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SIDLEY AUSTIN llp
ONE SOUTH DEARBORN
CHICAGO, IL 60603
(312) 853 7000
(312) 853 7036 FAX
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BEIJING
BRUSSELS
CHICAGO
DALLAS
FRANKFURT
GENEVA
HONG KONG
LONDON
LOS ANGELES
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NEW YORK
PALO ALTO
SAN FRANCISCO
SHANGHAI
SINGAPORE
SYDNEY
TOKYO
WASHINGTON, D.C.
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FOUNDED 1866 |
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February 20, 2010
Via Facsimile, EDGAR and Federal Express
Securities and Exchange Commission
100 F Street, N.E., Mail Stop 4720
Washington, D.C. 20549
Attention: Michael D. Clampitt
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Re: |
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Wintrust Financial Corporation
File No. 000-21923
Form 10-K for the fiscal year ended December 31, 2008
Definitive Schedule 14A filed April 20, 2009
Form 10-Q for the period ended March 31, 2009
Form 10-Q for the period ended June 30, 2009
Form 10-Q for the period ended September 30, 2009 |
Ladies and Gentlemen:
On behalf of Wintrust Financial Corporation (“the “Company” or “Wintrust”), we
are writing in response to the comments contained in the comment letter dated February 18, 2010
(the “Comment Letter”) of the staff (the “Staff”) of the Securities and Exchange
Commission (the “Commission”) with respect to the Company’s Annual Report on Form 10-K for
the year ended December 31, 2008 (the “2008 Annual Report”), its Definitive Schedule 14A
filed April 20, 2009, its Quarterly Report on Form 10-Q for the quarter ended March 31, 2009, its
Quarterly Report on Form 10-Q for the quarter ended June 30, 2009 (the “Second Quarter
10-Q”) and its Quarterly Report on Form 10-Q for the quarter ended September 30, 2009 (the
“Third Quarter 10-Q”). For your convenience, three (3) courtesy copies of this letter are
also being delivered, by Federal Express, to Mr. Michael D. Clampitt. Additionally, as noted
below, marked copies of certain of the Company’s proposed revised disclosures are being hand
delivered to the Staff.
For the convenience of the Staff’s review, we have set forth the comments contained in the
Comment Letter in italics followed by the Company’s response.
In addition, attached is a letter from the Company containing the acknowledgments of the
Company requested by the Staff in the Comment Letter.
Sidley
Austin LLP is a limited liability partnership practicing in
affiliation with other Sidley Austin partnerships
Securities and Exchange Commission
February 20, 2010
Page 2
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As we requested in comment 25 of our comment letter to you dated September 29, 2009 and
comment 3 of our letter to you dated January 20, 2010, revise Exhibit 3 with meaningful
disclosure and analysis relating to your business condition, financial condition and
results of operations (rather than the banking industry generally, “numerous financial
institutions” and the national economy) consistent with Release No. 33-8350 including, but not
limited to, the following: |
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provide a balanced, executive-level discussion, in addition to the tables,
that identifies the most important themes or other significant matters with
which
management is concerned primarily in evaluating the company’s financial
condition and operating results; and |
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identify and provide insight into material opportunities, challenges and
risks that you face, on which your executives are most focused for both
the short and long term such as: |
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the economic recession in your market
areas; |
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the drop in commercial real estate prices,
commercial real estate sales and new construction in your
market areas and its effect on the value of collateral underlying
your loans and the delinquencies and defaults on your
loans; |
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the rise in unemployment in your market
areas; and |
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the extent of your loan portfolio
attributable to real estate loans (including analysis of the extent to
which your losses are attributable to commercial real estate
loans and the extent to which these loans are concentrated in the
greater Chicago and southern Wisconsin metropolitan areas). |
The Company proposes to revise its prior response in light of the Staff’s comment. In
particular, the Company proposes to revise the first two paragraphs of the “Overview—The Current
Economic Environment” section of its MD&A to clarify that the general economic conditions discussed
by the Company apply particularly to the markets where the Company operates. Such revised
disclosure, which is set forth in the attached Exhibit 1, would be contained in the
Company’s Annual Report on Form 10-K for the year ended December 31, 2009 (the “2009 10-K”). The Company undertakes to include such revised disclosure in its future filings.
As so revised, the Company believes that the entirety of the “Overview” section of its MD&A in
its forthcoming 2009 10-K provides a tailored description of the most important
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Securities and Exchange Commission
February 20, 2010
Page 3
themes and other
significant matters with which management is concerned in evaluating the Company’s financial
condition and operating results. The Company notes that its summary does not contain marketwide
statistical data regarding economic indicators because the Company does not use such data in
managing its business. The Company’s market area is diverse and covers many communities, each of
which is impacted differently by the economic forces affecting the Company’s general market area.
In addition, the extent of the decline in real estate valuations has varied meaningfully among the
types of loans made by the Company. Therefore, the Company manages its business based on local
analysis at each of its banks.
This disclosure was contained in each of the Company’s two prior responses to the Staff’s
comments, making it difficult to review the complete revised “Overview” section. So that the
Staff may review the entire “Overview” section, we have attached the entirety of the “Overview”
section as it would be contained in the 2009 10-K within Exhibit 1. For the Staff’s
convenience, a marked copy showing the changes to the “Overview—The Current Economic
Environment” section made in response to the Staff’s comment 1 will be hand delivered to the
Staff.
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We note your claim in the third full paragraph on the third page of your Exhibit 3, that you
increased your loan portfolio from 2008 to 2009 by $800 million. Please provide more detail
including but not limited to the following: |
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explain how you did so (e.g. acquisitions or purchases) and what types of
loans increased; |
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explain how much of the increase in your loan portfolio was due to the loans
you purchased in 2009 from AIG for $679 million; |
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describe the extent that you reduced your loan portfolio during 2009 and the
types of loans involved; and |
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revise the statement in the second paragraph that you originated and sold
$4.7 billion in residential mortgage loans in 2009 to disclose the aggregate
amount originated in 2009 compared to 2008 and the aggregate amount of loans
that you sold in 2009 compared to 2008 and the reasons for such sales. |
The Company proposes to revise its prior response in light of the Staff’s comment. The
proposed revisions are shown in the “Overview—The Current Economic Environment” section attached
in the third and fifth paragraphs of page 3 of Exhibit 1. Such revised disclosure would
be included in the 2009 10-K. The Company undertakes to include such revised disclosure in its
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Securities and Exchange Commission
February 20, 2010
Page 4
future filings. For the Staff’s convenience, a marked copy showing changes in light of the Staff’s
comment 2 will be hand delivered to the Staff.
The Company notes that its revised disclosure summarizes categories of loans that increased
and decreased during the reporting period and includes a cross-reference to the detailed discussion
of its loan portfolio contained later in the MD&A, which includes a thorough analysis of the
individual factors impacting the net increase in its loan portfolio. A copy of such
cross-referenced disclosure is attached as Exhibit 2. Given the offsetting nature of
increases and decreases in different portions of the Company’s loan portfolio, the Company believes
it would be misleading to attribute the net increase of $800 million to any increase or reduction
relating to any particular group of loans.
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We note your proposed response to comment 5 of our letter to you dated January 20, 2010.
