance business with FIFC’s acquisition of Broadway Premium Funding Corporation
(“Broadway”), a commercial finance company headquartered in New York City. Broadway’s products are
marketed through insurance agents and brokers to their small to mid-size corporate clients.
Broadway’s clients are located primarily in the northeastern United States and California. Broadway
was merged into FIFC in November 2008 and currently operates as a division of FIFC.
The Company also provides short-term accounts receivable financing (“Tricom finance receivables”)
and out-sourced administrative services, such as data processing of payrolls, billing and cash
management services, to clients in the temporary staffing industry located throughout the United
States, through Tricom, Inc. of Milwaukee (“Tricom”), a wholly-owned subsidiary of Hinsdale Bank.
Wintrust Mortgage Corporation engages in the origination and purchase of residential mortgages for
sale into the secondary market and provides the document preparation and other loan closing
services to a network of mortgage brokers. The Company acquired SGB Corporation d/b/a WestAmerica
Mortgage Company (“WestAmerica”) and its affiliate Guardian Real Estate Services, Inc.
(“Guardian”), in May 2004. In 2008, the Company changed the name of WestAmerica to Wintrust
Mortgage Corporation, and liquidated Guardian Real Estate Services. In
December 2008, Wintrust Mortgage Corporation acquired certain assets and assumed certain
liabilities of the mortgage banking business of Professional Mortgage Partners (“PMP”). Wintrust
Mortgage Corporation currently maintains origination offices in ten states, including
Illinois, and originates loans in other states through wholesale and correspondent offices.
Wintrust Mortgage Corporation is a wholly-owned subsidiary of Barrington Bank. Mortgage banking
operations are also performed within each of the Banks.
As a mid-size financial services company, management expects to benefit from greater access to
financial and managerial resources while maintaining its commitment to local decision-making and to
its community banking philosophy. Management also believes the Company is positioned to compete
more effectively with other larger and more diversified banks, bank holding companies and other
financial services companies as it continues to execute its growth strategy through additional
branch openings and de novo bank formations, expansion of its wealth management and premium finance
businesses, development of additional specialized earning asset niches and potential acquisitions
of other community-oriented banks, wealth management units or specialty finance companies.
Community Banking
The Company provides 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
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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.
Wintrust developed its banking franchise through the 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 was founded in December 1991 to service the Lake Forest and Lake Bluff communities.
Following the same business plan, the Company started Hinsdale Bank in 1993 to service the
communities of Hinsdale and Burr Ridge, North Shore Bank in 1994 to service the communities of
Wilmette and Kenilworth, Libertyville Bank in 1995 to service the communities of Libertyville,
Ver-non Hills and Mundelein, Barrington Bank in 1996 to service the greater Barrington/Inverness
areas, Crystal Lake Bank in 1997 to service the communities of Crystal Lake and Cary, Northbrook
Bank in 2000 to service the communities of Northbrook, Glenview and Deerfield, Beverly Bank in 2004
to service the communities of Beverly Hills and Morgan Park on the southwest side of Chicago and
Old Plank Trail Bank in 2006 to serve the communities of New Lenox, Mokena and Frankfurt. Since the
initial openings of these nine banks, each of them has opened additional branches in adjacent and
nearby communities to expand their franchise.
Wintrust completed its first bank acquisitions in the fourth quarter of 2003, with the acquisitions
of Advantage Bank in October 2003 and Village Bank in December 2003. In September 2004, Wintrust
acquired Northview Financial Corporation and its wholly-owned subsidiary, Northview Bank & Trust
Company, with banking locations in Northfield, Mundelein and Wheaton, Illinois, and in December
2004, Wintrust relocated the bank’s charter to its Wheaton branch, renamed the bank Wheaton Bank &
Trust Company and transferred its Mundelein branch to Libertyville Bank and its Northfield branches
to Northbrook Bank. In October 2004, Wintrust acquired Town Bankshares, Ltd. and its wholly-owned
subsidiary, Town Bank, with locations in Delafield and Madison, Wisconsin. Town Bank represents the
Company’s first banking operation outside of Illinois. In January 2005, the Company completed its
acquisition of Antioch Holding Company and its wholly-owned subsidiary, State Bank of The Lakes,
and on March 31, 2005 the Company acquired First Northwest Bancorp, Inc. and its wholly-owned
subsidiary First Northwest Bank. First Northwest Bank was merged into Village Bank in May 2005 as
both banks were located in and served the same market area. In May 2006, the Company completed its acquisition of Hinsbrook Bancshares, Inc. and its wholly-owned subsidiary, Hinsbrook
Bank & Trust, with five banking locations in the western suburbs of Chicago, including Willowbrook,
Downers Grove, Darien, Glen Ellyn and Geneva. In November 2006, Wintrust relocated Hinsbrook Bank’s
charter to its Geneva branch, renamed the bank St. Charles Bank & Trust Company, and transferred
the Willow brook, Downers Grove and Darien branches to Hinsdale Bank and the Glen Ellyn branch to
Wheaton Bank. These branch transactions were done to align the banking locations within the same
market area under one bank charter. As of December 31, 2008, the Company had 79 banking locations.
All of the banks acquired by Wintrust share the same commitment to community banking and customer
service as the banks the Company organized. Each of the acquired banks, with the exception of
Hinsbrook Bank (currently St. Charles Bank) and State Bank of The Lakes, began operations within
the same time frame in which Wintrust organized its Banks. The charters of Hinsbrook Bank and State
Bank of The Lakes, however, date back to 1987 and 1894, respectively.
The deposits of each of the Banks are insured by the Federal Deposit Insurance Corporation (“FDIC”)
up to the applicable limits. The standard maximum deposit insurance amount was $100,000 per
non-retirement account capacity, subject to possible cost-of-living adjustments after
2010, and up to $250,000 for certain retirement accounts. However, as part of the Emergency
Economic Stabilization Act of 2008, enacted on October 3, 2008, the limit on deposit insurance has
been temporarily increased to $250,000 per depositor. The increase is scheduled to expire on
December 31, 2009.
In addition, 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.
Specialty Lending
The Company conducts its specialty lending business through indirect non-bank subsidiaries and
divisions of its Banks.
FIFC, headquartered in Northbrook, Illinois, is the Company’s most significant specialized lending
niche. As previously noted, Broadway was merged into FIFC in November 2008. References to FIFC’s
business, operations and results include those of Broadway. 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
| 4 | Wintrust Financial Corporation |
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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. Due to the indirect nature of this lending and because the borrowers are located
nationwide, this business may be more susceptible to third party fraud. The majority of the loans
originated by FIFC have been purchased by the Banks in order to more fully utilize their lending
capacity. These loans generally provide the Banks with higher yields than alternative investments.
During 2008, FIFC originated approximately $3.2 billion of premium finance receivables and sold
approximately $218 million, or 7%, of the premium finance receivables generated during the year to
unrelated third parties, with servicing retained. The Company has been selling these loans to third
parties since 1999. Selling these loans to third parties, allows the Company to originate loans
without compromising the liquidity position of the Company. FIFC is licensed or otherwise qualified
to do business as an insurance premium finance company in all 50 states and the District of
Columbia.
In 2007, FIFC began financing life insurance policy premiums for high net-worth individuals. These
loans are originated through independent insurance agents with assistance from financial advisors
and legal counsel. The life insurance policy is the primary form of collateral, in addition, these
loans can be secured with a letter of credit or certificate of deposit.
Tricom was acquired by Hinsdale Bank in October 1999 as part of the Company’s strategy to pursue
specialty lending niches and is an operating subsidiary of Hinsdale Bank. It is located in the
Milwaukee, Wisconsin metropolitan area and has been in business since 1989. Through Tricom, the
Company provides 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 2008,
Tricom processed payrolls with associated client billings of approximately $312 million and
contributed approximately $6.3 million of revenue, net of interest expense, to the Company.
The Company also engages in several other specialty lending areas through divisions of 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 and Lake Forest Bank’s
franchise lending program which provides lending primarily to restaurant franchises. Hinsdale Bank
operated an indirect auto lending program which originated new and used automobile loans that were
purchased by the Banks. In the third quarter of 2008, the Company exited this business due to
competitive pricing pressures, the current economic environment and the retirement of the founder
of this niche business. Hinsdale Bank will continue to service its existing portfolio generated by
this business for the duration of the credits. The loans were generated through a network of
automobile dealers located in the Chicago area, secured by new and used vehicles and diversified
among many individual borrowers. At December 31, 2008, indirect auto loans totaled $165.9 million
and comprised approximately 2.2% of the Company’s loan portfolio. These other specialty loans
(including the indirect auto loans) generated through divisions of the Banks comprised
approximately 4.0% of the Company’s loan and lease portfolio at December 31, 2008.
Wintrust Mortgage Corporation, formerly WestAmerica, was acquired by Barrington Bank in May 2004 to
enhance and diversify the Company’s revenue sources and earning asset base. In December 2008,
Wintrust Mortgage Corporation acquired certain assets and assumed certain liabilities of PMP to
expand its retail loan origination capabilities. Wintrust Mortgage Corporation engages primarily in
the origination and purchase of residential mortgages for sale into the secondary market, sells its
loans servicing released and does not currently engage in mortgage
loan servicing. The Company, through its Banks, does engage in loan servicing as a portion of the
loans sold by the Banks into the secondary market are sold to the Federal National Mortgage
Association (“FNMA”) with the servicing of those loans retained. Wintrust Mortgage Corporation
maintains principal origination offices in seven states, including Illinois, and originates loans
in other states through wholesale and correspondent offices. Wintrust Mortgage Corporation also
established offices at several of the Banks and provides the Banks with the ability to use an
enhanced loan origination and documentation system. This allows Wintrust Mortgage Corporation and
the Banks to better utilize existing operational capacity and improve the product offering for the
Banks’ customers.
Wealth Management Activities
The Company currently offers a full range of wealth management services through three separate
subsidiaries, including trust and investment services, asset management and securities brokerage
services, marketed primarily under the Wayne Hummer name. Wintrust acquired WHI and WHAMC, which
are headquartered in Chicago, in February 2002. To further expand the Company’s wealth management
business, in February 2003, the Company acquired Lake Forest Capital Management Company, a
registered investment adviser with approximately $300 million of assets under management upon
acquisition. Lake Forest Capital Management Company was merged into WHAMC.
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WHTC, the Company’s trust subsidiary, offers trust and investment management services to clients
through offices located in downtown Chicago and at various banking offices of the Company’s fifteen
banks. Assets under administration and/or management by WHTC as of December 31, 2008 were
approximately $1.2 billion. WHTC is subject to regulation, supervision and regular examination by
the OCC.
WHI, the Company’s registered broker/dealer subsidiary, has been in operations since 1931. Through
WHI, the Company provides a full range of private client and securities brokerage services to
clients located primarily in the Midwest. Assets held in WHI client accounts were approximately
$4.0 billion at December 31, 2008. WHI is headquartered in downtown Chicago, operates an office in
Appleton, Wisconsin, and as of December 31, 2008, established branch locations in offices at a
majority of the Company’s 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.
WHAMC, a registered investment adviser, provides money management services and advisory services to
individuals and institutional municipal and tax-exempt organizations. WHAMC also provides portfolio
management and financial supervision for a wide range of pension and profit-sharing plans. WHAMC
had approximately $407 million of assets under management at December 31, 2008. In addition, WHAMC
also provides money management and advisory services to WHTC.
Competition
The Company competes in the commercial banking industry through the Banks in the communities each
serves. 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.
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 the Company’s decentralized corporate structure to its advantage, in 2008, the
Company announced the creation of its MaxSafe® deposit accounts, which provide customers with
expanded FDIC insurance coverage by spreading a customer’s deposit across its fifteen bank
charters. This product differentiates the Company’s Banks from many of its competitors that have
consolidated their bank charters into branches. Some of the financial institutions and financial
services organizations with which the Banks compete are not subject to the same degree of
regulation as imposed on financial holding companies, Illinois or Wisconsin state banks and
national banking associations. In addition, the larger banking organizations have significantly
greater resources than those available to the Banks. As a result, such competitors have advantages
over the Banks in providing certain non-deposit services. Management views technology as a great
equalizer to offset some of the inherent advantages of its significantly larger competitors.
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 their
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. Management believes that its commitment to service also distinguishes it from its
competitors.
The Company’s wealth management companies (WHTC, WHI and WHAMC) compete with more established
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.
The Company believes it 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. The Company continues to recruit and hire experienced professionals from the more
established Chicago area wealth management companies, which is expected to help in attracting new
customer relationships.
Wintrust Mortgage Corporation, 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. The Company
believes 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.
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 adversely affected.
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Employees
At December 31, 2008, the Company and its subsidiaries employed a total of 2,326
full-time-equivalent employees. The Company provides its employees with comprehensive medical and
dental benefit plans, life insurance plans, 401(k) plans and an employee stock purchase plan. The
Company considers its relationship with its employees to be good.
Available Information
The Company’s internet address is www.wintrust.com. The Company makes available at this address,
free of charge, its annual report on Form 10-K, its annual reports to shareholders, quarterly
reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable
after such material is electronically filed with, or furnished to, the SEC.
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, WHTC, WHI, WHAMC, Tricom and
Wintrust Mortgage Corporation. 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. 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 advisor regulations.
Extraordinary Government Programs
Troubled Asset Relief Program. On October 3, 2008, the Emergency Economic Stabilization Act of 2008
(“EESA”) was enacted, which, among other things, provided the United States Department of the
Treasury (“Treasury”) access to up to $700 billion to stabilize the U.S. banking system. On October
14, 2008, Treasury announced its intention to inject capital into nine large U.S. financial
institutions under the Capital Purchase Program (the “CPP”) as part of the Troubled Asset Relief
Program (“TARP”) implementing the EESA, and since has injected capital into many other financial
institutions.
On December 19, 2008, the Company entered into an agreement with Treasury to participate in the
CPP, pursuant to which the Company issued and sold preferred stock and a warrant to Treasury, in
exchange for aggregate consideration of $250 million. Treasury is permitted to amend the agreement
unilaterally in order to comply with any changes in applicable federal statutes.
The terms of the preferred stock and warrant impose certain restrictions on the Company. In
particular, the Company may not increase dividends from the last semiannual cash dividend per share
($0.18) declared on common stock prior to October 14, 2008. These restrictions will terminate on
the earlier of the third anniversary of the issuance of the preferred stock to Treasury, or the
date that the preferred stock has been redeemed by the Company or transferred by
Treasury to third parties. After that same date, the Company may also repurchase from Treasury at
fair market value the warrant and any common stock received upon exercise by Treasury. In addition,
the ability of the Company to declare or pay dividends or distributions on, or repurchase, redeem
or otherwise acquire for consideration, shares of its common stock or other securities will be
subject to restrictions in the event that the Company fails to declare and pay full dividends (or
declare and set aside a sum sufficient for payment thereof) on the preferred stock issued to
Treasury. In the purchase agreement, the Company agreed that, until such time as Treasury ceases to
own any debt or equity securities of the Company acquired pursuant to the purchase agreement, the
Company will take all necessary action to ensure that its compensation and benefit plans with
respect to its senior executive officers comply with Section 111(b) of the EESA. On February 17,
2009, President Obama signed into law the American Recovery and Reinvestment Act of 2009, which
contains a provision making more stringent the limitations on executive compensation. For
additional information on the terms of the preferred stock and the warrant, see “Management’s
Discussion and Analysis of Financial Condition and Results of Operations — Treasury Capital
Purchase Program.”
Temporary Liquidity Guarantee Program. FDIC issued a final rule establishing the Temporary
Liquidity Guarantee Program (“TLGP”) on November 21, 2008. The TLGP applies to, among others, all
U.S. depository institutions insured by the FDIC and all U.S. bank holding companies, unless they
have opted out of the TLGP or the FDIC has terminated their participation. The Company and the
Banks have not opted out of the TLGP, and their participation has not been terminated. Under the
TLGP, the FDIC will guarantee certain senior unsecured debt of the Company and the Banks, as well
as noninterest-bearing transaction account deposits at the Banks, and in return for these
guarantees the bank pays the FDIC a fee based on the amount of the deposit or the amount and
maturity of the debt. Under the debt guarantee component of the TLGP, the FDIC will pay the unpaid
principal and interest on an FDIC-guaranteed debt instrument upon the uncured failure of
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the participating entity to make a timely payment of principal or interest in accordance with the
terms of the instrument. The Company and the Banks have not issued any debt subject to the TLGP
guarantee. Under the transaction account guarantee component of the TLGP, all noninterest-bearing
transaction accounts maintained at the Banks are insured in full by the FDIC until December 31,
2009, regardless of the standard maximum deposit insurance amount.
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
Secretary of the Illinois Department of Financial and Professional Regulation (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 WHTC 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 of Financial Institutions (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 Wayne Hummer Companies. 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. Banking subsidiaries of financial holding
companies are required to 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
engagein any activities not permissible for a bank holding company that is not a financial holding
company. Moreover, during the period of noncompliance, 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, this limitation applies until the
Community Reinvestment Act rating improves.
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.
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It is 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 takes 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.
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 1 Capital also includes the preferred stock issued to
Treasury as part of the CPP. 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. Regulations proposed by the federal banking regulators
referred to as the Basel II and Basel IA proposals could alter the capital adequacy frameworks for
banking organizations such as the Company.
As of December 31, 2008, the Company’s total capital to risk-weighted assets ratio was 13.07%, its
Tier 1 Capital to risk-weighted asset ratio was 9.45% and its leverage ratio was 8.58%. 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, 2008, 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 prior year is sufficient to fully fund the dividends and
(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.
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.
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,
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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 WHTC) 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 FDIC 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 undercapital-ized. Institutions that are not adequately capitalized may be subject to a
variety of supervisory actions including, but not limited to, restrictions on growth, investments
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 greater 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 apply to the Company as a result of its participation in
the CPP. See Extraordinary Government Programs — Troubled Asset Relief Program. 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 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
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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”). 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. Each institution’s assessment rate depends on the capital category and supervisory
category to which it is assigned. During 2008, the Banks recognized expense for deposit insurance
premiums in the aggregate amount of $5.6 million. As part of the EESA, the limit on deposit
insurance has been temporarily increased to $250,000 per depositor. The increase is scheduled to
expire on December 31, 2009.
In November 2006, the FDIC adopted a new risk-based insurance assessment system, which was
effective January 1, 2007, designed to tie what banks pay for deposit insurance more closely to the
risks they pose. The FDIC also adopted a new base schedule of rates that the FDIC can adjust up or
down, depending on the needs of the DIF, and set initial premiums for 2007 that range from 5 cents
per $100 of domestic deposits in the lowest risk category to 43 cents per $100 of domestic deposits
for banks in the highest risk category. The assessment system has resulted in increased annual
assessments on the deposits of the Company’s bank subsidiaries of 5 to 7 cents per $100 of
deposits. An FDIC credit available to the Company’s bank subsidiaries for prior contributions
offset some of the assessment increase in 2007. Significant increases in the insurance assessments
of the Company’s bank subsidiaries will increase the Company’s costs once the credit is fully
utilized.
In October 2008, the FDIC issued a proposal to revise assessment rates, and to change its system
for risk-based assessments. For small Risk Category 1 institutions, like the Banks, the FDIC
proposed to introduce a new financial ratio into the financial ratios method to include brokered
deposits (those in excess of 10 percent of domestic deposits) that are used to fund rapid asset
growth, and revise the uniform amount and the pricing multipliers. The FDIC also proposed to
introduce three adjustments that could be made to an institution’s initial base assessment rate: a
potential decrease of up to 2 basis points for long-term unsecured debt, including senior and
subordinated debt and, for small institutions, a portion of Tier 1 capital; a potential increase
not to exceed 50% of an institution’s assessment rate before the increase for secured liabilities
in excess of 15% of domestic deposits; and, for non-Risk Category I institutions, a potential
increase not to exceed 10 basis points for brokered deposits in excess of 10% of domestic deposits.
The FDIC proposed raising the current assessment rates uniformly by 7 basis points for the
assessment for the first quarter of 2009 only, resulting in annualized assessment rates for Risk
Category I institutions of 12 to 14 basis points. On December 16, 2008, the FDIC finalized that
proposal. The FDIC has further proposed initial base assessment rates, to be effective April 1,
2009, of 10 to 14 basis points for Risk Category I institutions which, after the effect of
potential adjustments, would result in annualized risk assessment rates ranging from 8 to 21 basis
points. The FDIC has indicated that a final rule would be issued in early 2009 to be effective on
April 1, 2009.
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 1.14 cents
per $100 of deposits for the first quarter of 2009.
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.
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,
may not pay dividends in an amount greater than their current net profits after deducting losses
and
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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 WHTC 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 WHTC to pay dividends may
be affected by the various minimum capital requirements and the capital and non-capital standards
established under the FDIA, as described below. 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.
Additionally, as discussed above under the heading “Extraordinary Government Programs — Troubled
Asset Relief Program” the Company’s participation in the Treasury’s CPP has placed additional
limitations on the Company’s ability to declare and pay dividends.
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 U.S. Department of 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 Bank 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 Bank 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 Bank 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 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
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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 Bank 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 savings and loan holding company acquisitions. 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). For 2008, the first $9.3 million of otherwise reservable
balances (subject to adjustments by the Federal Reserve for each Bank) were exempt from the reserve
requirements. A 3% reserve ratio applied to balances over $9.3 million up to and including $43.9
million and a 10% reserve ratio applied to balances in excess of $43.9 million. The Banks were in
compliance with the applicable requirements in 2008. In 2009, the first $10.3 million of otherwise
reservable balances (subject to adjustments by the Federal Reserve for each Bank) will be exempt
from the reserve requirements. A 3% reserve ratio will apply to balances over $10.3 million up to
and including $44.4 million and a 10% reserve ratio applied to balances in excess of $44.4 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. Undercapi-talized 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
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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 Soldiers’ and
Sailors’ Civil Relief Act and the Home Mortgage Disclosure Act. Wintrust Mortgage Corporation 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. |
In 2008, federal regulators finalized a number of significant amendments to the regulations
implementing these statutes. The Federal Reserve has adopted new rules applicable to the Banks (and
Wintrust Mortgage Corporation) that govern disclosures for mortgage loans and for open-end credit,
and rules applicable to the Banks that define unfair and deceptive practices for credit card
lending. The Federal Reserve has also proposed new rules to govern practices and disclosures with
respect to overdraft programs.
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 2009 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, would require prior Federal Reserve approval under the BHC
Act.
Broker-Dealer and Investment Adviser Regulation
WHI and WHAMC are subject to extensive regulation under federal and state securities laws. WHI is a
registered as a broker-dealer with the Securities and Exchange Commission (“SEC”) and in all 50
states, the District of Columbia and the U.S. Virgin Islands. Both WHI and WHAMC 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
American Stock Exchange, 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 WHAMC are registered only with the SEC as investment advisers, but certain of their advisory
personnel are subject to regulation by state securities regulatory agencies.
As a result of federal and state registrations and SRO memberships, WHI is subject to over-lapping
schemes of regulation which cover all aspects of its securities businesses. Such regulations cover,
among other things, minimum net capital requirements; uses and safekeeping of clients’ funds;
recordkeeping
| 14 | Wintrust Financial Corporation |
Table of Contents
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 the timing of
proprietary trading in relation to customers’ trades; 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 a registered broker-dealer, WHI is subject to the SEC’s net capital rule and the net capital
requirements of various securities exchanges. 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 provides protection for customers of broker-dealers against
losses in the event of the liquidation of a broker-dealer. SIPC protects customers’ securities
accounts held by a broker-dealer up to $500,000 for each eligible customer, subject to a limitation
of $100,000 for claims for cash balances.
WHAMC, 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.
In 2008, there has been significant disruption of credit markets on a national and global scale.
Liquidity in credit markets has been severely depressed. Major financial institutions have 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
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. 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. These
programs and additional programs may or may not continue in 2009. 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 programs to mitigate foreclosure
have been proposed in Congress and by federal regulators, and may affect the Company in 2009.
Supplemental Statistical Data
The following statistical information is provided in accordance with the requirements of The
Exchange Act Industry Guide 3, Statistical Disclosures 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.
| 2008 Annual Report | 15 |
Table of Contents
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, 2008, 2007 and 2006 (in thousands):
| 2008 | 2007 | 2006 | ||||||||||
U.S. Treasury |
$ | — | 33,109 | 34,072 | ||||||||
U.S. Government agencies |
298,729 | 322,043 | 690,574 | |||||||||
Municipal |
59,295 | 49,127 | 49,209 | |||||||||
Corporate notes and other debt |
28,041 | 42,802 | 60,080 | |||||||||
Mortgage-backed |
285,307 | 688,846 | 866,288 | |||||||||
Federal Reserve/FHLB stock and other equity securities |
113,301 | 167,910 | 139,493 | |||||||||
Total available-for-sale securities |
$ | 784,673 | 1,303,837 | 1,839,716 | ||||||||
Tables presenting the carrying amounts and gross unrealized gains and losses for securities
available-for-sale at December 31, 2008 and 2007, are included by reference to Note 3 to the
Consolidated Financial Statements included in this Form 10-K.
Maturities of available-for-sale securities as of December 31, 2008, by maturity distribution, are
as follows (in thousands):
| Federal | ||||||||||||||||||||||||||||
| Reserve / | ||||||||||||||||||||||||||||
| From 5 | FHLB stock | |||||||||||||||||||||||||||
| Within | From 1 | to 10 | After | Mortgage- | and other | |||||||||||||||||||||||
| 1 year | to 5 years | years | 10 years | backed | equities | Total | ||||||||||||||||||||||
U.S. Treasury |
$ | — | — | — | — | — | — | — | ||||||||||||||||||||
U.S. Government agencies |
163,800 | 44,122 | 90,807 | — | — | — | 298,729 | |||||||||||||||||||||
Municipal |
10,641 | 16,293 | 16,817 | 15,544 | — | — | 59,295 | |||||||||||||||||||||
Corporate notes and other debt |
2,420 | 7,916 | 12,560 | 5,145 | — | — | 28,041 | |||||||||||||||||||||
Mortgage-backed(1) |
— | — | — | — | 285,307 | — | 285,307 | |||||||||||||||||||||
Federal Reserve/FHLB stock
and other equity securities |
— | — | — | — | — | 113,301 | 113,301 | |||||||||||||||||||||
Total available-for-sale securities |
$ | 176,861 | 68,331 | 120,184 | 20,689 | 285,307 | 113,301 | 784,673 | ||||||||||||||||||||
| (1) | The maturities of mortgage-backed securities may differ from contractual maturities since the underlying mortgages may be called or prepaid without penalties. Therefore, these securities are not included within the maturity categories above. |
The weighted average yield for each range of maturities of securities, on a tax-equivalent basis,
is shown below as of December 31, 2008:
| Federal | ||||||||||||||||||||||||||||
| Reserve / | ||||||||||||||||||||||||||||
| From 5 | FHLB stock | |||||||||||||||||||||||||||
| Within | From 1 | to 10 | After | Mortgage- | and other | |||||||||||||||||||||||
| 1 year | to 5 years | years | 10 years | backed | equities | Total | ||||||||||||||||||||||
U.S. Treasury |
— | — | — | — | — | — | — | |||||||||||||||||||||
U.S. Government agencies |
2.66 | % | 2.55 | % | 2.48 | % | — | — | — | 2.59 | % | |||||||||||||||||
Municipal |
4.55 | % | 5.51 | % | 6.03 | % | 7.49 | % | — | — | 6.01 | % | ||||||||||||||||
Corporate notes and other debt |
7.75 | % | 6.19 | % | 8.86 | % | 4.78 | % | — | — | 7.00 | % | ||||||||||||||||
Mortgage-backed(1) |
— | — | — | — | 5.67 | % | — | 5.67 | % | |||||||||||||||||||
Federal Reserve/FHLB stock
and other equity securities |
— | — | — | — | — | 3.21 | % | 3.21 | % | |||||||||||||||||||
Total available-for-sale securities |
2.82 | % | 3.84 | % | 3.74 | % | 6.57 | % | 5.67 | % | 3.21 | % | 4.22 | % | ||||||||||||||
| (1) | The maturities of mortgage-backed securities may differ from contractual maturities since the underlying mortgages may be called or prepaid without penalties. Therefore, these securities are not included within the maturity categories above. |
| 16 | Wintrust Financial Corporation |
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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):
| 2008 | 2007 | 2006 | 2005 | 2004 | ||||||||||||||||||||||||||||||||||||
| % of | % of | % of | % of | % of | ||||||||||||||||||||||||||||||||||||
| Amount | Total | Amount | Total | Amount | Total | Amount | Total | Amount | Total | |||||||||||||||||||||||||||||||
Commercial and commercial real estate |
$ | 4,778,664 | 63 | % | 4,408,661 | 65 | 4,068,437 | 63 | 3,161,734 | 61 | 2,465,852 | 57 | ||||||||||||||||||||||||||||
Home equity |
896,438 | 12 | 678,298 | 10 | 666,471 | 10 | 624,337 | 12 | 574,668 | 13 | ||||||||||||||||||||||||||||||
Residential real estate |
262,908 | 3 | 226,686 | 3 | 207,059 | 3 | 275,729 | 5 | 248,118 | 5 | ||||||||||||||||||||||||||||||
Premium finance receivables |
1,346,586 | 18 | 1,078,185 | 16 | 1,165,846 | 18 | 814,681 | 16 | 770,792 | 18 | ||||||||||||||||||||||||||||||
Indirect consumer loans |
175,955 | 2 | 241,393 | 4 | 249,534 | 4 | 203,002 | 4 | 171,926 | 4 | ||||||||||||||||||||||||||||||
Tricom finance receivables |
17,320 | — | 27,719 | — | 43,975 | 1 | 49,453 | 1 | 29,730 | 1 | ||||||||||||||||||||||||||||||
Consumer and other loans |
143,198 | 2 | 140,660 | 2 | 95,158 | 1 | 84,935 | 1 | 87,260 | 2 | ||||||||||||||||||||||||||||||
Total loans, net of unearned income |
$ | 7,621,069 | 100 | % | 6,801,602 | 100 | 6,496,480 | 100 | 5,213,871 | 100 | 4,348,346 | 100 | ||||||||||||||||||||||||||||
Commercial and commercial real estate loans. The commercial loan component is comprised primarily
of commercial real estate loans, lines of credit for working capital purposes, and term loans for
the acquisition of equipment. Commercial real estate is predominantly owner occupied and secured by
a first mortgage lien and assignment of rents on the property. Working capital lines are generally
renewable annually and supported by business assets, personal guarantees and, oftentimes,
additional collateral. Equipment loans are generally secured by titles and/or U.C.C. filings. Also
included in this category are 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. The vast majority of commercial loans are made within the Banks’ immediate market areas.
The increase in this loan category can be attributed to an emphasis on business development calling
programs, opening of additional banking facilities, recruitment of additional experienced
commercial business lending officers and superior servicing of existing commercial loan customers
which has increased referrals.
In addition to the home mortgages originated by the Banks, the Company participates in mortgage
warehouse lending by providing interim funding to unaffiliated mortgage brokers to finance
residential mortgages originated by such brokers for sale into the secondary market. The Company’s
loans to the mortgage brokers are secured by the business assets of the mortgage companies as well
as the underlying mortgages, the majority of which are funded by the Company on a loan-by-loan
basis after they have been pre-approved for purchase by third party end lenders who forward payment
directly to the Company upon their acceptance of final loan documentation. In addition, the Company
may also provide interim financing for packages of mortgage loans on a bulk basis in circumstances
where the mortgage brokers desire to competitively bid a number of mortgages for sale 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.
Home equity loans. The Company’s home equity loan products are generally structured as lines of
credit secured by first or second position mortgage liens on the underlying property with
loan-to-value ratios not exceeding 80%, including prior liens, if any. The Banks’ home equity loans
feature competitive rate structures and fee arrangements. As a result of deteriorating economic
conditions and declining real estate values in 2008, the Company has been actively managing its
home equity portfolio to ensure that diligent pricing, appraisal and other underwriting activities
continue to exist. The Company has not sacrificed asset quality or pricing standards to grow
outstanding loan balances.
Residential real estate mortgages. The residential real estate category 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. The
adjustable rate mortgages are
often non-agency conforming, may have terms based on differing indexes, and relate to properties
located principally in the Chicago and southern Wisconsin metropolitan areas or vacation homes
owned by local residents. Adjustable-rate mortgage loans decrease, but do not eliminate, the risks
associated with changes in interest rates. Because periodic and lifetime caps limit the interest
rate adjustments, the value of adjustable-rate mortgage loans fluctuates inversely with changes in
interest rates. In addition, as interest rates increase, the required payments by the borrower
increases, thus increasing the potential for default. The Company does not generally originate
loans for its own portfolio with long-term fixed rates due to interest rate risk considerations.
| 2008 Annual Report | 17 |
Table of Contents
Through the Banks and the Company’s Wintrust Mortgage
subsidiary, the Company can accommodate customer
requests for fixed rate loans by originating and
selling these loans into the secondary market, in
connection with which the Company receives fee income,
or by selectively including certain of these loans
within the Banks’ own portfolios. A portion of the
loans sold by the Company into the secondary market
were sold to FNMA with the servicing of those loans
retained. The amount of loans serviced for FNMA as of
December 31, 2008 and 2007 was $528 million and $488
million, respectively. All other mortgage loans sold
into the secondary market were sold without the
retention of servicing rights.
