UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
þ | Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the fiscal year ended December 31, 2015
¨ | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the Transition Period from to
Commission File Number 001-35077
Wintrust Financial Corporation
(Exact name of registrant as specified in its charter)
Illinois | 36-3873352 | |
(State of incorporation or organization) | (I.R.S. Employer Identification No.) | |
9700 W. Higgins Road, Suite 800
Rosemont, Illinois 60018
(Address of principal executive offices)
Registrant’s telephone number, including area code: (847) 939-9000
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class | Name of Each Exchange on Which Registered | |
Common Stock, no par value Series D Preferred Stock, no par value Warrants (expiring December 19, 2018) | The NASDAQ Global Select Market The NASDAQ Global Select Market The NASDAQ Global Select Market | |
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. þ Yes ¨ No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ¨ Yes þ No
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ Yes ¨ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). þ Yes ¨ No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨ Yes þ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definition 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 ¨ | Non-Accelerated filer ¨ | Smaller reporting company ¨ | |||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ¨ Yes þ No
The aggregate market value of the voting stock held by non-affiliates of the registrant on June 30, 2015 (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 $53.38, as reported by the NASDAQ Global Select Market, was $2,514,968,967.
As of February 24, 2016, the registrant had 48,429,151 shares of Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Company’s Annual Meeting of Shareholders to be held on May 26, 2016 are incorporated by reference into Part III.
TABLE OF CONTENTS
Page | ||
PART I | ||
ITEM 1 | Business | |
ITEM 1A. | Risk Factors | |
ITEM 1B. | Unresolved Staff Comments | |
ITEM 2. | Properties | |
ITEM 3. | Legal Proceedings | |
ITEM 4. | Mine Safety Disclosures | |
PART II | ||
ITEM 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | |
ITEM 6. | Selected Financial Data | |
ITEM 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operation | |
ITEM 7A. | Quantitative and Qualitative Disclosures About Market Risk | |
ITEM 8. | Financial Statements and Supplementary Data | |
ITEM 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | |
ITEM 9A. | Controls and Procedures | |
ITEM 9B. | Other Information | |
PART III | ||
ITEM 10. | Directors, Executive Officers and Corporate Governance | |
ITEM 11. | Executive Compensation | |
ITEM 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | |
ITEM 13. | Certain Relationships and Related Transactions, and Director Independence | |
ITEM 14. | Principal Accountant Fees and Services | |
PART IV | ||
ITEM 15. | Exhibits and Financial Statement Schedules | |
Signatures | ||
PART I
ITEM 1. BUSINESS
Overview
Wintrust Financial Corporation, an Illinois corporation (“we,” “Wintrust” or “the Company”), which was incorporated in 1992, is a financial holding company based in Rosemont, Illinois, with total assets of approximately $22.9 billion as of December 31, 2015. We conduct our businesses through three segments: community banking, specialty finance and wealth management. All segment measurements discussed below are based on the reportable segments and do not reflect intersegment eliminations.
We provide community-oriented, personal and commercial banking services to customers located in the Chicago metropolitan area and in southern Wisconsin (“our market area”) through our fifteen wholly owned banking subsidiaries (collectively, the “banks”), as well as the origination and purchase of residential mortgages for sale into the secondary market through Wintrust Mortgage, a division of Barrington Bank and Trust Company, N.A. (“Barrington Bank”). For the years ended December 31, 2015, 2014 and 2013, the community banking segment had net revenues of $714 million, $621 million and $599 million, respectively, and net income of $102 million, $99 million and $88 million, respectively. The community banking segment had total assets of $19.3 billion, $16.7 billion and $15.1 billion as of December 31, 2015, 2014 and 2013, respectively. The community banking segment accounted for approximately 77% of our consolidated net revenues for the year ended December 31, 2015.
We provide specialty finance services, including financing for the payment of commercial insurance premiums and life insurance premiums (“premium finance receivables”) on a national basis through our wholly owned subsidiary, First Insurance Funding Corporation (“FIFC”) and in Canada through our premium finance company, First Insurance Funding of Canada (“FIFC Canada”), and short-term accounts receivable financing and outsourced administrative services through our wholly owned subsidiary, Tricom, Inc. of Milwaukee (“Tricom”). For the years ended December 31, 2015, 2014 and 2013, the specialty finance segment had net revenues of $119 million, $115 million and $105 million, respectively, and net income of $42 million, $41 million and $38 million, respectively. The specialty finance segment had total assets of $3.1 billion, $2.8 billion and $2.5 billion as of December 31, 2015, 2014 and 2013, respectively. The specialty finance segment accounted for 13% of our consolidated net revenues for the year ended December 31, 2015.
We provide a full range of wealth management services primarily to customers in our market area through three separate subsidiaries, The Chicago Trust Company, N.A. (“CTC”), Wayne Hummer Investments, LLC (“WHI”) and Great Lakes Advisors, LLC (“Great Lakes Advisors”). For the years ended December 31, 2015, 2014 and 2013, the wealth management segment had net revenues of $93 million, $89 million and $80 million, respectively, and net income of $13 million, $12 million and $11 million, respectively. The wealth management segment had total assets of $549 million, $520 million and $494 million as of December 31, 2015, 2014 and 2013, respectively. The wealth management segment accounted for 10% of our consolidated net revenues for the year ended December 31, 2015.
Our Business
Community Banking
Through our banks, we provide community-oriented, personal and commercial banking services to customers located in our market area. Our customers include individuals, small to mid-sized businesses, local governmental units and institutional clients residing primarily in the banks' local service areas. The banks have a strategy to provide comprehensive community-focused banking services. In keeping with this strategy, the banks provide highly personalized and responsive service, a characteristic of locally-owned and managed institutions. As such, the banks compete for deposits principally by offering depositors a variety of deposit programs, convenient office locations, hours and other services, and for loan originations primarily through the interest rates and loan fees they charge, the efficiency and quality of services they provide to borrowers and the variety of their loan and cash management products. Using our decentralized corporate structure to our advantage, we offer our MaxSafe® deposit accounts, which provide customers with expanded Federal Deposit Insurance Corporation (“FDIC”) insurance coverage by spreading a customer's deposit across our fifteen banks. This product differentiates our banks from many of our competitors that have consolidated their bank charters into branches. We also have a downtown Chicago office that works with each of our banks to capture commercial and industrial business. Our commercial and industrial lenders in our downtown office operate in close partnership with lenders at our community banks. By combining our expertise in the commercial and industrial sector with our high level of personal service and full suite of banking products, we believe we create another point of differentiation from both our larger and smaller competitors. Our banks also offer home equity, consumer, and real estate loans, safe deposit facilities, ATMs, internet banking and other innovative and traditional services specially tailored to meet the needs of customers in their market areas.
3 | ||
We developed our banking franchise through a combination of de novo organization and the purchase of existing bank franchises. The organizational efforts began in 1991, when a group of experienced bankers and local business people identified an unfilled niche in the Chicago metropolitan area retail banking market. As large banks acquired smaller ones and personal service was subjected to consolidation strategies, the opportunity increased for locally owned and operated, highly personal service-oriented banks. As a result, Lake Forest Bank and Trust Company (“Lake Forest Bank”) was founded in December 1991 to service the Lake Forest and Lake Bluff communities.
We now own fifteen banks, including nine Illinois-chartered banks: Lake Forest Bank, Hinsdale Bank and Trust Company (“Hinsdale Bank”), Wintrust Bank, Libertyville Bank and Trust Company (“Libertyville Bank”), Northbrook Bank & Trust Company (“Northbrook Bank”), Village Bank & Trust (“Village Bank”), Wheaton Bank & Trust Company (“Wheaton Bank”), State Bank of the Lakes and St. Charles Bank & Trust Company (“St. Charles Bank”). In addition, we have one Wisconsin-chartered bank, Town Bank, and five nationally chartered banks: Barrington Bank, Crystal Lake Bank & Trust Company, N.A. (“Crystal Lake Bank”), Schaumburg Bank & Trust Company, N.A. (“Schaumburg Bank”), Beverly Bank & Trust Company, N.A. (“Beverly Bank”) and Old Plank Trail Community Bank, N.A. (“Old Plank Trail Bank”). As of December 31, 2015, we had 152 banking locations.
Each bank is subject to regulation, supervision and regular examination by: (1) the Secretary of the Illinois Department of Financial and Professional Regulation (“Illinois Secretary”) and the Board of Governors of the Federal Reserve System (“Federal Reserve”) for Illinois-chartered banks; (2) the Office of the Comptroller of the Currency (“OCC”) for nationally-chartered banks; or (3) the Wisconsin Department of Financial Institutions (“Wisconsin Department”) and the Federal Reserve for Town Bank.
We also engage in the retail origination and correspondent purchase of residential mortgages through Wintrust Mortgage. Most originated and purchased loans sold into the secondary market are sold with servicing released. Certain originated loans are sold to the Company's banks with servicing remaining within Wintrust Mortgage operations. Wintrust Mortgage maintains retail mortgage offices in a number of states, with the largest concentration located in the Chicago, Minneapolis and Los Angeles metropolitan areas.
We also offer several niche lending products through several 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; and Lake Forest Bank's franchise lending program, which provides lending to restaurant franchisees. Other niches offered throughout our banking franchise include Wintrust Commercial Finance, which offers direct leasing opportunities; Wintrust Business Credit, which specializes in asset-based lending for middle-market companies; Wintrust SBA Lending, which is dedicated to offering expertise in Small Business Administration loans; Wintrust Commercial Real Estate, which concentrates on real estate lending solutions including commercial mortgages and construction loans; and Wintrust Government, Non-Profit & Hospital, which focuses on financial solutions for mission-based organizations such as hospitals, non-profits, educational institutions and local government operations.
Specialty Finance
We conduct our specialty finance businesses through non-bank subsidiaries. Our wholly owned subsidiary, FIFC, engages in the premium finance receivables business, our most significant specialized lending niche, including commercial insurance premium finance and life insurance premium finance. We also engage in commercial insurance premium finance in Canada through our wholly owned subsidiary FIFC Canada.
In their commercial insurance premium finance operations, FIFC and FIFC Canada make loans to businesses to finance the insurance premiums they pay on their commercial insurance policies. Approved medium and large insurance agents and brokers located throughout the United States and Canada assist FIFC and FIFC Canada, respectively, in arranging each commercial premium finance loan between the borrower and FIFC or FIFC Canada, as the case may be. FIFC or FIFC Canada evaluates each loan request according to its own underwriting criteria including the amount of the down payment on the insurance policy, the term of the loan, the credit quality of the insurance company providing the financed insurance policy, the interest rate, the borrower's previous payment history, if any, and other factors deemed appropriate. Upon approval of the loan by FIFC or FIFC Canada, as the case may be, the borrower makes a down payment on the financed insurance policy, which is generally done by providing payment to the agent or broker, who then forwards it to the insurance company. FIFC or FIFC Canada may either forward the financed amount of the remaining policy premiums directly to the insurance carrier or to the agent or broker for remittance to the insurance carrier on FIFC's or FIFC Canada's behalf. In some cases the agent or broker may hold our collateral, in the form of the proceeds of the unearned insurance premium from the insurance company, and forward it to FIFC or FIFC Canada in the event of a default by the borrower. This lending involves relatively rapid turnover of the loan portfolio and high volume of loan originations. Because the agent or broker is the primary contact to the ultimate borrowers who are located nationwide and because proceeds and our collateral may be handled by the agent or brokers during the term of the loan, FIFC and FIFC Canada may be
4 | ||
more susceptible to third party (i.e., agent or broker) fraud. The Company performs various controls and procedures including ongoing credit and other reviews of the agents and brokers as well as performs various internal audit steps to mitigate against the risk of any fraud.
The commercial and property premium finance business is subject to regulation in the majority of states. Regulation typically governs notices to borrowers prior to cancellation of a policy, notices to insurance companies, maximum interest rates and late fees and approval of loan documentation. FIFC is licensed or otherwise qualified to provide financing of commercial insurance policies in all 50 states, the District of Columbia and Puerto Rico, and FIFC’s compliance department regularly monitors changes to regulations and updates policies and programs accordingly.
FIFC also finances life insurance policy premiums generally used for estate planning purposes of high net-worth borrowers. These loans are originated directly with the borrowers with assistance from life insurance carriers, independent insurance agents, financial advisors and legal counsel. The cash surrender value of the life insurance policy is the primary form of collateral. In addition, these loans often are secured with a letter of credit, marketable securities or certificates of deposit. In some cases, FIFC may make a loan that has a partially unsecured position.
The life insurance premium finance business is governed under banking regulations but is not subject to additional systemic regulation. FIFC's compliance department regularly monitors the regulatory environment and the company's compliance with existing regulations. FIFC maintains a policy prohibiting the knowing financing of stranger-originated life insurance and has established procedures to identify and prevent the company from financing such policies. While a carrier could potentially put at risk the cash surrender value of a policy, which serves as FIFC's primary collateral, by challenging the validity of the insurance contract for lack of an insurable interest, FIFC believes it has strong counterclaims against any such claims by carriers, in addition to recourse to borrowers and guarantors as well as to additional collateral in certain cases.
Premium finance loans made by FIFC and FIFC Canada are primarily secured by the insurance policies financed by the loans. These insurance policies are written by a large number of insurance companies geographically dispersed throughout the United States and Canada. Our premium finance receivables balances finance insurance policies that are spread among a large number of insurers, however one of the insurers represents approximately 14% of such balances and two additional insurers each represent approximately 5% of such balances. FIFC and FIFC Canada consistently monitor carrier ratings and financial performance of our carriers. In the event ratings fall below certain levels, most of FIFC's life insurance premium finance policies provide for an event of default and allow FIFC to have recourse to borrowers and guarantors as well as to additional collateral in certain cases. For the commercial premium finance business, the term of the loans is sufficiently short such that in the event of a decline in carrier ratings, FIFC or FIFC Canada, as the case may be, can restrict or eliminate additional loans to finance premiums to such carriers. The majority of premium finance receivables are purchased by the banks in order to more fully utilize their lending capacity as these loans generally provide the banks with higher yields than alternative investments.
Through our wholly owned subsidiary Tricom, we provide high-yielding, short-term accounts receivable financing and value-added, outsourced administrative services, such as data processing of payrolls, billing and cash management services to the temporary staffing industry. Tricom’s clients, located throughout the United States, provide staffing services to businesses in diversified industries. During 2015, Tricom processed payrolls with associated client billings of approximately $660 million and contributed approximately $10.6 million to our revenue, net of interest expense. Net revenue is based on our reportable segments and does not reflect intersegment eliminations.
In 2015, our commercial premium finance operations, life insurance premium finance operations and accounts receivable finance operations accounted for 58%, 33% and 9%, respectively, of the total revenues of our specialty finance business.
Wealth Management Activities
We offer a full range of wealth management services through three separate subsidiaries, trust and investment services, asset management and securities brokerage services. These subsidiaries are subject to regulation by the Securities and Exchange Commission (the "SEC") and the Financial Industry Regulatory Authority ("FINRA").
Great Lakes Advisors, our registered investment adviser with locations in downtown Chicago and Safety Harbor, Florida as well as in various banking offices of our fifteen banks, provides money management services and advisory services to individuals, institutions, and municipal and tax-exempt organizations. Great Lakes Advisors also provides portfolio management and financial supervision for a wide range of pension and profit-sharing plans as well as money management and advisory services to CTC. At December 31, 2015, the Company’s wealth management subsidiaries had approximately $21.2 billion of assets under administration, which includes $2.6 billion of assets owned by the Company and its subsidiary banks.
CTC, our trust subsidiary, offers trust and investment management services to clients through offices located in downtown Chicago and at various banking offices of our fifteen banks. CTC is subject to regulation, supervision and regular examination by the OCC.
5 | ||
WHI, our registered broker/dealer subsidiary which has been operating since 1931, provides a full range of private client and securities brokerage services to clients located primarily in the Midwest. WHI is headquartered in downtown Chicago, operates an office in Appleton, Wisconsin, and has established branch locations in offices at a majority of our banks. WHI also provides a full range of investment services to clients through a network of relationships with community-based financial institutions primarily located in Illinois.
Strategy and Competition
Historically, we have executed a growth strategy through branch openings and de novo bank formations, expansion of our wealth management and premium finance business, development of specialized earning asset niches and acquisitions of other community-oriented banks or specialty finance companies. After we made a decision to slow our growth from 2006 until 2008 due to unfavorable credit spreads, loosened underwriting standards by many of our competitors, and intense price competition, we raised capital and began to increase our lending and deposits in late 2008. From 2009 through 2012, this capital as well as additional capital raised during that period allowed us to be in a position to take advantage of opportunities in a disrupted marketplace by:
• | Increasing our lending as other financial institutions pulled back; |
• | Hiring quality lenders and other staff away from larger and smaller institutions that may have substantially deviated from a customer-focused approach or who may have substantially limited the ability of their staff to provide credit or other services to their customers; |
• | Investing in dislocated assets such as the purchased life insurance premium finance portfolio, the Canadian commercial premium finance portfolio, trust and investment management companies and certain collateralized mortgage obligations; and |
• | Purchasing banks and banking assets either directly or through the FDIC-assisted process in areas key to our geographic expansion. |
The Company has employed certain strategies since 2013 to manage net income amid an environment characterized by low interest rates and increased competition. In general, the Company has taken a steady and measured approach to grow strategically and manage expenses. Specifically, the Company has:
• | Leveraged its internal loan pipeline and external growth opportunities to grow earnings assets to increase net interest income; |
• | Continued efforts to reduce interest costs by improving our funding mix; |
• | Written call option contracts on certain securities as an economic hedge to enhance the securities' overall return by using fees generated from these options and mitigate overall interest rate risk; |
• | Entered into mirror-image swap transactions to both satisfy customer preferences and maintain variable rate exposure; |
• | Purchased interest rate cap derivatives to offset margin compression caused by the repricing of variable rate liabilities and lack of repricing of fixed rate loans and securities in a potential rising rate environment; |
• | Completed strategic acquisitions to expand presence in existing and complimentary markets; |
• | Focused on cost control and leveraging our current infrastructure to grow without a commensurate increase in operating expenses; |
• | Expanded the Wintrust Commercial Finance direct leasing niche in 2015; and |
• | Further strengthened our capital position in 2015 and raised net proceeds of $120.8 million through the issuance and sale of non-cumulative perpetual preferred stock; |
Our strategy and competitive position for each of our business segments is summarized in further detail, below.
Community Banking
We compete in the commercial banking industry through our banks in the communities they serve. The commercial banking industry is highly competitive and the banks face strong direct competition for deposits, loans and other financial related services. The banks compete with other commercial banks, thrifts, credit unions, stockbrokers, government-sponsored entities, mutual fund companies, insurance companies, factoring companies and other non-bank financial companies. Some of these competitors are local, while others are statewide or nationwide.
As a mid-size financial services company, we expect to benefit from greater access to financial and managerial resources than our smaller local competitors while maintaining our commitment to local decision-making and to our community banking philosophy. In particular, we are able to provide a wider product selection and larger credit facilities than many of our smaller competitors, and we believe our service offerings help us in recruiting talented staff. We continue to add lenders throughout the community banking organization, many of whom have joined us because of our ability to offer a range of products and level of services which compete effectively with both larger and smaller market participants. We have continued to expand our product delivery systems, including a wide variety of electronic banking options for our retail and commercial customers which allow us to provide a level
6 | ||
of service typically associated with much larger banking institutions. Consequently, management views technology as a great equalizer to offset some of the inherent advantages of its significantly larger competitors. Additionally, we have access to public capital markets whereas many of our local competitors are privately held and may have limited capital-raising capabilities.
We also believe we are positioned to compete effectively with other larger and more diversified banks, bank holding companies and other financial services companies due to the multi-chartered approach that pushes accountability for building a franchise and a high level of customer service down to each of our banking franchises. Additionally, we believe that we provide a relatively complete portfolio of products that is responsive to the majority of our customers' needs through the retail and commercial operations supplied by our banks, and through our mortgage and wealth management operations. The breadth of our product mix allows us to compete effectively with our larger competitors, while our multi-chartered approach with local and accountable management provides for what we believe is superior customer service relative to our larger and more centralized competitors.
Wintrust Mortgage competes with large mortgage brokers as well as other banking organizations. Consolidation, on-going investor push-backs, enhanced regulatory guidance and the promise of equal oversight for both banks and independent lenders have created challenges for small and medium-sized independent mortgage lenders. Wintrust Mortgage's size, bank affiliation, regulatory competency, branding, technology, business development tools and reputation make the firm well positioned to compete in this environment. In 2013, we expanded our mortgage banking business through the acquisition of certain assets and liabilities of Surety Financial Services of Sherman Oaks, California. Additionally, in 2015, we have increased the amount of loans sold with servicing retained, including those loans sold to the Company's banks with servicing remaining within Wintrust Mortgage operations. While earnings will fluctuate with the rise and fall of long-term interest rates, we expect that mortgage banking revenue will be a continuous source of revenue for us and our mortgage lending relationships will continue to provide franchise value to our other financial service businesses.
In 2015, we furthered our growth strategy by purchasing, through certain of our banking subsidiaries, additional banking locations. We acquired four new banking locations in southern Wisconsin and sixteen new banking locations in the Chicago metropolitan area. In addition, the Company opened six new branch locations in the Chicago metropolitan area. However, the Company closed fourteen banking locations in 2015 as part of the integration of operations and the identification of under-performing locations. We believe that strategic acquisitions and branch expansion will allow us to grow into contiguous markets that we currently do not service and expand our footprint.
Specialty Finance
FIFC encounters intense competition from numerous other firms, including a number of national commercial premium finance companies, companies affiliated with insurance carriers, independent insurance brokers who offer premium finance services and other lending institutions. Some of its competitors are larger and have greater financial and other resources. FIFC competes with these entities by emphasizing a high level of knowledge of the insurance industry, flexibility in structuring financing transactions, and the timely funding of qualifying contracts. We believe that our commitment to service also distinguishes us from our competitors. Additionally, we believe that FIFC's acquisition of a large life insurance premium finance portfolio and related assets in 2009 enhanced our ability to market and sell life insurance premium finance products. FIFC Canada competes with one national commercial premium finance company and a few regional providers. In 2014, FIFC Canada expanded its operations through the acquisition of two affiliated Canadian insurance premium funding and payment services companies.
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.
Wealth Management Activities
Our wealth management companies (CTC, WHI and Great Lakes Advisors) compete with larger wealth management subsidiaries of other larger bank holding companies as well as with other trust companies, brokerage and other financial service companies, stockbrokers and financial advisors. We believe we can successfully compete for trust, asset management and brokerage business by offering personalized attention and customer service to small to midsize businesses and affluent individuals. We continue to recruit and hire experienced professionals from the larger Chicago area wealth management companies, which is expected to help in attracting new customer relationships.
Supervision and Regulation
General
Our business is subject to extensive regulation and supervision under federal and state laws and regulations. The Company is a bank holding company under the Bank Holding Company Act of 1956, as amended (the “BHC Act”), subject to regulation,
7 | ||
supervision, and examination by the Federal Reserve. Our subsidiary banks are subject to regulation, supervision, and examination by the agency that granted their banking charters: (1) the OCC for Barrington Bank, Crystal Lake Bank, Schaumburg Bank, Beverly Bank and Old Plank Trail Bank; (2) the Illinois Secretary for Lake Forest Bank, Hinsdale Bank, Wintrust Bank, Libertyville Bank, Northbrook Bank, Village Bank, Wheaton Bank, State Bank of the Lakes and St. Charles Bank; and (3) the Wisconsin Department for Town Bank. Our Illinois and Wisconsin state-chartered bank subsidiaries are also members of the Federal Reserve System, subject to supervision and regulation by the Federal Reserve as their primary federal regulator. The deposits of all of our subsidiary banks are insured by the Deposit Insurance Fund (“DIF”) and, as such, the FDIC has additional oversight authority over the banks. The supervision, regulation and examination of banks and bank holding companies by bank regulatory agencies are intended primarily for the protection of depositors, the DIF, and the banking system as a whole, rather than shareholders of banks and bank holding companies, and in some instances may be contrary to their interests.
Our non-bank subsidiaries generally are subject to regulation by their functional regulators, including state finance and insurance agencies, the SEC, FINRA, the Chicago Stock Exchange, the OCC, as well as by the Federal Reserve.
These federal and state laws, and the regulations of the bank regulatory agencies issued under them, affect, among other things, the scope of business, the kinds and amounts of investments banks may make, reserve requirements, capital levels relative to operations, the nature and amount of collateral for loans, the establishment of branches, the ability to merge, consolidate and acquire, dealings with insiders and affiliates and the payment of dividends. The regulatory agencies generally have broad discretion to impose restrictions and limitations on the operations of a regulated entity where the agencies determine, among other things, that such operations are unsafe or unsound, fail to comply with applicable law or are otherwise inconsistent with laws and regulations or with the supervisory policies of these agencies
The following is a description of some of the laws and regulations that currently affect our business. By necessity, the descriptions below are summaries that do not purport to be complete, and that are qualified in their entirety by reference to those statutes and regulations discussed, and all regulatory interpretations thereof. In recent years, lawmakers and regulators have increased their focus on the financial services industry. Additional changes in applicable laws, regulations, or the interpretations thereof are possible, and could have a material adverse effect on our business or the business of our subsidiaries.
Bank Holding Company Regulation
The Company is a bank holding company that has elected to be treated by the Federal Reserve as a financial holding company for purposes of the BHC Act. The activities of bank holding companies generally are limited to the business of banking, managing or controlling banks, and other activities determined by the Federal Reserve, by regulation or order prior to November 11, 1999, to be so closely related to banking as to be a proper incident thereto. Impermissible activities for bank holding companies and their subsidiaries include activities that are related to commerce, such as retail sales of nonfinancial products or manufacturing.
As a financial holding company, we may engage in an expanded range of activities, including securities and insurance activities conducted as agent or principal that are considered to be financial in nature. Moreover, financial holding companies may engage in activities incidental or complementary to financial activities, if the Federal Reserve determines that such activities pose no substantial risk to the safety or soundness of depository institutions or the financial system in general. Maintaining our financial holding company status requires that our subsidiary banks remain “well-capitalized” and “well-managed” as defined by regulation, and maintain at least a “satisfactory” rating under the Community Reinvestment Act (“CRA”). In addition, under the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”), we must also remain well-capitalized and well-managed to maintain our financial holding company status. If we or our subsidiary banks fail to continue to meet these requirements, we could be subject to restrictions on new activities and acquisitions, and/or be required to cease and possibly divest of operations that conduct existing activities that are not permissible for a bank holding company that is not a financial holding company.
The BHC Act generally requires us to obtain prior approval from the Federal Reserve before acquiring direct or indirect ownership or control of more than 5% of the voting shares of, or substantially all the assets of, a new bank, or to merge or consolidate with another bank holding company. As a result of the Dodd-Frank Act, the BHC Act also now requires us to be well-capitalized and well-managed, as opposed to merely adequately capitalized and adequately managed as was previously required, in order to acquire a bank located outside of our home state. Additionally, subject to certain exceptions, the BHC Act generally prohibits us from acquiring direct or indirect ownership or control of voting shares of any company engaged in activities that are not permissible for us to engage in.
The Federal Deposit Insurance Act (“FDIA”), as amended by the Dodd-Frank Act, and Federal Reserve regulations and policy require us to serve as a source of financial and managerial strength for our subsidiary banks, and to commit resources to support the banks. This support may be required even if doing so may adversely affect our ability to meet other obligations.
8 | ||
Acquisitions of Ownership
Acquisitions of the Company’s voting stock above certain thresholds may be subject to prior regulatory notice or approval under applicable federal and state banking laws. Investors are responsible for ensuring that they do not, directly or indirectly, acquire shares of our stock in excess of the amount that can be acquired without regulatory approval under the BHC Act, the Change in Bank Control Act, the Illinois Banking Act and Wisconsin banking laws.
Regulatory Reform
The Dodd-Frank Act strengthened the ability of the federal bank regulatory agencies to supervise and examine bank holding companies and their subsidiaries. The Dodd-Frank Act represents a sweeping reform of the United States supervisory and regulatory framework applicable to financial institutions and capital markets in the wake of the global financial crisis, certain aspects of which are described below in more detail. In particular, and among other things, the Dodd-Frank Act: created a Financial Stability Oversight Council as part of a regulatory structure for identifying emerging systemic risks and improving interagency cooperation; created the Consumer Financial Protection Bureau (“CFPB”), which is authorized to regulate providers of consumer credit, savings, payment and other consumer financial products and services; narrowed the scope of federal preemption of state consumer laws enjoyed by national banks and federal savings associations and expanded the authority of state attorneys general to bring actions to enforce federal consumer protection legislation; imposed more stringent capital requirements on bank holding companies and subjected certain activities, including interstate mergers and acquisitions, to heightened capital conditions; with respect to mortgage lending, (1) significantly expanded requirements applicable to loans secured by 1-4 family residential real property, (2) imposed strict rules on mortgage servicing, and (3) required the originator of a securitized loan, or the sponsor of a securitization, to retain at least 5% of the credit risk of securitized exposures unless the underlying exposures are qualified residential mortgages or meet certain underwriting standards; repealed the prohibition on the payment of interest on business checking accounts; restricted the interchange fees payable on debit card transactions for issuers with $10 billion in assets or greater; subject to numerous exceptions, prohibited depository institutions and affiliates from certain investments in, and sponsorship of, hedge funds and private equity funds and from engaging in proprietary trading; provided for enhanced regulation of advisers to private funds and of the derivatives markets; enhanced oversight of credit rating agencies; and prohibited banking agency requirements tied to credit ratings. These statutory changes shifted the regulatory framework for financial institutions, impacted the way in which they do business and have the potential to constrain revenues.
Numerous provisions of the Dodd-Frank Act are required to be implemented through rulemaking by the appropriate federal regulatory agencies. A majority of the required regulations have been issued and others have been released for public comment or released in final form. Furthermore, while the reforms primarily target systemically important financial service providers, their influence is expected to filter down in varying degrees to smaller institutions over time. We will continue to evaluate the effect of the Dodd-Frank Act changes; however, in many respects, the ultimate impact of the Dodd-Frank Act will not be fully known for years, and no current assurance may be given that the Dodd-Frank Act, or any other new legislative changes, will not have a negative impact on the results of operations and financial condition of the Company and its subsidiaries. For further discussion of the most recent developments under the Dodd-Frank Act, see Item 7 “Management's Discussion and Analysis of Financial Condition and Results of Operations - Overview and Strategy - Financial Regulatory Reform.”
Volcker Rule
The Dodd-Frank Act added a new Section 13 to the BHC Act, known as the “Volcker Rule.” On December 10, 2013, five United States financial regulators, including the Federal Reserve, the FDIC and the OCC, adopted final rules implementing the Volcker Rule. The final rules prohibit banking entities from (1) engaging in short-term proprietary trading for their own accounts, and (2) having certain ownership interests in and relationships with hedge funds or private equity funds. Further, the final rules are intended to provide greater clarity with respect to both the extent of those primary prohibitions and of the related exemptions and exclusions. These rules also require each regulated entity to establish an internal compliance program that is consistent with the extent to which it engages in activities covered by the Volcker Rule, which must include (for the largest entities) making regular reports about those activities to regulators. Although the final rules provide some differences in compliance and reporting obligations based on size, the fundamental prohibitions of the Volcker Rule apply to banking entities of any size, including the Company and its bank subsidiaries. These rules were effective April 1, 2014, but the conformance period was extended from its statutory end date of July 21, 2014 until July 21, 2015 for proprietary trading and until July 2016 to divest private equity and hedge funds. We expect this date to be extended again until July 2017, which will be the final extension allowable under the Dodd-Frank Act.
We have evaluated the implications of these rules on our investments and determined that some of the securities in our investment portfolio will be subject to the Volcker Rule and, absent any further amendments to the Volcker Rule, will have to be divested or converted. In one instance, the need to divest that security at a fixed near-term date caused us to record an other-than-temporary
9 | ||
impairment of $3.3 million on that security in the fourth quarter of 2013. We do not believe that any other required divestitures or reporting requirements will have any material financial implications on the Company.
Capital Requirements
We are subject to various regulatory capital requirements both at the Company and at the subsidiary bank level. Failure to meet minimum capital requirements could result in certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have an adverse material effect on our financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action (described below), we must meet specific capital guidelines that involve quantitative measures of our assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting policies. Our capital amounts and classification are also subject to judgments by the regulators regarding qualitative components, risk weightings, and other factors. We have consistently maintained regulatory capital ratios at or above the well-capitalized standards. These capital rules have undergone significant changes with the adoption by the federal banking agencies of final rules that implement Basel III requirements, which are discussed below.
The Basel Committee on Banking Supervision has drafted frameworks for the regulation of capital and liquidity of internationally active banking organizations, the most recent of which is generally referred to as “Basel III.” In July 2013, the federal banking agencies jointly issued final rules establishing a new comprehensive capital framework for U.S. banking organizations that would implement the Basel III capital framework and certain provisions of the Dodd-Frank Act. The final rules seek to strengthen the components of regulatory capital, increase risk-based capital requirements, and make selected changes to the calculation of risk-weighted assets. The final rules, among other things:
• | revise minimum capital requirements and adjust prompt corrective action thresholds; |
• | revise the components of regulatory capital and create a new capital measure called “Tier 1 Common Equity,” which must constitute at least 4.5% of risk-weighted assets; |
• | specify that Tier 1 capital consists only of Tier 1 Common Equity and certain “Additional Tier 1 Capital” instruments meeting specified requirements; |
• | increase the minimum Tier 1 capital ratio requirement from 4% to 6%; |
• | retain the existing risk-based capital treatment for 1-4 family residential mortgage exposures; |
• | permit most banking organizations, including the Company, to retain, through a one-time permanent election, the existing capital treatment for accumulated other comprehensive income; |
• | implement a new capital conservation buffer of common equity Tier 1 capital equal to 2.5% of risk-weighted assets, which will be in addition to the 4.5% common equity Tier 1 capital ratio and be phased in over a three-year period beginning January 1, 2016, which buffer is generally required to make capital distributions and pay executive bonuses; |
• | increase capital requirements for past-due loans, high volatility commercial real estate exposures, and certain short-term loan commitments; |
• | require the deduction of mortgage servicing assets and deferred tax assets that exceed 10% of common equity Tier 1 capital in each category and 15% of common equity Tier 1 capital in the aggregate; and |
• | remove references to credit ratings consistent with the Dodd-Frank Act and establish due diligence requirements for securitization exposures. |
Under the final rules, compliance by the Company was required by January 1, 2015, subject to a transition period for several aspects of the final rules, including the new minimum capital ratio requirements, the capital conservation buffer, and the regulatory capital adjustments and deductions. Requirements to maintain higher levels of capital could adversely impact our return on equity. We believe that we will continue to exceed all estimated well-capitalized regulatory requirements on a fully phased-in basis.
Under capital rules in effect for the year ended December 31, 2015, as a bank holding company, we were required to maintain a minimum ratio of qualifying total capital to risk-weighted assets of 8.0%, of which at least 6.0% must be in the form of Tier 1 capital (generally common equity, retained earnings and a limited amount of qualifying preferred stock, less goodwill and certain core deposit intangibles). The remainder may consist of Tier 2 capital, which, subject to certain conditions and limitations, consists of: the allowance for credit losses; perpetual preferred stock and related surplus; hybrid capital instruments; unrealized holding gains on marketable equity securities; perpetual debt and mandatory convertible debt securities; term subordinated debt and intermediate-term preferred stock. The Federal Reserve has stated that Tier 1 voting common equity should be the predominant form of capital. In addition, the Federal Reserve requires a minimum leverage ratio of Tier 1 capital to total assets of 3.0% for the most highly-rated bank holding companies, and 4% for all other bank holding companies. Our bank regulatory agencies uniformly encourage banks and bank holding companies to be “well-capitalized,” which, for the year ended December 31, 2015, required: a leverage ratio of Tier 1 capital to total assets of 5% or greater, a ratio of Tier 1 capital to total risk-weighted assets of 8% or greater, a ratio of common equity Tier 1 capital to total risk-weighted assets of 6.5%, and a ratio of total capital to total risk-weighted assets of 10% or greater. As of December 31, 2015, the Company's total capital to risk-weighted assets ratio was 12.2%,
10 | ||
its Tier 1 capital to risk-weighted asset ratio was 10.0%, its common equity Tier 1 capital to risk-weighted assets ratio was 8.4%, and its Tier 1 leverage ratio was 9.1%.
Failure to meet minimum capital requirements could result in certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have an adverse material effect on our financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action (described below), we must meet specific capital guidelines that involve quantitative measures of our assets, liabilities, and certain off-balance sheet items, as calculated under regulatory accounting policies. Our capital amounts and classification are also subject to judgments by the regulators regarding qualitative components, risk weightings, and other factors.
For more information, see Item 7 “Management's Discussion and Analysis of Financial Condition and Results of Operations - Overview and Strategy - Financial Regulatory Reform.”
Liquidity Requirements
Historically, regulation and monitoring of bank and bank holding company liquidity has been addressed as a supervisory matter, without required formulaic measures. However, the Basel III liquidity framework requires banks and bank holding companies to measure their liquidity against specific liquidity tests that are similar in some respects to liquidity measures historically applied by banks and regulators for management and supervisory purposes. One such test, referred to as the Liquidity Coverage Ratio (“LCR”), is designed to ensure that the banking entity has an adequate stock of unencumbered high-quality liquid assets that can be converted easily and immediately in private markets into cash to meet liquidity needs for a 30-calendar day liquidity stress scenario. Another test, known as the Net Stable Funding Ratio (“NSFR”), is designed to promote more medium- and long-term funding of the assets and activities of financial institutions over a one-year horizon. These measures provide an incentive for banks and holding companies to increase their holdings in Treasury securities and other sovereign debt as a component of assets, increase the use of long-term debt as a funding source and rely on stable funding like core deposits (in lieu of brokered deposits).
The U.S. bank regulatory agencies implemented the LCR in September 2014, which requires large financial firms to hold levels of liquid assets sufficient to protect against constraints on their funding during times of financial turmoil. While the LCR only applies to the largest banking organizations in the country, certain elements are expected to filter down to all insured depository institutions, and we are reviewing our liquidity risk management policies in light of the LCR and NSFR regulations.
Capital Planning and Stress Testing Requirements
On October 12, 2012, the Federal Reserve published two final rules implementing the company-run stress test requirements mandated by the Dodd-Frank Act: one for U.S. bank holding companies with total consolidated assets of $10 billion to $50 billion, and one for U.S. bank holding companies with total consolidated assets of $50 billion or more. In 2014 and 2013, under the rule applicable to the Company, which became effective November 15, 2012, we were required to conduct annual company-run stress tests using data as of September 30th of each year and different scenarios provided by the Federal Reserve. Submissions were due to the Federal Reserve no later than March 31st of each following year. Each subsequent year, we have been required to use data as of December 31st with submissions due to the Federal Reserve no later than July 31st of each following year. For further discussion of capital planning and stress testing requirements, see Item 7 “Management's Discussion and Analysis of Financial Condition and Results of Operations - Overview and Strategy - Financial Regulatory Reform.”
Payment of Dividends and Share Repurchases
We are a legal entity separate and distinct from our banking and non-banking subsidiaries. Since our consolidated net income consists largely of net income of our bank and non-bank subsidiaries, our ability to pay dividends depends largely upon our receipt of dividends from our subsidiaries. There are various federal and state law limitations on the extent to which our banking subsidiaries can declare and pay dividends to us, including minimum regulatory capital requirements, federal and state banking law requirements concerning the payment of dividends out of net profits or surplus, and general regulatory oversight to prevent unsafe or unsound practices. No assurances can be given that the banks will, in any circumstances, pay dividends to the Company.
In general, applicable federal and state banking laws prohibit, without prior regulatory approval, insured depository institutions, such as our bank subsidiaries, from making dividend distributions if such distributions are not paid out of available earnings, or would cause the institution to fail to meet applicable minimum capital requirements. In addition, our right, and the right of our shareholders and creditors, to participate in any distribution of the assets or earnings of our bank and non-bank subsidiaries is further subject to the prior claims of creditors of our subsidiaries.
Our ability to declare and pay dividends to our shareholders is similarly limited by federal banking law and Federal Reserve regulations and policy. Federal Reserve policy provides that a bank holding company should not pay dividends unless (1) the bank holding company's net income over the last four quarters (net of dividends paid) is sufficient to fully fund the dividends,
11 | ||
(2) the prospective rate of earnings retention appears consistent with the capital needs, asset quality and overall financial condition of the bank holding company and its subsidiaries and (3) the bank holding company will continue to meet minimum required capital adequacy ratios. The policy also provides that a bank holding company should inform the Federal Reserve reasonably in advance of declaring or paying a dividend that exceeds earnings for the period for which the dividend is being paid or that could result in a material adverse change to the bank holding company's capital structure. Bank holding companies also are required to consult with the Federal Reserve before increasing dividends or redeeming or repurchasing capital instruments. Additionally, the Federal Reserve could prohibit or limit the payment of dividends by a bank holding company if it determines that payment of the dividend would constitute an unsafe or unsound practice.
In addition, under the Basel III Rule, institutions that seek the freedom to pay dividends will have to maintain 2.5% of risk-weighted assets in Common Equity Tier 1 attributable to the capital conservation buffer to be phased in over three years beginning in 2016. For more information on the capital conservation buffer, see Item 7 “Management's Discussion and Analysis of Financial Condition and Results of Operations - Overview and Strategy - Financial Regulatory Reform.”
FDICIA and Prompt Corrective Action
The Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”), among other things, requires the federal bank regulatory agencies to take “prompt corrective action” regarding FDIC-insured depository institutions that do not meet minimum capital requirements. Depository institutions are placed into one of five capital tiers: “well-capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized.” An institution that fails to remain well-capitalized will be subject to a series of restrictions that increase as its capital condition worsens. For example, institutions that are less than well-capitalized are barred from soliciting, taking or rolling over brokered deposits. FDICIA generally prohibits a depository institution from making any capital distribution (including payment of a dividend) if the depository institution would be undercapitalized thereafter. Undercapitalized depository institutions are subject to growth limitations and must submit a capital restoration plan, which must be guaranteed by the institution's holding company. In addition, an undercapitalized institution is subject to increased monitoring and asset growth restrictions and is subject to greater regulatory approval requirements. The FDICIA also provides for enhanced supervisory authority over undercapitalized institutions, including authority for the appointment of a conservator or receiver for the institution. Guidance from the federal banking agencies also indicates that a holding company may be required to provide assurances that a subsidiary bank will comply with any requirements imposed on it under prompt corrective action.
As a result of the Dodd-Frank Act, bank holding companies will be subject to an “early remediation” regime that is substantially similar to the prompt corrective action regime applicable to banks. The remedial actions also increase as the condition of the holding company deteriorates, although the proposed holding company regime would use several forward-looking triggers to identify when a holding company is in troubled condition, beyond just the capital ratios used under the prompt corrective action regime.
As of December 31, 2015 and 2014, each of the Company's banks was categorized as “well-capitalized.” In order to maintain the Company's designation as a financial holding company, the Company and each of the banks is required to maintain capital ratios at or above the “well-capitalized” levels. Management is committed to maintaining the Company's capital levels above the “well-capitalized” levels established by the Federal Reserve for bank holding companies.
Enforcement Authority
The federal bank regulatory agencies have broad authority to issue orders to depository institutions and their holding companies prohibiting activities that constitute violations of law, rule, regulation, or administrative order, or that represent unsafe or unsound banking practices, as determined by the federal banking agencies. The federal banking agencies also are empowered to require affirmative actions to correct any violation or practice; issue administrative orders that can be judicially enforced; direct increases in capital; limit dividends and distributions; restrict growth; assess civil money penalties against institutions or individuals who violate any laws, regulations, orders, or written agreements with the agencies; order termination of certain activities of holding companies or their non-bank subsidiaries; remove officers and directors; order divestiture of ownership or control of a non-banking subsidiary by a holding company; or terminate deposit insurance and appoint a conservator or receiver.
FDIA and Safety and Soundness
The FDIA imposes various requirements on insured depository institutions, including our subsidiary banks. Among other things, the FDIA includes requirements applicable to the closure of branches; merger or consolidation by or with another insured bank; additional disclosures to depositors with respect to terms and interest rates applicable to deposit accounts; uniform regulations for extensions of credit secured by real estate; restrictions on activities of and investments by state-chartered banks; and increased reporting requirements on agricultural loans and loans to small businesses. Under the “cross-guarantee” provision of the FDIA, insured depository institutions such as the subsidiary banks may be liable to the FDIC for any losses incurred, or reasonably
12 | ||
expected to be incurred, by the FDIC resulting from the default of, or FDIC assistance to, any other commonly controlled insured depository institution. All of our subsidiary banks are commonly controlled within the meaning of the cross-guarantee provision.
The FDIA also requires the federal bank regulatory agencies to prescribe standards of safety and soundness, by regulations or guidelines, relating generally to operations and management, asset growth, asset quality, earnings, stock valuation and compensation. The federal bank regulatory agencies have adopted a set of guidelines prescribing safety and soundness standards pursuant to the FDIA. The guidelines establish general standards relating to internal controls and information systems, informational security, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, and compensation, fees and benefits. 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.
During the past decade, properly managing risks has been identified as critical to the conduct of safe and sound banking activities and has become even more important as new technologies, product innovation, and the size and speed of financial transactions have changed the nature of banking markets. The agencies have identified a spectrum of risks facing banking institutions including, but not limited to, credit, market, liquidity, operational, legal, and reputational risk. In particular, recent regulatory pronouncements have focused on operational risk, which arises from the potential that inadequate information systems, operational problems, breaches in internal controls, fraud, or unforeseen catastrophes will result in unexpected losses. New products and services, third-party risk management and cybersecurity are critical sources of operational risk that financial institutions are expected to address in the current environment. The subsidiary banks are expected to have active board and senior management oversight; adequate policies, procedures, and limits; adequate risk measurement, monitoring, and management information systems; and comprehensive and effective internal controls.
Risk Committee Requirement
On March 27, 2014, the Federal Reserve published final rules to implement certain "enhanced prudential standards" mandated by the Dodd-Frank Act. Many of these enhanced prudential standards apply only to bank holding companies and foreign banking organizations with total consolidated assets of $50 billion or more, and do not apply to the Company. However, the Federal Reserve's enhanced prudential standards require that, beginning in 2015, publicly traded bank holding companies with total consolidated assets of greater than $10 billion and less than $50 billion must establish and maintain risk committees for their boards of directors to oversee the bank holding companies' risk management frameworks. Our Board has had a separate risk committee since 1998; we believe that our risk committee and corresponding risk management framework is in compliance with all applicable requirements.
Insurance of Deposit Accounts
The deposits of each of our subsidiary banks are insured by the DIF up to the standard maximum deposit insurance amount of $250,000 per depositor. Each of our subsidiary banks is subject to deposit insurance assessments based on the risk it poses to the DIF, as determined by the capital category and supervisory category to which it is assigned. The FDIC has authority to raise or lower assessment rates on insured deposits in order to achieve statutorily required reserve ratios in the DIF and to impose special additional assessments. In light of the significant increase in depository institution failures in 2008-2010 and the increase of deposit insurance limits, the DIF incurred substantial losses during recent years. To bolster reserves in the DIF, the Dodd-Frank Act increased the minimum reserve ratio of the DIF to 1.35% of insured deposits and deleted the statutory cap for the reserve ratio. In December 2010, the FDIC set the designated reserve ratio at 2%, 65 basis points above the statutory minimum. In April 2011, the FDIC implemented changes required by the Dodd-Frank Act to revise the definition of the assessment base for calculating deposit insurance premiums from the amount of insured deposits held by an institution to the institution's average total consolidated assets less average tangible equity. The FDIC also changed the assessment rates, providing that they will initially range from 2.5 basis points to 45 basis points. The FDIC has indicated that these changes generally will not require an increase in the level of assessments for depository institutions with less than $10 billion in assets, such as each of our bank subsidiaries, and may result in decreased assessments for such institutions. However, there is a risk that the banks' deposit insurance premiums will again increase if failures of insured depository institutions continue to deplete the DIF.
In addition, the Deposit Insurance Fund Act of 1996 authorizes the Financing Corporation (“FICO”) to impose assessments on DIF assessable deposits in order to service the interest on FICO's bond obligations. The FICO assessment rate is adjusted quarterly and for the fourth quarter of 2015 was approximately 0.600 basis points (60 cents per $10,000 of assessable deposits).
Limits on Loans to One Borrower and Loans to Insiders
Federal and state banking laws impose limits on the amount of credit a bank can extend to any one person (or group of related persons). The Dodd-Frank Act expanded the scope of these restrictions for national banks under federal law to include credit
13 | ||
exposure arising from derivative transactions, repurchase agreements, and securities lending and borrowing transactions. Provisions of the Dodd-Frank Act also amended the FDIA to prohibit state-chartered banks (including certain of our banking subsidiaries) from engaging in derivative transactions unless the state lending limit laws take into account credit exposure to such transactions.
Applicable banking laws and regulations also place restrictions on loans by FDIC-insured banks and their affiliates to their directors, executive officers and principal shareholders.
Additional Provisions Regarding Deposit Accounts
The Dodd-Frank Act eliminated prohibitions under federal law against the payment of interest on demand deposits, thus allowing businesses to have interest-bearing checking accounts. Depending upon the market response, this change could have an adverse impact on our interest expense.
Federal Reserve regulations require depository institutions to maintain reserves against their transaction accounts (primarily NOW and regular checking accounts). For 2016, the first $15.2 million of otherwise reservable balances are exempt from the reserve requirements; for transaction accounts aggregating more than $15.2 million to $110.2 million, the reserve requirement is 3% of total transaction accounts; and for net transaction accounts in excess of $110.2 million, the reserve requirement is 10% of the aggregate amount of total transaction accounts in excess of $110.2 million. These reserve requirements are subject to annual adjustment by the Federal Reserve. Our banks are in compliance with the foregoing requirements.
De Novo Branching
The Dodd-Frank Act amended the FDIA and the National Bank Act to allow national banks and state banks, with the approval of their regulators, to establish de novo branches in states other than the bank's home state as if such state was the bank's home state.
In 2009, the FDIC adopted enhanced supervisory procedures for de novo banks, which extended the special supervisory period for such banks from three to seven years. Throughout the de novo period, newly chartered banks will be subject to higher capital requirements, more frequent examinations and other requirements.
Anti-Tying Provisions
Under the anti-tying provisions of the BHC Act, among other things, each of our subsidiary banks is prohibited from conditioning the availability of any product or service, or varying the price for any product or service, on the requirement that the customer obtain some additional product or service from the bank or any of its affiliates, other than loans, deposits and trust services.