Please revise as follows: |
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revise the first sentence of the first paragraph to explain that the net
income would have been a loss of $22 million instead of a gain of $73 million
but for an extraordinary non cash gain in the value of assets you acquired from
AIG in 2009 for which you paid $679 million; |
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explain, in the second paragraph, the particular reasons for your losses
(such as increases in defaults on your commercial real estate loans in the
Chicago area) instead of vaguely attributing it to “the continuation of the
credit crisis;” |
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delete your claim that the FDIC assessment is “one time” since the Chairman
of the FDIC stated in May 2009 that it was “probable” that an additional
special assessment would be necessary in the fourth quarter of 2009; |
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disclose how much of the FDIC “expense” was due to the FDIC requiring all
insured institutions to prepay three years worth of deposit insurance premiums
at the end of 2009 and explain how you accounted for this prepayment; and |
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revise the last paragraph to address the problems in your loan portfolio and
your market area. |
In response to the first bullet of the Staff’s comment, the Company notes that it provided the
disclosure requested by the Staff in the first sentence of the second paragraph of this section.
The first paragraph is limited to providing the net income for the past three years as well as
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Securities and Exchange Commission
February 20, 2010
Page 5
providing the percentage change in net income and earnings per share from the two prior comparable
periods. The Company believes that the placement of the sentence describing adjustments to net
income after the disclosure setting forth the GAAP financial measure is appropriate.
In response to the second, third and fifth bullets of the Staff’s comment, the Company
proposes to revise its prior response as set forth in Exhibit 3A. In response to the
fourth bullet of the Staff’s comment, the Company proposes to add additional disclosure to the
“Consolidated Results of Operations—Non-Interest Expense” section of MD&A in its 2009 10-K, a copy
of which additional disclosure is also set forth within Exhibit 3B. Each such instance of
revised disclosure would be included in the 2009 10-K. The Company undertakes to include such
revised disclosure in its future filings. For the Staff’s convenience, a marked copy showing
changes in light of the Staff’s comment 3 will be hand delivered to the Staff.
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We note your proposed response to comment 6 of our letter to you dated January 20, 2010. |
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explain why the average expected life of these loans is 5 to 7 years; |
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revise your statement in the overview that these loans “are generally
collateralized” and your statement in the last sentence of the second paragraph
are “partially unsecured” to quantify the extent to which your life insurance
premium finance loans are not secured or are “partially unsecured;” |
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provide more detail in the second paragraph regarding the legal basis for
your security interest in these loans including whether most are secured by the
policy itself and whether other forms of collateral are in addition to or are
alternatives to the insurance policy; |
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as we requested, explain in more detail what consents are required and from
whom; and |
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disclose the amount of the escrow as of December 31, 2009 and a recent date. |
The Company proposes to revise its prior response in response to the Staff’s comment. The
proposed revised disclosure is set forth in Exhibit 4. Such revised disclosure would be
included in the 2009 10-K. The Company undertakes to include such revised disclosure in its future
filings.
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Securities and Exchange Commission
February 20, 2010
Page 6
The Company notes that in response to the fourth bullet of the Staff’s comment, it has
provided additional detail regarding the consents required in Exhibit 4, but has not provided
detail regarding the identity of those from whom consent is required. The Company believes that
this level of detail would be immaterial to investors and, accordingly, has not included it in the
proposed revised disclosure. The Company supplementally advises the Staff that, of the $50 million
remaining in escrow as of December 31, 2009, approximately $5 million related to two accounts for
which the Company awaited brokerage firms to assign brokerage account to the Company control. In
addition, approximately $45 million of such escrowed purchase price related to 27 accounts for
which the Company awaited commercial banks to provide that the Company, rather than the sellers, be
the beneficiary of a letter of credit.
Additionally, in response to the Staff’s request in the fifth bullet of the Staff’s comment
that the Company disclose the amount of escrowed purchase price as of a recent date, the Company
advises the Staff that, as of January 31, 2010, approximately $39.9 million of escrowed purchase
price related to required consents remaining to be received. If in future reporting periods, any
portion of the purchase price remains escrowed, the Company will so disclose and will state the
amount remaining in escrow as of the end of the applicable reporting period.
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With a view towards additional disclosure, please supplemenally advise us as to whether the
company has any plans, arrangements, understandings and/or agreement to raise capital in the
next 12 months. |
The Company has responded to comment 5 of the Comment Letter by a separate letter of even date
herewith.
*************
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Securities and Exchange Commission
February 20, 2010
Page 7
If you have any questions regarding the foregoing, please feel free to contact me at (312)
853-7833. My fax number is (312) 853-7036.
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Sincerely,
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/s/ Lisa J. Reategui
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Lisa J. Reategui |
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Attachments
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cc: |
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Edward J. Wehmer, Wintrust Financial Corporation
David A. Dykstra, Wintrust Financial Corporation
David L. Stoehr, Wintrust Financial Corporation |
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[Wintrust Financial Corporation Letterhead]
February 20, 2010
Via EDGAR and Federal Express
Securities and Exchange Commission
100 F Street, N.E., Mail Stop 4720
Washington, D.C. 20549
Attention: Michael D. Clampitt
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Re: |
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Wintrust Financial Corporation
File No. 000-21923
Form 10-K for the fiscal year ended December 31, 2009
Definitive Schedule 14A filed April 20, 2009
Form 10-Q for the period ended March 31, 2009
Form 10-Q for the period ended June 30, 2009
Form 10-Q for the period ended September 30, 2009 |
Ladies and Gentlemen:
In response to the request of the staff (the “Staff”) of the Securities and Exchange
Commission (the “Commission”) set forth in the Staff’s letter dated February 18, 2010,
Wintrust Financial Corporation (the “Company”) hereby acknowledges that:
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the Company is responsible for the adequacy and accuracy of the
disclosure in the filings; |
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Staff comments or changes to disclosure in response to Staff comments
do not foreclose the Commission from taking any action with respect to
the filing; and |
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the Company may not assert Staff comments as a defense in any
proceeding initiated by the Commission or any person under the federal
securities laws of the United States. |
WINTRUST FINANCIAL CORPORATION
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By:
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/s/ David L. Stoehr
David L. Stoehr
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Executive Vice President and Chief Financial Officer |
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EXHIBIT 1
The Current Economic Environment
Both the U.S. economy and the Company’s local markets continued to face numerous challenging
conditions in 2009. The credit crisis that began in 2008 continued into 2009 resulting in rising
unemployment and declining home values throughout the Chicago metropolitan area and southeastern
Wisconsin. In addition, the low liquidity in the debt markets and high volatility in the equity
markets impacted the entire financial system, including the financial markets upon which the
Company depends. As a result of these conditions, consumer confidence and spending decreased
substantially and real estate asset values declined in the Company’s markets. The stress of the
existing economic environment and the depressed real estate valuations in the Company’s markets had
an adverse impact on our business in 2009. Defaults by borrowers increased in 2009 and the decline
in fair value of collateral resulted in the Company recording higher provisions for credit losses,
higher net charge-offs, an increase in the Company’s allowance for loan losses and the
restructuring of certain borrower loan agreements. In response to these conditions, during 2009, Management monitored carefully the impact on the
Company of illiquidity in the financial markets, the declining values of real property and other
assets, loan performance, default rates and other financial and macro-economic indicators in order
to navigate the challenging economic environment. In particular:
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Wintrust experienced an increase in defaults and foreclosures in 2009 throughout its
banking footprint in the metropolitan areas of Chicago and Milwaukee. In response to these
events, in 2008, the Company created a dedicated division, the Managed Assets Division, to
focus on resolving problem asset situations. Comprised of experienced lenders, the Managed
Assets Division takes control of managing the Company’s more significant problem assets and
also conducts ongoing reviews and evaluations of all significant problem assets, including
the formulation of action plans and updates on recent developments. |
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The Company’s 2009 provision for credit losses totaled $167.9 million, an increase of
$110.5 million when compared to 2008, while net charge-offs increased to $137.4 million
during 2009, compared to only $37.0 million for 2008. |
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The Company increased its allowance for loan losses to $98.3 million at December 31,
2009, reflecting an increase of $28.5 million, or 40.9%, when compared to December 31,
2008. |
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Total non-performing loans (loans on non-accrual status and loans more than 90 days past
due and still accruing interest) were $131.8 million at December 31, 2009, a decrease of
$4.3 million compared to December 31, 2008. The slight decline in non-performing loans was
a result of Management’s assessment that addressing the resolution of non-performing assets
was a key goal for 2009. To that end, non-performing loans |
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declined as a result of actions that included selling such loans to third parties, charging
loans off or down to fair value, collections, and transfers to other real estate owned.