Premium finance receivables. The Company originates
premium finance receivables primarily through FIFC. In
November 2007, the Company acquired Broadway, a
commercial finance company that specializes in
financing insurance premiums for corporate entities. On
October 1, 2008, Broadway merged with its parent, FIFC,
but continues to utilize the Broadway brand in serving
its segment of the marketplace. Most of the receivables
originated by FIFC are sold to the Banks and retained
within their loan portfolios. During 2008, FIFC
originated approximately $3.2 billion of loans. FIFC
began selling loans to an unrelated third party in
1999. Sales of these receivables are dependent upon the
market conditions impacting both sales of these loans
and the opportunity for securitizing these loans as
well as liquidity and capital management
considerations. In 2008 and 2007, the Company sold
approximately $218 million and $230 million of premium
finance receivables to unrelated third parties and
recognized gains of $2.5 million and $2.0 million
related to this activity. As of December 31, 2008 and
2007, the balance of these receivables that FIFC
services for others totaled approximately $38 million
and $220 million, respectively. All premium finance
receivables are subject to the Company’s stringent
credit standards, and substantially all such loans are
made to commercial customers.
FIFC generally offers financing of insurance premiums
primarily to commercial purchasers of property and
casualty and liability insurance who desire to pay
insurance premiums on an installment basis. FIFC
markets its financial services primarily by
establishing and maintaining relationships with medium
and large insurance agents and brokers and by offering
a high degree of service and innovative products.
Senior management is significantly involved in FIFC’s
marketing efforts, currently focused almost exclusively
on commercial accounts, except for loans to irrevocable
life insurance trusts, discussed below. Loans are
originated by FIFC’s own sales force working with
insurance agents and brokers throughout the United
States. As of December 31, 2008, FIFC had the
necessary licensing or other regulatory approvals to do
business in all 50 states and the District of Columbia.
In financing insurance premiums, the Company does not
assume the risk of loss normally borne by insurance
carriers. Typically, the insured buys an insurance
policy from an independent insurance agent or broker
who offers financing through FIFC. The insured
typically makes a down payment of approximately 15% to
25% of the total premium and signs a premium finance
agreement for the balance due, which FIFC disburses
directly to the insurance carrier or its agents to
satisfy the unpaid premium amount. The initial average
balance of premium finance loans originated during 2008
was approximately $26,000 and the average term of the
agreements was approximately 10 months. As the insurer
earns the premium ratably over the life of the policy,
the unearned portion of the premium secures payment of
the balance due to FIFC by the insured. Under the terms
of the Company’s standard form of financing contract,
the Company has the power to cancel the insurance
policy if there is a default in the payment on the
finance contract and to collect the unearned portion of
the premium from the insurance carrier. In the event of
cancellation of a policy, the cash returned in payment
of the unearned premium by the insurer should be
sufficient to cover the loan balance and generally the
interest and other charges due as well. The major risks
inherent in this type of lending are (1) the risk of
fraud on the part of an insurance agent whereby the
agent fraudulently fails to forward funds to the
insurance carrier or to FIFC, as the case may be; (2)
the risk that the insurance carrier becomes insolvent
and is unable to return unearned premiums related to
loans in default; (3) for policies that are subject to
an audit by the insurance carrier (e.g. workers
compensation policies where the insurance carrier can
audit the insured actual payroll records), the risk
that the initial underwriting of the policy was such
that the premium paid by the insured is not sufficient
to cover the entire return premium in the event of
default; and (4) that the borrower is unable to
ultimately satisfy the debt in the event the returned
unearned premium is insufficient to retire the loan.
FIFC has established underwriting procedures to reduce
the potential of loss associated with the
aforementioned risks and has systems in place to
continually monitor conditions that would indicate an
increase in risk factors and to act on situations where
the Company’s collateral position is in jeopardy.
In 2007, FIFC began financing life insurance policy
premiums for high net-worth individuals. These loans
are originated through independent insurance agents
with assistance from financial advisors and legal
counsel. The life insurance policy is the primary form
of collateral. In addition, these loans can be secured
with a letter of credit or certificate of deposit. In
the first quarter of 2009, FIFC will begin selling most
of these loans to the Banks in a similar fashion to the
premium finance receivables sales discussed above.
| 18 | Wintrust Financial Corporation |
Table of Contents
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 ceased the origination of indirect automobile
loans through Hinsdale Bank. This niche business served the Company well over the past twelve years
in helping de novo banks quickly and profitably, grow into their physical structures. Competitive
pricing pressures significantly reduced the long-term potential profitably of this niche business.
Given the current economic environment, the retirement of the founder of this niche business and
the Company’s belief that interest rates may rise over the longer-term, exiting the origination of
this business was deemed to be in the best interest of the Company. The Company continues to
service its existing portfolio during the duration of the credits. At December 31, 2008, the
average actual maturity of indirect automobile loans is estimated to be approximately 39 months.
Tricom finance receivables. Tricom finance receivables represent high-yielding short-term accounts
receivable financing to clients in the temporary staffing industry located throughout the United
States. The clients’ working capital needs arise primarily from the timing differences between
weekly payroll funding and monthly collections from customers. The primary security for Tricom’s
finance receivables are the accounts receivable of its clients and personal guarantees. Tricom
generally advances 80- 95% based on various factors including the client’s financial condition, the
length of client relationship and the nature of the client’s customer business lines. Typically,
Tricom will also provide value-added out-sourced administrative services to many of these clients,
such as data processing of payrolls, billing and cash management services, which generates
additional fee income.
Consumer and Other. Included in the consumer and other loan category is a wide variety of personal
and consumer loans to individuals. 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.
Foreign. The Company had no loans to businesses or governments of foreign countries at any time
during 2008.
Maturities and Sensitivities of Loans to Changes In Interest Rates
The following table classifies the commercial loan portfolios at December 31, 2008 by date at which
the loans reprice (in thousands):
| One year | From one | Over | ||||||||||||||
| or less | to five years | five years | Total | |||||||||||||
Commercial and commercial real estate loans |
$ | 3,690,585 | 935,157 | 152,922 | 4,778,664 | |||||||||||
Premium finance receivables, net of unearned income |
1,346,586 | — | — | 1,346,586 | ||||||||||||
Tricom finance receivables |
17,320 | — | — | 17,320 | ||||||||||||
Of those loans repricing after one year, approximately $945 million have fixed rates.
| 2008 Annual Report | 19 |
Table of Contents
ITEM 1A. RISK FACTORS
An investment in Wintrust’s common stock is subject to
risks inherent to Wintrust’s 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
focused on or that management currently deems
immaterial may also impair Win-trust’s business
operations. This report is qualified in its entirety by
these risk factors. If any of the following risks
actually occur, Wintrust’s financial condition and
results of operations could be materially and adversely
affected. If this were to happen, the value of
Wintrust’s common stock could decline significantly,
and you could lose all or part of your investment.
The financial services industry is very competitive.
The Company faces competition in attracting and
retaining deposits, making loans, and providing other
financial services (including wealth management
services) throughout the Company’s market area. The
Company’s competitors include other community banks,
larger banking institutions, and a wide range of other
financial institutions such as credit unions,
government-sponsored enterprises, mutual fund
companies, insurance companies and other nonbank
businesses. Many of these competitors have
substantially greater resources than the Company. If
the Company is unable to compete effectively, it will
lose market share and income from deposits, loans, and
other products may be reduced. The financial services
industry could become even more competitive as a result
of legislative, regulatory and technological changes
and continued consolidation. Banks, securities firms
and insurance companies can merge under the umbrella of
a financial holding company, which can offer virtually
any type of financial service, including banking,
securities underwriting, insurance (both agency and
underwriting) and merchant banking. 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
automatic payment systems.
Wintrust’s 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 rate at which the Company introduces new products and services relative to its competitors; | ||
| • | customer satisfaction with the Company’s level of service; | ||
| • | industry and general economic trends. |
Failure to perform in any of these areas could
significantly weaken the Company’s competitive
position, which could adversely affect the Company’s
growth and profitability, which, in turn, could have a
material adverse effect on the Company’s financial
condition and results of operations.
Wintrust may be adversely affected by interest rate
changes.
Wintrust’s interest income and interest expense are
affected by general economic conditions and by the
policies of regulatory authorities, including the
monetary policies of the Federal Reserve. Changes in
interest rates may influence the growth rate of loans
and deposits, the quality of the loan portfolio, loan
and deposit pricing, the volume of loan originations in
Win-trust’s mortgage banking business and the value
that Wintrust can recognize on the sale of mortgage
loans in the secondary market. Wintrust expects the
results of its mortgage banking business in selling
loans into the secondary market will be negatively
impacted during periods of rising interest rates.
With the relatively low interest rates that prevailed
in recent years, Wintrust had been able to augment the
total return of its investment securities portfolio by
selling call options on fixed-income securities it
owns. However, Wintrust’s ability to engage in such
transactions is dependent on the level and volatility
of interest rates. During 2008, 2007 and 2006,
Win-trust recorded fee income of approximately $29.0
million, $2.6 million and $3.2 million, respectively,
from premiums earned on these option transactions.
Wintrust’s opportunities to sell covered call options
may be limited in the future if rates rise. The loss of
such premium income or changes in the growth rate,
quality and pricing of Wintrust’s loan and deposit
portfolio caused by changes in interest rates could
have a material adverse effect on Wintrust’s financial
condition and results of operations.
| 20 | WINTRUST FINANCIAL CORPORATION |
Table of Contents
Wintrust is subject to lending risk.
There are inherent risks associated with the Company’s
lending activities. Increases in interest rates and/or
weakening economic conditions could adversely impact
the ability of borrowers to repay outstanding loans or
the value of the collateral securing these loans. A
significant portion of the Company’s loan portfolio
consisted of commercial and commercial real estate
loans. These types of loans are generally viewed as
having more risk of default than residential real
estate loans or consumer loans. These types of loans
are also typically larger than residential real estate
loans and consumer loans. Because the Company’s loan
portfolio contains a significant number of commercial
and commercial real estate loans, the deterioration of
these loans could cause a significant increase in
non-performing loans. An increase in non-performing
loans could result in a net loss of earnings from these
loans, an increase in the provision for credit losses
and an increase in loan charge-offs, all of which could
have a material adverse effect on the Company’s
financial condition and results of operations.
Wintrust’s allowance for loan losses may prove to be
insufficient to absorb losses that may occur in its
loan portfolio.
Wintrust’s allowance for loan losses is established in
consultation with management of its operating
subsidiaries and is maintained at a level considered
adequate by management to absorb loan losses that are
inherent in the portfolios. At December 31, 2008,
Wintrust’s allowance for loan losses was 51.3% of total
nonperforming loans and 0.92% of total loans. The
amount of future losses is susceptible to changes in
economic, operating and other conditions, including
changes in interest rates that may be beyond its
control, and such losses may exceed current estimates.
Estimating loan loss allowances for Wintrust’s newer
banks is more difficult because rapidly growing and de
novo bank loan portfolios are, by their nature,
unseasoned. Therefore, the Banks may be more
susceptible to changes in estimates, and to losses
exceeding estimates, than banks with more seasoned loan
portfolios. There can be no assurance that the
allowance for loan losses will prove sufficient to
cover actual loan or lease losses in the future, which
could result in a material adverse effect on Wintrust’s
financial condition and results of operations.
Difficult market conditions have adversely affected
the financial services industry and further negative
changes my hurt the value of the Company’s collateral
and ability to collect.
The housing and real estate sectors have been
experiencing an extraordinary economic slowdown during
2007 and 2008 causing the values of real estate
collateral supporting many loans to decline and which
may continue to decline. Market turmoil has lead to an
increase in delinquencies and has negatively impacted consumer confidence and the level of
business activity. Further deterioration in economic
conditions may cause increases in delinquencies,
problem assets, charge-offs and provisions for credit
losses. If these problems escalate, court systems may
become less efficient in dealing with increased
foreclosure actions.
It is difficult to predict how long these economic
conditions will exist, which markets, products or other
businesses will ultimately be affected, and whether
management’s actions will effectively mitigate these
external factors. If these conditions persist, they
will impact the Company’s business, financial condition
and results of operations.
Recent legislative and regulatory initiatives to
address difficult market and economic conditions may
not restore liquidity and stability to the United
States financial system.
On October 3, 2008, EESA was signed into law. Under
EESA, Treasury has the authority to, among other
things, invest in financial institutions for the
purpose of stabilizing and providing liquidity to the
U.S. financial markets. Pursuant to this authority, the
Treasury announced its Capital Purchase Program
(“CPP”), under which it is purchasing preferred stock
and warrants in eligible institutions to increase the
flow of credit to businesses and consumers and to
support the economy. Wintrust received preliminary
approval to participate in the CPP on November 26,
2008, and, on December 19, 2008, the Company issued and
sold to the Treasury shares of senior preferred stock
and warrants to purchase shares of the Company’s common
stock in accordance with the terms of the CPP for an
aggregate consideration of approximately $250 million.
Participation in the CPP subjects the Company to
specific restrictions under the terms of the CPP and
increased oversight by the Treasury, regulators and
Congress under EESA. These restrictions include
limitations on Wintrust’s ability to increase dividends
on its common stock or to repurchase its common stock.
Additionally, the CPP subjects the Company to
restrictions on executive compensation practices. With
regard to increased oversight, the Treasury has the
power to unilaterally amend the terms of the purchase
agreement to the extent required to comply with changes
in applicable federal law and to inspect Wintrust’s
corporate books and records through its federal banking
regulator. In addition, the Treasury has the right to
appoint two directors to the board if the Company
misses dividend payments for six dividend periods,
whether or not consecutive, on the preferred stock.
Congress has held hearings on the implementation of the
CPP and the use of funds and may adopt further
legislation impacting financial institutions that
obtain funding under the CPP or changing lending
practices that legislators believe led to the
| 2008 Annual Report | 21 |
Table of Contents
current economic situation. On January 21, 2009, the
U.S. House of Representatives approved legislation
amending the TARP provisions of EESA to include
quarterly reporting requirements with respect to
lending activities, examinations by an institution’s
primary federal regulator of use of funds and
compliance with program requirements, restrictions on
acquisitions by depository institutions receiving TARP
funds, and authorization for Treasury to have an
observer at board meetings of recipient institutions,
among other things. Although it is unclear whether this
legislation will be enacted into law, its provisions,
or similar ones, may be imposed administratively by the
Treasury. Such provisions could restrict the Company’s
lending or increase governmental oversight of its
businesses and corporate governance practices.
The participation of several of competitors of the
Company in the CPP and other government programs
subjects Wintrust to more intense competition. Such
competitors are large financial institutions that have
received multi-billion dollar infusions of capital from
the Treasury or other support from federal programs,
which has strengthened their balance sheets and
increased their ability to withstand the uncertainty of
the current economic environment.
The costs of participating in any such government
programs, and the effect on the Company’s results of
operations, cannot reliably be determined at this time.
In addition, there can be no assurance as to the actual
impact that EESA and its implementing regulations, or
any other governmental program, will have on the
financial markets generally, including the extreme
levels of volatility and limited credit availability
currently being experienced. The failure of the
financial markets to stabilize and a continuation or
worsening of current financial market conditions could
materially and adversely affect the Company’s business,
results of operations, financial condition, access to
funding and the trading price of its common stock.
The Company’s agreements with the Treasury impose
restrictions and obligations on Wintrust that limit
Wintrust’s ability to increase dividends or repurchase
its common stock or preferred stock and place limits
on executive compensation.
Prior to December 19, 2011, unless the Company has
redeemed all of the preferred stock or the Treasury has
transferred all of the preferred stock to a third
party, the consent of the Treasury will be required for
Wintrust to, among other things, increase its common
stock dividend or repurchase its common stock or other
preferred stock (with certain exceptions, including the
repurchase of common stock to offset share dilution
from equity-based employee compensation awards).
Additionally, the terms of the CPP place limits on
executive compensation, which may have a negative
impact on the Company’s ability to retain or attract
well qualified and experienced senior officers. The
inability to retain or attract well qualified
senior officer could materially and adversely affect
business, results of operations, financial condition,
access to funding and, in turn, the trading price of
its common stock.
The current economic recession is likely to adversely
affect Wintrust’s business and results of operations.
Wintrust’s business is affected by economic conditions
in the United States of America, and Illinois and
Wisconsin in particular, including rates of economic
growth and the impact that such economic conditions
have on the financial markets. Recent downturns in the
U.S. and global economy have led to an increased level
of commercial and consumer delinquencies, lack of
consumer confidence, decreased market valuations and
liquidity, increased market volatility and a widespread
reduction of business activity generally. The resulting
economic pressure and lack of confidence in the
financial markets may adversely affect Wintrust, its
business, financial condition and results of
operations, as well as the business of its customers. A
worsening of economic conditions in the U.S. or in
Illinois or Wisconsin would likely exacerbate the
adverse effects of these difficult conditions on the
Company and on the financial services industry in
general.
Difficulties experienced by the financial services
industry may lead to changes which negatively impact
the Company’s business and ability to grow.
Wintrust’s business is directly affected by market
conditions, legislative and regulatory changes, and
changes in governmental monetary and fiscal policies
and inflation. New or more stringent regulation may
result for the disruptions in the marketplace, and
Wintrust may face increased regulation of its industry.
Compliance with such regulation will likely increase
costs and may limit the Company’s ability to pursue
business opportunities. In addition, the increased
insurance exposure by the FDIC may not be matched with
increased payments. As a result, the FDIC insurance
fund could be under-funded, and Wintrust may experience
a significant increase in FDIC premiums.
Current levels of market volatility are unprecedented.
The capital and credit markets have been experiencing
volatility and disruption for more than a year. In
recent months, the volatility and disruption has
reached unprecedented levels. In many cases, the
markets have produced downward pressure on stock prices
and credit capacity for certain companies without
regard to those companies’ underlying financial
strength. If current levels of market volatility and
disruption continue or worsen, there can be no
assurance that the Company will not experience an
adverse effect, which may be material, on our ability
to access capital, if needed or desired, and on the
Company’s business, financial condition and results of
operations.
| 22 | Wintrust Financial Corporation |
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De novo operations and branch openings impact
Wintrust’s profitability.
Wintrust’s financial results have been and will
continue to be impacted by its strategy of de novo bank
formations and branch openings. Wintrust expects to
undertake additional de novo bank formations or branch
openings. Based on Wintrust’s experience, its
management believes 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. To the extent
Wintrust undertakes additional de novo bank, branch and
business formations, its level of reported net income,
return on average equity and return on average assets
will be impacted by start-up 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 Wintrust expected or than its experience
has shown, which could have a material adverse effect
on Wintrust’s financial condition and results of
operations.
Wintrust’s premium finance business involves unique
operational risks and could expose it to losses.
Of Wintrust’s total loans at December 31, 2008, 18%, or
approximately $1.3 billion, were comprised of
commercial insurance premium finance receivables and
life insurance loans that it generates through FIFC.
These loans comprised 16% and 18% of loans at December
31, 2007 and 2006, respectively. These loans involve a
different, and possibly higher, level of risk of
delinquency or collection than generally associated
with loan portfolios of more traditional community
banks because Wintrust conducts lending in this segment
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 more difficult
than in the Banks. FIFC may also be more susceptible to
third party fraud. Acts of fraud are difficult to
detect and deter, and Wintrust cannot assure investors
that its risk management procedures and controls will
prevent losses from fraudulent activity. Wintrust may
be exposed to the risk of loss in its premium finance
business, which could result in a material adverse
effect on Wintrust’s 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, the Company’s
operations could be adversely affected. There can be no assurance that FIFC will be able to continue to compete
successfully in its markets.
Wintrust may not be able to obtain liquidity and
income from the sale of premium finance
receivables in the future.
Wintrust has sold some of the loans FIFC originates to
unrelated third parties. Wintrust recognized gains on
the sales of these receivables, and the proceeds of
such sales have provided Wintrust with additional
liquidity. However, Wintrust did not sell any of these
loans in the fourth quarter of 2008 due to capacity to
retain such loans with the Banks. Wintrust sold $218
million of premium finance receivables during 2008,
compared to $230 million in 2007 to unrelated third
parties. During 2007, sales of premium finance
receivables were made only in the fourth quarter.
Wintrust may pursue similar sales of premium finance
receivables in the future; however, it cannot assure
you that there will continue to be a market for the
sale of these loans and the extent of Wintrust’s future
sales of these loans will depend on the level of new
volume growth in relation to its capacity to maintain
the loans within the Banks’ loan portfolios. Because
Wintrust has a recourse obligation to the purchaser of
premium finance loans that it sells, it could incur
losses in connection with the loans sold if collections
on the underlying loans prove to be insufficient to
repay to the purchaser the principal amount of the
loans sold plus interest at the negotiated buy-rate and
if the collection shortfall on the loans sold exceeds
Wintrust’s estimate of losses at the time of sale. An
inability to sell premium finance receivables in the
future or the failure of collections on the underlying
loans to be sufficient to repay the principal amount of
such loans could result in a material adverse effect on
Wintrust’s financial condition and results of
operations.
An actual or perceived reduction in the Company’s
financial strength may cause others to reduce or
cease doing business with the Company.
Wintrust’s customers rely upon its financial strength
and stability and evaluate the risks of doing business
with the Company. If the Company experiences
diminished financial strength or stability, actual or
perceived, including due to market or regulatory
developments, announced or rumored business
developments or results of operations, a decline in
stock price or a reduced credit rating, customers may
withdraw their deposits or otherwise seek services from
other banking institutions and prospective customers
may select other service providers. The risk that the
Company 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 counter-parties and competitors. If customers reduce their deposits
with the Company or select other service providers for
all or a portion of the services the Company provides
them, net interest and fee revenues will decrease
accordingly.
| 2008 Annual Report | 23 |
Table of Contents
Wintrust historically has engaged in numerous
acquisitions. Wintrust may not be able to continue to
implement such an acquisition strategy in the future
and there are risks associated with such acquisitions.
In the past several years, Wintrust has completed
numerous acquisitions of banks and other financial
service related companies and may continue to make such
acquisitions in the future. Wintrust 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 Wintrust’s business, including diversion of Wintrust’s 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 Wintrust’s financial
condition and results of operations.
Wintrust is subject to extensive government
regulation and supervision.
The Company and its subsidiaries are subject to
extensive federal and state regulation and supervision.
Regulatory authorities have extensive discretion in
their supervisory and enforcement activities, including
the imposition of restrictions on operations, the
classification of assets and determination of the
level of allowance for loan losses. These regulations
affect the Company’s lending practices, capital
structure, investment practices, dividend policy and
growth, among other things. Changes to statutes,
regulations or regulatory policies, including changes in interpretation or
implementation of statutes, regulations or policies,
could affect Wintrust in substantial and unpredictable
ways. Failure to comply with laws, regulations or
policies could result in sanctions by regulatory
agencies, civil money penalties and/or reputation
damage, which could have a material adverse effect on
the Company’s business, financial condition and results
of operations. See the section captioned “Supervision
and Regulation” in Item 1. Business for additional
information.
Wintrust’s profitability depends significantly on
economic conditions in the State of Illinois.
Wintrust’s success depends primarily on the general
economic conditions of the State of Illinois and the
specific local markets in which the Company operates.
Unlike larger national or other regional banks that are
more geographically diversified, Wintrust provides
banking and financial services to customers primarily
in the greater Chicago and southeast Wisconsin
metropolitan areas. The local economic conditions in
these areas have a significant impact on the demand for
Wintrust’s products and services as well as the ability
of Wintrust’s customers to repay loans, the value of
the collateral securing loans and the stability of
Wintrust’s deposit funding sources. A significant
decline in economic conditions, caused by inflation,
recession, acts of terrorism, outbreak of hostilities
or other international or domestic occurrences,
unemployment, changes in securities markets or other
factors with impact on these local markets could, in
turn, have a material adverse effect on the Company’s
financial condition and results of operations.
Wintrust relies on dividends from its subsidiaries
for most of its revenue.
Wintrust is a separate and distinct legal entity from
its subsidiaries. It receives substantially all of its
revenue from dividends from its subsidiaries. These
dividends are the principal source of funds to pay
dividends on the Company’s common stock and interest
and principal on its debt. Various federal and state
laws and regulations limit the amount of dividends that
the Banks and certain non-bank subsidiaries may pay to
Wintrust. In the event that the Banks are unable to pay
dividends to Win-trust, it may not be able to service
debt, pay obligations or pay dividends on the Company’s
common stock. The inability to receive dividends from
the Banks could have a material adverse effect on the
Company’s business, financial condition and results of
operations. See the section captioned “Supervision and
Regulation” in Item 1. — Business for more
information.
| 24 | Wintrust Financial Corporation |
Table of Contents
Wintrust’s information systems may experience an
interruption or breach in security.
Wintrust relies heavily on communications and
information systems to conduct its business. Any
failure, interruption, or breach in security of these
systems could result in failures or disruptions in
customer relationship management, general ledger,
deposit, loan or other systems. While Wintrust has
policies and procedures designed to prevent or limit
the effect of such a failure, interruption, or security
breach of its information systems, there can be no
assurance that any such failures, interruptions or
security breaches will not occur or, if they do occur,
that they will be adequately addressed. The occurrence
of any failures, interruptions or security breaches of
information systems could damage Wintrust’s reputation,
result in a loss of customer business, subject Wintrust
to additional regulatory scrutiny or civil litigation
and possible financial liability, any of which could
have a material and adverse effect on Win-trust’s
financial condition and results of operations.
Wintrust may issue additional securities, which
could dilute the ownership percentage of holders
of Wintrust’s common stock.
The Company may issue additional securities to raise
additional capital or finance acquisitions or upon the
exercise or conversion of outstanding warrants or
equity awards, and if it does, the ownership percentage
of holders of its common stock could be diluted.
Consumers may decide not to use banks to
complete their financial transactions.
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 the Company’s financial condition and results of
operations.
Wintrust’s future success depends, in part, on its
ability to attract and retain experienced and
qualified personnel.
Wintrust believes that its future success depends, in
part, on its ability to attract and retain experienced
personnel, including its senior management and other
key personnel. The restrictions placed on executive
compensation under EESA may negatively impact the
Company’s ability to retain and attract senior management. The loss of any of its senior managers or
other key personnel, or its inability to identify,
recruit and retain such personnel, could materially and
adversely affect Wintrust’s business, operating results
and financial condition.
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 79 banking
facilities, the majority of which are owned. The
Company owns 118 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. The Banks also own two locations that are
used as operations centers. Excess space in certain
properties is leased to third parties.
WHI has two locations, one in downtown Chicago and one
in Appleton, Wisconsin, both of which are leased, as
well as office locations at various Banks. Wintrust
Mortgage Corporation has 28 locations in ten states, all
of which are leased, as well as office locations at
various Banks. FIFC has one location which is owned and
one which is leased. Tricom has one location which is
owned. WITS has one location which is owned and one
which is leased. 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. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders
during the fourth quarter of 2008.
| 2008 Annual Report | 25 |
Table of Contents
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
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
2008 and 2007.
| 2008 | 2007 | |||||||||||||||
| High | Low | High | Low | |||||||||||||
Fourth Quarter |
$ | 32.00 | $ | 15.37 | $ | 45.51 | $ | 31.81 | ||||||||
Third Quarter |
44.90 | 17.04 | 45.78 | 37.65 | ||||||||||||
Second Quarter |
37.08 | 22.88 | 46.97 | 42.89 | ||||||||||||
First Quarter |
38.99 | 28.87 | 50.00 | 42.02 | ||||||||||||
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
National Market stocks for United States companies
(broad market index) and (2) all Nasdaq National 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 National Market for United States companies’
index comprises all domestic common shares traded on
the Nasdaq National Market and the Nasdaq Small-Cap
Market. The Nas-daq National Market bank stocks index
comprises all banks traded on the Nasdaq National
Market and the Nasdaq Small-Cap Market.
This graph and other information furnished in the
section titled “Performance Graph” under this Part II,
Item 5 of this Form 10-K shall not be deemed to be
“soliciting” materials or to be “filed” with the
Securities and Exchange Commission or subject to
Regulation 14A or 14C, or to the liabilities of Section
18 of the Securities Exchange Act of 1934, as amended.
| 2003 | 2004 | 2005 | 2006 | 2007 | 2008 | |||||||||||||||||||
Wintrust Financial Corporation |
100.00 | 126.74 | 122.71 | 108.08 | 75.78 | 48.74 | ||||||||||||||||||
Nasdaq — Total US |
100.00 | 108.84 | 111.16 | 122.11 | 132.42 | 63.80 | ||||||||||||||||||
Nasdaq — Bank Index |
100.00 | 114.44 | 111.80 | 125.47 | 99.45 | 72.51 | ||||||||||||||||||
| 26 | Wintrust Financial Corporation |
Table of Contents
Approximate Number of Equity Security Holders
As of
February 26, 2009 there were approximately
1,597 shareholders of record of the Company’s common
stock.
Dividends on Common Stock
The Company’s Board of Directors approved the first
semi-annual cash dividend on its common stock in
January 2000 and has continued to approve a semi-annual
dividend since that time.
Following is a summary of the cash dividends paid in
2007 and 2008:
| Dividend | ||||||||
| Record Date | Payable Date | per Share | ||||||
February 8, 2007 |
February 22, 2007 | $ | 0.16 | |||||
August 9, 2007 |
August 23, 2007 | $ | 0.16 | |||||
February 7, 2008 |
February 21, 2008 | $ | 0.18 | |||||
August 7, 2008 |
August 21, 2008 | $ | 0.18 | |||||
In January 2009, the Company’s Board of Directors
approved a semi-annual dividend of $0.18 per share. The
dividend was paid on February 26, 2009 to shareholders
of record as of February 12, 2009.
The $250 million of Fixed Rate Cumulative Perpetual
Preferred Stock, Series B (the “Series B Preferred
Stock”), issued to the United States Department of the
Treasury (“the US Treasury”) on December 19, 2008,
includes a restriction on increasing dividends on the
Company’s common stock from its last dividend payment
prior to the issuance of the Series B Preferred Stock.
This restriction will terminate on the earlier of (a)
the third anniversary of the date of issuance of the
Series B Preferred Stock and (b) the date on which the
Series B Preferred Stock has been redeemed in whole or
the US Treasury has transferred all of the Series B
Preferred Stock to third parties.
Taking into account the limitation on the payment of
dividends in connection with the Series B Preferred
Stock, the final determination of timing, amount and
payment of dividends is at the discretion of the
Company’s Board of Directors and will depend upon the
Company’s earnings, financial condition, capital
requirements and other relevant factors. Additionally,
the payment of dividends is also subject to statutory
restrictions and restrictions arising under the terms
of the Company’s Trust Preferred Securities offerings
and under certain financial covenants in the Company’s
revolving line of credit.
Because the Company’s consolidated net income consists
largely of net income of the Banks, Wintrust Mortgage
Corporation, FIFC, Tricom and the Wayne Hummer Companies, 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 11 of this
Form 10-K. During 2008, 2007 and 2006, the Banks paid
$73.2 million, $105.9 million and $76.8 million,
respectively, in dividends to the Company. De novo
banks are prohibited from paying dividends during their
first three years of operations. As of January 1, 2009,
Old Plank Trail Bank, which began operations in March
2006, was subject to this additional dividend
restriction. The de novo period for Old Plank Trail
Bank will end in March 2009.