Transactions with Affiliates
Certain “covered” transactions between a bank and its holding company or other non-bank affiliates are subject to various restrictions imposed by state and federal law and regulation. Such “covered transactions” include loans and other extensions of credit by the bank to the affiliate, investments in securities issued by the affiliate, purchases of assets from the affiliate, payments of fees or other distributions to the affiliate, certain derivative transactions that create a credit exposure to an affiliate, the acceptance of securities issued by the affiliate as collateral for a loan, and the issuance of a guarantee, acceptance or letter of credit on behalf of the affiliate. In general, these affiliate transaction rules limit the amount of covered transactions between an institution and a single affiliate, as well as the aggregate amount of covered transactions between an institution and all of its affiliates. In addition, covered transactions that are credit transactions must be secured by acceptable collateral, and all covered transactions must be on terms that are at least as favorable to the institution as then-prevailing in the market for comparable transactions with unaffiliated entities. Transactions between affiliated banks may be subject to certain exemptions under applicable federal law.
Community Reinvestment Act
Under the CRA, a financial institution has a continuing and affirmative obligation, consistent with the safe and sound operation of such institution, to help meet the credit needs of its entire community, including low and moderate-income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution's discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the CRA. However, institutions are rated on their performance in meeting the needs of their communities. The CRA requires each federal banking agency to take an institution's CRA record into account when evaluating certain applications by the institution, including applications for charters, branches and other deposit facilities, relocations, mergers, consolidations, acquisitions of assets or assumptions of liabilities, and bank and savings association acquisitions. An unsatisfactory record of performance may be the basis for denying or conditioning approval of an application by a financial institution or its holding company. The CRA also requires that all institutions publicly disclose their CRA ratings. Each of our subsidiary banks received a “satisfactory” or better rating from the Federal Reserve or the OCC on their most recent CRA performance evaluations.
14 | ||
Compliance with Consumer Protection Laws
Our banks and some other operating subsidiaries are also subject to many federal consumer protection statutes and regulations, including the Truth in Lending Act, the Truth in Savings Act, the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Electronic Fund Transfer Act, the Consumer Financial Protection Act, the Federal Trade Commission Act and analogous state statutes, the Fair Housing Act, the Real Estate Settlement Procedures Act, the Servicemembers Civil Relief Act and the Home Mortgage Disclosure Act. Wintrust Mortgage must also comply with many of these consumer protection statutes and regulations. Violation of these statutes can lead to significant potential liability for damages and penalties, in litigation by consumers as well as enforcement actions by regulators. Some of the key requirements of these laws:
• | require specific disclosures of the terms of credit, and regulate underwriting and other practices for mortgage loans and other types of credit; |
• | require specific disclosures about deposit account terms, and the electronic transfers that can be made to or from accounts at the banks; |
• | provide limited consumer liability for unauthorized transactions; |
• | prohibit discrimination against an applicant in any consumer or business credit transaction; |
• | require notifications about the approval or decline of credit applications, the reasons for a decline, and the credit scores used to make credit decisions; |
• | prohibit unfair, deceptive or abusive acts or practices; |
• | require mortgage lenders to collect and report applicant and borrower data regarding loans for home purchases or improvement projects; |
• | require lenders to provide borrowers with information regarding the nature and cost of real estate settlements; |
• | forbid the payment of referral fees for any settlement service as part of a real estate transaction; |
• | prohibit certain lending practices and limit escrow amounts with respect to real estate transactions; |
• | provide interest rate reductions and other protections for servicemembers called to active duty; and |
• | prescribe possible penalties for violations of the requirements of consumer protection statutes and regulations. |
During the past several years, Congress has amended these laws and federal regulators have proposed and finalized a number of significant amendments to the regulations implementing these laws. Among other things, the Federal Reserve, the FDIC and the OCC have adopted new rules applicable to the banks (and in some cases, Wintrust Mortgage) that govern consumer credit practices and disclosures, as well as rules that govern overdraft practices and disclosures. These rules may affect the profitability of our consumer banking activities.
As described above, the Dodd-Frank Act established the CFPB. The law transferred to the CFPB existing regulatory authority with respect to many of these consumer related regulations, and gave the CFPB new authority under the Consumer Financial Protection Act. In July 2011, many of the consumer financial protection functions previously assigned to other federal agencies shifted to the CFPB. The CFPB now has broad rulemaking authority over a wide range of consumer protection laws that apply to banks and other providers of financial products and services, including the authority to prohibit “unfair, deceptive or abusive practices,” to ensure that all consumers have access to markets for consumer financial products and services, and to ensure that such markets are fair, transparent and competitive. The Dodd-Frank Act also required the CFPB to adopt a number of new specific regulatory requirements. These new rules may increase the costs of engaging in these activities for all market participants, including our subsidiaries. In addition to the CFPB, other federal and state regulators have issued, and may in the future issue, regulations and guidance affecting aspects of our business. The developments may impose additional burdens on us and our subsidiaries. The CFPB has broad supervisory, examination and enforcement authority. Although we and our subsidiary banks are not subject to CFPB examination, the actions taken by the CFPB, including from its rulemaking authority, may influence enforcement actions and positions taken by other federal and state regulators, including those with jurisdiction over us and our subsidiaries. Finally, the Dodd-Frank Act authorizes state attorneys general and other state officials to enforce consumer protection rules issued by the CFPB.
Mortgage Related Rule Changes Generally
The Dodd-Frank Act amended the Truth in Lending Act and the Real Estate Settlement Procedures Act to impose a number of new requirements regarding the origination and servicing of residential mortgage loans. These amendments created a variety of new consumer protections. First, it significantly expands underwriting requirements applicable to loans secured by 1-4 family residential real property and augments federal law combating predatory lending practices. In addition to numerous new disclosure requirements, the Dodd-Frank Act imposes new standards for mortgage loan originations on all lenders, including banks and savings associations, in an effort to strongly encourage lenders to verify a borrower’s ability to repay, while also establishing a presumption of compliance for certain “qualified mortgages.” In addition, the Dodd-Frank Act generally requires lenders or securitizers to retain an economic interest in the credit risk relating to loans that the lender sells, and other asset-backed securities
15 | ||
that the securitizer issues, if the loans have not complied with the ability-to-repay standards. The risk retention requirement generally will be 5%, but could be increased or decreased by regulation.
Ability to Repay Rule
On January 10, 2013, the CFPB issued a final rule implementing the Dodd-Frank Act’s ability-to-repay requirements. Under the final rule, lenders, in assessing a borrower’s ability to repay a mortgage-related obligation, must consider eight underwriting factors: (1) current or reasonably expected income or assets; (2) current employment status; (3) monthly payment on the subject transaction; (4) monthly payment on any simultaneous loan; (5) monthly payment for all mortgage-related obligations; (6) current debt obligations, alimony, and child support; (7) monthly debt-to-income ratio or residual income; and (8) credit history. The final rule also includes guidance regarding the application of, and methodology for evaluating, these factors.
Further, the final rule clarified that qualified mortgages do not include “no-doc” loans and loans with negative amortization, interest-only payments, balloon payments, terms in excess of 30 years, or points and fees paid by the borrower that exceed 3% of the loan amount, subject to certain exceptions. In addition, for qualified mortgages, the rule mandated that the monthly payment be calculated on the highest payment that will occur in the first five years of the loan, and required that the borrower’s total debt-to-income ratio generally may not be more than 43%. The final rule also provided that certain mortgages that satisfy the general product feature requirements for qualified mortgages and that also satisfy the underwriting requirements of Fannie Mae and Freddie Mac (while they operate under federal conservatorship or receivership), or the U.S. Department of Housing and Urban Development, Department of Veterans Affairs, or Department of Agriculture or Rural Housing Service, are also considered to be qualified mortgages. This second category of qualified mortgages will phase out as the aforementioned federal agencies issue their own rules regarding qualified mortgages, the conservatorship of Fannie Mae and Freddie Mac ends, and, in any event, after seven years.
As set forth in the Dodd-Frank Act, subprime (or higher-priced) mortgage loans are subject to the ability-to-repay requirement, and the final rule provided for a rebuttable presumption of lender compliance for those loans. The final rule also applied the ability-to-repay requirement to prime loans, while also providing a conclusive presumption of compliance (i.e., a safe harbor) for prime loans that are also qualified mortgages. Additionally, the final rule generally prohibited prepayment penalties (subject to certain exceptions) and set forth a 3-year record retention period with respect to documenting and demonstrating the ability-to-repay requirement and other provisions.
Changes to Mortgage Loan Originator Compensation
Previously existing regulations concerning the compensation of mortgage loan originators have been amended. As a result of these amendments, mortgage loan originators may not receive compensation based on a mortgage transaction’s terms or conditions other than the amount of credit extended under the mortgage loan. Further, the new standards limit the total points and fees that a bank and/or a broker may charge on conforming and jumbo loans to 3% of the total loan amount. Mortgage loan originators may receive compensation from a consumer or from a lender, but not both. These rules contain requirements designed to prohibit mortgage loan originators from “steering” consumers to loans that provide mortgage loan originators with greater compensation. In addition, the rules contain other requirements concerning recordkeeping.
Mortgage Loan Servicing
On January 17, 2013, the CFPB announced rules to implement certain provisions of the Dodd-Frank Act relating to mortgage servicing. The new servicing rules require servicers to meet certain benchmarks for loan servicing and customer service in general. Servicers must provide periodic billing statements and certain required notices and acknowledgments, promptly credit borrowers’ accounts for payments received and promptly investigate complaints by borrowers and are required to take additional steps before purchasing insurance to protect the lender’s interest in the property. The new servicing rules also call for additional notice, review and timing requirements with respect to delinquent borrowers. The new servicing rules took effect on January 10, 2014.
In order to ensure compliance with the Dodd-Frank Act mortgage-related rules the Company consolidated its consumer mortgage loan origination and loan servicing operations within Wintrust Mortgage. All consumer mortgage applications are taken through Wintrust Mortgage which has extensively trained loan originators located at each of our branches. While in certain limited cases our banks may offer specialized consumer mortgages to our customers, we expect that on a going forward basis, consumer mortgages for all of our banks will be originated and closed by Wintrust Mortgage. Wintrust Mortgage then sells loans to third parties or to our banks. To the extent that we retain consumer mortgage loans in our bank portfolios, our banks have engaged Wintrust Mortgage to provide loan servicing. We believe that by centralizing loan origination and servicing operations we will not only meet the new compliance requirements, but reduce costs associated with such compliance.
16 | ||
TILA-RESPA Integrated Disclosure
On December 31, 2013, the CFPB published final rules and forms that combine certain disclosures that consumers receive in connection with applying for and closing on a mortgage loan under the Truth in Lending Act and the Real Estate Settlement Procedures Act. The two new forms developed by the CFPB are the Loan Estimate and the Closing Disclosure. The Loan Estimate replaces the Good Faith Estimate ("GFE") and the Early Truth in Lending Disclosure ("TIL") and adds additional disclosure language as required by the Dodd-Frank Act. The creditor must give the form to the consumer no later than three business days after the consumer applies for a mortgage loan. Consistent with current law, the creditor generally cannot charge the consumer any fees until after the consumer has been given the Loan Estimate form and the consumer has communicated intent to proceed with the transaction. Creditors may provide consumers with written estimates prior to application so long as there is a disclaimer to prevent confusion with the Loan Estimate form. The second disclosure, the Closing Disclosure form, replaces the HUD-1 and the Final TIL and adds additional disclosure language as required by Dodd Frank. The creditor must give the form to the consumer at least three business days before the consumer closes the loan. The rule became effective October 3, 2015. Wintrust Mortgage and the charter banks are both impacted by the rule, and have implemented procedures to comply with this regulation.
Expansion of the Home Mortgage Disclosure Act
The CFPB has published a lengthy amendment related to the reporting requirements under the Home Mortgage Disclosure Act. The CFPB claims the proposed rule aims to: 1) improve market information, data access, and the electronic reporting process; 2) monitor access to credit; 3) standardize the reporting threshold; 4) ease reporting requirements for some small banks; and 5) align reporting requirements with industry data standards. The proposed rule requires several new items of data be collected and reported to the FFIEC during annual reporting. A majority of the provisions of the rule become effective January 1, 2018. We expect to be fully compliant at that time.
Federal Preemption
The Dodd-Frank Act also amended the laws governing federal preemption of state laws as applied to national banks, and eliminated federal preemption for subsidiaries of national banks. These changes may subject the Company's national banks and their divisions, including Wintrust Mortgage, to additional state regulation and enforcement.
Debit Interchange
The Dodd-Frank Act added a new statutory requirement that interchange fees for electronic debit transactions that are paid to or charged by payment card issuers (including our bank subsidiaries) be reasonable and proportional to the cost incurred by the issuer. The Dodd-Frank Act also gave the Federal Reserve the authority to establish rules regarding these interchange fees. The Federal Reserve issued final regulations that were effective in October 2011, and that limit interchange fees for electronic debit transactions to 21 cents plus .05% of the transaction, plus an additional one cent per transaction fraud adjustment. The rule also imposes requirements regarding routing and exclusivity of electronic debit transactions, and generally requires that debit cards be usable in at least two unaffiliated networks.
Anti-Money Laundering Programs
The Bank Secrecy Act (“BSA”) and USA PATRIOT Act of 2001 contain anti-money laundering (“AML”) and financial transparency provisions intended to detect, and prevent the use of the U.S. financial system for, money laundering and terrorist financing activities. The BSA, as amended by the USA PATRIOT Act, requires depository institutions and their holding companies to undertake activities including maintaining an AML program, verifying the identity of clients, monitoring for and reporting suspicious transactions, reporting on cash transactions exceeding specified thresholds, and responding to requests for information by regulatory authorities and law enforcement agencies. Each of our subsidiary banks is subject to the BSA and, therefore, is required to provide its employees with AML training, designate an AML compliance officer and undergo an annual, independent audit to assess the effectiveness of its AML program. We have implemented policies, procedures and internal controls that are designed to comply with these AML requirements. In 2014, the Financial Crimes Enforcement Network (“FinCEN”), which is a unit of the Treasury Department that drafts regulations implementing the USA PATRIOT Act and other AML and BSA legislation, proposed a rule that would contain explicit customer due diligence requirements and impose a new regulatory requirement on financial institutions to obtain beneficial ownership information with respect to all legal entity customers with which such institutions conduct business. The scope and compliance requirements of such a rule have yet to be finalized. Bank regulators are focusing their examinations on anti-money laundering compliance, and we will continue to monitor and augment, where necessary, our AML compliance programs.
17 | ||
Office of Foreign Assets Control Regulation
The U.S. Department of the Treasury's Office of Foreign Assets Control, or "OFAC," is responsible for administering economic sanctions that affect transactions with designated foreign countries, nationals and others, as defined by various Executive Orders and Acts of Congress. OFAC-administered sanctions take many different forms. For example, sanctions may include: (1) restrictions on trade with or investment in a sanctioned country, including prohibitions against direct or indirect imports from and exports to a sanctioned country and prohibitions on U.S. persons engaging in financial transactions relating to, making investments in, or providing investment-related advice or assistance to, a sanctioned country; and (2) a blocking of assets in which the government or "specially designated nationals" of the sanctioned country have an interest, by prohibiting transfers of property subject to U.S. jurisdiction (including property in the possession or control of U.S. persons). OFAC also publishes lists of persons, organizations, and countries suspected of aiding, harboring or engaging in terrorist acts, known as Specially Designated Nationals and Blocked Persons. Blocked assets (e.g., property and bank deposits) cannot be paid out, withdrawn, set off or transferred in any manner without a license from OFAC. Failure to comply with these sanctions could have serious legal and reputational consequences.
Protection of Client Information
Legal requirements concerning the use and protection of client information affect many aspects of the Company's business, and are continuing to evolve. Current legal requirements include the privacy and information safeguarding provisions of the GLB Act, the Fair Credit Reporting Act (“FCRA”) and the amendments adopted by the Fair and Accurate Credit Transactions Act of 2003 (the “FACT Act”), as well as state law requirements. The GLB Act requires a financial institution to disclose its privacy policy to certain customers, and requires the financial institution to allow those customers to opt-out of some sharing of the customers' nonpublic personal information with nonaffiliated third persons. In accordance with these requirements, we and each of our banks and operating subsidiaries provide a written privacy to each affected customer when the customer relationship begins and an annual basis. As described in the privacy notice, we protect the security of information about our customers, educate our employees about the importance of protecting customer privacy, and allow affected customers to opt out of certain types of information sharing. We and our subsidiaries also require business partners with which we share information to have adequate security safeguards and to follow the requirements of the GLB Act. The GLB Act, as interpreted by the federal banking regulators, and state laws require us to take certain actions, including possible notice to affected customers, in the event that sensitive customer information is comprised. We and/or each of the banks and operating subsidiaries may need to amend our privacy policies and adapt our internal procedures in the event that these legal requirements, or the regulators' interpretation of them, change, or if new requirements are added.
Like other lenders, the banks and several of our operating subsidiaries utilize credit bureau data in their underwriting activities. Use of such data is regulated under the FCRA, and the FCRA also regulates reporting information to credit bureaus, prescreening individuals for credit offers, sharing of information between affiliates, and using affiliate data for marketing purposes. Similar state laws may impose additional requirements on us, the banks and our operating subsidiaries.
Violation of these legal requirements may expose us to regulatory action and private litigation, including claims for damages and penalties. In addition, a security incident can cause substantial reputational harm.
Broker-Dealer and Investment Adviser Regulation
WHI and Great Lakes Advisors are subject to extensive regulation under federal and state securities laws. WHI is registered as a broker-dealer with the SEC and in all 50 states, the District of Columbia and the U.S. Virgin Islands. Both WHI and Great Lakes Advisors are registered as investment advisers with the SEC. In addition, WHI is a member of several self-regulatory organizations (“SROs”), including FINRA and the Chicago Stock Exchange. Although WHI is required to be registered with the SEC, much of its regulation has been delegated to SROs that the SEC oversees, including FINRA and the national securities exchanges. In addition to SEC rules and regulations, the SROs adopt rules, subject to approval of the SEC, that govern all aspects of business in the securities industry and conduct periodic examinations of member firms. WHI is also subject to regulation by state securities commissions in states in which it conducts business. WHI and Great Lakes Advisors are registered only with the SEC as investment advisers, but certain of their advisory personnel are subject to regulation by state securities regulatory agencies.
As a result of federal and state registrations and SRO memberships, WHI is subject to overlapping schemes of regulation that cover all aspects of its securities businesses. Such regulations cover, among other things, uses and safekeeping of clients' funds; record-keeping and reporting requirements; supervisory and organizational procedures intended to assure compliance with securities laws and to prevent improper trading on material nonpublic information; personnel-related matters, including qualification and licensing of supervisory and sales personnel; limitations on extensions of credit in securities transactions; clearance and settlement procedures; “suitability” determinations as to certain customer transactions; limitations on the amounts and types of fees and commissions that may be charged to customers; and regulation of proprietary trading activities and affiliate transactions.
18 | ||
Violations of the laws and regulations governing a broker-dealer's actions can result in censures, fines, the issuance of cease-and-desist orders, revocation of licenses or registrations, the suspension or expulsion from the securities industry of a broker-dealer or its officers or employees, or other similar actions by both federal and state securities administrators, as well as the SROs.
As a registered broker-dealer, WHI is subject to the SEC's net capital rule as well as the net capital requirements of the SROs of which it is a member. Net capital rules, which specify minimum capital requirements, are generally designed to measure general financial integrity and liquidity and require that at least a minimum amount of net assets be kept in relatively liquid form. Rules of FINRA and other SROs also impose limitations and requirements on the transfer of member organizations' assets. Compliance with net capital requirements may limit the Company's operations requiring the intensive use of capital. These requirements restrict the Company's ability to withdraw capital from WHI, which in turn may limit the Company's ability to pay dividends, repay debt or redeem or purchase shares of the Company's own outstanding stock. WHI is a member of the Securities Investor Protection Corporation (“SIPC”), which subject to certain limitations, serves to oversee the liquidation of a member brokerage firm, and to return missing cash, stock and other securities owed to the firm's brokerage customers, in the event a member broker-dealer fails. The general SIPC protection for customers' securities accounts held by a member broker-dealer is up to $500,000 for each eligible customer, including a maximum of $250,000 for cash claims. SIPC does not protect brokerage customers against investment losses.
WHI in its capacity as an investment adviser is subject to regulations covering matters such as transactions between clients, transactions between the adviser and clients, custody of client assets and management of mutual funds and other client accounts. The principal purpose of regulation and discipline of investment firms is the protection of customers, clients and the securities markets rather than the protection of creditors and shareholders of investment firms. Sanctions that may be imposed for failure to comply with laws or regulations governing investment advisers include the suspension of individual employees, limitations on an adviser's engaging in various asset management activities for specified periods of time, the revocation of registrations, other censures and fines.
Employees
At December 31, 2015, the Company and its subsidiaries employed a total of 3,770 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, under the "Investor Relations" tab, 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 Securities Exchange Act of 1934 (the "Exchange Act") as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC.
19 | ||
Supplemental Statistical Data
The following statistical information is provided in accordance with the requirements of The Securities Act Industry Guide 3, Statistical Disclosure by Bank Holding Companies, which is part of Regulation S-K as promulgated by the SEC. This data should be read in conjunction with the Company’s Consolidated Financial Statements and notes thereto, and Management’s Discussion and Analysis which are contained in Item 7 of this Annual Report on Form 10-K.
Investment Securities Portfolio
The following table presents the amortized cost and fair value of the Company’s investment securities portfolios, by investment category, as of December 31, 2015, 2014 and 2013:
(Dollars in thousands) | 2015 | 2014 | 2013 | |||||||||||||||||||||
Amortized Cost | Fair Value | Amortized Cost | Fair Value | Amortized Cost | Fair Value | |||||||||||||||||||
Available-for-sale securities | ||||||||||||||||||||||||
U.S. Treasury | $ | 312,282 | $ | 306,729 | $ | 388,713 | $ | 381,805 | $ | 354,262 | $ | 336,095 | ||||||||||||
U.S. Government agencies | 70,313 | 70,236 | 686,106 | 668,316 | 950,086 | 895,688 | ||||||||||||||||||
Municipal | 105,702 | 108,595 | 234,951 | 238,529 | 154,463 | 152,716 | ||||||||||||||||||
Corporate notes: | ||||||||||||||||||||||||
Financial issuers | 80,014 | 80,043 | 129,309 | 129,758 | 129,362 | 128,944 | ||||||||||||||||||
Other | 1,500 | 1,502 | 3,766 | 3,821 | 5,994 | 6,094 | ||||||||||||||||||
Mortgage-backed: (1) | ||||||||||||||||||||||||
Mortgage-backed securities | 1,069,680 | 1,052,510 | 271,129 | 271,649 | 562,708 | 548,198 | ||||||||||||||||||
Collateralized mortgage obligations | 40,421 | 40,087 | 47,347 | 47,061 | 57,711 | 57,027 | ||||||||||||||||||
Equity securities | 51,380 | 56,686 | 46,592 | 51,139 | 50,532 | 51,528 | ||||||||||||||||||
Total available-for-sale securities | $ | 1,731,292 | $ | 1,716,388 | $ | 1,807,913 | $ | 1,792,078 | $ | 2,265,118 | $ | 2,176,290 | ||||||||||||
Held-to-maturity securities | ||||||||||||||||||||||||
U.S. Government agencies | $ | 687,302 | $ | 680,162 | $ | — | $ | — | $ | — | $ | — | ||||||||||||
Municipal | 197,524 | 197,949 | — | — | — | — | ||||||||||||||||||
Total held-to-maturity securities | $ | 884,826 | $ | 878,111 | $ | — | $ | — | $ | — | $ | — | ||||||||||||
(1) Consisting entirely of residential mortgage-backed securities, none of which are subprime.
Tables presenting the carrying amounts and gross unrealized gains and losses for securities available-for-sale at December 31, 2015 and 2014 are included by reference to Note 3 to the Consolidated Financial Statements presented under Item 8 of this Annual Report on Form 10-K. The following table presents the carrying value of the investment securities portfolios as of December 31, 2015, by maturity distribution.
(Dollars in thousands) | Within 1 year | From 1 to 5 years | From 5 to 10 years | After 10 years | Mortgage- backed | Equity Securities | Total | |||||||||||||||||||||
Available-for-sale securities | ||||||||||||||||||||||||||||
U.S. Treasury | $ | 96,974 | $ | 14,950 | $ | 194,805 | $ | — | $ | — | $ | — | $ | 306,729 | ||||||||||||||
U.S. Government agencies | 11,031 | 53,715 | 5,490 | — | — | — | 70,236 | |||||||||||||||||||||
Municipal | 39,272 | 42,058 | 22,276 | 4,989 | — | — | 108,595 | |||||||||||||||||||||
Corporate notes: | ||||||||||||||||||||||||||||
Financial issuers | 11,977 | 55,745 | 3,128 | 9,193 | — | — | 80,043 | |||||||||||||||||||||
Other | 1,502 | — | — | — | — | — | 1,502 | |||||||||||||||||||||
Mortgage-backed: (1) | ||||||||||||||||||||||||||||
Mortgage-backed securities | — | — | — | — | 1,052,510 | — | 1,052,510 | |||||||||||||||||||||
Collateralized mortgage obligations | — | — | — | — | 40,087 | — | 40,087 | |||||||||||||||||||||
Equity securities | — | — | — | — | — | 56,686 | 56,686 | |||||||||||||||||||||
Total available-for-sale securities | $ | 160,756 | $ | 166,468 | $ | 225,699 | $ | 14,182 | $ | 1,092,597 | $ | 56,686 | $ | 1,716,388 | ||||||||||||||
Held-to-maturity securities | ||||||||||||||||||||||||||||
U.S. Government agencies | $ | — | $ | 6,569 | $ | 44,740 | $ | 635,993 | $ | — | $ | — | $ | 687,302 | ||||||||||||||
Municipal | — | 12,639 | 51,714 | 133,171 | — | — | 197,524 | |||||||||||||||||||||
Total held-to-maturity securities | $ | — | $ | 19,208 | $ | 96,454 | $ | 769,164 | $ | — | $ | — | $ | 884,826 | ||||||||||||||
(1) Consisting entirely of residential mortgage-backed securities, none of which are subprime.
20 | ||
The weighted average yield for each range of maturities of securities, on a tax-equivalent basis, is shown below as of December 31, 2015:
Within 1 year | From 1 to 5 years | From 5 to 10 years | After 10 years | Mortgage- backed | Equity Securities | Total | |||||||||||||||
Available-for-sale securities | |||||||||||||||||||||
U.S. Treasury | 0.41 | % | 0.60 | % | 1.62 | % | — | % | — | % | — | % | 1.19 | % | |||||||
U.S. Government agencies | 0.66 | 0.77 | 5.30 | — | — | — | 1.11 | ||||||||||||||
Municipal | 1.86 | 2.51 | 4.70 | 4.77 | — | — | 2.83 | ||||||||||||||
Corporate notes: | |||||||||||||||||||||
Financial issuers | 1.17 | 1.87 | 2.73 | 4.80 | — | — | 2.14 | ||||||||||||||
Other | 1.78 | — | — | — | — | — | 1.78 | ||||||||||||||
Mortgage-backed: (1) | |||||||||||||||||||||
Mortgage-backed securities | — | — | — | — | 2.79 | — | 2.79 | ||||||||||||||
Collateralized mortgage obligations | — | — | — | — | 1.96 | — | 1.96 | ||||||||||||||
Equity securities | — | — | — | — | — | 4.45 | 4.45 | ||||||||||||||
Total available-for-sale securities | 0.85 | % | 1.56 | % | 2.03 | % | 4.79 | % | 2.76 | % | 4.45 | % | 2.44 | % | |||||||
Held-to-maturity securities | |||||||||||||||||||||
U.S. Government agencies | — | % | 1.66 | % | 3.97 | % | 3.48 | % | — | % | — | % | 3.49 | % | |||||||
Municipal | — | 3.03 | 4.42 | 4.93 | — | — | 4.67 | ||||||||||||||
Total held-to-maturity securities | — | % | 2.56 | % | 4.21 | % | 3.73 | % | — | % | — | % | 3.76 | % | |||||||
(1) Consisting entirely of residential mortgage-backed securities, none of which are subprime.
21 | ||
ITEM 1A. | RISK FACTORS |
An investment in our securities is subject to risks inherent to our business. Certain 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 Annual Report on Form 10-K and in our other filings with the SEC. Additional risks and uncertainties that management is not aware of or that management currently deems immaterial may also impair Wintrust's business operations. This Annual Report on Form 10-K is qualified in its entirety by these risk factors. If any of the following risks actually occur, our business, financial condition and results of operations could be materially and adversely affected. If this were to happen, the value of our securities could decline significantly, and you could lose all or part of your investment.
Risks Related to Our Business and Operating Environment
Difficult economic conditions have adversely affected our company and the financial services industry in general and further deterioration in economic conditions may materially adversely affect our business, financial condition, results of operations and cash flows.
The U.S. economy was in a recession from the third quarter of 2008 to the second quarter of 2009, and economic activity continues to be restrained. The housing and real estate markets have also been experiencing extraordinary volatility since 2007. Additionally, unemployment rates remained historically high during these periods. These factors have had a significant negative effect on us and other companies in the financial services industry. As a lending institution, our business is directly affected by the ability of our borrowers to repay their loans , as well as by the value of collateral, such as real estate, that secures many of our loans. Market turmoil led to an increase in charge-offs and has negatively impacted consumer confidence and the level of business activity. However, net charge-offs, excluding covered loans, decreased to $19.2 million in 2015 from $27.2 million in 2014. Our balance of non-performing loans, excluding covered loans, and other real estate owned (“OREO”), excluding covered other real estate owned, was $84.1 million and $43.9 million, respectively, at December 31, 2015 compared to $78.7 million and $45.6 million, respectively, at December 31, 2014. Continued weakness or resumed deterioration in the economy, real estate markets or unemployment rates, particularly in the markets in which we operate, will likely diminish the ability of our borrowers to repay loans that we have given them, the value of any collateral securing such loans and may cause increases in delinquencies, problem assets, charge-offs and provision for credit losses, all of which could materially adversely affect our financial condition and results of operations. Further, the underwriting and credit monitoring policies and procedures that we have adopted may not prevent losses that could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Since our business is concentrated in the Chicago metropolitan and southern Wisconsin market areas, further declines in the economy of this region could adversely affect our business.
Except for our premium finance business and certain other niche businesses, our success depends primarily on the general economic conditions of the specific local markets in which we operate. Unlike larger national or other regional banks that are more geographically diversified, we provide banking and financial services to customers primarily in the Chicago metropolitan and southern Wisconsin market areas. The local economic conditions in these areas significantly impact the demand for our products and services as well as the ability of our customers to repay loans, the value of the collateral securing loans and the stability of our deposit funding sources. Specifically, many of the loans in our portfolio are secured by real estate located in the Chicago metropolitan area. Like many areas, our local market area has experienced significant volatility in real estate values in recent years. Further declines in economic conditions, including inflation, recession, unemployment, changes in securities markets or other factors impacting these local markets could, in turn, have a material adverse effect on our financial condition and results of operations. Deterioration in the real estate markets where collateral for our mortgage loans is located could adversely affect the borrower's ability to repay the loan and the value of the collateral securing the loan, and in turn the value of our assets.
In addition, the State of Illinois has experienced significant financial difficulty and is facing pension funding shortfalls. To the extent that these issues impact the economic vitality of the state and the businesses operating in Illinois, encourage businesses to leave the state or discourage new employers to start or move businesses to Illinois, it could have a material adverse effect on our financial condition and results of operations.
If our allowance for loan losses is not sufficient to absorb losses that may occur in our loan portfolio, our financial condition and liquidity could suffer.
We maintain an allowance for loan losses that is intended to absorb credit losses that we expect to incur in our loan portfolio. At each balance sheet date, our management determines the amount of the allowance for loan losses based on our estimate of probable and reasonably estimable losses in our loan portfolio, taking into account probable losses that have been identified relating to
22 | ||
specific borrowing relationships, as well as probable losses inherent in the loan portfolio and credit undertakings that are not specifically identified.
Because our allowance for loan losses represents an estimate of probable losses, there is no certainty that it will be adequate over time to cover credit losses in the portfolio, particularly if there is deterioration in general economic or market conditions or events that adversely affect specific customers. In 2015, we charged off $19.2 million in loans, excluding covered loans, (net of recoveries) and increased our allowance for loan losses, excluding the allowance for covered loans, from $91.7 million at December 31, 2014 to $105.4 million at December 31, 2015. The increase in allowance in 2015 was primarily the result of significant loan growth during the period. Our allowance for loan losses, excluding the allowance for covered loans, represents 0.62% of total loans, excluding covered loans outstanding at December 31, 2015, compared to 0.64% at December 31, 2014.
Although we believe our loan loss allowance is adequate to absorb probable and reasonably estimable losses in our loan portfolio, if our estimates are inaccurate and our actual loan losses exceed the amount that is anticipated, or if the loss assumptions we used in calculating our reserves are significantly different from those we actually experience, our financial condition and liquidity could be materially adversely affected.
For more information regarding our allowance for loan losses, see “Loan Portfolio and Asset Quality” under Management's Discussion and Analysis of Financial Condition and Results of Operations in Item 7.
A significant portion of our loan portfolio is comprised of commercial loans, the repayment of which is largely dependent upon the financial success and economic viability of the borrower.
The repayment of our commercial loans is dependent upon the financial success and viability of the borrower. If the economy remains weak for a prolonged period or experiences further deterioration or if the industry or market in which the borrower operates weakens, our borrowers may experience depressed or dramatic and sudden decreases in revenues that could hinder their ability to repay their loans. Our commercial loan portfolio totaled $4.7 billion or 27% of our total loan portfolio, at December 31, 2015, compared to $3.9 billion, or 26% of our total loan portfolio, at December 31, 2014.
Commercial loans are secured by different types of collateral related to the underlying business, such as accounts receivable, inventory and equipment. Should a commercial loan require us to foreclose on the underlying collateral, the unique nature of the collateral may make it more difficult and costly to liquidate, thereby increasing the risk to us of not recovering the principal amount of the loan. Accordingly, our business, results of operations and financial condition may be materially adversely affected by defaults in this portfolio.
A substantial portion of our loan portfolio is secured by real estate, in particular commercial real estate. Deterioration in the real estate markets could lead to additional losses, which could have a material adverse effect on our financial condition and results of operations.
As of both December 31, 2015 and 2014, approximately 43% of our total loan portfolio was secured by real estate, the majority of which is commercial real estate. The commercial and residential real estate market continues to experience a variety of difficulties, including the Chicago metropolitan area and southern Wisconsin, in which a majority of our real estate loans are concentrated. Increases in commercial and consumer delinquency levels or declines in real estate market values would require increased net charge-offs and increases in the allowance for loan and lease losses, which could have a material adverse effect on our business, financial condition and results of operations.
Any inaccurate assumptions in our analytical and forecasting models could cause us to miscalculate our projected revenue or losses, which could adversely affect our financial condition.
We use analytical and forecasting models to estimate the effects of economic conditions on our loan portfolio and probable loan performance. Those models reflect certain assumptions about market forces, including interest rates and consumer behavior that may be incorrect. If our analytical and forecasting models’ underlying assumptions are incorrect, improperly applied, or otherwise inadequate, we may suffer deleterious effects such as higher than expected loan losses, lower than expected net interest income, or unanticipated charge-offs, any of which could have a material adverse effect on our business, financial condition and results of operations.
Unanticipated changes in prevailing interest rates and the effects of changing regulation could adversely affect our net interest income, which is our largest source of income.
Wintrust is exposed to interest rate risk in its core banking activities of lending and deposit taking, since changes in prevailing interest rates affect the value of our assets and liabilities. Such changes may adversely affect our net interest income, which is the difference between interest income and interest expense. Our net interest income is affected by the fact that assets and liabilities reprice at different times and by different amounts as interest rates change. Net interest income represents our largest component of net income, and was $641.5 million and $598.6 million for the years ended December 31, 2015 and 2014, respectively.
23 | ||
Each of our businesses may be affected differently by a given change in interest rates. For example, we expect that the results of our mortgage banking business in selling loans into the secondary market would be negatively impacted during periods of rising interest rates, whereas falling interest rates could have a negative impact on the net interest spread earned on deposits as we would be unable to lower the rates on many interest bearing deposit accounts of our customers to the same extent as many of our higher yielding asset classes.
Additionally, increases in interest rates may adversely influence the growth rate of loans and deposits, the quality of our loan portfolio, loan and deposit pricing, the volume of loan originations in our mortgage banking business and the value that we can recognize on the sale of mortgage loans in the secondary market.
We seek to mitigate our interest rate risk through several strategies, which may not be successful. With the relatively low interest rates that prevailed in recent years, we were able to augment the total return of our investment securities portfolio by selling call options on fixed-income securities that we own. We recorded fee income of approximately $15.4 million, $7.9 million and $4.8 million for the years ended December 31, 2015, 2014 and 2013, respectively. We also mitigate our interest rate risk by entering into interest rate swaps and other interest rate derivative contracts from time to time with counterparties. To the extent that the market value of any derivative contract moves to a negative market value, we are subject to loss if the counterparty defaults. In the future, there can be no assurance that such mitigation strategies will be available or successful.
Our liquidity position may be negatively impacted if economic conditions continue to suffer.
Liquidity is a measure of whether our cash flows and liquid assets are sufficient to satisfy current and future financial obligations, such as demand for loans, deposit withdrawals and operating costs. Our liquidity position is affected by a number of factors, including the amount of cash and other liquid assets on hand, payment of interest and dividends on debt and equity instruments that we have issued, capital we inject into our bank subsidiaries, proceeds we raise through the issuance of securities, our ability to draw upon our revolving credit facility and dividends received from our banking subsidiaries. Our future liquidity position may be adversely affected by multiple factors, including:
• | if our banking subsidiaries report net losses or their earnings are weak relative to our cash flow needs; |
• | if it is necessary for us to make capital injections to our banking subsidiaries; |
• | if changes in regulations require us to maintain a greater level of capital, as more fully described below; |
• | if we are unable to access our revolving credit facility due to a failure to satisfy financial and other covenants; or |
• | if we are unable to raise additional capital on terms that are satisfactory to us. |
Weakness or worsening of the economy, real estate markets or unemployment levels may increase the likelihood that one or more of these events will occur. If our liquidity is adversely affected, it may have a material adverse effect on our business, results of operations and financial condition.
The financial services industry is very competitive, and if we are not able to compete effectively, we may lose market share and our business could suffer.
We face competition in attracting and retaining deposits, making loans, and providing other financial services (including wealth management services) throughout our market area. Our competitors include national, regional and other community banks, and a wide range of other financial institutions such as credit unions, government-sponsored enterprises, mutual fund companies, insurance companies, factoring companies and other non-bank financial companies. Many of these competitors have substantially greater resources and market presence than Wintrust and, as a result of their size, may be able to offer a broader range of products and services, better pricing for those products and services, or newer technologies to deliver those products and services than we can. Several of our local competitors have experienced improvements in their financial condition over the few years and are better positioned to compete for loans, acquisitions and personnel. The financial services industry could become even more competitive as a result of legislative, regulatory and technological changes and continued consolidation. Also, technology has lowered barriers to entry and made it possible for non-banks to offer products and services traditionally provided by banks, such as automatic transfer and payment systems, and for banks that do not have a physical presence in our markets to compete for deposits.
Our ability to compete successfully depends on a number of factors, including, among other things:
• | the ability to develop, maintain and build upon long-term customer relationships based on top quality service and high ethical standards; |
• | the scope, relevance and pricing of products and services offered to meet customer needs and demands; |
• | the ability to expand our market position; |
24 | ||
• | the ability to uphold our reputation in the marketplace; |
• | the rate at which we introduce new products and services relative to our competitors; |
• | customer satisfaction with our level of service; and |
• | industry and general economic trends. |
If we are unable to compete effectively, we will lose market share and income from deposits, loans and other products may be reduced. This could adversely affect our profitability and have a material adverse effect on our business, financial condition and results of operations.
If we are unable to continue to identify favorable acquisitions or successfully integrate our acquisitions, our growth may be limited and our results of operations could suffer.
In the past several years, we have completed numerous acquisitions of banks, other financial service related companies and financial service related assets, including acquisitions of troubled financial institutions, as more fully described below. We expect to continue to make such acquisitions in the future. Wintrust seeks merger or acquisition partners that are culturally similar, have experienced management, possess either significant market presence or have potential for improved profitability through financial management, economies of scale or expanded services. Failure to successfully identify and complete acquisitions likely will result in Wintrust achieving slower growth. Acquiring other banks, businesses or branches involves various risks commonly associated with acquisitions, including, among other things:
• | potential exposure to unknown or contingent liabilities or asset quality issues of the target company; |
• | failure to adequately estimate the level of loan losses at the target company; |
• | difficulty and expense of integrating the operations and personnel of the target company; |
• | potential disruption to our business, including diversion of our management's time and attention; |
• | the possible loss of key employees and customers of the target company; |
• | difficulty in estimating the value of the target company; and |
• | potential changes in banking or tax laws or regulations that may affect the target company. |
Acquisitions typically involve the payment of a premium over book and market values, and, therefore, some dilution of Wintrust's tangible book value and net income per common share may occur as a result of any future transaction. In addition, certain acquisitions may expose us to additional regulatory risks, including from foreign governments. Our ability to comply with any such regulations will impact the success of any such acquisitions. Furthermore, failure to realize the expected revenue increases, cost savings, increases in geographic or product presence, and/or other projected benefits from an acquisition could have a material adverse effect on our financial condition and results of operations.
Our participation in FDIC-assisted acquisitions may present additional risks to our financial condition and results of operations.
As part of our growth strategy, we have made opportunistic partial acquisitions of troubled financial institutions in transactions facilitated by the FDIC through our bank subsidiaries. These acquisitions, and any future FDIC-assisted transactions we may undertake, involve greater risk than traditional acquisitions because they are typically conducted on an accelerated basis, allowing less time for us to prepare for and evaluate possible transactions, or to prepare for integration of an acquired institution. These transactions also present risks of customer loss, strain on management resources related to collection and management of problem loans and problems related to the integration of operations and personnel of the acquired financial institutions. As a result, there can be no assurance that we will be able to successfully integrate the financial institutions we acquire, or that we will realize the anticipated benefits of the acquisitions. Additionally, while the FDIC may agree to assume certain losses in transactions that it facilitates, there can be no assurances that we would not be required to raise additional capital as a condition to, or as a result of, participation in an FDIC-assisted transaction. Any such transactions and related issuances of stock may have dilutive effect on earnings per share. Furthermore, we may face competition from other financial institutions with respect to proposed FDIC-assisted transactions.
We are also subject to certain risks relating to our loss sharing agreements with the FDIC. Under a loss sharing agreement, the FDIC generally agrees to reimburse the acquiring bank for a portion of any losses relating to covered assets of the acquired financial institution. This is an important financial term of any FDIC-assisted transaction, as troubled financial institutions often have poorer asset quality. As a condition to reimbursement, however, the FDIC requires the acquiring bank to follow certain servicing procedures. A failure to follow servicing procedures or any other breach of a loss sharing agreement by us could result in the loss of FDIC reimbursement. While we have established a group dedicated to servicing the loans covered by the FDIC loss sharing agreements, there can be no assurance that we will be able to comply with the FDIC servicing procedures. In addition, reimbursable losses and recoveries under loss sharing agreements are based on the book value of the relevant loans and other assets as determined
25 | ||
by the FDIC as of the effective dates of the acquisitions. The amount that the acquiring banks realize on these assets could differ materially from the carrying value that will be reflected in our financial statements, based upon the timing and amount of collections on the covered loans in future periods. Any failure to receive reimbursement, or any material differences between the amount of reimbursements that we do receive and the carrying value reflected in our financial statements, could have a material negative effect on our financial condition and results of operations.
An actual or perceived reduction in our financial strength may cause others to reduce or cease doing business with us, which could result in a decrease in our net interest income and fee revenues.
Our customers rely upon our financial strength and stability and evaluate the risks of doing business with us. If we experience diminished financial strength or stability, actual or perceived, including due to market or regulatory developments, announced or rumored business developments or results of operations, or a decline in stock price, customers may withdraw their deposits or otherwise seek services from other banking institutions and prospective customers may select other service providers. The risk that we may be perceived as less creditworthy relative to other market participants is increased in the current market environment, where the consolidation of financial institutions, including major global financial institutions, is resulting in a smaller number of much larger counterparties and competitors. As our community banks become more closely identified with the Wintrust name, the impact of any perceived weakness or creditworthiness at either the holding company or our community banks may be greater than in prior periods. If customers reduce their deposits with us or select other service providers for all or a portion of the services that we provide them, net interest income and fee revenues will decrease accordingly, and could have a material adverse effect on our results of operations.
If our growth requires us to raise additional capital, that capital may not be available when it is needed or the cost of that capital may be very high.
We are required by regulatory authorities to maintain adequate levels of capital to support our operations (see “-Risks Related to Our Regulatory Environment-If we fail to meet our regulatory capital ratios, we may be forced to raise capital or sell assets”) and as we grow, internally and through acquisitions, the amount of capital required to support our operations grows as well. We may need to raise additional capital to support continued growth both internally and through acquisitions. Any capital we obtain may result in the dilution of the interests of existing holders of our common stock.
Our ability to raise additional capital, if needed, will depend on conditions in the capital markets at that time which are outside our control and on our financial condition and performance. If we cannot raise additional capital when needed, or on terms acceptable to us, our ability to further expand our operations through internal growth and acquisitions could be materially impaired and our financial condition and liquidity could be materially and negatively affected.
Disruption in the financial markets could result in lower fair values for our investment securities portfolio.
The Company's available-for-sale and trading securities are carried at fair value. Major disruptions in the capital markets experienced in recent years have impacted investor demand for all classes of securities and resulted in volatility in the fair values of the Company's investment securities.
Accounting standards require the Company to categorize these securities according to a fair value hierarchy. As of December 31, 2015, approximately 95% of the Company's available-for-sale securities were categorized in level 2 of the fair value hierarchy (meaning that their fair values were determined by quoted prices for similar assets or other observable inputs). Significant prolonged reduced investor demand could manifest itself in lower fair values for these securities and may result in recognition of an other-than-temporary or permanent impairment of these assets, which could lead to accounting charges and have a material adverse effect on the Company's financial condition and results of operations.
The remaining securities in our available-for-sale securities portfolio were categorized as level 3 (meaning that their fair values were determined by inputs that are unobservable in the market and therefore require a greater degree of management judgment). The determination of fair value for securities categorized in level 3 involves significant judgment due to the complexity of factors contributing to the valuation, many of which are not readily observable in the market. Recent market disruptions make valuation of such securities even more difficult and subjective. In addition, the nature of the business of the third party source that is valuing the securities at any given time could impact the valuation of the securities. Consequently, the ultimate sales price for any of these securities could vary significantly from the recorded fair value at December 31, 2015, especially if the security is sold during a period of illiquidity or market disruption or as part of a large block of securities under a forced transaction.
There can be no assurance that decline in market value associated with these disruptions will not result in other-than-temporary or permanent impairments of these assets, which would lead to accounting charges which could have a material negative effect on our business, financial condition and results of operations.
26 | ||
Our controls and procedures may fail or be circumvented.
Management regularly reviews and updates our internal controls over financial reporting, disclosure controls and procedures and corporate governance policies and procedures. Any system of controls, however well-designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met. Any circumvention of our controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on our business, results of operations and financial condition.
New lines of business and new products and services are essential to our ability to compete but may subject us to additional risks.
We continually implement new lines of business and offer new products and services within existing lines of business to offer our customers a competitive array of products and services. The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology-driven products and services. The effective use of technology can increase efficiency and enable financial institutions to better serve customers and to reduce costs. However, some new technologies needed to compete effectively result in incremental operating costs. Our future success depends, in part, upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in operations. Many of our competitors, because of their larger size and available capital, have substantially greater resources to invest in technological improvements. We may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to our customers. Failure to successfully keep pace with technological change affecting the financial services industry could cause a loss of customers and have a material adverse effect on our business.
At the same time, there can be substantial risks and uncertainties associated with these efforts, particularly in instances where the markets for such services are still developing. In developing and marketing new lines of business and/or new products or services, we may invest significant time and resources. Initial timetables for the introduction and development of new lines of business and/or new products or services may not be achieved, and price and profitability targets may not prove feasible. External factors, such as compliance with regulations, competitive alternatives, and shifting market preferences, may also impact the successful implementation of a new line of business or a new product or service. Furthermore, any new line of business and/or new product or service could have a significant impact on the effectiveness of our system of internal controls. Failure to successfully manage these risks in the development and implementation of new lines of business or new products or services could have a material adverse effect on our business, financial condition, and results of operations.
Failures of our information technology systems may adversely affect our operations.
We are increasingly dependent upon computer and other information technology systems to manage our business. We rely upon information technology systems to process, record, monitor and disseminate information about our operations. In some cases, we depend on third parties to provide or maintain these systems. While we perform a review of controls instituted by our critical vendors in accordance with industry standards, we must rely on the continued maintenance of these controls by the outside party, including safeguards over the security of customer data. Additionally, we must rely on our employees to safeguard access to our information technology systems and avoid inadvertent complicity with external security threats. Although we take protective measures and endeavor to modify them as circumstances warrant, the security of our computer systems, software and networks may be vulnerable to breaches, unauthorized access, misuse, computer viruses or other malicious code and cyber attacks that could have a security impact. If one or more of these events occur, or if any of our financial, accounting or other data processing systems fail or have other significant shortcomings, this could jeopardize our or our customers’ confidential and other information processed and stored in, and transmitted through, our computer systems and networks or otherwise cause interruptions or malfunctions in our operations or the operations of our customers or counterparties. We may be required to expend significant additional resources to modify our protective measures or to investigate and remediate vulnerabilities or other exposures, and we may be subject to litigation and financial losses that are either not insured against or not fully covered through any insurance maintained by us. Security breaches in our online banking systems could also have an adverse effect on our reputation. Our systems may also be affected by events that are beyond our control, which may include, for example, electrical or telecommunications outages or other damage to our property or assets. Although we take precautions against malfunctions and security breaches, our efforts may not be adequate to prevent problems that could materially adversely affect our business, financial condition and results of operations.
Failures by or of our vendors may adversely affect our operations.
We use and rely upon many external vendors to provide us with day-to-day products and services essential to our operations. We are thus exposed to risk that such vendors will not perform as contracted or at agreed-upon service levels. The failure of our vendors to perform as contracted or at necessary service levels for any reason could disrupt our operations, which could adversely affect our business. In addition, if any of our vendors experience insolvency or other business failure, such failure could affect our ability to obtain necessary products or services from a substitute vendor in a timely and cost-effective manner or prevent us from effectively
27 | ||
pursuing certain business objectives entirely. Our failure to implement business objectives due to vendor nonperformance could adversely affect our financial condition and results of operations.