This aggressive stance combined with the significant declines in real estate valuations
during 2009 increased net charge-offs and increased the aggregate other real estate owned
balance but also resulted in the decline in level of non-performing loans. |
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As discussed above, the Company’s other real estate owned increased by $47.6 million, to
$80.2 million during 2009, from $32.6 million at December 31, 2008. These changes were
largely caused by the increase in properties acquired in foreclosure or received through a
deed in lieu of foreclosure related to residential real estate development and commercial
real estate loans. |
During 2009, Management implemented a strategic effort to aggressively resolve problem loans
through liquidation, rather than retention, of loans or real estate acquired as collateral through
the foreclosure process. Management believes that some financial institutions have taken a longer
term view of problem loan situations, hoping to realize higher values on acquired collateral
through extended marketing efforts or an improvement in market conditions. Management believed that
the distressed macro-economic conditions would continue to exist in 2009 and 2010 and that the
banking industry’s increase in non-performing loans would eventually lead to many properties being
sold by financial institutions, thus saturating the market and possibly driving fair values of
non-performing loans and foreclosed collateral further downwards. Accordingly, the Company
attempted to liquidate as many non-performing loans and assets as possible during 2009. The impact
of those decisions and actions included a slight decline in non-performing loans from the prior
year-end, a significant increase in the provision for credit losses and net charge-offs in 2009
compared to 2008, an increase in the overall level of the allowance for loan losses and an increase
in other real estate owned as the Company acquired properties for ultimate sale through foreclosure
or deeds in lieu of foreclosure. Management believes these actions will serve the Company well in
the future as they protect the Company from further valuation deterioration and permit Management
to spend less time on resolution of problem loans and more time on growing the Company’s core
business and the evaluation of other opportunities presented by this volatile economic environment.
The Company’s goal in 2009 was to finish the year in a position to take advantage of the
opportunities that many times result from distressed credit markets — specifically, a dislocation
of assets, banks and people in the overall market.
Further, the level of loans past due 30 days or more and still accruing interest totaled $108.6
million as of December 31 2009, declining $57.3 million compared to the balance of $165.9 million
as of December 31, 2008. Although the balance of loans past due greater than 30 days and still
accruing interest is an indicator that future potential non-performing loans and charge-offs may be
less in 2010 than 2009, Management is very cognizant of the volatility in and the fragile nature of
the national and local economic conditions and that some borrowers can experience severe
difficulties and default suddenly even if they have never previously been delinquent in loan
payments. Accordingly, Management believes that the current economic conditions will continue to
apply stress to the quality of our loan portfolio and significant attention will continue to be
directed toward the prompt identification, management and resolution of problem loans.
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In addition, in 2009, the Company restructured certain loans by providing economic concessions to
borrowers to better align the terms of their loans with their current ability to pay. At December
31, 2009, approximately $32 million in loans had terms modified. These actions helped financially
stressed borrowers maintain their homes or businesses and kept these loans in an accruing status
for the Company. The Company had no such restructured loan situations at the end of 2008. The
Company considers restructuring loans when it appears that both the borrower and the Company can
benefit and preserve a solid and sustainable relationship.
An acceleration or significantly extended continuation in real estate valuation and macro-economic
deterioration could result in higher default levels, a significant increase in foreclosure
activity, a material decline in the value of the Company’s assets, or any combination of more than
one of these trends could have a material adverse effect on the Company’s financial condition or
results of operations.
A positive result of the economic environment was that our mortgage banking operation benefited
from the low interest rate environment during 2009. Beginning in late 2008 and continuing
throughout 2009, demand for mortgage loans increased due to the fall in interest rates. The
interest rate environment coupled with the acquisition of additional staff and infrastructure
resulted in the Company originating $4.7 billion and selling $4.5 billion of residential mortgage
loans in 2009, as compared to originating $1.6 billion and selling $1.6 billion in 2008. The
Company’s practice is generally not to retain long-term fixed rate mortgages on its balance sheet
in order to mitigate interest rate risk and consequently sells most of such mortgages into the
secondary market.
Prior to its participation in the U.S. Treasury’s Capital Purchase Program, the Company was
well-capitalized and throughout 2009, the Company’s capital ratios exceeded the minimum levels
required for it to be considered well-capitalized. The Company’s participation in the CPP provided
the Company with additional capital to expand its franchise through growth in loans and deposits.
In total, the Company increased its loan portfolio from $7.6 billion at December 31, 2008 to $8.4
billion at December 31, 2009. This net $800 million increase was primarily as a result of an
increase in our commercial and commercial real estate portfolio as well as the purchase of the life
insurance premium finance portfolio, and to a lesser extent was due to a slight increase in the
residential real estate and home equity portfolios. These increases were partially offset by the
securitization and sale of a portion of our commercial premium finance loan portfolio and a decline
in our indirect consumer loan portfolio as we exited the indirect auto line of business. This net
growth in the loan portfolio occurred without the Company making significant changes to its loan
underwriting standards. For more information regarding changes in the Company’s loan portfolio,
see “—Analysis of Financial Condition—Interest
Earning Assets” and note 4 (“Loans”) to the
Company’s consolidated financial statements.
Management considers the maintenance of adequate liquidity to be important to the management of
risk. Accordingly, during 2009, the Company continued its practice of maintaining appropriate
funding capacity to provide the Company with adequate liquidity for its ongoing operations. In this
regard, the Company benefited from its strong deposit base, a liquid short-
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term investment portfolio and its access to funding from a variety of external funding sources,
including exceptional sources provided or facilitated by the federal government for the benefit of
U.S. financial institutions. Among such sources is the Federal Reserve Bank of New York’s Term
Asset-Backed Securities Loan Facility (the “TALF”). In September 2009 the Company securitized a
portion of its property and casualty premium finance loan portfolio the of $600 million, which was
facilitated by the premium finance loans being eligible collateral under the TALF. The Company
also benefited from its maintenance of fifteen separate banking charters, which allow the Company
to offer its MaxSafe product. Through the MaxSafe product, the Company offers its customers the
ability to maintain a depository account at each of the Company’s banking charters and thus receive
fifteen times the ordinary FDIC limit, with the Company attending to much of the administrative
difficulties this would ordinarily require. While the FDIC insurance limit, formerly $100,000 per
depositor at each banking charter, has been raised by the FDIC to $250,000 per depositor at each
banking charter through calendar year 2013, the MaxSafe product has allowed the Company to attract
large amounts of high quality deposits as financial distress has affected a number of banking
institutions. At year-end 2009, the Company had approximately $1 billion in overnight liquid
funds and short-term interest-bearing deposits with banks and was operating at slightly less than
an 85% loan-to-deposit ratio — just below the low end of the Company’s desired range of 85% to
90%. Redeploying a portion of those liquid assets into higher yielding assets while continuing to
maintain adequate liquidity is a priority for 2010.