Reference is made to Note 19 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.
| 2008 Annual Report | 27 |
Table of Contents
Issuer Purchases of Equity Securities
On January 24, 2008, the Company’s Board of Directors authorized the repurchase of up to an
additional 1.0 million shares of its outstanding common stock over the following 12 months. No
shares were repurchased during the fourth quarter of 2008 and the Board of Directors retracted the
authority to use this repurchase program in December of 2008.
| ISSUER PURCHASES OF EQUITY SECURITIES | ||||||||||||||||
| (a) | (b) | (c) | (d) | |||||||||||||
| Total Number | ||||||||||||||||
| of Shares | Maximum Number | |||||||||||||||
| Purchased as | of Shares that | |||||||||||||||
| Total | Average | Part of Publicly | May Yet Be Purchased | |||||||||||||
| Number | Price Paid | Announced Plans | Under the Plans | |||||||||||||
| Period | of Shares | per Share | or Programs | or Programs | ||||||||||||
October 1 - October 31 |
— | $ | — | — | 1,000,000 | |||||||||||
November 1 — November 30 |
— | — | — | 1,000,000 | ||||||||||||
December 1 - December 17 |
— | — | — | 1,000,000 | ||||||||||||
December 18 — December 31 |
— | — | — | — | ||||||||||||
Total |
— | $ | — | — | ||||||||||||
The Purchase Agreement pursuant to which the Series B Preferred Stock was issued provides that no
share repurchases may be made until the earlier of (a) the third anniversary of the date of
issuance of the Series B Preferred Stock and (b) the date on which the Series B Preferred Stock has
been redeemed in whole or the US Treasury has transferred all of the Series B Preferred Stock to
third parties.
| 28 | Wintrust Financial Corporation |
Table of Contents
ITEM 6. SELECTED FINANCIAL DATA
| Years Ended December 31, | ||||||||||||||||||||
| 2008 | 2007 | 2006 | 2005 | 2004 | ||||||||||||||||
| (dollars in thousands, except per share data) | ||||||||||||||||||||
Selected Financial Condition Data
(at end of year): |
||||||||||||||||||||
Total assets |
$ | 10,658,326 | $ | 9,368,859 | $ | 9,571,852 | $ | 8,177,042 | $ | 6,419,048 | ||||||||||
Total loans |
7,621,069 | 6,801,602 | 6,496,480 | 5,213,871 | 4,348,346 | |||||||||||||||
Total deposits |
8,376,750 | 7,471,441 | 7,869,240 | 6,729,434 | 5,104,734 | |||||||||||||||
Notes payable |
1,000 | 60,700 | 12,750 | 1,000 | 1,000 | |||||||||||||||
Federal Home Loan Bank advances |
435,981 | 415,183 | 325,531 | 349,317 | 303,501 | |||||||||||||||
Subordinated notes |
70,000 | 75,000 | 75,000 | 50,000 | 50,000 | |||||||||||||||
Junior subordinated debentures |
249,515 | 249,662 | 249,828 | 230,458 | 204,489 | |||||||||||||||
Total shareholders’ equity |
1,066,572 | 739,555 | 773,346 | 627,911 | 473,912 | |||||||||||||||
Selected Statements of Operations Data: |
||||||||||||||||||||
Net interest income |
$ | 244,567 | $ | 261,550 | $ | 248,886 | $ | 216,759 | $ | 157,824 | ||||||||||
Net revenue (1) |
343,161 | 341,638 | 340,118 | 310,316 | 243,276 | |||||||||||||||
Net income |
20,488 | 55,653 | 66,493 | 67,016 | 51,334 | |||||||||||||||
Net income per common share — Basic |
0.78 | 2.31 | 2.66 | 2.89 | 2.49 | |||||||||||||||
Net income per common share — Diluted |
0.76 | 2.24 | 2.56 | 2.75 | 2.34 | |||||||||||||||
Cash dividends declared per common share |
0.36 | 0.32 | 0.28 | 0.24 | 0.20 | |||||||||||||||
Selected Financial Ratios and Other Data: |
||||||||||||||||||||
Performance Ratios: |
||||||||||||||||||||
Net interest
margin(2) |
2.81 | % | 3.11 | % | 3.10 | % | 3.16 | % | 3.17 | % | ||||||||||
Core net
interest margin
(2)(3) |
3.10 | 3.38 | 3.32 | 3.37 | 3.31 | |||||||||||||||
Non-interest income to average assets |
1.01 | 0.85 | 1.02 | 1.23 | 1.57 | |||||||||||||||
Non-interest expense to average assets |
2.62 | 2.57 | 2.56 | 2.62 | 2.86 | |||||||||||||||
Net overhead
ratio (4) |
1.60 | 1.72 | 1.54 | 1.39 | 1.30 | |||||||||||||||
Efficiency
ratio (2)(5) |
72.92 | 71.06 | 66.96 | 63.97 | 64.45 | |||||||||||||||
Return on average assets |
0.21 | 0.59 | 0.74 | 0.88 | 0.94 | |||||||||||||||
Return on average common equity |
2.44 | 7.64 | 9.47 | 11.00 | 13.12 | |||||||||||||||
Average total assets |
$ | 9,753,220 | $ | 9,442,277 | $ | 8,925,557 | $ | 7,587,602 | $ | 5,451,527 | ||||||||||
Average total shareholders’ equity |
779,437 | 727,972 | 701,794 | 609,167 | 391,335 | |||||||||||||||
Ending loan-to-deposit ratio |
91.0 | % | 91.0 | % | 82.6 | % | 77.5 | % | 85.2 | % | ||||||||||
Average loans to average deposits ratio |
94.3 | 90.1 | 82.2 | 83.4 | 87.7 | |||||||||||||||
Average earning assets to
average interest bearing liabilities |
107.83 | 106.93 | 107.78 | 108.83 | 109.89 | |||||||||||||||
Asset Quality Ratios: |
||||||||||||||||||||
Non-performing loans to total loans |
1.79 | % | 1.06 | % | 0.57 | % | 0.50 | % | 0.43 | % | ||||||||||
Allowance
for credit losses to total loans(6) |
0.94 | 0.75 | 0.72 | 0.78 | 0.79 | |||||||||||||||
Allowance for loan losses to
non-performing loans |
51.26 | 70.13 | 124.90 | 153.82 | 184.13 | |||||||||||||||
Common Share Data (at end of year): |
||||||||||||||||||||
Market price per common share |
$ | 20.57 | $ | 33.13 | $ | 48.02 | $ | 54.90 | $ | 56.96 | ||||||||||
Book value per common share |
$ | 33.03 | $ | 31.56 | $ | 30.38 | $ | 26.23 | $ | 21.81 | ||||||||||
Common shares outstanding |
23,756,674 | 23,430,490 | 25,457,935 | 23,940,744 | 21,728,548 | |||||||||||||||
Other Data (at end of year): |
||||||||||||||||||||
Number of: |
||||||||||||||||||||
Bank subsidiaries |
15 | 15 | 15 | 13 | 12 | |||||||||||||||
Non-bank subsidiaries |
7 | 8 | 8 | 10 | 10 | |||||||||||||||
Banking offices |
79 | 77 | 73 | 62 | 50 | |||||||||||||||
| (1) | Net revenue is net interest income plus non-interest income. | |
| (2) | See Item 7, “Managements Discussion and Analysis of Financial Condition and Results of Operations — Non-GAAP Financial Measures/Ratios,” of the Company’s 2008 Form 10-K for a reconciliation of this performance measure/ratio to GAAP. | |
| (3) | The core net interest margin excludes the effect of the net interest expense associated with the Company’s junior subordinated debentures and the interest expense incurred to fund any common stock repurchases. | |
| (4) | 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. | |
| (5) | 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. |
|
| (6) | The allowance for credit losses includes both the allowance for loan losses and the allowance for lending-related commitments. |
| 2008 Annual Report | 29 |
Table of Contents
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSOF OPERATIONS
Forward Looking Statements
This document and the documents incorporated by reference herein contain forward-looking statements
within the meaning of federal securities laws. The forward-looking information in this document can
be identified through the use of words such as “may,” “will,” “intend,” “plan,” “project,”
“expect,” “anticipate,” “should,” “would,” “believe,” “estimate,” “contemplate,” “possible,” and
“point.” Forward-looking statements and information are not historical facts, are premised on many
factors, 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 20 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 projected growth, anticipated improvements in earnings, earnings per share and other
financial performance measures, and management’s long-term performance goals, as well as statements
relating to the anticipated effects on financial results of condition from expected developments or
events, the Company’s business and growth strategies, including anticipated internal growth, plans
to form additional de novo banks and to open new branch offices, and to pursue additional potential
development or acquisitions of banks, wealth management entities or specialty finance businesses.
Actual results could differ materially from those addressed in the forward-looking statements as a
result of numerous factors, including the following:
| • | 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). | ||
| • | Changes in the interest rate environment, which may influence, among other things, the growth of loans and deposits, the quality of the Company’s loan portfolio, the pricing of loans and deposits and interest income. | ||
| • | The extent of defaults and losses on the Company’s loan portfolio, which may require further increases in its allowance for credit losses. | ||
| • | Distressed global credit and capital markets. | ||
| • | The ability of the Company to obtain liquidity and income from the sale of premium finance receivables in the future and the unique collection and delinquency risks associated with such loans. | ||
| • | Legislative or regulatory changes, particularly changes in the regulation of financial services companies and/or the products and services offered by financial services companies. | ||
| • | Failure to identify and complete acquisitions in the future or unexpected difficulties or unanticipated developments related to the integration of acquired entities with the Company. | ||
| • | Significant litigation involving the Company. | ||
| • | Changes in general economic conditions in the markets in which the Company operates. | ||
| • | The ability of the Company to receive dividends from its subsidiaries. | ||
| • | Unexpected difficulties or unanticipated developments related to the Company’s strategy of de novo bank formations and openings. De novo banks typically require over 13 months of operations before becoming profitable, due to the impact of organizational and overhead expenses, the startup phase of generating deposits and the time lag typically involved in redeploying deposits into attractively priced loans and other higher yielding earning assets. | ||
| • | 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 risk that the terms of the U.S. Treasury Departments’ Capital Purchase Program could change. | ||
| • | The effect of continued margin pressure on the Company’s financial results. | ||
| • | Additional deterioration in asset quality. | ||
| • | Additional charges related to asset impairments. | ||
| • | The other risk factors set forth in the Company’s filings with the Securities and Exchange Commission. |
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 Annual Report. Persons are advised, however, to consult any
further disclosures management makes on related subjects in its reports filed with the SEC and in
its press releases.
| 30 | Wintrust Financial Corporation |
Table of Contents
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, 2008. 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 | ||||||||||||||||||
| 2008 | 2007 | 2006 | 2007 to 2008 | 2006 to 2007 | ||||||||||||||||
Net income |
$ | 20,488 | $ | 55,653 | $ | 66,493 | (63 | )% | (16 | )% | ||||||||||
Net income per common share — Diluted |
$ | 0.76 | $ | 2.24 | $ | 2.56 | (66 | )% | (13 | )% | ||||||||||
Net revenue (1) |
$ | 343,161 | $ | 341,638 | $ | 340,118 | — | % | — | % | ||||||||||
Net interest income |
$ | 244,567 | $ | 261,550 | $ | 248,886 | (6 | )% | 5 | % | ||||||||||
Net interest margin (5) |
2.81 | % | 3.11 | % | 3.10 | % | (30)bp | 1 bp | ||||||||||||
Core net interest margin(2)(5) |
3.10 | % | 3.38 | % | 3.32 | % | (28)bp | 6 bp | ||||||||||||
Net overhead ratio (3) |
1.60 | % | 1.72 | % | 1.54 | % | (12)bp | 18 bp | ||||||||||||
Efficiency ratio (4)(5) |
72.92 | % | 71.06 | % | 66.96 | % | 186 bp | 410 bp | ||||||||||||
Return on average assets |
0.21 | % | 0.59 | % | 0.74 | % | (38)bp | (15)bp | ||||||||||||
Return on average common equity |
2.44 | % | 7.64 | % | 9.47 | % | (520)bp | (183)bp | ||||||||||||
At end of period: |
||||||||||||||||||||
Total assets |
$ | 10,658,326 | $ | 9,368,859 | $ | 9,571,852 | 14 | % | (2 | )% | ||||||||||
Total loans |
$ | 7,621,069 | $ | 6,801,602 | $ | 6,496,480 | 12 | % | 5 | % | ||||||||||
Total deposits |
$ | 8,376,750 | $ | 7,471,441 | $ | 7,869,240 | 12 | % | (5 | )% | ||||||||||
Total equity |
$ | 1,066,572 | $ | 739,555 | $ | 773,346 | 44 | % | (4 | )% | ||||||||||
Book value per common share |
$ | 33.03 | $ | 31.56 | $ | 30.38 | 5 | % | 4 | % | ||||||||||
Market price per common share |
$ | 20.57 | $ | 33.13 | $ | 48.02 | (38 | )% | (31 | )% | ||||||||||
Common shares outstanding |
23,756,674 | 23,430,490 | 25,457,935 | 1 | % | (8 | )% | |||||||||||||
| (1) | Net revenue is net interest income plus non-interest income. | |
| (2) | Core net interest margin excludes the effect of the net interest expense associated with Wintrust’s junior subordinated debentures and the interest expense incurred to fund any common stock repurchases. | |
| (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. | |
| (5) | See “Non-GAAP Financial Measures/Ratios” for additional information on this performance measure/ratio. |
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.
| 2008 Annual Report | 31 |
Table of Contents
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), core net
interest margin 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 also evaluates the net interest margin excluding the interest expense associated with
the Company’s junior subordinated debentures and the interest expense incurred to fund any common
stock repurchases (“Core Net Interest Margin”). Because junior subordinated debentures are utilized
by the Company primarily as capital instruments and the cost incurred to fund any common stock
repurchases is capital utilization related, management finds it useful to view the net interest
margin excluding these expenses and deems it to be a more meaningful view of the operational net
interest margin of the Company.
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 years ended December 31, 2008, 2007 and 2006 (dollars
in thousands):
| Years Ended | ||||||||||||
| December 31, | ||||||||||||
| 2008 | 2007 | 2006 | ||||||||||
(A) Interest income (GAAP) |
$ | 514,723 | $ | 611,557 | $ | 557,945 | ||||||
Taxable-equivalent adjustment |
||||||||||||
- Loans |
645 | 826 | 409 | |||||||||
- Liquidity management assets |
1,795 | 2,388 | 1,195 | |||||||||
- Other earning assets |
47 | 13 | 17 | |||||||||
Interest income - FTE |
$ | 517,210 | $ | 614,784 | $ | 559,566 | ||||||
(B) Interest expense (GAAP) |
270,156 | 350,007 | 309,059 | |||||||||
Net interest income - FTE |
$ | 247,054 | $ | 264,777 | $ | 250,507 | ||||||
(C) Net interest income (GAAP)
(A minus B) |
$ | 244,567 | $ | 261,550 | $ | 248,886 | ||||||
Net interest income - FTE |
$ | 247,054 | $ | 264,777 | $ | 250,507 | ||||||
Add: Interest expense on junior
subordinated debentures and
interest cost incurred for
common stock repurchases(1) |
25,418 | 23,170 | 17,838 | |||||||||
Core net interest income - FTE(2) |
$ | 272,472 | $ | 287,947 | $ | 268,345 | ||||||
(D) Net interest margin (GAAP) |
2.78 | % | 3.07 | % | 3.07 | % | ||||||
Net interest margin - FTE |
2.81 | % | 3.11 | % | 3.10 | % | ||||||
Core net interest margin - FTE(2) |
3.10 | % | 3.38 | % | 3.32 | % | ||||||
(E) Efficiency ratio (GAAP) |
73.44 | % | 71.74 | % | 67.28 | % | ||||||
Efficiency ratio - FTE |
72.92 | % | 71.06 | % | 66.96 | % | ||||||
| (1) | Interest expense from the junior subordinated debentures is net of the interest income on the Common Securities owned by the Trusts and included in interest income. Interest cost incurred for any common stock repurchases is estimated using current period average rates on certain debt obligations. | |
| (2) | Core net interest income and core net interest margin are by definition non-GAAP measures/ratios. The GAAP equivalents are the net interest income and net interest margin determined in accordance with GAAP (lines C and D in the table). |
| 32 | Wintrust Financial Corporation |
Table of Contents
OVERVIEW AND STRATEGY
Wintrust is a financial holding company, providing traditional community banking services as well
as a full array of wealth management services and certain other specialty lending business. The
Banks have been among the fastest growing community-oriented de novo banking operations in Illinois
and the country. The Company grew rapidly from its inception, but this growth has moderated
recently. As of December 31, 2008, the Company operated 15 community-oriented bank subsidiaries
(the “Banks”) with 79 banking locations. During 2008, the Company opened two new bank branches.
During 2007, the Company acquired a premium finance company and opened five new bank branches.
During 2006, the Company acquired one bank with five locations, opened its ninth de novo bank and
opened five new branches. The historical financial performance of the Company has been affected by
costs associated with growing market share in deposits and loans, establishing new banks and
opening new branch facilities, and building an experienced management team. The Company’s
experience has been that it generally takes over 13 months for new banking offices to achieve
operational profitability.
Management’s ongoing focus is to balance further asset growth with earnings growth by seeking to
fully leverage the existing capacity within each of the Banks and non-bank subsidiaries. One aspect
of this strategy is to continue to pursue specialized lending or earning asset niches in order to
maintain the mix of earning assets in higher-yielding loans as well as diversify the loan
portfolio. Another aspect of this strategy is a continued focus on less aggressive deposit pricing
at the Banks with significant market share and more established customer bases.
Wintrust also provides a full range of wealth management services through its trust, asset
management and broker-dealer subsidiaries.
De Novo Bank Formations, Branch Openings and Acquisitions
The Company developed its community banking franchise through the formation of nine de novo banks,
the opening of branch offices of the Banks and acquisitions. Following is a summary of the
expansion of the Company’s banking franchise through newly chartered banks, new branching locations
and acquisitions over the last three years.
2008 Banking Expansion Activity
Opened the following branch locations
| • | Vernon Hills, Illinois, a branch of Libertyville Bank | |
| • | Deerfield, Illinois, a branch of Northbrook Bank |
2007 Banking Expansion Activity
Opened the following branch locations
| • | Hoffman Estates, Illinois, a branch of Barrington Bank | |
| • | Hartland, Wisconsin, a branch of Town Bank | |
| • | Bloomingdale, Illinois, a branch of Advantage Bank | |
| • | Island Lake, Illinois, a branch of Libertyville Bank | |
| • | North Chicago, Illinois, a branch of Lake Forest Bank | |
| Closed the following branch location | ||
| • | Glen Ellyn Bank, temporary facility opened in 2005, a branch of Wheaton Bank | |
2006 Banking Expansion Activity
Opened the Company’s ninth de novo bank
| • | Old Plank Trail Bank in Frankfort, Illinois |
Opened the following branch locations
| • | St. Charles, Illinois, a branch of St. Charles Bank | |
| • | Algonquin, Illinois, a branch of Crystal Lake Bank | |
| • | Mokena, Illinois, a branch of Old Plank Trail Bank | |
| • | Elm Grove, Wisconsin, a branch of Town Bank | |
| • | New Lenox, Illinois, a branch of Old Plank Trail Bank |
Acquired the following banks
| • | Hinsbrook Bank with Illinois locations in Willowbrook, Downers Grove, Glen Ellyn, Darien and Geneva |
Earning Assets, Wealth Management and Other Business Niches
As previously mentioned, the Company continues to pursue specialized earning asset and business
niches in order to maximize the Company’s revenue stream as well as diversify its loan portfolio. A
summary of the Company’s more significant earning asset niches and non-bank operating subsidiaries
follows.
Wayne Hummer Investments LLC (“WHI”), a registered broker-dealer, provides a full-range of
investment products and services tailored to meet the specific needs of individual and
institutional investors throughout the country, but primarily in the Midwest. In addition, WHI
provides a full range of investment services to clients through a network of relationships with
community-based financial institutions located primarily in Illi-nois. Although headquartered in
Chicago, WHI also operates an office in Appleton, Wisconsin that opened in 1936 and serves the
greater Appleton area. As of December 31, 2008, WHI had branch locations in offices in a majority
of the Company’s 15 Banks and approximately $4.0 billion of client assets in custody.
| 2008 Annual Report | 33 |
Table of Contents
Wayne Hummer Asset Management (“WHAMC”), a registered investment advisor, is the investment
advisory affiliate of WHI. WHAMC provides money management, financial planning and investment
advisory services to individuals and institutional, municipal and tax-exempt organizations. WHAMC
also provides portfolio management and financial supervision for a wide-range of pension and profit
sharing plans. At December 31, 2008, assets under management totaled approximately $407 million.
Wayne Hummer Trust Company (“WHTC”) was formed to offer trust and investment management services to
all communities served by the Banks. In addition to offering trust services to existing bank
customers at each of the Banks, the Company believes WHTC can successfully compete for trust
business by targeting small to mid-size businesses and affluent individuals whose needs command the
personalized attention offered by WHTC’s experienced trust professionals. Services offered by WHTC
typically include traditional trust products and services, as well as investment management
services. Assets under administration by WHTC as of December 31, 2008 were approximately $1.2
billion.
First Insurance Funding Corp. (“FIFC”) is the Company’s most significant specialized earning asset
niche, originating approximately $3.2 billion in loan (premium finance receivables) volume during
2008. 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 may be more susceptible to third party fraud,
however no material third party fraud has occurred since the third quarter of 2000. The majority of
these loans are purchased by the Banks in order to more fully utilize their lending capacity, and
these loans generally provide the Banks with higher yields than alternative investments. However,
excess FIFC originations over the capacity to retain such loans within the Banks’ loan portfolios
may be sold to an unrelated third party with servicing retained.
In November 2007, the Company acquired Broadway Premium Funding Corporation (“Broadway”). Broadway
also provides loans to businesses to finance insurance premiums, mainly through insurance agents
and brokers in the northeastern portion of the United States and California. On October 1, 2008,
Broadway merged with its parent, FIFC, but continues to utilize the Broadway brand in serving its
segment of the marketplace.
Additionally, in 2007, FIFC began financing life insurance policy premiums for high net-worth
individuals. These loans are originated through independent insurance agents with assistance from
financial advisors and legal counsel. The life insurance policy is the primary form of collateral.
In addition, these loans can be secured with a letter of credit or certificate of deposit.
Wintrust Mortgage Corporation (“WMC”) (formerly known as WestAmerica Mortgage Company) engages
primarily in the origination and purchase of residential mortgages for sale into the secondary
market. WMC sells its loans with servicing released and does not currently engage in servicing
loans for others. WMC maintains principal origination offices in nine states, including Illinois,
and originates loans in other states through wholesale and correspondent offices. WMC provides the
Banks with the ability to use an enhanced loan origination and documentation system which allows
WMC and each Bank to better utilize existing operational capacity and expand the mortgage products
offered to the Banks’ customers. WMC’s production of adjustable rate mortgage loans may be retained
by the Banks in their loan portfolios, resulting in additional earning assets to the combined
organization, thus adding further desired diversification to the Company’s earning asset base. In
December 2008, WMC acquired certain assets and assumed certain liabilities of the mortgage banking
business of Professional Mortgage Partners (“PMP”).
Tricom, Inc. (“Tricom”), operating since 1989, specializes in providing high-yielding, short-term
accounts receivable financing and value-added out-sourced administrative services, such as data
processing of payrolls, billing and cash management services to clients in the temporary staffing
industry. Tricom’s clients, located throughout the United States, provide staffing services to
businesses in diversified industries. These receivables may involve greater credit risks than
generally associated with the loan portfolios of more traditional community banks depending on the
marketability of the collateral. The principal sources of repayments on the receivables are
payments received by the borrowers from their customers who are located throughout the United
States. Tricom mitigates this risk by employing lock-boxes and other cash management techniques to
protect its interests. Tricom’s revenue principally consists of interest income from financing
activities and fee-based revenues from administrative services. Tricom processed payrolls with
associated client billings of approximately $312 million in 2008 and $467 million in 2007.
In addition to the earning asset niches provided by the Company’s non-bank subsidiaries, several
earning asset niches operate within the Banks. In addition, Hinsdale Bank operates a mortgage
warehouse lending program that provides loan and deposit services to mortgage brokerage companies
located predominantly in the Chicago metropolitan area, Crystal Lake Bank has a specialty in small
aircraft lending and Lake Forest Bank has a
| 34 | Wintrust Financial Corporation |
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franchise lending program. The Company continues to pursue the development or acquisition of other
specialty lending businesses that generate assets suitable for bank investment and/or secondary
market sales. Indirect auto lending which until recently was conducted through Hinsdale Bank, and
Barrington Bank’s Community Advantage program that provides lending, deposit and cash management
services to condominium, homeowner and community associations.
In the third quarter of 2008, the Company ceased the origination of indirect automobile loans. This
niche business served the Company well over the past 12 years in helping de novo banks quickly, and
profitably, grow into their physical structures. Competitive pricing pressures have significantly
reduced the long-term potential profitably of the niche business. Given the current economic
environment and the retirement of the founder of this niche business, exiting the origination of
this business was deemed to be in the best interest of the Company. The Company will continue to
service its existing portfolio for the duration of the life of the existing credits.
Treasury Capital Purchase Program
On October 3, 2008, the EESA was signed into law. Under EESA, the U.S. Department of the Treasury
(the “Treasury”) has the authority to, among other things, invest in financial institutions for the
purpose of stabilizing and providing liquidity to the U.S. financial markets. Pursuant to this
authority, the Treasury announced its Troubled Asset Relief Program (“TARP”) Capital Purchase
Program (“CPP”), under which it is purchasing senior preferred stock and warrants in eligible
institutions to increase the flow of credit to businesses and consumers and to support the economy.
On December 19, 2008, the Company entered into an agreement with Treasury to participate in the
CPP, pursuant to which the Company issued and sold preferred stock and a warrant to Treasury, in
exchange for aggregate consideration of $250 million. The Special Inspector General for the TARP
program as well as federal banking agencies are scrutinizing the uses by TARP recipients of the
funds received pursuant to the CPP. Treasury is permitted to amend the agreement unilaterally in
order to comply with any changes in applicable federal statutes.
The preferred stock qualifies as Tier 1 capital and pays a cumulative dividend rate of five percent
per annum for the first five years and a rate of nine percent per annum after year five. The
preferred stock is non-voting, other than class voting rights on certain matters that could amend
the rights of or adversely affect the stock. The preferred stock is redeemable after three years
with the approval of the appropriate federal banking agency. Prior to the end of three years, the
preferred stock may be redeemed with the proceeds from a qualifying equity offering of any Tier 1
perpetual preferred or common stock resulting in proceeds of not less than 25 percent of the issue
price of the pre-
ferred stock. The Treasury may transfer the preferred stock to a third party at any time.
Participation in the CPP restricts the Company’s ability to increase dividends on its common stock
or to repurchase its common stock until three years have elapsed, unless (i) all of the preferred
stock issued to the Treasury is redeemed, (ii) all of the preferred stock issued to the Treasury
has been transferred to third parties, or (iii) the Company receives the consent of the Treasury.
In conjunction with the purchase of preferred stock, the Treasury received warrants to purchase
1,643,295 shares of the Company’s common stock for an aggregate market price of $37,500,000. The
warrant is immediately exercisable and has a ten year term.
In conjunction with the Company’s participation in the CPP, the Company was required to adopt the
Treasury’s standards for executive compensation and corporate governance for the period during
which the Treasury holds equity issued under the CPP. These standards generally apply to the chief
executive officer, chief financial officer, plus the three most highly compensated executive
officers. In addition, the Company is required to not to deduct for tax purposes executive
compensation in excess of $500,000 for each senior executive.
In addition, participation in the CPP subjects the Company to increased oversight by the Treasury,
regulators and Congress. Under the terms of the CPP, the Treasury has the power to unilaterally
amend the terms of the purchase agreement to the extent required to comply with changes in
applicable federal law and to inspect corporate books and records through Wintrust’s federal
banking regulator. In addition, the Treasury has the right to appoint two directors to the Wintrust
board if the Company misses dividend payments for six dividend periods, whether or not consecutive,
on the preferred stock.
Congress has held hearings on implementation of TARP. On January 21, 2009, the U.S. House of
Representatives approved legislation amending the TARP provisions of EESA to include quarterly
reporting requirements with respect to lending activities, examinations by an institution’s primary
federal regulator of use of funds and compliance with program requirements, restrictions on
acquisitions by depository institutions receiving TARP funds, and authorization for Treasury to
have an observer at board meetings of recipient institutions, among other things. Although it is
unclear whether this legislation will be enacted into law, its provisions, or similar ones, may be
imposed administratively by the Treasury. In addition, Congress may adopt other legislation
impacting financial institutions that obtain funding under the CPP or changing lending practices
that legislators believe led to the current economic situation. Such provisions could restrict or
require changes to lending or governance practices or increase governmental oversight of
businesses. See “Item 1. Business—Supervision and Regulation” and “Item 1A. Risk Factors—Recent
legislative and regulatory initiatives to address difficult market and economic conditions may not
restore liquidity and stability to the United States financial system.”
| 2008 Annual Report | 35 |
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The Company may not redeem the preferred stock it sold to the Treasury prior to February 15,
2012 unless it has received aggregate gross proceeds from one or more qualified equity offerings
(as described below) equal to $62,500,000, which equals 25% of the aggregate liquidation amount
of the preferred stock the Company sold Treasury. If such qualified equity offerings are made,
then the Company may redeem the preferred stock in whole or in part, subject to the approval of
the Federal Reserve Board, upon notice as described below, up to a maximum amount equal to the
aggregate net cash proceeds received by us from such qualified equity offerings. A “qualified
equity offering” is a sale and issuance for cash by the Company, to persons other than the
Company or its subsidiaries after December 19, 2008, of shares of perpetual preferred stock,
common stock or a combination thereof, that in each case qualify as Tier 1 capital at the time
of issuance under the applicable risk-based capital guidelines of the Federal Reserve Board.
On or after February 15, 2012, the Company may redeem the preferred stock sold to the Treasury
at any time, in whole or in part, subject to the approval of the Federal Reserve Board and the
notice requirements described below.
Pursuant to the American Recovery and Reinvestment Act of 2009, or the ARRA, financial
institutions that receive assistance under TARP may, subject to consultation with the
appropriate Federal banking agency, repay such assistance without regard to the waiting
period and source requirements described above. The ARRA further provides that in the
event a recipient repays such assistance, the Secretary of the Treasury will liquidate
the warrants associated with such assistance at the current market price. The shares
of preferred stock and the warrant sold by Wintrust to the initial selling securityholder are
subject to these provisions of the ARRA.
The Secretary of the Treasury has not yet published any guidance on the repayment process,
including whether partial repayments will be permitted, and if so, on what terms. Wintrust
will evaluate its options as such guidance becomes available.
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. These
estimates, assumptions and judgments are based on information available as of the date of the
financial statements; accordingly, as this information changes, the financial statements could
reflect different estimates, assumptions, and judgments. 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 of producing results that could be 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.
Carrying assets and liabilities at fair value inherently results in more financial statement
volatility. The fair values and the information used to record valuation adjustments for certain
assets and liabilities are based either on quoted market prices or are provided by other
third-party sources, when available. When third party information is not available, valuation
adjustments are estimated in good faith by management primarily through the use of internal cash
flow modeling techniques.
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 the determination of the allowance for loan losses and the
allowance for losses on lending-related commitments, estimations of fair value, the valuation of
the retained interest in the premium finance receivables sold, 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 the 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
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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. Management has established credit committees at each of
the Banks that evaluate the credit quality of the loan portfolio and the level of the adequacy of
the allowance for loan losses and the allowance for lending-related commitments. 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 22 to the Consolidated Financial Statements later in this report for a further
discussion of fair value measurements.
Sales of Premium Finance Receivables
The gains on the sale of premium finance receivables are determined based on management’s estimates
of the underlying future cash flows of the loans sold. Cash flow projections are used to allocate
the Company’s initial investment in a loan between the loan, the servicing asset and the Company’s
retained interest, including its guarantee obligation, based on their relative fair values. Gains
or losses are recognized for the difference between the proceeds received and the cost basis
allocated to the loan. The Company’s retained interest includes a servicing asset, an interest only
strip and a guarantee obligation pursuant to the terms of the sale agreement. The estimates of
future cash flows from the underlying loans incorporate assumptions for prepayments, late payments
and other factors. The Company’s guarantee obligation is estimated based on the historical loss
experience and credit risk factors of the loans. If actual cash flows from the underlying loans are
less than originally anticipated, the Company’s retained interest may be impaired, and such
impairment would be recorded as a charge to earnings. Because the terms of the loans sold are less
than ten months, the estimation of the cash flows is inherently easier to monitor than if the
assets had longer durations, such as mortgage loans. See Note 1 to the Consolidated Financial
Statements and the section titled “Non-interest Income” later in this report for further analysis
of the gains on sale of premium finance receivables.
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 Com-
| 2008 Annual Report | 37 |
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pany’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.
As a result of ongoing volatility in the financial industry and the Company’s market capitalization
decreasing to a level below book value, the Company determined it was necessary to perform an
interim goodwill impairment analysis during the fourth quarter of 2008. Based on this interim
goodwill impairment analysis, it was determined that the fair value of each reporting unit exceeded
its carrying value and therefore no impairment was recognized.
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 79 offices at the end of 2008. FIFC has matured from its limited operations in 1991 to a
company that generated, on a national basis, $3.2 bil-
lion in premium finance receivables in 2008. 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.
Earnings Summary
Net income for the year ended December 31, 2008, totaled $20.5 million, or $0.76 per diluted common
share, compared to $55.7 million, or $2.24 per diluted common share, in 2007, and $66.5 million, or
$2.56 per diluted common share, in 2006. During 2008, net income declined by 63% while earnings per
diluted common share declined by 66%, and during 2007, net income declined by 16% while earnings
per diluted common share declined 13%. Financial results in 2008 were negatively impacted by
increases in provision for credit losses, further interest rate spread compression, and higher
other-than-temporary impairment losses on available-for-sale securities. In 2008, the banking
industry experienced unprecedented economic instability and real estate valuations have become
extraordinarily distressed due to lack of sales activity and other factors. These distressed real
estate valuations contributed to the Company’s increased credit costs. The Company continues to
aggresively manage its impaired loan portfolio. Financial results in 2007 were negatively impacted
by a continued compression of interest rate spreads, an increase in provision for credit losses,
lower levels of mortgage banking revenue and a reduced level of trading income.
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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 2008 totaled $247.1 million, down from $264.8 million in 2007
and $250.5 million in 2006, representing decreases of $17.7 million, or 7% in 2008 and $14.3
million, or 1% in 2007. 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 2008 and 2007.
Average earning assets increased $276.6 million, or 3%, in 2008 and $426.5 million, or 5%, in 2007.