We issue debit cards, and debit card transactions pose a particular cybersecurity risk that is outside of our control.
Debit card numbers are susceptible to theft at the point of sale via the physical terminal through which transactions are processed and by other means of hacking. The security and integrity of these transactions are dependent upon retailers’ vigilance and willingness to invest in technology and upgrades. Despite third-party security risks that are beyond our control, we offer our customers protection against fraud and attendant losses for unauthorized use of debit cards in order to stay competitive in the marketplace. Offering such protection to our customers exposes us to potential losses which, in the event of a data breach at one or more retailers of considerable magnitude, may adversely affect our business, financial condition, and results of operations.
We depend on the accuracy and completeness of information we receive about our customers and counterparties to make credit decisions.
We rely on information furnished by or on behalf of customers and counterparties in deciding whether to extend credit or enter into other transactions. This information could include financial statements, credit reports, and other financial information. We also rely on representations of those customers, counterparties, or other third parties, such as independent auditors, as to the accuracy and completeness of that information. Reliance on inaccurate or misleading financial statements, credit reports, or other financial information could have a material adverse impact on our business, financial condition and results of operations.
If we are unable to attract and retain experienced and qualified personnel, our ability to provide high quality service will be diminished, we may lose key customer relationships, and our results of operations may suffer.
We believe that our future success depends, in part, on our ability to attract and retain experienced personnel, including our senior management and other key personnel. Our business model is dependent upon our ability to provide high quality and personal service. In addition, as a holding company that conducts its operations through our subsidiaries, we are focused on providing entrepreneurial-based compensation to the chief executives of each our business units. As a Company with start-up and growth oriented operations, we are cognizant that to attract and retain the managerial talent necessary to operate and grow our businesses we often have to compensate our executives with a view to the business we expect them to manage, rather than the size of the business they currently manage. Accordingly, any executive compensation restrictions may negatively impact our ability to retain and attract senior management. The departure of a senior manager or other key personnel may damage relationships with certain customers, or certain customers may choose to follow such personnel to a competitor. The loss of any of our senior managers or other key personnel, or our inability to identify, recruit and retain such personnel, could materially and adversely affect our business, results of operations and financial condition.
We are subject to environmental liability risk associated with lending activities.
A significant portion of the Company's loan portfolio is secured by real property. In the ordinary course of business, the Company may foreclose on and take title to properties securing certain loans. In doing so, there is a risk that hazardous or toxic substances could be found on these properties. If hazardous or toxic substances are found, the Company may be liable for remediation costs, as well as for personal injury and property damage. In addition, we own and operate a number of properties that may be subject to similar environmental liability risks.
Environmental laws may require the Company to incur substantial expenses and could materially reduce the affected property's value or limit the Company's ability to use or sell the affected property. The costs associated with investigation and remediation activities could be substantial. In addition, if we are the owner or former owner of a contaminated site, we may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from the property. Although the Company has policies and procedures to perform an environmental review before initiating any foreclosure action on real property, these reviews may not be sufficient to detect all potential environmental hazards. The remediation costs and any other financial liabilities associated with an environmental hazard could have a material adverse effect on the Company's business, financial condition and results of operations.
We are subject to claims and legal actions which could negatively affect our results of operations or financial condition.
Periodically, as a result of our normal course of business, we are involved in claims and related litigation from our customers or employees. These claims and legal actions, whether meritorious or not, as well as reviews, investigations and proceedings by governmental and self-regulatory agencies could involve large monetary claims and significant legal expense. In addition, such actions may negatively impact our reputation in the marketplace and lessen customer demand. If such claims and legal actions are not decided in Wintrust's favor, our results of operations and financial condition could be adversely impacted.
28 | ||
Losses incurred in connection with actual or projected repurchases and indemnification payments related to mortgages that we have sold into the secondary market may exceed our financial statement reserves and we may be required to increase such reserves in the future. Increases to our reserves and losses incurred in connection with actual loan repurchases and indemnification payments could have a material adverse effect on our business, financial condition, results of operations or cash flows.
We engage in the origination and purchase of residential mortgages for sale into the secondary market. In connection with such sales, we make certain representations and warranties, which, if breached, may require us to repurchase such loans, substitute other loans or indemnify the purchasers of such loans for actual losses incurred in respect of such loans. Due, in part, to increased mortgage payment delinquency rates and declining housing prices during the post 2007 period, we have been receiving such requests for loan repurchases and indemnification payments relating to the representations and warranties with respect to such loans. We have been able to reach settlements with a number of purchasers, and believe that we have established appropriate reserves with respect to indemnification requests. It is possible that the number of such requests will increase or that we will not be able to reach settlements with respect to such requests in the future. Accordingly, it is possible that losses incurred in connection with loan repurchases and indemnification payments may be in excess of our financial statement reserves, and we may be required to increase such reserves and may sustain additional losses associated with such loan repurchases and indemnification payments in the future. Increases to our reserves and losses incurred by us in connection with actual loan repurchases and indemnification payments in excess of our reserves could have a material adverse effect on our business, financial condition, results of operations or cash flows.
Consumers may decide not to use banks to complete their financial transactions, which could adversely affect our business and results of operations.
Technology and other changes are allowing parties to complete financial transactions that historically have involved banks through alternative methods. For example, consumers can now maintain funds that would have historically been held as bank deposits in brokerage accounts or mutual funds. Consumers can also complete transactions such as paying bills and transferring funds directly without the assistance of banks. The process of eliminating banks as intermediaries could result in the loss of fee income, as well as the loss of customer deposits and the related income generated from those deposits. The loss of these revenue streams and the lower cost deposits as a source of funds could have a material adverse effect on our business, financial condition and results of operations.
We may be adversely impacted by the soundness of other financial institutions.
Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships. We have exposure to many different industries and counterparties and routinely execute transactions with counterparties in the financial services industry, including the Federal Home Loan Bank ("FHLB"), commercial banks, brokers and dealers, investment banks and other institutional clients. Many of these transactions expose us to credit risk in the event of a default by a counterparty or client. In addition, our credit risk may be exacerbated when collateral held by us cannot be realized or is liquidated at prices not sufficient to recover the full amount due to us. Any such losses could have material adverse effect on our business, financial condition and results of operations.
De novo operations often involve significant expenses and delayed returns and may negatively impact Wintrust's profitability.
Our financial results have been and will continue to be impacted by our strategy of branch openings and de novo bank formations. We expect to increase the opening of additional branches as market conditions improve and, if the interest rate environment and economic climate and regulatory conditions become favorable, may resume de novo bank formations. Based on our experience, we believe that it generally takes over 13 months for de novo banks to first achieve operational profitability, depending on the number of banking facilities opened, the impact of organizational and overhead expenses, the start-up phase of generating deposits and the time lag typically involved in redeploying deposits into attractively priced loans and other higher yielding earning assets. However, it may take longer than expected or more 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 branches or banks will ever be profitable. Moreover, the FDIC's extension of the enhanced supervisory period for de novo banks from three to seven years, including higher capital requirements during this period, could also delay a new bank's ability to contribute to the Company's earnings and impact the Company's willingness to expand through de novo bank formation. To the extent we undertake additional de novo bank, branch and business formations, our level of reported net income, return on average equity and return on average assets will be impacted by startup costs associated with such operations, and it is likely to continue to experience the effects of higher expenses relative to operating income from the new operations. These expenses may be higher than we expected or than our experience has shown, which could have a material adverse effect on our business, financial condition and results of operations.
29 | ||
We are subject to examinations and challenges by tax authorities, and changes in federal and state tax laws and changes in interpretation of existing laws can impact our financial results.
In the normal course of business, we, as well as our subsidiaries, are routinely subject to examinations from federal and state tax authorities regarding the amount of taxes due in connection with investments we have made and the businesses in which we have engaged. Recently, federal and state tax authorities have become increasingly aggressive in challenging tax positions taken by financial institutions. These tax positions may relate to among other things tax compliance, sales and use, franchise, gross receipts, payroll, property and income tax issues, including tax base, apportionment and tax credit planning. The challenges made by tax authorities may result in adjustments to the timing or amount of taxable income or deductions or the allocation of income among tax jurisdictions. If any such challenges are made and are not resolved in our favor, they could have a material adverse effect on our financial condition and results of operations. Given the current economic and political environment and ongoing budgetary pressures, the enactment of new federal or state tax legislation may occur. The enactment of such legislation, or changes in the interpretation of existing law, including provisions impacting tax rates, apportionment, consolidation or combination, income, expenses and credits may have a material adverse effect on our business, financial condition and results of operations.
Changes in accounting policies or accounting standards could materially adversely affect how we report our financial results and financial condition.
Our accounting policies are fundamental to understanding our financial results and financial condition. Some of these policies require use of estimates and assumptions that affect the value of our assets or liabilities and financial results. Some of our accounting policies are critical because they require management to make difficult, subjective and complex judgments about matters that are inherently uncertain and because it is likely that materially different amounts would be reported under different conditions or using different assumptions. If such estimates or assumptions underlying our financial statements are incorrect, we may experience material losses. From time to time, the Financial Accounting Standards Board ("FASB") and the SEC change the financial accounting and reporting standards that govern the preparation of our financial statements. These changes can be hard to predict and can materially impact how we record and report our financial condition and results of operations. In some cases, we could be required to apply a new or revised standard retroactively, resulting in the restatement of prior period financial statements.
We are a bank holding company, and our sources of funds, including to pay dividends, are limited.
We are a bank holding company and our operations are primarily conducted by and through our 15 operating banks, which are subject to significant federal and state regulation. Cash available to pay dividends to our shareholders, repurchase our shares or repay our indebtedness is derived primarily from dividends received from our banks and our ability to receive dividends from our subsidiaries is restricted. Various statutory provisions restrict the amount of dividends our banks can pay to us without regulatory approval. The banks may not pay cash dividends if that payment could reduce the amount of their capital below that necessary to meet the “adequately capitalized” level in accordance with regulatory capital requirements. It is also possible that, depending upon the financial condition of the banks and other factors, regulatory authorities could conclude that payment of dividends or other payments, including payments to us, is an unsafe or unsound practice and impose restrictions or prohibit such payments. Our inability to receive dividends from our banks could adversely affect our business, financial condition and results of operations.
Anti-takeover provisions could negatively impact our shareholders.
Certain provisions of our articles of incorporation, by-laws and Illinois law may have the effect of impeding the acquisition of control of Wintrust by means of a tender offer, a proxy fight, open-market purchases or otherwise in a transaction not approved by our board of directors. For example, our board of directors may issue additional authorized shares of our capital stock to deter future attempts to gain control of Wintrust, including the authority to determine the terms of any one or more series of preferred stock, such as voting rights, conversion rates and liquidation preferences. As a result of the ability to fix voting rights for a series of preferred stock, the board has the power, to the extent consistent with its fiduciary duty, to issue a series of preferred stock to persons friendly to management in order to attempt to block a merger or other transaction by which a third party seeks control, and thereby assist the incumbent board of directors and management to retain their respective positions. In addition, our articles of incorporation expressly elect to be governed by the provisions of Section 7.85 of the Illinois Business Corporation Act, which would make it more difficult for another party to acquire us without the approval of our board of directors.
The ability of a third party to acquire us is also limited under applicable banking regulations. The BHC Act requires any “bank holding company” (as defined in the BHC Act) to obtain the approval of the Federal Reserve prior to acquiring more than 5% of our outstanding common stock. Any person other than a bank holding company is required to obtain prior approval of the Federal Reserve to acquire 10% or more of our outstanding common stock under the Change in Bank Control Act of 1978. Any holder of 25% or more of our outstanding common stock, other than an individual, is subject to regulation as a "bank holding company" under the BHC Act. For purposes of calculating ownership thresholds under these banking regulations, bank regulators would likely at least take the position that the minimum number of shares, and could take the position that the maximum number of shares, of Wintrust common stock that a holder is entitled to receive pursuant to securities convertible into or settled in Wintrust
30 | ||
common stock, including pursuant to Wintrust's warrants to purchase Wintrust common stock held by such holder, must be taken into account in calculating a shareholder's aggregate holdings of Wintrust common stock.
These provisions may have the effect of discouraging a future takeover attempt that is not approved by our board of directors but which our individual shareholders may deem to be in their best interests or in which our shareholders may receive a substantial premium for their shares over then-current market prices. As a result, shareholders who might desire to participate in such a transaction may not have an opportunity to do so. Such provisions will also render the removal of our current board of directors or management more difficult.
Risks Related to Our Regulatory Environment
If we fail to meet our regulatory capital ratios, we may be forced to raise capital or sell assets.
As a banking institution, we are subject to regulations that require us to maintain certain capital ratios, such as the ratio of our Tier 1 capital to our risk-based assets. If our regulatory capital ratios decline, as a result of decreases in the value of our loan portfolio or otherwise, we will be required to improve such ratios by either raising additional capital or by disposing of assets. If we choose to dispose of assets, we cannot be certain that we will be able to do so at prices that we believe to be appropriate, and our future operating results could be negatively affected. If we choose to raise additional capital, we may accomplish this by selling additional shares of common stock, or securities convertible into or exchangeable for common stock, which could significantly dilute the ownership percentage of holders of our common stock and cause the market price of our common stock to decline. Additionally, events or circumstances in the capital markets generally may increase our capital costs and impair our ability to raise capital at any given time.
If our credit rating is lowered, our financing costs could increase.
We have been rated by Fitch Ratings as BBB.
Our creditworthiness is not fixed and should be expected to change over time as a result of company performance and industry conditions. We cannot give any assurances that our credit ratings will remain at current levels, and it is possible that our ratings could be lowered or withdrawn by Fitch Ratings. Any actual or threatened downgrade or withdrawal of our credit rating could affect our perception in the marketplace and ability to raise capital, and could increase our debt financing costs.
Changes in the United States’ monetary policy may restrict our ability to conduct our business in a profitable manner.
Our ability to profitably operate is dependent, in part, upon federal fiscal policies that cannot be predicted. We are particularly affected by the monetary policies of the Federal Reserve Board, which influence money supply in the United States. Any change in the United States’ monetary policy, or worsening federal budgetary pressures, could affect our access to capital. Additionally, any trend toward inflation, economic decline, destabilizing of financial markets, or other factors beyond our control may significantly affect consumer demand for our products and consumers’ ability to repay loans, reducing our results of operations.
Legislative and regulatory actions taken now or in the future regarding the financial services industry may significantly increase our costs or limit our ability to conduct our business in a profitable manner.
We are already subject to extensive federal and state regulation and supervision. The cost of compliance with such laws and regulations can be substantial and adversely affect our ability to operate profitably. While we are unable to predict the scope or impact of any potential legislation or regulatory action until it becomes final, it is possible that changes in applicable laws, regulations or interpretations hereof could significantly increase our regulatory compliance costs, impede the efficiency of our internal business processes, negatively impact the recoverability of certain of our recorded assets, require us to increase our regulatory capital, interfere with our executive compensation plans, or limit our ability to pursue business opportunities in an efficient manner including our plan for de novo growth and growth through acquisitions.
The Dodd-Frank Act significantly changed the bank regulatory structure and affects the lending, deposit, investment, trading and operating activities of financial institutions and their holding companies. The Dodd-Frank Act requires various federal agencies to adopt a broad range of new rules and regulations, including heightened capital requirements, and to prepare numerous studies and reports for Congress. The Dodd-Frank Act amended the laws governing federal preemption of state laws as applied to national banks, and eliminated federal preemption for subsidiaries of national banks. These changes may subject our national banks and their subsidiaries and divisions, including Wintrust Mortgage, to additional state regulation. With regard to mortgage lending, the Dodd-Frank Act imposed new requirements regarding the origination and servicing of residential mortgage loans. The law created a variety of new consumer protections, including limitations on the manner by which loan originators may be compensated and an obligation of the part of lenders to assess and verify a borrower's “ability to repay” a residential mortgage loan.
The Dodd-Frank Act also enhanced provisions relating to affiliate and insider lending restrictions and loans-to-one-borrower limitations. Federal and state banking laws impose limits on the amount of credit a bank can extend to any one person (or group of related persons). The Dodd-Frank Act expanded the scope of these restrictions for national banks under federal law to include credit exposure arising from derivative transactions, repurchase agreements, and securities lending and borrowing transactions.
31 | ||
Provisions of the Dodd-Frank Act also amended the FDIA to prohibit state-chartered banks (including certain of our banking subsidiaries) from engaging in derivative transactions unless the state lending limit laws take into account credit exposure to such transactions.
Additional discussion of the Dodd-Frank Act may be found in this Annual Report on Form 10-K under “Business - Supervision and Regulation” and “Management's Discussion and Analysis of Financial Condition and Results of Operations-Overview and Strategy-Financial Regulatory Reform” in Item 7.
Given the uncertainty associated with the manner in which many provisions of the Dodd-Frank Act will be implemented by the various regulatory agencies, the full extent of the impact that its requirements will have on our operations is unclear. However, its requirements may, individually or in the aggregate, have a material adverse effect upon the Company's business, results of operations, cash flows and financial position.
Financial reform legislation and increased regulatory rigor around mortgage-related issues may reduce our ability to market our products to consumers and may limit our ability to profitably operate our mortgage business.
The Dodd-Frank Act also established the CFPB within the Federal Reserve, which now regulates consumer financial products and services. On July 21, 2011, many of the consumer financial protection functions previously assigned to other federal agencies shifted to the CFPB. The CFPB now has broad rulemaking authority over a wide range of consumer protection laws that apply to banks and other providers of consumer financial services, including the authority to prohibit “unfair, deceptive or abusive acts or practices,” and to enact regulations to ensure that all consumers have access to markets for consumer financial products and services, and that such markets are fair, transparent and competitive. The Dodd-Frank Act also required the CFPB to adopt a number of new specific regulatory requirements. These new rules may increase the costs of engaging in these activities for all market participants, including our subsidiaries. Additionally, the CFPB has broad supervisory, examination and enforcement authority. Although we and our subsidiary banks are not subject to CFPB examination, the actions taken by the CFPB may influence enforcement actions and positions taken by other federal and state regulators, including those with jurisdiction over us and our subsidiaries. In addition, in the wake of the mortgage crisis of the last few years, federal and state banking regulators are closely examining the mortgage and mortgage servicing activities of depository financial institutions. Should the regulatory agencies have serious concerns with respect to our operations in this regard, the effect of such concerns could have a material adverse effect on our profits. Finally, the Dodd-Frank Act authorizes state attorneys general and other state officials to enforce certain consumer protection rules issued by the CFPB.
Federal, state and local consumer lending laws may restrict our ability to originate certain mortgage loans or increase our risk of liability with respect to such loans and could increase our cost of doing business.
Federal, state and local laws have been adopted that are intended to eliminate certain lending practices considered "predatory." These laws prohibit practices such as steering borrowers away from more affordable products, selling unnecessary insurance to borrowers, repeatedly refinancing loans and making loans without a reasonable expectation that the borrowers will be able to repay the loans irrespective of the value of the underlying property. Over the course of 2013 and 2014, the CFPB issued several rules on mortgage lending, notably a rule requiring all home mortgage lenders to determine a borrower's ability to repay the loan. Loans with certain terms and conditions and that otherwise meet the definition of a "qualified mortgage" may be protected from liability to a borrower for failing to make the necessary determinations. In either case, we may find it necessary to tighten our mortgage loan underwriting standards in response to the CFPB rules, which may constrain our ability to make loans consistent with our business strategies. It is our policy not to make predatory loans and to determine borrowers' ability to repay, but the law and related rules create the potential for increased liability with respect to our lending and loan investment activities. They increase our cost of doing business and, ultimately, may prevent us from making certain loans and cause us to reduce the average percentage rate or the points and fees on loans that we do make. In addition, regulation related to redlining, fair lending, Community Re-Investment Act compliance and Bank Secrecy Act compliance create significant burdens which necessitate increased costs. Any failure to comply with any of these regulations could have a significant impact on our ability to operate, our ability to acquire or open new banks and/or result in meaningful fines.
Regulatory initiatives regarding bank capital requirements may require heightened capital.
Both the Dodd-Frank Act, which reformed the regulation of financial institutions in a comprehensive manner, and the Basel III regulatory capital reforms, which increase both the amount and quality of capital that financial institutions must hold will impact our capital requirements. Specifically, in July 2013, the U.S. federal banking authorities approved the implementation of the Basel III Rule. The Basel III Rule is applicable to all U.S. banks that are subject to minimum capital requirements as well as to bank and saving and loan holding companies, other than “small bank holding companies” (generally bank holding companies with consolidated assets of less than $500 million). The Basel III Rule not only increases most of the required minimum regulatory capital ratios, it introduces a new Common Equity Tier 1 capital ratio and the concept of a capital conservation buffer. The Basel III Rule also expands the current definition of capital by establishing additional criteria that capital instruments must meet to be considered Additional Tier 1 capital (i.e., Tier 1 capital in addition to Common Equity) and Tier 2 capital. A number of instruments that now generally qualify as Tier 1 capital will not qualify or their qualifications will change when the Basel III Rule is fully
32 | ||
implemented. The Basel III Rule has maintained the general structure of the current prompt corrective action thresholds while incorporating the increased requirements, including the Common Equity Tier 1 capital ratio. In order to be a “well-capitalized” depository institution under the new regime, an institution must maintain a Common Equity Tier 1 capital ratio of 6.5% or more, a Tier 1 capital ratio of 8% or more, a total capital ratio of 10% or more, and a leverage ratio of 5% or more. Institutions must also maintain a capital conservation buffer consisting of Common Equity Tier 1 capital. Financial institutions became subject to the Basel III Rule on January 1, 2015 with a phase-in period through 2019 for many of the changes.
The implementation of these provisions, as well as any other aspects of current or proposed regulatory or legislative changes to laws applicable to the financial industry, will impact the profitability of our business activities and may change certain of our business practices, including the ability to offer new products, obtain financing, attract deposits, make loans, and achieve satisfactory interest spreads, and could expose us to additional costs, including increased compliance costs. These changes also may require us to invest significant management attention and resources to make any necessary changes to operations in order to comply, and could therefore also materially and adversely affect our business, financial condition and results of operations. Our management is actively reviewing the provisions of the Dodd-Frank Act and the Basel III Rule, many of which are to be phased-in over the next several months and years, and assessing the probable impact on our operations. However, the ultimate effect of these changes on the financial services industry in general, and us in particular, is uncertain at this time.
In October 2012, the Federal Reserve published a final rule implementing the stress test requirements under the Dodd-Frank Act, which are designed to evaluate the sufficiency of a banking organization's capital to support its operations during periods of stress. As a bank holding company with between $10 billion and $50 billion in total consolidated assets, we were required to conduct annual stress tests based on scenarios provided by the Federal Reserve, beginning in the fall of 2013, and will be required to publicly disclose the results of our stress tests going forward. This stress test requirement has increased our compliance costs. We anticipate that our pro forma capital ratios, as reflected in the stress test calculations under the required stress test scenarios, will be an important factor considered by the Federal Reserve Board in evaluating whether proposed payments of dividends or stock repurchases are consistent with its prudential expectations. Requirements to maintain higher levels of capital or liquidity to address potential adverse stress scenarios could adversely impact our net income and our return on equity.
Our FDIC insurance premiums may increase, which could negatively impact our results of operations.
Recent insured institution failures, as well as deterioration in banking and economic conditions, have significantly increased FDIC loss provisions, resulting in a decline of its deposit insurance fund to historical lows. In addition, the Dodd-Frank Act made permanent a temporary increase in the limit on FDIC coverage to $250,000 per depositor. These developments have caused our FDIC insurance premiums to increase, and may cause additional increases. Certain provisions of the Dodd-Frank Act may further affect our FDIC insurance premiums. The Dodd-Frank Act includes provisions that change the assessment base for federal deposit insurance from the amount of insured deposits to average total consolidated assets less average tangible capital, eliminate the maximum size of the DIF, eliminate the requirement that the FDIC pay dividends to depository institutions when the reserve ratio exceeds certain thresholds, and increase the minimum reserve ratio of the DIF from 1.15% to 1.35%. Beginning in late 2010, the FDIC issued regulations implementing some of these changes. There is a risk that the banks' deposit insurance premiums will continue to increase if failures of insured depository institutions continue to deplete the DIF. Any such increase may negatively impact our financial condition and results of operations.
Non-compliance with the USA PATRIOT Act, Bank Secrecy Act or other laws and regulations could result in fines or sanctions.
The USA PATRIOT Act and the Bank Secrecy Act require financial institutions to develop programs to prevent financial institutions from being used for money laundering or the funding of terrorist activities. If such activities are detected, financial institutions are obligated to file suspicious activity reports with FinCEN. These rules require certain financial institutions to establish procedures for identifying and verifying the identity of customers seeking to open new accounts. Failure to comply with these regulations could result in fines or sanctions. Several banking institutions have received large fines for non-compliance with these laws and regulations. Although we have developed policies and procedures designed to assist in compliance with these laws and regulations, no assurance can be given that these policies and procedures will be effective in preventing violations of these laws and regulations.
33 | ||
Risks Related to Our Niche Businesses
Our premium finance business may involve a higher risk of delinquency or collection than our other lending operations, and could expose us to losses.
We provide financing for the payment of commercial insurance premiums and life insurance premiums on a national basis through our wholly owned subsidiary, FIFC, and financing for the payment of commercial insurance premiums in Canada through our wholly owned subsidiary, FIFC Canada. Commercial insurance premium finance loans involve a different, and possibly higher, risk of delinquency or collection than life insurance premium finance loans and the loan portfolios of our bank subsidiaries because these loans are issued primarily through relationships with a large number of unaffiliated insurance agents and because the borrowers are located nationwide. As a result, risk management and general supervisory oversight may be difficult. As of December 31, 2015, we had $2.4 billion of commercial insurance premium finance loans outstanding, of which $2.1 billion were originated in the U.S. by FIFC and $278.3 million were originated in Canada by FIFC Canada. Together, these loans represented 14% of our total loan portfolio as of such date.
FIFC and FIFC Canada may also be more susceptible to third party fraud with respect to commercial insurance premium finance loans because these loans are originated and many times funded through relationships with unaffiliated insurance agents and brokers. In the second quarter of 2010, fraud perpetrated against a number of premium finance companies in the industry, including the property and casualty division of FIFC, increased both the Company's net charge-offs and provision for credit losses by $15.7 million. Acts of fraud are difficult to detect and deter, and we cannot assure investors that our risk management procedures and controls will prevent losses from fraudulent activity.
FIFC may be exposed to the risk of loss in our life insurance premium finance business because of fraud. While FIFC maintains a policy prohibiting the knowing financing of stranger-originated life insurance and has established procedures to identify and prevent the company from financing such policies, FIFC cannot be certain that it will never provide loans with respect to such a policy. In the event such policies were financed, a carrier could potentially put at risk the cash surrender value of a policy, which serves as FIFC's primary collateral, by challenging the validity of the insurance contract for lack of an insurable interest.
See the below risk factor “Widespread financial difficulties or credit downgrades among commercial and life insurance providers could lessen the value of the collateral securing our premium finance loans and impair the financial condition and liquidity of FIFC and FIFC Canada” for a discussion of further risks associated with our insurance premium finance activities.
While FIFC is licensed as required and carefully monitors compliance with regulation of each of its businesses, there can be no assurance that FIFC will not be negatively impacted by material changes in the regulatory environment. FIFC Canada is not required to be licensed in most provinces of Canada, but there can be no assurance that future regulations which impact the business of FIFC Canada will not be enacted.
Additionally, to the extent that affiliates of insurance carriers, banks, and other lending institutions add greater service and flexibility to their financing practices in the future, our competitive position and results of operations could be adversely affected. FIFC's life insurance premium finance business could be materially negatively impacted by changes in the federal or state estate tax provisions. There can be no assurance that FIFC will be able to continue to compete successfully in its markets.
Widespread financial difficulties or credit downgrades among commercial and life insurance providers could lessen the value of the collateral securing our premium finance loans and impair the financial condition and liquidity of FIFC and FIFC Canada.
FIFC and FIFC Canada's premium finance loans are primarily secured by the insurance policies financed by the loans. These insurance policies are written by a large number of insurance companies geographically dispersed throughout the country. Our premium finance receivables balances finance insurance policies which are spread among a large number of insurers; however, one of the insurers represents approximately 14% of such balances and two additional insurers each of which represents approximately 5% of such balances. FIFC and FIFC Canada consistently monitor carrier ratings and financial performance of our carriers. While FIFC and FIFC Canada can mitigate its risks as a result of this monitoring to the extent that commercial or life insurance providers experience widespread difficulties or credit downgrades, the value of our collateral will be reduced. FIFC and FIFC Canada are also subject to the possibility of insolvency of insurance carriers in the commercial and life insurance businesses that are in possession of our collateral. If one or more large nationwide insurers were to fail, the value of our portfolio could be significantly negatively impacted. A significant downgrade in the value of the collateral supporting our premium finance business could impair our ability to create liquidity for this business, which, in turn could negatively impact our ability to expand.
Proposed regulatory changes could significantly reduce loan volume and impair the financial condition of FIFC.
FinCEN has proposed additional AML rules that would require banks to gather and verify additional customer information, including beneficial ownership of borrowers. These requirements, if imposed on FIFC, would likely impose delays in processing premium finance loan applications and may result in transition of loan transaction volume to premium finance companies that are not subject to these AML rules, i.e., premium finance companies that are not affiliated with banks. A material reduction in loan
34 | ||
transaction volume would likely impair the financial condition of FIFC. There can be no assurance that the proposed additional AML rules will be issued by FinCEN in final form, when they might become effective, or whether they will apply to FIFC.
Our wealth management business in general, and WHI's brokerage operation, in particular, exposes us to certain risks associated with the securities industry.
Our wealth management business in general, and WHI's brokerage operations in particular, present special risks not borne by community banks that focus exclusively on community banking. For example, the brokerage industry is subject to fluctuations in the stock market that may have a significant adverse impact on transaction fees, customer activity and investment portfolio gains and losses. Likewise, additional or modified regulations may adversely affect our wealth management operations. Each of our wealth management operations is dependent on a small number of professionals whose departure could result in the loss of a significant number of customer accounts. A significant decline in fees and commissions or trading losses suffered in the investment portfolio could adversely affect our results of operations. In addition, we are subject to claim arbitration risk arising from customers who claim their investments were not suitable or that their portfolios were inappropriately traded. These risks increase when the market, as a whole, declines. The risks associated with retail brokerage may not be supported by the income generated by our wealth management operations.
35 | ||
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
The Company’s executive offices are located at 9700 W. Higgins Road, Rosemont, Illinois. The Company also leases office locations and retail space at 231 S. LaSalle Street in downtown Chicago. The Company’s banks operate through 152 banking facilities, the majority of which are owned. The Company owns 224 automatic teller machines, the majority of which are housed at banking locations. The banking facilities are located in communities throughout the Chicago metropolitan area and southern Wisconsin. Excess space in certain properties is leased to third parties.
The Company’s wealth management subsidiaries have one location in downtown Chicago, one in Appleton, Wisconsin, and one in Safety Harbor, Florida, all of which are leased, as well as office locations at several of our banks. Wintrust Mortgage is headquartered in our corporate headquarters in Rosemont, Illinois and has 55 locations in 12 states, all of which are leased, as well as office locations at several of our banks. FIFC has one location in Northbrook, Illinois which is owned and locations in Jersey City, New Jersey and Long Island, New York which are leased. FIFC Canada has three locations in Canada that are leased, located in Toronto, Ontario, Mississauga, Ontario and Vancouver, British Columbia. Tricom has one location in Menomonee Falls, Wisconsin which is owned. In addition, the Company owns other real estate acquired for further expansion that, when considered in the aggregate, is not material to the Company’s financial position.
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries, from time to time, are subject to pending and threatened legal action and proceedings arising in the ordinary course of business.
In accordance with applicable accounting principles, the Company establishes an accrued liability for litigation and threatened litigation actions and proceedings when those actions present loss contingencies which are both probable and estimable. In actions for which a loss is reasonably possible in future periods, the Company determines whether it can estimate a loss or range of possible loss. To determine whether a possible loss is estimable, the Company reviews and evaluates its material litigation on an ongoing basis, in conjunction with any outside counsel handling the matter, in light of potentially relevant factual and legal developments. This review may include information learned through the discovery process, rulings on substantive or dispositive motions, and settlement discussions.
On March 15, 2012, a former mortgage loan originator employed by Wintrust Mortgage Company, named Wintrust, Barrington Bank and its subsidiary, Wintrust Mortgage Company, as defendants in a Fair Labor Standards Act class action lawsuit filed in the U.S. District Court for the Northern District of Illinois. The suit asserts that Wintrust Mortgage Company violated the federal Fair Labor Standards Act and challenges the manner in which Wintrust Mortgage Company classified its loan originators and compensated them for their work. The suit also seeks to assert these claims as a class. On September 30, 2013, the Court entered an order conditionally certifying an “opt-in” class in this case. Notice to the potential class members was sent on or about October 22, 2013, primarily informing the putative class of the right to opt-into the class and setting a deadline for same. Approximately 15% of the notice recipients joined the class. On September 26, 2014, the Court stayed actions by opt-in plaintiffs with arbitration agreements, which reduced the class size by more than 40%. The Court also denied the opt-in plaintiffs’ motion for equitable tolling, which the Company anticipates will reduce the class size by an additional 15%. On April 30, 2015, the parties settled the dispute for an immaterial amount and the Court approved the settlement on June 17, 2015.
On January 15, 2015, Lehman Brothers Holdings, Inc. ("Lehman Holdings") sent a demand letter asserting that Wintrust Mortgage must indemnify it for losses arising from loans sold by Wintrust Mortgage to Lehman Brothers Bank, FSB under a Loan Purchase Agreement between Wintrust Mortgage, as successor to SGB Corporation, and Lehman Brothers Bank. The demand was the precursor for triggering the alternative dispute resolution process mandated by the U.S. Bankruptcy Court for the Southern District of New York. Lehman Holdings triggered the mandatory alternative dispute resolution process on October 16, 2015. On February 3, 2016, following a ruling by the federal Court of Appeals for the Tenth Circuit that was adverse to Lehman Holdings on the statute of limitations that is applicable to similar loan purchase claims, Lehman Holdings filed a complaint against Wintrust Mortgage and 150 other entities from which it had purchased loans in the U.S. Bankruptcy Court for the Southern District of New York. Wintrust Mortgage has not been served with the new complaint. The mandatory mediation is scheduled for March 16, 2016.
The Company has reserved an amount for the Lehman Holdings demand that is immaterial to its results of operations or financial condition. Such litigation and threatened litigation actions necessarily involve substantial uncertainty and it is not possible at this time to predict the ultimate resolution or to determine whether, or to what extent, any loss with respect to these legal proceedings may exceed the amounts reserved by the Company.
36 | ||
On August 28, 2015, Wintrust Mortgage received a demand from RFC Liquidating Trust asserting that that Wintrust Mortgage is liable to it for losses arising from loans sold by Wintrust Mortgage or its predecessors to Residential Funding Company LLC and/or related entities. No litigation has been initiated and the range of liability is not reasonably estimable at this time and it is not foreseeable when sufficient information will become available to provide a basis for recording a reserve, should a reserve ultimately be required.
On August 13, 2015, BMO Harris Financial Advisors (“BHFA”) filed an arbitration demand with the FINRA seeking damages and a permanent injunction and a complaint with the Circuit Court for Cook County, Illinois seeking a temporary restraining order against one of its former financial advisors and a current financial advisor with WHI. A narrow and limited temporary injunction was entered and the matter was referred to FINRA for arbitration. In November 2015, BHFA added WHI as a co-defendant in the arbitration action, alleging that WHI tortiously interfered with BHFA’s contract with its former financial advisor. As discovery is still in the preliminary stages, the range of liability is not reasonably estimable at this time and it is not foreseeable when sufficient information will become available to provide a basis for recording a reserve, should a reserve ultimately be required. A hearing on the merits has been set for September 12 - 15, 2016.
Based on information currently available and upon consultation with counsel, management believes that the eventual outcome of any pending or threatened legal actions and proceedings will not have a material adverse effect on the operations or financial condition of the Company. However, it is possible that the ultimate resolution of these matters, if unfavorable, may be material to the results of operations or financial condition for a particular period.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
37 | ||
PART II
ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
The Company’s common stock is traded on The NASDAQ Global Select Stock Market under the symbol WTFC. The following table sets forth the high and low sales prices reported on NASDAQ for the common stock by fiscal quarter during 2015 and 2014.
2015 | 2014 | |||||||||||||||
High | Low | High | Low | |||||||||||||
Fourth Quarter | $ | 55.00 | $ | 47.32 | $ | 47.78 | $ | 41.99 | ||||||||
Third Quarter | 55.79 | 48.83 | 48.53 | 44.34 | ||||||||||||
Second Quarter | 54.00 | 46.77 | 49.46 | 42.53 | ||||||||||||
First Quarter | 48.81 | 41.04 | 49.99 | 42.14 | ||||||||||||
Performance Graph
The following performance graph compares the five-year percentage change in the Company’s cumulative shareholder return on common stock compared with the cumulative total return on composites of (1) all NASDAQ Global Select Market stocks for United States companies (broad market index) and (2) all NASDAQ Global Select Market bank stocks (peer group index). Cumulative total return is computed by dividing the sum of the cumulative amount of dividends for the measurement period and the difference between the Company’s share price at the end and the beginning of the measurement period by the share price at the beginning of the measurement period. The NASDAQ Global Select Market for United States companies’ index comprises all domestic common shares traded on the NASDAQ Global Select Market and the NASDAQ Small-Cap Market. The NASDAQ Global Select Market bank stocks index comprises all banks traded on the NASDAQ Global Select Market and the NASDAQ Small-Cap Market.
This graph and other information furnished in the section titled “Performance Graph” under this Part II, Item 5 of this Annual Report on Form 10-K shall not be deemed to be “soliciting” materials or to be “filed” with the SEC or subject to Regulation 14A or 14C, or to the liabilities of Section 18 of the Exchange Act, as amended.
2010 | 2011 | 2012 | 2013 | 2014 | 2015 | |||||||||||||
Wintrust Financial Corporation | 100.00 | 84.92 | 111.11 | 139.63 | 141.57 | 146.90 | ||||||||||||
NASDAQ — Total US | 100.00 | 100.31 | 116.79 | 155.90 | 175.33 | 176.17 | ||||||||||||
NASDAQ — Bank Index | 100.00 | 74.57 | 100.48 | 137.27 | 153.50 | 156.89 | ||||||||||||
38 | ||
Approximate Number of Equity Security Holders
As of February 24, 2016 there were approximately 1,702 shareholders of record of the Company’s common stock.
Dividends on Common Stock
The Company’s Board of Directors approved the first semi-annual dividend on the Company’s common stock in January 2000 and continued to approve a semi-annual dividend until quarterly dividends were approved in 2014 and 2015. The payment of dividends is subject to statutory restrictions and restrictions arising under the terms of the Company's 5.00% Non-Cumulative Perpetual Convertible Preferred Stock, Series C (the "Series C Preferred Stock"), the terms of the Company's Fixed-to-Floating Non-Cumulative Perpetual Preferred Stock, Series D (the "Series D Preferred Stock"), the terms of the Company’s Trust Preferred Securities offerings and under certain financial covenants in the Company’s revolving and term facilities. Under the terms of these separate facilities entered into on December 15, 2014 and subsequently amended in December 2015, the Company is prohibited from paying dividends on any equity interests, including its common stock and preferred stock, if such payments would cause the Company to be in default under its facilities or exceed a certain threshold.
The following is a summary of the cash dividends paid in 2015 and 2014:
Record Date | Payable Date | Dividend per Share | ||
November 12, 2015 | November 27, 2015 | $0.11 | ||
August 6, 2015 | August 20, 2015 | $0.11 | ||
May 7, 2015 | May 21, 2015 | $0.11 | ||
February 5, 2015 | February 19, 2015 | $0.11 | ||
November 6, 2014 | November 20, 2014 | $0.10 | ||
August 7, 2014 | August 21, 2014 | $0.10 | ||
May 8, 2014 | May 22, 2014 | $0.10 | ||
February 6, 2014 | February 20, 2014 | $0.10 | ||
On January 28, 2016, Wintrust Financial Corporation announced that the Company’s Board of Directors approved a quarterly cash dividend of $0.12 per share of outstanding common stock. The dividend was paid on February 25, 2016 to shareholders of record as of February 11, 2016.
Because the Company’s consolidated net income consists largely of net income of the banks and certain wealth management subsidiaries, the Company’s ability to pay dividends generally depends upon its receipt of dividends from these entities. The banks’ ability to pay dividends is regulated by banking statutes. See “Supervision and Regulation - Payment of Dividends and Share Repurchases” in Item 1 of this Annual Report on Form 10-K. During 2015, 2014 and 2013, the banks and certain wealth management subsidiaries paid $22.2 million, $77.0 million and $112.8 million, respectively, in dividends to the Company.
Reference is also made to Note 18 to the Consolidated Financial Statements and “Liquidity and Capital Resources” contained in Item 8 of this Annual Report on 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.
Issuer Purchases of Equity Securities
No purchases of the Company’s common shares were made by or on behalf of the Company or any “affiliated purchaser” as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934, as amended, during the year ended December 31, 2015. There is currently no authorization to repurchase shares of outstanding common stock.
39 | ||
ITEM 6. | SELECTED FINANCIAL DATA |
Years Ended December 31, | ||||||||||||||||||||
(Dollars in thousands, except per share data) | 2015 | 2014 | 2013 | 2012 | 2011 | |||||||||||||||
Selected Financial Condition Data (at end of year): | ||||||||||||||||||||
Total assets | $ | 22,917,166 | $ | 20,010,727 | $ | 18,097,783 | $ | 17,519,613 | $ | 15,893,808 | ||||||||||
Total loans, excluding loans held-for-sale and covered loans | 17,118,117 | 14,409,398 | 12,896,602 | 11,828,943 | 10,521,377 | |||||||||||||||
Total deposits | 18,639,634 | 16,281,844 | 14,668,789 | 14,428,544 | 12,307,267 | |||||||||||||||
Junior subordinated debentures | 268,566 | 249,493 | 249,493 | 249,493 | 249,493 | |||||||||||||||
Total shareholders’ equity | 2,352,274 | 2,069,822 | 1,900,589 | 1,804,705 | 1,543,533 | |||||||||||||||
Selected Statements of Income Data: | ||||||||||||||||||||
Net interest income | $ | 641,529 | $ | 598,575 | $ | 550,627 | $ | 519,516 | $ | 461,377 | ||||||||||
Net revenue (1) | 913,126 | 813,815 | 773,024 | 745,608 | 651,075 | |||||||||||||||
Net income | 156,749 | 151,398 | 137,210 | 111,196 | 77,575 | |||||||||||||||
Net income per common share – Basic | 3.05 | 3.12 | 3.33 | 2.81 | 2.08 | |||||||||||||||
Net income per common share – Diluted | 2.93 | 2.98 | 2.75 | 2.31 | 1.67 | |||||||||||||||
Selected Financial Ratios and Other Data: | ||||||||||||||||||||
Performance Ratios: | ||||||||||||||||||||
Net interest margin (2) | 3.36 | % | 3.53 | % | 3.50 | % | 3.49 | % | 3.42 | % | ||||||||||
Non-interest income to average assets | 1.29 | 1.15 | 1.27 | 1.37 | 1.27 | |||||||||||||||
Non-interest expense to average assets | 2.99 | 2.92 | 2.88 | 2.96 | 2.82 | |||||||||||||||
Net overhead ratio (2) (3) | 1.70 | 1.77 | 1.60 | 1.59 | 1.55 | |||||||||||||||
Efficiency ratio (2) (4) | 68.49 | 66.89 | 64.57 | 65.85 | 64.58 | |||||||||||||||
Return on average assets | 0.75 | 0.81 | 0.79 | 0.67 | 0.52 | |||||||||||||||
Return on average common equity (2) | 7.15 | 7.77 | 7.56 | 6.60 | 5.12 | |||||||||||||||
Return on average tangible common equity (2) | 9.44 | 10.14 | 9.93 | 8.70 | 6.70 | |||||||||||||||
Average total assets | $ | 21,009,773 | $ | 18,699,458 | $ | 17,468,249 | $ | 16,529,617 | $ | 14,920,160 | ||||||||||
Average total shareholders’ equity | 2,232,989 | 1,993,959 | 1,856,706 | 1,696,276 | 1,484,720 | |||||||||||||||
Average loans to average deposits ratio (excluding covered loans) | 92.0 | % | 89.9 | % | 88.9 | % | 87.8 | % | 88.3 | % | ||||||||||
Average loans to average deposits ratio (including covered loans) | 93.1 | 91.7 | 92.1 | 92.6 | 92.8 | |||||||||||||||
Common Share Data at end of year: | ||||||||||||||||||||
Market price per common share | $ | 48.52 | $ | 46.76 | $ | 46.12 | $ | 36.70 | $ | 28.05 | ||||||||||
Book value per common share (2) | $ | 43.42 | $ | 41.52 | $ | 38.47 | $ | 37.78 | $ | 34.23 | ||||||||||
Tangible common book value per share (2) | $ | 33.17 | $ | 32.45 | $ | 29.93 | $ | 29.28 | $ | 26.72 | ||||||||||
Common shares outstanding | 48,383,279 | 46,805,055 | 46,116,583 | 36,858,355 | 35,978,349 | |||||||||||||||
Other Data at end of year: (7) | ||||||||||||||||||||
Leverage Ratio | 9.1 | % | 10.2 | % | 10.5 | % | 10.0 | % | 9.4 | % | ||||||||||
Tier 1 capital to risk-weighted assets | 10.0 | 11.6 | 12.2 | 12.1 | 11.8 | |||||||||||||||
Common equity Tier 1 capital to risk-weighted assets | 8.4 | N/A | N/A | N/A | N/A | |||||||||||||||
Total capital to risk-weighted assets | 12.2 | 13.0 | 12.9 | 13.1 | 13.0 | |||||||||||||||
Tangible Common Equity ratio (TCE) (2) (6) | 7.2 | 7.8 | 7.8 | 7.4 | 7.5 | |||||||||||||||
Tangible Common Equity ratio, assuming full conversion of preferred stock (2) (6) | 7.7 | 8.4 | 8.5 | 8.4 | 7.8 | |||||||||||||||
Allowance for credit losses (5) | $ | 106,349 | $ | 92,480 | $ | 97,641 | $ | 121,988 | $ | 123,612 | ||||||||||
Non-performing loans | 84,057 | 78,677 | 103,334 | 118,083 | 120,084 | |||||||||||||||
Allowance for credit losses(5) to total loans, excluding covered loans | 0.62 | % | 0.64 | % | 0.76 | % | 1.03 | % | 1.17 | % | ||||||||||
Non-performing loans to total loans, excluding covered loans | 0.49 | 0.55 | 0.80 | 1.00 | 1.14 | |||||||||||||||
Number of: | ||||||||||||||||||||
Bank subsidiaries | 15 | 15 | 15 | 15 | 15 | |||||||||||||||
Banking offices | 152 | 140 | 124 | 111 | 99 | |||||||||||||||
(1) | Net revenue includes net interest income and non-interest income |
(2) | See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Measures/Ratios,” for a reconciliation of this performance measure/ratio to GAAP. |
(3) | The net overhead ratio is calculated by netting total non-interest expense and total non-interest income, annualizing this amount, and dividing by that period’s total average assets. A lower ratio indicates a higher degree of efficiency. |
(4) | The efficiency ratio is calculated by dividing total non-interest expense by tax-equivalent net revenue (less securities gains or losses). A lower ratio indicates more efficient revenue generation. |
(5) | The allowance for credit losses includes both the allowance for loan losses and the allowance for unfunded lending-related commitments, but excludes the allowance for covered loan losses. |
(6) | Total shareholders’ equity minus preferred stock and total intangible assets divided by total assets minus total intangible assets. |
(7) | Asset quality ratios exclude covered loans. |
40 | ||
ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Forward Looking Statements
This document contains forward-looking statements within the meaning of federal securities laws. Forward-looking information can be identified through the use of words such as “intend,” “plan,” “project,” “expect,” “anticipate,” “believe,” “estimate,” “contemplate,” “possible,” “will,” “may,” “should,” “would” and “could.” Forward-looking statements and information are not historical facts, are premised on many factors and assumptions, and represent only management’s expectations, estimates and projections regarding future events. Similarly, these statements are not guarantees of future performance and involve certain risks and uncertainties that are difficult to predict, which may include, but are not limited to, those listed below and the Risk Factors discussed under Item 1A on page 22 of this Annual Report on Form 10-K, as well as other risks and uncertainties set forth from time to time in the Company’s other filings with the SEC. The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and is including this statement for purposes of invoking these safe harbor provisions. Such forward-looking statements may be deemed to include, among other things, statements relating to the Company’s future financial performance, the performance of its loan portfolio, the expected amount of future credit reserves and charge-offs, delinquency trends, growth plans, regulatory developments, securities that the Company may offer from time to time, and management’s long-term performance goals, as well as statements relating to the anticipated effects on financial condition and results of operations from expected developments or events, the Company’s business and growth strategies, including future acquisitions of banks, specialty finance or wealth management businesses, internal growth and plans to form additional de novo banks or branch offices. Actual results could differ materially from those addressed in the forward-looking statements as a result of numerous factors, including the following:
• | negative economic conditions that adversely affect the economy, housing prices, the job market and other factors that may affect the Company’s liquidity and the performance of its loan portfolios, particularly in the markets in which it operates; |
• | the extent of defaults and losses on the Company’s loan portfolio, which may require further increases in its allowance for credit losses; |
• | estimates of fair value of certain of the Company’s assets and liabilities, which could change in value significantly from period to period; |
• | the financial success and economic viability of the borrowers of our commercial loans; |
• | commercial real estate market conditions in the Chicago metropolitan area and southern Wisconsin; |
• | the extent of commercial and consumer delinquencies and declines in real estate values, which may require further increases in the Company’s allowance for loan and lease losses; |
• | inaccurate assumptions in our analytical and forecasting models used to manage our loan portfolio; |
• | changes in the level and volatility of interest rates, the capital markets and other market indices that may affect, among other things, the Company’s liquidity and the value of its assets and liabilities; |
• | competitive pressures in the financial services business which may affect the pricing of the Company’s loan and deposit products as well as its services (including wealth management services), which may result in loss of market share and reduced income from deposits, loans, advisory fees and income from other products; |
• | failure to identify and complete favorable acquisitions in the future or unexpected difficulties or developments related to the integration of the Company’s recent or future acquisitions; |
• | unexpected difficulties and losses related to FDIC-assisted acquisitions, including those resulting from our loss-sharing arrangements with the FDIC; |
• | any negative perception of the Company’s reputation or financial strength; |
• | ability of the Company to raise additional capital on acceptable terms when needed; |
• | disruption in capital markets, which may lower fair values for the Company’s investment portfolio; |
• | ability of the Company to use technology to provide products and services that will satisfy customer demands and create efficiencies in operations and to manage risks associated therewith; |
• | adverse effects on our information technology systems resulting from failures, human error or tampering; |
• | adverse effects of failures by our vendors to provide agreed upon services in the manner and at the cost agreed, particularly our information technology vendors; |
• | increased costs as a result of protecting our customers from the impact of stolen debit card information; |
• | accuracy and completeness of information the Company receives about customers and counterparties to make credit decisions; |
• | ability of the Company to attract and retain senior management experienced in the banking and financial services industries; |
• | environmental liability risk associated with lending activities; |
• | the impact of any claims or legal actions to which the Company is subject, including any effect on our reputation; |
• | losses incurred in connection with repurchases and indemnification payments related to mortgages and increases in reserves associated therewith; |
41 | ||
• | the loss of customers as a result of technological changes allowing consumers to complete their financial transactions without the use of a bank; |
• | the soundness of other financial institutions; |
• | the expenses and delayed returns inherent in opening new branches and de novo banks; |
• | examinations and challenges by tax authorities; |
• | changes in accounting standards, rules and interpretations and the impact on the Company’s financial statements; |
• | the ability of the Company to receive dividends from its subsidiaries; |
• | a decrease in the Company’s regulatory capital ratios, including as a result of further declines in the value of its loan portfolios, or otherwise; |
• | legislative or regulatory changes, particularly changes in regulation of financial services companies and/or the products and services offered by financial services companies, including those resulting from the Dodd-Frank Act; |
• | a lowering of our credit rating; |
• | changes in U.S. monetary policy; |
• | restrictions upon our ability to market our products to consumers and limitations on our ability to profitably operate our mortgage business resulting from the Dodd-Frank Act; |
• | increased costs of compliance, heightened regulatory capital requirements and other risks associated with changes in regulation and the current regulatory environment, including the Dodd-Frank Act; |
• | the impact of heightened capital requirements; |
• | increases in the Company’s FDIC insurance premiums, or the collection of special assessments by the FDIC; |
• | delinquencies or fraud with respect to the Company’s premium finance business; |
• | credit downgrades among commercial and life insurance providers that could negatively affect the value of collateral securing the Company’s premium finance loans; |
• | the Company’s ability to comply with covenants under its credit facility; and |
• | fluctuations in the stock market, which may have an adverse impact on the Company’s wealth management business and brokerage operation. |
Therefore, there can be no assurances that future actual results will correspond to these forward-looking statements. The reader is cautioned not to place undue reliance on any forward-looking statement made by the Company. 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 update any forward-looking statement to reflect the impact of circumstances after the date of this Annual Report on Form 10-K. Persons are advised, however, to consult further disclosures management makes on related subjects in its reports filed with the Securities and Exchange Commission and in its press releases.