Community Banking
As of December 31, 2009, our community banking franchise consisted of 15 community banks (the
“banks”) with 78 locations. Through these banks, we provide banking and financial services
primarily to individuals, small to mid-sized businesses, local governmental units and institutional
clients residing primarily in the banks’ local service areas. These services include traditional
deposit products such as demand, NOW, money market, savings and time deposit accounts, as well as a
number of unique deposit products targeted to specific market segments. The banks also offer home
equity, home mortgage, consumer, real estate and commercial loans, safe deposit facilities, ATMs,
internet banking and other innovative and traditional services specially tailored to meet the needs
of customers in their market areas. Profitability of our community banking franchise is primarily
driven by our net interest income and margin, our funding mix and related costs, the level of
non-performing loans and other real estate owned, the amount of mortgage banking revenue and our
history of establishing de novo banks.
Net interest income and margin. The primary source of the ourrevenue is net interest income. Net
interest income is the difference between interest income and fees on earning assets, such as loans
and securities, and interest expense on liabilities to fund those assets, including deposits and
other borrowings. Net interest income can change significantly from period to period based on
general levels of interest rates, customer prepayment patterns, the mix of interest-earning assets
and the mix of interest-bearing and non-interest bearing deposits and borrowings.
Funding mix and related costs. Our most significant source of funding is core deposits, which are
comprised of non-interest bearing deposits, non-brokered interest-bearing transaction accounts,
savings deposits and domestic time deposits. Our branch network is our principal
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source of core deposits, which generally carry lower interest rates than wholesale funds of
comparable maturities. Our profitability has been bolstered in recent quarters as fixed term
certificates of deposit have been renewing at lower rates given the historically low interest rate
levels in place recently and particularly since the fourth quarter of 2008.
Level of non-performing loans and other real estate owned. The level of non-performing loans and
other real estate owned can significantly impact our profitability as these loans do not accrue any
income, can be subject to charge-offs and write-downs due to deteriorating market conditions and
generally result in additional legal and collections expenses. Given the current economic
conditions, these costs have been trending higher in recent quarters.
Mortgage banking revenue. Our community banking franchise is also influenced by the level of fees
generated by the origination of residential mortgages and the sale of such mortgages into the
secondary market. This revenue is significantly impacted by the level of interest rates associated
with home mortgages. Recently, such interest rates have been historically low and customer
refinancing have been high, resulting in increased fee revenue. Additionally, in December 2008, we
acquired certain assets and assumed certain liabilities of the mortgage banking business of
Professional Mortgage Partners (“PMP”) for an initial cash purchase price of $1.4 million, plus
potential contingent consideration of up to $1.5 million per year in each of the following three
years dependent upon reaching certain earnings thresholds. As a result of the acquisition, we
significantly increased the capacity of our mortgage-origination operations, primarily in the
Chicago metropolitan market. The PMP transaction also changed the mix of our mortgage origination
business in the Chicago market, resulting in a relatively greater portion of that business being
retail, rather than wholesale, oriented. The primary risk of the PMP acquisition transaction
relates to the integration of a significant number of locations and staff members into our existing
mortgage operation during a period of increased mortgage refinancing activity. Costs in the
mortgage business are variable as they primarily relate to commissions paid to originators.
Establishment of de novo operations. Our historical financial performance has been affected by
costs associated with growing market share in deposits and loans, establishing and acquiring banks,
opening new branch facilities and building an experienced management team. Our financial
performance generally reflects the improved profitability of our banking subsidiaries as they
mature, offset by the costs of establishing and acquiring banks and opening new branch facilities.
From our experience, it generally takes over 13 months for new banks to achieve operational
profitability depending on the number and timing of branch facilities added.
In determining the timing of the formation of de novo banks, the opening of additional branches of
existing banks, and the acquisition of additional banks, we consider many factors, particularly our
perceived ability to obtain an adequate return on our invested capital driven largely by the then
existing cost of funds and lending margins, the general economic climate and the level of
competition in a given market. We began to slow the rate of growth of new locations in 2007 due to
tightening net interest margins on new business which, in the opinion of management, did not
provide enough net interest spread to be able to garner a sufficient return on our invested
capital. Since the second quarter of 2008, we have not established a new banking location either
through a de novo opening or through an acquisition, due to the financial system crisis and
recessionary
5
economy and our decision to utilize our capital to support our existing franchise rather than
deploy our capital for expansion through new locations which tend to operate at a loss in the early
months of operation. Thus, while expansion activity during the past three years has been at a level
below earlier periods in our history, we expect to resume de novo bank openings, formation of
additional branches and acquisitions of additional banks when favorable market conditions return.
In addition to the factors considered above, before we engage in expansion through de novo branches
or banks we must first make a determination that the expansion fulfills our objective of enhancing
shareholder value through potential future earnings growth and enhancement of the overall franchise
value of the Company. Generally, we believe that, in normal market conditions, expansion through de
novo growth is a better long-term investment than acquiring banks because the cost to bring a de
novo location to profitability is generally substantially less than the premium paid for the
acquisition of a healthy bank. Each opportunity to expand is unique from a cost and benefit
perspective. Factors including the valuation of our stock, other economic market conditions, the
size and scope of the particular expansion opportunity and competitive landscape all influence the
decision to expand via de novo growth or through acquisition.
Specialty Finance
Through our specialty finance segment, we offer financing of insurance premiums for businesses and
individuals; accounts receivable financing, value-added, out-sourced administrative services; and
other specialty finance businesses. We conduct our specialty finance businesses through indirect
non-bank subsidiaries. Our wholly owned subsidiary, First Insurance Funding Corporation (“FIFC”)
engages in the premium finance receivables business, our most significant specialized lending
niche, including commercial insurance premium finance and life insurance premium finance.
Financing of Commercial Insurance Premiums
FIFC originated approximately $3.3 billion in commercial insurance premium finance receivables
during 2009. 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
than relationship lending; however, management has established various control procedures to
mitigate the risks associated with this lending. The majority of these loans are purchased by the
banks in order to more fully utilize their lending capacity as these loans generally provide the
banks with higher yields than alternative investments. Historically, FIFC originations that were
not purchased by the banks were sold to unrelated third parties with servicing retained. However,
during the third quarter of 2009, FIFC initially sold $695 million in commercial premium finance
receivables to our indirect subsidiary, FIFC Premium Funding I, LLC, which in turn sold $600
million in aggregate principal amount
6
of notes backed by such premium finance receivables in a securitization transaction sponsored by
FIFC.