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 increased $420.7 million, or 6%, in 2008
and $811.5 million, or 14%, in 2007. Total average loans as a percentage of total average earning
assets were 82%, 80% and 74% in 2008, 2007, and 2006, respectively. The average yield on loans was
6.13% in 2008, 7.71% in 2007 and 7.60% in 2006, reflecting a decrease of 158 basis points in 2008
and an increase of 11 basis points in 2007. The lower loan yield in 2008 compared to 2007 is a
result of the aggressive interest rate decreases effected by the Federal Reserve Bank. The higher
loan yield in 2007 compared to 2006 is a result of the higher average rate environment in the first
three quarters of 2007. Similarly, the average rate paid on interest bearing deposits, the largest
component of the Company’s interest bearing liabilities, was 3.13% in 2008, 4.26% in 2007 and 3.97%
in 2006, representing a decrease of 113 basis points in 2008 and an increase of 84 basis points in
2007. The lower level of interest bearing deposits rate in 2008 was due to a lower interest rate
environment compared to 2007. 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. The interest bearing deposits rate
increased in 2007 due to higher costs of retail deposits as rates had generally risen in 2007,
continued competitive pricing pressures on fixed-maturity time deposits in most markets and
promotional pricing activities associated with opening additional de novo branches.
Net interest margin, which reflects net interest income as a percent of average earning assets,
decreased to 2.81% in 2008 compared to 3.11% in 2007. During 2008, interest rate compression on
large portions of NOW, savings and money market accounts occurred as the Federal Reserve quickly
lowered rates preventing these deposits from repricing at the same speed and magnitude as variable
rate earning assets. During 2007, the Company’s focus on retail deposit pricing and changing the
mix of deposits helped offset the competitive pricing of retail certificates of deposit. In 2007,
the Company shifted its mix of retail deposits away from certificates of deposit into lower cost,
more variable rate NOW, money market and wealth management deposits. Net interest margin in 2006
was 3.10%.
The core net interest margin was 3.10% in 2008, 3.38% in 2007 and 3.32% in 2006. Management
evaluates the core net interest margin excluding the net interest expense associated with the
Company’s junior subordinated debentures and the interest expense incurred to fund common stock
repurchases. Because junior subordinated debentures are utilized by the Company primarily as
capital instruments and the cost incurred to fund common stock repurchases is capital utilization
related, management finds it useful to view the net interest margin excluding these expenses and
deems them to be a more accurate view of the operational net interest margin of the Company. See
Non-GAAP Financial Measures/Ratios section of this report.
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
purchase 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. See Note 7 of the
Consolidated Financial Statements for further discussion of the Company’s business combinations.
| 2008 Annual Report | 39 |
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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, 2008, 2007 and 2006. 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 and do not have a material effect on the average yield. 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, | ||||||||||||||||||||||||||||||||||||
| 2008 | 2007 | 2006 | ||||||||||||||||||||||||||||||||||
| Average | Average | Average | ||||||||||||||||||||||||||||||||||
| Average | Yield/ | Average | Yield/ | Average | Yield/ | |||||||||||||||||||||||||||||||
| Balance(1) | Interest | Rate | Balance(1) | Interest | Rate | Balance(1) | Interest | Rate | ||||||||||||||||||||||||||||
Assets |
||||||||||||||||||||||||||||||||||||
Interest bearing deposits with banks |
$ | 28,677 | $ | 341 | 1.19 | % | $ | 14,036 | $ | 841 | 5.99 | % | $ | 13,361 | $ | 651 | 4.87 | % | ||||||||||||||||||
Securities |
1,439,642 | 69,895 | 4.86 | 1,588,542 | 81,790 | 5.15 | 1,930,662 | 94,593 | 4.90 | |||||||||||||||||||||||||||
Federal funds sold and securities
purchased under resale agreements |
63,963 | 1,333 | 2.08 | 72,141 | 3,774 | 5,23 | 110,775 | 5,393 | 4.87 | |||||||||||||||||||||||||||
Total liquidity management assets (2) (8) |
1,532,282 | 71,569 | 4.67 | 1,674,719 | 86,405 | 5.16 | 2,054,798 | 100,637 | 4.90 | |||||||||||||||||||||||||||
Other earning assets (2) (3) |
23,052 | 1,147 | 4.98 | 24,721 | 1,943 | 7.86 | 29,675 | 2,136 | 7.20 | |||||||||||||||||||||||||||
Loans, net of unearned income (2) (4) (8) |
7,245,609 | 444,494 | 6.13 | 6,824,880 | 526,436 | 7.71 | 6,013,344 | 456,793 | 7.60 | |||||||||||||||||||||||||||
Total earning assets (8) |
8,800,943 | 517,210 | 5.88 | 8,524,320 | 614,784 | 7.21 | 8,097,817 | 559,566 | 6.91 | |||||||||||||||||||||||||||
Allowance for loan losses |
(57,656 | ) | (48,605 | ) | (44,648 | ) | ||||||||||||||||||||||||||||||
Cash and due from banks |
117,923 | 131,271 | 125,253 | |||||||||||||||||||||||||||||||||
Other assets |
892,010 | 835,291 | 747,135 | |||||||||||||||||||||||||||||||||
Total assets |
$ | 9,753,220 | $ | 9,442,277 | $ | 8,925,557 | ||||||||||||||||||||||||||||||
Liabilities and Shareholders’ Equity |
||||||||||||||||||||||||||||||||||||
Deposits — interest bearing: |
||||||||||||||||||||||||||||||||||||
NOW accounts |
$ | 1,011,402 | $ | 13,101 | 1.30 | % | $ | 938,960 | $ | 25,033 | 2.67 | % | $ | 774,481 | $ | 19,548 | 2.52 | % | ||||||||||||||||||
Wealth management deposits |
622,842 | 14,583 | 2.34 | 547,408 | 24,871 | 4.54 | 464,438 | 20,456 | 4.40 | |||||||||||||||||||||||||||
Money market accounts |
904,245 | 20,357 | 2.25 | 696,760 | 22,427 | 3.22 | 639,590 | 17,497 | 2.74 | |||||||||||||||||||||||||||
Savings accounts |
319,128 | 3,164 | 0.99 | 302,339 | 4,504 | 1.49 | 307,142 | 4,275 | 1.39 | |||||||||||||||||||||||||||
Time deposits |
4,156,600 | 168,232 | 4.05 | 4,442,469 | 218,079 | 4.91 | 4,509,488 | 203,953 | 4.52 | |||||||||||||||||||||||||||
Total interest bearing deposits |
7,014,217 | 219,437 | 3.13 | 6,927,936 | 294,914 | 4.26 | 6,695,139 | 265,729 | 3.97 | |||||||||||||||||||||||||||
Federal Home Loan Bank advances |
435,761 | 18,266 | 4.19 | 400,552 | 17,558 | 4.38 | 364,149 | 14,675 | 4.03 | |||||||||||||||||||||||||||
Notes payable and other borrowings |
387,377 | 10,718 | 2.77 | 318,540 | 13,794 | 4.33 | 149,764 | 5,638 | 3.76 | |||||||||||||||||||||||||||
Subordinated notes |
74,589 | 3,486 | 4.60 | 75,000 | 5,181 | 6.81 | 66,742 | 4,695 | 6.94 | |||||||||||||||||||||||||||
Junior subordinated debentures |
249,575 | 18,249 | 7.19 | 249,739 | 18,560 | 7.33 | 237,249 | 18,322 | 7.62 | |||||||||||||||||||||||||||
Total interest bearing liabilities |
8,161,519 | 270,156 | 3.31 | 7,971,767 | 350,007 | 4.39 | 7,513,043 | 309,059 | 4.11 | |||||||||||||||||||||||||||
Non-interest bearing deposits |
672,924 | 647,715 | 623,542 | |||||||||||||||||||||||||||||||||
Other liabilities |
139,340 | 94,823 | 87,178 | |||||||||||||||||||||||||||||||||
Equity |
779,437 | 727,972 | 701,794 | |||||||||||||||||||||||||||||||||
Total liabilities and shareholders’ equity |
$ | 9,753,220 | $ | 9,442,277 | $ | 8,925,557 | ||||||||||||||||||||||||||||||
Interest rate spread (5) (8) |
2.57 | % | 2.82 | % | 2.80 | % | ||||||||||||||||||||||||||||||
Net free funds/contribution (6) |
$ | 639,424 | 0.24 | % | $ | 552,553 | 0.29 | % | $ | 584,774 | 0.30 | % | ||||||||||||||||||||||||
Net interest income/Net interest margin (8) |
$ | 247,054 | 2.81 | % | $ | 264,777 | 3.11 | % | $ | 250,507 | 3.10 | % | ||||||||||||||||||||||||
Core net interest margin (7) (8) |
3.10 | % | 3.38 | % | 3.32 | % | ||||||||||||||||||||||||||||||
| (1) | Average balances were generally computed using daily balances. | |
| (2) | 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 reflected in the above table are $2.5 million, $3.2 million and $1.6 million in 2008, 2007 and 2006, respectively. | |
| (3) | Other earning assets include brokerage customer receivables and trading account securities. | |
| (4) | Loans, net of unearned income, include mortgages held-for-sale and non-accrual loans. | |
| (5) | Interest rate spread is the difference between the yield earned on earning assets and the rate paid on interest-bearing liabilities. | |
| (6) | 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. | |
| (7) | The core net interest margin excludes the effect of the net interest expense associated with Wintrust’s junior subordinated debentures and the interest expense incurred to fund any common stock repurchases. | |
| (8) | See “Supplemental Financial Measures/Ratios” for additional information on this performance measure/ratio. |
| 40 | Wintrust Financial Corporation |
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, | ||||||||||||||||||||||||
| 2008 Compared to 2007 | 2007 Compared to 2006 | |||||||||||||||||||||||
| 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 |
$ | (981 | ) | 481 | (500 | ) | $ | 156 | 34 | 190 | ||||||||||||||
Securities |
(4,550 | ) | (7,345 | ) | (11,895 | ) | 4,633 | (17,436 | ) | (12,803 | ) | |||||||||||||
Federal funds sold and securities purchased
under resale agreement |
(2,063 | ) | (378 | ) | (2,441 | ) | 375 | (1,994 | ) | (1,619 | ) | |||||||||||||
Total liquidity management assets |
(7,594 | ) | (7,242 | ) | (14,836 | ) | 5,164 | (19,396 | ) | (14,232 | ) | |||||||||||||
Other earning assets |
(676 | ) | (120 | ) | (796 | ) | 185 | (378 | ) | (193 | ) | |||||||||||||
Loans |
(114,120 | ) | 32,178 | (81,942 | ) | 6,749 | 62,894 | 69,643 | ||||||||||||||||
Total interest income |
(122,390 | ) | 24,816 | (97,574 | ) | 12,098 | 43,120 | 55,218 | ||||||||||||||||
Interest expense: |
||||||||||||||||||||||||
Deposits — interest bearing: |
||||||||||||||||||||||||
NOW accounts |
(13,802 | ) | 1,870 | (11,932 | ) | 1,199 | 4,286 | 5,485 | ||||||||||||||||
Wealth management deposits |
(13,412 | ) | 3,124 | (10,288 | ) | 667 | 3,748 | 4,415 | ||||||||||||||||
Money market accounts |
(7,809 | ) | 5,739 | (2,070 | ) | 3,266 | 1,664 | 4,930 | ||||||||||||||||
Savings accounts |
(1,595 | ) | 255 | (1,340 | ) | 296 | (67 | ) | 229 | |||||||||||||||
Time deposits |
(36,892 | ) | (12,955 | ) | (49,847 | ) | 17,220 | (3,094 | ) | 14,126 | ||||||||||||||
Total interest expense — deposits |
(73,510 | ) | (1,967 | ) | (75,477 | ) | 22,648 | 6,537 | 29,185 | |||||||||||||||
Federal Home Loan Bank advances |
(804 | ) | 1,512 | 708 | 1,340 | 1,543 | 2,883 | |||||||||||||||||
Notes payable and other borrowings |
(5,683 | ) | 2,607 | (3,076 | ) | 966 | 7,190 | 8,156 | ||||||||||||||||
Subordinated notes |
(1,681 | ) | (14 | ) | (1,695 | ) | (86 | ) | 572 | 486 | ||||||||||||||
Junior subordinated debentures |
(350 | ) | 39 | (311 | ) | (699 | ) | 937 | 238 | |||||||||||||||
Total interest expense |
(82,028 | ) | 2,177 | (79,851 | ) | 24,169 | 16,779 | 40,948 | ||||||||||||||||
Net interest income |
$ | (40,362 | ) | 22,639 | (17,723 | ) | $ | (12,071 | ) | 26,341 | 14,270 | |||||||||||||
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 due to an additional day resulting from the 2008 leap year has been
allocated entirely to the change due to volume.
| 2008 Annual Report | 41 |
Table of Contents
Provision for Credit Losses
The provision for credit losses totaled $57.4 million in 2008, $14.9 million in 2007, and $7.1
million in 2006. Net charge-offs totaled $37.0 million in 2008, $10.9 million in 2007 and $5.2
million in 2006. The allowance for loan losses as a percentage of loans at December 31, 2008, 2007
and 2006 was 0.92%, 0.74% and 0.71%, respectively. Non-performing loans were $136.1 million, $71.9
million and $36.9 million at December 31, 2008, 2007 and 2006, respectively. The increase in the
provision for credit losses, net charge-offs and non-performing loans in 2008 as compared to 2007
was primarily the result of economic weaknesses experienced in the Company’s markets during 2008.
Distressed real estate market conditions continue to impact the Company’s valuation of its impaired
loan portfolio due to lack of sales activity and large property inventories. However, the Company
is focused on resolving existing problem credits and working to identify potential problem credits.
See the “Credit Risk and Asset Quality” section of this report for more detail on these items. In
2008, the Company reclassified $1.1 million from its allowance for loan losses to a separate
liability account which represents the portion of the allowance for loan losses that was associated
with lending-related commitments, specifically unfunded loan commitments and letters of credit. In
2007, the Company reclassified $36,000 from its allowance for loan losses to the allowance for
lending-relating commitments. In future periods, the provision for credit losses may contain both a
component related to funded loans (provision for loan losses) and a component related to
lending-related commitments (provision for unfunded loan commitments and letters of credit).
Management believes the allowance for loan losses is adequate to provide for inherent losses in the
portfolio. There can be no assurances however, that future losses will not exceed the amounts
provided for, thereby affecting future results of operations. The amount of future additions to the
allowance for loan losses and the allowance for lending-related commitments will be dependent upon
management’s assessment of the adequacy of the allowance based on its evaluation of economic
conditions, changes in real estate values, interest rates, the regulatory environment, the level of
past-due and non-performing loans, and other factors.
Non-interest Income
Non-interest income totaled $98.6 million in 2008, $80.1 million in 2007 and $91.2 million in 2006,
reflecting an increase of 23% in 2008 compared to 2007 and a decrease of 12% in 2007 compared to
2006.
The following table presents non-interest income by category for 2008, 2007 and 2006 (in
thousands):
| Years ended December 31, | 2008 compared to 2007 | 2007 compared to 2006 | ||||||||||||||||||||||||||
| 2008 | 2007 | 2006 | $ Change | % Change | $ Change | % Change | ||||||||||||||||||||||
Brokerage |
$ | 18,649 | 20,346 | 19,615 | $ | (1,697 | ) | (8 | )% | $ | 731 | 4 | % | |||||||||||||||
Trust and asset management |
10,736 | 10,995 | 12,105 | (259 | ) | (2 | ) | (1,110 | ) | (9 | ) | |||||||||||||||||
Total wealth management |
29,385 | 31,341 | 31,720 | (1,956 | ) | (6 | ) | (379 | ) | (1 | ) | |||||||||||||||||
Mortgage banking |
21,258 | 14,888 | 22,341 | 6,370 | 43 | (7,453 | ) | (33 | ) | |||||||||||||||||||
Service charges on deposit accounts |
10,296 | 8,386 | 7,146 | 1,910 | 23 | 1,240 | 17 | |||||||||||||||||||||
Gain on sales of premium
finance receivables |
2,524 | 2,040 | 2,883 | 484 | 24 | (843 | ) | (29 | ) | |||||||||||||||||||
Administrative services |
2,941 | 4,006 | 4,598 | (1,065 | ) | (27 | ) | (592 | ) | (13 | ) | |||||||||||||||||
Fees from covered call options |
29,024 | 2,628 | 3,157 | 26,396 | NM | (529 | ) | (17 | ) | |||||||||||||||||||
(Losses) gains on available-for-sale
securities, net |
(4,171 | ) | 2,997 | 17 | (7,168 | ) | NM | 2,980 | NM | |||||||||||||||||||
Other: |
||||||||||||||||||||||||||||
Trading income — net cash settlement
of swaps |
— | — | 1,237 | — | — | (1,237 | ) | 100 | ||||||||||||||||||||
Trading income — change in fair
market value |
291 | 265 | 7,514 | 26 | 10 | (7,249 | ) | (97 | ) | |||||||||||||||||||
Bank Owned Life Insurance |
1,622 | 4,909 | 2,948 | (3,287 | ) | (67 | ) | 1,961 | 67 | |||||||||||||||||||
Miscellaneous |
5,424 | 8,628 | 7,671 | (3,204 | ) | (37 | ) | 957 | 13 | |||||||||||||||||||
Total other |
7,337 | 13,802 | 19,370 | (6,465 | ) | (47 | ) | (5,568 | ) | (29 | ) | |||||||||||||||||
Total non-interest income |
$ | 98,594 | 80,088 | 91,232 | $ | 18,506 | 23 | % | $ | (11,144 | ) | (12 | )% | |||||||||||||||
| NM — Not Meaningful | ||
| 42 | Wintrust Financial Corporation |
Table of Contents
Wealth management is comprised of the trust and asset management revenue of WHTC, the asset
management fees of WHAMC and brokerage commissions, trading commissions and insurance product
commissions generated by WHI. Trust and asset management fees represent WHTC’s trust fees which
include fees earned on assets under management, custody fees and other trust related fees and
WHAMC’s fees for advisory services to individuals and institutions, municipal and tax-exempt
organizations, including the management of the Wayne Hummer proprietary mutual funds. The brokerage
income is generated by WHI, the Company’s broker-dealer subsidiary.
Brokerage revenue is directly impacted by trading volumes. In 2008, brokerage revenue totaled $18.6
million, reflecting a decrease of $1.7 million, or 8%, compared to 2007. Continued uncertainties
surrounding the equity markets overall have slowed the growth of the brokerage component of wealth
management revenue. In 2007, brokerage revenue totaled $20.3 million reflecting an increase of
$731,000, or 4%, compared to 2006.
Trust and asset management revenue totaled $10.7 million in 2008, a decrease of $259,000, or 2%,
compared to 2007. In 2007, trust and asset management fees totaled $11.0 million and decreased $1.1
million, or 9%, compared to 2006. In 2006, trust and asset management revenue included a $2.4
million gain on the sale of the Wayne Hummer Growth Fund. Trust and asset management fees are based
primarily on the market value of the assets under management or administration. Decreased asset
valuations due to equity market declines in 2008 have hindered the revenue growth from trust and
asset management activities. Trust assets and assets under management totaled $1.2 billion at
December 31, 2008, $1.6 billion at December 31, 2007 and $1.4 billion at December 31, 2006.
Mortgage banking includes revenue from activities related to originating, selling and servicing
residential real estate loans for the secondary market. Mortgage banking revenue totaled $21.3
million in 2008, $14.9 million in 2007, and $22.3 million in 2006, reflecting an increase of $6.4
million, or 43%, in 2008, and a decrease of $7.4 million, or 33%, in 2007. The increase in 2008 is
a result of the impact on 2007 results of mortgage banking valuation and recourse obligation
adjustments for estimated losses related to recourse obligations on residential mortgage loans sold
to investors totaling $6.0 million for the year. The Company recognized higher gains on mortgage
loans sold in 2008 compared to 2007, however these gains were offset by a decline in the fair value
of mortgage servicing rights. Future growth of mortgage banking is impacted by the interest rate
environment and current disruption in the residential housing market and will continue to be
dependent upon both. A continuation of the existing depressed residential real estate environment
may hamper mortgage banking production growth.
However, with the acquisition of certain assets of PMP in December 2008, the Company has expanded
its retail mortgage offices across the greater Chicago Metropolitan area.
Service charges on deposit accounts totaled $10.3 million in 2008, $8.4 million in 2007 and $7.1
million in 2006. The increases of 23% in 2008 and 17% in 2007, were due primarily to the overall
larger household account base. 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.
Gain on sales of premium finance receivables results from the Company’s sales of premium finance
receivables to unrelated third parties. Having a program in place to sell premium finance
receivables to third parties allows the Company to execute its strategy to be asset-driven while
providing the benefits of additional sources of liquidity and revenue. Sales of these receivables
are dependent upon the market conditions impacting both sales of these loans, the opportunity for
securitizing these loans, as well as liquidity and capital management considerations. Loans sold to
unrelated third parties totaled $217.8 million in 2008, $230.0 million in 2007 and $302.9 million
in 2006, representing 7%, 8% and 10% of FIFC’s total originations in 2008, 2007 and 2006,
respectively. The Company recognized net gains totaling $2.5 million in 2008, $2.0 million in 2007
and $2.9 million in 2006 related to this activity.
As FIFC continues to service the loans it sells, it recognizes a retained interest in the loans
sold (which consists of a servicing asset, interest only strip and a recourse obligation), upon
each sale. Recognized gains, recorded in accordance with SFAS 140, as well as the Company’s
retained interests in these loans are based on the Company’s projection of cash flows that will be
generated from the loans. The cash flow model incorporates the amounts FIFC is contractually
entitled to receive from the customer, including an estimate of late fees, the amounts due to the
purchaser of the loans, fees paid to insurance agents as well as estimates of the term of the loans
and credit losses. Significant differences in actual cash flows and the projected cash flows can
cause impairment to the servicing asset and interest only strip as well as the recourse obligation.
The Company monitors the performance of these loans on a “static pool” basis and adjusts the
assumptions in its cash flow model when warranted. These loans have relatively short maturities
(less than 12 months) and prepayments are not highly correlated to movements in interest rates. Due
to the short-term nature of these loans, the Company believes that the book value of the servicing
asset approximates fair value.
| 2008 Annual Report | 43 |
Table of Contents
The Company capitalized $1.9 million and amortized $3.5 million in servicing assets related to the
sale of these loans in 2008, and capitalized $2.0 million and amortized $590,000 in servicing
assets related to sale of these loans in 2007. As of December 31, 2008 and 2007, the Company’s
retained interest in the loans sold included a servicing asset of $195,000 and $1.9 million,
respectively, an interest only strip of $1.0 million and $2.6 million, respectively, and a
liability for its recourse obligation of $82,000 and $179,000, respectively. In accordance with the
terms of the underlying sales agreement, recourse is limited to 2% of the average principal balance
outstanding.
Gains are significantly dependent on the spread between the net yield on the loans sold and the
rate passed on to the purchasers. The net yield on the loans sold and the rates passed on to the
purchasers typically do not react in a parallel fashion, therefore causing the spreads to vary from
period to period. This spread was 5.09% to 5.50 % in 2008, compared to 3.70% in 2007 and 2.62% to
3.24% in 2006.
The Company typically makes a clean up call by repurchasing the remaining loans in the pools sold
after approximately ten months from the sale date. Upon repurchase, the loans are recorded in the
Company’s premium finance receivables portfolio and any remaining balance of the Company’s retained
interest is recorded as an adjustment to the gain on sale of premium finance receivables. Clean-up
calls resulted in increased gains of $618,000, $444,000, and $761,000 in 2008, 2007 and 2006,
respectively. The Company continuously monitors the performance of the loan pools to the
projections and adjusts the assumptions in its cash flow model when warranted. Credit losses on
loans sold were estimated at 0.20% to 0.30% of the estimated average balances in 2008, at 0.20% for
2007 and at 0.15% for 2006. The gains are also influenced by the number of months these loans are
estimated to be outstanding. The estimated average terms of the loans were nine months in 2008,
2007 and 2006. The applicable discount rate used in determining gains related to this activity was
the same in 2008, 2007 and 2006.
At December 31, 2008 and 2007, premium finance loans sold and serviced for others for which the
Company retains a recourse obligation related to credit losses totaled approximately $37.5 million
and $219.9 million, respectively. The remaining estimated recourse obligation carried in other
liabilities was approximately $82,000 and $179,000, at December 31, 2008 and 2007, respectively.
Credit losses incurred on loans sold are applied against the recourse obligation liability that is
established at the date of sale. Credit losses, net of recoveries, for premium finance receivables
sold and serviced for others totaled $280,000 in 2008, $129,000 in 2007 and $191,000 in 2006. At
December 31, 2008, non-performing loans related to this sold portfolio were approximately $2.2
million, or 6% of the sold loans, compared to $180,000, or less than 1%, of the sold loans at
December 31, 2007. The premium finance portfolio owned by the Company had a ratio of non-performing
loans to total loans
of 1.54% at December 31, 2008 and 1.80% at December 31, 2007. Ultimate losses on premium finance
loans are substantially less than non-performing loans for the reasons noted in the “Non-performing
Premium Finance Receivables” portion of the “Credit Risk and Asset Quality” section of this report.
Administrative services revenue generated by Tricom was $2.9 million in 2008, $4.0 million in 2007
and $4.6 million in 2006. 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. The decrease in revenue in 2008 and 2007 reflects the general
staffing trends in the economy and the entrance of new competitors in most markets served by
Tricom.
The Company recognized $4.2 million of net losses on available-for-sale securities in 2008 compared
to net gains of $3.0 million in 2007 and $17,000 in 2006. In 2008, the Company recognized $8.2
million of non-cash other-than-temporary impairment charges on certain corporate debt investment
securities. In the fourth quarter of 2007, the Company recognized a $2.5 million gain on its
investment in an unaffiliated bank holding company that was acquired by another bank holding
company.
Premium income from covered call option transactions totaled $29.0 million in 2008, $2.6 million in
2007 and $3.2 million in 2006. The interest rate environment in 2008 has been conducive to entering
into a significantly higher level of covered call option transactions than in 2007 and 2006.
During 2008, call option contracts were written against $3.5 billion of underlying securities,
compared to $1.1 billion in 2007 and $1.6 billion in 2006. The same security may be included in
this total more than once to the extent that multiple call option contracts were written against it
if the initial call option contracts were not exercised. The Company routinely writes 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. Management enters into these transactions with the
goal of enhancing its overall return on its investment portfolio by using the 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 SFAS 133. There were no outstanding call option contracts at
December 31, 2008 or December 31, 2007.
The Company recognized trading income related to interest rate swaps not designated in hedge
relationships and the trading account assets of its broker-dealer. Trading income recognized for
the net cash settlement of swaps is income that would have been recognized regardless of whether
the swaps were designated
| 44 | Wintrust Financial Corporation |
Table of Contents
in hedging relationships. However, in the absence of hedge accounting, the net cash settlement of
the swaps is included in trading income rather than net interest income. Trading income totaled
$291,000 in 2008, $265,000 in 2007 and $8.8 million in 2006. At June 30, 2006, the Company had
$231.1 million of interest rate swaps that were initially documented at their inception dates as
being in hedging relationships with the Company’s variable rate junior subordinated debentures and
subordinated notes, but subsequently, management determined that the hedge documentation did not
meet the standards of SFAS 133. In July 2006, the Company settled its position in these interest
rate swap contracts by selling them to third parties. The Company realized approximately $5.8
million from the settlement of these swaps and eliminated any further earnings volatility due to
the changes in fair values.
Bank Owned life Insurance (“BOLI”) generated non-interest income of $1.6 million in 2008, $4.9
million in 2007 and $2.9 million in 2006. This income typically represents adjustments to the cash
surrender value of BOLI policies; however in the third quarter of 2007, the Company recorded a
non-taxable $1.4 million death benefit gain. 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 purchased additional BOLI since
then, including $8.9 million of BOLI that was owned by State Bank of the Lakes and $8.4 million
owned by Hinsbrook Bank when Wintrust acquired these banks. BOLI totaled $86.5 million at December
31, 2008 and $84.7 million at December 31, 2007, and is included in other assets.
Miscellaneous other non-interest income includes loan servicing fees, service charges and
miscellaneous other income. In 2008 the Company recognized $1.2 million of net losses on certain
limited partnership interests. In 2007, the Company recognized a $2.6 million gain from the sale of
property held by the Company, which was partially offset by $1.4 million of losses recognized
certain limited partnership interests.
Non-interest Expense
Non-interest expense totaled $255.1 million in 2008, and increased $12.1 million, or 5%, compared
to 2007. In 2007, non-interest expense totaled $242.9 million, and increased $14.1 million, or 6%,
compared to 2006.
The following table presents non-interest expense by category for 2008, 2007 and 2006 (in
thousands):
| Years ended December 31, | 2008 compared to 2007 | 2007 compared to 2006 | ||||||||||||||||||||||||||
| 2008 | 2007 | 2006 | $ Change | % Change | $ Change | % Change | ||||||||||||||||||||||
Salaries and employee benefits |
$ | 145,087 | 141,816 | 137,008 | $ | 3,271 | 2 | % | $ | 4,808 | 4 | % | ||||||||||||||||
Equipment |
16,215 | 15,363 | 13,529 | 852 | 6 | 1,834 | 14 | |||||||||||||||||||||
Occupancy, net |
22,918 | 21,987 | 19,807 | 931 | 4 | 2,180 | 11 | |||||||||||||||||||||
Data processing |
11,573 | 10,420 | 8,493 | 1,153 | 11 | 1,927 | 23 | |||||||||||||||||||||
Advertising and marketing |
5,351 | 5,318 | 5,074 | 33 | 1 | 244 | 5 | |||||||||||||||||||||
Professional fees |
8,824 | 7,090 | 6,172 | 1,734 | 24 | 918 | 15 | |||||||||||||||||||||
Amortization of other intangible assets |
3,129 | 3,861 | 3,938 | (732 | ) | (19 | ) | (77 | ) | (2 | ) | |||||||||||||||||
Other: |
||||||||||||||||||||||||||||
Commissions - 3rd party brokers |
3,769 | 3,854 | 3,842 | (85 | ) | (2 | ) | 12 | — | |||||||||||||||||||
Postage |
4,120 | 3,841 | 3,940 | 279 | 7 | (99 | ) | (3 | ) | |||||||||||||||||||
Stationery and supplies |
3,005 | 3,159 | 3,233 | (154 | ) | (5 | ) | (74 | ) | (2 | ) | |||||||||||||||||
FDIC Insurance |
5,600 | 3,713 | 911 | 1,887 | 51 | 2,802 | NM | |||||||||||||||||||||
Miscellaneous |
25,488 | 22,513 | 22,873 | 2,975 | 13 | (360 | ) | (2 | ) | |||||||||||||||||||
Total other |
41,982 | 37,080 | 34,799 | 4,902 | 13 | 2,281 | 7 | |||||||||||||||||||||
Total non-interest expense |
$ | 255,079 | 242,935 | 228,820 | $ | 12,144 | 5 | % | $ | 14,115 | 6 | % | ||||||||||||||||
| NM — Not Meaningful | ||
| 2008 Annual Report | 45 |
Table of Contents
Salaries and employee benefits is the largest component of non-interest expense, accounting for 57%
of the total in 2008, 58% of the total in 2007 and 60% in 2006. For the year ended December 31,
2008, salaries and employee benefits totaled $145.1 million and increased $3.3 million, or 2%
compared to 2007. Increase in base compensation was the primary reason for the increase in 2008.
For the year ended December 31, 2007, salaries and employee benefits totaled $141.8 million, and
increased $4.8 million, or 4%, compared to 2006. Base pay components and the impact of the
Hinsbrook and Broadway acquisitions contributed to the majority of the increase in 2007 compared to
2006.
Equipment expense, which includes furniture, equipment and computer software depreciation and
repairs and maintenance costs, totaled $16.2 million in 2008, $15.4 million in 2007 and $13.5
million in 2006, reflecting increases of 6% in 2008 and 14% in 2007. These increases were caused by
higher levels of expense related to the furniture, equipment and computer software required at new
and expanded facilities and at existing facilities due to increased staffing.
Occupancy expense for the years 2008, 2007 and 2006 was $22.9 million, $22.0 million and $19.8
million, respectively, reflecting increases of 4% in 2008 and 11% in 2007. Occupancy expense
includes depreciation on premises, real estate taxes, utilities and maintenance of premises, as
well as net rent expense for leased premises. Increases in 2008 and 2007 reflect the increases in
the number of facilities operated as well as market increases in operating costs of such
facilities.
Data processing expenses totaled $11.6 million in 2008, $10.4 million in 2007 and $8.5 million in
2006, representing increases of 11% in 2008 and 23% in 2007. The increases are primarily due to the
additional costs of new branch facilities at existing banks and the overall growth of loan and
deposit accounts.
Advertising and marketing expenses totaled $5.4 million for 2008, $5.3 million for 2007 and $5.1
million for 2006. 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 at
the more established locations and to attract loans and deposits at the newly chartered banks. 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 targeted marketing programs in the more mature market areas.
Professional fees include legal, audit and tax fees, external loan review costs and normal
regulatory exam assessments. These fees totaled $8.8 million in 2008, $7.1 million in 2007 and $6.2
million in 2006. The increase for 2008 is primarily related to increased legal costs related to
non-performing loans. The increase for 2007 is attributable to the general growth in the Company’s
total assets, the expansion of the banking franchise and the acquisition of Hinsbrook Bank.
Amortization of other intangibles assets relates to the amortization of core deposit premiums and
customer list intangibles established in connection with the application of SFAS 142 to business
combinations. See Note 8 of the Consolidated Financial Statements for further information on these
intangible assets.