42 | ||
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, 2015. 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 Annual Report on Form 10-K.
OPERATING SUMMARY
Wintrust’s key measures of profitability and balance sheet changes are shown in the following table:
Years Ended December 31, | % or Basis Point (bp)change | % or Basis Point (bp)change | ||||||||||||||
(Dollars in thousands, except per share data) | 2015 | 2014 | 2013 | 2014 to 2015 | 2013 to 2014 | |||||||||||
Net income | $ | 156,749 | $ | 151,398 | $ | 137,210 | 4% | 10% | ||||||||
Net income per common share — Diluted | 2.93 | 2.98 | 2.75 | (2) | 8 | |||||||||||
Net revenue (1) | 913,126 | 813,815 | 773,024 | 12 | 5 | |||||||||||
Net interest income | 641,529 | 598,575 | 550,627 | 7 | 9 | |||||||||||
Net interest margin (2) | 3.36 | % | 3.53 | % | 3.50 | % | (17) bp | 3 bp | ||||||||
Net overhead ratio (2) (3) | 1.70 | 1.77 | 1.60 | (7) | 17 | |||||||||||
Efficiency ratio (2) (4) | 68.49 | 66.89 | 64.57 | 160 | 232 | |||||||||||
Return on average assets | 0.75 | 0.81 | 0.79 | (6) | 2 | |||||||||||
Return on average common equity(2) | 7.15 | 7.77 | 7.56 | (62) | 21 | |||||||||||
Return on average tangible common equity (2) | 9.44 | 10.14 | 9.93 | (70) | 21 | |||||||||||
At end of period | ||||||||||||||||
Total assets | $ | 22,917,166 | $ | 20,010,727 | $ | 18,097,783 | 15% | 11% | ||||||||
Total loans, excluding loans held-for-sale, excluding covered loans | 17,118,117 | 14,409,398 | 12,896,602 | 19 | 12 | |||||||||||
Total loans, including loans held-for-sale, excluding covered loans | 17,506,155 | 14,760,688 | 13,230,929 | 19 | 12 | |||||||||||
Total deposits | 18,639,634 | 16,281,844 | 14,668,789 | 14 | 11 | |||||||||||
Total shareholders’ equity | 2,352,274 | 2,069,822 | 1,900,589 | 14 | 9 | |||||||||||
Tangible common equity ratio (TCE) (2)(6) | 7.2 | % | 7.8 | % | 7.8 | % | (60) bp | 0 bp | ||||||||
Tangible common equity ratio, assuming full conversion of preferred stock (2)(6) | 7.7 | 8.4 | 8.5 | (70) bp | (10) bp | |||||||||||
Book value per common share (2) | $ | 43.42 | $ | 41.52 | $ | 38.47 | 5% | 8% | ||||||||
Tangible common book value per common share (2) | 33.17 | 32.45 | 29.93 | 2 | 8 | |||||||||||
Market price per common share | 48.52 | 46.76 | 46.12 | 4 | 1 | |||||||||||
Excluding covered loans: | ||||||||||||||||
Allowance for credit losses to total loans(5) | 0.62 | % | 0.64 | % | 0.76 | % | (2) bp | (12) bp | ||||||||
Non-performing loans to total loans | 0.49 | 0.55 | 0.80 | (6) bp | (25) bp | |||||||||||
(1) | Net revenue is net interest income plus non-interest income. |
(2) | See “Non-GAAP Financial Measures/Ratios” for additional information on this performance measure/ratio. |
(3) | The net overhead ratio is calculated by netting total non-interest expense and total non-interest income, annualizing this amount, and dividing by that period’s total average assets. A lower ratio indicates a higher degree of efficiency. |
(4) | The efficiency ratio is calculated by dividing total non-interest expense by tax-equivalent net revenues (less securities gains or losses). A lower ratio indicates more efficient revenue generation. |
(5) | The allowance for credit losses includes both the allowance for loan losses and the allowance for lending-related commitments, but excludes the allowance for covered loan losses. |
(6) | Total shareholders' equity minus preferred stock and total intangible assets divided by total assets minus total intangible assets. |
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.
43 | ||
NON-GAAP FINANCIAL MEASURES/RATIOS
The accounting and reporting policies of Wintrust conform to generally accepted accounting principles (“GAAP”) in the United States and prevailing practices in the banking industry. However, certain non-GAAP performance measures and ratios are used by management to evaluate and measure the Company’s performance. These include taxable-equivalent net interest income (including its individual components), net interest margin (including its individual components), the efficiency ratio, tangible common equity ratio, tangible common book value per share and return on average tangible common equity. In addition, certain operating measures and ratios are adjusted for acquisition and non-operating compensation charges. These operating measures and ratios include operating net income, the efficiency ratio, the net overhead ratio, return on average assets, return on average common equity, return on average tangible common equity and net income per diluted common share. Management believes that these measures and ratios provide users of the Company’s financial information a more meaningful view of the performance of the interest-earning assets and interest-bearing liabilities and of the Company’s operating efficiency. Other financial holding companies may define or calculate these measures and ratios differently.
Management reviews yields on certain asset categories and the net interest margin of the Company and its banking subsidiaries on a fully taxable-equivalent (“FTE”) basis. In this non-GAAP presentation, net interest income is adjusted to reflect tax-exempt interest income on an equivalent before-tax basis. This measure ensures comparability of net interest income arising from both taxable and tax-exempt sources. Net interest income on a FTE basis is also used in the calculation of the Company’s efficiency ratio. The efficiency ratio, which is calculated by dividing non-interest expense by total taxable-equivalent net revenue (less securities gains or losses), measures how much it costs to produce one dollar of revenue. Securities gains or losses are excluded from this calculation to better match revenue from daily operations to operational expenses. Management considers the tangible common equity ratio and tangible book value per common share as useful measurements of the Company’s equity. The Company references the return on average tangible common equity as a measurement of profitability. Management considers operating net income, which is reported net income excluding acquisition and non-operating compensation charges, as a useful measure of operating performance. Acquisition related charges are specific costs incurred by the Company as a result of an acquisition that are not expected to continue in subsequent periods. Non-operating compensation charges are certain salary and employee benefit costs incurred that are not related to current operating services provided by employees of the Company. The Company excludes acquisition and non-operating compensation charges from reported net income as well as certain operating measures and ratios noted above to provide better comparability between periods.
44 | ||
The following table presents a reconciliation of certain non-GAAP performance measures and ratios used by the Company to evaluate and measure the Company’s performance to the most directly comparable GAAP financial measures for the last five years.
Years Ended December 31, | ||||||||||||||||||||
(Dollars and shares in thousands, except per share data) | 2015 | 2014 (1) | 2013 (1) | 2012 (1) | 2011 (1) | |||||||||||||||
Calculation of Net Interest Margin and Efficiency Ratio | ||||||||||||||||||||
(A) Interest Income (GAAP) | $ | 718,464 | $ | 671,267 | $ | 630,709 | $ | 627,021 | $ | 605,793 | ||||||||||
Taxable-equivalent adjustment: | ||||||||||||||||||||
-Loans | 1,431 | 1,128 | 842 | 576 | 458 | |||||||||||||||
-Liquidity management assets | 3,221 | 2,000 | 1,407 | 1,363 | 1,224 | |||||||||||||||
-Other earning assets | 57 | 41 | 11 | 8 | 12 | |||||||||||||||
Interest Income — FTE | $ | 723,173 | $ | 674,436 | $ | 632,969 | $ | 628,968 | $ | 607,487 | ||||||||||
(B) Interest Expense (GAAP) | 76,935 | 72,692 | 80,082 | 107,505 | 144,416 | |||||||||||||||
Net interest income — FTE | $ | 646,238 | $ | 601,744 | $ | 552,887 | $ | 521,463 | $ | 463,071 | ||||||||||
(C) Net Interest Income (GAAP) (A minus B) | $ | 641,529 | $ | 598,575 | $ | 550,627 | $ | 519,516 | $ | 461,377 | ||||||||||
(D) Net interest margin (GAAP-derived) | 3.34 | % | 3.51 | % | 3.49 | % | 3.47 | % | 3.41 | % | ||||||||||
Net interest margin — FTE | 3.36 | 3.53 | 3.50 | 3.49 | 3.42 | |||||||||||||||
(E) Efficiency ratio (GAAP-derived) | 68.84 | 67.15 | 64.76 | 66.02 | 64.75 | |||||||||||||||
Efficiency ratio — FTE | 68.49 | 66.89 | 64.57 | 65.85 | 64.58 | |||||||||||||||
Efficiency ratio - Adjusted for acquisition and non-operating compensation charges | 67.01 | 66.89 | 64.57 | 65.85 | 64.58 | |||||||||||||||
(F) Net overhead ratio (GAAP) | 1.70 | 1.77 | 1.60 | 1.59 | 1.55 | |||||||||||||||
Net Overhead Ratio - Adjusted for acquisition and non-operating compensation charges | 1.63 | 1.77 | 1.60 | 1.59 | 1.55 | |||||||||||||||
Calculation of Tangible Common Equity ratio (at period end) | ||||||||||||||||||||
Total shareholders' equity | $ | 2,352,274 | $ | 2,069,822 | $ | 1,900,589 | $ | 1,804,705 | $ | 1,543,533 | ||||||||||
(G) Less: Convertible preferred stock | (126,287 | ) | (126,467 | ) | (126,477 | ) | (176,406 | ) | (49,768 | ) | ||||||||||
Less: Non-convertible preferred stock | (125,000 | ) | — | — | — | — | ||||||||||||||
Less: Intangible assets | (495,970 | ) | (424,445 | ) | (393,760 | ) | (366,348 | ) | (327,538 | ) | ||||||||||
(H) Total tangible common shareholders’ equity | $ | 1,605,017 | $ | 1,518,910 | $ | 1,380,352 | $ | 1,261,951 | $ | 1,166,227 | ||||||||||
Total assets | $ | 22,917,166 | $ | 20,010,727 | $ | 18,097,783 | $ | 17,519,613 | $ | 15,893,808 | ||||||||||
Less: Intangible assets | (495,970 | ) | (424,445 | ) | (393,760 | ) | (366,348 | ) | (327,538 | ) | ||||||||||
(I) Total tangible assets | $ | 22,421,196 | $ | 19,586,282 | $ | 17,704,023 | $ | 17,153,265 | $ | 15,566,270 | ||||||||||
Tangible common equity ratio (H/I) | 7.2 | % | 7.8 | % | 7.8 | % | 7.4 | % | 7.5 | % | ||||||||||
Tangible common equity ratio, assuming full conversion of preferred stock ((H-G)/I) | 7.7 | 8.4 | 8.5 | 8.4 | 7.8 | |||||||||||||||
Calculation of book value per common share | ||||||||||||||||||||
Total shareholders’ equity | $ | 2,352,274 | $ | 2,069,822 | $ | 1,900,589 | $ | 1,804,705 | $ | 1,543,533 | ||||||||||
Less: Preferred stock | (251,287 | ) | (126,467 | ) | (126,477 | ) | (176,406 | ) | (49,768 | ) | ||||||||||
(J) Total common equity | $ | 2,100,987 | $ | 1,943,355 | $ | 1,774,112 | $ | 1,628,299 | $ | 1,493,765 | ||||||||||
Actual common shares outstanding | 48,383 | 46,805 | 46,117 | 36,858 | 35,978 | |||||||||||||||
Add: TEU conversion shares | — | — | — | 6,241 | 7,666 | |||||||||||||||
(K) Common shares used for book value calculation | 48,383 | 46,805 | 46,117 | 43,099 | 43,644 | |||||||||||||||
Book value per common share (J/K) | $ | 43.42 | $ | 41.52 | $ | 38.47 | $ | 37.78 | $ | 34.23 | ||||||||||
Tangible common book value per share (H/K) | 33.17 | 32.45 | 29.93 | 29.28 | 26.72 | |||||||||||||||
45 | ||
Years Ended December 31, | ||||||||||||||||||||
(Dollars and shares in thousands, except per share data) | 2015 | 2014 (1) | 2013 (1) | 2012 (1) | 2011 (1) | |||||||||||||||
Calculation of return on average assets | ||||||||||||||||||||
(L) Net income | $ | 156,749 | $ | 151,398 | $ | 137,210 | $ | 111,196 | $ | 77,575 | ||||||||||
Add: Acquisition and non-operating compensation charges, net of tax | 8,987 | — | — | — | — | |||||||||||||||
(M) Operating net income | $ | 165,736 | $ | 151,398 | $ | 137,210 | $ | 111,196 | $ | 77,575 | ||||||||||
(N) Total average assets | $ | 21,009,773 | $ | 18,699,458 | $ | 17,468,249 | $ | 16,529,617 | $ | 14,920,160 | ||||||||||
Return on average assets, annualized (L/N) | 0.75 | % | 0.81 | % | 0.79 | % | 0.67 | % | 0.52 | % | ||||||||||
Return on average assets, adjusted for acquisition and non-operating compensation charges (M/N) | 0.79 | 0.81 | 0.79 | 0.67 | 0.52 | |||||||||||||||
Calculation of return on average common equity | ||||||||||||||||||||
(O) Net income applicable to common shares | $ | 145,880 | $ | 145,075 | $ | 128,815 | $ | 102,103 | $ | 73,447 | ||||||||||
(P) Add: Acquisition and non-operating compensation charges, net of tax | 8,987 | — | — | — | — | |||||||||||||||
(Q) Add: After-tax intangible asset amortization | 2,879 | 2,881 | 2,828 | 2,668 | 2,076 | |||||||||||||||
(R) Tangible operating net income applicable to common shares | $ | 157,746 | $ | 147,956 | $ | 131,643 | $ | 104,771 | $ | 75,523 | ||||||||||
Total average shareholders' equity | $ | 2,232,989 | $ | 1,993,959 | $ | 1,856,706 | $ | 1,696,276 | $ | 1,484,720 | ||||||||||
Less: Average preferred stock | (191,416 | ) | (126,471 | ) | (153,724 | ) | (149,373 | ) | (49,701 | ) | ||||||||||
(S) Total average common shareholders' equity | $ | 2,041,573 | $ | 1,867,488 | $ | 1,702,982 | $ | 1,546,903 | $ | 1,435,019 | ||||||||||
Less: Average intangible assets | (466,225 | ) | (408,642 | ) | (376,762 | ) | (342,969 | ) | (307,298 | ) | ||||||||||
(T) Total average tangible common shareholders’ equity | $ | 1,575,348 | $ | 1,458,846 | $ | 1,326,220 | $ | 1,203,934 | $ | 1,127,721 | ||||||||||
Return on average common equity (O/S) | 7.15 | % | 7.77 | % | 7.56 | % | 6.60 | % | 5.12 | % | ||||||||||
Return on average common equity, adjusted for acquisition and non-operating compensation charges ((O+P)/S) | 7.59 | 7.77 | 7.56 | 6.60 | 5.12 | |||||||||||||||
Return on average tangible common equity ((O+Q)/T) | 9.44 | 10.14 | 9.93 | 8.70 | 6.70 | |||||||||||||||
Return on average tangible common equity, adjusted for acquisition and non-operating compensation charges (R/T) | 10.01 | 10.14 | 9.93 | 8.70 | 6.70 | |||||||||||||||
Calculation of net income per common share - diluted | ||||||||||||||||||||
(U) Net income applicable to common shares - Diluted | $ | 152,194 | $ | 151,398 | $ | 137,140 | $ | 111,058 | $ | 73,447 | ||||||||||
Add: Acquisition and non-operating compensation charges, net of tax | 8,987 | — | — | — | — | |||||||||||||||
(V) Net income applicable to common shares - Diluted, adjusted for acquisition and non-operating compensation charges | $ | 161,186 | $ | 151,398 | $ | 137,140 | $ | 111,058 | $ | 73,447 | ||||||||||
Weighted average common shares and effect of dilutive potential common shares (W) | 51,937 | 50,845 | 49,948 | 48,034 | 43,991 | |||||||||||||||
Net income per common share - Diluted (U/W) | $ | 2.93 | $ | 2.98 | $ | 2.75 | $ | 2.31 | $ | 1.67 | ||||||||||
Net income per common share - Diluted, adjusted for acquisition and non-operating compensation charges (V/W) | 3.10 | 2.98 | 2.75 | 2.31 | 1.67 | |||||||||||||||
(1) | The Company considers acquisition and non-operating compensation charges incurred prior to 2015 to be insignificant. |
46 | ||
OVERVIEW AND STRATEGY
2015 Highlights
The Company recorded net income of $156.7 million for the year of 2015 compared to $151.4 million and $137.2 million for the years of 2014 and 2013, respectively. The results for 2015 demonstrate continued operating strengths including strong loan and deposit growth driving higher net interest income, increased mortgage banking revenue, higher fees from covered call options and customer interest rate swaps and stable credit quality metrics.
The Company increased its loan portfolio, excluding covered loans, from $14.4 billion at December 31, 2014 to $17.1 billion at December 31, 2015. This increase was primarily a result of the Company’s commercial banking initiative, growth in the commercial real estate and life insurance premium finance receivables portfolios and acquisitions during the period. The Company is focused on making new loans, including in the commercial and commercial real estate sector, where opportunities that meet our underwriting standards exist. For more information regarding changes in the Company’s loan portfolio, see “Analysis of Financial Condition – Interest Earning Assets” and Note 4 “Loans” of the Consolidated Financial Statements presented under Item 8 of this Annual Report on Form 10-K.
Management considers the maintenance of adequate liquidity to be important to the management of risk. Accordingly, during 2015, the Company continued its practice of maintaining appropriate funding capacity to provide the Company with adequate liquidity for its ongoing operations. In this regard, the Company benefited from its strong deposit base, a liquid short-term investment portfolio and its access to funding from a variety of external funding sources including the issuance of the Series D Preferred Stock (as defined below) in 2015. At December 31, 2015, the Company had overnight liquid funds and interest-bearing deposits with banks of $883.6 million compared to $1.2 billion at December 31, 2014.
The Company recorded net interest income of $641.5 million in 2015 compared to $598.6 million and $550.6 million in 2014 and 2013, respectively. The higher level of net interest income recorded in 2015 compared to 2014 resulted primarily from a $2.1 billion increase in the balance of average loans, excluding covered loans. The increase in average loans, excluding covered loans, was partially offset by a 20 basis point decline in the yield on earning assets as well as an increase in borrowings under the Company's term credit facility in 2015 and an increase in borrowings from the issuance of subordinated debt and the completion of the Canadian secured borrowing transaction in 2014.
Non-interest income totaled $271.6 million in 2015, increasing $56.4 million, or 26%, compared to 2014. The increase in non-interest income in 2015 compared to 2014 was primarily attributable to an increase in mortgage banking revenues, higher fees from covered call options, higher fees from customer interest rate swap fees and an increase in service charges on deposits (see "Non-Interest Income" section later in this Item 7 for further detail).
Non-interest expense totaled $628.4 million in 2015, increasing $81.6 million, or 15%, compared to 2014. The increase compared to 2014 was primarily attributable to $14.0 million in acquisition and non-operating compensation charges, $42.0 million increase in salaries and employee benefits, increased equipment and occupancy, data processing and professional fees, and higher marketing expenses, partially offset by a reduction in OREO expenses. The increase in salaries and employee benefits was, specifically, attributable to a $17.2 million increase in salaries resulting from additional employees from acquisitions and larger staffing as the Company grew, a $16.5 million increase in commissions and incentive compensation primarily attributable to the Company's long-term incentive program, and an $8.3 million increase in employee benefits due to higher insurance costs.
The Current Economic Environment
The economic environment in 2015 was characterized by continued low interest rates and continued competition as banks have experienced improvements in their financial condition allowing them to be more active in the lending market. The Company has employed certain strategies to manage net income in the current rate environment, including those discussed below.
Net Interest Income
The Company has leveraged its internal loan pipeline and external growth opportunities to grow its earning assets base. The Company has also continued its efforts to shift a greater portion of its deposit base to non-interest bearing deposits. These deposits as a percentage of total deposits were 26% on December 31, 2015 as compared to 22% on December 31, 2014. In 2015, the Company's net interest margin declined to 3.36% as compared to 3.53% in 2014 primarily as a result of a reduction in loan yields due to pricing pressures, run-off of the covered loan portfolio, an increase in borrowings under the Company's term credit facility in 2015 as well as the issuance of subordinated debt and the completion of the Canadian secured borrowing transaction in 2014. However, as a result of the growth in earning assets and improvement in funding mix, the Company increased net interest income by $43.0 million in 2015 compared to 2014.
47 | ||
The Company has continued its practice of writing call options against certain U.S. Treasury and Agency securities to economically hedge the securities positions and receive fee income to compensate for net interest margin compression. In 2015, the Company recognized $15.4 million in fees on covered call options.
In preparation for a rising rate environment, the Company, having the ability and positive intent to hold certain securities until maturity, transferred $862.7 million of securities from available-for-sale classification to held-to-maturity classification in 2015. For more information see Note 3 “Investment Securities” of the Consolidated Financial Statements presented under Item 8 of this Annual Report on Form 10-K.
The Company utilizes “back to back” interest rate derivative transactions, primarily interest rate swaps, to receive floating rate interest payments related to customer loans. In these arrangements, the Company makes a floating rate loan to a borrower who prefers to pay a fixed rate. To accommodate the risk management strategy of certain qualified borrowers, the Company enters a swap with its borrower to effectively convert the borrower's variable rate loan to a fixed rate. However, in order to minimize the Company's exposure on these transactions and continue to receive a floating rate, the Company simultaneously executes an offsetting mirror-image swap with a third party.
Non-Interest Income
In preparation for a rising rate environment, the Company has purchased interest rate cap contracts to offset the negative impact on the net interest margin in a rising rate environment caused by the repricing of variable rate liabilities and lack of repricing of fixed rate loans and securities. As of December 31, 2015, the Company held four interest rate cap derivatives with a total notional value of $446.5 million which are not designated as accounting hedges but are considered to be an economic hedge for the potential rise in interest rates. Because these are not accounting hedges, fluctuations in the fair value of the caps are recorded in earnings. In 2015, the Company recognized $934,000 in trading losses related to the mark to market of these interest rate caps. For more information see Note 20 “Derivative Financial Instruments” of the Consolidated Financial Statements presented under Item 8 of this Annual Report on Form 10-K.
The interest rate environment impacts the profitability and mix of the Company's mortgage banking business which generated revenues of $115.0 million in 2015 and $91.6 million in 2014, representing 13% of total net revenue in 2015 and 11% in 2014. Mortgage banking revenue is primarily comprised of gains on sales of mortgage loans originated for new home purchases as well as mortgage refinancing. Mortgage banking revenue is partially offset by corresponding commission and overhead costs. Mortgage originations totaled $3.9 billion and $3.2 billion in 2015 and 2014, respectively. In 2015, approximately 61% of originations were mortgages associated with new home purchases while 39% of originations were related to refinancing of mortgages. Assuming the housing market continues to improve and interest rates rise, we expect a higher percentage of originations to be attributed to new home purchases.
Non-Interest Expense
Management believes expense management is important amid the low interest rate environment and increased competition to enhance profitability. Cost control and an efficient infrastructure should position the Company appropriately as it continues its growth strategy. Management continues to be disciplined in its approach to growth and plans to leverage the Company's existing expense infrastructure to expand its presence in existing and complimentary markets.
Potentially impacting the cost control strategies discussed above, the Company anticipates increased costs resulting from the changing regulatory environment in which we operate. We have already experienced increases in compliance-related costs and we expect that compliance with the Dodd-Frank Act and its implementing regulations will require us to invest significant additional management attention and resources.
Credit Quality
The Company's credit quality metrics remained relatively stable in 2015 compared to 2014. The Company continues to actively address non-performing assets and remains disciplined in its approach to grow without sacrificing asset quality. Management primarily reviews credit quality excluding covered loans as those loans are obtained through FDIC-assisted acquisitions and therefore potential credit losses are subject to indemnification by the FDIC.
In particular:
• | The Company’s 2015 provision for credit losses, excluding covered loans, totaled $33.7 million, compared to $22.9 million in 2014 and $46.0 million in 2013. Net charge-offs, excluding covered loans, decreased to $19.2 million in 2015 (of which $6.5 million related to commercial and commercial real estate loans), compared to $27.2 million in 2014 (of which $17.4 million related to commercial and commercial real estate loans) and $56.1 million in 2013 (of which $42.7 million related to commercial and commercial real estate loans). |
48 | ||
• | The Company's allowance for loan losses, excluding covered loans, increased to $105.4 million at December 31, 2015, reflecting an increase of $13.7 million, or 15%, when compared to 2014. At December 31, 2015, approximately $43.8 million, or 42%, of the allowance for loan losses, excluding covered loans, was associated with commercial real estate loans and another $36.1 million, or 34%, was associated with commercial loans. |
• | The Company has significant exposure to commercial real estate. At December 31, 2015, $5.5 billion, or 32%, of our loan portfolio, excluding covered loans, was commercial real estate, with more than 91% located in our market area. The commercial real estate loan portfolio, excluding purchased credit impaired ("PCI") loans, was comprised of $437.1 million related to land, residential and commercial construction, $863.0 million related to office buildings loans, $868.4 million related to retail loans, $727.6 million related to industrial use, $742.3 million related to multi-family loans and $1.7 billion related to mixed use and other use types. In analyzing the commercial real estate market, the Company does not rely upon the assessment of broad market statistical data, in large part because the Company’s market area is diverse and covers many communities, each of which is impacted differently by economic forces affecting the Company’s general market area. As such, the extent of the decline in real estate valuations can vary meaningfully among the different types of commercial and other real estate loans made by the Company. The Company uses its multi-chartered structure and local management knowledge to analyze and manage the local market conditions at each of its banks. As of December 31, 2015, the Company had approximately $26.6 million of non-performing commercial real estate loans representing approximately 0.5% of the total commercial real estate loan portfolio. |
• | Total non-performing loans (loans on non-accrual status and loans more than 90 days past due and still accruing interest), excluding covered loans, were $84.1 million (of which $26.6 million, or 32%, was related to commercial real estate) at December 31, 2015, an increase of $5.4 million compared to December 31, 2014. |
• | The Company’s other real estate owned, excluding covered other real estate owned, decreased by $1.7 million, to $43.9 million during 2015, from $45.6 million at December 31, 2014. The decrease in other real estate owned is primarily a result of disposals during 2015. The $43.9 million of other real estate owned as of December 31, 2015 was comprised of $29.7 million of commercial real estate property, $11.3 million of residential real estate property and $2.9 million of residential real estate development property. |
During 2015, management continued its efforts to aggressively resolve problem loans through liquidation, rather than retention of loans or real estate acquired as collateral through the foreclosure process. Since 2009, the Company has attempted to liquidate as many non-performing loans and assets as possible. Management believes these actions will serve the Company well in the future by providing some protection for the Company from further valuation deterioration and permitting Management to spend less time on resolution of problem loans and more time on growing the Company’s core business and the evaluation of other opportunities presented by this volatile economic environment.
Management continues to direct significant attention toward the prompt identification, management and resolution of problem loans. The Company has 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, 2015, approximately $51.9 million in loans had terms modified, with $42.7 million of these modified loans continuing in accruing status. See Note 5 – Allowance for Loan Losses, Allowance for Losses on Lending-Related Commitments and Impaired Loans of the Consolidated Financial Statements presented under Item 8 of this Annual Report on Form 10-K for additional discussion of restructured loans.
The Company enters into residential mortgage loan sale agreements with investors in the normal course of business. The Company’s practice is generally not to retain long-term fixed rate mortgages on its balance sheet in order to mitigate interest rate risk, and consequently sells most of such mortgages into the secondary market. These agreements provide recourse to investors through certain representations concerning credit information, loan documentation, collateral and insurability. Investors request the Company to indemnify them against losses on certain loans or to repurchase loans which the investors believe do not comply with applicable representations. An increase in requests for loss indemnification can negatively impact mortgage banking revenue as additional recourse expense. The liability for estimated losses on repurchase and indemnification claims for residential mortgage loans previously sold to investors was $4.0 million and $3.1 million at December 31, 2015 and 2014, respectively.
Community Banking
Through our community banking franchise, we provide banking and financial services primarily to individuals, small to mid-sized businesses, local governmental units and institutional clients residing primarily in the local areas we service. Profitability of this franchise is primarily driven by our net interest income and margin, our funding mix and related costs, the level of non-performing loans and other real estate owned, the amount of mortgage banking revenue and our history of acquiring banking operations and establishing de novo banks.
49 | ||
Net interest income and margin. The primary source of our revenue is net interest income. Net interest income is the difference between interest income and fees on earning assets, such as loans and securities, and interest expense on liabilities to fund those assets, including deposits and other borrowings. Net interest income can change significantly from period to period based on general levels of interest rates, customer prepayment patterns, the mix of interest-earning assets and the mix of interest-bearing and non-interest bearing deposits and borrowings.
Funding mix and related costs. The most significant source of funding in community banking 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 the principal source of core deposits, which generally carry lower interest rates than wholesale funds of comparable maturities. Community banking profitability has been bolstered in recent years as the Company funded strong loan growth with a more desirable blend of funds. Additionally, non-interest bearing deposits have grown as a result of the Company's commercial banking initiative and fixed term certificates of deposits have been running off and renewing at lower rates.
Level of non-performing loans and other real estate owned. The level of non-performing loans and other real estate owned can significantly impact our profitability as these loans and other real estate owned do not accrue any income, can be subject to charge-offs and write-downs due to deteriorating market conditions and generally result in additional legal and collections expenses. The Company's credit quality measures have improved in recent years.
Mortgage banking revenue. Our community banking franchise is also influenced by the level of fees generated by the origination of residential mortgages and the sale of such mortgages into the secondary market by Wintrust Mortgage. The Company recognized an increase of $23.4 million in mortgage banking revenue in 2015 compared to 2014 as a result of higher origination volumes in 2015. Mortgage originations totaled $3.9 billion and $3.2 billion in 2015 and 2014, respectively.
Expansion of banking operations. Our historical financial performance has been affected by costs associated with growing market share in deposits and loans, establishing and acquiring banks, opening new branch facilities and building an experienced management team. Our financial performance generally reflects the improved profitability of our banking subsidiaries as they mature, offset by the costs of establishing and acquiring banks and opening new branch facilities. From our experience, it generally takes over 13 months for new banks to achieve operational profitability depending on the number and timing of branch facilities added.
In determining the timing of the 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. While expansion activity from 2007 through 2009 had been at a level below earlier periods in our history, we resumed the formation of additional branches and acquisitions of additional banks starting in 2010. See discussion of 2015 and 2014 acquisition activity in the “Recent Acquisition Transactions” section below.
In addition to the factors considered above, before we engage in expansion through de novo branches 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. Both FDIC-assisted and non-FDIC-assisted acquisitions offer a unique opportunity for the Company to expand into new and existing markets in a non-traditional manner. Potential acquisitions are reviewed in a similar manner as a de novo branch opportunities, however, FDIC-assisted and non-FDIC-assisted acquisitions have the ability to immediately enhance shareholder value. Factors including the valuation of our stock, other economic market conditions, the size and scope of the particular expansion opportunity and competitive landscape all influence the decision to expand via de novo growth or through acquisition.
Specialty Finance
Through our specialty finance segment, we offer financing of insurance premiums for businesses and individuals; accounts receivable financing, value-added, out-sourced administrative services; and other specialty finance businesses.
Financing of Commercial Insurance Premiums
The primary driver of profitability related to the financing of commercial insurance premiums is the net interest spread that FIFC and FIFC Canada can produce between the yields on the loans generated and the cost of funds allocated to the business unit. The commercial insurance premium finance business is a competitive industry and yields on loans are influenced by the market rates offered by our competitors. The majority of loans originated by FIFC 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.We fund these
50 | ||
loans primarily through our deposits, the cost of which is influenced by competitors in the retail banking markets in our market area.
Financing of Life Insurance Premiums
As with the commercial premium finance business, the primary driver of profitability related to the financing of life insurance premiums is the net interest spread that FIFC can produce between the yields on the loans generated and the cost of funds allocated to the business unit. Profitability of financing both commercial and life insurance premiums is also meaningfully impacted by leveraging information technology systems, maintaining operational efficiency and increasing average loan size, each of which allows us to expand our loan volume without significant capital investment.
Wealth Management
We offer a full range of wealth management services including trust and investment services, asset management solutions, securities brokerage services, and 401(k) and retirement plan services through three separate subsidiaries (WHI, CTC and Great Lakes Advisors).
The primary drivers of 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 investments, asset management and trust units receive a management fee for advisory, administrative and custodial services. As such, revenues are influenced by a rise or fall in the debt and equity markets and the resulting increase or decrease in the value of our client accounts on which our fees are based. The commissions received by the brokerage unit are not as directly influenced by the directionality of the debt and equity markets but rather the desire of our customers to engage in trading based on their particular situations and outlooks of the market or particular stocks and bonds. Profitability in the brokerage business is impacted by commissions which fluctuate over time.
Financial Regulatory Reform
The Dodd-Frank Act contains a comprehensive set of provisions designed to govern the practices and oversight of financial institutions and other participants in the financial markets. Our banking regulators have introduced, and continue to introduce, new regulations, supervisory guidance, and enforcement actions related to the Dodd-Frank Act. We are unable to predict the nature, extent, or impact of any additional changes to statutes or regulations, including the interpretation, implementation, or enforcement thereof, which may occur in the future.
The exact impact of the changing regulatory environment on our business and operations depends upon the final implementing regulations and the actions of our competitors, customers, and other market participants. However, the changes mandated by the Dodd-Frank Act, as well as other possible legislative and regulatory changes, generally could have a significant impact on us by, for example, requiring us to change our business practices; requiring us to meet more stringent capital, liquidity and leverage ratio requirements; limiting our ability to pursue business opportunities; imposing additional costs and compliance obligations on us; limiting fees we can charge for services; impacting the value of our assets; or otherwise adversely affecting our businesses and our earnings’ capabilities. We have already experienced significant increases in compliance related costs and we expect that compliance with the Dodd-Frank Act and its implementing regulations will require us to invest significant additional management attention and resources. We will continue to monitor the impact that the implementation of applicable rules, regulations and policies arising out of the Dodd-Frank Act will have on our organization.
Recent Rules Regarding Mortgage Origination and Servicing
The CFPB has indicated that the mortgage industry is an area of supervisory focus. In 2013, the CFPB released final regulations governing a wide variety of mortgage origination and servicing practices to implement provisions of the Dodd-Frank Act. Among other things, these regulations require mortgage lenders to assess and verify borrowers' “ability to pay” and establish a safe harbor for mortgages that meet certain criteria. For mortgages that do not meet the safe harbor's criteria, the Dodd-Frank Act provides for enhanced liability for the mortgage lender as well as assignees. The CFPB’s new regulations also cover compensation of loan officers and brokers, escrow accounts for payment of taxes and insurance, mortgage billing statements, force-placed insurance, and servicing practices with respect to delinquent borrowers and loss mitigation procedures. We have centralized our mortgage origination and servicing operations and implemented compliance programs for each of these new requirements as applicable to our business. For further discussion of the rules related to mortgage origination and servicing and our compliance see “Business - Supervision and Regulation.”
In addition to changes to the specific regulations governing our mortgage business, regulatory enforcement policies remain an important consideration in the operation of our business. In 2012, for example, the largest mortgage lenders and servicers entered into settlements with federal and state regulators regarding mortgage origination and servicing practices. While the Company and
51 | ||
the banks (including the Wintrust Mortgage division of Barrington Bank) were not parties to these settlements, and are not subject to examination by the CFPB, the terms of the settlements may influence regulators' future actions and expectations of mortgage lenders generally.
There are additional proposals to further amend some of these statutes and their implementing regulations, and there may be additional proposals or final amendments in 2016 or beyond. For example, proposals to reform the residential mortgage market may include changes to the operations of Fannie Mae and Freddie Mac (including potential winding down of operations), and reduction of mortgage loan products available in Federal Housing Administration programs.
Developments Related to Capital
In July 2013, the U.S. federal banking agencies approved sweeping regulatory capital reforms and promulgated rules effecting changes required by the Dodd-Frank Act and implementing the international capital accord known as Basel III. In contrast to capital requirements historically, which were in the form of guidelines, Basel III was released in the form of regulations by each of the federal regulatory agencies. Basel III is applicable to all financial institutions that are subject to minimum capital requirements, including federal and state banks and savings and loan associations, as well as to bank and savings and loan holding companies other than “small bank holding companies” (generally bank holding companies with consolidated assets of less than $1 billion).
Basel III not only increased most of the required minimum capital ratios as of January 1, 2015, but it introduced the concept of “Common Equity Tier 1 Capital,” which consists primarily of common stock, related surplus (net of Treasury stock), retained earnings, and Common Equity Tier 1 minority interests, subject to certain regulatory adjustments. Basel III also established more stringent criteria for instruments to be considered “Additional Tier 1 Capital” (Tier 1 capital in addition to Common Equity) and Tier 2 capital. A number of instruments that qualified as Tier 1 capital will not qualify, or their qualifications will change. For example, cumulative preferred stock and certain hybrid capital instruments, including trust preferred securities, will no longer qualify as Tier 1 capital of any kind, with the exception, subject to certain restrictions, of such instruments issued before May 10, 2010, by bank holding companies with total consolidated assets of less than $15 billion as of December 31, 2009. For those institutions, trust preferred securities and other nonqualifying capital instruments previously included in consolidated Tier 1 capital were permanently grandfathered under Basel III, subject to certain restrictions. Noncumulative perpetual preferred stock, which formerly qualified as simple Tier 1 capital, will not qualify as Common Equity Tier 1 capital, but will instead qualify as Additional Tier 1 capital. Basel III also constrained the inclusion of minority interests, mortgage-servicing assets, and deferred tax assets in capital and requires deductions from Common Equity Tier 1 capital in the event that such assets exceed a certain percentage of a banking institution’s Common Equity Tier 1 capital.
As of January 1, 2015, Basel III required:
• | A new minimum ratio of Common Equity Tier 1 capital to risk-weighted assets of 4.5%; |
• | An increase in the minimum required amount of Additional Tier 1 capital to 6% of risk-weighted assets; |
• | A continuation of the current minimum required amount of Total capital (Tier 1 plus Tier 2) at 8% of risk-weighted assets; and |
• | A minimum leverage ratio of Tier 1 capital to total assets equal to 4% in all circumstances. |
Basel III maintained the general structure of the prompt corrective action framework (a framework that denominates levels of decreasing capital and requires corresponding regulatory actions), while incorporating the increased requirements and adding the Common Equity Tier 1 capital ratio. In order to be “well-capitalized” under the new regime, a depository institution must maintain a Common Equity Tier 1 capital ratio of 6.5% or more; an Additional Tier 1 capital ratio of 8% or more; a Total capital ratio of 10% or more; and a leverage ratio of 5% or more.
In addition, institutions that seek the freedom to make capital distributions (including for dividends and repurchases of stock) and pay discretionary bonuses to executive officers without restriction must also maintain 2.5% of risk-weighted assets in Common Equity Tier 1 attributable to a capital conservation buffer to be phased in over three years beginning in 2016. The purpose of the conservation buffer is to ensure that banking institutions maintain a buffer of capital that can be used to absorb losses during periods of financial and economic stress. Factoring in the fully phased-in conservation buffer increases the minimum ratios depicted above to 7% for Common Equity Tier 1, 8.5% for Tier 1 capital and 10.5% for total capital. The leverage ratio is not impacted by the conservation buffer, and a banking institution may be considered well-capitalized while remaining out of compliance with the capital conservation buffer.
Not only did Basel III change the components and requirements of capital, but, for nearly every class of financial assets, Basel III requires a more complex, detailed and calibrated assessment of credit risk and calculation of risk weightings. While Basel III would have changed the risk weighting for residential mortgage loans based on loan-to-value ratios and certain product and
52 | ||
underwriting characteristics, there was concern in the United States that the proposed methodology for risk weighting residential mortgage exposures and the higher risk weightings for certain types of mortgage products would increase costs to consumers and reduce their access to mortgage credit. As a result, Basel III did not effect this change, and banking institutions will continue to apply a risk weight of 50% or 100% to their exposure from residential mortgages.
Furthermore, there was significant concern noted by the financial industry in connection with the Basel III rulemaking as to the proposed treatment of accumulated other comprehensive income (“AOCI”). Basel III requires unrealized gains and losses on available-for-sale securities to flow through to regulatory capital as opposed to the previous treatment, which neutralized such effects. Recognizing the problem for community banks, the U.S. bank regulatory agencies adopted Basel III with a one-time election for smaller institutions like the Company and our subsidiary banks to opt out of including most elements of AOCI in regulatory capital. This opt-out, which was made in conjunction with the filing of the bank's call reports for the first quarter of 2015, excludes from regulatory capital both unrealized gains and losses on available-for-sale debt securities and accumulated net gains and losses on cash-flow hedges and amounts attributable to defined benefit post-retirement plans. We made this election to avoid variations in the level of our capital depending on fluctuations in the fair value of our securities and derivatives portfolio, as well as changes in certain foreign currency exchange rates.
Banking institutions (except for large, internationally active financial institutions) became subject to Basel III on January 1, 2015. There are separate phase-in/phase-out periods for: (i) the capital conservation buffer; (ii) regulatory capital adjustments and deductions; (iii) nonqualifying capital instruments; and (iv) changes to the prompt corrective action rules. The phase-in periods commence on January 1, 2016 and extend until 2019. We believe that we will continue to exceed all well-capitalized regulatory requirements on a fully phased-in basis.
In October 2012, the Federal Reserve published a final rule implementing the stress test requirements under the Dodd-Frank Act, which are designed to evaluate the sufficiency of a banking organization's capital to support its operations during periods of stress. As a bank holding company with between $10 billion and $50 billion in total consolidated assets, we were required to conduct annual stress tests based on scenarios provided by the Federal Reserve, beginning in the fall of 2013. Beginning with our 2014 stress test, we were also required to publicly disclose the results of our stress tests. While depository institutions that meet certain asset thresholds are subject to the stress test requirements, currently none of our subsidiary banks will be subject to the recent stress test rules.
Recent Acquisition Transactions
Acquisition of Community Financial Shares, Inc.
On July 24, 2015, the Company completed its acquisition of Community Financial Shares, Inc ("CFIS"). CFIS was the parent company of Community Bank - Wheaton/Glen Ellyn ("CBWGE"). CBWGE was merged into the Company's wholly-owned subsidiary Wheaton Bank & Trust Company ("Wheaton Bank"). In addition to the banking facilities the Company acquired approximately $351 million of assets, including $160 million of loans, and assumed approximately $290 million of deposits.
Acquisition of Suburban Illinois Bancorp, Inc.
On July 17, 2015, the Company completed its acquisition of Suburban Illinois Bancorp, Inc. ("Suburban"). Suburban was the parent company of Suburban Bank & Trust Company ("SBT"). SBT was merged into the Company's wholly-owned subsidiary Hinsdale Bank & Trust Company ("Hinsdale Bank"). In addition to the banking facilities, the Company acquired approximately $495 million of assets, including $258 million of loans, and assumed approximately $417 million of deposits.
Acquisition of North Bank
On July 1, 2015, the Company, through its wholly-owned subsidiary Wintrust Bank, completed its acquisition of North Bank. Through this transaction the Company acquired two banking locations in downtown Chicago. In addition to the banking facilities, the Company acquired approximately $118 million of assets, including $52 million of loans, and assumed approximately $101 million of deposits.
Acquisition of Delavan Bancshares, Inc.
On January 16, 2015 the Company completed its acquisition of Delavan. Delavan was the parent company of Community Bank CBD. Community Bank CBD was merged into the Company's wholly-owned subsidiary Town Bank. In addition to the banking facilities, the Company acquired approximately $224 million of assets, including $128 million of loans and assumed approximately $170 million of deposits.
53 | ||
Acquisition of bank facilities and certain related deposits of Talmer Bank & Trust
On August 8, 2014, the Company, through its subsidiary Town Bank, completed its acquisition of certain branch offices and deposits of Talmer Bank & Trust. Through this transaction, Town Bank acquired eleven branch offices and approximately $355 million in deposits.
Acquisition of a bank facility and certain related deposits of THE National Bank
On July 11, 2014, the Company, through its subsidiary Town Bank, completed its acquisition of the Pewaukee, Wisconsin branch of THE National Bank. In addition to the banking facility, Town Bank acquired approximately $94 million of assets, including $75 million of loans and approximately $36 million of deposits.
Acquisition of a bank facility and certain related deposits of Urban Partnership Bank
On May 16, 2014, the Company, through its subsidiary Hinsdale Bank, completed its acquisition of the Stone Park branch office and certain related deposits of Urban Partnership Bank.
Acquisition of two affiliated Canadian insurance premium funding and payment services companies
On April 28, 2014, the Company, through its subsidiary, FIFC Canada, completed its acquisition of 100% of the shares of each of Policy Billing Services Inc. and Equity Premium Finance Inc., two affiliated Canadian insurance premium funding and payment services companies.
Acquisition of a bank facility and certain assets and liabilities of Baytree National Bank &Trust Company
On February 28, 2014, the Company, through its subsidiary Lake Forest Bank and Trust Company ("Lake Forest Bank"), completed an acquisition of a bank branch from Baytree National Bank & Trust Company. In addition to the banking facility, Lake Forest Bank acquired certain assets and approximately $15 million of deposits.
Other Completed Transactions
Issuance of Series D Preferred Stock
In June 2015, the Company issued and sold 5,000,000 shares of fixed-to-floating rate non-cumulative perpetual preferred stock, Series D, no par value per share (the “Series D Preferred Stock”), with a liquidation preference of $25 per share for $125.0 million in a public offering. Dividends on the Series D Preferred Stock are payable quarterly in arrears when, as and if declared by the Company's Board of Directors or a duly authorized committee thereof (collectively, the "Board") at a rate of 6.50% per annum on the liquidation preference of $25 per share from the original issuance date to, but excluding, July 15, 2025. From (and including) July 15, 2025, dividends on the Series D Preferred Stock will be payable quarterly in arrears, when, as and if declared by the Board, at a floating rate equal to the then-applicable three-month LIBOR (as defined in the Certificate of Designations) plus a spread of 4.06% per annum. The dividend rate of such floating rate dividend will be reset quarterly. The Company received proceeds, after deducting underwriting discounts, commissions and related costs, of approximately $120.8 million from the issuance, which were intended to be used for general corporate purposes.
Issuance of Subordinated Notes Due 2024
On June 13, 2014, the Company completed a public offering of $140,000,000 aggregate principal amount of its 5.00% Subordinated Notes due 2024. The Company received proceeds prior to expenses of approximately $139.1 million from the offering, after deducting underwriting discounts and commissions and before expenses, which were intended to be used for general corporate purposes.
54 | ||
SUMMARY OF CRITICAL ACCOUNTING POLICIES
The Company’s Consolidated Financial Statements are prepared in accordance with generally accepted accounting principles ("GAAP") in the United States and prevailing practices of the banking industry. Application of these principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in the financial statements and accompanying notes. Certain policies and accounting principles inherently have a greater reliance on the use of estimates, assumptions and judgments, and as such have a greater possibility that changes in those estimates and assumptions could produce financial results that are materially different than originally reported. Estimates, assumptions and judgments are necessary when assets and liabilities are required to be recorded at fair value, when a decline in the value of an asset not carried on the financial statements at fair value warrants an impairment write-down or valuation reserve to be established, or when an asset or liability needs to be recorded contingent upon a future event, are based on information available as of the date of the financial statements; accordingly, as information changes, the financial statements could reflect different estimates and assumptions.