The primary driver of profitability related to the financing of commercial insurance premiums is
the net interest spread that FIFC can produce between the yields on the loans generated and the
cost of funds allocated to the business unit. The commercial insurance premium finance business is
a competitive industry and yields on loans are influenced by the market rates offered by our
competitors. We fund these loans either through the securitization facility described above or
through our deposits, the cost of which is influenced by competitors in the retail banking markets
in the Chicago and Milwaukee metropolitan areas.
Financing of Life Insurance Premiums
In 2007, FIFC began financing life insurance policy premiums generally for high net-worth
individuals. These loans are originated directly with the borrowers with assistance from life
insurance carriers, independent insurance agents, financial advisors and legal counsel. The life
insurance policy is the primary form of collateral. In addition, these loans often are secured with
a letter of credit, marketable securities or certificates of deposit. In some cases, FIFC may make
a loan that has a partially unsecured position. In July 2009, FIFC expanded this niche lending
business segment when it purchased a portfolio of domestic life insurance premium finance loans
from certain affiliates of American International Group for an aggregate purchase price of $685.3
million. At closing, a portion of the portfolio, with an aggregate unpaid principal balance of
approximately $321.1 million, and a corresponding portion of the purchase price of approximately
$232.8 million were placed in escrow, pending the receipt of required third party consents. To the
extent any of the required consents are not obtained prior to October 28, 2010, the corresponding
portion of the portfolio will be reassumed by the applicable seller, and the corresponding portion
of the purchase price will be returned to FIFC. Also, as part of the purchase, an aggregate of
$84.4 million of additional life insurance premium finance assets were available for future
purchase by FIFC subject to the satisfaction of certain conditions. On October 2, 2009, the
conditions were satisfied in relation to the majority of the additional life insurance premium
finance assets and FIFC purchased $83.4 million of the $84.4 million of life insurance premium
finance assets available for an aggregate purchase price of $60.5 million in cash.
As with the commercial premium finance business, the primary driver of profitability related to the
financing of life insurance premiums is the net interest spread that FIFC can produce between the
yields on the loans generated and the cost of funds allocated to the business unit.
Profitability of financing both commercial and life insurance premiums is also meaningfully
impacted by leveraging information technology systems, maintaining operational efficiency and
increasing average loan size, each of which allows us to expand our loan volume without significant
capital investment.
7
Wealth Management
We currently offer 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. The primary influences on the profitability of the
wealth management business can be associated with the level of commission received related to the
trading performed by the brokerage customers for their accounts; and the amount of assets under
management for which asset management and trust units receive a management fee for advisory,
administrative and custodial services. As such, revenues are influenced by a rise or fall in the
debt and equity markets and the resultant increase or decrease in the value of our client accounts
on which are fees are based. The commissions received by the brokerage unit are not as directly
influenced by the directionality of the debt and equity markets but rather the desire of our
customers to engage in trading based on their particular situations and outlooks of the market or
particular stocks and bonds. Profitability in the brokerage business is impacted by commissions
which fluctuate over time.
Federal Government, Federal Reserve and FDIC Programs
Since October of 2008, the federal government, the Federal Reserve Bank of New York (the “New York
Fed”) and the FDIC have made a number of programs available to banks and other financial
institutions in an effort to ensure a well-functioning U.S. financial system. We participate in
three of these programs: the CPP, administered by the Treasury, TALF, created by the New York Fed,
and the Temporary Liquidity Guarantee Program (“TLGP”), created by the FDIC.
Participation in Capital Purchase Program. In October 2008, the Treasury announced that it intended
to use a portion of the initial funds allocated to it pursuant to the Troubled Asset Relief Program
(“TARP”), created by the Emergency Economic Stabilization Act of 2008, to invest directly in
financial institutions through the newly-created CPP. At that time, U.S. Treasury Secretary Henry
Paulson stated that the program was “designed to attract broad participation by healthy
institutions” which “have plenty of capital to get through this period, but are not positioned to
lend as widely as is necessary to support our economy.” Our management believed at the time of the
CPP investment, as it does now, that Treasury’s CPP investment was not necessary for the Company’s
short or long-term health. However, the CPP investment presented an opportunity for us. By
providing us with a significant source of relatively inexpensive capital, the Treasury’s CPP
investment allows us to accelerate our growth cycle and expand lending.
Consequently, we applied for CPP funds and our application was accepted by Treasury. As a result,
on December 19, 2008, we entered into an agreement with the U.S. Department of the Treasury to
participate in Treasury’s CPP, pursuant to which we issued and sold preferred stock and a warrant
to Treasury in exchange for aggregate consideration of $250 million (the “CPP investment”). As a
result of the CPP investment, our total risk based capital ratio as of December 31, 2008 increased
from 10.3% to 13.1%. To be considered “well capitalized,” we must maintain a total risk-based
capital ratio in excess of 10%. The terms of our agreement with Treasury impose significant
restrictions upon us, including increased scrutiny by Treasury, banking regulators and Congress,
additional corporate governance requirements, restrictions upon our ability to repurchase stock and
pay dividends and, as a result of increasingly stringent regulations issued by Treasury following
the closing of the CPP investment, significant restrictions upon
8
executive compensation. Pursuant to the terms of the agreement between Treasury and us, Treasury is
permitted to amend the agreement unilaterally in order to comply with any changes in applicable
federal statutes.
The CPP investment provided the Company with additional capital resources which in turn permitted
the expansion of the flow of credit to U.S. consumers and businesses beyond what we would have done
without the CPP funding. The capital itself is not loaned to our borrowers but represents
additional shareholders’ equity that has been leveraged by the Company to permit it to provide new
loans to qualified borrowers and raise deposits to fund the additional lending without incurring
excessive risk.
Due to the combination of our prior decisions in appropriately managing our risks, the capital
support provided from the August 2008 private issuance of $50 million of convertible preferred
stock and the additional capital support from the CPP, we have been able to take advantage of
opportunities when they have arisen and our banks continue to be active lenders within their
communities. Without the additional funds from the CPP, our prudent management philosophy and
strict underwriting standards likely would have required us to continue to restrain lending due to
the need to preserve capital during these uncertain economic conditions. While many other banks saw
2009 as a year of retraction or stagnation as it relates to lending activities, the capital from
the CPP positioned Wintrust to make 2009 a year in which we expanded our lending. Specifically,
since the receipt of the CPP funds, we have funded in excess of $10.0 billion of loans, including
funding of new loans, advances on prior commitments and renewals of maturing loans, consisting of
over 193,000 individual credits. These loans are to a wide variety of businesses and we consider
such loans to be essential to assisting growth in the economy. In connection with our
participation in the CPP, we have committed to expand the flow of credit to U.S. consumers and
businesses on competitive terms, and to work to modify the terms of residential mortgages as
appropriate. The following tables set forth information regarding our efforts to comply with these
commitments since we received the CPP investment on December 19, 2008:
ItttUt Manure
Lrrid
D«tmtti 11.
...t
—— —
GaiEimar Laans
Number of new and renewed bans originated a.119
Agg regale a ma uin af la arc; a rig ire ted s 245.271
GamrrBrcial and Com me re ia I Real Esfeil-?