Commissions paid to 3rd party brokers primarily represent the commissions paid on revenue generated
by WHI through its network of unaffiliated banks.
FDIC insurance totaled $5.6 million in 2008, $3.7 million in 2007 and $0.9 million in 2006. The
significant increases in 2008 and 2007 are a result of a higher rate structure imposed on all
financial institutions beginning in 2007.
Miscellaneous non-interest expense includes ATM expenses, other real estate owned expenses
(“OREO”), correspondent banking charges, directors’ fees, telephone, travel and entertainment,
corporate insurance and dues and subscriptions. These expenses represent a large collection of
controllable daily operating expenses. This category increased $3.0 million, or 13%, in 2008 and
decreased $360,000, or 2%, in 2007. The increase in 2008 compared to 2007 is primarily due to an
$829,000 increase in OREO expenses and a $1.7 million increase in net loan expenses due to the
adoption of SFAS 159 on January 1, 2008 for Mortgages Held for Sale originated by the Company’s
mortgage subsidiary. Origination costs are no longer deferred on mortgage loans originated for sale
at this subsidiary with the impact being higher current operating expenses (as reflected in the
miscellaneous expense component) offset by higher levels of gains recognized on the sale of the
loans to the end investors (due to the lower cost basis of the loan).
Income Taxes
The Company recorded income tax expense of $10.2 million in 2008, $28.2 million in 2007 and $37.7
million in 2006. The effective tax rates were 33.1%, 33.6% and 36.2% in 2008, 2007 and 2006,
respectively. Please refer to Note 17 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.
| 46 | Wintrust Financial Corporation |
Table of Contents
Operating Segment Results
As described in Note 24 to the Consolidated Financial Statements, the Company’s operations consist
of four primary segments: banking, premium finance, Tricom 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 banking segment. The net interest income of the
banking segment includes income and related interest costs from portfolio loans that were purchased
from the premium finance segment. For purposes of internal segment profitability analysis,
management reviews the results of its premium finance segment as if all loans originated and sold
to the banking segment were retained within that segment’s operations. Similarly, for purposes of
analyzing the contribution from the wealth management segment, management allocates the net
interest income earned by the banking segment on deposit balances of customers of the wealth
management segment to the wealth management segment.
The banking segment’s net interest income for the year ended December 31, 2008 totaled $237.4
million as compared to $259.0 million for the same period in 2007, a decrease of $21.6 million, or
8%. The decrease in 2008 compared to 2007 is directly attributable to two factors: first, interest
rate compression as certain variable rate retail deposit rates were unable to decline at the same
magnitude as variable rate earning assets and second, the negative impact of an increased balance
of nonaccrual loans. The increase in net interest income for 2007 when compared to the total of
$235.2 million in 2006 was $23.8 million, or 10%. The increase in 2007 compared to 2006 was
primarily a result of an increase in net interest margin which was attributable to a higher
loan-to-deposit ratio and the shift in deposits away from higher cost retail certificates of
deposit in 2007. Total loans increased 7% in 2008, and 8% in 2007. Provision for credit losses
increased to $56.6 million in 2008 compared to $14.3 million in 2007 and $6.3 million in 2006. This
increase reflects the current net charge-offs and credit quality levels. The banking segment’s
non-interest income totaled $70.1 million in 2008, an increase of $33.8 million, or 93%, when
compared to the 2007 total of $36.3 million. The increase in non-interest income for 2008 is
primarily attributable to higher levels of fees from covered call options and higher mortgage
banking revenues. In 2007, non-interest income for the banking segment decreased $4.3 million, or
11% when compared to the 2006 total of $40.6 million. The decrease in 2007 compared to 2006 is
primarily a result of lower mortgage banking revenues which were impacted by mortgage banking
valuation and recourse obligation adjustments totaling $6.0 million. The banking segment’s net
income for the year ended December 31, 2008 totaled $38.0 million, a decrease of $24.3 million, or
39%, as compared to the 2007 total of $62.3 million. Net income for the year ended December 31,
2007 increased $1.2 million, or 2%, as compared to the 2006 total of $61.1 million.
The premium finance segment’s net interest income totaled $70.9 million for the year ended December
31, 2008 and increased $10.4 million, or 17%, over the $60.5 million in 2007. In November 2007, the
Company completed the acquisition of Broadway Premium Funding Corporation which is now included in
the premium finance segment results since the date of acquisition. FIFC began selling loans to an
unrelated third party in 1999. Sales of these receivables are dependent upon market conditions
impacting both sales of these loans and the opportunity for securitizing these loans as well as
liquidity and capital management considerations. Wintrust did not sell any premium finance
receivables to unrelated third party financial institutions in the third and fourth quarters of
2006 or the first three quarters of 2007. Wintrust sold approximately $217.8 million of premium
finance receivables in 2008 to unrelated third parties. The premium finance segment’s non-interest
income totaled $2.5 million, $2.0 million and $2.9 million for the years ended December 31, 2008,
2007 and 2006, respectively. Non-interest income for this segment reflects the gains from the sale
of premium finance receivables to unrelated third parties, as more fully discussed in the
Consolidated Results of Operations section. Net after-tax profit of the premium finance segment
totaled $34.2 million, $29.8 million and $19.6 million for the years ended December 31, 2008, 2007
and 2006, respectively. New receivable originations totaled $3.2 billion in 2008, $3.1 billion in
2007 and $3.0 billion in 2006. The increases in new volumes each year is indicative of this
segment’s ability to increase market penetration in existing markets and establish a presence in
new markets.
The Tricom segment data reflects the business associated with short-term accounts receivable
financing and value-added out-sourced administrative services, such as data processing of payrolls,
billing and cash management services that Tricom provides to its clients in the temporary staffing
industry. The segment’s net interest income was $3.4 million in 2008 and $3.9 million in both 2007
and 2006. Non-interest income for 2008 was $2.9 million, a decrease of $1.1 million or 27%, from
the $4.0 million reported in 2007. Non-interest income for 2007 decreased $592,000, or 13% from the
$4.6 million reported in 2006. The segment’s net income was $706,000 in 2008, $1.4 million in 2007
and $1.8 million 2006. Revenue trends at Tricom reflect the general staffing trends of the economy
and the entrance of new competitors in most market places served by Tricom.
The wealth management segment reported net interest income of $18.6 million for 2008 compared to
$12.9 million for 2007 and $6.3 million for 2006. Net interest income is comprised of the net
interest earned on brokerage customer receivables at WHI and an allocation of the net interest
income earned by the 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 $17.7 million ($10.9 million after
| 2008 Annual Report | 47 |
Table of Contents
tax) in 2008, $11.7 million ($7.2 million after tax) in 2007 and $5.2 million ($3.2 million after
tax) in 2006. During the third quarter of 2006, the Company changed the measurement methodology for
the net interest income component of the wealth management segment. In conjunction with the change
in the executive management team for this segment in the third quarter of 2006, the contribution
attributable to the wealth management deposits was redefined to measure the full net interest
income contribution. In previous periods, the contribution from these deposits was limited to the
value as an alternative source of funding for each bank. As such, the contribution in previous
periods did not capture the total net interest income contribution of this funding source. Current
executive management of this segment uses this measured contribution to determine overall
profitability. Wealth management customer account balances on deposit at the Banks averaged $624.4
million, $538.7 million and $465.4 million in 2008, 2007 and 2006, respectively. This segment
recorded non-interest income of $36.3 million for 2008 as compared to $39.3 million for 2007 and
$38.0 million for 2006. In 2006, this segment’s non-interest income included a $2.4 million gain on
the sale of the Wayne Hummer Growth Fund. 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. Wealth management revenue growth generated in the banking locations is significantly
outpacing the growth derived from the traditional Wayne Hummer Investment downtown Chicago sources.
Wintrust is committed to growing the wealth management segment in order to better service its
customers and create a more diversified revenue stream and continues to focus on reducing the fixed
cost structure of this segment to a variable cost structure. This segment reported net income of
$10.4 million for 2008 compared to $7.7 million for 2007 and $3.3 million for 2006.
ANALYSIS OF FINANCIAL CONDITION
The Company’s total assets were $10.7 billion at December 31, 2008, an increase of $1.3 billion, or
14%, over the $9.4 billion at December 31, 2007. Total assets decreased $203.0 million, or 2%, in
2007 when compared to the $9.6 billion at December 31, 2006. In 2008, loans increased $819.5
million and available-for-sale securities, trade date securities receivable and other liquidity
management assets increased $432.9 million. In 2007, available-for-sale securities decreased $535.9
million, while loans increased $305.1 million.
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, | ||||||||||||||||||||||||
| 2008 | 2007 | 2006 | ||||||||||||||||||||||
| Average | Percent | Average | Percent | Average | Percent | |||||||||||||||||||
| Balance | of Total | Balance | of Total | Balance | of Total | |||||||||||||||||||
Loans: |
||||||||||||||||||||||||
Commercial and
commercial real estate |
$ | 4,580,524 | 52 | % | $ | 4,182,205 | 49 | % | $ | 3,647,982 | 45 | % | ||||||||||||
Home equity |
772,361 | 9 | 652,034 | 8 | 641,494 | 8 | ||||||||||||||||||
Residential real estate (1) |
335,714 | 4 | 335,894 | 4 | 365,159 | 5 | ||||||||||||||||||
Premium finance receivables |
1,178,421 | 13 | 1,264,941 | 15 | 989,689 | 12 | ||||||||||||||||||
Indirect consumer loans |
215,453 | 2 | 248,203 | 3 | 229,757 | 3 | ||||||||||||||||||
Tricom finance receivables |
22,416 | — | 33,552 | — | 41,703 | 1 | ||||||||||||||||||
Consumer and other loans |
140,720 | 2 | 108,051 | 1 | 97,560 | 1 | ||||||||||||||||||
Total loans, net of
unearned income (2) |
7,245,609 | 82 | 6,824,880 | 80 | 6,013,344 | 75 | ||||||||||||||||||
Liquidity management assets (3) |
1,532,282 | 18 | 1,674,719 | 20 | 2,054,798 | 25 | ||||||||||||||||||
Other earning assets (4) |
23,052 | — | 24,721 | — | 29,675 | — | ||||||||||||||||||
Total average earning assets |
$ | 8,800,943 | 100 | % | $ | 8,524,320 | 100 | % | $ | 8,097,817 | 100 | % | ||||||||||||
Total average assets |
$ | 9,753,220 | $ | 9,442,277 | $ | 8,925,557 | ||||||||||||||||||
Total average earning assets to
total average assets |
90 | % | 90 | % | 91 | % | ||||||||||||||||||
| (1) | Includes mortgage loans held-for-sale | |
| (2) | Includes non-accrual loans | |
| (3) | Includes available-for-sale securities, interest earning deposits with banks and federal funds sold and securities purchased under resale agreements | |
| (4) | Includes brokerage customer receivables and trading account securities |
| 48 | Wintrust Financial Corporation |
Table of Contents
Average earning assets increased $276.6 million, or 3%,
in 2008 and $426.5 million, or 5%, in 2007. The ratio
of average earning assets as a percent of total average
assets in 2008 and 2007 was 90% and 91% in 2006.
Loans. Average total loans, net of unearned income,
increased $420.7 million, or 6%, in 2008 and $811.5
million, or 14%, in 2007. Average commercial and
commercial real estate loans, the largest loan
category, totaled $4.6 billion in 2008, and increased
$398.3 million, or 10%, over the average balance in
2007. The average balance in 2007 increased $534.2
million, or 15%, over the average balance in 2006. This
category comprised 63% of the average loan portfolio in
2008 and 61% in 2007. The growth realized in this
category in 2008 is attributable to increased business
development efforts. Loan growth in 2007 is a result of
acquisitions, business development efforts and to a
lesser extent the reclassification of $78.6 million of
loans in the fourth quarter of 2006 from the
residential real estate category to commercial and
commercial real estate.
In order to minimize the time lag typically experienced
by de novo banks in redeploying deposits into higher
yielding earning assets, the Company has developed
lending programs focused on specialized earning asset
niches that generally have large volumes of homogeneous
assets that can be acquired for the Banks’ portfolios
and possibly sold in the secondary market to generate
fee income. These specialty niches also diversify the
Banks’ loan portfolios and add higher yielding earning
assets that help to improve the net interest margin.
However, these loans may involve greater credit risk
than generally associated with loan portfolios of more
traditional community banks due to marketability of the
collateral, or because of the indirect relationship the
Company has with the underlying borrowers. Specialty
loan programs include premium finance, Tricom finance
receivables, mortgage broker warehouse lending through
Hinsdale Bank, the Community Advantage program at
Barrington Bank, which provides lending, deposit and
cash management services to condominium, homeowner and
community associations, the small aircraft lending
program at Crystal Lake Bank and franchise lending at
Lake Forest Bank. Other than the premium finance
receivables and Tricom finance receivables, all of the
loans generated by these specialty loan programs are
included in commercial and commercial real estate loans
in the preceding table. Management continues to
evaluate other specialized types of earning assets to
assist with the deployment of deposit funds and to
diversify the earning asset portfolio.
Home equity loans averaged $772.4 million in 2008, and
increased $120.3 million, or 19%, when compared to the
average balance in 2007. Home equity loans averaged
$652.0 million in 2007, and increased $10.5 million, or
2%,
when compared to the average balance in 2006. Unused
commitments on home equity lines of credit totaled
$897.9 million at December 31, 2008 and $878.1 million
at December 31, 2007. The increase in average home
equity loans in 2008 is primarily a result of new loan
orig-
inations. As a result of deteriorating economic
conditions and declining real estate values in 2008,
the Company has been actively managing its home equity
portfolio to ensure that diligent pricing, appraisal
and other underwriting activities continue to exist.
The Company has not sacrificed asset quality or pricing
standards to grow outstanding loan balances.
Residential real estate loans averaged $335.7 million
in 2008, essentially unchanged from the average balance
of $335.9 million in 2007. In 2007, residential real
estate loans decreased $29.3 million, or 8%, from the
average balance in 2006. 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 remaining loans in this category are maintained
within the Banks’ loan portfolios and represent mostly
adjustable rate mortgage loans and shorter-term fixed
rate mortgage loans. The lower average residential real
estate loans in 2007 resulted from the Company’s
reclassification of $78.6 million of loans in the
fourth quarter of 2006 to the commercial and commercial
real estate loan category.
Average premium finance receivables totaled $1.2
billion in 2008, and accounted for 16% of the Company’s
average total loans. In 2008, average premium finance
receivables decreased $86.5 million, or 7%, from the
average balance of $1.3 billion in 2007. In 2007,
average premium finance receivables increased $275.3
million, or 28%, compared to 2006. The decrease in the
average balance of premium finance receivables in 2008
compared to 2007 is a result of higher sales of premium
finance receivables to unrelated third parties in 2008
compared to 2007. The Company did not sell any premium
finance receivables to unrelated third parties from the
third quarter of 2006 to the third quarter of 2007. In
2008, the Company sold approximately $217.8 million of
premium finance receivables to unrelated third parties.
The increase in the average balance of premium finance
receivables in 2007 compared to 2006 was a result of
not selling premium finance receivables beginning in
the third quarter of 2006 through the third quarter of
2007 and to a lesser extent from loans acquired through
the Broadway acquisition in the fourth quarter of 2007.
The majority of the receivables originated by FIFC are
sold to the Banks and retained in their loan
portfolios. Having a program in place to sell premium
finance receivables to third parties allows the Company
to execute its strategy to be asset-
driven while providing the benefits of additional
sources of liquidity and revenue. The level of premium
finance receivables sold to unrelated third parties
depends in large part on the capacity of the Banks to
retain such loans in their portfolio and therefore, it
is possible that sales of these receivables may occur
in the future. See Consolidated Results of Operations
for further information on these loan sales. Total
premium finance loan originations were $3.2 billion,
$3.1 billion and $3.0 billion in 2008, 2007 and 2006,
respectively.
| 2008 Annual Report | 49 |
Table of Contents
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, the Company ceased
the origination of indirect automobile loans at
Hinsdale Bank. This niche business served the Company
well over the past twelve years in helping de novo
banks quickly and profitably, grow into their physical
structures. Competitive pricing pressures significantly
reduced the long-term potential profitably of this
niche business. Given the current economic environment,
the retirement of the founder of this niche business
and the Company’s belief that interest rates may rise
over the longer-term, exiting the origination of this
business was deemed to be in the best interest of the
Company. The Company will continue to service its
existing portfolio during the duration of the credits.
At December 31, 2008, the average maturity of indirect
automobile loans is estimated to be approximately 39
months. During 2008, 2007 and 2006 average indirect
consumer loans totaled $215.5 million, $248.2 million
and $229.8 million, respectively.
Tricom finance receivables represent high-yielding
short-term accounts receivable financing to Tricom’s
clients in the temporary staffing industry located
throughout the United States. These receivables may
involve greater credit risks than generally associated
with the loan portfolios of more traditional community
banks depending on the marketability of the collateral.
The principal sources of repayments on the receivables
are payments due to the borrowers from their customers
who are located throughout the United States. The
Company mitigates this risk by employing lockboxes and
other cash management techniques to protect their
interests. Typically, Tricom also provides value-added
out-sourced administrative services to many of these
clients, such as data processing of payrolls, billing
and cash management services, which generate additional
fee income. Average Tricom finance receivables were
$22.4 million in 2008, $33.6 million in 2007 and $41.7
million in 2006. Lower activity from existing clients
and slower growth in new customer relationships due to
sluggish economic conditions have led to the decrease
in Tricom finance receivables in the last two years.
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 17% of total average earning
assets in 2008, 20% in 2007 and 25% in 2006. Average
liquidity management assets decreased $142.4 million in
2008 compared to 2007, and decreased $380.1 million in
2007 compared to 2006. The decrease in average
liquidity management assets in 2008 compared to 2007 is
the result of the maturity of various
available-for-sale securities that were reinvested by
funding loans. The balances of liquidity management
assets can fluctuate based on management’s ongoing
effort to manage liquidity and for asset liability
management purposes. The decrease in average liquidity
management assets in 2007 compared to 2006 was the
result of the maturity of various available-for-sale
securities, primarily in the first half of 2007. As a
result of the interest rate environment in 2007, loan
growth and the Company’s balance sheet strategy, not
all maturities were replaced with new purchases.
Other earning assets. Average other earning assets
include trading account securities and brokerage
customer receivables 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 outsourced 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.
| 50 | Wintrust Financial Corporation |
Table of Contents
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, 2008, were $8.4 billion, increasing $905 million, or 12%,
compared to the $7.5 billion at December 31, 2007. Average deposit balances in 2008 were $7.7
billion, reflecting an increase of $111 million, or 1.5%, compared to the average balances in 2007.
During 2007, average deposits increased $257 million, or 4%, compared to the prior year.
The increase in year end deposits in 2008 over 2007 reflects the Company’s initiatives in 2008 to
reduce the level of higher rate certificates of deposit as well as the advertising of its MaxSafe®
deposit account which provides customers with 15 times the FDIC insurance of a single bank.
Beginning in 2007, the Company’s retail deposit pricing strategies focused on shifting the mix of
deposits away from certificates of deposit into lower rate and more variable rate NOW and money
market accounts.
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, | ||||||||||||||||||||||||
| 2008 | 2007 | 2006 | ||||||||||||||||||||||
| Average | Percent | Average | Percent | Average | Percent | |||||||||||||||||||
| Balance | of Total | Balance | of Total | Balance | of Total | |||||||||||||||||||
Non-interest bearing deposits |
$ | 672,924 | 9 | % | $ | 647,715 | 9 | % | $ | 623,542 | 9 | % | ||||||||||||
NOW accounts |
1,011,402 | 13 | 938,960 | 12 | 774,481 | 10 | ||||||||||||||||||
Wealth management deposits |
622,842 | 8 | 547,408 | 7 | 464,438 | 6 | ||||||||||||||||||
Money market accounts |
904,245 | 12 | 696,760 | 9 | 639,590 | 9 | ||||||||||||||||||
Savings accounts |
319,128 | 4 | 302,339 | 4 | 307,142 | 4 | ||||||||||||||||||
Time certificates of deposit |
4,156,600 | 54 | 4,442,469 | 59 | 4,509,488 | 62 | ||||||||||||||||||
Total deposits |
$ | 7,687,141 | 100 | % | $ | 7,575,651 | 100 | % | $ | 7,318,681 | 100 | % | ||||||||||||
Wealth management deposits are funds from the brokerage customers of WHI, the trust and asset
management customers of WHTC and brokerage customers from an unaffiliated company which have been
placed into deposit accounts of the Banks (“Wealth management deposits” in table above). 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.
| 2008 Annual Report | 51 |
Table of Contents
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, | ||||||||||||||||||||||||
| 2008 | 2007 | 2006 | ||||||||||||||||||||||
| Average | Percent | Average | Percent | Average | Percent | |||||||||||||||||||
| Balance | of Total | Balance | of Total | Balance | of Total | |||||||||||||||||||
Lake Forest Bank |
$ | 1,046,069 | 14 | % | $ | 1,060,954 | 14 | % | $ | 1,048,493 | 14 | % | ||||||||||||
Hinsdale Bank (1) |
949,658 | 12 | 1,037,514 | 14 | 888,430 | 12 | ||||||||||||||||||
North Shore Bank |
768,081 | 10 | 781,699 | 10 | 819,010 | 11 | ||||||||||||||||||
Libertyville Bank |
781,708 | 10 | 798,522 | 11 | 741,231 | 10 | ||||||||||||||||||
Barrington Bank |
694,471 | 9 | 700,728 | 9 | 707,620 | 10 | ||||||||||||||||||
Crystal Lake Bank |
469,022 | 6 | 470,586 | 6 | 457,486 | 6 | ||||||||||||||||||
Northbrook Bank |
570,401 | 7 | 613,943 | 8 | 632,337 | 9 | ||||||||||||||||||
Advantage Bank |
286,722 | 4 | 241,117 | 3 | 219,689 | 3 | ||||||||||||||||||
Village Bank |
463,433 | 6 | 491,307 | 6 | 504,021 | 7 | ||||||||||||||||||
Beverly Bank |
169,732 | 2 | 141,186 | 2 | 138,800 | 2 | ||||||||||||||||||
Wheaton Bank (1) |
268,174 | 4 | 244,158 | 3 | 157,440 | 2 | ||||||||||||||||||
Town Bank |
483,331 | 6 | 399,857 | 6 | 358,295 | 5 | ||||||||||||||||||
State Bank of The Lakes |
467,857 | 6 | 428,653 | 6 | 418,805 | 6 | ||||||||||||||||||
Old Plank Trail Bank(2) |
166,675 | 2 | 108,887 | 1 | 44,569 | 1 | ||||||||||||||||||
St. Charles Bank(1) |
101,807 | 2 | 56,540 | 1 | 182,455 | 2 | ||||||||||||||||||
Total deposits |
$ | 7,687,141 | 100 | % | $ | 7,575,651 | 100 | % | $ | 7,318,681 | 100 | % | ||||||||||||
Percentage increase from prior year |
5 | % | 4 | % | 19 | % | ||||||||||||||||||
| (1) | For 2006, represents effect on consolidated average deposits from effective acquisition date of May 31, 2006 for Hinsbrook Bank. Branches (and related deposits) from Hinsbrook Bank were sold to Hinsdale Bank and Wheaton Bank in the fourth quarter of 2006. Hinsbrook’s Geneva branch was renamed St. Charles Bank. | |
| (2) | For 2006, represents effect on consolidated average deposits from effective organization date of March 23, 2006 for Old Plank Trail Bank. At December 31, 2006, Old Plank Trail Bank had total deposits of $92.0 million. |
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 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 2008, 2007 and 2006 is presented in the
following table (dollars in thousands):
| Years Ended December 31, | ||||||||||||||||||||||||
| 2008 | 2007 | 2006 | ||||||||||||||||||||||
| Average | Percent | Average | Percent | Average | Percent | |||||||||||||||||||
| Balance | of Total | Balance | of Total | Balance | of Total | |||||||||||||||||||
Notes payable |
$ | 50,799 | 4 | % | $ | 51,979 | 5 | % | $ | 6,913 | 1 | % | ||||||||||||
Federal Home Loan Bank advances |
435,761 | 38 | 400,552 | 38 | 364,149 | 45 | ||||||||||||||||||
Subordinated notes |
74,589 | 7 | 75,000 | 7 | 66,742 | 8 | ||||||||||||||||||
Short-term borrowings |
334,714 | 29 | 264,743 | 25 | 140,968 | 17 | ||||||||||||||||||
Junior subordinated debentures |
249,575 | 22 | 249,739 | 25 | 237,249 | 29 | ||||||||||||||||||
Other |
1,863 | — | 1,818 | — | 1,883 | — | ||||||||||||||||||
Total other funding sources |
$ | 1,147,301 | 100 | % | $ | 1,043,831 | 100 | % | $ | 817,904 | 100 | % | ||||||||||||
| 52 | Wintrust Financial Corporation |
Table of Contents
Notes payable balances represent the balances on a
credit agreement with an unaffiliated bank. This 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, 2008
and 2007, the Company had $1.0 million and $60.7
million, respectively, of notes payable outstanding. At
December 31, 2008, the Company was in violation of one
debt covenant, however it has applied for a waiver of
compliance on that debt convenant. The Company does not
expect this violation to have a material impact on its
liquidity. See Note 11 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 $436.0 million at December 31, 2008, and
$415.2 million at December 31, 2007. See Note 12 to the
Consolidated Financial Statements for further
discussion of the terms of these advances.
The Company borrowed $75.0 million under three separate
$25 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 $70.0
million and $75.0 million at December 31, 2008 and
2007, respectively. See Note 13 to the Consolidated
Financial Statements for further discussion of the
terms of the notes.
Short-term borrowings include securities sold under
repurchase agreements and federal funds purchased.
These borrowings totaled $334.9 million and $252.6
million at December 31, 2008 and 2007, respectively.
Securities sold under repurchase agreements primarily
represent sweep accounts for certain customers in
connection with master repurchase agreements at the
Banks. This funding category fluctuates based on
customer preferences and daily liquidity needs of the
Banks, their customers and the Banks’ operating
subsidiaries. See Note 14 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, 2008. 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. On September 1,
2006, the Company issued $51.5 million of 6.84% fixed
rate junior subordinated debentures in connection with
a
private placement of the related Trust Preferred
Securities and on September 5, 2006, the Company used
the proceeds from this issuance to redeem at par $32.0
million of 9.0% fixed rate junior subordinated
debentures originally issued in 1998. See Note 15 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.
Shareholders’ Equity. Total shareholders’ equity was
$1.1 billion at December 31, 2008, reflecting an
increase of $328.0 million from the December 31, 2007
total of $739.6. In 2007, shareholders’ equity
decreased $33.7 million when compared to the December
31, 2006 balance. The increase from December 31, 2007,
was the result of the retention of approximately $9.9
million of earnings (net income of $20.5 million less
preferred stock dividends of $2.1 million and common
stock dividends of $8.5 million), a $299.4 million
increase from the issuance of preferred stock, net of
issuance costs, a $5.2 million increase from the
issuance of shares of the Company’s common stock (and
related tax benefit) pursuant to various stock
compensation plans and $9.9 million credited to surplus
for stock-based compensation costs, a $3.4 million
increase in net unrealized gains from
available-for-sale securities and the mark-to-market
adjustment on cash flow hedges, net of tax, partially
offset by a $688,000 cumulative effect adjustment to
retained earnings from the adoption of a new accounting
standard.
The $33.7 million decrease in shareholders’ equity in
2007 was primarily due to the retention of $47.8
million of earnings
($55.7 million of net income less dividends of $7.8
million), $10.8 million due to stock-based compensation
costs, $8.9 million from the issuance of shares
(including related tax benefits) pursuant to various
stock-based compensation plans and $4.1 million from
other comprehensive income, net of tax. These were
offset by a $105.9 million purchase of 2,506,717 shares
of treasury stock, at an average price of $42.23 per
share.
| 2008 Annual Report | 53 |
Table of Contents
CREDIT RISK AND ASSET QUALITY
Allowance for Credit Losses
The following table summarizes the activity in the allowance for credit losses during the last five
years (dollars in thousands):
| 2008 | 2007 | 2006 | 2005 | 2004 | ||||||||||||||||
Allowance for loan losses at beginning of year |
$ | 50,389 | 46,055 | 40,283 | 34,227 | 25,541 | ||||||||||||||
Provision for credit losses |
57,441 | 14,879 | 7,057 | 6,676 | 6,298 | |||||||||||||||
Allowance acquired in business combinations |
— | 362 | 3,852 | 4,792 | 5,110 | |||||||||||||||
Reclassification from/(to) allowance for
lending-related commitments |
(1,093 | ) | (36 | ) | 92 | (491 | ) | — | ||||||||||||
Charge-offs: |
||||||||||||||||||||
Commercial and commercial real estate loans |
30,469 | 8,958 | 4,534 | 3,252 | 2,356 | |||||||||||||||
Home equity loans |
284 | 289 | 97 | 88 | — | |||||||||||||||
Residential real estate loans |
1,631 | 147 | 81 | 198 | — | |||||||||||||||
Consumer and other loans |
474 | 593 | 371 | 363 | 204 | |||||||||||||||
Premium finance receivables |
4,073 | 2,425 | 2,760 | 2,067 | 1,852 | |||||||||||||||
Indirect consumer loans |
1,322 | 873 | 584 | 555 | 425 | |||||||||||||||
Tricom finance receivables |
144 | 252 | 50 | — | 33 | |||||||||||||||
Total charge-offs |
38,397 | 13,537 | 8,477 | 6,523 | 4,870 | |||||||||||||||
Recoveries: |
||||||||||||||||||||
Commercial and commercial real estate loans |
496 | 1,732 | 2,299 | 527 | 1,148 | |||||||||||||||
Home equity loans |
1 | 61 | 31 | — | 6 | |||||||||||||||
Residential real estate loans |
— | 6 | 2 | — | — | |||||||||||||||
Consumer and other loans |
95 | 178 | 148 | 243 | 104 | |||||||||||||||
Premium finance receivables |
662 | 514 | 567 | 677 | 738 | |||||||||||||||
Indirect consumer loans |
173 | 172 | 191 | 155 | 152 | |||||||||||||||
Tricom finance receivables |
— | 3 | 10 | — | — | |||||||||||||||
Total recoveries |
1,427 | 2,666 | 3,248 | 1,602 | 2,148 | |||||||||||||||
Net charge-offs |
(36,970 | ) | (10,871 | ) | (5,229 | ) | (4,921 | ) | (2,722 | ) | ||||||||||
Allowance for loan losses at end of year |
$ | 69,767 | 50,389 | 46,055 | 40,283 | 34,227 | ||||||||||||||
Allowance for lending-related commitments
at end of year |
1,586 | 493 | 457 | 491 | — | |||||||||||||||
Allowance for credit losses at end of year |
$ | 71,353 | 50,882 | 46,512 | 40,774 | 34,227 | ||||||||||||||
Net charge-offs (recoveries) by category
as a percentage of its own respective category’s average: |
||||||||||||||||||||
Commercial and commercial real estate loans |
0.65 | % | 0.17 | % | 0.06 | % | 0.09 | % | 0.06 | % | ||||||||||
Home equity loans |
0.04 | 0.04 | 0.01 | 0.01 | (0.00 | ) | ||||||||||||||
Residential real estate loans |
0.49 | 0.04 | 0.02 | 0.05 | — | |||||||||||||||
Consumer and other loans |
0.27 | 0.38 | 0.23 | 0.12 | 0.13 | |||||||||||||||
Premium finance receivables |
0.29 | 0.15 | 0.22 | 0.16 | 0.14 | |||||||||||||||
Indirect consumer loans |
0.53 | 0.28 | 0.17 | 0.20 | 0.15 | |||||||||||||||
Tricom finance receivables |
0.64 | 0.74 | 0.10 | — | 0.12 | |||||||||||||||
Total loans, net of unearned income |
0.51 | % | 0.16 | % | 0.09 | % | 0.10 | % | 0.07 | % | ||||||||||
Net charge-offs as a percentage of the provision
for credit losses |
68.36 | % | 73.07 | % | 74.10 | % | 73.71 | % | 43.22 | % | ||||||||||
Year-end total loans |
$ | 7,621,069 | 6,801,602 | 6,496,480 | 5,213,871 | 4,348,346 | ||||||||||||||
Allowance for loan losses as a percentage
of loans at end of year |
0.92 | % | 0.74 | % | 0.71 | % | 0.77 | % | 0.79 | % | ||||||||||
Allowance for credit losses as a percentage
of loans at end of year |
0.94 | % | 0.75 | % | 0.72 | % | 0.78 | % | 0.79 | % | ||||||||||
| 54 | Wintrust Financial Corporation |
Table of Contents
Risk Elements in the Loan Portfolio
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 (dollars in thousands):
| 2008 | 2007 | 2006 | 2005 | 2004 | ||||||||||||||||||||||||||||||||||||
| % 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 and commercial real estate |
$ | 56,985 | 63 | % | $ | 38,995 | 65 | % | $ | 32,943 | 63 | % | $ | 28,288 | 61 | % | $ | 20,016 | 57 | % | ||||||||||||||||||||
Home equity |
3,067 | 12 | 2,057 | 10 | 1,985 | 10 | 1,835 | 12 | 1,404 | 13 | ||||||||||||||||||||||||||||||
Residential real estate |
1,698 | 3 | 1,290 | 3 | 1,381 | 3 | 1,372 | 5 | 993 | 5 | ||||||||||||||||||||||||||||||
Consumer and other |
1,641 | 2 | 1,442 | 2 | 1,757 | 1 | 1,516 | 1 | 1,585 | 2 | ||||||||||||||||||||||||||||||
Premium finance receivables |
4,666 | 18 | 3,672 | 16 | 4,838 | 18 | 4,586 | 16 | 7,708 | 18 | ||||||||||||||||||||||||||||||
Indirect consumer loans |
1,690 | 2 | 2,900 | 4 | 3,019 | 4 | 2,538 | 4 | 2,149 | 4 | ||||||||||||||||||||||||||||||
Tricom finance receivables |
20 | — | 33 | — | 132 | 1 | 148 | 1 | 372 | 1 | ||||||||||||||||||||||||||||||
Total allowance for loan losses |
$ | 69,767 | 100 | % | $ | 50,389 | 100 | % | $ | 46,055 | 100 | % | $ | 40,283 | 100 | % | $ | 34,227 | 100 | % | ||||||||||||||||||||
Allowance category as a percent of total allowance: |
||||||||||||||||||||||||||||||||||||||||
Commercial and commercial real estate |
82 | % | 77 | % | 72 | % | 70 | % | 58 | % | ||||||||||||||||||||||||||||||
Home equity |
5 | 4 | 4 | 5 | 4 | |||||||||||||||||||||||||||||||||||
Residential real estate |
2 | 3 | 3 | 4 | 3 | |||||||||||||||||||||||||||||||||||
Consumer and other |
2 | 3 | 4 | 4 | 5 | |||||||||||||||||||||||||||||||||||
Premium finance receivables |
7 | 7 | 10 | 11 | 23 | |||||||||||||||||||||||||||||||||||
Indirect consumer loans |
2 | 6 | 7 | 6 | 6 | |||||||||||||||||||||||||||||||||||
Tricom finance receivables |
— | — | — | — | 1 | |||||||||||||||||||||||||||||||||||
Total allowance for loan losses |
100 | % | 100 | % | 100 | % | 100 | % | 100 | % | ||||||||||||||||||||||||||||||
Allowance for losses on lending-related commitments: |
||||||||||||||||||||||||||||||||||||||||
Commercial and commercial real estate |
$ | 1,586 | $ | 493 | $ | 457 | $ | 491 | $ | — | ||||||||||||||||||||||||||||||
Total allowance for credit losses |
$ | 71,353 | $ | 50,882 | $ | 46,512 | $ | 40,774 | $ | 34,227 | ||||||||||||||||||||||||||||||
Management has determined that the allowance for loan losses and the allowance for losses on
lending-related commitments were adequate at December 31, 2008. The Company’s loan rating process
is an integral component of the methodology utilized in determining the adequacy of the allowance
for loan losses. The Company utilizes a loan rating system to assign risk to loans and utilizes
that risk rating system to assist in developing the Problem Loan Report as a means of reporting
non-performing and potential problem loans. At each scheduled meeting of the Boards of Directors of
the Banks and the Wintrust Risk Management Committee, a Problem Loan Report is presented, showing
loans that are non-performing and loans that may warrant additional monitoring. Accordingly, in
addition to those loans disclosed under “Past Due Loans and Non-performing Assets,” there are
certain loans in the portfolio which management has identified, through its Problem Loan Report,
which exhibit a higher than normal credit risk. These Problem Loan Report credits are reviewed
individually by management. However, these loans are still performing and, accordingly, are not
included in non-performing loans. Management’s philosophy is to be proactive and conservative in
assigning risk ratings to loans and identifying loans to be included on the Problem Loan Report.