A summary of the Company’s significant accounting policies is presented in Note 1 to the Consolidated Financial Statements in Item 8. These policies, along with the disclosures presented in the other financial statement notes and in this Management’s Discussion and Analysis section, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. Management views critical accounting policies to be those which are highly dependent on subjective or complex judgments, estimates and assumptions, and where changes in those estimates and assumptions could have a significant impact on the financial statements. Management currently views critical accounting policies to include the determination of the allowance for loan losses, allowance for covered loan losses and the allowance for losses on lending-related commitments, loans acquired with evidence of credit quality deterioration since origination, estimations of fair value, the valuations required for impairment testing of goodwill, the valuation and accounting for derivative instruments and income taxes as the accounting areas that require the most subjective and complex judgments, and as such could be most subject to revision as new information becomes available.
Allowance for Loan Losses, Allowance for Covered Loan Losses and Allowance for Losses on Lending-Related Commitments
The allowance for loan losses and the allowance for covered loan losses represent 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 fair value of the underlying collateral and amount and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans based on historical loss experience, and consideration of current economic trends and conditions, all of which are susceptible to significant change. The loan portfolio also represents the largest asset type on the consolidated balance sheet. The Company also maintains an allowance for lending-related commitments, specifically unfunded loan commitments and letters of credit, which relates to certain amounts the Company is committed to lend but for which funds have not yet been disbursed. See Note 1 to the Consolidated Financial Statements in Item 8 and the section titled “Loan Portfolio and Asset Quality” in Item 7 for a description of the methodology used to determine the allowance for loan losses, allowance for covered loan losses and the allowance for lending-related commitments.
Loans Acquired with Evidence of Credit Quality Deterioration since Origination
Under accounting guidance applicable to loans acquired with evidence of credit quality deterioration since origination, the excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable yield and is recognized in interest income over the remaining estimated life of the loans, using the effective-interest method. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the nonaccretable difference. Changes in the expected cash flows from the date of acquisition will either impact the accretable yield or result in a charge to the provision for credit losses. Subsequent decreases to expected principal cash flows will result in a charge to provision for credit losses and a corresponding increase to allowance for loan losses. Subsequent increases in expected principal cash flows will result in recovery of any previously recorded allowance for loan losses, to the extent applicable, and a reclassification from nonaccretable difference to accretable yield for any remaining increase. All changes in expected interest cash flows, including the impact of prepayments, will result in reclassifications to/from nonaccretable differences.
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 and mortgage servicing rights. 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.
55 | ||
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 21 to the Consolidated Financial Statements in Item 8 for a further discussion of fair value measurements.
Impairment Testing of Goodwill
The Company performs impairment testing of goodwill on an annual basis or more frequently when events warrant, using a qualitative or quantitative approach. Valuations are estimated in good faith by management through the use of publicly available valuations of comparable entities and discounted cash flow models using internal financial projections in the reporting unit’s business plan.
Using a quantitative approach, 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 purchase price allocation analysis that would calculate the implied fair value of goodwill. If the implied fair value of goodwill is less than the recorded goodwill, the Company would record an impairment charge for the difference.
The goodwill impairment analysis requires management to make subjective judgments in determining if an indicator of impairment has occurred. Events and factors that may significantly affect the analysis include: a significant decline in the Company’s expected future cash flows, a substantial increase in the discount factor, a sustained, significant decline in the Company’s stock price and market capitalization, a significant adverse change in legal factors or in the business climate. Other factors might include changing competitive forces, customer behaviors and attrition, revenue trends, cost structures, along with specific industry and market conditions. Adverse change in these factors could have a significant impact on the recoverability of intangible assets and could have a material impact on the Company’s consolidated financial statements.
As of December 31, 2015, the Company had three reporting units: Community Banking, Specialty Finance and Wealth Management. Based on the Company’s 2015 goodwill impairment testing, no goodwill impairment was indicated for any of the reporting units on their respective annual testing dates.
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 United States, its states, Canada 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.
56 | ||
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 de novo banks since December 1991. Wintrust 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 152 offices at the end of 2015. FIFC has matured from its limited operations in 1991 to a company that generated, on a national basis, $5.9 billion in premium finance receivables in 2015 within the United States. FIFC Canada, acquired in 2012, originated $617.1 million in Canadian commercial premium finance receivables in 2015. In addition, the wealth management companies have been building a team of experienced professionals who are located within a majority of the banks.
Earnings Summary
Net income for the year ended December 31, 2015, totaled $156.7 million, or $2.93 per diluted common share, compared to $151.4 million, or $2.98 per diluted common share, in 2014, and $137.2 million, or $2.75 per diluted common share, in 2013. During 2015, net income increased by $5.3 million and earnings per diluted common share decreased by $0.05. During 2014, net income increased by $14.2 million and earnings per diluted common share increased by $0.23. Net income increased in 2015 as compared to 2014 primarily as a result of an increase in net interest income driven by growth in earning assets, an increase in mortgage banking revenues and higher fees on covered call options and customer interest rate swaps, partially offset by increased salary and employee benefits, equipment and occupancy costs and advertising and marketing expense. Net income increased in 2014 as compared to 2013 as a result of an increase in interest income on loans and available-for-sale securities, decreases in interest expense on deposits and the provision for credit losses, as well as an increase in wealth management revenues partially offset by increased salary and employee benefit and occupancy costs and decreases in mortgage banking revenue.
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. Net interest margin represents tax-equivalent net interest income as a percentage of the average earning assets during the period.
Tax-equivalent net interest income in 2015 totaled $646.2 million, up from $601.7 million in 2014 and $552.9 million in 2013, representing an increase of $44.5 million, or 7%, in 2015 and an increase of $48.8 million, or 9%, in 2014. 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 2015 and 2014. Average earning assets increased $2.2 billion, or 13%, in 2015 and $1.2 billion, or 8%, in 2014. Loans are the most significant component of the earning asset base as they earn interest at a higher rate than the other earning assets. Average loans, excluding covered loans, increased $2.1 billion, or 15%, in 2015 and $1.2 billion, or 10%, in 2014. Total average loans, excluding covered loans, as a percentage of total average earning assets were 83%, 82% and 81% in 2015, 2014 and 2013, respectively. The average yield on loans, excluding covered loans, was 4.01% in 2015, 4.23% in 2014 and 4.34% in 2013, reflecting a decrease of 22 basis points in 2015 and a decrease of 11 basis points in 2014. The lower loan yields in 2015 compared to 2014 and 2014 compared to 2013 are a result of the negative impact of both competitive and economic pricing pressures. The average rate paid on interest bearing deposits, the largest component of the Company’s interest bearing liabilities, was 0.37% in 2015, 0.39% in 2014 and 0.45% in 2013, representing a decrease of two basis points in 2015 and six basis points in 2014. The lower level of interest bearing deposits rates in 2015 compared to 2014 and 2014 compared to 2013 was primarily due to continued downward re-pricing of retail deposits in recent years. As a result of the above, net interest margin decreased to 3.36% in 2015 compared to 3.53% in 2014.
Net interest income and net interest margin were also affected by amortization of valuation adjustments to earning assets and interest-bearing liabilities of acquired businesses. Under the acquisition method of accounting, assets and liabilities of acquired businesses are required to be recognized at their estimated fair value at the date of acquisition. These valuation adjustments represent the difference between the estimated fair value and the carrying value of assets and liabilities acquired. These adjustments are amortized into interest income and interest expense based upon the estimated remaining lives of the assets and liabilities acquired, typically on an accelerated basis.
57 | ||
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, 2015, 2014 and 2013. The yields and costs include loan origination fees and certain direct origination costs that are considered adjustments to yields. Interest income on non-accruing loans is reflected in the year that it is collected, to the extent it is not applied to principal. Such amounts are not material to net interest income or the net change in net interest income in any year. Non-accrual loans are included in the average balances. Net interest income and the related net interest margin have been adjusted to reflect tax-exempt income, such as interest on municipal securities and loans, on a tax-equivalent basis. This table should be referred to in conjunction with this analysis and discussion of the financial condition and results of operations.
Average Balance for the year ended December 31, | Interest for the year ended December 31, | Yield/Rate for the year ended December 31, | ||||||||||||||||||||||||||||||
(Dollars in thousands) | 2015 | 2014 | 2013 | 2015 | 2014 | 2013 | 2015 | 2014 | 2013 | |||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||||||||
Interest bearing deposits with banks | $ | 524,163 | $ | 523,660 | $ | 612,205 | $ | 1,486 | $ | 1,472 | $ | 1,644 | 0.28 | % | 0.28 | % | 0.27 | % | ||||||||||||||
Investment securities | 2,371,930 | 2,142,619 | 1,846,988 | 64,227 | 54,951 | 38,432 | 2.71 | 2.56 | 2.08 | |||||||||||||||||||||||
Federal Home Loan Bank and Federal Reserve Bank stock | 90,004 | 81,000 | 78,532 | 3,232 | 2,920 | 2,773 | 3.59 | 3.60 | 3.53 | |||||||||||||||||||||||
Federal funds sold and securities purchased under resale agreements | 6,409 | 14,171 | 19,498 | 4 | 25 | 27 | 0.05 | 0.17 | 0.14 | |||||||||||||||||||||||
Total liquidity management assets (1) (6) | $ | 2,992,506 | $ | 2,761,450 | $ | 2,557,223 | $ | 68,949 | $ | 59,368 | $ | 42,876 | 2.30 | % | 2.15 | % | 1.68 | % | ||||||||||||||
Other earning assets (1) (2) (6) | 30,161 | 28,699 | 26,554 | 962 | 916 | 816 | 3.19 | 3.19 | 3.07 | |||||||||||||||||||||||
Loans, net of unearned income (1) (3) (6) | 16,022,371 | 13,958,842 | 12,742,202 | 641,917 | 590,620 | 553,035 | 4.01 | 4.23 | 4.34 | |||||||||||||||||||||||
Covered loans | 186,427 | 280,946 | 462,518 | 11,345 | 23,532 | 36,242 | 6.09 | 8.38 | 7.84 | |||||||||||||||||||||||
Total earning assets (6) | $ | 19,231,465 | $ | 17,029,937 | $ | 15,788,497 | $ | 723,173 | $ | 674,436 | $ | 632,969 | 3.76 | % | 3.96 | % | 4.01 | % | ||||||||||||||
Allowance for loan and covered loan losses | (103,459 | ) | (100,586 | ) | (124,970 | ) | ||||||||||||||||||||||||||
Cash and due from banks | 249,488 | 234,194 | 222,453 | |||||||||||||||||||||||||||||
Other assets | 1,632,279 | 1,535,913 | 1,582,269 | |||||||||||||||||||||||||||||
Total assets | $ | 21,009,773 | $ | 18,699,458 | $ | 17,468,249 | ||||||||||||||||||||||||||
Liabilities and Shareholders’ Equity | ||||||||||||||||||||||||||||||||
Deposits — interest bearing: | ||||||||||||||||||||||||||||||||
NOW and interest bearing demand deposits | $ | 2,246,451 | $ | 2,028,485 | $ | 2,049,573 | $ | 3,159 | $ | 2,472 | $ | 3,009 | 0.14 | % | 0.12 | % | 0.15 | % | ||||||||||||||
Wealth management deposits | 1,456,289 | 1,227,072 | 987,885 | 3,702 | 1,836 | 706 | 0.25 | 0.15 | 0.07 | |||||||||||||||||||||||
Money market accounts | 3,888,781 | 3,575,605 | 3,048,045 | 7,961 | 7,400 | 7,199 | 0.20 | 0.21 | 0.24 | |||||||||||||||||||||||
Savings accounts | 1,610,603 | 1,453,559 | 1,300,681 | 2,415 | 2,430 | 2,744 | 0.15 | 0.17 | 0.21 | |||||||||||||||||||||||
Time deposits | 4,069,180 | 4,185,876 | 4,460,670 | 31,626 | 34,273 | 39,533 | 0.78 | 0.82 | 0.89 | |||||||||||||||||||||||
Total interest bearing deposits | $ | 13,271,304 | $ | 12,470,597 | $ | 11,846,854 | $ | 48,863 | $ | 48,411 | $ | 53,191 | 0.37 | % | 0.39 | % | 0.45 | % | ||||||||||||||
Federal Home Loan Bank advances | 389,426 | 387,591 | 423,221 | 9,110 | 10,523 | 11,014 | 2.34 | 2.71 | 2.60 | |||||||||||||||||||||||
Other borrowings | 233,152 | 132,479 | 269,311 | 3,627 | 1,773 | 4,341 | 1.56 | 1.34 | 1.61 | |||||||||||||||||||||||
Subordinated notes | 140,000 | 77,479 | 10,521 | 7,105 | 3,906 | 167 | 5.07 | 5.04 | 1.57 | |||||||||||||||||||||||
Junior subordinated notes | 258,203 | 249,493 | 249,493 | 8,230 | 8,079 | 11,369 | 3.14 | 3.19 | 4.49 | |||||||||||||||||||||||
Total interest-bearing liabilities | $ | 14,292,085 | $ | 13,317,639 | $ | 12,799,400 | $ | 76,935 | $ | 72,692 | $ | 80,082 | 0.54 | % | 0.55 | % | 0.62 | % | ||||||||||||||
Non-interest bearing deposits | 4,144,378 | 3,062,338 | 2,487,761 | |||||||||||||||||||||||||||||
Other liabilities | 340,321 | 325,522 | 324,382 | |||||||||||||||||||||||||||||
Equity | 2,232,989 | 1,993,959 | 1,856,706 | |||||||||||||||||||||||||||||
Total liabilities and shareholders’ equity | $ | 21,009,773 | $ | 18,699,458 | $ | 17,468,249 | ||||||||||||||||||||||||||
Interest rate spread (4) (6) | 3.22 | % | 3.41 | % | 3.39 | % | ||||||||||||||||||||||||||
Net free funds/contribution (5) | $ | 4,939,380 | $ | 3,712,298 | $ | 2,989,097 | 0.14 | 0.12 | 0.11 | |||||||||||||||||||||||
Net interest income/margin (6) | $ | 646,238 | $ | 601,744 | $ | 552,887 | 3.36 | % | 3.53 | % | 3.50 | % | ||||||||||||||||||||
(1) | Interest income on tax-advantaged loans, trading securities and investment securities reflects a tax-equivalent adjustment based on a marginal federal corporate tax rate of 35%. The total adjustments for the years ended December 31, 2015, 2014 and 2013 were $4.7 million, $3.2 million and $2.3 million, respectively. |
(2) | Other earning assets include brokerage customer receivables and trading account securities. |
(3) | Loans, net of unearned income, include loans held-for-sale and non-accrual loans. |
(4) | Interest rate spread is the difference between the yield earned on earning assets and the rate paid on interest-bearing liabilities. |
(5) | Net free funds is the difference between total average earning assets and total average interest-bearing liabilities. The estimated contribution to net interest margin from net free funds is calculated using the rate paid for total interest-bearing liabilities. |
(6) | See “Supplemental Financial Measures/Ratios” for additional information on this performance ratio. |
58 | ||
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:
Years Ended December 31, | ||||||||||||||||||||||||
2015 Compared to 2014 | 2014 Compared to 2013 | |||||||||||||||||||||||
(Dollars in thousands) | Change Due to Rate | Change Due to Volume | Total Change | Change Due to Rate | Change Due to Volume | Total Change | ||||||||||||||||||
Interest income: | ||||||||||||||||||||||||
Interest bearing deposits with banks | $ | — | $ | 14 | $ | 14 | $ | 62 | $ | (234 | ) | $ | (172 | ) | ||||||||||
Investment securities | 2,782 | 6,494 | 9,276 | 9,752 | 6,767 | 16,519 | ||||||||||||||||||
Federal Home Loan Bank and Federal Reserve Bank stock | (8 | ) | 320 | 312 | 57 | 90 | 147 | |||||||||||||||||
Federal funds sold and securities purchased under resale agreements | (12 | ) | (9 | ) | (21 | ) | 6 | (8 | ) | (2 | ) | |||||||||||||
Total liquidity management assets | $ | 2,762 | $ | 6,819 | $ | 9,581 | $ | 9,877 | $ | 6,615 | $ | 16,492 | ||||||||||||
Other earning assets | — | 46 | 46 | 33 | 67 | 100 | ||||||||||||||||||
Loans, net of unearned income | (32,090 | ) | 83,387 | 51,297 | (14,269 | ) | 51,854 | 37,585 | ||||||||||||||||
Covered loans | (5,464 | ) | (6,723 | ) | (12,187 | ) | 2,351 | (15,061 | ) | (12,710 | ) | |||||||||||||
Total interest income | $ | (34,792 | ) | $ | 83,529 | $ | 48,737 | $ | (2,008 | ) | $ | 43,475 | $ | 41,467 | ||||||||||
Interest Expense: | ||||||||||||||||||||||||
Deposits — interest bearing: | ||||||||||||||||||||||||
NOW and interest bearing demand deposits | $ | 385 | $ | 302 | $ | 687 | $ | (482 | ) | $ | (55 | ) | $ | (537 | ) | |||||||||
Wealth management deposits | 1,006 | 860 | 1,866 | 575 | 555 | 1,130 | ||||||||||||||||||
Money market accounts | — | 561 | 561 | (914 | ) | 1,115 | 201 | |||||||||||||||||
Savings accounts | (284 | ) | 269 | (15 | ) | (592 | ) | 278 | (314 | ) | ||||||||||||||
Time deposits | (1,505 | ) | (1,142 | ) | (2,647 | ) | (3,478 | ) | (1,782 | ) | (5,260 | ) | ||||||||||||
Total interest expense — deposits | $ | (398 | ) | $ | 850 | $ | 452 | $ | (4,891 | ) | $ | 111 | $ | (4,780 | ) | |||||||||
Federal Home Loan Bank advances | (1,462 | ) | 49 | (1,413 | ) | 456 | (946 | ) | (490 | ) | ||||||||||||||
Other borrowings | (525 | ) | 2,379 | 1,854 | (637 | ) | (1,931 | ) | (2,568 | ) | ||||||||||||||
Subordinated notes | 23 | 3,176 | 3,199 | 950 | 2,788 | 3,738 | ||||||||||||||||||
Junior subordinated notes | (126 | ) | 277 | 151 | (3,290 | ) | — | (3,290 | ) | |||||||||||||||
Total interest expense | $ | (2,488 | ) | $ | 6,731 | $ | 4,243 | $ | (7,412 | ) | $ | 22 | $ | (7,390 | ) | |||||||||
Net interest income | $ | (32,304 | ) | 76,798 | 44,494 | $ | 5,404 | 43,453 | 48,857 | |||||||||||||||
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.
59 | ||
Non-Interest Income
The following table presents non-interest income by category for 2015, 2014 and 2013:
Years ended December 31, | 2015 compared to 2014 | 2014 compared to 2013 | ||||||||||||||||||||||||
(Dollars in thousands) | 2015 | 2014 | 2013 | $ Change | % Change | $ Change | % Change | |||||||||||||||||||
Brokerage | $ | 27,030 | $ | 30,438 | $ | 29,281 | $ | (3,408 | ) | (11 | )% | $ | 1,157 | 4 | % | |||||||||||
Trust and asset management | 46,422 | 40,905 | 33,761 | 5,517 | 13 | 7,144 | 21 | |||||||||||||||||||
Total wealth management | $ | 73,452 | $ | 71,343 | $ | 63,042 | $ | 2,109 | 3 | % | $ | 8,301 | 13 | % | ||||||||||||
Mortgage banking | 115,011 | 91,617 | 106,857 | 23,394 | 26 | (15,240 | ) | (14 | ) | |||||||||||||||||
Service charges on deposit accounts | 27,384 | 23,307 | 20,366 | 4,077 | 17 | 2,941 | 14 | |||||||||||||||||||
Gains (losses) on available-for-sale securities | 323 | (504 | ) | (3,000 | ) | 827 | NM | 2,496 | NM | |||||||||||||||||
Fees from covered call options | 15,364 | 7,859 | 4,773 | 7,505 | 95 | 3,086 | 65 | |||||||||||||||||||
Trading (losses) gains, net | (247 | ) | (1,609 | ) | 892 | 1,362 | NM | (2,501 | ) | NM | ||||||||||||||||
Operating lease income, net | 2,728 | 163 | — | 2,565 | NM | 163 | NM | |||||||||||||||||||
Other: | ||||||||||||||||||||||||||
Interest rate swap fees | 9,487 | 4,469 | 7,629 | 5,018 | 112 | (3,160 | ) | (41 | ) | |||||||||||||||||
BOLI | 4,622 | 2,700 | 3,446 | 1,922 | 71 | (746 | ) | (22 | ) | |||||||||||||||||
Administrative services | 4,252 | 3,893 | 3,390 | 359 | 9 | 503 | 15 | |||||||||||||||||||
Miscellaneous | 19,221 | 12,002 | 15,002 | 7,219 | 60 | (3,000 | ) | (20 | ) | |||||||||||||||||
Total Other | $ | 37,582 | $ | 23,064 | $ | 29,467 | $ | 14,518 | 63 | % | $ | (6,403 | ) | (22 | )% | |||||||||||
Total Non-Interest Income | $ | 271,597 | $ | 215,240 | $ | 222,397 | $ | 56,357 | 26 | % | $ | (7,157 | ) | (3 | )% | |||||||||||
NM—Not Meaningful
Notable contributions to the change in non-interest income are as follows:
Wealth management revenue is comprised of the trust and asset management revenue of the CTC and Great Lakes Advisors and the brokerage commissions, managed money fees and insurance product commissions at WHI.
Brokerage revenue is directly impacted by trading volumes. In 2015, brokerage revenue totaled $27.0 million, reflecting a decrease of $3.4 million, or 11%, compared to 2014. In 2014, brokerage revenue totaled $30.4 million, reflecting an increase of $1.2 million, or 4%, compared to 2013. The decrease in brokerage revenue during 2015 compared to 2014 can be attributed to a decrease in customer transactional activity and a slightly down market. The increase in brokerage revenue in 2014 compared to 2013 can be attributed to increased customer trading activity.
Trust and asset management revenue totaled $46.4 million in 2015, an increase of $5.5 million, or 13%, compared to 2014. Trust and asset management revenue totaled $40.9 million in 2014, an increase of $7.1 million, or 21%, compared to 2013. Trust and asset management fees are based primarily on the market value of the assets under management or administration. Increased asset levels from adding new customers helped drive revenue growth in 2015 compared to 2014. Higher asset levels from new customers and new financial advisors along with market appreciation helped drive revenue growth in 2014 compared to 2013.
Mortgage banking revenue totaled $115.0 million in 2015, $91.6 million in 2014, and $106.9 million in 2013, reflecting an increase of $23.4 million, or 26%, in 2015, and a decrease of $15.2 million, or 14%, in 2014. Mortgage banking revenue includes revenue from activities related to originating, selling and servicing residential real estate loans for the secondary market. A main factor in the mortgage banking revenue recognized by the Company is the volume of mortgage loans originated or purchased for sale. Mortgage loans originated or purchased for sale were $3.9 billion in 2015 compared to $3.2 billion in 2014, and $3.7 billion in 2013. The increase in volume is the result of a more favorable mortgage banking environment during 2015 as compared to 2014 and 2013. Mortgage revenue is also impacted by changes in the fair value of MSRs as the Company does not hedge this change in fair value. The Company typically originates mortgage loans held-for-sale with associated MSRs either retained or released. The Company records MSRs at fair value on a recurring basis.
Service charges on deposit accounts totaled $27.4 million in 2015, $23.3 million in 2014 and $20.4 million in 2013, reflecting an increase of 17% in 2015 and 14% in 2014. The increase in recent years is primarily a result of higher account analysis fees on
60 | ||
deposit accounts which have increased as a result of the Company's commercial banking initiative as well as additional service charges on deposit accounts from acquired institutions.
The Company recognized $323,000 of net gains on available-for-sale securities in 2015 compared to net losses of $504,000 in 2014 and net losses of $3.0 million in 2013. The net gains in 2015 primarily relate to the sale of mortgage-backed securities in that were held in the Company's available-for-sale securities portfolio. The Company recorded fewer losses on available-for-sale securities in 2014 compared to 2013 due to other-than-temporary impairment recorded on one security in 2013 as a result of the Volcker Rule. The Company did not recognize any other-than-temporary impairment charges in 2015 and 2014.
Fees from covered call option transactions totaled $15.4 million in 2015, $7.9 million in 2014 and $4.8 million in 2013. The Company has typically written call options with terms of less than three months against certain U.S. Treasury and agency securities held in its portfolio for liquidity and other purposes. Management has effectively entered into these transactions with the goal of economically hedging security positions and enhancing its overall return on its investment portfolio by using fees generated from these options to compensate for net interest margin compression. These option transactions are designed to mitigate overall interest rate risk and to increase the total return associated with holding certain investment securities and do not qualify as hedges pursuant to accounting guidance. Fees from covered call options increased primarily as a result of selling call options against a larger volume of underlying securities resulting in higher premiums received by the Company in 2015 compared to 2014 and 2013. There were no outstanding call option contracts at December 31, 2015, December 31, 2014 or December 31, 2013.
The Company recognized $247,000 of trading losses in 2015, trading losses of $1.6 million in 2014, and trading gains of $892,000 in 2013. Trading gains and losses recorded by the Company primarily result from fair value adjustments related to interest rate derivatives not designated as hedges, primarily interest rate cap instruments that the Company uses to manage interest rate risk, specifically in the event of future increases in short-term interest rates. The change in value of the cap derivatives reflects the present value of expected cash flows over the remaining life of the caps. These expected cash flows are derived from the expected path for and a measure of volatility of short-term interest rates.
Operating lease income totaled $2.7 million in 2015 compared to $163,000 in 2014. The increase in 2015 is primarily related to growth in business from the Company's leasing divisions.
Interest rate swap fee revenue totaled $9.5 million in 2015, $4.5 million in 2014 and $7.6 million in 2013. Swap fee revenues result from interest rate hedging transactions related to both customer-based trades and the related matched trades with inter-bank dealer counterparties. The revenue recognized on this customer-based activity is sensitive to the pace of organic loan growth, the shape of the yield curve and the customers’ expectations of interest rates. The increase in swap fee revenue in 2015 compared to 2014 and 2013 primarily results from interest rate hedging transactions related to both customer-based trades and the related matched trades with inter-bank dealer counterparties.
Bank owned life insurance (“BOLI”) generated non-interest income of $4.6 million in 2015, $2.7 million in 2014 and $3.4 million in 2013. This income typically represents adjustments to the cash surrender value of BOLI policies. The Company initially purchased BOLI to consolidate existing term life insurance contracts of executive officers and to mitigate the mortality risk associated with death benefits provided for in executive employment contracts and in connection with certain deferred compensation arrangements. The Company has also assumed additional BOLI policies as the result of the acquisition of certain banks. The Company recognized $2.1 million in BOLI death benefits in 2015. The cash surrender value of BOLI totaled $136.2 million at December 31, 2015 and $121.4 million at December 31, 2014, and is included in other assets.
Administrative services revenue generated by Tricom was $4.3 million in 2015, $3.9 million in 2014 and $3.4 million in 2013. 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 increases in recent years are a result of an increase in the volume of Tricom’s client billings.
Miscellaneous other non-interest income totaled $19.2 million in 2015, $12.0 million in 2014 and $15.0 million in 2013. Miscellaneous income includes loan servicing fees, income from other investments, service charges and other fees. The increase in miscellaneous other income for 2015 compared to 2014 primarily resulted from $4.1 million in lower FDIC indemnification asset amortization and $1.8 million in higher net gains on partnership investments. The decrease in miscellaneous other income for 2014 compared to 2013 resulted from $5.1 million in higher FDIC indemnification asset amortization and a $615,000 loss related to a bank branch sale.
61 | ||
Non-Interest Expense
The following table presents non-interest expense by category for 2015, 2014 and 2013:
Years ended December 31, | 2015 compared to 2014 | 2014 compared to 2013 | ||||||||||||||||||||||||
(Dollars in thousands) | 2015 | 2014 | 2013 | $ Change | % Change | $ Change | % Change | |||||||||||||||||||
Salaries and employee benefits: | ||||||||||||||||||||||||||
Salaries | $ | 197,475 | $ | 177,811 | $ | 170,123 | $ | 19,664 | 11 | % | $ | 7,688 | 5 | % | ||||||||||||
Commissions and incentive compensation | 120,138 | 103,185 | 87,837 | 16,953 | 16 | 15,348 | 17 | |||||||||||||||||||
Benefits | 64,467 | 54,510 | 50,834 | 9,957 | 18 | 3,676 | 7 | |||||||||||||||||||
Total salaries and employee benefits | $ | 382,080 | $ | 335,506 | $ | 308,794 | $ | 46,574 | 14 | % | $ | 26,712 | 9 | % | ||||||||||||
Equipment | 32,812 | 29,609 | 26,450 | 3,203 | 11 | 3,159 | 12 | |||||||||||||||||||
Equipment on operating lease | 1,826 | 142 | — | 1,684 | NM | 142 | NM | |||||||||||||||||||
Occupancy, net | 48,880 | 42,889 | 36,633 | 5,991 | 14 | 6,256 | 17 | |||||||||||||||||||
Data processing | 26,940 | 19,336 | 18,672 | 7,604 | 39 | 664 | 4 | |||||||||||||||||||
Advertising and marketing | 21,924 | 13,571 | 11,051 | 8,353 | 62 | 2,520 | 23 | |||||||||||||||||||
Professional fees | 18,225 | 15,574 | 14,922 | 2,651 | 17 | 652 | 4 | |||||||||||||||||||
Amortization of other intangible assets | 4,621 | 4,692 | 4,627 | (71 | ) | (2 | ) | 65 | 1 | |||||||||||||||||
FDIC insurance | 12,386 | 12,168 | 12,728 | 218 | 2 | (560 | ) | (4 | ) | |||||||||||||||||
OREO expenses, net | 4,483 | 9,367 | 5,834 | (4,884 | ) | (52 | ) | 3,533 | 61 | |||||||||||||||||
Other: | ||||||||||||||||||||||||||
Commissions — 3rd party brokers | 5,474 | 6,381 | 5,078 | (907 | ) | (14 | ) | 1,303 | 26 | |||||||||||||||||
Postage | 7,030 | 6,045 | 5,591 | 985 | 16 | 454 | 8 | |||||||||||||||||||
Miscellaneous | 61,738 | 51,567 | 52,171 | 10,171 | 20 | (604 | ) | (1 | ) | |||||||||||||||||
Total other | $ | 74,242 | $ | 63,993 | $ | 62,840 | $ | 10,249 | 16 | % | $ | 1,153 | 2 | % | ||||||||||||
Total Non-Interest Expense | $ | 628,419 | $ | 546,847 | $ | 502,551 | $ | 81,572 | 15 | % | $ | 44,296 | 9 | % | ||||||||||||
NM—Not Meaningful
Notable contributions to the change in non-interest expense are as follows:
Salaries and employee benefits is the largest component of non-interest expense, accounting for 61% of the total in 2015, 2014 and 2013. For the year ended December 31, 2015, salaries and employee benefits totaled $382.1 million and increased $46.6 million, or 14%, compared to 2014. This increase can be attributed to $4.5 million in acquisition and non-operating compensation charges, a $17.2 million increase in salaries resulting from annual salary increases, additional employees from various acquisitions and larger staffing as the company grows, a $16.6 million increase in commissions and incentive compensation primarily attributable to higher expenses on variable pay based arrangements and an $8.3 million increase in employee benefits primarily due to higher insurance costs. For the year ended December 31, 2014, salaries and employee benefits totaled $335.5 million and increased $26.7 million, or 9%, compared to 2013. This increase can be attributed to a $7.7 million increase in salaries resulting from annual salary increases, additional employees from acquisitions and larger staffing as the Company grows, a $15.3 million increase in commissions and incentive compensation primarily attributable to the Company's long-term incentive program and a $3.7 million increase in employee benefits (primarily health plan and payroll taxes related).
Equipment expense totaled $32.8 million in 2015, $29.6 million in 2014 and $26.5 million in 2013, reflecting an increase of 11% in 2015 and an increase of 12% in 2014. The increase in equipment expense in 2015 primarily related to increased software license fees, the impact of recent acquisitions and higher depreciation as a result of equipment purchases. The increase in equipment expense in 2014 compared to 2013 was a result of both additional equipment depreciation related to the increasing number of facilities due to acquisition activity and maintenance and repair expenses. Equipment expense includes furniture, equipment and computer software, depreciation and repairs and maintenance costs.
Equipment on operating lease expense totaled $1.8 million in 2015, an increase of $1.7 million compared to 2014. The increase in 2015 compared to 2014 was primarily related to growth in business from the Company's leasing divisions.
Occupancy expense for the years 2015, 2014 and 2013 was $48.9 million, $42.9 million and $36.6 million, respectively, reflecting increases of 14% in 2015 and 17% in 2014. The increases in 2015 and 2014 were primarily the result of increased rent expense on leased properties as well as increased depreciation and property taxes on owned locations including those obtained in the Company's acquisitions. In addition, the Company incurred a loss of $1.1 million upon entering into a sublease agreement on an
62 | ||
existing property in the fourth quarter of 2014 as well as increased snow removal costs during the first quarter of 2014. Occupancy expense includes depreciation on premises, real estate taxes, utilities and maintenance of premises, as well as net rent expense for leased premises.
Data processing expenses totaled $26.9 million in 2015, $19.3 million in 2014 and $18.7 million in 2013, representing an increase of 39% in 2015 and an increase of 4% in 2014. The amount of data processing expenses incurred fluctuates based on the overall growth of loan and deposit accounts as well as additional expenses recorded related to bank acquisition transactions. Data processing expenses increased in 2015 compared to 2014 primarily due to acquisition-related charges of $5.0 million during 2015. The increase in 2014 compared to 2013 was primarily due to continued growth in the Company during the period.
Advertising and marketing expenses totaled $21.9 million for 2015, $13.6 million for 2014 and $11.1 million for 2013. Marketing costs are incurred to promote the Company’s brand, commercial banking capabilities, the Company’s MaxSafe® suite of products, community-based products, to attract loans and deposits and to announce new branch openings as well as the expansion of the Company's non-bank businesses. The increase in 2015 compared to 2014 and 2013 was primarily due to expenses for community-related advertisements and sponsorships. The level of marketing expenditures depends on the type of marketing programs utilized which are determined based on the market area, targeted audience, competition and various other factors. Management continues to utilize mass market media promotions as well as targeted marketing programs in certain market areas. In 2015 and 2014, the Company incurred increased advertising and marketing costs to increase Wintrust's name recognition associated with the overall goal of becoming "Chicago's and Wisconsin's Bank."
Professional fees totaled $18.2 million in 2015, $15.6 million in 2014 and $14.9 million in 2013. The increase in 2015 as compared to 2014 and 2013 related primarily to increased legal fees incurred in connection with acquisitions in addition to increased audit and tax-related services. The increase in 2014 compared to 2013 was primarily the result of increased consulting services. Professional fees include legal, audit and tax fees, external loan review costs and normal regulatory exam assessments.
OREO expense was $4.5 million in 2015, $9.4 million in 2014, and $5.8 million in 2013. The decrease in 2015 compared to 2014 was primarily the result of fewer negative valuation adjustments of OREO properties and lower expenses to maintain OREO properties. The increase in 2014 as compared to 2013 was primarily the result of higher gains on covered OREO sales in 2013. OREO expenses include all costs associated with obtaining, maintaining and selling other real estate owned properties as well as valuation adjustments.
Miscellaneous non-interest expense increased $10.2 million, or 20%, in 2015 compared to 2014 and decreased $604,000, or 1%, in 2014 compared to 2013. The increase in 2015 compared to 2014 was primarily a result of higher travel and entertainment expenses and increased costs related to postage, insurance, donations and operating losses. Miscellaneous non-interest expense includes ATM expenses, correspondent banking charges, directors’ fees, telephone, travel and entertainment, corporate insurance, dues and subscriptions, problem loan expenses, operating losses and lending origination costs that are not deferred.
Income Taxes
The Company recorded income tax expense of $95.0 million in both 2015 and 2014 and $87.2 million in 2013. The effective tax rates were 37.7%, 38.6% and 38.9% in 2015, 2014 and 2013, respectively. The lower effective tax rate in 2015 as compared to the 2014 and 2013 was a result of a lower state income tax rate in Illinois in 2015 and an increase in tax-exempt income relative to income before income taxes in 2015 as compared to 2014 and 2013. Please refer to Note 16 to the Consolidated Financial Statements in Item 8 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.
63 | ||
Operating Segment Results
As described in Note 23 to the Consolidated Financial Statements in Item 8, the Company’s operations consist of three primary segments: community banking, specialty finance and wealth management. The Company’s profitability is primarily dependent on the net interest income, provision for credit losses, non-interest income and operating expenses of its community banking segment. For purposes of internal segment profitability, management allocates certain intersegment and parent company balances. Management allocates a portion of revenues to the specialty finance segment related to loans originated by the specialty finance segment and sold to the community banking segment. Similarly, for purposes of analyzing the contribution from the wealth management segment, management allocates a portion of the net interest income earned by the community banking segment on deposit balances of customers of the wealth management segment to the wealth management segment. Finally, expenses incurred at the Wintrust parent company are allocated to each segment based on each segment's risk-weighted assets.
The community banking segment’s net interest income for the year ended December 31, 2015 totaled $523.1 million as compared to $484.5 million for the same period in 2014, an increase of $38.6 million, or 8%, and the segment’s net interest income in 2014 compared to 2013 increased $36.3 million or 8%. The increases in 2015 compared to 2014 as well as 2014 compared to 2013 were primarily attributable to an increase in earning assets including those acquired in bank acquisitions. The community banking segment's provision for credit losses totaled $29.7 million in 2015 compared to $17.7 million in 2014 and $45.4 million in 2013. The provision for credit losses increased in 2015 compared to 2014 as a result of an increase in loans, excluding covered loans, during 2015. The decrease in 2014 compared to 2013 was due to improved credit quality ratios, including reduced levels of non-performing loans. Non-interest income for the community banking segment increased $54.9 million, or 40%, in 2015 when compared to 2014 and decreased $14.2 million, or 9%, in 2014 when compared to 2013. The increase in 2015 compared to 2014 was primarily attributable to higher mortgage banking revenues from higher originations in 2015 as a result of the favorable mortgage environment and increased fees on covered call options. The decrease in 2014 compared to 2013 was primarily attributable to a lower volume of mortgage loans originated or purchased for sale resulting in decreased mortgage banking revenue. The community banking segment’s net income for the year ended December 31, 2015 totaled $101.9 million, an increase of $3.2 million, compared to net income of $98.7 million in 2014. Net income for the year ended December 31, 2014 of $98.7 million was an increase of $10.3 million as compared to net income in 2013 of $88.4 million.
The specialty finance segment’s net interest income totaled $85.3 million for the year ended December 31, 2015, compared to $82.4 million in the same period of 2014, an increase of $2.9 million, or 3%. The specialty finance segment’s net interest income for the year ended December 31, 2014 increased $8.5 million, or 12%, from $73.9 million in 2013. The specialty finance segment's provision for credit losses increased to $3.2 million in 2015 compared to $2.8 million in 2014 and $637,000 in 2013. The provision for credit losses increased in 2015 and 2014 compared to the respective prior year primarily due to growth in the loan portfolio within the segment during 2015 and 2014. The specialty finance segment’s non-interest income totaled $33.6 million for the year ended December 31, 2015 compared to $32.5 million in 2014 and $30.9 million in 2013. The increase in non-interest income is a result of increased premium finance receivable originations. For 2015, our commercial premium finance operations, life insurance premium finance operations and accounts receivable finance operations accounted for 58%, 33% and 9%, respectively, of the total revenues of our specialty finance business. Net income of the specialty finance segment totaled $42.1 million, $40.6 million and $38.1 million for the years ended December 31, 2015, 2014 and 2013, respectively.
The wealth management segment reported net interest income of $17.0 million for 2015, $16.0 million for 2014 and $14.1 million for 2013. Net interest income for this segment is primarily comprised of an allocation of net interest income earned by the community banking segment on non-interest bearing and interest-bearing wealth management customer account balances on deposit at the banks. Wealth management customer account balances on deposit at the banks averaged $890.6 million, $832.9 million and $782.7 million in 2015, 2014 and 2013, respectively. This segment recorded non-interest income of $75.5 million for 2015 as compared to $73.4 million for 2014 and $65.6 million for 2013. This increase is primarily due to a growth in assets from new customers and new financial advisors, as well as an increase in existing customer activity and market appreciation. 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. The Company is committed to growing the wealth management segment in order to better service its customers and create a more diversified revenue stream. The wealth management segment reported net income of $12.7 million for 2015 compared to $12.1 million for 2014 and $10.7 million for 2013.
64 | ||
ANALYSIS OF FINANCIAL CONDITION
Total assets were $22.9 billion at December 31, 2015, representing an increase of $2.9 billion, or 15%, when compared to December 31, 2014. Total funding, which includes deposits, all notes and advances, including secured borrowings and the junior subordinated debentures, was $20.2 billion at December 31, 2015 and $17.6 billion at December 31, 2014. See Notes 3, 4, and 10 through 14 of the Consolidated Financial Statements in Item 8 for additional period-end detail on the Company’s interest-earning assets and funding liabilities.
Interest-Earning Assets
The following table sets forth, by category, the composition of average earning assets and the relative percentage of each category to total average earning assets for the periods presented:
Years Ended December 31, | |||||||||||||||||||||
2015 | 2014 | 2013 | |||||||||||||||||||
(Dollars in thousands) | Balance | Percent | Balance | Percent | Balance | Percent | |||||||||||||||
Loans: | |||||||||||||||||||||
Commercial | $ | 4,250,698 | 22 | % | $ | 3,559,368 | 21 | % | $ | 3,005,880 | 19 | % | |||||||||
Commercial real estate | 4,990,657 | 26 | 4,368,326 | 26 | 4,076,844 | 26 | |||||||||||||||
Home equity | 749,760 | 4 | 715,174 | 4 | 753,181 | 5 | |||||||||||||||
Residential real estate (1) | 899,039 | 5 | 745,637 | 4 | 772,753 | 5 | |||||||||||||||
Premium finance receivables | 4,973,095 | 26 | 4,401,525 | 26 | 3,946,647 | 25 | |||||||||||||||
Other loans | 159,122 | 1 | 168,812 | 1 | 186,897 | 1 | |||||||||||||||
Total loans, net of unearned income(2) excluding covered loans | $ | 16,022,371 | 83 | % | $ | 13,958,842 | 82 | % | $ | 12,742,202 | 81 | % | |||||||||
Covered loans | 186,427 | 1 | 280,946 | 2 | 462,518 | 3 | |||||||||||||||
Total average loans (2) | $ | 16,208,798 | 84 | % | $ | 14,239,788 | 84 | % | $ | 13,204,720 | 84 | % | |||||||||
Liquidity management assets (3) | $ | 2,992,506 | 16 | % | $ | 2,761,450 | 16 | % | $ | 2,557,223 | 16 | % | |||||||||
Other earning assets (4) | 30,161 | — | 28,699 | — | 26,554 | — | |||||||||||||||
Total average earning assets | $ | 19,231,465 | 100 | % | $ | 17,029,937 | 100 | % | $ | 15,788,497 | 100 | % | |||||||||
Total average assets | $ | 21,009,773 | $ | 18,699,458 | $ | 17,468,249 | |||||||||||||||
Total average earning assets to total average assets | 92 | % | 91 | % | 90 | % | |||||||||||||||
(1) | Includes mortgage loans held-for-sale |
(2) | Includes loans held-for-sale and non-accrual loans |
(3) | Liquidity management assets include investment securities, Federal Home Loan Bank and Federal Reserve Bank stock, interest earning deposits with banks, federal funds sold and securities purchased under resale agreements |
(4) | Other earning assets include brokerage customer receivables and trading account securities |
Total average earning assets increased $2.2 billion, or 13%, in 2015 and $1.2 billion, or 7%, in 2014. Average earning assets comprised 92% of average total assets in 2015 compared to 91% of average total assets in 2014 and 90% of average total assets in 2013.
Loans. Average total loans, net of unearned income, totaled $16.2 billion and increased $2.0 billion, or 14%, in 2015 and $1.0 billion, or 8%, in 2014. Average commercial loans totaled $4.3 billion in 2015, and increased $691.3 million, or 19%, over the average balance in 2014, while average commercial real estate loans totaled $5.0 billion in 2015, increasing $622.3 million, or 14%, since 2014. From 2013 to 2014, average commercial loans increased $553.5 million, or 18%, while average commercial real estate loans increased by $291.5 million, or 7%. Combined, these categories comprised 57% of the average loan portfolio in 2015 and 56% in 2014. The growth realized in these categories for 2015 and 2014 is primarily attributable to the various bank acquisitions and increased business development efforts.
Home equity loans averaged $749.8 million in 2015, and increased $34.6 million, or 5%, when compared to the average balance in 2014. Home equity loans averaged $715.2 million in 2014, and decreased $38.0 million, or 5%, when compared to the average balance in 2013. Unused commitments on home equity lines of credit totaled $855.1 million at December 31, 2015 and $744.3 million at December 31, 2014. The Company has been actively managing its home equity portfolio to ensure that diligent pricing,
65 | ||
appraisal and other underwriting activities continue to exist. The Company has not sacrificed asset quality or pricing standards when originating new home equity loans.
Residential real estate loans averaged $899.0 million in 2015, and increased $153.4 million, or 21%, from the average balance in 2014. In 2014, residential real estate loans averaged $745.6 million, and decreased $27.1 million, or 4%, from the average balance in 2013. 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. Average mortgage loans held-for-sale increased during 2015 as a result of higher origination volumes due to the impact of lower rates on refinancing activity.
Average premium finance receivables totaled $5.0 billion in 2015, and accounted for 31% of the Company’s average total loans. Premium finance receivables consist of a commercial portfolio and a life portfolio, comprising 49% and 51%, respectively, of the average total balance for 2015. In 2014, the commercial portfolio and life portfolio comprised 54% and 46%, respectively, of premium finance receivables. In 2015, average premium finance receivables increased $571.6 million, or 13%, compared to 2014. In 2014, average premium finance receivables increased $454.9 million, or 12%, from the average balance of $3.9 billion in 2013. The increase during 2015 and 2014 was the result of continued originations within the portfolio due to the effective marketing and customer servicing. Approximately $6.5 billion of premium finance receivables were originated in 2015 compared to approximately $6.2 billion in 2014.
Other loans represent a wide variety of personal and consumer loans to individuals as well as indirect automobile and consumer loans, and high-yielding short-term accounts receivable financing to clients in the temporary staffing industry located throughout the United States. Consumer loans generally have shorter terms and higher interest rates than mortgage loans but generally involve more credit risk due to the type and nature of the collateral. Additionally, short-term accounts receivable financing may also involve greater credit risks than generally associated with the loan portfolios of more traditional community banks depending on the marketability of the collateral.
Covered loans averaged $186.4 million in 2015, and decreased $94.5 million, or 34%, when compared to 2014. In 2014, average covered loans totaled $280.9 million and decreased $181.6 million, or 39%, from 2013. Covered loans represent loans acquired through the nine FDIC-assisted transactions, all of which occurred prior to 2013. These loans are subject to loss sharing agreements with the FDIC. The FDIC has agreed to reimburse the Company for 80% of losses incurred on the purchased loans, foreclosed real estate, and certain other assets during the respective terms of the loss share agreements. The Company expects the covered loan portfolio to continue to decrease as these acquired loans are paid off and as loss sharing agreements expire. See Note 7 — Business Combinations for a discussion of these acquisitions, including the aggregation of these loans by risk characteristics when determining the initial and subsequent fair value.
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. Average liquidity management assets accounted for 16% of total average earning assets in 2015, 2014 and 2013. Average liquidity management assets increased $231.1 million in 2015 compared to 2014, and increased $204.2 million in 2014 compared to 2013. The balances of these assets can fluctuate based on management’s ongoing effort to manage liquidity and for asset liability management purposes.
Other earning assets. Other earning assets include brokerage customer receivables and trading account securities. 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, under an agreement with the out-sourced securities firm, credit is extended to the customer, subject to various regulatory and internal margin requirements, collateralized by cash and securities in customer’s accounts. In connection with these activities, WHI executes and the out-sourced firm clears customer transactions relating to the sale of securities not yet purchased, substantially all of which are transacted on a margin basis subject to individual exchange regulations. Such transactions may expose WHI to off-balance-sheet risk, particularly in volatile trading markets, in the event margin requirements are not sufficient to fully cover losses that customers may incur. In the event a customer fails to satisfy its obligations, WHI under an agreement with the out-sourced 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.
66 | ||
Deposits and Other Funding Sources
Total deposits at December 31, 2015, were $18.6 billion, increasing $2.4 billion, or 14%, compared to the $16.3 billion at December 31, 2014. Average deposit balances in 2015 were $17.4 billion, reflecting an increase of $1.9 billion, or 12%, compared to the average balances in 2014. During 2014, average deposits increased $1.2 billion, or 8%, compared to the prior year.
The increase in year end and average deposits in 2015 over 2014 is primarily attributable to the Company's acquisition activity as well as additional deposits associated with the increased commercial lending relationships. The Company continues to see a beneficial shift in its deposit mix as average non-interest bearing deposits increased $1.1 billion, or 35% in 2015 compared to 2014, with period end balances ending at 26% of total deposits at December 31, 2015, compared to 22% at December 31, 2014.
The following table presents the composition of average deposits by product category for each of the last three years:
Years Ended December 31, | |||||||||||||||||||||
2015 | 2014 | 2013 | |||||||||||||||||||
(Dollars in thousands) | Balance | Percent | Balance | Percent | Balance | Percent | |||||||||||||||
Non-interest bearing deposits | $ | 4,144,378 | 24 | % | $ | 3,062,338 | 20 | % | $ | 2,487,761 | 17 | % | |||||||||
NOW and interest bearing demand deposits | 2,246,451 | 13 | 2,028,485 | 13 | 2,049,573 | 14 | |||||||||||||||
Wealth management deposits | 1,456,289 | 8 | 1,227,072 | 8 | 987,885 | 7 | |||||||||||||||
Money market accounts | 3,888,781 | 23 | 3,575,605 | 23 | 3,048,045 | 21 | |||||||||||||||
Savings accounts | 1,610,603 | 9 | 1,453,559 | 9 | 1,300,681 | 9 | |||||||||||||||
Time certificates of deposit | 4,069,180 | 23 | 4,185,876 | 27 | 4,460,670 | 32 | |||||||||||||||
Total average deposits | $ | 17,415,682 | 100 | % | $ | 15,532,935 | 100 | % | $ | 14,334,615 | 100 | % | |||||||||
Wealth management deposits are funds from the brokerage customers of WHI, the trust and asset management customers of CTC and brokerage customers from unaffiliated companies which have been placed into deposit accounts of the banks (“wealth management deposits” in table above). Wealth management deposits consist primarily of money market accounts. Consistent with reasonable interest rate risk parameters, these funds have generally been invested in loan production of the banks as well as other investments suitable for banks.