Laans
Number of rev; and renewed bans arigirrated 4.543
Agg regale a ma jn1 al aarrs a r g nated : 1.617729
Residential Real Eslale Loans
Number of new and renewed kiarc; originated s 21,307 4352.57-:
Agg regale a ma jii1 al aarrs
arigirated
CamrrBrcial premium Finance Loans
Number ol new and renewed loaiE originatej 159j071
Agg regale a ma nil of aarrs arigirated $ 3,616,700
—— —— — |
9
To date, Wintrust generally has not modified the terms of residential mortgages.
We have no present plans to repay the CPP investment, but believe that we have the ability to
conduct an equity offering that would allow us to make such repayment. Accordingly, we intend to
remain focused on investing the proceeds of the CPP investment, and will only seek to repay such
investment when we believe doing so is in the best interests of our shareholders.
For additional information on the terms of the preferred stock and the warrant, see Note 24 of the
Consolidated Financial Statements.
TALF-Eligible Issuance. In September 2009, our indirect subsidiary, FIFC Premium Funding I, LLC,
sold $600 million in aggregate principal amount of its Series 2009-A Premium Finance Asset Backed
Notes, Class A (the “Notes”), which were issued in a securitization transaction sponsored by FIFC.
FIFC Premium Funding I, LLC’s obligations under the Notes are secured by revolving loans made to
buyers of property and casualty insurance policies to finance the related premiums payable by the
buyers to the insurance companies for the policies. At the time of issuance, the Notes were
eligible collateral under TALF and certain investors therefore received non-recourse funding from
the New York Fed in order to purchase the Notes. As a result, FIFC believes it received greater
proceeds at lower interest rates from the securitization than it otherwise would have received in
non-TALF-eligible transactions. As a result, if TALF is not renewed or is allowed to expire, it is
possible that funding our growth will be more costly if we pursue similar transactions in the
future. However, as is true in the case of the CPP investment, management views the TALF-eligible
securitization as a funding mechanism offering us the ability to accelerate our growth plan, rather
than one essential to the maintenance of our “well capitalized” status.
TLGP Guarantee. In November 2008, the FDIC adopted a final rule establishing the TLGP. The TLGP
provided two limited guarantee programs: One, the Debt Guarantee Program, that guaranteed
newly-issued senior unsecured debt, and another, the Transaction Account Guarantee program (“TAG”)
that guaranteed certain non-interest-bearing transaction accounts at insured depository
institutions. All insured depository institutions that offer non-interest-bearing transaction
accounts had the option to participate in either program. We did not participate in the Debt
Guarantee Program.
In December 2008, each of our subsidiary banks elected to participate in the TAG, which provides
unlimited FDIC insurance coverage for the entire account balance in exchange for an additional
insurance premium to be paid by the depository institution for accounts with balances in excess of
the current FDIC insurance limit of $250,000. This additional insurance coverage would continue
through December 31, 2009. In October 2009, the FDIC notified depository institutions that it was
extending the TAG program for an additional six months until June 30, 2010 at the option of
participating banks. Our subsidiary banks have determined that it is in their best interest to
continue participation in the TAG program and have opted to participate for the additional
six-month period.
10
EXHIBIT 2
EXCERPT FROM “ANALYSIS OF FINANCIAL CONDITION—
INTEREST-EARNING ASSETS” SECTION OF MD&A
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, |
|
|
2009 |
|
2008 |
|
2007 |
|
|
Average |
|
Percent |
|
Average |
|
Percent |
|
Average |
|
Percent |
|
|
Balance |
|
of Total |
|
Balance |
|
of Total |
|
Balance |
|
of Total |
|
|
|
Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and commercial real estate |
|
$ |
4,990,004 |
|
|
|
48 |
% |
|
$ |
4,580,524 |
|
|
|
52 |
% |
|
$ |
4,182,205 |
|
|
|
49 |
% |
Home equity |
|
|
919,233 |
|
|
|
9 |
|
|
|
772,361 |
|
|
|
9 |
|
|
|
652,034 |
|
|
|
8 |
|
Residential
real estate(1) |
|
|
503,910 |
|
|
|
5 |
|
|
|
335,714 |
|
|
|
4 |
|
|
|
335,894 |
|
|
|
4 |
|
Premium finance receivables |
|
|
1,653,786 |
|
|
|
16 |
|
|
|
1,178,421 |
|
|
|
13 |
|
|
|
1,264,941 |
|
|
|
15 |
|
Indirect consumer loans |
|
|
134,757 |
|
|
|
1 |
|
|
|
215,453 |
|
|
|
2 |
|
|
|
248,203 |
|
|
|
3 |
|
Other loans |
|
|
133,731 |
|
|
|
1 |
|
|
|
163,136 |
|
|
|
2 |
|
|
|
141,603 |
|
|
|
1 |
|
|
|
|
Total loans,
net of unearned income(2) |
|
|
8,335,421 |
|
|
|
80 |
|
|
|
7,245,609 |
|
|
|
82 |
|
|
|
6,824,880 |
|
|
|
80 |
|
Liquidity management assets(3) |
|
|
2,086,653 |
|
|
|
20 |
|
|
|
1,532,282 |
|
|
|
18 |
|
|
|
1,674,719 |
|
|
|
20 |
|
Other
earning assets(4) |
|
|
23,979 |
|
|
|
— |
|
|
|
23,052 |
|
|
|
— |
|
|
|
24,721 |
|
|
|
— |
|
|
|
|
Total average earning assets |
|
$ |
10,446,053 |
|
|
|
100 |
% |
|
$ |
8,800,943 |
|
|
|
100 |
% |
|
$ |
8,524,320 |
|
|
|
100 |
% |
|
|
|
Total average assets |
|
$ |
11,415,322 |
|
|
|
|
|
|
$ |
9,753,220 |
|
|
|
|
|
|
$ |
9,442,277 |
|
|
|
|
|
|
|
|
Total average earning assets to total average assets |
|
|
|
|
|
|
92 |
% |
|
|
|
|
|
|
90 |
% |
|
|
|
|
|
|
90 |
% |
|
|
|
(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 non-accrual loans |
|
(4) |
|
Includes brokerage customer receivables and trading account securities |
Average earning assets increased $1.6 billion, or 19%, in 2009 and $276.6 million, or 3%, in 2008.
Loans. Average total loans, net of unearned income, increased $1.1 billion, or 15%, in 2009 and
$420.7 million, or 6%, in 2008. Average commercial and commercial real estate loans, the largest
loan category, totaled $5.0 billion in 2009, and increased $409.5 million, or 9%, over the average
balance in 2008. The average balance in 2008 increased $398.3 million, or 10%, over the average
balance in 2007. This category comprised 60% of the average loan portfolio in 2009 and 63% in 2008.
The growth realized in this category for 2009 and 2008 is attributable to increased business
development efforts. While many other banks saw 2009 as a year of retraction or stagnation as it
relates to lending activities, the capital from the CPP positioned Wintrust to expand lending.
Home equity loans averaged $919.2 million in 2009, and increased $146.9 million, or 19%, when
compared to the average balance in 2008. Home equity loans averaged $772.4 million in 2008, and
increased $120.3 million, or 19%, when compared to the average balance in 2007. Unused commitments
on home equity lines of credit totaled $854.2 million at December 31, 2009 and $897.9 million at
December 31, 2008. The increase in average home equity loans in 2009 is primarily a result of new
loan originations and borrowers exhibiting a greater propensity to borrow on their existing lines
of credit. As a result of economic conditions, the Company has been actively managing its home
equity portfolio to ensure that diligent pricing, appraisal and other underwriting activities
continue to exist. The Company has not sacrificed asset quality or pricing standards to grow
outstanding loan balances.