The principal amount of loans on the Company’s Problem Loan Report (exclusive of those loans
reported as non-performing) as of December 31, 2008 and December 31, 2007, was approximately $246.6
million and $142.1 million, respectively. The increase in 2008 is primarily a result of Problem
Loan Report credits in the commercial and commercial real estate category. These loans are
performing and, accordingly, do not cause management to have serious doubts as to the abiltity of
such borrowers to comply with the present loan repayment terms.
| 2008 Annual Report | 55 |
Table of Contents
In the second quarter of 2008, the Company refined its
methodology for determining certain elements of the
allowance for loan losses. These refinements resulted
in an allocation of the allowance to loan portfolio
groups based on loan collateral and credit risk rating
and did not have a material impact on the allowance as
compared to the previous methodology. Previously, this
element of the allowance was not segmented at the loan
collateral and credit risk rating level. The Company
maintains its allowance for loan losses at a level
believed adequate by management to absorb probable
losses inherent in the loan portfolio and is based on
the size and current risk characteristics of the loan
portfolio, an assessment of internal problem loan
identification system (“Problem Loan Report”) loans and
actual loss experience, changes in the composition of
the loan portfolio, historical loss experience, changes
in lending policies and procedures, including
underwriting standards and collections, charge-off, and
recovery practices, changes in experience, ability and
depth of lending management and staff, changes in
national and local economic and business conditions and
developments, including the condition of various market
segments and changes in the volume and severity of past
due and classified loans and trends in the volume of
non-accrual loans, troubled debt restructurings and
other loan modifications. The allowance for loan losses
also includes an element for estimated probable but
undetected losses and for imprecision in the credit
risk models used to calculate the allowance. The
Company reviews non-accrual loans on a case-by-case
basis to allocate a specific dollar amount of reserves,
whereas all other loans are reserved for based on loan
collateral and assigned credit risk rating reserve
percentages. 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. Loan losses are
charged off against the allowance, while recoveries are
credited to the allowance. A provision for credit
losses is charged to operations based on management’s
periodic evaluation of the factors previously
mentioned, as well as other pertinent factors.
Evaluations are conducted at least quarterly and more
frequently if deemed necessary.
The Company also maintains an allowance for
lending-related commitments, specifically unfunded loan
commitments and letters of credit, to provide for the
risk of loss inherent in these arrangements. The
allowance for lending-related commitments relates to
certain amounts that the Company is 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. This allowance
is included in other liabilities on the Consolidated
Statement of Condition
while the corresponding provision for these losses is
recorded as a component of the provision for credit
losses.
An analysis of commercial and commercial real estate
loans actual loss experience is conducted to assess
reserves established for credits with similar risk
characteristics. The Company separately measures the
fair value of impaired commercial and commercial real
estate loans using either the present value of expected
future cash flows discounted at the loan’s effective
interest rate, the observable market price of the loan,
or the fair value of the collateral if the loan is
collateral dependent. Commercial and commercial real
estate loans continue to represent a larger percentage
of the Company’s total loans outstanding. The credit
risk of commercial and commercial real estate loans is
largely influenced by the impact on borrowers of
general economic conditions, which can be challenging
and uncertain. The home equity, residential real
estate, consumer and other loan allocations are based
on analysis of historical delinquency and charge-off
statistics and trends and the current economic
environment. Allocations for niche loans such as
premium finance receivables, indirect consumer and
Tricom finance receivables are also based on an
analysis of historical delinquency and charge-off
statistics and trends and the current economic
environment.
The allowance for loan losses as of December 31, 2008,
increased $19.4 million to $69.8 million from December
31, 2007. The allowance for loan losses as a percentage
of total loans at December 31, 2008 and 2007 was 0.92%
and 0.74%, respectively. As a percent of average total
loans, total net charge-offs for 2008 and 2007 were
0.51% and 0.16%, respectively. While management
believes that the allowance for loan losses is adequate
to provide for losses inherent in the portfolio, there
can be no assurances that future losses will not exceed
the amounts provided for, thereby affecting future
earnings. In 2008, the Company reclassified $1.1
million from its allowance for loan losses to its
allowance for lending-related commitments, specifically
unfunded loan commitments and letters of credit. In
2007, the Company reclassified $36,000 from its
allowance for loan losses to its allowance for
lending-related commitments. In 2006, the Company
reclassified $92,000 from the allowance for lending
related commitments to its allowance for loan losses.
The allowance for credit losses is comprised of the
allowance for loan losses and the allowance for
lending-related commitments. In future periods, the
provision for credit losses may contain both a
component related to funded loans (provision for loan
losses) and a component related to lending-related
commitments (provision for unfunded loan commitments
and letters of credit).
Commercial and commercial real estate loans represent
the largest loan category in the Company’s loan
portfolio, accounting for 63% of total loans at
December 31, 2008.
Net charge-offs in this category totaled $30.0 million,
or 0.65% of average loans in this category in 2008, and
$7.2 million, or 0.17% of average loans in this
category in 2007.
| 56 | Wintrust Financial Corporation |
Table of Contents
Premium finance receivable loans represent the second largest loan category in the Company’s
portfolio, accounting for 18% of total loans at December 31, 2008. Net charge-offs totaled $3.4
million in 2008 as compared to $1.9 million in 2007. Net charge-offs were 0.29% of average premium
finance receivables in 2008 versus 0.15% in 2007. As noted in the next section of this report,
non-performing premium finance receivables as a percent of total premium finance receivables were
1.54% at December 31, 2008 and 1.80% at December 31, 2007.
Past Due Loans and Non-performing Assets
The following table classifies the Company’s non-performing assets as of December 31 for each of
last five years. The information in the table should be read in conjunction with the detailed
discussion following the table (dollars in thousands):
| 2008 | 2007 | 2006 | 2005 | 2004 | ||||||||||||||||||||
Loans past due greater than 90 days and still accruing: |
||||||||||||||||||||||||
Residential real estate and home equity(1) |
$ | 617 | 51 | 308 | 159 | — | ||||||||||||||||||
Commercial, consumer and other |
14,750 | 14,742 | 8,454 | 1,898 | 715 | |||||||||||||||||||
Premium finance receivables |
9,339 | 8,703 | 4,306 | 5,211 | 3,869 | |||||||||||||||||||
Indirect consumer loans |
679 | 517 | 297 | 228 | 280 | |||||||||||||||||||
Tricom finance receivables |
— | — | — | — | — | |||||||||||||||||||
Total loans past due greater than 90 days
and still accruing |
25,385 | 24,013 | 13,365 | 7,496 | 4,864 | |||||||||||||||||||
Non-accrual loans: |
||||||||||||||||||||||||
Residential real estate and home equity(1) |
6,528 | 3,215 | 1,738 | 457 | 2,660 | |||||||||||||||||||
Commercial, consumer and other |
91,814 | 33,267 | 12,959 | 11,712 | 3,550 | |||||||||||||||||||
Premium finance receivables |
11,454 | 10,725 | 8,112 | 6,189 | 7,396 | |||||||||||||||||||
Indirect consumer loans |
913 | 560 | 376 | 335 | 118 | |||||||||||||||||||
Tricom finance receivables |
— | 74 | 324 | — | — | |||||||||||||||||||
Total non-accrual |
110,709 | 47,841 | 23,509 | 18,693 | 13,724 | |||||||||||||||||||
Total non-performing loans: |
||||||||||||||||||||||||
Residential real estate and home equity(1) |
7,145 | 3,266 | 2,046 | 616 | 2,660 | |||||||||||||||||||
Commercial, consumer and other |
106,564 | 48,009 | 21,413 | 13,610 | 4,265 | |||||||||||||||||||
Premium finance receivables |
20,793 | 19,428 | 12,418 | 11,400 | 11,265 | |||||||||||||||||||
Indirect consumer loans |
1,592 | 1,077 | 673 | 563 | 398 | |||||||||||||||||||
Tricom finance receivables |
— | 74 | 324 | — | — | |||||||||||||||||||
Total non-performing loans |
136,094 | 71,854 | 36,874 | 26,189 | 18,588 | |||||||||||||||||||
Total non-performing loans by category
as a percent of its own respective category’s
year end balance: |
||||||||||||||||||||||||
Residential real estate and home equity(1) |
0.62 | % | 0.36 | % | 0.23 | % | 0.07 | % | 0.32 | % | ||||||||||||||
Commercial, consumer and other |
2.17 | 1.06 | 0.51 | 0.42 | 0.17 | |||||||||||||||||||
Premium finance receivables |
1.54 | 1.80 | 1.07 | 1.40 | 1.46 | |||||||||||||||||||
Indirect consumer loans |
0.90 | 0.45 | 0.27 | 0.28 | 0.23 | |||||||||||||||||||
Tricom finance receivables |
— | 0.27 | 0.74 | — | — | |||||||||||||||||||
Total non-performing loans |
1.79 | % | 1.06 | % | 0.57 | % | 0.50 | % | 0.43 | % | ||||||||||||||
Allowance for loan losses as a
percentage of non-performing loans |
51.26 | % | 70.13 | % | 124.90 | % | 153.82 | % | 184.13 | % | ||||||||||||||
| (1) | Residential real estate and home equity loans that are non-accrual and past due greater than 90 days and still accruing do not include non-performing mortgage loans held-for-sale. These loans totaled $0 and $2.0 million as of December 31, 2008 and 2007, respectively. Mortgage loans held-for-sale are carried at either fair value or at the lower of cost or market applied on an aggregate basis by loan type. Charges related to adjustments to record the loans at fair value are recognized in mortgage banking revenue. |
| 2008 Annual Report | 57 |
Table of Contents
Non-performing Residential Real Estate and Home
Equity
The non-performing residential real estate and home
equity loans totaled $7.1 million as of December 31,
2008. The balance increased $3.9 million from December
31, 2007. The December 31, 2008 non-performing balance
is comprised of $5.7 million of residential real estate
(18 individual credits) and $1.4 million of home equity
loans (12 individual credits). On average, this is
approximately two nonperforming 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, Consumer and Other
The commercial, consumer and other non-performing loan
category totaled $106.6 million as of December 31, 2008
compared to $48.0 million as of December 31, 2007.
Management is pursuing the resolution of all credits in
this category. However, given the current state of the
residential real estate development market, resolution
of certain credits could span a lengthy period of time
until market conditions stabilize. At this time,
management believes reserves are adequate to absorb
inherent losses that may occur upon the ultimate
resolution of these credits.
Non-performing Premium Finance Receivables
The table below presents the level of non-performing
premium finance receivables as of December 31, 2008 and
2007, and the amount of net charge-offs for the years
then ended (dollars in thousands):
| 2008 | 2007 | |||||||
Non-performing premium
finance receivables |
$ | 20,793 | $ | 19,428 | ||||
- as a percent of premium
finance receivables outstanding |
1.54 | % | 1.80 | % | ||||
Net charge-offs of premium
finance receivables |
$ | 3,411 | $ | 1,911 | ||||
- annualized as a percent of average
premium finance receivables |
0.29 | % | 0.15 | % | ||||
As noted below, fluctuations in this category may occur
due to timing and nature of account collections from
insurance carriers. Although non-performing balances
and net charge-offs in this category have increased
over the past 12 months, the Company’s underwriting
standards, regardless of the
condition of the economy, have remained consistent.
Management anticipates 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 premium finance receivables.
The ratio of non-performing premium finance receivables
fluctuates throughout the year due to the nature and
timing of canceled account collections from insurance
carriers. Due to the nature of collateral for premium
finance receivables it customarily takes 60-150 days to
convert the collateral into cash collections.
Accordingly, the level of non-performing premium
finance receivables is not necessarily indicative of
the loss inherent in the portfolio. In the event of
default, 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 Indirect Consumer Loans
Total non-performing indirect consumer loans were $1.6
million at December 31, 2008, compared to $1.1 million
at December 31, 2007. The ratio of these non-performing
loans to total indirect consumer loans was 0.90% at
December 31, 2008 compared to 0.45% at December 31,
2007. As noted in the Allowance for Credit Losses
table, net charge-offs as a percent of total indirect
consumer loans were 0.53% for the year ended December
31, 2008 compared to 0.28% in the same period in 2007.
The level of non-performing and net charge-offs of
indirect consumer loans continue to be below standard
industry ratios for this type of lending.
At the beginning of the third quarter the Company
ceased the origination of indirect automobile loans.
This niche business served the Company well over the
past 12 years in helping den-ovo banks quickly, and
profitably, grow into their physical structures.
Competitive pricing pressures have significantly
reduced the long-term potential profitably of this
niche business. Given the current economic environment
and the retirement of the founder of this niche
business, exiting the origination of this business was
deemed to be in the best interest of the Company. The
Company will continue to service its existing portfolio
during the duration of the credits.
| 58 | Wintrust Financial Corporation |
Table of Contents
Non-performing Loans
The $113.7 million of non-performing loans classified as residential real estate and home equity,
commercial, consumer, and other consumer consists of $52.7 million of residential real estate
construction and land development related loans, $26.6 million of commercial real estate
construction and land development related loans, $16.8 million of residential real estate and home
equity related loans, $11.9 million of commercial real estate related loans, $5.5 million of
commercial related loans and $223,000 of consumer related loans. Thirteen of these relationships
exceed $2.5 million in outstanding balances, approximating $82.5 million in total outstanding
balances.
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. At this time, management believes reserves are adequate to absorb inherent losses that
may occur upon the ultimate resolution of these credits. The Company had no concentrations of loans
exceeding 10% of total loans at December 31, 2008, except for loans included in the premium 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 as of December 31, 2008 and shows the
changes in the balance from December 31, 2007 for each property type:
| Residential | ||||||||||||||||||||||||||||||||||||||||||||||||
| Residential | Real Estate | Commercial | Total | |||||||||||||||||||||||||||||||||||||||||||||
| Real Estate | Development | Real Estate | Balance | |||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in Thousands) | Amount | # | R | Amount | # | R | Amount | # | R | Amount | # | R | ||||||||||||||||||||||||||||||||||||
Balance at December 31, 2007 |
$ | 874 | 5 | 5 | $ | 2,654 | 2 | 2 | $ | 330 | 1 | 1 | $ | 3,858 | 8 | 8 | ||||||||||||||||||||||||||||||||
Transfers at Fair Value |
8,275 | 16 | 16 | 22,550 | 46 | 14 | 3,953 | 7 | 4 | 34,778 | 69 | 34 | ||||||||||||||||||||||||||||||||||||
Fair Value adjustments |
(403 | ) | — | — | (255 | ) | — | — | — | — | — | (658 | ) | — | — | |||||||||||||||||||||||||||||||||
Resolved |
(1,839 | ) | (9 | ) | (9 | ) | (3,237 | ) | (2 | ) | (2 | ) | (330 | ) | (1 | ) | (1 | ) | (5,406 | ) | (12 | ) | (12 | ) | ||||||||||||||||||||||||
Balance at December 31, 2008 |
$ | 6,907 | 12 | 12 | $ | 21,712 | 46 | 14 | $ | 3,953 | 7 | 4 | $ | 32,572 | 65 | 3 | ||||||||||||||||||||||||||||||||
# — Number of properties
R — Number of relationships
2008 Annual Report |
59 |
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 the Company’s
capital ratios as of December 31, 2008, 2007 and 2006:
| Wintrust’s | Wintrust’s | Wintrust’s | ||||||||||||||||||
| Well | Ratios at | Ratios at | Ratios at | |||||||||||||||||
| Minimum | Capitalized | Year-end | Year-end | Year-end | ||||||||||||||||
| Ratios | Ratios | 2008 | 2007 | 2006 | ||||||||||||||||
Tier 1 Leverage Ratio |
4.0 | % | 5.0 | % | 8.6 | % | 7.7 | % | 8.2 | % | ||||||||||
Tier 1 Capital
to Risk-Weighted Assets |
4.0 | % | 6.0 | % | 9.5 | % | 8.7 | % | 9.8 | % | ||||||||||
Total Capital
to Risk-Weighted Assets |
8.0 | % | 10.0 | % | 13.1 | % | 10.2 | % | 11.3 | % | ||||||||||
Total average equity to total
average assets |
N/A | N/A | 8.0 | % | 7.7 | % | 7.9 | % | ||||||||||||
As reflected in the table, each of the Company’s
capital ratios at December 31, 2008, exceeded the
well-capitalized ratios established by the Federal
Reserve. Refer to Note 19 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 an
unaffiliated bank and proceeds from the issuances of
subordinated debt, junior subordinated debentures and
additional equity. Refer to Notes 11, 13, 15 and 23 of
the Consolidated Financial
Statements for further information on the Company’s
notes payable, subordinated note, junior sub-
ordinated 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.
Pursuant to the Treasury’s CPP, on December 19, 2008,
the Company issued to the Treasury, in exchange for
aggregate consideration of $250 million, (i) 250,000
shares of the Company’s fixed rate cumulative perpetual
preferred Stock, Series B, liquidation preference
$1,000 per share (the “Series B Preferred Stock”), and
(ii) a warrant to purchase 1,643,295 shares of
Win-trust common stock at a per share exercise price of
$22.82 and with a term of 10 years. The senior
preferred stock will pay a cumulative dividend at a
coupon rate of 5% for the first five years and 9%
thereafter. This investment can, with the approval of
the Federal Reserve, be redeemed in the first three
years with the proceeds from the issuance of certain
qualifying Tier 1 capital or after three years at par
value plus accrued and unpaid dividends.
For as long as any shares of Series B Preferred Stock
are outstanding, the ability of the Company to declare
or pay dividends or distributions on, or purchase,
redeem or otherwise acquire for consideration, shares
of its common stock or other securities, including
trust preferred securities, will be subject to
restrictions. The Treasury’s consent is required for
any increase in common dividends per share from the
amount of the Company’s semiannual cash dividend of
$0.18 per share, until the third anniversary of the
purchase agreement with the Treasury unless prior to
such third anniversary the Series B Preferred Stock is
redeemed in whole or the Treasury has transferred all
of the Series B Preferred Stock to third parties.
In August 2008, the Company issued for $50 million,
50,000 shares of non-cumulative perpetual convertible
preferred stock, Series A, liquidation preference
$1,000 per share (the “Series A Preferred Stock”) in a
private transaction. If declared, dividends on the
Series A Preferred Stock are payable quarterly in
arrears at a rate of 8.00% per annum. The Series A
Preferred Stock is convertible into common stock at the
option of the holder at a conversion rate of 38.8804
shares of common stock per share of Series A Preferred
Stock subject to adjustment for certain dilutive
transactions. On and after August 26, 2010, the
preferred stock will be subject to mandatory conversion
into common stock under certain circumstances.
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. In addition, the payment
of dividends may be restricted under certain financial
covenants in the Company’s revolving credit line
agreement.
| 60 | Wintrust Financial Corporation |
Table of Contents
At January 1, 2009, subject to minimum capital
requirements at the Banks, approximately $37.1 million
was available as dividends from the Banks without prior
regulatory approval. However, since the Banks are
required to maintain their capital at the
well-capitalized level (due to the Company being
approved as 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.
At January 1, 2009, approximately $5.9 million was
available as dividends from the Banks without
compromising the Banks’ well-capitalized positions.
During 2008, 2007 and 2006 the subsidiaries paid
dividends to Wintrust totaling $73.2 million, $105.9
million and $183.6 million, respectively.
The Company declared its first semi-annual cash
dividend on its common stock in 2000 and increased the
dividend each year up to and through 2008. However, as
discussed above, for as long as any shares of Series B
Preferred Stock are outstanding, the Company is
restricted as to the amount of common dividends which
can be paid.
In July 2006, the Company’s Board of Directors
authorized the repurchase of up to 2.0 million shares
of the Company’s outstanding common stock over 18
months. The Company repurchased a total of
approximately 1.8 million shares at an average price of
$45.74 per share under the July 2006 share repurchase
plan. In April 2007, the Company’s Board of Directors
terminated the prior plan and authorized the repurchase
of up to an additional 1.0 million shares of the
Company’s outstanding common stock over 12 months. The
Company began to repurchase shares under the new plan
in July 2007 and repurchased all 1.0 million shares at
an average price of $37.57 per share during the third
and fourth quarters of 2007. On January 24, 2008, the
Company’s Board of Directors authorized the repurchase
of up to an additional 1.0 million shares of its
outstanding common stock over the following 12 months.
No shares were repurchased under the January 2008 share
repurchase plan and the Company’s Board of Directors
retracted the authority to use this repurchase program
in December of 2008. Pursuant to the terms of the
Series B Preferred Stock issued to the Treasury, the
Company may not make any repurchases until the third
anniversary of the purchase agreement with the Treasury
unless prior to such third anniversary the Series B
Preferred Stock is redeemed in whole or the Treasury
has transferred all of the Series B Preferred stock to
third parties.
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. On October 3, 2008, President Bush
signed into law the EESA which also temporarily
increased federal deposit insurance on most deposit
accounts from $100,000 to $250,000. This basic deposit
insurance limit is scheduled to return to $100,000
after December 31, 2009. In addition, the FDIC has
implemented two temporary programs to provide deposit
insurance for the full amount of most non-interest
bearing transaction accounts and to guarantee certain
unsecured debt of financial institutions and their
holding companies. Using the Company’s decentralized
corporate structure to its advantage, the Company
created its MaxSafe® deposit accounts, which provide
customers with expanded FDIC insurance coverage by
spreading a customer’s deposit across its fifteen bank
charters. This product differentiates the Company’s
Banks from many of its competitors that have
consolidated their bank charters into branches.
Approximately 54% and 55% of the Company’s total assets
were funded by core deposits at the end of 2008 and
2007, respectively. The remaining assets were funded by
other funding sources such as time deposits with
balances in excess of $100,000, borrowed funds and
equity capital. 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.
Liquid assets refer to money market assets such as
Federal funds sold and interest bearing deposits with
banks, as well as available- for-sale debt securities.
Net liquid assets represent the sum of the liquid asset
categories less the amount of assets pledged to secure
public funds. At December 31, 2008, net liquid assets
totaled approximately $400.2 million, compared to
approximately $191.4 million at December 31, 2007. This
increase is due to the receipt of $250.0 million of
proceeds from the issuance of Series B Preferred Stock.
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,
2008 and 2007, the Banks had approximately $1.1 billion
and $780.8 million, respectively, of securities
collateralizing such public deposits and other
short-term borrowings. Deposits requiring pledged
assets are not considered to be core deposits, and the
assets that are pledged as collateral for these
deposits are not deemed to be liquid assets.
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 adverse effect on the Company’s capital
resources, operations or liquidity.
| 2008 Annual Report | 61 |
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, 2008, 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 | |||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||
Deposits (1) |
10 | $ | 7,214,596 | 1,033,932 | 128,065 | 157 | 8,376,750 | |||||||||||||||||
Notes payable |
11 | — | — | — | 1,000 | 1,000 | ||||||||||||||||||
FHLB advances (1) (2) |
12 | 5,000 | 122,500 | 153,500 | 155,000 | 436,000 | ||||||||||||||||||
Subordinated notes |
13 | 10,000 | 25,000 | 25,000 | 10,000 | 70,000 | ||||||||||||||||||
Other borrowings |
14 | 167,737 | 1,838 | 167,189 | — | 336,764 | ||||||||||||||||||
Junior subordinated debentures (1) |
15 | — | — | — | 249,493 | 249,493 | ||||||||||||||||||
Operating leases |
16 | 3,904 | 7,588 | 5,031 | 15,820 | 32,343 | ||||||||||||||||||
Purchase obligations (3) |
17,769 | 21,103 | 964 | 173 | 40,009 | |||||||||||||||||||
Total |
$ | 7,419,006 | 1,211,961 | 479,749 | 431,643 | 9,542,359 | ||||||||||||||||||
| (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 out-sourcing 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, 2008 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, 2008. Further information on these commitments is
included in Note 20 of the Consolidated Financial Statements.
| One Year | 1 - 3 | 3 - 5 | Over | |||||||||||||||||
| or Less | Years | Years | 5 Years | Total | ||||||||||||||||
| (in thousands) | ||||||||||||||||||||
Commitment type: |
||||||||||||||||||||
Commercial, commercial real estate and construction |
$ | 1,300,391 | 330,042 | 114,963 | 26,813 | 1,772,209 | ||||||||||||||
Residential real estate |
176,115 | — | — | — | 176,115 | |||||||||||||||
Revolving home equity lines of credit |
897,866 | — | — | — | 897,866 | |||||||||||||||
Letters of credit |
116,674 | 61,944 | 13,921 | 1,085 | 193,624 | |||||||||||||||
Commitments to sell mortgage loans |
237,319 | — | — | — | 237,319 | |||||||||||||||
Contingent Liabilities. In connection with the sale of premium finance receivables, the Company
continues to service the receivables and maintains a recourse obligation to the purchasers should
the underlying borrowers default on their obligations. The estimated recourse obligation is taken
into account in recording the sale, effectively reducing the gain recognized. As of December 31,
2008, outstanding premium finance receivables sold to and serviced for third parties for which the
Company has a recourse obligation were $37.5 million and the estimated recourse obligation was
$82,000 and included in other liabilities on the balance sheet. In accordance with the terms of the
underlying sales agreement, recourse is limited to 2% of the average principal balance outstanding.
Please refer to the Consolidated Results of Operations section of this report for further
discussion of these loan sales.
| 62 | Wintrust Financial Corporation |
Table of Contents
The Company enters into residential mortgage loan sale
agreements with investors in the normal course of
business. These agreements usually require certain
representations concerning credit information, loan
documentation, collateral and insurability. On
occasion, investors have requested the Company to
indemnify them against losses on certain loans or to
repurchase loans which the investors believe do not
comply with applicable representations. Upon completion
of its own investigation, the Company generally
repurchases or provides indemnification on certain
loans. Indemnification requests are generally received
within two years subsequent to sale. Management
maintains a liability for estimated losses on loans
expected to be repurchased or on which indemnification
is expected to be provided and regularly evaluates the
adequacy of this recourse liability based on trends in
repurchase and indemnification requests, actual loss
experience, known and inherent risks in the loans, and
current economic conditions. At December 31, 2008 the
liability for estimated losses on repurchase and
indemnification was $734,000 and was included in other
liabilities on the balance sheet.
| ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS |
Effects of Inflation
A banking organization’s assets and liabilities are
primarily monetary. Changes in the rate of inflation do
not have as great an impact on the financial condition
of a bank as do changes in interest rates. Moreover,
interest rates do not necessarily change at the same
percentage as does inflation. Accordingly, changes in
inflation are not expected to have a material impact on
the Company. An analysis of the Company’s asset and
liability structure provides the best indication of how
the organization is positioned to respond to changing
interest rates.
Asset-Liability Management
As an ongoing part of its financial strategy, the
Company attempts to manage the impact of fluctuations
in market interest rates on net interest income. This
effort entails providing a reasonable balance between
interest rate risk, credit risk, liquidity risk and
maintenance of yield. Asset-liability management
policies are established and monitored by management in
conjunction with the boards of directors of the Banks,
subject to general oversight by
the Risk Management Committee of the Company’s Board of
Directors. The policies establish guidelines for
acceptable limits on the sensitivity of the market
value of assets and liabilities to changes in interest
rates.
Interest rate risk arises when the maturity or
repricing periods and interest rate indices of the
interest earning assets, interest bearing liabilities,
and derivative financial instruments are different. It
is the risk that changes in the level of market
interest rates will result in disproportionate changes
in the value of, and the net earnings generated from,
the Company’s interest earning
assets, interest bearing liabilities and derivative
financial instruments. The Company continuously
monitors not only the organization’s current net
interest margin, but also the historical trends of
these margins. In addition, management attempts to
identify potential adverse changes in net interest
income in future years as a result of interest rate
fluctuations by performing simulation analysis of
various interest rate environments. If a potential
adverse change in net interest margin and/or net income
is identified, management would take appropriate
actions with its asset-liability structure to mitigate
these potentially adverse situations. Please refer to
Item 7 “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” for
further discussion of the net interest margin.
Since the Company’s primary source of interest bearing
liabilities is from customer deposits, the Company’s
ability to manage the types and terms of such deposits
may be somewhat limited by customer preferences and
local competition in the market areas in which the
Banks operate. The rates, terms and interest rate
indices of the Company’s interest earning assets result
primarily from the Company’s strategy of investing in
loans and securities that permit the Company to limit
its exposure to interest rate risk, together with
credit risk, while at the same time achieving an
acceptable interest rate spread.
The Company’s exposure to interest rate risk is
reviewed on a regular basis by management and the Risk
Management Committees of the boards of directors of
each of the Banks and the Company. The objective is to
measure the effect on net income and to adjust balance
sheet and derivative financial instruments to minimize
the inherent risk while at the same time maximize net
interest income.
Management measures its exposure to changes in interest
rates using many different interest rate
scenarios. One interest rate scenario utilized is to
measure the percentage change in net interest income
assuming a ramped increase and decrease of 100 and 200
basis points that occurs in equal steps over a
twelvemonth time horizon. Utilizing this measurement
concept, the interest rate risk of the Company,
expressed as a percentage change in net interest income
over a one-year time horizon due to changes in interest
rates, at December 31, 2008 and December 31, 2007, is
as follows:
| + 200 | + 100 | - 100 | - 200 | |||||||||||||
| Basis | Basis | Basis | Basis | |||||||||||||
| Points | Points | Points | Points | |||||||||||||
Percentage change in net interest
income due to a ramped 100
and 200 basis point shift in the
yield curve: |
||||||||||||||||
December 31, 2008 |
2.0 | % | (0.3 | )% | (4.2 | )% | (6.7 | )% | ||||||||
December 31, 2007 |
6.1 | % | 3.1 | % | (2.9 | )% | (6.3 | )% | ||||||||
| 2008 Annual Report | 63 |
1
Table of Contents
This simulation analysis is based upon actual cash
flows and repricing characteristics for balance sheet
instruments and incorporates management’s projections
of the future volume and pricing of each of the product
lines offered by the Company as well as other pertinent
assumptions. Actual results may differ from these
simulated results due to timing, magnitude, and
frequency of interest rate changes as well as changes
in market conditions and management strategies.