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:
Years Ended December 31, | |||||||||||||||||||||
2015 | 2014 | 2013 | |||||||||||||||||||
(Dollars in thousands) | Balance | Percent | Balance | Percent | Balance | Percent | |||||||||||||||
Wintrust Bank | $ | 2,871,755 | 17 | % | $ | 2,350,644 | 16 | % | $ | 1,816,775 | 13 | % | |||||||||
Lake Forest Bank | 1,927,484 | 11 | 1,819,033 | 12 | 1,721,068 | 12 | |||||||||||||||
Hinsdale Bank | 1,505,057 | 9 | 1,294,351 | 9 | 1,265,361 | 9 | |||||||||||||||
Town Bank | 1,288,312 | 7 | 924,163 | 6 | 732,828 | 5 | |||||||||||||||
Northbrook Bank | 1,235,701 | 7 | 1,198,678 | 8 | 1,380,842 | 11 | |||||||||||||||
Barrington Bank | 1,177,254 | 7 | 1,106,884 | 7 | 1,061,249 | 7 | |||||||||||||||
Old Plank Trail Bank | 1,069,543 | 6 | 1,002,729 | 6 | 873,408 | 6 | |||||||||||||||
Libertyville Bank | 1,017,398 | 6 | 996,416 | 6 | 988,953 | 7 | |||||||||||||||
Village Bank | 953,194 | 5 | 879,896 | 6 | 833,258 | 6 | |||||||||||||||
Wheaton Bank | 853,841 | 5 | 678,292 | 4 | 598,263 | 4 | |||||||||||||||
State Bank of the Lakes | 758,243 | 4 | 672,995 | 4 | 604,301 | 4 | |||||||||||||||
Beverly Bank | 732,054 | 4 | 687,499 | 4 | 642,836 | 4 | |||||||||||||||
Crystal Lake Bank | 705,355 | 4 | 674,941 | 4 | 620,385 | 4 | |||||||||||||||
Schaumburg Bank | 679,260 | 4 | 636,988 | 4 | 617,328 | 4 | |||||||||||||||
St. Charles Bank | 641,231 | 4 | 609,426 | 4 | 577,760 | 4 | |||||||||||||||
Total deposits | $ | 17,415,682 | 100 | % | $ | 15,532,935 | 100 | % | $ | 14,334,615 | 100 | % | |||||||||
Percentage increase from prior year | 12 | % | 8 | % | 9 | % | |||||||||||||||
67 | ||
Various acquisitions, most notably those made during 2015 by Town Bank, are partially responsible for the deposit fluctuations from 2014 to 2015. These acquisitions are discussed in Note 7 - Business Combinations. The Company's continued overall growth during 2015 also contributed to these deposit fluctuations.
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 and the retention of earnings, the Company uses several other funding sources to support its growth. These sources include short-term borrowings, notes payable, FHLB advances, subordinated debt, secured borrowings and junior subordinated debentures. The Company evaluates the terms and unique characteristics of each source, as well as its asset-liability management position, in determining the use of such funding sources.
The following table sets forth, by category, the composition of the average balances of other funding sources for the periods presented:
Years Ended December 31, | |||||||||||||||||||||
2015 | 2014 | 2013 | |||||||||||||||||||
Average | Percent | Average | Percent | Average | Percent | ||||||||||||||||
(Dollars in thousands) | Balance | of Total | Balance | of Total | Balance | of Total | |||||||||||||||
Notes payable | $ | 40,130 | 4 | % | $ | 134 | — | % | $ | 6,032 | 1 | % | |||||||||
Federal Home Loan Bank advances | 389,426 | 38 | 387,591 | 46 | 423,221 | 44 | |||||||||||||||
Secured borrowings | 118,443 | 12 | 5,656 | 1 | — | — | |||||||||||||||
Subordinated notes | 140,000 | 14 | 77,479 | 9 | 10,521 | 1 | |||||||||||||||
Short-term borrowings | 55,862 | 5 | 107,588 | 13 | 234,153 | 25 | |||||||||||||||
Junior subordinated debentures | 258,203 | 25 | 249,493 | 29 | 249,493 | 26 | |||||||||||||||
Other | 18,717 | 2 | 19,101 | 2 | 29,126 | 3 | |||||||||||||||
Total other funding sources | $ | 1,020,781 | 100 | % | $ | 847,042 | 100 | % | $ | 952,546 | 100 | % | |||||||||
Notes payable balances represent the balances on separate loan agreements with unaffiliated banks, which included a $100.0 million revolving credit facility that was replaced in 2014 by a separate $150 million loan agreement with unaffiliated banks consisting of a $75.0 million revolving credit facility and a $75.0 million term facility. Both loan facilities are 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, 2015, the Company had an outstanding balance under the term facility of $67.5 million compared to no balance at December 31, 2014. The Company was contractually required to borrow the entire amount of the term facility on June 15, 2015 and all such borrowings must be repaid by June 15, 2020. At December 31, 2015 and December 31, 2014, the Company had no outstanding balance on the $75.0 million revolving 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 $859.9 million at December 31, 2015 and $733.1 million at December 31, 2014. See Note 11 to the Consolidated Financial Statements for further discussion of the terms of these advances.
The average balance of secured borrowings represents a third party Canadian transaction ("Canadian Secured Borrowing"). Under the Canadian Secured Borrowing, in December 2014, the Company, through its subsidiary, FIFC Canada, sold an undivided co-ownership interest in all receivables owed to FIFC Canada to an unrelated third party in exchange for a cash payment of approximately C$150 million pursuant to a receivables purchase agreement (“Receivables Purchase Agreement”). The Receivables Purchase Agreement was amended in December 2015, effectively extending the maturity date from December 15, 2015 to December 15, 2017. Additionally, at that time, the unrelated third party paid an additional C$10 million, which increased the total payments to C$160 million. The proceeds received from these transactions are reflected on the Company’s Consolidated Statements of Condition as a secured borrowing owed to the unrelated third party and translated to the Company’s reporting currency as of the respective date. At December 31, 2015, the translated balance of the Canadian Secured Borrowing totaled $115.6 million with an interest rate of 1.4452%.
At December 31, 2015 and 2014, subordinated notes totaled $140.0 million. During 2014, the Company issued $140.0 million of subordinated notes receiving $139.1 million in net proceeds. The notes have a stated interest rate of 5.00% and mature in June 2024. Previously, the Company borrowed $75.0 million under three separate $25.0 million subordinated note agreements. Each subordinated note required annual principal payments of $5.0 million beginning in the sixth year of the note and had a term of ten years. In 2013, the remaining subordinated note with a balance of $10.0 million was paid off prior to maturity.
68 | ||
Short-term borrowings include securities sold under repurchase agreements and federal funds purchased. These borrowings totaled $63.9 million and $48.6 million at December 31, 2015 and 2014, respectively. Securities sold under repurchase agreements represent sweep accounts for certain customers in connection with master repurchase agreements at the banks as well as short-term borrowings from banks and brokers. In 2014, $180.0 million of short-term borrowings were paid-off. This funding category typically fluctuates based on customer preferences and daily liquidity needs of the banks, their customers and the banks’ operating subsidiaries. See Note 13 to the Consolidated Financial Statements for further discussion of these borrowings.
The Company has $268.6 million of junior subordinated debentures outstanding as of December 31, 2015 compared to $249.5 million outstanding as of December 31, 2014. The amounts reflected on the balance sheet represent the junior subordinated debentures issued to eleven trusts by the Company and equal the amount of the preferred and common securities issued by the trusts. The balance increased $19.1 million in 2015 as a result of the addition of the Suburban Illinois Capital Trust II and Community Financial Shares Statutory Trust II acquired as a part of the acquisitions of Suburban and CFIS, respectively. See Note 14 of the Consolidated Financial Statements for further discussion of the Company’s junior subordinated debentures. Starting in 2015, a portion of these junior subordinated debentures still qualified as Tier 1 regulatory capital of the Company and the amount in excess of those certain limitations, subject to certain restrictions, was included in Tier 2 capital. At December 31, 2015, $65.1 million and $195.4 million of the junior subordinated debentures, net of common securities, were included in the Company's Tier 1 and Tier 2 regulatory capital, respectively. Starting on January 1, 2016, these junior subordinated debentures no longer qualify as Tier 1 regulatory capital of the Company, however, subject to other restrictions, they could be included in Tier 2 capital. Interest expense on these debentures is deductible for tax purposes, resulting in a cost-efficient form of regulatory capital.
Other borrowings include debt issued by the Company in conjunction with its tangible equity unit offering in December 2010, a fixed-rate promissory note entered into in August 2012 related to an office building complex owned by the Company and non-recourse notes issued by the Company to other banks related to certain capital leases. In December 2013, the debt issued in conjunction with its tangible equity unit offering was paid-off at maturity. At December 31, 2015, the fixed-rate promissory note related to an office building complex had an outstanding balance of $18.3 million compared to $18.8 million at December 31, 2014. See Notes 13 and 22 to the Consolidated Financial Statements in Item 8 for further discussion of these borrowings.
Shareholders’ Equity. Total shareholders’ equity was $2.4 billion at December 31, 2015, an increase of $282.5 million from the December 31, 2014 total of $2.1 billion. The increase in 2015 was primarily a result of net income of $156.7 million in 2015, $120.8 million from the issuance of the Series D Preferred Stock, net of costs, $38.7 million from the issuance of shares of the Company's common stock related to the acquisition of CFIS and Delavan, $13.8 million from the issuance of shares of the Company's common stock (and related tax benefit) pursuant to various stock compensation plans, net of treasury shares, $9.7 million credited to surplus for stock-based compensation costs and $324,000 of net unrealized gains on cash flow hedges, net of tax, partially offset by common stock dividends of $21.1 million, $17.6 million of foreign currency translation adjustments, net of tax, preferred stock dividends of $10.9 million and $8.1 million in net unrealized losses from investment securities, net of tax.
Changes in shareholders’ equity from 2013 to 2014 were primarily a result of net income of $151.4 million in 2014, net unrealized gains of $44.1 million on investment securities, net of tax, $9.9 million from the issuance of shares of the Company’s common stock (and related tax benefit) related to acquisitions and pursuant to various stock compensation plans and $7.8 million credited to surplus for stock-based compensation costs, partially offset by common stock dividends of $18.6 million, $18.6 million of foreign currency translation adjustments, net of tax, preferred stock dividends of $6.3 million, $549,000 of common stock repurchased by the Company and $55,000 in net unrealized losses on cash flow hedges, net of tax.
69 | ||
LOAN PORTFOLIO AND ASSET QUALITY
Loan Portfolio
The following table shows the Company’s loan portfolio by category as of December 31 for each of the five previous fiscal years:
2015 | 2014 | 2013 | 2012 | 2011 | |||||||||||||||||||||||||||||||
% of | % of | % of | % of | % of | |||||||||||||||||||||||||||||||
(Dollars in thousands) | Amount | Total | Amount | Total | Amount | Total | Amount | Total | Amount | Total | |||||||||||||||||||||||||
Commercial | $ | 4,713,909 | 27 | % | $ | 3,924,394 | 26 | % | $ | 3,253,687 | 25 | % | $ | 2,914,798 | 24 | % | $ | 2,498,313 | 22 | % | |||||||||||||||
Commercial real estate | 5,529,289 | 32 | 4,505,753 | 31 | 4,230,035 | 32 | 3,864,118 | 31 | 3,514,261 | 31 | |||||||||||||||||||||||||
Home equity | 784,675 | 5 | 716,293 | 5 | 719,137 | 5 | 788,474 | 6 | 862,345 | 8 | |||||||||||||||||||||||||
Residential real estate | 607,451 | 3 | 483,542 | 3 | 434,992 | 3 | 367,213 | 3 | 350,289 | 3 | |||||||||||||||||||||||||
Premium finance receivables—commercial | 2,374,921 | 14 | 2,350,833 | 16 | 2,167,565 | 16 | 1,987,856 | 16 | 1,412,454 | 13 | |||||||||||||||||||||||||
Premium finance receivables—life insurance | 2,961,496 | 17 | 2,277,571 | 16 | 1,923,698 | 15 | 1,725,166 | 14 | 1,695,225 | 15 | |||||||||||||||||||||||||
Other loans | 146,376 | 1 | 151,012 | 1 | 167,488 | 1 | 181,318 | 2 | 188,490 | 2 | |||||||||||||||||||||||||
Total loans, net of unearned income, excluding covered loans | $ | 17,118,117 | 99 | % | $ | 14,409,398 | 98 | % | $ | 12,896,602 | 97 | % | $ | 11,828,943 | 96 | % | $ | 10,521,377 | 94 | % | |||||||||||||||
Covered loans | 148,673 | 1 | 226,709 | 2 | 346,431 | 3 | 560,087 | 4 | 651,368 | 6 | |||||||||||||||||||||||||
Total loans | $ | 17,266,790 | 100 | % | $ | 14,636,107 | 100 | % | $ | 13,243,033 | 100 | % | $ | 12,389,030 | 100 | % | $ | 11,172,745 | 100 | % | |||||||||||||||
70 | ||
Commercial and commercial real estate loans. Our commercial and commercial real estate loan portfolios are comprised primarily of commercial real estate loans and lines of credit for working capital purposes. The table below sets forth information regarding the types, amounts and performance of our loans within these portfolios (excluding covered loans) as of December 31, 2015 and 2014:
As of December 31, 2015 (Dollars in thousands) | Balance | % of Total Balance | Non-accrual | > 90 Days Past Due and Still Accruing | Allowance For Loan Losses Allocation | ||||||||||||||
Commercial: | |||||||||||||||||||
Commercial and industrial | $ | 2,851,354 | 27.8 | % | $ | 12,416 | $ | 6 | $ | 23,457 | |||||||||
Franchise | 245,228 | 2.4 | — | — | 3,086 | ||||||||||||||
Mortgage warehouse lines of credit | 222,806 | 2.2 | — | — | 1,628 | ||||||||||||||
Community Advantage — homeowner associations | 130,986 | 1.3 | — | — | 3 | ||||||||||||||
Aircraft | 5,327 | 0.1 | 288 | — | 7 | ||||||||||||||
Asset-based lending | 742,684 | 7.3 | 8 | — | 5,859 | ||||||||||||||
Tax exempt | 267,273 | 2.6 | — | — | 1,759 | ||||||||||||||
Leases | 226,074 | 2.2 | — | 535 | 232 | ||||||||||||||
Other | 3,588 | — | — | — | 20 | ||||||||||||||
PCI - commercial loans (1) | 18,589 | 0.2 | — | 892 | 84 | ||||||||||||||
Total commercial | $ | 4,713,909 | 46.1 | % | $ | 12,712 | $ | 1,433 | $ | 36,135 | |||||||||
Commercial Real Estate: | |||||||||||||||||||
Residential construction | $ | 70,381 | 0.7 | % | $ | 273 | $ | — | $ | 895 | |||||||||
Commercial construction | 288,279 | 2.8 | 33 | — | 3,018 | ||||||||||||||
Land | 78,417 | 0.8 | 1,751 | — | 2,467 | ||||||||||||||
Office | 863,001 | 8.4 | 4,619 | — | 5,890 | ||||||||||||||
Industrial | 727,648 | 7.1 | 9,564 | — | 6,377 | ||||||||||||||
Retail | 868,399 | 8.5 | 1,760 | — | 5,597 | ||||||||||||||
Multi-family | 742,349 | 7.2 | 1,954 | — | 7,356 | ||||||||||||||
Mixed use and other | 1,732,816 | 16.9 | 6,691 | — | 11,809 | ||||||||||||||
PCI - commercial real estate (1) | 157,999 | 1.5 | — | 22,111 | 349 | ||||||||||||||
Total commercial real estate | $ | 5,529,289 | 53.9 | % | $ | 26,645 | $ | 22,111 | $ | 43,758 | |||||||||
Total commercial and commercial real estate | $ | 10,243,198 | 100.0 | % | $ | 39,357 | $ | 23,544 | $ | 79,893 | |||||||||
Commercial real estate—collateral location by state: | |||||||||||||||||||
Illinois | $ | 4,455,287 | 80.6 | % | |||||||||||||||
Wisconsin | 581,844 | 10.5 | |||||||||||||||||
Total primary markets | $ | 5,037,131 | 91.1 | % | |||||||||||||||
Florida | 55,631 | 1.0 | |||||||||||||||||
California | 64,018 | 1.2 | |||||||||||||||||
Indiana | 129,467 | 2.3 | |||||||||||||||||
Other (no individual state greater than 0.7%) | 243,042 | 4.4 | |||||||||||||||||
Total | $ | 5,529,289 | 100.0 | % | |||||||||||||||
(1) | PCI loans represent loans acquired with evidence of credit quality deterioration since origination, in accordance with ASC 310-30. Loan agings are based upon contractually required payments. |
71 | ||
As of December 31, 2014 (Dollars in thousands) | Balance | % of Total Balance | Nonaccrual | > 90 Days Past Due and Still Accruing | Allowance For Loan Losses Allocation | ||||||||||||||
Commercial: | |||||||||||||||||||
Commercial and industrial | $ | 2,214,480 | 26.3 | % | $ | 9,132 | $ | 474 | $ | 20,750 | |||||||||
Franchise | 252,200 | 3.0 | — | — | 1,702 | ||||||||||||||
Mortgage warehouse lines of credit | 139,003 | 1.6 | — | — | 995 | ||||||||||||||
Community Advantage—homeowner associations | 106,364 | 1.3 | — | — | 3 | ||||||||||||||
Aircraft | 8,065 | 0.1 | — | — | 10 | ||||||||||||||
Asset-based lending | 806,402 | 9.6 | 25 | — | 7,051 | ||||||||||||||
Tax exempt | 217,487 | 2.6 | — | — | 1,077 | ||||||||||||||
Leases | 160,136 | 1.9 | — | — | 32 | ||||||||||||||
Other | 11,034 | 0.1 | — | — | 79 | ||||||||||||||
PCI - commercial loans (1) | 9,223 | 0.1 | — | 365 | — | ||||||||||||||
Total commercial | $ | 3,924,394 | 46.6 | % | $ | 9,157 | $ | 839 | $ | 31,699 | |||||||||
Commercial Real Estate: | |||||||||||||||||||
Residential construction | $ | 38,696 | 0.5 | % | $ | — | $ | — | $ | 609 | |||||||||
Commercial construction | 187,766 | 2.2 | 230 | — | 2,780 | ||||||||||||||
Land | 91,830 | 1.1 | 2,656 | — | 2,289 | ||||||||||||||
Office | 705,432 | 8.4 | 7,288 | — | 4,626 | ||||||||||||||
Industrial | 623,970 | 7.4 | 2,392 | — | 3,894 | ||||||||||||||
Retail | 731,488 | 8.7 | 4,152 | — | 4,991 | ||||||||||||||
Multi-family | 605,742 | 7.1 | 249 | — | 4,366 | ||||||||||||||
Mixed use and other | 1,465,117 | 17.3 | 9,638 | — | 11,890 | ||||||||||||||
PCI - commercial real estate (1) | 55,712 | 0.7 | — | 10,976 | 88 | ||||||||||||||
Total commercial real estate | $ | 4,505,753 | 53.4 | % | $ | 26,605 | $ | 10,976 | $ | 35,533 | |||||||||
Total commercial and commercial real estate | $ | 8,430,147 | 100.0 | % | $ | 35,762 | $ | 11,815 | $ | 67,232 | |||||||||
Commercial real estate—collateral location by state: | |||||||||||||||||||
Illinois | $ | 3,686,193 | 81.8 | % | |||||||||||||||
Wisconsin | 472,985 | 10.5 | |||||||||||||||||
Total primary markets | $ | 4,159,178 | 92.3 | % | |||||||||||||||
Florida | 79,740 | 1.8 | |||||||||||||||||
California | 28,999 | 0.6 | |||||||||||||||||
Indiana | 91,282 | 2.0 | |||||||||||||||||
Other (no individual state greater than 0.5%) | 146,554 | 3.3 | |||||||||||||||||
Total | $ | 4,505,753 | 100.0 | % | |||||||||||||||
(1) | PCI loans represent loans acquired with evidence of credit quality deterioration since origination, in accordance with ASC 310-30. Loan agings are based upon contractually required payments. |
We make commercial loans for many purposes, including working capital lines, which are generally renewable annually and supported by business assets, personal guarantees and additional collateral. Commercial business lending is generally considered to involve a slightly higher degree of risk than traditional consumer bank lending. Primarily as a result of growth in the commercial portfolio in 2015, our allowance for loan losses in our commercial loan portfolio is $36.1 million as of December 31, 2015 compared to $31.7 million as of December 31, 2014.
Our commercial real estate loans are generally secured by a first mortgage lien and assignment of rents on the property. Since most of our bank branches are located in the Chicago metropolitan area and southern Wisconsin, 91.1% of our commercial real estate loan portfolio is located in this region. While commercial real estate market conditions have improved recently, a number of specific markets continue to be under stress. We have been able to effectively manage and reduce our total non-performing commercial real estate loans. As of December 31, 2015, our allowance for loan losses related to this portfolio is $43.8 million compared to $35.5 million as of December 31, 2014.
The Company also participates in mortgage warehouse lending by providing interim funding to unaffiliated mortgage bankers to finance residential mortgages originated by such bankers for sale into the secondary market. The Company’s loans to the mortgage bankers are secured by the business assets of the mortgage companies as well as the specific mortgage loans funded by the Company, after they have been pre-approved for purchase by third party end lenders. The Company may also provide interim financing for packages of mortgage loans on a bulk basis in circumstances where the mortgage bankers desire to competitively bid on a number
72 | ||
of mortgages for sale as a package in the secondary market. Amounts advanced with respect to any particular mortgage loan are usually required to be repaid within 21 days. During 2015, our mortgage warehouse lines increased to $222.8 million as of December 31, 2015 from $139.0 million as of December 31, 2014 as a result of a more favorable mortgage banking environment.
Home equity loans. Our home equity loans and lines of credit are originated by each of our banks in their local markets where we have a strong understanding of the underlying real estate value. Our banks monitor and manage these loans, and we conduct an automated review of all home equity loans and lines of credit at least twice per year. This review collects current credit performance for each home equity borrower and identifies situations where the credit strength of the borrower is declining, or where there are events that may influence repayment, such as tax liens or judgments. Our banks use this information to manage loans that may be higher risk and to determine whether to obtain additional credit information or updated property valuations. As a result of this work and general market conditions, we have modified our home equity offerings and changed our policies regarding home equity renewals and requests for subordination. In a limited number of situations, the unused availability on home equity lines of credit was frozen.
The rates we offer on new home equity lending are based on several factors, including appraisals and valuation due diligence, in order to reflect inherent risk, and we place additional scrutiny on larger home equity requests. In a limited number of cases, we issue home equity credit together with first mortgage financing, and requests for such financing are evaluated on a combined basis. It is not our practice to advance more than 85% of the appraised value of the underlying asset, which ratio we refer to as the loan-to-value ratio, or LTV ratio, and a majority of the credit we previously extended, when issued, had an LTV ratio of less than 80%. Our home equity loan portfolio has performed well in light of the ongoing volatility in the overall residential real estate market.
Residential real estate mortgages. Our residential real estate portfolio predominantly includes one- to four-family adjustable rate mortgages that have repricing terms generally from one to three years, construction loans to individuals and bridge financing loans for qualifying customers. As of December 31, 2015, our residential loan portfolio totaled $607.5 million, or 3% of our total outstanding loans.
Our adjustable rate mortgages relate to properties located principally in the Chicago metropolitan area and southern Wisconsin or vacation homes owned by local residents. These adjustable rate mortgages are often non-agency conforming. Adjustable rate mortgage loans decrease the interest rate risk we face on our mortgage portfolio. However, this risk is not eliminated due to the fact that such loans generally provide for periodic and lifetime limits on the interest rate adjustments among other features. Additionally, adjustable rate mortgages may pose a higher risk of delinquency and default because they require borrowers to make larger payments when interest rates rise. As of December 31, 2015, $12.0 million of our residential real estate mortgages, or 2.0% of our residential real estate loan portfolio, excluding PCI loans, were classified as nonaccrual, $5.8 million were 30 to 89 days past due (0.9%) and $586.2 million were current (97.1%). We believe that since our loan portfolio consists primarily of locally originated loans, and since the majority of our borrowers are longer-term customers with lower LTV ratios, we face a relatively low risk of borrower default and delinquency.
While we generally do not originate loans for our own portfolio with long-term fixed rates due to interest rate risk considerations, we can accommodate customer requests for fixed rate loans by originating such loans and then selling them into the secondary market, for which we receive fee income. We may also selectively retain certain of these loans within the banks’ own portfolios where they are non-agency conforming, or where the terms of the loans make them favorable to retain. A portion of the loans we sold into the secondary market were sold with the servicing of those loans retained. The amount of loans serviced for others as of December 31, 2015 and 2014 was $939.8 million and $877.9 million, respectively. All other mortgage loans sold into the secondary market were sold without the retention of servicing rights.
It is not our current practice to underwrite, and we have no plans to underwrite, subprime, Alt A, no or little documentation loans, or option ARM loans. As of December 31, 2015, approximately $3.7 million of our mortgages consist of interest-only loans.
Premium finance receivables — commercial. FIFC and FIFC Canada originated approximately $5.6 billion in commercial insurance premium finance receivables during 2015 as compared to approximately $5.5 billion in 2014. FIFC and FIFC Canada make loans to businesses to finance the insurance premiums they pay on their commercial insurance policies. The loans are originated by working through independent medium and large insurance agents and brokers located throughout the United States and Canada. The insurance premiums financed are primarily for commercial customers’ purchases of liability, property and casualty and other commercial insurance.
This lending involves relatively rapid turnover of the loan portfolio and high volume of loan originations. Because of the indirect nature of this lending through third party agents and brokers and because the borrowers are located nationwide and in Canada, this segment is more susceptible to third party fraud than relationship lending. The Company performs ongoing credit and other reviews of the agents and brokers, and performs various internal audit steps to mitigate against the risk of any fraud. The 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.
73 | ||
Premium finance receivables — life insurance. FIFC originated approximately $914.0 million in life insurance premium finance receivables in 2015 as compared to $653.2 million in 2014. The Company continues to experience increased competition and pricing pressure within the current market. 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.
Consumer and other. Included in the other loan category is a wide variety of personal and consumer loans to individuals as well as high yielding short-term accounts receivable financing to clients in the temporary staffing industry located throughout the United States. The banks originate consumer loans in order to provide a wider range of financial services to their customers.
Consumer loans generally have shorter terms and higher interest rates than mortgage loans but generally involve more credit risk than mortgage loans due to the type and nature of the collateral. Additionally, short-term accounts receivable financing may also involve greater credit risks than generally associated with the loan portfolios of more traditional community banks depending on the marketability of the collateral.
Foreign. The Company had approximately $278.3 million of loans to businesses of foreign countries as of December 31, 2015 compared to $311.7 million at December 31, 2014. This balance as of December 31, 2015 consists of loans originated by FIFC Canada.
Maturities and Sensitivities of Loans to Changes in Interest Rates
The following table classifies the commercial loan portfolios at December 31, 2015 by date at which the loans re-price or mature, and the type of rate exposure:
(Dollars in thousands) | One year or less | From one to five years | Over five years | Total | ||||||||||||
Commercial | ||||||||||||||||
Fixed rate | $ | 81,553 | $ | 612,979 | $ | 292,371 | $ | 986,903 | ||||||||
Variable rate | ||||||||||||||||
With floor feature | 630,833 | 4,783 | — | 635,616 | ||||||||||||
Without floor feature | 3,082,306 | 8,270 | 814 | 3,091,390 | ||||||||||||
Total commercial | $ | 3,794,692 | $ | 626,032 | $ | 293,185 | $ | 4,713,909 | ||||||||
Commercial real-estate | ||||||||||||||||
Fixed rate | $ | 360,298 | $ | 1,727,118 | $ | 234,623 | $ | 2,322,039 | ||||||||
Variable rate | ||||||||||||||||
With floor feature | 247,892 | 10,739 | — | 258,631 | ||||||||||||
Without floor feature | 2,897,620 | 45,953 | 5,046 | 2,948,619 | ||||||||||||
Total commercial real-estate | $ | 3,505,810 | $ | 1,783,810 | $ | 239,669 | $ | 5,529,289 | ||||||||
Premium finance receivables, net of unearned income | ||||||||||||||||
Fixed rate | $ | 2,414,107 | $ | 61,334 | $ | 392 | $ | 2,475,833 | ||||||||
Variable rate | ||||||||||||||||
With floor feature | — | — | — | — | ||||||||||||
Without floor feature | 2,860,584 | — | — | 2,860,584 | ||||||||||||
Total premium finance receivables | $ | 5,274,691 | $ | 61,334 | $ | 392 | $ | 5,336,417 | ||||||||
74 | ||
Past Due Loans and Non-performing Assets
Our ability to manage credit risk depends in large part on our ability to properly identify and manage problem loans. To do so, the Company operates a credit risk rating system under which our credit management personnel assign a credit risk rating to each loan at the time of origination and review loans on a regular basis to determine each loan’s credit risk rating on a scale of 1 through 10 with higher scores indicating higher risk. The credit risk rating structure used is shown below:
1 Rating | — | Minimal Risk (Loss Potential — none or extremely low) (Superior asset quality, excellent liquidity, minimal leverage) | ||
2 Rating | — | Modest Risk (Loss Potential demonstrably low) (Very good asset quality and liquidity, strong leverage capacity) | ||
3 Rating | — | Average Risk (Loss Potential low but no longer refutable) (Mostly satisfactory asset quality and liquidity, good leverage capacity) | ||
4 Rating | — | Above Average Risk (Loss Potential variable, but some potential for deterioration) (Acceptable asset quality, little excess liquidity, modest leverage capacity) | ||
5 Rating | — | Management Attention Risk (Loss Potential moderate if corrective action not taken) (Generally acceptable asset quality, somewhat strained liquidity, minimal leverage capacity) | ||
6 Rating | — | Special Mention (Loss Potential moderate if corrective action not taken) (Assets in this category are currently protected, potentially weak, but not to the point of substandard classification) | ||
7 Rating | — | Substandard Accrual (Loss Potential distinct possibility that the bank may sustain some loss, but no discernable impairment) (Must have well defined weaknesses that jeopardize the liquidation of the debt) | ||
8 Rating | — | Substandard Non-accrual (Loss Potential well documented probability of loss, including potential impairment) (Must have well defined weaknesses that jeopardize the liquidation of the debt) | ||
9 Rating | — | Doubtful (Loss Potential extremely high) (These assets have all the weaknesses in those classified “substandard” with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of current existing facts, conditions, and values, highly improbable) | ||
10 Rating | — | Loss (fully charged-off) (Loans in this category are considered fully uncollectible.) | ||
Each loan officer is responsible for monitoring his or her loan portfolio, recommending a credit risk rating for each loan in his or her portfolio and ensuring the credit risk ratings are appropriate. These credit risk ratings are then ratified by the bank’s chief credit officer and/or concurrence credit officer. Credit risk ratings are determined by evaluating a number of factors including, a borrower’s financial strength, cash flow coverage, collateral protection and guarantees. A third party loan review firm independently reviews a significant portion of the loan portfolio at each of the Company’s subsidiary banks to evaluate the appropriateness of the management-assigned credit risk ratings. These ratings are subject to further review at each of our bank subsidiaries by the applicable regulatory authority, including the Federal Reserve Bank of Chicago, the OCC, the State of Illinois and the State of Wisconsin and our internal audit staff.
The Company’s problem loan reporting system automatically includes all loans with credit risk ratings of 6 through 9. This system is designed to provide an on-going detailed tracking mechanism for each problem loan. Once management determines that a loan has deteriorated to a point where it has a credit risk rating of 6 or worse, the Company’s Managed Asset Division performs an overall credit and collateral review. As part of this review, all underlying collateral is identified and the valuation methodology is analyzed and tracked. As a result of this initial review by the Company’s Managed Asset Division, the credit risk rating is reviewed and a portion of the outstanding loan balance may be deemed uncollectible or an impairment reserve may be established. The Company’s impairment analysis utilizes an independent re-appraisal of the collateral (unless such a third-party evaluation is not possible due to the unique nature of the collateral, such as a closely-held business or thinly traded securities). In the case of commercial real-estate collateral, an independent third party appraisal is ordered by the Company’s Real Estate Services Group
75 | ||
to determine if there has been any change in the underlying collateral value. These independent appraisals are reviewed by the Real Estate Services Group and sometimes by independent third party valuation experts and may be adjusted depending upon market conditions. An appraisal is ordered at least once a year for these loans, or more often if market conditions dictate. In the event that the underlying value of the collateral cannot be easily determined, a detailed valuation methodology is prepared by the Managed Asset Division. A summary of this analysis is provided to the directors’ loan committee of the bank which originated the credit for approval of a charge-off, if necessary.
Through the credit risk rating process, loans are reviewed to determine if they are performing in accordance with the original contractual terms. If the borrower has failed to comply with the original contractual terms, further action may be required by the Company, including a downgrade in the credit risk rating, movement to non-accrual status, a charge-off or the establishment of a specific impairment reserve. In the event a collateral shortfall is identified during the credit review process, the Company will work with the borrower for a principal reduction and/or a pledge of additional collateral and/or additional guarantees. In the event that these options are not available, the loan may be subject to a downgrade of the credit risk rating. If we determine that a loan amount or portion thereof, is uncollectible the loan’s credit risk rating is immediately downgraded to an 8 or 9 and the uncollectible amount is charged-off. Any loan that has a partial charge-off continues to be assigned a credit risk rating of an 8 or 9 for the duration of time that a balance remains outstanding. The Managed Asset Division undertakes a thorough and ongoing analysis to determine if additional impairment and/or charge-offs are appropriate and to begin a workout plan for the credit to minimize actual losses.
The Company’s approach to workout plans and restructuring loans is built on the credit-risk rating process. A modification of a loan with an existing credit risk rating of 6 or worse or a modification of any other credit, which will result in a restructured credit risk rating of 6 or worse must be reviewed for troubled debt restructuring ("TDR") classification. In that event, our Managed Assets Division conducts an overall credit and collateral review. A modification of a loan is considered to be a TDR if both (1) the borrower is experiencing financial difficulty and (2) for economic or legal reasons, the bank grants a concession to a borrower that it would not otherwise consider. The modification of a loan where the credit risk rating is 5 or better both before and after such modification is not considered to be a TDR. Based on the Company’s credit risk rating system, it considers that borrowers whose credit risk rating is 5 or better are not experiencing financial difficulties and therefore, are not considered TDRs.
TDRs, which are by definition considered impaired loans, are reviewed at the time of modification and on a quarterly basis to determine if a specific reserve is needed. The carrying amount of the loan is compared to the expected payments to be received, discounted at the loan’s original rate, or for collateral dependent loans, to the fair value of the collateral less the estimated cost to sell. Any shortfall is recorded as a specific reserve.
For non-TDR loans, if based on current information and events, it is probable that the Company will be unable to collect all amounts due to it according to the contractual terms of the loan agreement, a loan is considered impaired, and a specific impairment reserve analysis is performed and if necessary, a specific reserve is established. In determining the appropriate reserve for collateral-dependent loans, the Company considers the results of appraisals for the associated collateral.
76 | ||
Non-Performing Assets, excluding covered assets
The following table sets forth the Company’s non-performing assets and TDRs performing under the contractual terms of the loan agreement, excluding covered assets and PCI loans, as of the dates shown:
(Dollars in thousands) | 2015 | 2014 | 2013 | 2012 | 2011 | |||||||||||||||
Loans past due greater than 90 days and still accruing (1): | ||||||||||||||||||||
Commercial | $ | 541 | $ | 474 | $ | — | $ | — | $ | — | ||||||||||
Commercial real estate | — | — | 230 | — | — | |||||||||||||||
Home equity | — | — | — | 100 | — | |||||||||||||||
Residential real estate | — | — | — | — | — | |||||||||||||||
Premium finance receivables – commercial | 10,294 | 7,665 | 8,842 | 10,008 | 5,281 | |||||||||||||||
Premium finance receivables – life insurance | — | — | — | — | — | |||||||||||||||
Consumer and other | 150 | 119 | 105 | 221 | 314 | |||||||||||||||
Total loans past due greater than 90 days and still accruing | $ | 10,985 | $ | 8,258 | $ | 9,177 | $ | 10,329 | $ | 5,595 | ||||||||||
Non-accrual loans (2): | ||||||||||||||||||||
Commercial | 12,712 | 9,157 | 10,780 | 21,737 | 19,018 | |||||||||||||||
Commercial real estate | 26,645 | 26,605 | 46,658 | 49,973 | 66,508 | |||||||||||||||
Home equity | 6,848 | 6,174 | 10,071 | 13,423 | 14,164 | |||||||||||||||
Residential real estate | 12,043 | 15,502 | 14,974 | 11,728 | 6,619 | |||||||||||||||
Premium finance receivables – commercial | 14,561 | 12,705 | 10,537 | 9,302 | 7,755 | |||||||||||||||
Premium finance receivables – life insurance | — | — | — | 25 | 54 | |||||||||||||||
Consumer and other | 263 | 277 | 1,137 | 1,566 | 371 | |||||||||||||||
Total non-accrual loans | $ | 73,072 | $ | 70,420 | $ | 94,157 | $ | 107,754 | $ | 114,489 | ||||||||||
Total non-performing loans: | ||||||||||||||||||||
Commercial | $ | 13,253 | $ | 9,631 | $ | 10,780 | $ | 21,737 | $ | 19,018 | ||||||||||
Commercial real estate | 26,645 | 26,605 | 46,888 | 49,973 | 66,508 | |||||||||||||||
Home equity | 6,848 | 6,174 | 10,071 | 13,523 | 14,164 | |||||||||||||||
Residential real estate | 12,043 | 15,502 | 14,974 | 11,728 | 6,619 | |||||||||||||||
Premium finance receivables – commercial | 24,855 | 20,370 | 19,379 | 19,310 | 13,036 | |||||||||||||||
Premium finance receivables – life insurance | — | — | — | 25 | 54 | |||||||||||||||
Consumer and other | 413 | 395 | 1,242 | 1,787 | 685 | |||||||||||||||
Total non-performing loans | $ | 84,057 | $ | 78,677 | $ | 103,334 | $ | 118,083 | $ | 120,084 | ||||||||||
Other real estate owned | 26,849 | 36,419 | 43,398 | 54,546 | 79,007 | |||||||||||||||
Other real estate owned – from acquisitions | 17,096 | 9,223 | 7,056 | 8,345 | 7,516 | |||||||||||||||
Other repossessed assets | 174 | 303 | 542 | — | — | |||||||||||||||
Total non-performing assets | $ | 128,176 | $ | 124,622 | $ | 154,330 | $ | 180,974 | $ | 206,607 | ||||||||||
TDRs performing under the contractual terms of the loan agreement | $ | 42,744 | $ | 69,697 | $ | 78,610 | $ | 106,119 | $ | 119,920 | ||||||||||
Total non-performing loans by category as a percent of its own respective category’s period-end balance: | ||||||||||||||||||||
Commercial | 0.28 | % | 0.25 | % | 0.33 | % | 0.75 | % | 0.76 | % | ||||||||||
Commercial real estate | 0.48 | 0.59 | 1.11 | 1.29 | 1.89 | |||||||||||||||
Home equity | 0.87 | 0.86 | 1.40 | 1.72 | 1.64 | |||||||||||||||
Residential real estate | 1.98 | 3.21 | 3.44 | 3.19 | 1.89 | |||||||||||||||
Premium finance receivables – commercial | 1.05 | 0.87 | 0.89 | 0.97 | 0.92 | |||||||||||||||
Premium finance receivables – life insurance | — | — | — | — | — | |||||||||||||||
Consumer and other | 0.28 | 0.26 | 0.74 | 0.99 | 0.36 | |||||||||||||||
Total non-performing loans | 0.49 | % | 0.55 | % | 0.80 | % | 1.00 | % | 1.14 | % | ||||||||||
Total non-performing assets, as a percentage of total assets | 0.56 | % | 0.62 | % | 0.85 | % | 1.03 | % | 1.30 | % | ||||||||||
Allowance for loan losses as a percentage of total non-performing loans | 125.39 | % | 116.56 | % | 93.80 | % | 90.91 | % | 91.92 | % | ||||||||||
(1) | As of the dates shown, no TDRs were past due greater than 90 days and still accruing interest. |
(2) | Non-accrual loans included TDRs totaling $9.1 million, $12.6 million, $28.5 million, $20.4 million and $10.6 million as of the years ended 2015, 2014, 2013, 2012 and 2011, respectively. |
77 | ||
Non-performing Commercial and Commercial Real Estate
Commercial non-performing loan category totaled $13.3 million as of December 31, 2015 compared to $9.6 million as of December 31, 2014, while the non-performing commercial real estate loan category totaled $26.6 million as of both December 31, 2015 and 2014.
Management is pursuing the resolution of all credits in this category. At this time, management believes reserves are adequate to absorb inherent losses that may occur upon the ultimate resolution of these credits.
Non-performing Residential Real Estate and Home Equity
Non-performing home equity and residential real estate loans totaled $18.9 million as of December 31, 2015. The balance decreased $2.8 million from December 31, 2014. The December 31, 2015 non-performing balance is comprised of $12.0 million of residential real estate (61 individual credits) and $6.8 million of home equity loans (45 individual credits). The Company believes control and collection of these loans is very manageable. At this time, management believes reserves are adequate to absorb inherent losses that may occur upon the ultimate resolution of these credits.
Non-performing Commercial Premium Finance Receivables
The table below presents the level of non-performing property and casualty premium finance receivables as of December 31, 2015 and 2014, and the amount of net charge-offs for the years then ended.
December 31, | ||||||||
(Dollars in thousands) | 2015 | 2014 | ||||||
Non-performing premium finance receivables — commercial | $ | 24,855 | $ | 20,370 | ||||
- as a percent of premium finance receivables — commercial | 1.05 | % | 0.87 | % | ||||
Net charge-offs of premium finance receivables — commercial | $ | 5,772 | $ | 4,583 | ||||
- as a percent of average premium finance receivables — commercial | 0.24 | % | 0.19 | % | ||||
Fluctuations in this category may occur due to timing and nature of account collections from insurance carriers. The Company’s underwriting standards, regardless of the condition of the economy, have remained consistent. We anticipate that net charge-offs and non-performing asset levels in the near term will continue to be at levels that are within acceptable operating ranges for this category of loans. Management is comfortable with administering the collections at this level of non-performing property and casualty premium finance receivables and believes reserves are adequate to absorb inherent losses that may occur upon the ultimate resolution of these credits.
Due to the nature of collateral for commercial premium finance receivables, it customarily takes 60-150 days to convert the collateral into cash. Accordingly, the level of non-performing commercial premium finance receivables is not necessarily indicative of the loss inherent in the portfolio. In the event of default, Wintrust has the power to cancel the insurance policy and collect the unearned portion of the premium from the insurance carrier. In the event of cancellation, the cash returned in payment of the unearned premium by the insurer should generally be sufficient to cover the receivable balance, the interest and other charges due. Due to notification requirements and processing time by most insurance carriers, many receivables will become delinquent beyond 90 days while the insurer is processing the return of the unearned premium. Management continues to accrue interest until maturity as the unearned premium is ordinarily sufficient to pay-off the outstanding balance and contractual interest due.
78 | ||
Loan Portfolio Aging
The following table shows, as of December 31, 2015, only 0.6% of the entire portfolio, excluding covered loans, is in a non-performing loan (non-accrual or greater than 90 days past due and still accruing interest) with only 0.8% either one or two payments past due. In total, 98.6% of the Company’s total loan portfolio, excluding covered loans, as of December 31, 2015 is current according to the original contractual terms of the loan agreements.