Residential real estate loans averaged $503.9 million in 2009, and increased $168.2 million, or
50%, from the average balance of $335.7 million in 2008. In 2008, residential real estate loans
were essentially unchanged from the average balance in 2007. This category includes mortgage loans
held-for-sale. By selling residential mortgage loans into the secondary market, the Company
eliminates the interest-rate risk associated with these loans, as they are predominantly long-term
fixed rate loans, and provides a source of non-interest revenue. The majority of the increase in
residential mortgage loans in 2009 as compared to 2008 is a result of higher mortgage loan
originations. The increase in originations resulted from the interest rate environment and the
positive impact of the PMP
transaction, completed at the end of 2008. 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.
Average premium finance receivables totaled $1.7 billion in 2009, and accounted for 20% of the
Company’s average total loans. In 2009, average premium finance receivables increased $475.4
million, or 40%, from the average balance of $1.2 billion in 2008. In 2008, average premium finance
receivables decreased $86.5 million, or 7%, compared to 2007. The increase in the average balance
of premium finance receivables in 2009 is a result of FIFC’s purchase of a portfolio of domestic
life insurance premium finance loans in 2009 for a total aggregate purchase price of $745.9
million. Historically, the majority of premium finance receivables, commercial and life insurance,
were purchased by the banks in order to more fully utilize their lending capacity as these loans
generally provide the banks with higher yields than alternative investments. FIFC originations of
commercial premium finance receivables that were not purchased by the banks were typically sold to
unrelated third parties with servicing retained. However, during the third quarter of 2009, FIFC
initially sold $695 million in commercial premium finance receivables to our indirect subsidiary,
FIFC Premium Funding I, LLC, which in turn sold $600 million in aggregate principal amount of notes
backed by such commercial premium finance receivables in a securitization transaction sponsored by
FIFC. Under the terms of the securitization, FIFC has the right, but not the obligation, to
securitize additional receivables in the future and is responsible for the servicing,
administration and collection of securitized receivables and related security in accordance with
FIFC’s credit and collection policy. FIFC’s obligations under the securitization are subject to
customary covenants, including the obligation to file and amend financing statements; the
obligation to pay costs and expenses; the obligation to indemnify other parties for its breach or
failure to perform; the obligation to defend the right, title and interest of the transferee of the
conveyed receivables against third party claims; the obligation to repurchase the securitized
receivables if certain representations fail to be true and correct and receivables are materially
and adversely affected thereby; the obligation to maintain its corporate existence and licenses to
operate; and the obligation to qualify the securitized notes under the securities laws. In the
event of a default by FIFC under certain of these obligations, the ability to add loans to
securitization facility could terminate.
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 suspended the sale of premium finance receivables to unrelated third parties
from the third quarter of 2006 to the third quarter of 2007. Due to the Company’s average
loan-to-average deposit ratio being consistently above the target range of 85% to 90%, the Company
reinstated its program of selling premium finance receivables to unrelated third parties in the
fourth quarter of 2007.
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 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, 2009, the average maturity of indirect automobile loans is estimated to be
approximately 31 months. During 2009, 2008 and 2007 average indirect consumer loans totaled $134.8
million, $215.5 million and $248.2 million, respectively.
Other loans represent a wide variety of personal and consumer loans to individuals as well as
high-yielding short-term accounts receivable financing to clients in the temporary staffing
industry located throughout the United States. Consumer loans generally have shorter terms and
higher interest rates than mortgage loans but generally involve more credit risk due to the type
and nature of the collateral. Additionally, short-term accounts receivable financing may also
involve greater credit risks than generally associated with the loan portfolios of more traditional
community banks depending on the marketability of the collateral. Lower activity from existing
clients and slower growth in new customer relationships due to sluggish economic conditions have led to a decrease in
short-term accounts receivable financing in the last few years.
EXCERPT FROM THE NOTES TO THE COMPANY’S
FINANCIAL STATEMENTS — NOTE 4 (“LOANS”)
(4) Loans
A summary of the loan portfolio at December 31, 2009 and 2008 is as follows (in thousands):
Trading income’ • clunge n lav
marhBlulue J-.jjJ 291 2fi£ 2T.401 NM 2C U
tuner:
Bank Owned Lie Insuring £.044 1522 rM’J 422 Jj > :rf. {fi7>
AdTns1ritw»rv«=. 1.9IS 2.^-41 1-M5 |»b; |33; |1-DSj; (27}
MrKelanwus t.Mt 6.JQS fl.433 3.1fli 44 |1.975h
|J3>
Tatil ottier 13.118 11J71 1739J L.bll 21 |fi327h
\*l<i\
Tjfc ^i- THrel i-:jT-r J3U.64I 99.675 79.343 < 21J.«^
Jl^’-’. j 19.735 iffifc |
Certain premium finance receivables are recorded net of unearned income. The unearned income
portions of such premium finance receivables were $31.8 million and $27.1 million at December 31,
2009 and 2008, respectively. Life insurance premium finance receivables are also recorded net of
credit discounts attributable to the life insurance premium finance loan acquisition in the third
quarter of 2009. See “Acquired Loan Information at Acquisition”, below.
Indirect consumer loans include auto, boat and other indirect consumer loans. Total loans include
net deferred loan fees and costs and fair value purchase accounting adjustments totaling $10.7
million and $9.4 million at December 31, 2009 and 2008, respectively.
Certain real estate loans, including mortgage loans held-for-sale, and home equity loans with
balances totaling approximately $1.7 billion and $1.6 billion, at December 31, 2009 and 2008,
respectively, were pledged as collateral to secure the availability of borrowings from certain
Federal agency banks. At December 31, 2009, approximately $948.9 million of these pledged loans are
included in a blanket pledge of qualifying loans to the Federal Home Loan Bank (“FHLB”). The
remaining $722.9 million of pledged loans was used to secure potential borrowings at the Federal
Reserve Bank discount window. At December 31, 2009 and 2008, the Banks borrowed $431.0 million and
$436.0 million, respectively, from the FHLB in connection with these collateral arrangements. See
Note 13 for a summary of these borrowings.
The Company’s loan portfolio is generally comprised of loans to consumers and small to medium-sized
businesses located within the geographic market areas that the Banks serve. The premium finance
receivables portfolios are made to customers on a national basis and the majority of the indirect
consumer loans were generated through a network of local automobile dealers. As a result, the
Company strives to maintain a loan portfolio that is diverse in terms of loan type, industry,
borrower and geographic concentrations. Such diversification reduces the exposure to economic
downturns that may occur in different segments of the economy or in different industries.
It is the policy of the Company to review each prospective credit in order to determine the
appropriateness and, when required, the adequacy of security or collateral necessary to obtain when
making a loan. The type of collateral, when required, will vary from liquid assets to real estate.
The Company seeks to assure access to collateral, in the event of default, through adherence to
state lending laws and the Company’s credit monitoring procedures.