One method utilized by financial institutions to manage
interest rate risk is to enter into derivative
financial instruments. A derivative financial
instrument includes interest rate swaps, interest rate
caps and floors, futures, forwards, option contracts
and other financial instruments with similar
characteristics. Additionally, the Company enters into
commitments to fund certain mortgage loans (interest
rate locks) to be sold into the secondary market and
forward commitments for the future delivery of mortgage
loans to third party investors. See Note 21 of the
Financial Statements presented under Item 1 of this
report for further information on the Company’s
derivative financial instruments.
During 2008, the Company also entered into certain
covered call option transactions related to certain
securities held by the Company. The Company uses these
option transactions (rather than entering into other
derivative interest rate contracts, such as
interest rate floors) to increase the total return
associated with the related securities. Although the
revenue received from these options is recorded as
non-interest income rather than interest income, the
increased return attributable to the related securities
from these options contributes to the Company’s overall
profitability. The Company’s exposure to interest rate
risk may be impacted by these transactions. To mitigate
this risk, the Company may acquire fixed rate term debt
or use financial derivative instruments. There were no
covered call options outstanding as of December 31,
2008.
| 64 | Wintrust Financial Corporation |
Table of Contents
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm on Consolidated Financial Statements
The Board of Directors and Shareholders of Wintrust Financial Corporation
We have audited the accompanying consolidated statements of condition of Wintrust Financial
Corporation and Subsidiaries as of December 31, 2008 and 2007, and the related consolidated
statements of income, changes in shareholders’ equity, and cash flows for each of the three years
in the period ended December 31, 2008. These financial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these financial statements
based on our audits. We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Wintrust Financial Corporation and Subsidiaries at
December 31, 2008 and 2007, and the consolidated results of their operations and their cash flows
for each of the three years in the period ended December 31, 2008, in conformity with U.S.
generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), Win-trust Financial Corporation’s internal control over financial reporting
as of December 31, 2008, based on criteria established in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated
February 27, 2009 expressed an unqualified opinion thereon.
 |
Chicago, Illinois
February 27, 2009
February 27, 2009
| 2008 Annual Report | 65 |
Table of Contents
WINTRUST FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
(In thousands, except share data)
CONSOLIDATED STATEMENTS OF CONDITION
(In thousands, except share data)
| December 31, | ||||||||
| 2008 | 2007 | |||||||
Assets |
||||||||
Cash and due from banks |
$ | 219,794 | 170,190 | |||||
Federal funds sold and securities purchased under resale agreements |
226,110 | 90,964 | ||||||
Interest bearing deposits with banks |
123,009 | 10,410 | ||||||
Available-for-sale securities, at fair value |
784,673 | 1,303,837 | ||||||
Trading account securities |
4,399 | 1,571 | ||||||
Brokerage customer receivables |
17,901 | 24,206 | ||||||
Mortgage loans held-for-sale, at fair value |
51,029 | — | ||||||
Mortgage loans held-for-sale, at lower of cost or market |
10,087 | 109,552 | ||||||
Loans, net of unearned income |
7,621,069 | 6,801,602 | ||||||
Less: Allowance for loan losses |
69,767 | 50,389 | ||||||
Net loans |
7,551,302 | 6,751,213 | ||||||
Premises and equipment, net |
349,875 | 339,297 | ||||||
Accrued interest receivable and other assets |
240,664 | 189,462 | ||||||
Trade date securities receivable |
788,565 | 84,216 | ||||||
Goodwill |
276,310 | 276,204 | ||||||
Other intangible assets |
14,608 | 17,737 | ||||||
Total assets |
$ | 10,658,326 | 9,368,859 | |||||
Liabilities and Shareholders’ Equity |
||||||||
Deposits: |
||||||||
Non-interest bearing |
$ | 757,844 | 664,264 | |||||
Interest bearing |
7,618,906 | 6,807,177 | ||||||
Total deposits |
8,376,750 | 7,471,441 | ||||||
Notes payable |
1,000 | 60,700 | ||||||
Federal Home Loan Bank advances |
435,981 | 415,183 | ||||||
Other borrowings |
336,764 | 254,434 | ||||||
Subordinated notes |
70,000 | 75,000 | ||||||
Junior subordinated debentures |
249,515 | 249,662 | ||||||
Accrued interest payable and other liabilities |
121,744 | 102,884 | ||||||
Total liabilities |
9,591,754 | 8,629,304 | ||||||
Shareholders’ equity: |
||||||||
Preferred stock, no par value; 20,000,000 shares authorized, 300,000 and no shares issued and
outstanding at December 31, 2008 and 2007, respectively |
281,873 | — | ||||||
Common stock, no par value; $1.00 stated value; 60,000,000 shares
authorized; 26,610,714 and 26,281,296 shares issued at December 31, 2008
and 2007, respectively |
26,611 | 26,281 | ||||||
Surplus |
571,887 | 539,586 | ||||||
Treasury stock, at cost, 2,854,040 and 2,850,806 shares at December 31, 2008
and 2007, respectively |
(122,290 | ) | (122,196 | ) | ||||
Retained earnings |
318,793 | 309,556 | ||||||
Accumulated other comprehensive loss |
(10,302 | ) | (13,672 | ) | ||||
Total shareholders’ equity |
1,066,572 | 739,555 | ||||||
Total liabilities and shareholders’ equity |
$ | 10,658,326 | 9,368,859 | |||||
See accompanying Notes to Consolidated Financial Statements
| 66 | Wintrust Financial Corporation |
Table of Contents
WINTRUST FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
| Years Ended December 31, | ||||||||||||
| 2008 | 2007 | 2006 | ||||||||||
Interest income |
||||||||||||
Interest and fees on loans |
$ | 443,849 | 525,610 | 456,384 | ||||||||
Interest bearing deposits with banks |
340 | 841 | 651 | |||||||||
Federal funds sold and securities purchased under resale agreements |
1,333 | 3,774 | 5,393 | |||||||||
Securities |
68,101 | 79,402 | 93,398 | |||||||||
Trading account securities |
102 | 55 | 51 | |||||||||
Brokerage customer receivables |
998 | 1,875 | 2,068 | |||||||||
Total interest income |
514,723 | 611,557 | 557,945 | |||||||||
Interest expense |
||||||||||||
Interest on deposits |
219,437 | 294,914 | 265,729 | |||||||||
Interest on Federal Home Loan Bank advances |
18,266 | 17,558 | 14,675 | |||||||||
Interest on notes payable and other borrowings |
10,718 | 13,794 | 5,638 | |||||||||
Interest on subordinated notes |
3,486 | 5,181 | 4,695 | |||||||||
Interest on junior subordinated debentures |
18,249 | 18,560 | 18,322 | |||||||||
Total interest expense |
270,156 | 350,007 | 309,059 | |||||||||
Net interest income |
244,567 | 261,550 | 248,886 | |||||||||
Provision for credit losses |
57,441 | 14,879 | 7,057 | |||||||||
Net interest income after provision for credit losses |
187,126 | 246,671 | 241,829 | |||||||||
Non-interest income |
||||||||||||
Wealth management |
29,385 | 31,341 | 31,720 | |||||||||
Mortgage banking |
21,258 | 14,888 | 22,341 | |||||||||
Service charges on deposit accounts |
10,296 | 8,386 | 7,146 | |||||||||
Gain on sales of premium finance receivables |
2,524 | 2,040 | 2,883 | |||||||||
Administrative services |
2,941 | 4,006 | 4,598 | |||||||||
Fees from covered call options |
29,024 | 2,628 | 3,157 | |||||||||
(Losses) gains on available-for-sale securities, net |
(4,171 | ) | 2,997 | 17 | ||||||||
Other |
7,337 | 13,802 | 19,370 | |||||||||
Total non-interest income |
98,594 | 80,088 | 91,232 | |||||||||
Non-interest expense |
||||||||||||
Salaries and employee benefits |
145,087 | 141,816 | 137,008 | |||||||||
Equipment |
16,215 | 15,363 | 13,529 | |||||||||
Occupancy, net |
22,918 | 21,987 | 19,807 | |||||||||
Data processing |
11,573 | 10,420 | 8,493 | |||||||||
Advertising and marketing |
5,351 | 5,318 | 5,074 | |||||||||
Professional fees |
8,824 | 7,090 | 6,172 | |||||||||
Amortization of other intangible assets |
3,129 | 3,861 | 3,938 | |||||||||
Other |
41,982 | 37,080 | 34,799 | |||||||||
Total non-interest expense |
255,079 | 242,935 | 228,820 | |||||||||
Income before income taxes |
30,641 | 83,824 | 104,241 | |||||||||
Income tax expense |
10,153 | 28,171 | 37,748 | |||||||||
Net income |
$ | 20,488 | 55,653 | 66,493 | ||||||||
Dividends on preferred shares |
2,076 | — | — | |||||||||
Net income applicable to common shares |
$ | 18,412 | 55,653 | 66,493 | ||||||||
Net income per common share — Basic |
$ | 0.78 | 2.31 | 2.66 | ||||||||
Net income per common share — Diluted |
$ | 0.76 | 2.24 | 2.56 | ||||||||
Cash dividends declared per common share |
$ | 0.36 | 0.32 | 0.28 | ||||||||
Weighted average common shares outstanding |
23,624 | 24,107 | 25,011 | |||||||||
Dilutive potential common shares |
507 | 781 | 916 | |||||||||
Average common shares and dilutive common shares |
24,131 | 24,888 | 25,927 | |||||||||
See accompanying Notes to Consolidated Financial Statements
| 2008 Annual Report | 67 |
Table of Contents
WINTRUST FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(In thousands, except share data)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(In thousands, except share data)
| Accumulated | ||||||||||||||||||||||||||||
| other | Total | |||||||||||||||||||||||||||
| Preferred | Common | Treasury | Retained | comprehensive | shareholders’ | |||||||||||||||||||||||
| stock | stock | Surplus | stock | earnings | income (loss) | equity | ||||||||||||||||||||||
Balance at December 31, 2005 |
$ | — | 23,941 | 421,170 | — | 201,133 | (18,333 | ) | 627,911 | |||||||||||||||||||
Comprehensive income: |
||||||||||||||||||||||||||||
Net income |
— | — | — | — | 66,493 | — | 66,493 | |||||||||||||||||||||
Other comprehensive loss, net of tax: |
||||||||||||||||||||||||||||
Unrealized gains on securities, net of
reclassification adjustment |
— | — | — | — | — | 2,051 | 2,051 | |||||||||||||||||||||
Unrealized losses on derivative instruments |
— | — | — | — | — | (1,479 | ) | (1,479 | ) | |||||||||||||||||||
Comprehensive Income |
67,065 | |||||||||||||||||||||||||||
Cash dividends declared on common stock |
— | — | — | — | (6,961 | ) | — | (6,961 | ) | |||||||||||||||||||
Common stock repurchases |
— | — | — | (16,343 | ) | — | — | (16,343 | ) | |||||||||||||||||||
Cumulative effect of change in accounting
for mortgage servicing rights |
— | — | — | — | 1,069 | — | 1,069 | |||||||||||||||||||||
Stock-based compensation |
— | — | 17,282 | — | — | — | 17,282 | |||||||||||||||||||||
Common stock issued for: |
||||||||||||||||||||||||||||
New issuance, net of costs |
— | 200 | 11,384 | — | — | — | 11,584 | |||||||||||||||||||||
Business combinations |
— | 1,123 | 55,965 | — | — | — | 57,088 | |||||||||||||||||||||
Exercise of stock options and warrants |
— | 415 | 11,730 | — | — | — | 12,145 | |||||||||||||||||||||
Restricted stock awards |
— | 73 | (135 | ) | — | — | — | (62 | ) | |||||||||||||||||||
Employee stock purchase plan |
— | 37 | 1,949 | — | — | — | 1,986 | |||||||||||||||||||||
Director compensation plan |
— | 13 | 569 | — | — | — | 582 | |||||||||||||||||||||
Balance at December 31, 2006 |
$ | — | 25,802 | 519,914 | (16,343 | ) | 261,734 | (17,761 | ) | 773,346 | ||||||||||||||||||
Comprehensive income: |
||||||||||||||||||||||||||||
Net income |
— | — | — | — | 55,653 | — | 55,653 | |||||||||||||||||||||
Other comprehensive income, net of tax: |
||||||||||||||||||||||||||||
Unrealized gains on securities, net of
reclassification adjustment |
— | — | — | — | — | 8,185 | 8,185 | |||||||||||||||||||||
Unrealized losses on derivative instruments |
— | — | — | — | — | (4,096 | ) | (4,096 | ) | |||||||||||||||||||
Comprehensive Income |
59,742 | |||||||||||||||||||||||||||
Cash dividends declared on common stock |
— | — | — | — | (7,831 | ) | — | (7,831 | ) | |||||||||||||||||||
Common stock repurchases |
— | — | — | (105,853 | ) | — | — | (105,853 | ) | |||||||||||||||||||
Stock-based compensation |
— | — | 10,846 | — | — | — | 10,846 | |||||||||||||||||||||
Common stock issued for: |
||||||||||||||||||||||||||||
Exercise of stock options and warrants |
— | 312 | 6,930 | — | — | — | 7,242 | |||||||||||||||||||||
Restricted stock awards |
— | 112 | (472 | ) | — | — | — | (360 | ) | |||||||||||||||||||
Employee stock purchase plan |
— | 39 | 1,652 | — | — | — | 1,691 | |||||||||||||||||||||
Director compensation plan |
— | 16 | 716 | — | — | — | 732 | |||||||||||||||||||||
Balance at December 31, 2007 |
$ | — | 26,281 | 539,586 | (122,196 | ) | 309,556 | (13,672 | ) | 739,555 | ||||||||||||||||||
Comprehensive income: |
||||||||||||||||||||||||||||
Net income |
— | — | — | — | 20,488 | — | 20,488 | |||||||||||||||||||||
Other comprehensive income, net of tax: |
||||||||||||||||||||||||||||
Unrealized gains on securities, net of
reclassification adjustment |
— | — | — | — | — | 10,429 | 10,429 | |||||||||||||||||||||
Unrealized losses on derivative instruments |
— | — | — | — | — | (7,059 | ) | (7,059 | ) | |||||||||||||||||||
Comprehensive Income |
23,858 | |||||||||||||||||||||||||||
Cash dividends declared on common stock |
— | — | — | — | (8,487 | ) | — | (8,487 | ) | |||||||||||||||||||
Dividends on preferred stock |
115 | — | — | — | (2,076 | ) | — | (1,961 | ) | |||||||||||||||||||
Common stock repurchases |
— | — | — | (94 | ) | — | — | (94 | ) | |||||||||||||||||||
Stock-based compensation |
— | — | 9,936 | — | — | — | 9,936 | |||||||||||||||||||||
Cumulative effect of change in accounting
for split-dollar life insurance |
— | — | — | — | (688 | ) | — | (688 | ) | |||||||||||||||||||
Issuance of preferred stock, net of issuance costs |
281,758 | — | 17,500 | — | — | — | 299,258 | |||||||||||||||||||||
Common stock issued for: |
||||||||||||||||||||||||||||
Exercise of stock options and warrants |
— | 142 | 3,136 | — | — | — | 3,278 | |||||||||||||||||||||
Restricted stock awards |
— | 112 | (835 | ) | — | — | — | (723 | ) | |||||||||||||||||||
Employee stock purchase plan |
— | 46 | 1,434 | — | — | — | 1,480 | |||||||||||||||||||||
Director compensation plan |
— | 30 | 1,130 | — | — | — | 1,160 | |||||||||||||||||||||
Balance at December 31, 2008 |
$ | 281,873 | 26,611 | 571,887 | (122,290 | ) | 318,793 | (10,302 | ) | 1,066,572 | ||||||||||||||||||
See accompanying Notes to Consolidated Financial Statements.
| 68 | Wintrust Financial Corporation |
6
Table of Contents
WINTRUST FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| Years Ended December 31, | ||||||||||||
| 2008 | 2007 | 2006 | ||||||||||
Operating Activities: |
||||||||||||
Net income |
$ | 20,488 | 55,653 | 66,493 | ||||||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||||||
Provision for credit losses |
57,441 | 14,879 | 7,057 | |||||||||
Depreciation and amortization |
20,566 | 20,010 | 17,622 | |||||||||
Deferred income tax benefit |
(11,790 | ) | (4,837 | ) | (1,207 | ) | ||||||
Stock-based compensation |
9,936 | 10,845 | 12,159 | |||||||||
Tax benefit from stock-based compensation arrangements |
355 | 2,024 | 5,281 | |||||||||
Excess tax benefits from stock-based compensation arrangements |
(693 | ) | (2,623 | ) | (4,565 | ) | ||||||
Net amortization (accretion) of premium on securities |
(2,453 | ) | 618 | (1,136 | ) | |||||||
Fair market value change of interest rate swaps |
— | — | (1,809 | ) | ||||||||
Mortgage servicing rights fair value change and amortization, net |
2,365 | 1,030 | 905 | |||||||||
Originations and purchases of mortgage loans held-for-sale |
(1,553,929 | ) | (1,949,742 | ) | (1,971,894 | ) | ||||||
Proceeds from sales of mortgage loans held-for-sale |
1,615,773 | 1,997,445 | 1,922,284 | |||||||||
Bank owned life insurance, net of claims |
(1,622 | ) | (3,521 | ) | (2,948 | ) | ||||||
Gain on sales of premium finance receivables |
(2,524 | ) | (2,040 | ) | (2,883 | ) | ||||||
(Increase) decrease in trading securities, net |
(2,828 | ) | 753 | (714 | ) | |||||||
Net decrease (increase) in brokerage customer receivables |
6,305 | (166 | ) | 3,860 | ||||||||
Gain on mortgage loans sold |
(13,408 | ) | (12,341 | ) | (12,736 | ) | ||||||
Loss (gain) on available-for-sale securities, net |
4,171 | (2,997 | ) | (17 | ) | |||||||
Loss (gain) on sales of premises and equipment, net |
91 | (2,529 | ) | (14 | ) | |||||||
Increase in accrued interest receivable and other assets, net |
(1,275 | ) | (1,589 | ) | (7,867 | ) | ||||||
Increase (decrease) in accrued interest payable and other liabilities, net |
4,322 | (5,496 | ) | 13,521 | ||||||||
Net Cash Provided by Operating Activities |
151,291 | 115,376 | 41,392 | |||||||||
Investing Activities: |
||||||||||||
Proceeds from maturities of available-for-sale securities |
882,765 | 801,547 | 857,199 | |||||||||
Proceeds from sales of available-for-sale securities |
808,558 | 252,706 | 372,613 | |||||||||
Purchases of available-for-sale securities |
(1,851,545 | ) | (586,817 | ) | (1,069,596 | ) | ||||||
Proceeds from sales of premium finance receivables |
217,834 | 229,994 | 302,882 | |||||||||
Net cash paid for acquisitions |
— | (11,594 | ) | (51,070 | ) | |||||||
Net decrease (increase) in interest bearing deposits with banks |
(112,599 | ) | 8,849 | (6,819 | ) | |||||||
Net increase in loans |
(1,121,116 | ) | (487,676 | ) | (1,211,300 | ) | ||||||
Redemptions of Bank Owned Life Insurance |
— | 1,306 | — | |||||||||
Purchases of premises and equipment, net |
(28,632 | ) | (42,829 | ) | (64,824 | ) | ||||||
Net Cash (Used for) Provided by Investing Activities |
(1,204,735 | ) | 165,486 | (870,915 | ) | |||||||
Financing Activities: |
||||||||||||
Increase (decrease) in deposit accounts |
905,256 | (397,938 | ) | 717,044 | ||||||||
Increase in other borrowings, net |
82,330 | 39,801 | 63,476 | |||||||||
(Decrease) increase in notes payable, net |
(59,700 | ) | 47,950 | 11,750 | ||||||||
Increase (decrease) in Federal Home Loan Bank advances, net |
20,802 | 89,698 | (36,080 | ) | ||||||||
Net proceeds from issuance of preferred stock |
299,258 | — | - | |||||||||
Repayment of subordinated note |
(5,000 | ) | — | (8,000 | ) | |||||||
Net proceeds from issuance of junior subordinated debentures |
— | — | 50,000 | |||||||||
Redemption of junior subordinated debentures, net |
— | — | (31,050 | ) | ||||||||
Proceeds from issuance of subordinated note |
— | — | 25,000 | |||||||||
Excess tax benefits from stock-based compensation arrangements |
693 | 2,623 | 4,565 | |||||||||
Issuance of common stock, net of issuance costs |
— | — | 11,584 | |||||||||
Issuance of common stock resulting from exercise of stock options, employee
stock purchase plan and conversion of common stock warrants |
3,680 | 6,550 | 8,465 | |||||||||
Treasury stock purchases |
(94 | ) | (105,853 | ) | (16,343 | ) | ||||||
Dividends paid |
(9,031 | ) | (7,831 | ) | (6,961 | ) | ||||||
Net Cash Provided by (Used for) Financing Activities |
1,238,194 | (325,000 | ) | 793,450 | ||||||||
Net Increase (Decrease) in Cash and Cash Equivalents |
184,750 | (44,138 | ) | (36,073 | ) | |||||||
Cash and Cash Equivalents at Beginning of Year |
261,154 | 305,292 | 341,365 | |||||||||
Cash and Cash Equivalents at End of Year |
$ | 445,904 | 261,154 | 305,292 | ||||||||
Supplemental Disclosures of Cash Flow Information: |
||||||||||||
Cash paid during the year for: |
||||||||||||
Interest |
$ | 274,701 | 351,795 | 304,088 | ||||||||
Income taxes, net |
20,843 | 30,992 | 33,281 | |||||||||
Acquisitions: |
||||||||||||
Fair value of assets acquired, including cash and cash equivalents |
— | 59,683 | 483,723 | |||||||||
Value ascribed to goodwill and other intangible assets |
— | 7,221 | 79,832 | |||||||||
Fair value of liabilities assumed |
— | 53,095 | 448,409 | |||||||||
Non-cash activities
|
||||||||||||
Common stock issued for acquisitions |
— | — | 57,088 | |||||||||
Transfer to other real estate owned from loans |
34,778 | 5,427 | 2,439 | |||||||||
See accompanying Notes to Consolidated Financial Statements.
| 2008 Annual Report | 69 |
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Description of the Business
Wintrust Financial Corporation (“Wintrust” or “the
Company”) is a financial holding company currently
engaged in the business of providing traditional
community banking services to customers in the Chicago
metropolitan area and southern Wisconsin. Additionally,
the Company operates various non-bank subsidiaries.
Wintrust has 15 wholly-owned bank subsidiaries
(collectively, “the Banks”), nine of which the Company
started as de novo institutions, including Lake Forest
Bank & Trust Company (“Lake Forest Bank”), Hinsdale
Bank & Trust Company (“Hinsdale Bank”), North Shore
Community Bank & Trust Company (“North Shore Bank”),
Libertyville Bank & Trust Company (“Libertyville
Bank”), Barrington Bank & Trust Company, N.A.
(“Barrington Bank”), Crystal Lake Bank & Trust Company,
N.A. (“Crystal Lake Bank”), Northbrook Bank & Trust
Company (“Northbrook Bank”), Beverly Bank & Trust
Company, N.A. (“Beverly Bank”) and Old Plank Trail
Community Bank, N.A. (“Old Plank Trail Bank”). The
Company acquired Advantage National Bank (“Advantage
Bank”) in October 2003, Village Bank & Trust (“Village
Bank”) in December 2003, Northview Bank & Trust
(“Northview Bank”) in September 2004, Town Bank in
October 2004, State Bank of The Lakes in January 2005,
First Northwest Bank in March 2005 and Hinsbrook Bank
and Trust (“Hinsbrook Bank”) in May 2006. In December
2004, Northview Bank’s Wheaton branch became its main
office, it was renamed Wheaton Bank & Trust (“Wheaton
Bank”) and its two Northfield locations became branches
of Northbrook Bank and its Mundelein location became a
branch of Libertyville Bank. In May 2005, First
Northwest Bank was merged into Village Bank. In
November 2006, Hinsbrook Bank’s Geneva branch was
renamed St. Charles Bank & Trust (“St. Charles Bank”),
its Willowbrook, Downers Grove and Darien locations
became branches of Hinsdale Bank and its Glen Ellyn
location became a branch of Wheaton Bank.
The Company provides, on a national basis, loans to
businesses to finance insurance premiums on their
commercial insurance policies (“premium finance
receivables”) through First Insurance Funding
Corporation (“FIFC”). In 2007, FIFC began financing
life insurance policy premiums for high net-worth
individuals. These loans are originated through
independent insurance agents with assistance from
financial advisors and legal counsel. The life
insurance policy is the primary form of collateral. In
addition, these loans can be secured with a letter of
credit or certificate of deposit. FIFC is a
wholly-owned subsidiary of Lake Forest Bank. FIFC was
originally a subsidiary of Crabtree Capital Corporation
(“Crabtree”), however, in 2008 Crabtree was merged into
FIFC.
In November 2007, the Company acquired Broadway Premium
Funding Corporation (“Broadway”). Broadway also
provides loans to businesses to finance insurance
premiums, mainly through insurance agents and brokers
in the northeastern por-
tion of the United States and California. On October 1,
2008, Broadway merged with its parent, FIFC, but
continues to utilize the Broadway brand in serving its
segment of the marketplace.
Wintrust, through Tricom, Inc. of Milwaukee (“Tricom”),
provides high-yielding short-term accounts receivable
financing (“Tricom finance receivables”) and
value-added out-sourced administrative services, such
as data processing of payrolls, billing and cash
management services, to the temporary staffing
industry, with clients located throughout the United
States. Tricom is a wholly-owned subsidiary of
Hinsdale Bank.
The Company provides a full range of wealth management
services through its trust, asset management and
broker-dealer subsidiaries. Trust and investment
services are provided at the Banks through the
Company’s wholly-owned subsidiary, Wayne Hummer Trust
Company, N.A. (“WHTC”), a de novo company started in
1998. Wayne Hummer Investments, LLC (“WHI”) is a
broker-dealer providing a full range of private client
and securities brokerage services to clients located
primarily in the Midwest. WHI has office locations
staffed by one or more registered financial advisors in
a majority of the Company’s Banks. WHI also provides a
full range of investment services to individuals
through a network of relationships with community-based
financial institutions primarily in Illinois. WHI is a
wholly-owned subsidiary of North Shore Bank. Wayne
Hummer Asset Management Company (“WHAMC”) provides
money management services and advisory services to
individuals, institutions and municipal and tax-exempt
organizations, in addition to portfolio management and
financial supervision for a wide range of pension and
profit-sharing plans. WHI and WHAMC were acquired in
2002, and in February 2003, the Company acquired Lake
Forest Capital Management (“LFCM”), a registered
investment advisor, which was merged into WHAMC. WHTC,
WHI and WHAMC are referred to collectively as the
“Wayne Hummer Companies.”
In May 2004, the Company acquired Wintrust Mortgage
Corporation (“WMC”) (formerly known as
WestAmerica Mortgage Company) and its affiliate,
Guardian Real Estate Services, Inc. (“Guardian”). WMC
engages primarily in the origination and purchase of
residential mortgages for sale into the secondary
market. WMC maintains principal origination offices in
seven states, including Illinois, and originates loans
in other states through wholesale and correspondent
offices. WMC is a wholly-owned subsidiary of Barrington
Bank. Guardian provided document preparation and other
loan closing services to WMC and a network of mortgage
brokers. Guardian was merged into Bar-rington Bank in
November 2008.
Wintrust Information Technology Services Company
(“WITS”) provides information technology support, item
capture, imaging and statement preparation services to
the Wintrust subsidiaries and is a wholly-owned
subsidiary of Wintrust.
| 70 | Wintrust Financial Corporation |
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(1) Summary of Significant Accounting Policies
The accounting and reporting policies of Wintrust and
its subsidiaries conform to generally accepted
accounting principles (“GAAP”) in the United States and
prevailing practices of the banking industry. In the
preparation of the consolidated financial statements,
management is required to make certain estimates and
assumptions that affect the reported amounts contained
in the consolidated financial statements. Management
believes that the estimates made are reasonable;
however, changes in estimates may be required if
economic or other conditions change beyond management’s
expectations. Reclassifications of certain prior year
amounts have been made to conform to the current year
presentation. The following is a summary of the
Company’s more significant accounting policies.
Principles of Consolidation
The consolidated financial statements of Wintrust
include the accounts of the Company and its
subsidiaries. All significant intercompany accounts and
transactions have been eliminated in the consolidated
financial statements.
Earnings per Share
Basic earnings per share is computed by dividing income
available to common shareholders by the
weighted-average number of common shares outstanding
for the period. Diluted earnings per share reflects the
potential dilution that would occur if securities or
other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance
of common stock that then shared in the earnings of the
Company. The weighted-average number of common shares
outstanding is increased by the assumed conversion of
outstanding convertible preferred stock from the
beginning of the year or date of issuance, if later,
and the number of common shares that would be issued
assuming the exercise of stock options and the issuance
of restricted shares using the treasury stock method.
The adjustments to the weighted-average common shares
outstanding are only made when such adjustments will
dilute earnings per common share.
Business Combinations
Business combinations are accounted for by the purchase
method of accounting. Under the purchase
method, assets and liabilities of the business acquired
are recorded at their estimated fair values as of the
date of acquisition with any excess of the cost of the
acquisition over the fair value of the net tangible and
intangible assets acquired recorded as goodwill.
Results of operations of the acquired business are
included in the income statement from the effective
date of acquisition.
Cash Equivalents
For purposes of the consolidated statements of cash
flows, Win-trust considers cash on hand, cash items in
the process of collection,
non-interest bearing amounts due from
correspondent banks, federal funds sold and securities
purchased under resale agreements with original
maturities of three months or less, to be cash
equivalents.
Securities
The Company classifies securities upon purchase in one
of three categories: trading, held-to-maturity, or
available-for-sale. Trading securities are bought
principally for the purpose of selling them in the near
term. Held-to-maturity securities are those debt
securities in which the Company has the ability and
positive intent to hold until maturity. All other
securities are classified as available-for-sale as they
may be sold prior to maturity.
Held-to-maturity securities are stated at amortized
cost, which represents actual cost adjusted for premium
amortization and discount accretion using methods that
approximate the effective interest method.
Available-for-sale securities are stated at fair value.
Unrealized gains and losses on available-for-sale
securities, net of related taxes, are included as
accumulated other comprehensive income and reported as
a separate component of shareholders’ equity.
Trading account securities are stated at fair value.
Realized and unrealized gains and losses from sales and
fair value adjustments are included in other
non-interest income.
A decline in the market value of any available-for-sale
or held-to-maturity security below cost that is deemed
other than temporary is charged to earnings, resulting
in the establishment of a new cost basis for the
security.
Interest and dividends, including amortization of
premiums and accretion of discounts, are recognized as
interest income when earned. Realized gains and losses
for securities classified as available-for-sale are
included in non-interest income and are derived using
the specific identification method for determining the
cost of securities sold.
Investments in Federal Home Loan Bank and Federal
Reserve Bank stock are restricted as to redemption and
are carried at cost.
Securities Purchased Under Resale Agreements and
Securities Sold Under Repurchase Agreements
Securities purchased under resale agreements and
securities sold under repurchase agreements are
generally treated as collateralized financing
transactions and are recorded at the amount at which
the securities were acquired or sold plus accrued
interest. Securities, generally U.S. government and
Federal agency securities, pledged as collateral under
these financing arrangements cannot be sold by the
secured party. The fair value of collateral either
received from or provided to a third party is monitored
and additional collateral is obtained or requested to
be returned as deemed appropriate.
| 2008 Annual Report | 71 |
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Brokerage Customer Receivables
The Company, under an agreement with an out-sourced
securities clearing firm, extends credit to its
brokerage customers to finance their purchases of
securities on margin. The Company receives income from
interest charged on such extensions of credit.
Brokerage customer receivables represent amounts due on
margin balances. Securities owned by customers are held
as collateral for these receivables.
Mortgage Loans Held-for-Sale
Mortgage loans are classified as held-for-sale when
originated or acquired with the intent to sell the loan
into the secondary market. Market conditions or other
developments may change management’s intent with
respect to the disposition of these loans and loans
previously classified as mortgage loans held-for-sale
may be reclassified to the loan portfolio.
Statement of Financial Accouting Standard (“SFAS”) No.
159, “The Fair Value Option for Financial Assets and
Financial Liabilities – Including an Amendment of FASB
Statement No. 115” (“SFAS 159”) provides entities with
an option to report selected financial assets and
liabilities at fair value and was effective January 1,
2008. The Company elected to measure at fair value new
mortgage loans originated by WMC on or after January 1,
2008. The fair value of the loans is determined by
reference to investor price sheets for loan products
with similar characteristics. Changes in fair value are
recognized in mortgage banking revenue.