The tables below show the aging of the Company’s loan portfolio at December 31, 2015 and 2014:
As of December 31, 2015 (Dollars in thousands) | Non- accrual | 90+ days and still accruing | 60-89 days past due | 30-59 days past due | Current | Total Loans | ||||||||||||||||||
Loan Balances: | ||||||||||||||||||||||||
Commercial | ||||||||||||||||||||||||
Commercial and industrial | $ | 12,416 | $ | 6 | $ | 6,749 | $ | 12,930 | $ | 2,819,253 | $ | 2,851,354 | ||||||||||||
Franchise | — | — | — | — | 245,228 | 245,228 | ||||||||||||||||||
Mortgage warehouse lines of credit | — | — | — | — | 222,806 | 222,806 | ||||||||||||||||||
Community Advantage – homeowners association | — | — | — | — | 130,986 | 130,986 | ||||||||||||||||||
Aircraft | 288 | — | — | — | 5,039 | 5,327 | ||||||||||||||||||
Asset-based lending | 8 | — | 3,864 | 1,844 | 736,968 | 742,684 | ||||||||||||||||||
Tax exempt | — | — | — | — | 267,273 | 267,273 | ||||||||||||||||||
Leases | — | 535 | 748 | 4,192 | 220,599 | 226,074 | ||||||||||||||||||
Other | — | — | — | — | 3,588 | 3,588 | ||||||||||||||||||
PCI - commercial (1) | — | 892 | — | 2,510 | 15,187 | 18,589 | ||||||||||||||||||
Total commercial | $ | 12,712 | $ | 1,433 | $ | 11,361 | $ | 21,476 | $ | 4,666,927 | $ | 4,713,909 | ||||||||||||
Commercial real-estate: | ||||||||||||||||||||||||
Residential construction | $ | 273 | $ | — | $ | — | $ | 45 | $ | 70,063 | $ | 70,381 | ||||||||||||
Commercial construction | 33 | — | 1,371 | 1,600 | 285,275 | 288,279 | ||||||||||||||||||
Land | 1,751 | — | — | 120 | 76,546 | 78,417 | ||||||||||||||||||
Office | 4,619 | — | 764 | 3,817 | 853,801 | 863,001 | ||||||||||||||||||
Industrial | 9,564 | — | 1,868 | 1,009 | 715,207 | 727,648 | ||||||||||||||||||
Retail | 1,760 | — | 442 | 2,310 | 863,887 | 868,399 | ||||||||||||||||||
Multi-family | 1,954 | — | 597 | 6,568 | 733,230 | 742,349 | ||||||||||||||||||
Mixed use and other | 6,691 | — | 6,723 | 7,215 | 1,712,187 | 1,732,816 | ||||||||||||||||||
PCI - commercial real-estate (1) | — | 22,111 | 4,662 | 16,559 | 114,667 | 157,999 | ||||||||||||||||||
Total commercial real-estate | $ | 26,645 | $ | 22,111 | $ | 16,427 | $ | 39,243 | $ | 5,424,863 | $ | 5,529,289 | ||||||||||||
Home equity | 6,848 | — | 1,889 | 5,517 | 770,421 | 784,675 | ||||||||||||||||||
Residential real estate | 12,043 | — | 1,964 | 3,824 | 586,154 | 603,985 | ||||||||||||||||||
PCI - residential real estate (1) | — | 488 | 202 | 79 | 2,697 | 3,466 | ||||||||||||||||||
Premium finance receivables | ||||||||||||||||||||||||
Commercial insurance loans | 14,561 | 10,294 | 6,624 | 21,656 | 2,321,786 | 2,374,921 | ||||||||||||||||||
Life insurance loans | — | — | 3,432 | 11,140 | 2,578,632 | 2,593,204 | ||||||||||||||||||
PCI - life insurance loans (1) | — | — | — | — | 368,292 | 368,292 | ||||||||||||||||||
Consumer and other | 263 | 211 | 204 | 1,187 | 144,511 | 146,376 | ||||||||||||||||||
Total loans, net of unearned income, excluding covered loans | $ | 73,072 | $ | 34,537 | $ | 42,103 | $ | 104,122 | $ | 16,864,283 | $ | 17,118,117 | ||||||||||||
Covered loans | 5,878 | 7,335 | 703 | 5,774 | 128,983 | 148,673 | ||||||||||||||||||
Total loans, net of unearned income | $ | 78,950 | $ | 41,872 | $ | 42,806 | $ | 109,896 | $ | 16,993,266 | $ | 17,266,790 | ||||||||||||
(1) | PCI loans represent loans acquired with evidence of credit quality deterioration since origination, in accordance with ASC 310-30. Loan agings are based upon contractually required payments. |
79 | ||
As of December 31, 2015 | Non- accrual | 90+ days and still accruing | 60-89 days past due | 30-59 days past due | Current | Total Loans | ||||||||||||
Aging as a % of Loan Balance: | ||||||||||||||||||
Commercial | ||||||||||||||||||
Commercial and industrial | 0.4 | % | — | % | 0.2 | % | 0.5 | % | 98.9 | % | 100.0 | % | ||||||
Franchise | — | — | — | — | 100.0 | 100.0 | ||||||||||||
Mortgage warehouse lines of credit | — | — | — | — | 100.0 | 100.0 | ||||||||||||
Community Advantage – homeowners association | — | — | — | — | 100.0 | 100.0 | ||||||||||||
Aircraft | 5.4 | — | — | — | 94.6 | 100.0 | ||||||||||||
Asset-based lending | — | — | 0.5 | 0.3 | 99.2 | 100.0 | ||||||||||||
Tax exempt | — | — | — | — | 100.0 | 100.0 | ||||||||||||
Leases | — | 0.2 | 0.3 | 1.9 | 97.6 | 100.0 | ||||||||||||
Other | — | — | — | — | 100.0 | 100.0 | ||||||||||||
PCI - commercial (1) | — | 4.8 | — | 13.5 | 81.7 | 100.0 | ||||||||||||
Total commercial | 0.3 | % | — | % | 0.2 | % | 0.5 | % | 99.0 | % | 100.0 | % | ||||||
Commercial real estate: | ||||||||||||||||||
Residential construction | 0.4 | % | — | % | — | % | 0.1 | % | 99.5 | % | 100.0 | % | ||||||
Commercial construction | — | — | 0.5 | 0.6 | 98.9 | 100.0 | ||||||||||||
Land | 2.2 | — | — | 0.2 | 97.6 | 100.0 | ||||||||||||
Office | 0.5 | — | 0.1 | 0.4 | 99.0 | 100.0 | ||||||||||||
Industrial | 1.3 | — | 0.3 | 0.1 | 98.3 | 100.0 | ||||||||||||
Retail | 0.2 | — | 0.1 | 0.3 | 99.4 | 100.0 | ||||||||||||
Multi-family | 0.3 | — | 0.1 | 0.9 | 98.7 | 100.0 | ||||||||||||
Mixed use and other | 0.4 | — | 0.4 | 0.4 | 98.8 | 100.0 | ||||||||||||
PCI - commercial real-estate (1) | — | 14.0 | 3.0 | 10.5 | 72.5 | 100.0 | ||||||||||||
Total commercial real-estate | 0.5 | % | 0.4 | % | 0.3 | % | 0.7 | % | 98.1 | % | 100.0 | % | ||||||
Home equity | 0.9 | — | 0.2 | 0.7 | 98.2 | 100.0 | ||||||||||||
Residential real estate | 2.0 | — | 0.3 | 0.6 | 97.1 | 100.0 | ||||||||||||
PCI - residential real estate (1) | — | 14.1 | 5.8 | 2.3 | 77.8 | 100.0 | ||||||||||||
Premium finance receivables | ||||||||||||||||||
Commercial insurance loans | 0.6 | 0.4 | 0.3 | 0.9 | 97.8 | 100.0 | ||||||||||||
Life insurance loans | — | — | 0.1 | 0.4 | 99.5 | 100.0 | ||||||||||||
PCI - life insurance loans (1) | — | — | — | — | 100.0 | 100.0 | ||||||||||||
Consumer and other | 0.2 | 0.1 | 0.1 | 0.8 | 98.8 | 100.0 | ||||||||||||
Total loans, net of unearned income, excluding covered loans | 0.4 | % | 0.2 | % | 0.2 | % | 0.6 | % | 98.6 | % | 100.0 | % | ||||||
Covered loans | 4.0 | 4.9 | 0.5 | 3.9 | 86.7 | 100.0 | ||||||||||||
Total loans, net of unearned income | 0.5 | % | 0.2 | % | 0.2 | % | 0.6 | % | 98.5 | % | 100.0 | % | ||||||
(1) | PCI loans represent loans acquired with evidence of credit quality deterioration since origination, in accordance with ASC 310-30. Loan agings are based upon contractually required payments. |
80 | ||
As of December 31, 2014 (Dollars in thousands) | Nonaccrual | 90+ days and still accruing | 60-89 days past due | 30-59 days past due | Current | Total Loans | ||||||||||||||||||
Loan Balances: | ||||||||||||||||||||||||
Commercial | ||||||||||||||||||||||||
Commercial and industrial | $ | 9,132 | $ | 474 | $ | 3,161 | $ | 7,492 | $ | 2,194,221 | $ | 2,214,480 | ||||||||||||
Franchise | — | — | 308 | 1,219 | 250,673 | 252,200 | ||||||||||||||||||
Mortgage warehouse lines of credit | — | — | — | — | 139,003 | 139,003 | ||||||||||||||||||
Community Advantage – homeowners association | — | — | — | — | 106,364 | 106,364 | ||||||||||||||||||
Aircraft | — | — | — | — | 8,065 | 8,065 | ||||||||||||||||||
Asset-based lending | 25 | — | 1,375 | 2,394 | 802,608 | 806,402 | ||||||||||||||||||
Tax exempt | — | — | — | — | 217,487 | 217,487 | ||||||||||||||||||
Leases | — | — | 77 | 315 | 159,744 | 160,136 | ||||||||||||||||||
Other | — | — | — | — | 11,034 | 11,034 | ||||||||||||||||||
PCI - commercial (1) | — | 365 | 202 | 138 | 8,518 | 9,223 | ||||||||||||||||||
Total commercial | $ | 9,157 | $ | 839 | $ | 5,123 | $ | 11,558 | $ | 3,897,717 | $ | 3,924,394 | ||||||||||||
Commercial real-estate: | ||||||||||||||||||||||||
Residential construction | $ | — | $ | — | $ | 250 | $ | 76 | $ | 38,370 | $ | 38,696 | ||||||||||||
Commercial construction | 230 | — | — | 2,023 | 185,513 | 187,766 | ||||||||||||||||||
Land | 2,656 | — | — | 2,395 | 86,779 | 91,830 | ||||||||||||||||||
Office | 7,288 | — | 2,621 | 1,374 | 694,149 | 705,432 | ||||||||||||||||||
Industrial | 2,392 | — | — | 3,758 | 617,820 | 623,970 | ||||||||||||||||||
Retail | 4,152 | — | 116 | 3,301 | 723,919 | 731,488 | ||||||||||||||||||
Multi-family | 249 | — | 249 | 1,921 | 603,323 | 605,742 | ||||||||||||||||||
Mixed use and other | 9,638 | — | 2,603 | 9,023 | 1,443,853 | 1,465,117 | ||||||||||||||||||
PCI - commercial real-estate (1) | — | 10,976 | 6,393 | 4,016 | 34,327 | 55,712 | ||||||||||||||||||
Total commercial real-estate | $ | 26,605 | $ | 10,976 | $ | 12,232 | $ | 27,887 | $ | 4,428,053 | $ | 4,505,753 | ||||||||||||
Home equity | 6,174 | — | 983 | 3,513 | 705,623 | 716,293 | ||||||||||||||||||
Residential real estate | 15,502 | — | 267 | 6,315 | 459,224 | 481,308 | ||||||||||||||||||
PCI - residential real estate (1) | — | 549 | — | — | 1,685 | 2,234 | ||||||||||||||||||
Premium finance receivables | ||||||||||||||||||||||||
Commercial insurance loans | 12,705 | 7,665 | 5,995 | 17,328 | 2,307,140 | 2,350,833 | ||||||||||||||||||
Life insurance loans | — | — | 13,084 | 339 | 1,870,669 | 1,884,092 | ||||||||||||||||||
PCI - life insurance loans (1) | — | — | — | — | 393,479 | 393,479 | ||||||||||||||||||
Consumer and other | 277 | 119 | 293 | 838 | 149,485 | 151,012 | ||||||||||||||||||
Total loans, net of unearned income, excluding covered loans | $ | 70,420 | $ | 20,148 | $ | 37,977 | $ | 67,778 | $ | 14,213,075 | $ | 14,409,398 | ||||||||||||
Covered loans | 7,290 | 17,839 | 1,304 | 4,835 | 195,441 | 226,709 | ||||||||||||||||||
Total loans, net of unearned income | $ | 77,710 | $ | 37,987 | $ | 39,281 | $ | 72,613 | $ | 14,408,516 | $ | 14,636,107 | ||||||||||||
(1) | PCI loans represent loans acquired with evidence of credit quality deterioration since origination, in accordance with ASC 310-30. Loan agings are based upon contractually required payments. |
81 | ||
As of December 31, 2014 | Nonaccrual | 90+ days and still accruing | 60-89 days past due | 30-59 days past due | Current | Total Loans | ||||||||||||
Aging as a % of Loan Balance: | ||||||||||||||||||
Commercial | ||||||||||||||||||
Commercial and industrial | 0.4 | % | — | % | 0.1 | % | 0.3 | % | 99.2 | % | 100.0 | % | ||||||
Franchise | — | — | 0.1 | 0.5 | 99.4 | 100.0 | ||||||||||||
Mortgage warehouse lines of credit | — | — | — | — | 100.0 | 100.0 | ||||||||||||
Community Advantage – homeowners association | — | — | — | — | 100.0 | 100.0 | ||||||||||||
Aircraft | — | — | — | — | 100.0 | 100.0 | ||||||||||||
Asset-based lending | — | — | 0.2 | 0.3 | 99.5 | 100.0 | ||||||||||||
Tax exempt | — | — | — | — | 100.0 | 100.0 | ||||||||||||
Leases | — | — | — | 0.2 | 99.8 | 100.0 | ||||||||||||
Other | — | — | — | — | 100.0 | 100.0 | ||||||||||||
PCI - commercial (1) | — | 4.0 | 2.2 | 1.5 | 92.3 | 100.0 | ||||||||||||
Total commercial | 0.2 | % | — | % | 0.1 | % | 0.3 | % | 99.4 | % | 100.0 | % | ||||||
Commercial real-estate | ||||||||||||||||||
Residential construction | — | % | — | % | 0.6 | % | 0.2 | % | 99.2 | % | 100.0 | % | ||||||
Commercial construction | 0.1 | — | — | 1.1 | 98.8 | 100.0 | ||||||||||||
Land | 2.9 | — | — | 2.6 | 94.5 | 100.0 | ||||||||||||
Office | 1.0 | — | 0.4 | 0.2 | 98.4 | 100.0 | ||||||||||||
Industrial | 0.4 | — | — | 0.6 | 99.0 | 100.0 | ||||||||||||
Retail | 0.6 | — | — | 0.5 | 98.9 | 100.0 | ||||||||||||
Multi-family | — | — | — | 0.3 | 99.7 | 100.0 | ||||||||||||
Mixed use and other | 0.7 | — | 0.2 | 0.6 | 98.5 | 100.0 | ||||||||||||
PCI - commercial real-estate (1) | — | 19.7 | 11.5 | 7.2 | 61.6 | 100.0 | ||||||||||||
Total commercial real-estate | 0.6 | % | 0.2 | % | 0.3 | % | 0.6 | % | 98.3 | % | 100.0 | % | ||||||
Home equity | 0.9 | — | 0.1 | 0.5 | 98.5 | 100.0 | ||||||||||||
Residential real estate | 3.2 | — | 0.1 | 1.3 | 95.4 | 100.0 | ||||||||||||
PCI - residential real estate (1) | — | 24.6 | — | — | 75.4 | 100.0 | ||||||||||||
Premium finance receivables | ||||||||||||||||||
Commercial insurance loans | 0.5 | 0.3 | 0.3 | 0.7 | 98.2 | 100.0 | ||||||||||||
Life insurance loans | — | — | 0.7 | — | 99.3 | 100.0 | ||||||||||||
PCI - life insurance loans (1) | — | — | — | — | 100.0 | 100.0 | ||||||||||||
Consumer and other | 0.2 | 0.1 | 0.2 | 0.6 | 98.9 | 100.0 | ||||||||||||
Total loans, net of unearned income, excluding covered loans | 0.5 | % | 0.1 | % | 0.3 | % | 0.5 | % | 98.6 | % | 100.0 | % | ||||||
Covered loans | 3.2 | 7.9 | 0.6 | 2.1 | 86.2 | 100.0 | ||||||||||||
Total loans, net of unearned income | 0.5 | % | 0.3 | % | 0.3 | % | 0.5 | % | 98.4 | % | 100.0 | % | ||||||
(1) | PCI loans represent loans acquired with evidence of credit quality deterioration since origination, in accordance with ASC 310-30. Loan agings are based upon contractually required payments. |
As of December 31, 2015, only $42.1 million of all loans, excluding covered loans, or 0.2%, were 60 to 89 days past due and $104.1 million, or 0.6%, were 30 to 59 days (or one payment) past due. As of December 31, 2014, $38.0 million of all loans, excluding covered loans, or 0.3%, were 60 to 89 days past due and $67.8 million, or 0.5%, were 30 to 59 days (or one payment) past due. Many of the commercial and commercial real estate loans shown as 60 to 89 days and 30 to 59 days past due are included on the Company’s internal problem loan reporting system. Loans on this system are closely monitored by management on a monthly basis. Commercial and commercial real-estate loans with delinquencies from 30 to 89 days past-due increased $31.7 million since December 31, 2014.
The Company’s home equity and residential loan portfolios continue to exhibit low delinquency ratios. Home equity loans at December 31, 2015 that are current with regard to the contractual terms of the loan agreement represent 98.2% of the total home equity portfolio. Residential real estate loans, excluding PCI loans, at December 31, 2015 that are current with regards to the contractual terms of the loan agreements comprise 97.1% of these residential real estate loans outstanding.
82 | ||
Non-performing Loans Rollforward
The table below presents a summary of non-performing loans, excluding covered loans and PCI loans, for the periods presented:
(Dollars in thousands) | 2015 | 2014 | ||||||
Balance at beginning of period | $ | 78,677 | $ | 103,334 | ||||
Additions, net | 48,124 | 37,984 | ||||||
Return to performing status | (3,743 | ) | (8,345 | ) | ||||
Payments received | (22,804 | ) | (15,031 | ) | ||||
Transfers to OREO and other repossessed assets | (10,581 | ) | (23,402 | ) | ||||
Charge-offs | (10,519 | ) | (17,159 | ) | ||||
Net change for niche loans (1) | 4,903 | 1,296 | ||||||
Balance at end of period | $ | 84,057 | $ | 78,677 | ||||
(1) | This includes activity for premium finance receivables, mortgages held for investment by Wintrust Mortgage and indirect consumer loans |
PCI loans are excluded from non-performing loans as they continue to earn interest income from the related accretable yield, independent of performance with contractual terms of the loan. See Note 5 of the Consolidated Financial Statements in Item 8 for further discussion of non-performing loans and the loan aging during the respective periods.
Allowance for Loan Losses
The allowance for loan losses represents management’s estimate of the probable and reasonably estimable loan losses that our loan portfolio is expected to incur. The allowance for loan losses is determined quarterly using a methodology that incorporates important risk characteristics of each loan, as described below under “How We Determine the Allowance for Credit Losses” in this Item 7. This process is subject to review at each of our bank subsidiaries by the applicable regulatory authority, including the Federal Reserve Bank of Chicago, the OCC, the State of Illinois and the State of Wisconsin.
The following table sets forth the allocation of the allowance for loan and covered loan losses and the allowance for losses on lending-related commitments by major loan type and the percentage of loans in each category to total loans for the past five fiscal years:
December 31, 2015 | December 31, 2014 | December 31, 2013 | December 31, 2012 | December 31, 2011 | |||||||||||||||||||||||||||||||
(Dollars in thousands) | Amount | % of Loan Type to Total Loans | Amount | % of Loan Type to Total Loans | Amount | % of Loan Type to Total Loans | Amount | % of Loan Type to Total Loans | Amount | % of Loan Type to Total Loans | |||||||||||||||||||||||||
Allowance for loan losses and allowance for covered loan losses allocation: | |||||||||||||||||||||||||||||||||||
Commercial | $ | 36,135 | 27 | % | $ | 31,699 | 26 | % | $ | 23,092 | 25 | % | $ | 28,794 | 24 | % | $ | 31,237 | 22 | % | |||||||||||||||
Commercial real-estate | 43,758 | 32 | 35,533 | 31 | 48,658 | 32 | 52,135 | 31 | 56,405 | 31 | |||||||||||||||||||||||||
Home equity | 12,012 | 5 | 12,500 | 5 | 12,611 | 5 | 12,734 | 6 | 7,712 | 8 | |||||||||||||||||||||||||
Residential real-estate | 4,734 | 3 | 4,218 | 3 | 5,108 | 3 | 5,560 | 3 | 5,028 | 3 | |||||||||||||||||||||||||
Premium finance receivables – commercial | 6,016 | 14 | 5,726 | 16 | 4,842 | 16 | 5,530 | 16 | 6,109 | 13 | |||||||||||||||||||||||||
Premium finance receivables – life insurance | 1,217 | 17 | 787 | 16 | 741 | 15 | 566 | 14 | 1,105 | 15 | |||||||||||||||||||||||||
Consumer and other | 1,528 | 1 | 1,242 | 1 | 1,870 | 1 | 2,032 | 2 | 2,785 | 2 | |||||||||||||||||||||||||
Total allowance for loan losses | $ | 105,400 | 99 | % | $ | 91,705 | 98 | % | $ | 96,922 | 97 | % | $ | 107,351 | 96 | % | $ | 110,381 | 94 | % | |||||||||||||||
Covered loans | 3,026 | 1 | 2,131 | 2 | 10,092 | 3 | 13,454 | 4 | 12,977 | 6 | |||||||||||||||||||||||||
Total allowance for loan losses and allowance for covered loan losses | $ | 108,426 | 100 | % | $ | 93,836 | 100 | % | $ | 107,014 | 100 | % | $ | 120,805 | 100 | % | $ | 123,358 | 100 | % | |||||||||||||||
Allowance category as a percent of total allowance for loan losses and allowance for covered loan losses: | |||||||||||||||||||||||||||||||||||
Commercial | 33 | % | 34 | % | 22 | % | 24 | % | 25 | % | |||||||||||||||||||||||||
Commercial real-estate | 40 | 38 | 45 | 43 | 46 | ||||||||||||||||||||||||||||||
Home equity | 11 | 13 | 12 | 11 | 6 | ||||||||||||||||||||||||||||||
Residential real-estate | 4 | 4 | 5 | 5 | 4 | ||||||||||||||||||||||||||||||
Premium finance receivables—commercial | 6 | 6 | 5 | 5 | 5 | ||||||||||||||||||||||||||||||
Premium finance receivables—life insurance | 1 | 1 | 1 | — | 1 | ||||||||||||||||||||||||||||||
Consumer and other | 2 | 2 | 1 | 1 | 2 | ||||||||||||||||||||||||||||||
Total allowance for loan losses | 97 | % | 98 | % | 91 | % | 89 | % | 89 | % | |||||||||||||||||||||||||
Covered loans | 3 | 2 | 9 | 11 | 11 | ||||||||||||||||||||||||||||||
Total allowance for loan losses | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | |||||||||||||||||||||||||
Allowance for losses on lending-related commitments: | |||||||||||||||||||||||||||||||||||
Commercial and commercial real estate | $ | 949 | $ | 775 | $ | 719 | $ | 14,647 | $ | 13,231 | |||||||||||||||||||||||||
Total allowance for credit losses including allowance for covered loan losses | $ | 109,375 | $ | 94,611 | $ | 107,733 | $ | 135,452 | $ | 136,589 | |||||||||||||||||||||||||
83 | ||
Management determined that the allowance for loan losses was appropriate at December 31, 2015, and that the loan portfolio is well diversified and well secured, without undue concentration in any specific risk area. While this process involves a high degree of management judgment, the allowance for credit losses is based on a comprehensive, well documented, and consistently applied analysis of the Company’s loan portfolio. This analysis takes into consideration all available information existing as of the financial statement date, including environmental factors such as economic, industry, geographical and political factors. The relative level of allowance for credit losses is reviewed and compared to industry peers. This review encompasses the levels of total nonperforming loans, portfolio mix, portfolio concentrations, current geographic risks and overall levels of net charge-offs. Historical trending of both the Company’s results and the industry peers is also reviewed to analyze comparative significance.
Allowance for Credit Losses, Excluding Covered Loans
The following tables summarize the activity in our allowance for credit losses during the last five fiscal years.
(Dollars in thousands) | 2015 | 2014 | 2013 | 2012 | 2011 | |||||||||||||||
Allowance for loan losses at beginning of year | $ | 91,705 | $ | 96,922 | $ | 107,351 | $ | 110,381 | $ | 113,903 | ||||||||||
Provision for credit losses | 33,747 | 22,889 | 45,984 | 72,412 | 97,920 | |||||||||||||||
Other adjustments | (737 | ) | (824 | ) | (938 | ) | (1,333 | ) | — | |||||||||||
Reclassification from (to) allowance for unfunded lending-related commitments | (138 | ) | (56 | ) | 640 | 693 | 1,904 | |||||||||||||
Charge-offs: | ||||||||||||||||||||
Commercial | 4,253 | 4,153 | 14,123 | 22,405 | 31,951 | |||||||||||||||
Commercial real estate | 6,543 | 15,788 | 32,745 | 43,539 | 62,698 | |||||||||||||||
Home equity | 4,227 | 3,895 | 6,361 | 9,361 | 5,020 | |||||||||||||||
Residential real estate | 2,903 | 1,750 | 2,958 | 4,060 | 4,115 | |||||||||||||||
Premium finance receivables – commercial | 7,060 | 5,722 | 5,063 | 3,751 | 6,617 | |||||||||||||||
Premium finance receivables – life insurance | — | 4 | 17 | 29 | 275 | |||||||||||||||
Consumer and other | 521 | 792 | 1,110 | 1,245 | 1,776 | |||||||||||||||
Total charge-offs | $ | 25,507 | $ | 32,104 | $ | 62,377 | $ | 84,390 | $ | 112,452 | ||||||||||
Recoveries: | ||||||||||||||||||||
Commercial | 1,432 | 1,198 | 1,655 | 1,220 | 1,258 | |||||||||||||||
Commercial real estate | 2,840 | 1,334 | 2,526 | 6,635 | 1,386 | |||||||||||||||
Home equity | 312 | 535 | 432 | 428 | 64 | |||||||||||||||
Residential real estate | 283 | 335 | 289 | 22 | 10 | |||||||||||||||
Premium finance receivables – commercial | 1,288 | 1,139 | 1,108 | 871 | 6,006 | |||||||||||||||
Premium finance receivables – life insurance | 16 | 11 | 13 | 69 | 12 | |||||||||||||||
Consumer and other | 159 | 326 | 239 | 343 | 370 | |||||||||||||||
Total recoveries | $ | 6,330 | $ | 4,878 | $ | 6,262 | $ | 9,588 | $ | 9,106 | ||||||||||
Net charge-offs, excluding covered loans | $ | (19,177 | ) | $ | (27,226 | ) | $ | (56,115 | ) | $ | (74,802 | ) | $ | (103,346 | ) | |||||
Allowance for loan losses at year end | $ | 105,400 | $ | 91,705 | $ | 96,922 | $ | 107,351 | $ | 110,381 | ||||||||||
Allowance for unfunded lending-related commitments at year end | $ | 949 | $ | 775 | $ | 719 | $ | 14,647 | $ | 13,231 | ||||||||||
Allowance for credit losses at year end | $ | 106,349 | $ | 92,480 | $ | 97,641 | $ | 121,998 | $ | 123,612 | ||||||||||
Net charge-offs by category as a percentage of its own respective category’s average: | ||||||||||||||||||||
Commercial | 0.07 | % | 0.08 | % | 0.41 | % | 0.81 | % | 1.44 | % | ||||||||||
Commercial real estate | 0.07 | 0.33 | 0.74 | 1.02 | 1.80 | |||||||||||||||
Home equity | 0.52 | 0.47 | 0.79 | 1.08 | 0.56 | |||||||||||||||
Residential real estate | 0.29 | 0.19 | 0.35 | 0.51 | 0.79 | |||||||||||||||
Premium finance receivables – commercial | 0.24 | 0.19 | 0.19 | 0.16 | 0.04 | |||||||||||||||
Premium finance receivables – life insurance | — | — | — | — | 0.02 | |||||||||||||||
Consumer and other | 0.23 | 0.28 | 0.47 | 0.47 | 0.82 | |||||||||||||||
Total loans, net of unearned income, excluding covered loans | 0.12 | % | 0.20 | % | 0.44 | % | 0.65 | % | 1.02 | % | ||||||||||
Net charge-offs as a percentage of the provision for credit losses | 56.83 | % | 118.94 | % | 122.04 | % | 103.30 | % | 105.54 | % | ||||||||||
Year-end total loans (excluding covered loans) | $ | 17,118,117 | $ | 14,409,398 | $ | 12,896,602 | $ | 11,828,943 | $ | 10,521,377 | ||||||||||
Allowance for loan losses as a percentage of loans at end of year | 0.62 | % | 0.64 | % | 0.75 | % | 0.91 | % | 1.05 | % | ||||||||||
Allowance for credit losses as a percentage of loans at end of year | 0.62 | % | 0.64 | % | 0.76 | % | 1.03 | % | 1.17 | % | ||||||||||
84 | ||
The allowance for credit losses, excluding the allowance for covered loan losses, is comprised of an allowance for loan losses, which is determined with respect to loans that we have originated, and an allowance for lending-related commitments. Our allowance for lending-related commitments is determined with respect to funds that we have committed to lend but for which funds have not yet been disbursed and is computed using a methodology similar to that used to determine the allowance for loan losses. The allowance for unfunded lending-related commitments totaled $949,000 as of December 31, 2015 compared to $775,000 as of December 31, 2014.
Additions to the allowance for loan losses are charged to earnings through the provision for credit losses. Charge-offs represent the amount of loans that have been determined to be uncollectible during a given period, and are deducted from the allowance for loan losses, and recoveries represent the amount of collections received from loans that had previously been charged off, and are credited to the allowance for loan losses. See Note 5 of the Consolidated Financial Statements for further discussion of activity within the allowance for loan losses during the period and the relationship with respective loan balances for each loan category and the total loan portfolio, excluding covered loans.
How We Determine the Allowance for Credit Losses
The allowance for loan losses includes an element for estimated probable but undetected losses and for imprecision in the credit risk models used to calculate the allowance. If the loan is impaired, the Company analyzes the loan for purposes of calculating our specific impairment reserves as part of the Problem Loan Reporting system review. A general reserve is separately determined for loans not considered impaired. See Note 5 of the Consolidated Financial Statements for further discussion of the specific impairment reserve and general reserve as it relates to the allowance for credit losses for each loan category and the total loan portfolio, excluding covered loans.
Specific Impairment Reserves:
Loans with a credit risk rating of a 6 through 9 are reviewed on a monthly basis to determine if (a) an amount is deemed uncollectible (a charge-off) or (b) it is probable that the Company will be unable to collect amounts due in accordance with the original contractual terms of the loan (impaired loan). If a loan is impaired, the carrying amount of the loan is compared to the expected payments to be reserved, discounted at the loan’s original rate, or for collateral dependent loans, to the fair value of the collateral less the estimated cost to sell. Any shortfall is recorded as a specific impairment reserve.
At December 31, 2015, the Company had $101.3 million of impaired loans with $50.0 million of this balance requiring $6.4 million of specific impairment reserves. At December 31, 2014, the Company had $127.4 million of impaired loans with $69.5 million of this balance requiring $6.3 million of specific impairment reserves. The most significant fluctuations in impaired loans requiring specific impairment reserves from 2014 to 2015 occurred within the office, industrial and mixed use and other portfolios. The recorded investment of the office portfolio requiring specific impairment decreased $6.0 million primarily as a result of two loans totaling approximately $5.1 million being resolved in 2015. The industrial portfolio balance increased $8.2 million with the related specific impairment increasing $1.9 million. This fluctuation was primarily the result of one loan totaling approximately $7.3 million becoming non-performing during the period. Additionally, the recorded investment of the mixed use and other portfolio requiring specific impairment decreased $14.2 million with the specific impairment decreasing $1.7 million. These fluctuations were the result of two loans totaling approximately $4.7 million no longer requiring a specific reserve at December 31, 2015 and one additional loan totaling approximately $2.7 million being resolved during the period. See Note 5 of the Consolidated Financial Statements in Item 8 for further discussion of impaired loans and the related specific impairment reserve.
General Reserves:
For loans with a credit risk rating of 1 through 7 that are not considered impaired loans, reserves are established based on the type of loan collateral, if any, and the assigned credit risk rating. Determination of the allowance is inherently subjective as it requires significant estimates, including the amounts and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans based on the average historical loss experience over a five-year period, and consideration of current environmental factors and economic trends, all of which may be susceptible to significant change.
We determine this component of the allowance for loan losses by classifying each loan into (i) categories based on the type of collateral that secures the loan (if any), and (ii) one of ten categories based on the credit risk rating of the loan, as described above under “Past Due Loans and Non-Performing Assets” in this Item 7. Each combination of collateral and credit risk rating is then assigned a specific loss factor that incorporates the following factors:
• | historical loss experience; |
• | changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off, and recovery practices not considered elsewhere in estimating credit losses; |
85 | ||
• | changes in national, regional, and local economic and business conditions and developments that affect the collectibility of the portfolio; |
• | changes in the nature and volume of the portfolio and in the terms of the loans; |
• | changes in the experience, ability, and depth of lending management and other relevant staff; |
• | changes in the volume and severity of past due loans, the volume of non-accrual loans, and the volume and severity of adversely classified or graded loans; |
• | changes in the quality of the bank’s loan review system; |
• | changes in the underlying collateral for collateral dependent loans; |
• | the existence and effect of any concentrations of credit, and changes in the level of such concentrations; and |
• | the effect of other external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in the bank’s existing portfolio. |
In the second quarter of 2012, the Company modified its historical loss experience analysis from incorporating five−year average loss rate assumptions to incorporating three−year average loss rate assumptions. The reason for the migration at that time was charge-off rates from earlier years in the five-year period were no longer relevant as that period was characterized by historically low credit losses which then built up to a peak in credit losses as a result of the stressed economic environment and depressed real estate valuations that affected both the U.S. economy, generally, and the Company’s local markets.
In the second quarter of 2015, the Company returned to incorporating five-year average loss rate assumptions for its historical loss experience to capture an extended credit cycle. The five-year average loss rate assumption analysis is computed for each of the Company’s collateral codes. The historical loss experience is combined with the specific loss factor for each combination of collateral and credit risk rating which is then applied to each individual loan balance to determine an appropriate general reserve. The historical loss rates are updated on a quarterly basis and are driven by the performance of the portfolio and any changes to the specific loss factors are driven by management judgment and analysis of the factors described above. The Company also analyzes the three- and four-year average historical loss rates on a quarterly basis as a comparison.
Home Equity and Residential Real Estate Loans
The determination of the appropriate allowance for loan losses for residential real estate and home equity loans differs slightly from the process used for commercial and commercial real estate loans. The same credit risk rating system, Problem Loan Reporting system, collateral coding methodology and loss factor assignment are used. The only significant difference is in how the credit risk ratings are assigned to these loans.
The home equity loan portfolio is reviewed on a loan by loan basis by analyzing current FICO scores of the borrowers, line availability, recent line usage, an approaching maturity and the aging status of the loan. Certain of these factors, or combination of these factors, may cause a portion of the credit risk ratings of home equity loans across all banks to be downgraded. Similar to commercial and commercial real estate loans, once a home equity loan’s credit risk rating is downgraded to a 6 through 9, the Company’s Managed Asset Division reviews and advises the subsidiary banks as to collateral valuations and as to the ultimate resolution of the credits that deteriorate to a non-accrual status to minimize losses.
Residential real estate loans that are downgraded to a credit risk rating of 6 through 9 also enter the problem loan reporting system and have the underlying collateral evaluated by the Managed Assets Division.
Premium Finance Receivables
The determination of the appropriate allowance for loan losses for premium finance receivables is based on the assigned credit risk rating of loans in the portfolio. Loss factors are assigned to each risk rating in order to calculate an allowance for credit losses. The allowance for loan losses for these categories is entirely a general reserve.
Effects of Economic Recession and Real Estate Market
In recent years, the Company’s primary markets, which are mostly in suburban Chicago, have not experienced the same levels of credit deterioration in residential mortgage and home equity loans as certain other major metropolitan markets, however, the Company's markets have clearly been under stress. As of December 31, 2015, home equity loans and residential mortgages comprised 5% and 3%, respectively, of the Company’s total loan portfolio. At December 31, 2015 (excluding covered loans), approximately only 2.3% of all of the Company’s residential mortgage loans, excluding PCI loans, and approximately only 1.1% of all of the Company’s home equity loans are on nonaccrual status or more than one payment past due. Current delinquency statistics of these two portfolios, demonstrating that although there is stress in the Chicago metropolitan and southern Wisconsin markets, our portfolios of residential mortgages and home equity loans are performing reasonably well as reflected in the aging of the Company’s loan portfolio table shown earlier in this Item 7.
86 | ||
Methodology in Assessing Impairment and Charge-off Amounts
In determining the amount of impairment or charge-offs associated with collateral dependent loans, the Company values the loan generally by starting with a valuation obtained from an appraisal of the underlying collateral and then deducting estimated selling costs to arrive at a net appraised value. We obtain the appraisals of the underlying collateral typically on an annual basis from one of a pre-approved list of independent, third party appraisal firms. Types of appraisal valuations include “as-is”, “as-complete”, “as-stabilized”, bulk, fair market, liquidation and “retail sellout” values.
In many cases, the Company simultaneously values the underlying collateral by marketing the property to market participants interested in purchasing properties of the same type. If the Company receives offers or indications of interest, we will analyze the price and review market conditions to assess whether in light of such information the appraised value overstates the likely price and that a lower price would be a better assessment of the market value of the property and would enable us to liquidate the collateral. Additionally, the Company takes into account the strength of any guarantees and the ability of the borrower to provide value related to those guarantees in determining the ultimate charge-off or reserve associated with any impaired loans. Accordingly, the Company may charge-off a loan to a value below the net appraised value if it believes that an expeditious liquidation is desirable in the circumstance and it has legitimate offers or other indications of interest to support a value that is less than the net appraised value. Alternatively, the Company may carry a loan at a value that is in excess of the appraised value if the Company has a guarantee from a borrower that the Company believes has realizable value. In evaluating the strength of any guarantee, the Company evaluates the financial wherewithal of the guarantor, the guarantor’s reputation, and the guarantor’s willingness and desire to work with the Company. The Company then conducts a review of the strength of a guarantee on a frequency established as the circumstances and conditions of the borrower warrant.
In circumstances where the Company has received an appraisal but has no third party offers or indications of interest, the Company may enlist the input of realtors in the local market as to the highest valuation that the realtor believes would result in a liquidation of the property given a reasonable marketing period of approximately 90 days. To the extent that the realtors’ indication of market clearing price under such scenario is less than the net appraised valuation, the Company may take a charge-off on the loan to a valuation that is less than the net appraised valuation.
The Company may also charge-off a loan below the net appraised valuation if the Company holds a junior mortgage position in a piece of collateral whereby the risk to acquiring control of the property through the purchase of the senior mortgage position is deemed to potentially increase the risk of loss upon liquidation due to the amount of time to ultimately market the property and the volatile market conditions. In such cases, the Company may abandon its junior mortgage and charge-off the loan balance in full.
In other cases, the Company may allow the borrower to conduct a “short sale,” which is a sale where the Company allows the borrower to sell the property at a value less than the amount of the loan. Many times, it is possible for the current owner to receive a better price than if the property is marketed by a financial institution which the market place perceives to have a greater desire to liquidate the property at a lower price. To the extent that we allow a short sale at a price below the value indicated by an appraisal, we may take a charge-off beyond the value that an appraisal would have indicated.
Other market conditions may require a reserve to bring the carrying value of the loan below the net appraised valuation such as litigation surrounding the borrower and/or property securing our loan or other market conditions impacting the value of the collateral.
Having determined the net value based on the factors such as those noted above and compared that value to the book value of the loan, the Company arrives at a charge-off amount or a specific reserve included in the allowance for loan losses. In summary, for collateral dependent loans, appraisals are used as the fair value starting point in the estimate of net value. Estimated costs to sell are deducted from the appraised value to arrive at the net appraised value. Although an external appraisal is the primary source of valuation utilized for charge-offs on collateral dependent loans, alternative sources of valuation may become available between appraisal dates. As a result, we may utilize values obtained through these alternating sources, which include purchase and sale agreements, legitimate indications of interest, negotiated short sales, realtor price opinions, sale of the note or support from guarantors, as the basis for charge-offs. These alternative sources of value are used only if deemed to be more representative of value based on updated information regarding collateral resolution. In addition, if an appraisal is not deemed current, a discount to appraised value may be utilized. Any adjustments from appraised value to net value are detailed and justified in an impairment analysis, which is reviewed and approved by the Company’s Managed Assets Division.
87 | ||
TDRs
At December 31, 2015, the Company had $51.9 million in loans classified as TDRs. The $51.9 million in TDRs represents 102 credits in which economic concessions were granted to certain borrowers to better align the terms of their loans with their current ability to pay. The balance decreased from $82.3 million representing 145 credits at December 31, 2014.
Concessions were granted on a case-by-case basis working with these borrowers to find modified terms that would assist them in retaining their businesses or their homes and attempt to keep these loans in an accruing status for the Company. Typical concessions include reduction of the interest rate on the loan to a rate considered lower than market and other modification of terms including forgiveness of a portion of the loan balance, extension of the maturity date, and/or modifications from principal and interest payments to interest-only payments for a certain period. See Note 5 of Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K for further discussion regarding the effectiveness of these modifications in keeping the modified loans current based upon contractual terms.
Subsequent to its restructuring, any TDR that becomes nonaccrual or more than 90 days past-due and still accruing interest will be included in the Company’s nonperforming loans. Each TDR was reviewed for impairment at December 31, 2015 and approximately $1.8 million of impairment was present and appropriately reserved for through the Company’s normal reserving methodology in the Company’s allowance for loan losses. Additionally, at December 31, 2015, the Company was committed to lend additional funds to borrowers totaling $32,000 under the contractual terms related to TDRs.
The table below presents a summary of TDRs for the respective periods, presented by loan category and accrual status:
December 31, | December 31, | |||||||
(Dollars in thousands) | 2015 | 2014 | ||||||
Accruing TDRs: | ||||||||
Commercial | $ | 5,613 | $ | 6,654 | ||||
Commercial real estate | 32,777 | 60,120 | ||||||
Residential real estate and other | 4,354 | 2,923 | ||||||
Total accruing TDRs | $ | 42,744 | $ | 69,697 | ||||
Non-accrual TDRs: (1) | ||||||||
Commercial | $ | 134 | $ | 922 | ||||
Commercial real estate | 5,930 | 7,503 | ||||||
Residential real estate and other | 3,045 | 4,153 | ||||||
Total non-accrual TDRs | $ | 9,109 | $ | 12,578 | ||||
Total TDRs: | ||||||||
Commercial | $ | 5,747 | $ | 7,576 | ||||
Commercial real estate | 38,707 | 67,623 | ||||||
Residential real estate and other | 7,399 | 7,076 | ||||||
Total TDRs | $ | 51,853 | $ | 82,275 | ||||
Weighted-average contractual interest rate of TDRs | 4.13 | % | 4.09 | % | ||||
(1) | Included in total non-performing loans. |
88 | ||
TDR Rollforward
The table below presents a summary of TDRs as of December 31, 2015, 2014 and 2013, and shows the changes in the balance during those periods:
Year Ended December 31, 2015 (Dollars in thousands) | Commercial | Commercial Real Estate | Residential Real Estate and Other | Total | ||||||||||||
Balance at beginning of period | $ | 7,576 | $ | 67,623 | $ | 7,076 | $ | 82,275 | ||||||||
Additions during the period | — | 370 | 1,664 | 2,034 | ||||||||||||
Reductions: | ||||||||||||||||
Charge-offs | (397 | ) | (1,975 | ) | (140 | ) | (2,512 | ) | ||||||||
Transferred to OREO and other repossessed assets | (562 | ) | (2,290 | ) | (414 | ) | (3,266 | ) | ||||||||
Removal of TDR loan status (1) | (490 | ) | (13,019 | ) | — | (13,509 | ) | |||||||||
Payments received | (380 | ) | (12,002 | ) | (787 | ) | (13,169 | ) | ||||||||
Balance at period end | $ | 5,747 | $ | 38,707 | $ | 7,399 | $ | 51,853 | ||||||||
Year Ended December 31, 2014 (Dollars in thousands) | Commercial | Commercial Real Estate | Residential Real Estate and Other | Total | ||||||||||||
Balance at beginning of period | $ | 7,388 | $ | 93,535 | $ | 6,180 | $ | 107,103 | ||||||||
Additions during the period | 1,549 | 8,582 | 1,836 | 11,967 | ||||||||||||
Reductions: | ||||||||||||||||
Charge-offs | (51 | ) | (6,875 | ) | (479 | ) | (7,405 | ) | ||||||||
Transferred to OREO and other repossessed assets | (252 | ) | (16,057 | ) | — | (16,309 | ) | |||||||||
Removal of TDR loan status (1) | (383 | ) | — | — | (383 | ) | ||||||||||
Payments received | (675 | ) | (11,562 | ) | (461 | ) | (12,698 | ) | ||||||||
Balance at period end | $ | 7,576 | $ | 67,623 | $ | 7,076 | $ | 82,275 | ||||||||
Year Ended December 31, 2013 (Dollars in thousands) | Commercial | Commercial Real Estate | Residential Real Estate and Other | Total | ||||||||||||
Balance at beginning of period | $ | 17,995 | $ | 102,415 | $ | 6,063 | $ | 126,473 | ||||||||
Additions during the period | 708 | 19,676 | 2,296 | 22,680 | ||||||||||||
Reductions: | ||||||||||||||||
Charge-offs | (3,146 | ) | (8,658 | ) | (369 | ) | (12,173 | ) | ||||||||
Transferred to OREO and other repossessed assets | (3,800 | ) | (1,948 | ) | (103 | ) | (5,851 | ) | ||||||||
Removal of TDR loan status (1) | (2,932 | ) | (1,003 | ) | — | (3,935 | ) | |||||||||
Payments received | (1,437 | ) | (16,947 | ) | (1,707 | ) | (20,091 | ) | ||||||||
Balance at period end | $ | 7,388 | $ | 93,535 | $ | 6,180 | $ | 107,103 | ||||||||
(1) | Loan was previously classified as a TDR and subsequently performed in compliance with the loan’s modified terms for a period of six months (including over a calendar year-end) at a modified interest rate which represented a market rate at the time of restructuring. Per our TDR policy, the TDR classification is removed. |
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 Annual Report on Form 10-K, the Company has no potential problem loans as defined by SEC regulations.
Loan Concentrations
Loan concentrations are considered to exist when there are amounts loaned to multiple borrowers engaged in similar activities which would cause them to be similarly impacted by economic or other conditions. The Company had no concentrations of loans exceeding 10% of total loans at December 31, 2015, except for loans included in the specialty finance operating segment, which are diversified throughout the United States and Canada.
89 | ||
Other Real Estate Owned
In certain circumstances, the Company is required to take action against the real estate collateral of specific loans. The Company uses foreclosure only as a last resort for dealing with borrowers experiencing financial hardships. The Company employs extensive contact and restructuring procedures to attempt to find other solutions for our borrowers. The tables below presents a summary of other real estate owned, excluding covered other real estate owned, and shows the activity for the respective periods and the balance for each property type:
Year Ended | ||||||||
(Dollars in thousands) | December 31, 2015 | December 31, 2014 | ||||||
Balance at beginning of period | $ | 45,642 | $ | 50,454 | ||||
Disposal/resolved | (29,688 | ) | (30,923 | ) | ||||
Transfers in at fair value, less costs to sell | 18,747 | 32,162 | ||||||
Transfers in from covered OREO subsequent to loss share expiration | 7,385 | — | ||||||
Additions from acquisition | 5,378 | — | ||||||
Fair value adjustments | (3,519 | ) | (6,051 | ) | ||||
Balance at end of period | $ | 43,945 | $ | 45,642 | ||||
Period End | ||||||||
(Dollars in thousands) | December 31, 2015 | December 31, 2014 | ||||||
Residential real estate | $ | 11,322 | $ | 7,779 | ||||
Residential real estate development | 2,914 | 3,245 | ||||||
Commercial real estate | 29,709 | 34,618 | ||||||
Total | $ | 43,945 | $ | 45,642 | ||||
90 | ||
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 4.50% must be in the form of common equity Tier 1 capital and 6.0% 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 4.0%. In addition the Federal Reserve continues to consider the Tier 1 leverage ratio in evaluating proposals for expansion or new activities.
The following table summarizes the capital guidelines for bank holding companies, as well as certain ratios relating to the Company’s equity and assets as of December 31, 2015, 2014 and 2013:
Minimum Ratios | Well Capitalized Ratios | 2015 | 2014 | 2013 | |||||||||||
Tier 1 leverage ratio | 4.0 | % | 5.0 | % | 9.1 | % | 10.2 | % | 10.5 | % | |||||
Tier 1 capital to risk-weighted assets | 6.0 | 8.0 | 10.0 | 11.6 | 12.2 | ||||||||||
Common equity Tier 1 capital to risk-weighted assets | 4.5 | 6.5 | 8.4 | N/A | N/A | ||||||||||
Total capital to risk-weighted assets | 8.0 | 10.0 | 12.2 | 13.0 | 12.9 | ||||||||||
Total average equity to total average assets | N/A | N/A | 10.6 | 10.7 | 10.6 | ||||||||||
Dividend payout ratio | N/A | N/A | 15.0 | 13.4 | 6.5 | ||||||||||
As reflected in the table, each of the Company’s capital ratios at December 31, 2015, exceeded the well-capitalized ratios established by the Federal Reserve. Refer to Note 18 of the Consolidated Financial Statements for further information on the capital positions of the banks.
The Company’s principal sources of funds at the holding company level are dividends from its subsidiaries, borrowings under its loan agreement with unaffiliated banks and proceeds from the issuances of subordinated debt and additional equity. Refer to Notes 12, 13, 14 and 22 of the Consolidated Financial Statements in Item 8 for further information on the Company’s subordinated notes, other borrowings, junior subordinated debentures and shareholders’ equity, respectively. Management is committed to maintaining the Company’s capital levels above the “Well Capitalized” levels established by the Federal Reserve for bank holding companies.
In June 2015, the Company issued and sold 5,000,000 shares of the Series D Preferred Stock, with a liquidation preference of $25 per share for $125.0 million in a public offering. Dividends on the Series D Preferred Stock are payable quarterly in arrears when, as and if declared by the Board at a rate of 6.50% per annum on the original liquidation preference of $25 per share from the original issuance date to, but excluding, July 15, 2025. From (and including) July 15, 2025, dividends no the Series D Preferred Stock will be payable quarterly in arrears, when, as and if declared by the Board, at a floating rate equal to the then-applicable three-month LIBOR (as defined in the Certificate of Designations) plus a spread of 4.06% per annum. The dividend rate of such floating rate dividends will be reset quarterly. The Company received proceeds, after deducting underwriting discounts, commissions and related costs, of approximately $120.8 million from the issuance, which were intended to be used for general corporate purposes. The Series D Preferred Stock is listed on the NASDAQ Global Select Market under the symbol “WTFCM.”
In March 2012, the Company issued and sold 126,500 shares of 5.00% non-cumulative perpetual convertible preferred stock, Series C, no par value per share (the "Series C Preferred Stock"), with a liquidation preference of $1,000 per share for $126.5 million in a public offering. Net proceeds to the Company totaled $122.7 million after deducting offering costs. Dividends on the Series C Preferred Stock are payable quarterly in arrears, when, as and if authorized and declared by the Board, at an annual rate of 5.00% per year on the liquidation preference of $1,000 per share. If for any reason the Board does not authorize and declare full cash dividends on the Series C Preferred Stock for a quarterly dividend period, the Company will have no obligation to pay any dividends for that period, whether or not the Board authorizes and declared dividends on the Series C Preferred Stock for any subsequent dividend period.
Each share of the Series C Preferred Stock is convertible into Common Stock at the option of the holder at a conversion rate of 24.3132 shares of Common Stock per share of Series C Preferred Stock, plus cash in lieu of fractional shares, subject to customary anti-dilution adjustments. The conversion rate will be adjusted upon the occurrence of certain make-whole acquisition transactions and other events. In 2015, pursuant to such terms, 180 shares of the Series C Preferred Stock were converted at the option of the
91 | ||
respective holders into 4,374 shares of the Company's common stock. In 2014, pursuant to such terms, 10 shares of the Series C Preferred Stock were converted at the option of the respective holders into 244 shares of the Company's common stock. In 2013, 23 shares of the Series C Preferred Stock were converted at the option of the respective holders into 558 shares of the Company's common stock. On and after April 15, 2017, the Company will have the right under certain circumstances to cause the Series C Preferred Stock to be converted into common stock if the closing price of the Company’s common stock exceeds a certain amount.
In December 2010, the Company sold 4.6 million 7.50% tangible equity units (“TEU”) at a public offering price of $50.00 per unit. The Company received net proceeds of $222.7 million after deducting underwriting discounts and commissions and estimated offering expenses. Each tangible equity unit was composed of a prepaid stock purchase contract and a junior subordinated amortizing note that was paid-off in December 2013. For additional discussion of the TEUs, see Notes 13 and 22 of the Consolidated Financial Statements in Item 8.
The Board approved the first semi-annual dividend on the Company’s common stock in January 2000 and continued to approve semi-annual dividends until quarterly dividends were approved in 2014 and 2015. The payment of dividends is also subject to statutory restrictions and restrictions arising under the terms of the Company's Series C Preferred Stock, the terms of the Company's Series D Preferred Stock, the Company’s trust preferred securities offerings units and under certain financial covenants in the Company’s revolving and term facilities. Under the terms of these separate facilities entered into on December 15, 2014, the Company is prohibited from paying dividends on any equity interests, including its common stock and preferred stock, if such payments would cause the Company to be in default under its facilities or exceed a certain threshold. In January, April, July and October of 2015, Wintrust declared a quarterly cash dividend of $0.11 per common share. In January, April, July and October of 2014, Wintrust declared a quarterly cash dividend of $0.10 per common share. In January of 2016, Wintrust declared a quarterly cash dividend of $0.12 per common share. Taking into account the limitations on the payment of dividends, the final determination of timing, amount and payment of dividends is at the discretion of the Company’s Board of Directors and will depend on the Company’s earnings, financial condition, capital requirements and other relevant factors.
Banking laws impose restrictions upon the amount of dividends that can be paid to the holding company by the banks. Based on these laws, the banks could, subject to minimum capital requirements, declare dividends to the Company without obtaining regulatory approval in an amount not exceeding (a) undivided profits, and (b) the amount of net income reduced by dividends paid for the current and prior two years.
Since the banks are required to maintain their capital at the well-capitalized level (due to the Company being a financial holding company), funds otherwise available as dividends from the banks are limited to the amount that would not reduce any of the banks’ capital ratios below the well-capitalized level. During 2015, 2014 and 2013, the subsidiaries paid dividends to Wintrust totaling $22.2 million, $77.0 million, and $112.8 million, respectively. At January 1, 2016, subject to minimum capital requirements at the banks, approximately $70.2 million was available as dividends from the banks without prior regulatory approval and without compromising the banks’ well-capitalized positions.
Liquidity management at the banks involves planning to meet anticipated funding needs at a reasonable cost. Liquidity management is guided by policies, formulated and monitored by the Company’s senior management and each Bank’s asset/liability committee, which take into account the marketability of assets, the sources and stability of funding and the level of unfunded commitments. The banks’ principal sources of funds are deposits, short-term borrowings and capital contributions from the holding company. In addition, the banks are eligible to borrow under Federal Home Loan Bank advances and certain banks are eligible to borrow at the Federal Reserve Bank Discount Window, another source of liquidity.
Core deposits are the most stable source of liquidity for community banks due to the nature of long-term relationships generally established with depositors and the security of deposit insurance provided by the FDIC. Core deposits are generally defined in the industry as total deposits less time deposits with balances greater than $100,000. Due to the affluent nature of many of the communities that the Company serves, management believes that many of its time deposits with balances in excess of $100,000 are also a stable source of funds. Currently, standard deposit insurance coverage is $250,000 per depositor per insured bank, for each account ownership category.