Acquired Loan Information at Acquisition – Loans with evidence of credit quality deterioration
since origination
As part of our acquisition of a portfolio of life insurance premium finance loans in 2009, we
acquired loans for which there was evidence of credit quality deterioration since origination and
we determined that it was probable that the Company would be unable to collect all contractually
required principal and interest payments. These loans had an unpaid principal balance of $1.0
billion and a carrying value of $896.3 million. At December 31, 2009, the unpaid principal balance
and carrying value of these loans were $977.7 million and $864.4 million, respectively. The
following table provides details on these loans at acquisition (in thousands):
2DM ...................... 23QJ
Commancialand oommsrcBl rsalssb’ri- J 5.D39.9DC 477Bj6frl
Hanssquhy Q3D.4B2 flM.^3a
Residsntial raaleslals 30fi.2QG 2&2.<Kffl
Pramiumfinanos roosriabtes -
cwnmsrcial 73D.144 1.2^3.953
Pr^m uinl nanoa raoarrabkrs -
life insurance 1,197.flffl 102.728
I nd racl cj(i eu mar jan e 9 B. 13fl ‘ .-..- .-.-
Dlhar taaiE 1DB.91fi 1-]].513
TOtaJtaans .............................. j J.411.771 7.-221.::: |
During 2009, the Corporation recorded a $615,000 provision for credit losses establishing a
corresponding allowance for loan losses at December 31, 2009. This provision for credit losses
represents deterioration to the portfolio subsequent to acquisition.
Accretable Yield Activity
The following table provides activity for the accretable yield of these loans for the year ended
December 31, 2009 (in thousands):
Go T’-a: :ualv requ id uafs-ireils includ ing iitrasl j1. D32.111
Lass: NarBccrelaUedrlferenae 11.2J1
Cash flaws SKpsctad to be oaHaded"* 9ff1.433
Lass: AccnalaWayiaId B0.5GO
Fair valusal ban^ aoquinsd with evidence
fllcredh-qLHlhy detrioratian
siicc orignal Jii 91D.B73 |
EXHIBIT 3A
Recent Performance
Earnings Summary
Net income for the year ended December 31, 2009 totaled $73.1 million, or $2.18 per diluted common
share, compared to $20.5 million, or $0.76 per diluted common share, in 2008 and $55.7 million, or
$2.24 per diluted common share, in 2007. During 2009, net income increased by 257% while earnings
per diluted common share increased by 187%, and during 2008, net income declined by 63% while
earnings per diluted common share declined 66%.
Our net income in 2009 benefited from a bargain purchase gain of $156.0 million, without which we
would have incurred a loss of approximately $22.8 million. Our losses primarily related to
commercial real estate loans, including a significant portion related to residential real estate
construction and development loans, as a result of a significant oversupply of new homes in our
Chicago and southeast Wisconsin market areas, and to a lesser extent related to business loans to
commercial and industrial companies. Specifically, the Company recorded a provision for credit
losses of $167.9 million in 2009 compared to $57.4 million in 2008, an increase of $110.5 million.
Further, the Company recorded Other Real Estate Owned expenses of $19.0 million in 2009, a $16.9
million increase over the prior year. Also, as a result of the credit crisis, an increase in the
number of failed banks throughout the country and a industry-wide special FDIC assessment, the
Company recorded $21.2 million of FDIC insurance expense in 2009, which represented a $15.6
million increase from 2008. The Company continues to aggressively manage its impaired loan
portfolio and other real estate owned which it acquired through foreclosure or deed in lieu of
foreclosure. As a result of the these challenges, at December 31, 2009 our allowance for credit
losses increased to 1.21% of total loans, compared with 0.94% of total loans at December 31, 2008.
EXHIBIT 3B
DISCLOSURE IN RESPONSE TO FOURTH BULLET OF STAFF’S COMMENT #3
FDIC insurance totaled $21.2 million in 2009, $5.6 million in 2008 and $3.7 million in 2007. The
significant increase in 2009 is the result of an increase in FDIC insurance rates at the beginning
of the year and growth in the assessable deposit base as well as the industry wide special
assessment on financial institutions in the second quarter of 2009. On December 30, 2009, FDIC
insured institutions were required to prepay three years of estimated deposit insurance premiums.
Therefore, the Company prepaid approximately $48 million of estimated deposit insurance premiums
and recorded this amount as an asset on its Consolidated Statement of Financial Condition. No
expense for this prepayment occurred in 2009, as it will be expensed over the three year assessment
period.
EXHIBIT 4
Acquisition of the Life Insurance Premium Finance Business
Overview
As previously described, on July 28, 2009 our subsidiary FIFC purchased the majority of the U.S.
life insurance premium finance assets of subsidiaries of American International Group, Inc. Life
insurance premium finance loans are generally used for estate planning purposes of high net worth
borrowers, and, as described below, are collateralized by life insurance policies and their
related cash surrender value and are often additionally secured by letters of credit, annuities,
cash and marketable securities. Based upon an analysis of the payment patterns of the acquired
life insurance premium finance loans over a seven year period, the Company believes that the
average expected life of such loans is 5 to 7 years.
Credit Risk
The Company believes that its life insurance premium finance loans tend to have a lower level of
risk and delinquency than the Company’s commercial and residential real estate loans because of the
nature of the collateral. The life insurance policy is the primary form of collateral. In
addition, these loans often are secured with a letter of credit, marketable securities or
certificates of deposit. All of the Company’s life insurance premium finance loans are
collateralized by the life insurance or annuity policy. If cash surrender value is not
sufficient, then letters of credit, marketable securities or certificates of deposit are used to
provide additional security. Since the collateral is highly liquid and generally has a value in
excess of the loan amount, any defaults or delinquencies are generally cured relatively quickly by
the borrower or the collateral is generally liquidated in an expeditious manner to satisfy the loan
obligation. Greater than 95% of loans are fully secured. However, less than 5% of the
loans are partially unsecured and in those cases, a greater risk exists for default. No loans are
originated on a fully unsecured basis.
Fair Market Valuation at Date of Purchase and Allowance for Loan Losses
ASC 805 requires acquired loans to be recorded at fair market value. The application of ASC 805
requires incorporation of credit related factors directly into the fair value of the loans recorded
at the acquisition date, thereby eliminating separate recognition of the acquired allowance for
loan losses on the acquirer’s balance sheet. Accordingly, the Company established a credit
discount for each loan as part of the determination of the fair market value of such loan in
accordance with those accounting principles at the date of acquisition. See Note 4 of the
Consolidated Financial Statements for a detailed roll-forward of the aggregate credit discounts
established and any activity associated with balances since the dates of acquisition. Any adverse
changes in the deemed collectible nature of a loan would subsequently be provided through a charge
to the income statement through a provision for credit losses and a corresponding establishment of
an allowance for loan losses. The Company recorded $615,000 million of provision for credit losses
during 2009 due to changes in the credit environment related to certain loans.
Contingencies and Required Consents
At closing, a portion of the portfolio with an aggregate purchase price of approximately
$230 million was placed in escrow, pending the receipt of required third party consents. These
consents were required to effect the transfer of certain collateral which is currently held for
the benefit of the sellers to be held for the benefit of FIFC. The parties agreed that to the
extent any of the required consents were not obtained prior to October 28, 2010, the corresponding
portion of the portfolio would be reassumed by the applicable seller, and the corresponding portion
of the purchase price would be returned to FIFC. As of December 31, 2009, required consents were
received related to approximately $180 million of the escrowed purchase price with approximately
$50 million of escrowed purchase price related to required consents remaining to be received.