Mortgage loans held-for-sale not originated by WMC on
or after January 1, 2008 are carried at the lower of
cost or market applied on an aggregate basis by loan
type. Fair value is based on either quoted prices for
the same or similar loans or values obtained from third
parties. Charges related to adjustments to record the
loans at fair value are recognized in mortgage banking
revenue. Loans that are transferred between mortgage
loans held-for-sale and the loan portfolio are recorded
at the lower of cost or market at the date of transfer.
Loans, Allowance for Loan Losses and Allowance for
Losses on Lending-Related Commitments
Loans, which include premium finance receivables,
Tricom finance receivables and lease financing, are
generally reported at the principal amount outstanding,
net of unearned income. Interest income is recognized
when earned. Loan origination fees and certain direct
origination costs are deferred and amortized over the
expected life of the loan as an adjustment to the yield
using methods that approximate the effective interest
method. Finance charges on premium finance receivables
are earned over the term of the loan based on actual
funds outstanding, beginning with the funding date, using a
method which approximates the effective yield method.
Interest income is not accrued on loans where
management has determined that the borrowers may be
unable to meet contractual principal and/or interest
obligations, or where interest or principal is 90 days
or more past due, unless the loans are adequately
secured and in the process of collection. Cash receipts
on non-accrual loans are generally applied to the
principal balance until the remaining balance is
considered collectible, at which time interest income
may be recognized when received.
In the second quarter of 2008, the Company refined its
methodology for determining certain elements of the
allowance for loan losses. These refinements resulted
in an allocation of the allowance to loan portfolio
groups based on loan collateral and credit risk rating.
Previously, this element of the allowance was not
segmented at the loan collateral and credit risk rating
level. The Company maintains its allowance for loan
losses at a level believed adequate by management to
absorb probable losses inherent in the loan portfolio
and is based on the size and current risk
characteristics of the loan portfolio, an assessment of
internal problem loan identification system (“Problem
Loan Report”) loans and actual loss experience, changes
in the composition of the loan portfolio, historical
loss experience, changes in lending policies and
procedures, including underwriting standards and
collections, charge-off, and recovery practices,
changes in experience, ability and depth of lending
management and staff, changes in national and local
economic and business conditions and developments,
including the condition of various market segments and
changes in the volume and severity of past due and
classified loans and trends in the volume of
non-accrual loans, troubled debt restructurings and
other loan modifications. The allowance for loan losses
also includes an element for estimated probable but
undetected losses and for imprecision in the credit
risk models used to calculate the allowance. The
Company reviews non-performing loans on a case-by-case
basis to allocate a specific dollar amount of reserves,
whereas all other loans are reserved for based on loan
collateral and assigned credit risk rating reserve
percentages. 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. Loan losses are
charged off against the allowance, while recoveries are
credited to the allowance. A provision for credit
losses is charged to operations based on management’s
periodic evaluation of the factors previously
mentioned, as well as other pertinent factors.
Evaluations are conducted at least quarterly and more
frequently if deemed necessary.
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In accordance with the American Institute of Certified
Public Accountants Statement of Position (“SOP”) 03-3,
“Accounting for Certain Loans or Debt Securities
Acquired in a Transfer,” loans acquired after January
1, 2005, including debt securities, are recorded at the
amount of the Company’s initial investment and no
valuation allowance is carried over from the seller for
individually-evaluated loans that have evidence of
deterioration in credit quality since origination, and
for which it is probable all contractual cash flows on
the loan will be unable to be collected. Also, the
excess of all undiscounted cash flows expected to be
collected at acquisition over the purchaser’s initial
investment are recognized as interest income on a
level-yield basis over the life of the loan. Subsequent
increases in cash flows expected to be collected are
recognized prospectively through an adjustment of the
loan’s yield over its remaining life, while subsequent
decreases are recognized as impairment. Loans carried
at fair value, mortgage loans held-for-sale, and loans
to borrowers in good standing under revolving credit
agreements are excluded from the scope of SOP 03-3.
In estimating expected losses, the Company evaluates
loans for impairment in accordance with SFAS 114,
“Accounting by Creditors for Impairment of a Loan.” A
loan is considered impaired when, based on current
information and events, it is probable that a creditor
will be unable to collect all amounts due pursuant to
the contractual terms of the loan. Impaired loans are
generally considered by the Company to be non-accrual
loans, restructured loans or loans with principal
and/or interest at risk, even if the loan is current
with all payments of principal and interest. Impairment
is measured by estimating the fair value of the loan
based on the present value of expected cash flows, the
market price of the loan, or the fair value of the
underlying collateral less costs to sell. If the
estimated fair value of the loan is less than the
recorded book value, a valuation allowance is
established as a component of the allowance for loan
losses.
The Company also maintains an allowance for
lending-related commitments, specifically unfunded loan
commitments and letters of credit, to provide for the
risk of loss inherent in these arrangements. The
allowance is computed using a methodology similar to
that used to determine the allowance for loan losses.
This allowance is included in other liabilities on the
statement of condition while the corresponding
provision for these losses is recorded as a component
of the provision for credit losses.
Mortgage Servicing Rights
Mortgage Servicing Rights (“MSRs”) are recorded in the
Statement of Condition at fair value in accordance with
SFAS 156, “Accounting for the Servicing of Financial
Assets — An Amendment of FASB Statement No. 140”. The
Company originates mortgage loans for sale to the
secondary market, the majority of
which are sold without retaining servicing rights.
There are certain loans, however, that are originated
and sold to governmental agencies, with servicing
rights retained. MSRs associated with loans originated
and sold, where servicing is retained, are capitalized
at the time of sale at fair value based on the future
net cash flows expected to be realized for performing
the servicing activities, and included in other assets
in the consolidated statements of condition. The change
in the fair value of MSRs is recorded as a component of
mortgage banking revenue in non-interest income in the
consolidated statements of income. For purposes of
measuring fair value, a third party valuation is
obtained. This valuation stratifies the servicing
rights into pools based on product type and interest
rate. The fair value of each servicing rights pool is
calculated based on the present value of estimated
future cash flows using a discount rate commensurate
with the risk associated with that pool, given current
market conditions. Estimates of fair value include
assumptions about prepayment speeds, interest rates and
other factors which are subject to change over time.
Changes in these underlying assumptions could cause the
fair value of MSRs to change significantly in the
future.
Premises and Equipment
Premises and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation
and amortization are computed using the straight-line
method over the estimated useful lives of the related
assets. Useful lives range from two to ten years for
furniture, fixtures and equipment, two to five years
for software and computer-related equipment and seven
to 39 years for buildings and improvements. Land
improvements are amortized over a period of 15 years
and leasehold improvements are amortized over the
shorter of the useful life of the improvement or the
term of the respective lease. Land and antique
furnishings and artwork are not subject to
depreciation. Expenditures for major additions and
improvements are capitalized, and maintenance and
repairs are charged to expense as incurred. Internal
costs related to the configuration and installation of
new software and the modification of existing software
that provides additional functionality are capitalized.
Long-lived depreciable assets are evaluated
periodically for impairment when events or changes in
circumstances indicate the carrying amount may not be
recoverable. Impairment exists when the expected
undiscounted future cash flows of a long-lived asset
are less than its carrying value. In that event, a loss
is recognized for the difference between the carrying
value and the estimated fair value of the asset based
on a quoted market price, if applicable, or a
discounted cash flow analysis. Impairment losses are
recognized in other non-interest expense.
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Other Real Estate Owned
Other real estate owned is comprised of real estate
acquired in partial or full satisfaction of loans and
is included in other assets. Other real estate owned is
recorded at its estimated fair value less estimated
selling costs at the date of transfer, with any excess
of the related loan balance over the fair value less
expected selling costs charged to the allowance for
loan losses. Subsequent changes in value are reported
as adjustments to the carrying amount and are recorded
in other non-interest expense. Gains and losses upon
sale, if any, are also charged to other non-interest
income or expense, as appropriate. At December 31, 2008
and 2007, other real estate owned totaled $32.6 million
and $3.9 million, respectively.
Goodwill and Other Intangible Assets
Goodwill represents the excess of the cost of an
acquisition over the fair value of net assets acquired.
Other intangible assets represent purchased assets that
also lack physical substance but can be distinguished
from goodwill because of contractual or other legal
rights or because the asset is capable of being sold or
exchanged either on its own or in combination with a
related contract, asset or liability. In accordance
with SFAS 142, “Goodwill and Other Intangible Assets,”
goodwill is not amortized, but rather is tested for
impairment on an annual basis or more frequently when
events warrant. Intangible assets which have finite
lives are amortized over their estimated useful lives
and also are subject to impairment testing. All of the
Company’s other
intangible assets have finite lives and are amortized
over varying periods not exceeding ten years.
Bank-Owned Life Insurance
The Company owns bank-owned life insurance (“BOLI”) on
certain executives. BOLI balances are recorded at their
cash surrender values and are included in other assets.
Changes in the cash surrender values are included in
non-interest income. At December 31, 2008 and 2007,
BOLI totaled $86.5 million and $84.7 million,
respectively.
Additionally, in accordance with Emerging Issues Task
Force (“EITF”) consesus on EITF Issue 06-4, “Accounting
for Deferred Compensation and Postretirement Benefit
Aspects of Endorsement Split-Dollar Life Insurance
Arrangements” (“EITF 06-4”), the Company recognizes a
liability and related compensation costs for
endorsement split-dollar insurance arrangements that
provide a benefit to an employee that extends to
postretirement periods. The Company adopted EITF 06-4
on January 1, 2008 and established an initial liability
for postretirement split-dollar insurance benefits by
recognizing a cumulative-effect adjustment to retained
earnings of $688,000.
Derivative Instruments
The Company enters into derivative transactions
principally to protect against the risk of adverse
price or interest rate movements on the future cash
flows or the value of certain assets and liabilities.
The Company is also required to recognize certain
contracts and commitments, including certain
commitments to fund mortgage loans held-for-sale, as
derivatives when the characteristics of those contracts
and commitments meet the definition of a derivative.
The Company accounts for derivatives in accordance with
SFAS 133, “Accounting for Derivative Instruments and
Hedging Activities,” which requires that all derivative
instruments be recorded in the statement of condition
at fair value. The accounting for changes in the fair
value of a derivative instrument depends on whether it
has been designated and qualifies as part of a hedging
relationship and further, on the type of hedging
relationship.
Derivative instruments designated in a hedge
relationship to mitigate exposure to changes in the
fair value of an asset or liability attributable to a
particular risk, such as interest rate risk, are
considered fair value hedges. Derivative instruments
designated in a
hedge relationship to mitigate exposure to variability
in expected future cash flows, or other types of
forecasted transactions, are considered cash flow
hedges. Formal documentation of the relationship
between a derivative instrument and a hedged asset or
liability, as well as the risk-management objective and
strategy for undertaking each hedge transaction and an
assessment of effectiveness is required at inception to
apply hedge accounting. In addition, formal
documentation of ongoing effectiveness testing is
required to maintain hedge accounting.
Fair value hedges are accounted for by recording the
changes in the fair value of the derivative instrument
and the changes in the fair value related to the risk
being hedged of the hedged asset or liability on the
statement of condition with corresponding offsets
recorded in the income statement. The adjustment to the
hedged asset or liability is included in the basis of
the hedged item, while the fair value of the derivative
is recorded as a free-standing asset or liability.
Actual cash receipts or payments and related amounts
accrued during the period on derivatives included in a
fair value hedge relationship are recorded as
adjustments to the interest income or expense recorded
on the hedged asset or liability.
Cash flow hedges are accounted for by recording the
changes in the fair value of the derivative instrument
on the statement of condition as either a freestanding
asset or liability, with a corresponding offset
recorded in other comprehensive income within
shareholders’ equity, net of deferred taxes. Amounts
are reclassified from accumulated other comprehensive
income to interest expense in the period or periods the
hedged forecasted transaction affects earnings.
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Under both the fair value and cash flow hedge
scenarios, changes in the fair value of derivatives not
considered to be highly effective in hedging the change
in fair value or the expected cash flows of the hedged
item are recognized in earnings as non-interest income
during the period of the change.
Derivative instruments that do not qualify as hedges
pursuant to SFAS 133 are reported on the statement of
condition at fair value and the changes in fair value
are recognized in earnings as non-interest income
during the period of the change.
Commitments to fund mortgage loans (interest rate
locks) to be sold into the secondary market and forward
commitments for the future delivery of these mortgage
loans are accounted for as derivatives not qualifying
for hedge accounting. Fair values of these mortgage
derivatives are estimated based on changes in mortgage
rates from the date of the commitments. Changes in the
fair values of these derivatives are included in
mortgage banking revenue.
Periodically, the Company sells options to an unrelated
bank or dealer for the right to purchase certain
securities held within the Banks’ investment
portfolios. These option transactions are designed
primarily to increase the total return associated with
holding these securities as earning assets. These
transactions do not qualify as hedges pursuant to SFAS
133 and, accordingly, changes in fair values of these
contracts, are reported in other non-interest income.
There were no covered call option contracts outstanding
as of December 31, 2008 or 2007.
Junior Subordinated Debentures Offering Costs
In connection with the Company’s currently outstanding
junior subordinated debentures, approximately $726,000
of offering costs were incurred, including underwriting
fees, legal and professional fees, and other costs.
These costs are included in other assets and are being
amortized as an adjustment to interest expense using a
method that approximates the effective interest method.
As of December 31, 2008 and 2007, the unamortized
balance of these costs was approximately $311,000 and
$384,000, respectively. See Note 15 for further
information about the junior subordinated debentures.
Trust Assets, Assets Under Management and
Brokerage Assets
Assets held in fiduciary or agency capacity for customers are not included in the consolidated financial statements as they are not assets of Wintrust or its subsidiaries. Fee income is recognized on an accrual basis and is included as a component of non-interest income.
Assets held in fiduciary or agency capacity for customers are not included in the consolidated financial statements as they are not assets of Wintrust or its subsidiaries. Fee income is recognized on an accrual basis and is included as a component of non-interest income.
Administrative Services Revenue
Administrative services revenue is recognized as
services are performed, in accordance with the accrual
method of accounting. These services include providing
data processing of payrolls, billing and cash
management services to Tricom’s clients in the
temporary staffing services industry.
Income Taxes
Wintrust and its subsidiaries file a consolidated
Federal income tax return. Income tax expense is based
upon income in the consolidated financial statements
rather than amounts reported on the income tax return.
Deferred tax assets and liabilities are recognized for
the estimated future tax consequences attributable to
differences between the financial statement carrying
amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and
liabilities are measured using currently enacted tax
rates expected to apply to taxable income in the years
in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized
as an income tax benefit or income tax expense in the
period that includes the enactment date.
Positions taken in the Company’s tax returns may be
subject to challenge by the taxing authorities upon
examination. In accordance with FIN 48, “Accounting for
Uncertainty in Income Taxes, an interpretation of FASB
Statement No. 109, Accounting for Income Taxes,” which
the Company adopted effective January 1, 2007,
uncertain tax positions are initially recognized in the
financial statements when it is more likely than not
the positions will be sustained upon examination by the
tax authorities. Such tax positions are both initially
and subsequently measured as the largest amount of tax
benefit that is greater than 50% likely being realized
upon settlement with the tax authority, assuming full
knowledge of the position and all relevant facts.
Interest and penalties on income tax uncertainties are
classified within income tax expense in the income
statement.
Stock-Based Compensation Plans
On January 1, 2006, the Company adopted provisions of
SFAS 123(R), “Share-Based Payment”, using the modified
prospective transition method. Under this transition
method, compensation costs is recognized in the
financial statements beginning January 1, 2006, based
on the requirements of SFAS 123(R) for all share-based
payments granted after that date and based on the grant
date fair value estimated in accordance with the
original provisions of SFAS 123, “Accounting for
Stock-Based Compensation” for all share-based payments
granted prior to, but not yet vested as of December 31,
2005.
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Compensation cost is measured as the fair value of the
awards on their date of grant. A Black-Scholes model is
utilized to estimate the fair value of stock options
and the market price of the Company’s stock at the date
of grant is used to estimate the fair value of
restricted stock awards. Compensation cost is
recognized over the required service period, generally
defined as the vesting period. For awards with graded
vesting, compensation cost is recognized on a
straight-line basis over the requisite service period
for the entire award.
SFAS 123(R) requires the recognition of stock based
compensation for the number of awards that are
ultimately expected to vest. As a result, recognized
compensation expense for stock options and restricted
share awards is reduced for estimated forfeitures prior
to vesting. Forfeitures rates are estimated for each
type of award based on historical forfeiture
experience. Estimated forfeitures will be reassessed in
subsequent periods and may change based on new facts
and circumstances.
The Company issues new shares to satisfy option
exercises and vesting of restricted shares.
Advertising Costs
Advertising costs are expensed in the period in which
they are incurred.
Start-up Costs
Start-up and organizational costs are expensed in the
period in which they are incurred.
Comprehensive Income
Comprehensive income consists of net income and other
comprehensive income. Other comprehensive income
includes unrealized gains and losses on securities
available-for-sale, net of deferred taxes, and
adjustments related to cash flow hedges, net of
deferred taxes.
Stock Repurchases
The Company periodically repurchases shares of its
outstanding common stock through open market purchases
or other methods. Repurchased shares are recorded as
treasury shares on the trade date using the treasury
stock method, and the cash paid is recorded as treasury
stock.
Sales of Premium Finance Receivables
Sales of premium finance receivables to unrelated third
parties are recognized in accordance with SFAS 140,
“Accounting for Transfers and Servicing of Financial
Assets and Extinguishment of Liabilities.” The Company
recognizes as a gain or loss the difference between the
proceeds received and the allocated cost basis of the
loans. The allocated cost basis of the loans is determined by allocating the Company’s initial investment in
the loan between the loan and the Company’s retained
interests, based on their relative fair values. The
retained interests include assets for the servicing
rights and interest only strip and a liability for the
Company’s guarantee obligation pursuant to the terms of
the sale agreement. The servicing assets and interest
only strips are included in other assets and the
liability for the guarantee obligation is included in
other liabilities. If actual cash flows are less than
estimated, the servicing assets and interest only
strips would be impaired and charged to earnings. Loans
sold in these transactions have terms of less than
twelve months, resulting in minimal prepayment risk.
The Company typically makes a clean-up call by
repurchasing the remaining loans in the pools sold
after approximately 10 months from the sale date. Upon
repurchase, the loans are recorded in the Company’s
premium finance receivables portfolio and any remaining
balance of the Company’s retained interest is recorded
as an adjustment to the gain on sale of premium finance
receivables.
Variable Interest Entities
In accordance with Financial Accounting Standards Board
(“FASB”) Interpretation No. 46, “Consolidation of
Variable Interest Entities” (“FIN 46”), which addresses
the consolidation rules to be applied to entities
defined in FIN 46 as “variable interest entities,” the
Company does not consolidate its interests in
subsidiary trusts formed for purposes of issuing trust
preferred securities. Management believes that FIN 46
is not applicable to its various other investments or
interests.
(2) Recent Accounting Pronouncements
Accounting for Uncertainty in Income Taxes
In June 2006, the FASB issued Interpretation No. 48
(“FIN 48”), “Accounting for Uncertainty in Income
Taxes, an interpretation of FASB Statement No. 109,
Accounting for Income Taxes,” effective for the Company
beginning on January 1, 2007. FIN 48 clarifies the
accounting for income taxes by prescribing the minimum
recognition threshold a tax position is required to
meet before being recognized in the financial
statements. FIN 48 also provides guidance on
derecognition, measurement, classification of interest
and penalties, accounting in interim periods,
disclosure and transition. The adoption of FIN 48 did
not have a material impact on the Company.
Accounting for Split-Dollar Life Insurance
Arrangements
In September 2006, the FASB ratified the EITF consensus
on EITF 06-4. EITF 06-4 is limited to the recognition
of a liability and related compensation costs for
endorsement split-dollar insurance arrangements that
provide a benefit to an employee that extends to
postretirement periods. Therefore, the provisions of
EITF 06-4 do not apply to a split-dollar insurance
arrange-
| 76 | Wintrust Financial Corporation |
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ment that provides a specified benefit to an employee
that is limited to the employee’s active service period
with an employer. EITF 06-4 is effective for fiscal
years beginning after December 15, 2007. The Company
adopted EITF 06-4 on January 1, 2008 and established a
liability for postretirement split-dollar
insurance benefits by recognizing a cumulative-effect
adjustment to retained earnings of $688,000.
Fair Value Measurements
In September 2006, the FASB issued SFAS No. 157, “Fair
Value Measurements” (“SFAS 157”). SFAS 157 establishes
a framework for measuring fair value and requires
expanded disclosure about the information used to
measure fair value. The statement applies whenever
other statements require, or permit, assets or
liabilities to be measured at fair value. The statement
does not expand the use of fair value in any new
circumstances and was effective January 1, 2008. The
adoption of SFAS 157 did not materially impact the
consolidated financial statements. See Note 22 – Fair
Value of Financial Instruments, for a further
discussion of this FASB Statement and the related
required disclosures.
Fair Value Option for Financial Assets and Financial
Liabilities
In February 2007, the FASB issued SFAS No. 159, “The
Fair Value Option for Financial Assets and Financial
Liabilities –Including an Amendment of FASB Statement
No. 115” (“SFAS 159”). SFAS 159 provides entities with
an option to report selected financial assets and
liabilities at fair value and was effective January 1,
2008. The Company elected to measure at fair value new
mortgage loans originated by WMC on or after Jan-uary
1, 2008. Since SFAS 159 was elected for loans
originated on or after January 1, 2008, there was no
effect to the Company’s financial statements at the
date of adoption. The fair value of the loans is
determined by reference to investor price sheets for
loan products with similar characteristics. Before
electing this new statement, WMC accounted for loans
held-for-sale at the lower of cost or market (commonly
referred to as LOCOM). See Note 22 – Fair Value of
Financial Instruments, for a more detailed discussion
of fair value measurements.
Accounting for Written Loan Commitments at Fair
Value Through Earnings
In November 2007, the Securities and Exchange
Commission (“SEC”) issued Staff Accounting Bulletin No.
109 (“SAB 109”) “Written Loan Commitments Recorded at
Fair Value through Earnings.” SAB 109 states that the
expected cash flows related to servicing the loan
should be included in the measurement of all written
loan commitments that are accounted for at fair value.
Prior to SAB 109, this
component of value was not incorporated into the fair
value of the loan commitment. SAB 109 was effective for
financial statements issued for fiscal years beginning
after December 15, 2007. The adoption of SAB 109 did
not have a material impact to the Company’s financial
statements.
Business Combinations
In December 2007, the FASB issued SFAS No. 141(R),
“Business Combinations” (“SFAS 141R”). SFAS 141R
requires the acquiring entity in a business combination
to recognize the full fair value of the assets acquired
and liabilities assumed in a transaction at the
acquisition date; the immediate expense recognition of
transaction costs; and accounting for restructuring
plans separately from the business combination. SFAS
141R will eliminate separate recognition of the
acquired allowance for loan losses on the acquirer’s
balance sheet as credit related factors will be
incorporated directly into the fair value of the loans
recorded at the acquisition date. SFAS 141R is
effective for business combinations occurring after
December 15, 2008. Early adoption is prohibited.
Noncontrolling Interests in Consolidated Financial
Statements
In December 2007, the FASB issued SFAS No. 160,
“Noncon-trolling Interests in Consolidated Financial
Statements-an amendment of ARB No. 51” (“SFAS 160”).
SFAS 160 establishes accounting and reporting standards
for the noncontrolling interest in a subsidiary and for
the deconsolidation of a subsidiary. The guidance is
effective for fiscal years beginning after December 15,
2008. The adoption of SFAS 160 is not expected to have
a material impact on the Company’s financial
statements.
Disclosures about Derivative Instruments and Hedging
Activities
In March 2008, the FASB issued SFAS No. 161,
“Disclosures about Derivative Instruments and Hedging
Activities — an amendment of FASB Statement No. 133”
(“SFAS 161”). Effective for fiscal years and interim
periods beginning after November 15, 2008, SFAS 161
amends and expands the disclosure requirements of SFAS
133 by requiring enhanced disclosures for how and why
an entity uses derivative instruments; how derivative
instruments and related hedged items are accounted for
under SFAS
133 and its related interpretations; and how derivative
instruments and related items affect an entity’s
financial position, financial performance and cash
flows. SFAS 161 only relates to disclosures and
therefore will not have an impact on the Company’s
financial condition or results of operations.
Qualifying Special Purpose Entities
In April 2008, the FASB voted to eliminate Qualifying
Special Purpose Entities (QSPEs) from the guidance in
SFAS No. 140, “Accounting for Transfers and Servicing
of Financial Assets and Extinguishment of Liabilities”
(“SFAS 140”). In connection with the proposed changes
to SFAS 140, the FASB also is proposing three key
changes to the consolidation model in FASB
Interpretation No. 46R, “Consolidation of Variable
Interest Entities” (“FIN 46R”). First, the FASB will
now include former QSPEs in the scope of FIN 46R. In
addition, the FASB supports
| 2008 Annual Report | 77 |
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amending FIN 46R to change the method of analyzing which party to a variable interest entity
(“VIE”) should consolidate the VIE to a primarily qualitative determination of power combined with
benefits and losses instead of today’s risks and rewards model. Finally, the proposed amendment is
expected to require all VIEs and their primary beneficiaries to be reevaluated quarterly. The
previous rules required reconsideration only when specified reconsideration events occurred. The
FASB also clarified that upon initial consolidation of a variable interest entity all assets and
liabilities would be measured at fair value, with any difference being recorded as a
cumulative-effect adjustment to retained earnings. In July 2008, the FASB decided that these
changes, if finalized, would be effective no earlier than for financial statements issued for
fiscal years beginning after November 15, 2009. The FASB also decided that many of the disclosures
contemplated for the proposed amendments to SFAS 140 and FIN 46R will be included in a separate
FASB Staff Position, which has yet to be issued. The Company does not expect these proposed changes
to have a material impact on the Company’s financial statements.
Hierarchy of Generally Accepted Accounting Principles
In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting
Principles”. The new standard identifies the sources of accounting principles to be used in the
preparation of financial statements of nongovernmental entities that are presented in conformity
with GAAP, and refers to these sources as the GAAP hierarchy. The new standard is effective 60 days
following the SEC’s approval of amendments to existing auditing standards by the Public Company
Accounting Oversight Board. The Company currently prepares consolidated financial statements in
conformity with the GAAP hierarchy as presented in the new standard, and does not expect its
adoption to have a material impact on the Company’s financial statements.
(3) Available-for-Sale Securities
A summary of the available-for-sale securities portfolio presenting carrying amounts and gross
unrealized gains and losses as of December 31, 2008 and 2007 is as follows (in thousands):
| December 31, 2008 | December 31, 2007 | |||||||||||||||||||||||||||||||
| Gross | Gross | Gross | Gross | |||||||||||||||||||||||||||||
| Amortized | unrealized | unrealized | Fair | Amortized | unrealized | unrealized | Fair | |||||||||||||||||||||||||
| cost | gains | losses | value | cost | gains | losses | value | |||||||||||||||||||||||||
U.S. Treasury |
$ | — | — | — | — | 33,161 | 73 | (125 | ) | 33,109 | ||||||||||||||||||||||
U.S. Government
agencies |
297,191 | 1,539 | (1 | ) | 298,729 | 321,548 | 783 | (288 | ) | 322,043 | ||||||||||||||||||||||
Municipal |
59,471 | 563 | (739 | ) | 59,295 | 49,376 | 246 | (495 | ) | 49,127 | ||||||||||||||||||||||
Corporate notes and
other debt |
36,157 | 223 | (8,339 | ) | 28,041 | 45,920 | 12 | (3,130 | ) | 42,802 | ||||||||||||||||||||||
Mortgage-backed |
272,492 | 12,859 | (44 | ) | 285,307 | 699,166 | 282 | (10,602 | ) | 688,846 | ||||||||||||||||||||||
Federal
Reserve/FHLB stock
and other equity
securities |
115,414 | — | (2,113 | ) | 113,301 | 167,591 | 319 | — | 167,910 | |||||||||||||||||||||||
Total
available-for-sale
securities |
$ | 780,725 | 15,184 | (11,236 | ) | 784,673 | 1,316,762 | 1,715 | (14,640 | ) | 1,303,837 | |||||||||||||||||||||
The following table presents the portion of the Company’s available-for-sale securities portfolio
which has gross unrealized losses, reflecting the length of time that individual securities have
been in a continuous unrealized loss position at December 31, 2008 (in thousands):
| Continuous unrealized | Continuous unrealized | |||||||||||||||||||||||
| losses existing for | losses existing for | |||||||||||||||||||||||
| less than 12 months | greater than 12 months | Total | ||||||||||||||||||||||
| Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
| value | losses | value | losses | value | losses | |||||||||||||||||||
U.S. Treasury |
$ | — | — | — | — | — | — | |||||||||||||||||
U.S. Government agencies |
1,567 | (1 | ) | — | — | 1,567 | (1 | ) | ||||||||||||||||
Municipal |
13,535 | (456 | ) | 3,924 | (283 | ) | 17,459 | (739 | ) | |||||||||||||||
Corporate notes and other debt |
11,684 | (1,962 | ) | 18,841 | (6,377 | ) | 30,525 | (8,339 | ) | |||||||||||||||
Mortgage-backed |
1,324 | (43 | ) | 60 | (1 | ) | 1,384 | (44 | ) | |||||||||||||||
Federal Reserve/FHLB stock
and other equity securities |
8,269 | (2,113 | ) | — | — | 8,269 | (2,113 | ) | ||||||||||||||||
Total |
$ | 36,379 | (4,575 | ) | 22,825 | (6,661 | ) | 59,204 | (11,236 | ) | ||||||||||||||
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Available-for-sale securities are reviewed for possible other-than-temporary impairment on a
quarterly basis. During this review, the-Company considers the severity and duration of the
unrealized losses as well as its intent and ability to hold the securities until recovery, taking
into account balance sheet management strategies and its market view and outlook. The Company also
assesses the nature of the unrealized losses taking into consideration market factors, such as the
widening of general credit spreads, the industry in which the issuer operates and market supply and
demand, as well as the creditworthiness of the issuer. As a result of other-than-temporary
impairment reviews during 2008, the Company recognized $8.2 million of non-cash
other-than-temporary impairment losses on certain corporate notes and other debt securities. The
Company concluded that none of the other unrealized losses on the available-for-sale securities
portfolio represents an other-than-temporary impairment as of December 31, 2008. The Company has
the intent and ability to hold these investments until such time as the values recover or until
maturity.
The amortized cost and fair value of securities as of December 31, 2008 and 2007, by contractual
maturity, are shown in the following table. Contractual maturities may differ from actual
maturities as borrowers may have the right to call or repay obligations with or without call or
prepayment penalties. Mortgage-backed securities are not included in the maturity categories in the
following maturity summary as actual maturities may differ from contractual maturities because the
underlying mortgages may be called or prepaid without penalties (in thousands):
| December 31, 2008 | December 31, 2007 | |||||||||||||||
| Amortized | Fair | Amortized | Fair | |||||||||||||
| Cost | Value | Cost | Value | |||||||||||||
Due in one year or less |
$ | 174,302 | 176,861 | 184,645 | 184,739 | |||||||||||
Due in one to five years |
72,694 | 68,331 | 48,381 | 47,392 | ||||||||||||
Due in five to ten years |
122,236 | 120,184 | 92,708 | 90,998 | ||||||||||||
Due after ten years |
23,587 | 20,689 | 124,271 | 123,952 | ||||||||||||
Mortgage-backed |
272,492 | 285,307 | 699,166 | 688,846 | ||||||||||||
Federal Reserve/FHLB Stock
and other equity |
115,414 | 113,301 | 167,591 | 167,910 | ||||||||||||
Total available-for-sale securities |
$ | 780,725 | 784,673 | 1,316,762 | 1,303,837 | |||||||||||
In 2008, 2007 and 2006, the Company had gross realized gains on sales of available-for-sale
securities of $4.2 million, $3.6 million and $510,000, respectively. During 2008, 2007 and 2006,
gross realized losses on sales of available-for-sale securities totaled $150,000, $1,207 and
$493,000, respectively. Proceeds from sales of available-for-sale securities during 2008, 2007 and
2006, were $809 million, $253 million and $373 million, respectively. At December 31, 2008 and
2007, securities having a carrying value of $1.1 billion and $780.8 million, respectively, which
include securities traded but not yet settled, were pledged as collateral for public deposits,
trust deposits, FHLB advances and securities sold under repurchase agreements. At December 31,
2008, there were no securities of a single issuer, other than U.S. Government-sponsored agency
securities, which exceeded 10% of shareholders’ equity.
| 2008 Annual Report | 79 |
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(4) Loans
A summary of the loan portfolio at December 31, 2008
and 2007 is as follows (in thousands):
| 2008 | 2007 | |||||||
Commercial and commercial real estate |
$ | 4,778,664 | 4,408,661 | |||||
Home equity |
896,438 | 678,298 | ||||||
Residential real estate |
262,908 | 226,686 | ||||||
Premium finance receivables |
1,346,586 | 1,078,185 | ||||||
Indirect consumer loans |
175,955 | 241,393 | ||||||
Tricom finance receivables |
17,320 | 27,719 | ||||||
Consumer and other loans |
143,198 | 140,660 | ||||||
| &nb | ||||||||