While the Company obtains a portion of its total deposits through brokered deposits, the Company does so primarily as an asset-liability management tool to assist in the management of interest rate risk, and the Company does not consider brokered deposits to be a vital component of its current liquidity resources. Historically, brokered deposits have represented a small component of the Company’s total deposits outstanding, as set forth in the table below:
92 | ||
December 31, | ||||||||||||||||
(Dollars in thousands) | 2015 | 2014 | 2013 | 2012 | 2011 | |||||||||||
Total deposits | $ | 18,639,634 | 16,281,844 | 14,668,789 | 14,428,544 | 12,307,267 | ||||||||||
Brokered Deposits (1) | 862,026 | 718,986 | 476,139 | 787,812 | 674,013 | |||||||||||
Brokered deposits as a percentage of total deposits (1) | 4.6 | % | 4.4 | % | 3.2 | % | 5.5 | % | 5.5 | % | ||||||
(1) | Brokered Deposits include certificates of deposit obtained through deposit brokers, deposits received through the Certificate of Deposit Account Registry Program (“CDARS”), as well as wealth management deposits of brokerage customers from unaffiliated companies which have been placed into deposit accounts of the banks. |
The banks routinely accept deposits from a variety of municipal entities. Typically, these municipal entities require that banks pledge marketable securities to collateralize these public deposits. At December 31, 2015 and 2014, the banks had approximately $954.8 million and $948.4 million, respectively, of securities collateralizing public deposits and other short-term borrowings. Public deposits requiring pledged assets are not considered to be core deposits, however they provide the Company with a reliable, lower cost, short-term funding source than what is available through many other wholesale alternatives.
Other than as discussed in this section, the Company is not aware of any known trends, commitments, events, regulatory recommendations or uncertainties that would have any material adverse effect on the Company’s capital resources, operations or liquidity.
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, 2015, 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 in Item 8:
Payments Due in | |||||||||||||||||||
(Dollars in thousands) | Note Reference | One year or less | From one to three years | From three to five years | Over five years | Total | |||||||||||||
Deposits | 10 | $ | 17,486,110 | 994,306 | 158,609 | 609 | 18,639,634 | ||||||||||||
FHLB advances (1) | 11 | 425,600 | 314,597 | 94,679 | 25,000 | 859,876 | |||||||||||||
Subordinated notes | 12 | — | — | — | 140,000 | 140,000 | |||||||||||||
Other borrowings | 13 | 79,445 | 164,074 | 22,500 | — | 266,019 | |||||||||||||
Junior subordinated debentures | 14 | — | — | — | 268,566 | 268,566 | |||||||||||||
Operating leases | 15 | 10,515 | 19,864 | 18,340 | 114,513 | 163,232 | |||||||||||||
Purchase obligations (2) | 48,936 | 24,459 | 17,359 | 89,029 | 179,783 | ||||||||||||||
Total | $ | 18,050,606 | 1,517,300 | 311,487 | 637,717 | 20,517,110 | |||||||||||||
(1) | Certain advances provide the FHLB with call dates which are not reflected in the above table. |
(2) | Purchase obligations presented above primarily relate to certain contractual cash obligations for pending acquisitions, marketing obligations and services related to the construction of facilities, data processing and the outsourcing of certain operational activities. |
The Company also enters into derivative contracts under which the Company is required to either receive cash from or pay cash to counterparties depending on changes in interest rates. Derivative contracts are carried at fair value representing the net present value of expected future cash receipts or payments based on market rates as of the balance sheet date. Because the derivative assets and liabilities recorded on the balance sheet at December 31, 2015 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.
93 | ||
Commitments.
The following table presents a summary of the amounts and expected maturities of significant commitments as of December 31, 2015. Further information on these commitments is included in Note 19 of the Consolidated Financial Statements in Item 8.
(Dollars in thousands) | One year or less | From one to three years | From three to five years | Over five years | Total | |||||||||||
Commitment type: | ||||||||||||||||
Commercial, commercial real estate and construction | $ | 1,959,927 | 1,193,964 | 467,185 | 92,281 | 3,713,357 | ||||||||||
Residential real estate | 473,384 | — | — | — | 473,384 | |||||||||||
Revolving home equity lines of credit | 855,128 | — | — | — | 855,128 | |||||||||||
Letters of credit | 114,744 | 54,411 | 6,742 | 232 | 176,129 | |||||||||||
Commitments to sell mortgage loans | 753,890 | — | — | — | 753,890 | |||||||||||
Contingencies. 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. 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, 2015, the liability for estimated losses on repurchase and indemnification was $4.0 million and was included in other liabilities on the balance sheet.
94 | ||
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 inflation. Accordingly, changes in inflation are not expected to have a material impact on the Company.
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. 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 re-pricing 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 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 is 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 the banks and the Company. The objective of the review 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.
The following interest rate scenarios display the percentage change in net interest income over a one-year time horizon assuming increases and decreases of 100 and 200 basis points. The Static Shock Scenario results incorporate actual cash flows and repricing characteristics for balance sheet instruments following an instantaneous, parallel change in market rates based upon a static (i.e. no growth or constant) balance sheet. Conversely, the Ramp Scenario results incorporate management’s projections of future volume and pricing of each of the product lines following a gradual, parallel change in market rates over twelve months. 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. The interest rate sensitivity for both the Static Shock and Ramp Scenarios at December 31, 2015 and December 31, 2014 is as follows:
Static Shock Scenarios | +200 Basis Points | +100 Basis Points | -100 Basis Points | -200 Basis Points | ||||||||
December 31, 2015 | 16.1 | % | 8.7 | % | (10.6 | )% | (17.5 | )% | ||||
December 31, 2014 | 13.4 | 6.4 | (10.1 | ) | (16.9 | ) | ||||||
Ramp Scenarios | +200 Basis Points | +100 Basis Points | -100 Basis Points | -200 Basis Points | ||||||||
December 31, 2015 | 7.3 | % | 3.9 | % | (4.4 | )% | (7.7 | )% | ||||
December 31, 2014 | 5.4 | 2.5 | (3.9 | ) | (7.6 | ) | ||||||
95 | ||
One method utilized by financial institutions, including the Company, to manage interest rate risk is to enter into derivative financial instruments. Derivative financial instruments include 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 20 of the Financial Statements presented under Item 8 of this Annual Report on Form 10-K for further information on the Company’s derivative financial instruments.
During 2015 and 2014, the Company 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 economically hedge positions and compensate for net interest margin compression by increasing the total return associated with the related securities through fees generated from these options. 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 other financial derivative instruments. There were no covered call options outstanding as of December 31, 2015 or 2014.
96 | ||
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of Wintrust Financial Corporation and subsidiaries
We have audited the accompanying consolidated statements of condition of Wintrust Financial Corporation and subsidiaries as of December 31, 2015 and 2014, and the related consolidated statements of income, comprehensive income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2015. 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 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, 2015 and 2014, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2015, 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), Wintrust Financial Corporation and subsidiaries' internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 29, 2016 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Chicago, Illinois
February 29, 2016
97 | ||
WINTRUST FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
December 31, | ||||||||
(In thousands) | 2015 | 2014 | ||||||
Assets | ||||||||
Cash and due from banks | $ | 271,454 | $ | 225,136 | ||||
Federal funds sold and securities purchased under resale agreements | 4,341 | 5,571 | ||||||
Interest bearing deposits with banks | 607,782 | 998,437 | ||||||
Available-for-sale securities, at fair value | 1,716,388 | 1,792,078 | ||||||
Held-to-maturity securities, at amortized cost ($878.1 million fair value at December 31, 2015) | 884,826 | — | ||||||
Trading account securities | 448 | 1,206 | ||||||
Federal Home Loan Bank and Federal Reserve Bank stock | 101,581 | 91,582 | ||||||
Brokerage customer receivables | 27,631 | 24,221 | ||||||
Mortgage loans held-for-sale | 388,038 | 351,290 | ||||||
Loans, net of unearned income, excluding covered loans | 17,118,117 | 14,409,398 | ||||||
Covered loans | 148,673 | 226,709 | ||||||
Total loans | 17,266,790 | 14,636,107 | ||||||
Less: Allowance for loan losses | 105,400 | 91,705 | ||||||
Less: Allowance for covered loan losses | 3,026 | 2,131 | ||||||
Net loans | 17,158,364 | 14,542,271 | ||||||
Premises and equipment, net | 592,256 | 555,228 | ||||||
Lease investments, net | 63,170 | 426 | ||||||
FDIC indemnification asset | — | 11,846 | ||||||
Accrued interest receivable and other assets | 604,917 | 501,456 | ||||||
Trade date securities receivable | — | 485,534 | ||||||
Goodwill | 471,761 | 405,634 | ||||||
Other intangible assets | 24,209 | 18,811 | ||||||
Total assets | $ | 22,917,166 | $ | 20,010,727 | ||||
Liabilities and Shareholders’ Equity | ||||||||
Deposits: | ||||||||
Non-interest bearing | $ | 4,836,420 | $ | 3,518,685 | ||||
Interest bearing | 13,803,214 | 12,763,159 | ||||||
Total deposits | 18,639,634 | 16,281,844 | ||||||
Federal Home Loan Bank advances | 859,876 | 733,050 | ||||||
Other borrowings | 266,019 | 196,465 | ||||||
Subordinated notes | 140,000 | 140,000 | ||||||
Junior subordinated debentures | 268,566 | 249,493 | ||||||
Trade date securities payable | 538 | 3,828 | ||||||
Accrued interest payable and other liabilities | 390,259 | 336,225 | ||||||
Total liabilities | 20,564,892 | 17,940,905 | ||||||
Shareholders’ Equity: | ||||||||
Preferred stock, no par value; 20,000,000 shares authorized: | ||||||||
Series C - $1,000 liquidation value; 126,287 and 126,467 shares issued and outstanding at December 31, 2015 and 2014, respectively | 126,287 | 126,467 | ||||||
Series D - $25 liquidation value; 5,000,000 shares issued and outstanding at December 31, 2015 and no shares issued and outstanding at December 31, 2014 | 125,000 | — | ||||||
Common stock, no par value; $1.00 stated value; 100,000,000 shares authorized at December 31, 2015 and 2014; 48,468,894 shares issued at December 31, 2015 and 46,881,108 shares issued at December 31, 2014 | 48,469 | 46,881 | ||||||
Surplus | 1,190,988 | 1,133,955 | ||||||
Treasury stock, at cost, 85,615 shares issued at December 31, 2015 and 76,053 shares at December 31, 2014 | (3,973 | ) | (3,549 | ) | ||||
Retained earnings | 928,211 | 803,400 | ||||||
Accumulated other comprehensive loss | (62,708 | ) | (37,332 | ) | ||||
Total shareholders’ equity | 2,352,274 | 2,069,822 | ||||||
Total liabilities and shareholders’ equity | $ | 22,917,166 | $ | 20,010,727 | ||||
See accompanying Notes to Consolidated Financial Statements
98 | ||
WINTRUST FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, | ||||||||||||
(In thousands, except per share data) | 2015 | 2014 | 2013 | |||||||||
Interest income | ||||||||||||
Interest and fees on loans | $ | 651,831 | $ | 613,024 | $ | 588,435 | ||||||
Interest bearing deposits with banks | 1,486 | 1,472 | 1,644 | |||||||||
Federal funds sold and securities purchased under resale agreements | 4 | 25 | 27 | |||||||||
Investment securities | 61,006 | 52,951 | 37,025 | |||||||||
Trading account securities | 108 | 79 | 25 | |||||||||
Federal Home Loan Bank and Federal Reserve Bank stock | 3,232 | 2,920 | 2,773 | |||||||||
Brokerage customer receivables | 797 | 796 | 780 | |||||||||
Total interest income | 718,464 | 671,267 | 630,709 | |||||||||
Interest expense | ||||||||||||
Interest on deposits | 48,863 | 48,411 | 53,191 | |||||||||
Interest on Federal Home Loan Bank advances | 9,110 | 10,523 | 11,014 | |||||||||
Interest on other borrowings | 3,627 | 1,773 | 4,341 | |||||||||
Interest on subordinated notes | 7,105 | 3,906 | 167 | |||||||||
Interest on junior subordinated debentures | 8,230 | 8,079 | 11,369 | |||||||||
Total interest expense | 76,935 | 72,692 | 80,082 | |||||||||
Net interest income | 641,529 | 598,575 | 550,627 | |||||||||
Provision for credit losses | 32,942 | 20,537 | 46,033 | |||||||||
Net interest income after provision for credit losses | 608,587 | 578,038 | 504,594 | |||||||||
Non-interest income | ||||||||||||
Wealth management | 73,452 | 71,343 | 63,042 | |||||||||
Mortgage banking | 115,011 | 91,617 | 106,857 | |||||||||
Service charges on deposit accounts | 27,384 | 23,307 | 20,366 | |||||||||
Gains (losses) on available-for-sale securities, net | 323 | (504 | ) | (3,000 | ) | |||||||
Fees from covered call options | 15,364 | 7,859 | 4,773 | |||||||||
Trading (losses) gains, net | (247 | ) | (1,609 | ) | 892 | |||||||
Operating lease income, net | 2,728 | 163 | — | |||||||||
Other | 37,582 | 23,064 | 29,467 | |||||||||
Total non-interest income | 271,597 | 215,240 | 222,397 | |||||||||
Non-interest expense | ||||||||||||
Salaries and employee benefits | 382,080 | 335,506 | 308,794 | |||||||||
Equipment | 32,812 | 29,609 | 26,450 | |||||||||
Equipment on operating lease | 1,826 | 142 | — | |||||||||
Occupancy, net | 48,880 | 42,889 | 36,633 | |||||||||
Data processing | 26,940 | 19,336 | 18,672 | |||||||||
Advertising and marketing | 21,924 | 13,571 | 11,051 | |||||||||
Professional fees | 18,225 | 15,574 | 14,922 | |||||||||
Amortization of other intangible assets | 4,621 | 4,692 | 4,627 | |||||||||
FDIC insurance | 12,386 | 12,168 | 12,728 | |||||||||
OREO expenses, net | 4,483 | 9,367 | 5,834 | |||||||||
Other | 74,242 | 63,993 | 62,840 | |||||||||
Total non-interest expense | 628,419 | 546,847 | 502,551 | |||||||||
Income before taxes | 251,765 | 246,431 | 224,440 | |||||||||
Income tax expense | 95,016 | 95,033 | 87,230 | |||||||||
Net income | $ | 156,749 | $ | 151,398 | $ | 137,210 | ||||||
Preferred stock dividends and discount accretion | 10,869 | 6,323 | 8,395 | |||||||||
Net income applicable to common shares | $ | 145,880 | $ | 145,075 | $ | 128,815 | ||||||
Net income per common share—Basic | $ | 3.05 | $ | 3.12 | $ | 3.33 | ||||||
Net income per common share—Diluted | $ | 2.93 | $ | 2.98 | $ | 2.75 | ||||||
Cash dividends declared per common share | $ | 0.44 | $ | 0.40 | $ | 0.18 | ||||||
Weighted average common shares outstanding | 47,838 | 46,524 | 38,699 | |||||||||
Dilutive potential common shares | 4,099 | 4,321 | 11,249 | |||||||||
Average common shares and dilutive common shares | 51,937 | 50,845 | 49,948 | |||||||||
See accompanying Notes to Consolidated Financial Statements
99 | ||
WINTRUST FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years Ended December 31, | |||||||||||
(In thousands) | 2015 | 2014 | 2013 | ||||||||
Net income | $ | 156,749 | $ | 151,398 | $ | 137,210 | |||||
Unrealized (losses) gains on securities | |||||||||||
Before tax | (13,176 | ) | 72,488 | (102,790 | ) | ||||||
Tax effect | 5,153 | (28,660 | ) | 40,608 | |||||||
Net of tax | (8,023 | ) | 43,828 | (62,182 | ) | ||||||
Reclassification of net gains (losses) included in net income | |||||||||||
Before tax | 323 | (504 | ) | (3,000 | ) | ||||||
Tax effect | (127 | ) | 200 | 1,193 | |||||||
Net of tax | 196 | (304 | ) | (1,807 | ) | ||||||
Reclassification of amortization of unrealized losses on investment securities transferred to held-to-maturity from available-for-sale | |||||||||||
Before tax | (128 | ) | — | — | |||||||
Tax effect | 50 | — | — | ||||||||
Net of tax | (78 | ) | — | — | |||||||
Net unrealized (losses) gains on securities | (8,141 | ) | 44,132 | (60,375 | ) | ||||||
Unrealized gains (losses) on derivative instruments | |||||||||||
Before tax | 533 | (91 | ) | 4,702 | |||||||
Tax effect | (209 | ) | 36 | (1,872 | ) | ||||||
Net unrealized gains (losses) on derivative instruments | 324 | (55 | ) | 2,830 | |||||||
Foreign currency translation adjustment | |||||||||||
Before tax | (24,001 | ) | (24,346 | ) | (17,564 | ) | |||||
Tax effect | 6,442 | 5,973 | 4,362 | ||||||||
Net foreign currency translation adjustment | (17,559 | ) | (18,373 | ) | (13,202 | ) | |||||
Total other comprehensive (loss) income | (25,376 | ) | 25,704 | (70,747 | ) | ||||||
Comprehensive income | $ | 131,373 | $ | 177,102 | $ | 66,463 | |||||
See accompanying Notes to Consolidated Financial Statements
100 | ||
WINTRUST FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(In thousands) | Preferred stock | Common stock | Surplus | Treasury stock | Retained earnings | Accumulated other comprehensive income (loss) | Total shareholders' equity | |||||||||||||||||||||
Balance at January 1, 2013 | $ | 176,406 | $ | 37,108 | $ | 1,036,295 | $ | (7,838 | ) | $ | 555,023 | $ | 7,711 | $ | 1,804,705 | |||||||||||||
Net income | — | — | — | — | 137,210 | — | 137,210 | |||||||||||||||||||||
Other comprehensive loss, net of tax | — | — | — | — | — | (70,747 | ) | (70,747 | ) | |||||||||||||||||||
Cash dividends declared on common stock | — | — | — | — | (6,903 | ) | — | (6,903 | ) | |||||||||||||||||||
Dividends on preferred stock | — | — | — | — | (8,325 | ) | — | (8,325 | ) | |||||||||||||||||||
Accretion on preferred stock | 70 | — | — | — | (70 | ) | — | — | ||||||||||||||||||||
Stock-based compensation | — | — | 6,799 | — | — | — | 6,799 | |||||||||||||||||||||
Conversion of Series A preferred stock to common stock | (49,976 | ) | 1,944 | 48,032 | — | — | — | — | ||||||||||||||||||||
Conversion of Series C preferred stock to common stock | (23 | ) | 1 | 22 | — | — | — | — | ||||||||||||||||||||
Settlement of prepaid common stock purchase contracts | — | 5,870 | (14,212 | ) | 8,342 | — | — | — | ||||||||||||||||||||
Common stock issued for: | ||||||||||||||||||||||||||||
Acquisitions | — | 648 | 22,422 | — | — | — | 23,070 | |||||||||||||||||||||
Exercise of stock options and warrants | — | 372 | 13,613 | (3,215 | ) | — | — | 10,770 | ||||||||||||||||||||
Restricted stock awards | — | 145 | 182 | (289 | ) | — | — | 38 | ||||||||||||||||||||
Employee stock purchase plan | — | 62 | 2,397 | — | — | — | 2,459 | |||||||||||||||||||||
Director compensation plan | — | 31 | 1,482 | — | — | — | 1,513 | |||||||||||||||||||||
Balance at December 31, 2013 | $ | 126,477 | $ | 46,181 | $ | 1,117,032 | $ | (3,000 | ) | $ | 676,935 | $ | (63,036 | ) | $ | 1,900,589 | ||||||||||||
Net income | — | — | — | — | 151,398 | — | 151,398 | |||||||||||||||||||||
Other comprehensive income, net of tax | — | — | — | — | — | 25,704 | 25,704 | |||||||||||||||||||||
Cash dividends declared on common stock | — | — | — | — | (18,610 | ) | — | (18,610 | ) | |||||||||||||||||||
Dividends on preferred stock | — | — | — | — | (6,323 | ) | — | (6,323 | ) | |||||||||||||||||||
Stock-based compensation | — | — | 7,754 | — | — | — | 7,754 | |||||||||||||||||||||
Conversion of Series C preferred stock to common stock | (10 | ) | 1 | 9 | — | — | — | — | ||||||||||||||||||||
Common stock issued for: | ||||||||||||||||||||||||||||
Exercise of stock options and warrants | — | 538 | 4,414 | (313 | ) | — | — | 4,639 | ||||||||||||||||||||
Restricted stock awards | — | 76 | 178 | (236 | ) | — | — | 18 | ||||||||||||||||||||
Employee stock purchase plan | — | 65 | 2,939 | — | — | — | 3,004 | |||||||||||||||||||||
Director compensation plan | — | 20 | 1,629 | — | — | — | 1,649 | |||||||||||||||||||||
Balance at December 31, 2014 | $ | 126,467 | $ | 46,881 | $ | 1,133,955 | $ | (3,549 | ) | $ | 803,400 | $ | (37,332 | ) | $ | 2,069,822 | ||||||||||||
Net income | — | — | — | — | 156,749 | — | 156,749 | |||||||||||||||||||||
Other comprehensive loss, net of tax | — | — | — | — | — | (25,376 | ) | (25,376 | ) | |||||||||||||||||||
Cash dividends declared on common stock | — | — | — | — | (21,069 | ) | — | (21,069 | ) | |||||||||||||||||||
Dividends on preferred stock | — | — | — | — | (10,869 | ) | — | (10,869 | ) | |||||||||||||||||||
Stock-based compensation | — | — | 9,656 | — | — | — | 9,656 | |||||||||||||||||||||
Issuance of Series D preferred stock | 125,000 | — | (4,158 | ) | — | — | — | 120,842 | ||||||||||||||||||||
Conversion of Series C preferred stock to common stock | (180 | ) | 4 | 176 | — | — | — | — | ||||||||||||||||||||
Common stock issued for: | ||||||||||||||||||||||||||||
Acquisitions | — | 811 | 37,912 | — | — | — | 38,723 | |||||||||||||||||||||
Exercise of stock options and warrants | — | 587 | 9,149 | (130 | ) | — | — | 9,606 | ||||||||||||||||||||
Restricted stock awards | — | 108 | (57 | ) | (294 | ) | — | — | (243 | ) | ||||||||||||||||||
Employee stock purchase plan | — | 58 | 2,692 | — | — | — | 2,750 | |||||||||||||||||||||
Director compensation plan | — | 20 | 1,663 | — | — | — | 1,683 | |||||||||||||||||||||
Balance at December 31, 2015 | $ | 251,287 | $ | 48,469 | $ | 1,190,988 | $ | (3,973 | ) | $ | 928,211 | $ | (62,708 | ) | $ | 2,352,274 | ||||||||||||
See accompanying Notes to Consolidated Financial Statements.
101 | ||
WINTRUST FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
See accompanying Notes to Consolidated Financial Statements.
Years Ended December 31, | ||||||||||||
(In thousands) | 2015 | 2014 | 2013 | |||||||||
Operating Activities: | ||||||||||||
Net income | $ | 156,749 | $ | 151,398 | $ | 137,210 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities | ||||||||||||
Provision for credit losses | 32,942 | 20,537 | 46,033 | |||||||||
Depreciation and amortization | 36,671 | 32,117 | 26,180 | |||||||||
Deferred income tax expense | 23,054 | 4,125 | 1,539 | |||||||||
Stock-based compensation expense | 9,656 | 7,754 | 6,799 | |||||||||
Excess tax benefits from stock-based compensation arrangements | (744 | ) | (444 | ) | (474 | ) | ||||||
Net amortization of premium on securities | 3,398 | 1,498 | 2,934 | |||||||||
Accretion of discounts on loans | (34,378 | ) | (42,539 | ) | (34,273 | ) | ||||||
Mortgage servicing rights fair value change, net | (213 | ) | 1,428 | (1,739 | ) | |||||||
Originations and purchases of mortgage loans held-for-sale | (3,903,777 | ) | (3,182,684 | ) | (3,708,364 | ) | ||||||
Proceeds from sales of mortgage loans held-for-sale | 3,971,724 | 3,241,489 | 3,862,030 | |||||||||
Bank owned life insurance income, net of claims | (3,146 | ) | (2,701 | ) | (3,446 | ) | ||||||
Decrease (increase) in trading securities, net | 758 | (709 | ) | 86 | ||||||||
Net (increase) decrease in brokerage customer receivables | (3,410 | ) | 6,732 | (6,089 | ) | |||||||
Gains on mortgage loans sold | (104,695 | ) | (75,768 | ) | (75,793 | ) | ||||||
(Gains) losses on available-for-sale securities, net | (323 | ) | 504 | 3,000 | ||||||||
Loss on sales of premises and equipment, net | 807 | 644 | 23 | |||||||||
Net (gains) losses on sales and fair value adjustments of other real estate owned | (350 | ) | 3,735 | 136 | ||||||||
(Increase) decrease in accrued interest receivable and other assets, net | (147,063 | ) | 77,409 | 53,166 | ||||||||
Decrease in accrued interest payable and other liabilities, net | 292 | (38,902 | ) | (21,749 | ) | |||||||
Net Cash Provided by Operating Activities | 37,952 | 205,623 | 287,209 | |||||||||
Investing Activities: | ||||||||||||
Proceeds from maturities of available-for-sale securities | 506,798 | 431,347 | 295,807 | |||||||||
Proceeds from maturities of held-to-maturity securities | 55 | — | — | |||||||||
Proceeds from sales of available-for-sale securities | 1,515,559 | 852,330 | 138,274 | |||||||||
Proceeds from calls of held-to-maturity securities | 770 | — | — | |||||||||
Purchases of available-for-sale securities | (2,092,652 | ) | (1,597,587 | ) | (489,131 | ) | ||||||
Purchases of held-to-maturity securities | (22,892 | ) | — | — | ||||||||
(Purchase) redemption of Federal Home Loan Bank and Federal Reserve Bank stock, net | (9,999 | ) | (12,321 | ) | 303 | |||||||
Net cash (paid) received for acquisitions | (15,428 | ) | 228,946 | (14,491 | ) | |||||||
Divestiture of operations | — | — | (149,100 | ) | ||||||||
Proceeds from sales of other real estate owned | 50,405 | 92,620 | 100,162 | |||||||||
Proceeds received from the FDIC related to reimbursements on covered assets | 1,859 | 19,999 | 53,443 | |||||||||
Net decrease (increase) in interest-bearing deposits with banks | 531,396 | (502,863 | ) | 643,626 | ||||||||
Net increase in loans | (2,066,666 | ) | (1,311,927 | ) | (747,420 | ) | ||||||
Redemption of bank owned life insurance | 2,701 | — | — | |||||||||
Purchases of premises and equipment, net | (43,459 | ) | (38,136 | ) | (37,694 | ) | ||||||
Net Cash Used for Investing Activities | (1,641,553 | ) | (1,837,592 | ) | (206,221 | ) | ||||||
Financing Activities: | ||||||||||||
Increase (decrease) in deposit accounts | 1,381,425 | 1,217,396 | (78,946 | ) | ||||||||
Increase (decrease) in other borrowings, net | 44,685 | (58,639 | ) | (22,396 | ) | |||||||
Increase (decrease) in Federal Home Loan Bank advances, net | 115,186 | 315,550 | (18,000 | ) | ||||||||
Proceeds from the issuance of subordinated notes, net | — | 139,090 | — | |||||||||
Repayment of subordinated notes | — | — | (15,000 | ) | ||||||||
Excess tax benefits from stock-based compensation arrangements | 744 | 444 | 474 | |||||||||
Net proceeds from issuance of Series D preferred stock | 120,842 | — | — | |||||||||
Issuance of common shares resulting from exercise of stock options, employee stock purchase plan and conversion of common stock warrants | 16,119 | 10,453 | 19,113 | |||||||||
Common stock repurchases | (424 | ) | (549 | ) | (3,504 | ) | ||||||
Dividends paid | (29,888 | ) | (24,933 | ) | (13,893 | ) | ||||||
Net Cash Provided by (Used for) Financing Activities | 1,648,689 | 1,598,812 | (132,152 | ) | ||||||||
Net Increase (Decrease) in Cash and Cash Equivalents | 45,088 | (33,157 | ) | (51,164 | ) | |||||||
Cash and Cash Equivalents at Beginning of Period | 230,707 | 263,864 | 315,028 | |||||||||
Cash and Cash Equivalents at End of Period | $ | 275,795 | $ | 230,707 | $ | 263,864 | ||||||
Supplemental Disclosure of Cash Flow Information: | ||||||||||||
Cash paid during the year for: | ||||||||||||
Interest | $ | 77,737 | $ | 73,334 | $ | 83,395 | ||||||
Income taxes, net | 94,723 | 72,575 | 97,703 | |||||||||
Acquisitions: | ||||||||||||
Fair value of assets acquired, including cash and cash equivalents | 1,187,115 | 475,398 | 559,694 | |||||||||
Value ascribed to goodwill and other intangible assets | 79,879 | 37,526 | 35,056 | |||||||||
Fair value of liabilities assumed | 1,033,219 | 405,801 | 511,603 | |||||||||
Non-cash activities | ||||||||||||
Transfer of available-for-sale securities to held-to-maturity securities | 862,712 | — | — | |||||||||
Transfer to other real estate owned from loans | 28,565 | 52,102 | 81,526 | |||||||||
Common stock issued for acquisitions | 38,723 | — | 23,070 | |||||||||
102 | ||
(1) Summary of Significant Accounting Policies
The accounting and reporting policies of Wintrust Financial Corporation ("Wintrust" or the "Company") and its subsidiaries conform to generally accepted accounting principles 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 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 and tangible equity unit shares 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, the issuance of restricted shares and stock warrants 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. Net income applicable to common shares used in the diluted earnings per share calculation can be affected by the conversion of the Company's preferred stock. Where the effect of this conversion would reduce the loss per share or increase the income per share, net income applicable to common shares is not adjusted by the associated preferred dividends.
Business Combinations
The Company accounts for business combinations under the acquisition method of accounting in accordance with ASC 805, “Business Combinations” (“ASC 805”). The Company recognizes the fair value of the assets acquired and liabilities assumed, immediately expenses transaction costs and accounts for restructuring plans separately from the business combination. There is no separate recognition of the acquired allowance for loan losses on the acquirer’s balance sheet as credit related factors are incorporated directly into the fair value of the loans recorded at the acquisition date. The excess of the cost of the acquisition over the fair value of the net tangible and intangible assets acquired is recorded as goodwill. Alternatively, a gain is recorded equal to the amount by which the fair value of assets purchased exceeds the fair value of liabilities assumed and consideration paid.
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, Wintrust 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. Debt and equity securities held for resale are classified as trading securities. Debt securities for which the Company has the ability and positive intent to hold until maturity are classified as held-to-maturity. All other securities are classified as available-for-sale as they may be sold prior to maturity in response to changes in the Company’s interest rate risk profile, funding needs, demand for collateralized deposits by public entities or other reasons.
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, with unrealized gains and losses, net of related taxes, included in shareholders’ equity as a separate component of other comprehensive income. 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.
103 | ||
Declines in the fair value of held-to-maturity and available-for-sale investment securities (with certain exceptions for debt securities noted below) that are deemed to be other-than-temporary are charged to earnings as a realized loss, and a new cost basis for the securities is established. In evaluating other-than-temporary impairment, management considers the length of time and extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, and the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value in the near term. Declines in the fair value of debt securities below amortized cost are deemed to be other-than-temporary in circumstances where: (1) the Company has the intent to sell a security; (2) it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis; or (3) the Company does not expect to recover the entire amortized cost basis of the security. If the Company intends to sell a security or if it is more likely than not that the Company will be required to sell the security before recovery, an other-than-temporary impairment write-down is recognized in earnings equal to the difference between the security’s amortized cost basis and its fair value. If an entity does not intend to sell the security or it is not more likely than not that it will be required to sell the security before recovery, the other-than-temporary impairment write-down is separated into an amount representing credit loss, which is recognized in earnings, and an amount related to all other factors, which is recognized in other comprehensive income.
Interest and dividends, including amortization of premiums and accretion of discounts, are recognized as interest income when earned. Realized gains and losses on sales (using the specific identification method) and declines in value judged to be other-than-temporary are included in non-interest income.
Federal Home Loan Bank and Federal Reserve Bank Stock
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.
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, with the balance transferred at the lower of cost or market.
ASC 825, “Financial Instruments” provides entities with an option to report selected financial assets and liabilities at fair value. Mortgage loans originated by Wintrust Mortgage are measured at fair value which is determined by reference to investor prices for loan products with similar characteristics. Changes in fair value are recognized in mortgage banking revenue.
Loans, Allowance for Loan Losses, Allowance for Covered Loan Losses and Allowance for Losses on Lending-Related Commitments
Loans 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, 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.
104 | ||
The Company maintains its allowance for loan losses at a level believed appropriate 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 reporting system 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. Loans with a credit risk rating of a 6 through 9 are reviewed on a monthly basis to determine if (a) an amount is deemed uncollectible (a charge-off) or (b) it is probable that the Company will be unable to collect amounts due in accordance with the original contractual terms of the loan (an impaired loan). If a loan is impaired, the carrying amount of the loan is compared to the expected payments to be received, discounted at the loan’s original rate, or for collateral dependent loans, to the fair value of the collateral less the estimated cost to sell. Any shortfall is recorded as a specific reserve. For loans with a credit risk rating of 7 or better that are not considered impaired loans, reserves are established based on the type of loan collateral, if any, and the assigned credit risk rating. Determination of the allowance is inherently subjective as it requires significant estimates, including the amounts and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans based on the average 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 income 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.
Under accounting guidance applicable to loans acquired with evidence of credit quality deterioration since origination, the excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable yield and is recognized in interest income over the remaining estimated life of the loans, using the effective-interest method. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the nonaccretable difference. Changes in the expected cash flows from the date of acquisition will either impact the accretable yield or result in a charge to the provision for credit losses. Subsequent decreases to expected principal cash flows will result in a charge to provision for credit losses and a corresponding increase to allowance for loan losses. Subsequent increases in expected principal cash flows will result in recovery of any previously recorded allowance for loan losses, to the extent applicable, and a reclassification from nonaccretable difference to accretable yield for any remaining increase. All changes in expected interest cash flows, including the impact of prepayments, will result in reclassifications to/from nonaccretable differences.
In estimating expected losses, the Company evaluates loans for impairment in accordance ASC 310, “Receivables.” 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 include 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. For TDRs in which impairment is calculated by the present value of future cash flows, the Company records interest income representing the decrease in impairment resulting from the passage of time during the respective period, which differs from interest income from contractually required interest on these specific loans.
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 Consolidated Statements of Condition at fair value in accordance with ASC 860, “Transfers and Servicing.” 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 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. A third party valuation is obtained for purposes of measuring fair value related to a portion of MSRs. This third party valuation stratifies the servicing rights into pools based on homogenous characteristics, such as product type and interest rate. The fair value of each servicing rights pool is calculated based
105 | ||
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, including leasehold improvements, 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 12 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 including any lease renewals deemed to be reasonably assured. 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.
FDIC Loss Share Asset (Liability)
In conjunction with FDIC-assisted transactions, the Company entered into loss share agreements with the FDIC. These agreements cover losses incurred with respect to loans, foreclosed real estate and certain other assets. The loss share assets and liabilities are measured separately from the loan portfolios because they are not contractually embedded in the loans and are not transferable with the loans should the Company choose to dispose of them. Fair values at the acquisition dates were estimated based on projected cash flows available for loss-share based on the credit adjustments estimated for each loan pool and the loss share percentages. The loss share assets and liabilities are recorded as FDIC indemnification assets and other liabilities on the Consolidated Statements of Condition. Subsequent to the acquisition date, reimbursements received from the FDIC for actual incurred losses will reduce the FDIC loss share assets. Reductions to expected losses, to the extent such reductions to expected losses are the result of an improvement to the actual or expected cash flows from the covered assets, will also reduce the FDIC loss share assets and, if necessary, increase any loss share liability when necessary reductions exceed the current value of the FDIC loss share assets. In accordance with certain clawback provisions, the Company may be required to reimburse the FDIC when actual losses are less than certain thresholds established for each loss share agreement. The balance of these estimated reimbursements and any related amortization are adjusted periodically for changes in the expected losses on covered assets. On the Consolidated Statements of Condition, estimated reimbursements from clawback provisions are recorded as a reduction to the FDIC loss share assets or, if necessary, an increase to the loss share liability. Although these assets are contractual receivables from the FDIC, there are no contractual interest rates. Additional expected losses, to the extent such expected losses result in the recognition of an allowance for loan losses, will increase the FDIC loss share assets. The corresponding amortization or accretion is recorded as a component of non-interest income on the Consolidated Statements of Income.
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. Any excess of the related loan balance over the fair value less expected selling costs is charged to the allowance for loan losses. In contrast, any excess of the fair value less expected selling costs over the related loan balance is recorded as a recovery of prior charge-offs on the loan and, if any portion of the excess exceeds prior charge-offs, as an increase to earnings. 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 expense. At December 31, 2015 and 2014, other real estate owned, excluding covered other real estate owned, totaled $43.9 million and $45.6 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 accounting standards, goodwill is not amortized, but rather is tested for impairment on an
106 | ||
annual basis or more frequently when events warrant, using a qualitative or quantitative approach. 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 twenty years.
Bank-Owned Life Insurance
The Company owns 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, 2015 and 2014, BOLI totaled $136.2 million and $121.4 million, respectively.
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 ASC 815, “Derivatives and Hedging”, 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 freestanding 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.
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 are not designated as hedges according to accounting guidance 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 (i.e. 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 and are not designated in hedging relationships. 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.
Forward currency contracts used to manage foreign exchange risk associated with certain assets are accounted for as derivatives and are not designated in hedging relationships. Foreign currency derivatives are recorded at fair value based on prevailing currency exchange rates at the measurement date. Changes in the fair values of these derivatives resulting from fluctuations in currency rates are recognized in earnings as non-interest income during the period of change.
Periodically, the Company sells options to an unrelated bank or dealer for the right to purchase certain securities held within the banks’ investment portfolios (“covered call options”). These option transactions are designed primarily as an economic hedge to compensate for net interest margin compression by increasing the total return associated with holding the related securities as earning assets by using fee income generated from these options. These transactions are not designated in hedging relationships
107 | ||
pursuant to accounting guidance 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, 2015 and 2014.
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.
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 applicable accounting guidance, 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
In accordance with ASC 718, “Compensation — Stock Compensation”, 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.
Accounting guidance 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.
Comprehensive Income
Comprehensive income consists of net income and other comprehensive income. Other comprehensive income includes unrealized gains and losses on available-for-sale securities, net of deferred taxes, changes in deferred gains and losses on investment securities transferred from available-for-sale securities to held-to-maturity securities, net of deferred taxes, adjustments related to cash flow hedges, net of deferred taxes and foreign currency translation adjustments, net of 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.
Foreign Currency Translation
The Company revalues assets, liabilities, revenue and expense denominated in non-U.S. currencies into U.S. dollars at the end of each month using applicable exchange rates.
Gains and losses relating to translating functional currency financial statements for U.S. reporting are included in other comprehensive income. Gains and losses relating to the remeasurement of transactions to the functional currency are reported in the Consolidated Statements of Income.
108 | ||
New Accounting Pronouncements Adopted
In January 2014, the FASB issued ASU No. 2014-01, “Investments - Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects,” to provide guidance on accounting for investments by a reporting entity in flow-through limited liability entities that invest in affordable housing projects that qualify for the low-income housing tax credit. This ASU permits new accounting treatment, if certain conditions are met, which allows the Company to amortize the initial cost of an investment in proportion to the amount of tax credits and other tax benefits received with recognition of the investment performance in income tax expense. This guidance was effective for fiscal years beginning after December 15, 2014 and did not have a material impact on the Company’s consolidated financial statements.
In January 2014, the FASB issued ASU No. 2014-04, “Receivables - Troubled Debt Restructurings by Creditors (Topic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure,” to address diversity in practice and clarify guidance regarding the accounting for an in-substance repossession or foreclosure of residential real estate collateral. This ASU clarifies that an in-substance repossession or foreclosure occurs upon either the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or the borrower conveying all interest in the residential real estate property to the creditor. Additionally, this ASU requires disclosure of both the amount of foreclosed residential real estate property held by the Company and the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure. This guidance was effective for fiscal years beginning after December 15, 2014 and did not have a material impact on the Company’s consolidated financial statements.
(2) Recent Accounting Pronouncements
Revenue Recognition
In May 2014, the FASB issued ASU No. 2014-09, which created "Revenue from Contracts with Customers (Topic 606), to clarify the principles for recognizing revenue and develop a common revenue standard for customer contracts. This ASU provides guidance regarding how an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASU also added a new subtopic to the codification, ASC 340-40, "Other Assets and Deferred Costs: Contracts with Customers" to provide guidance on costs related to obtaining and fulfilling a customer contract. Furthermore, the new standard requires disclosure of sufficient information to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. At the time ASU No. 2014-09 was issued, the guidance was effective for fiscal years beginning after December 15, 2016. In July 2015, the FASB approved a deferral of the effective date by one year, which would result in the guidance becoming effective for fiscal years beginning after December 15, 2017. The Company is currently evaluating the impact of adopting this new guidance on the consolidated financial statements.
Extraordinary and Unusual Items
In January 2015, the FASB issued ASU No. 2015-01, “Income Statement - Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items,” to eliminate the concept of extraordinary items related to separately classifying, presenting and disclosing certain events and transactions that meet the criteria for that concept. This guidance is effective for fiscal years beginning after December 15, 2015 and is to be applied either prospectively or retrospectively. The Company does not expect this guidance to have a material impact on the Company’s consolidated financial statements.
Consolidation
In February 2015, the FASB issued ASU No. 2015-02, “Consolidation (Topic 810): Amendments to the Consolidation Analysis,” which changes the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. This guidance is effective for fiscal years beginning after December 15, 2015 and is to be applied retrospectively. The Company does not expect this guidance to have a material impact on the Company’s consolidated financial statements.
Debt Issuance Costs
In April 2015, the FASB issued ASU No. 2015-03, "Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs," to clarify the presentation of debt issuance costs within the balance sheet. This ASU requires that an entity present debt issuance costs related to a recognized debt liability on the balance sheet as a direct deduction from the carrying amount of that debt liability, not as a separate asset. The ASU does not affect the current guidance for the recognition and measurement for these debt issuance costs. Additionally, in August 2015, the FASB issued ASU No. 2015-15, "Interest - Imputation
109 | ||
of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements (Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting," to further clarify the the presentation of debt issuance costs related to line-of-credit agreements. This ASU states the SEC would not object to an entity deferring and presenting debt issuance costs related to line-of-credit agreements as an asset on the balance sheet and subsequently amortizing these costs ratably over the term of the agreement, regardless of any outstanding borrowing under the line-of-credit agreement. This guidance is effective for fiscal years beginning after December 15, 2015 and is to be applied retrospectively. The Company does not expect this guidance to have a material impact on the Company’s consolidated financial statements.
Business Combinations
In September 2015, the FASB issued ASU No. 2015-16, "Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments," to simplify the accounting for subsequent adjustments made to provisional amounts recognized at the acquisition date of a business combination. This ASU eliminates the requirement to retrospectively account for these adjustment for all prior periods impacted. The acquirer is required to recognize these adjustments identified during the measurement period in the reporting period in which the adjustment amount is determined. Additionally, the ASU requires an entity to present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current-period earnings that would have been recorded in previous reporting periods if the adjustment had been recognized at the acquisition date. This guidance is effective for fiscal years beginning after December 15, 2015 and is to be applied prospectively. The Company does not expect this guidance to have a material impact on the Company’s consolidated financial statements.
Financial Instruments
In January 2016, the FASB issued ASU No. 2016-01, "Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities," to improve the accounting for financial instruments. This ASU requires equity investments with readily determinable fair values to be measured at fair value with changes recognized in net income regardless of classification. For equity investments without a readily determinable fair value, the value of the investment would be measured at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer instead of fair value, unless a qualitative assessment indicates impairment. Additionally, this ASU requires the separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements. This guidance is effective for fiscal years beginning after December 15, 2017 and is to be applied prospectively with a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The Company is currently evaluating the impact of adopting this new guidance on the consolidated financial statements.
Leases
In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)," to improve transparency and comparability across entities regarding leasing arrangements. This ASU requires the recognition of a separate lease liability representing the required lease payments over the lease term and a separate lease asset representing the right to use the underlying asset during the same lease term. Additionally, this ASU provides clarification regarding the identification of certain components of contracts that would represent a lease as well as requires additional disclosures to the notes of the financial statements. This guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, and is to be applied under a modified retrospective approach, including the option to apply certain practical expedients. The Company is currently evaluating the impact of adopting this new guidance on the consolidated financial statements.
110 | ||
(3) Investment Securities
A summary of the available-for-sale and held-to-maturity securities portfolios presenting carrying amounts and gross unrealized gains and losses as of December 31, 2015 and 2014 is as follows:
December 31, 2015 | December 31, 2014 | |||||||||||||||||||||||||||||||
(Dollars in thousands) | Amortized Cost | Gross unrealized gains | Gross unrealized losses | Fair Value | Amortized Cost | Gross unrealized gains | Gross unrealized losses | Fair Value | ||||||||||||||||||||||||
Available-for-sale securities | ||||||||||||||||||||||||||||||||
U.S. Treasury | $ | 312,282 | $ | — | $ | (5,553 | ) | $ | 306,729 | $ | 388,713 | $ | 84 | $ | (6,992 | ) | $ | 381,805 | ||||||||||||||
U.S. Government agencies | 70,313 | 198 | (275 | ) | 70,236 | 686,106 | 4,113 | (21,903 | ) | 668,316 | ||||||||||||||||||||||
Municipal | 105,702 | 3,249 | (356 | ) | 108,595 | 234,951 | 5,318 | (1,740 | ) | 238,529 | ||||||||||||||||||||||
Corporate notes: | ||||||||||||||||||||||||||||||||
Financial issuers | 80,014 | 1,510 | (1,481 | ) | 80,043 | 129,309 | 2,006 | (1,557 | ) | 129,758 | ||||||||||||||||||||||
Other | 1,500 | 4 | (2 | ) | 1,502 | 3,766 | 55 | — | 3,821 | |||||||||||||||||||||||
Mortgage-backed: (1) | ||||||||||||||||||||||||||||||||
Mortgage-backed securities | 1,069,680 | 3,834 | (21,004 | ) | 1,052,510 | 271,129 | 5,448 | (4,928 | ) | 271,649 | ||||||||||||||||||||||
Collateralized mortgage obligations | 40,421 | 172 | (506 | ) | 40,087 | 47,347 | 249 | (535 | ) | 47,061 | ||||||||||||||||||||||
Equity securities | 51,380 | 5,799 | (493 | ) | 56,686 | 46,592 | 4,872 | (325 | ) | 51,139 | ||||||||||||||||||||||
Total available-for-sale securities | $ | 1,731,292 | $ | 14,766 | $ | (29,670 | ) | $ | 1,716,388 | $ | 1,807,913 | $ | 22,145 | $ | (37,980 | ) | $ | 1,792,078 | ||||||||||||||
Held-to-maturity securities | ||||||||||||||||||||||||||||||||
U.S. Government agencies | $ | 687,302 | $ | 4 | $ | (7,144 | ) | $ | 680,162 | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
Municipal | 197,524 | 867 | (442 | ) | 197,949 | — | — | — | — | |||||||||||||||||||||||
Total held-to-maturity securities | $ | 884,826 | $ | 871 | $ | (7,586 | ) | $ | 878,111 | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
(1) | Consisting entirely of residential mortgage-backed securities, none of which are subprime. |
In 2015, the Company transferred $862.7 million of investment securities with an unrealized loss of $14.4 million from the available-for-sale classification to the held-to-maturity classification. No investment securities were transferred from the available-for-sale classification to the held-to-maturity classification in 2014.
111 | ||
The following table presents the portion of the Company’s available-for-sale and held-to-maturity securities portfolios which has gross unrealized losses, reflecting the length of time that individual securities have been in a continuous unrealized loss position at December 31, 2015:
Continuous unrealized losses existing for less than 12 months | Continuous unrealized losses existing for greater than 12 months | Total | ||||||||||||||||||||||
(Dollars in thousands) | Fair value | Unrealized losses | Fair value | Unrealized losses | Fair value | Unrealized losses | ||||||||||||||||||
Available-for-sale securities | ||||||||||||||||||||||||
U.S. Treasury | $ | 306,729 | $ | (5,553 | ) | $ | — | $ | — | $ | 306,729 | $ | (5,553 | ) | ||||||||||
U.S. Government agencies | 56,193 | (192 | ) | 8,434 | (83 | ) | 64,627 | (275 | ) | |||||||||||||||
Municipal | 24,673 | (261 | ) | 3,680 | (95 | ) | 28,353 | (356 | ) | |||||||||||||||
Corporate notes: | ||||||||||||||||||||||||
Financial issuers | 16,225 | (266 | ) | 34,744 | (1,215 | ) | 50,969 | (1,481 | ) | |||||||||||||||
Other | 998 | (2 | ) | — | — | 998 | (2 | ) | ||||||||||||||||
Mortgage-backed: | ||||||||||||||||||||||||
Mortgage-backed securities | 835,086 | (15,753 | ) | 121,249 | (5,251 | ) | 956,335 | (21,004 | ) | |||||||||||||||
Collateralized mortgage obligations | 12,782 | (189 | ) | 9,196 | (317 | ) | 21,978 | (506 | ) | |||||||||||||||
Equity securities | 4,896 | (77 | ) | 8,485 | (416 | ) | 13,381 | (493 | ) | |||||||||||||||
Total available-for-sale securities | $ | 1,257,582 | $ | (22,293 | ) | $ | 185,788 | $ | (7,377 | ) | $ | 1,443,370 | $ | (29,670 | ) | |||||||||
Held-to-maturity securities | ||||||||||||||||||||||||
U.S. Government agencies | $ | 450,800 | $ | (4,223 | ) | $ | 235,518 | $ | (2,921 | ) | $ | 686,318 | $ | (7,144 | ) | |||||||||
Municipal | 51,933 | (282 | ) | 29,192 | (160 | ) | 81,125 | (442 | ) | |||||||||||||||
Total held-to-maturity securities | $ | 502,733 | $ | (4,505 | ) | $ | 264,710 | $ | (3,081 | ) | $ | 767,443 | $ | (7,586 | ) | |||||||||
112 | ||
The following table presents the portion of the Company’s available-for-sale and held-to-maturity securities portfolios which has gross unrealized losses, reflecting the length of time that individual securities have been in a continuous unrealized loss position at December 31, 2014:
Continuous unrealized losses existing for less than 12 months | Continuous unrealized losses existing for greater than 12 months | Total | ||||||||||||||||||||||
(Dollars in thousands) | Fair value | Unrealized losses | Fair value | Unrealized losses | Fair value | Unrealized losses | ||||||||||||||||||
Available-for-sale securities | ||||||||||||||||||||||||
U.S. Treasury | $ | 97,395 | $ | (31 | ) | $ | 193,187 | $ | (6,961 | ) | $ | 290,582 | $ | (6,992 | ) | |||||||||
U.S. Government agencies | 13,164 | (120 | ) | 459,035 | (21,783 | ) | 472,199 | (21,903 | ) | |||||||||||||||
Municipal | 40,904 | (315 | ) | 45,438 | (1,425 | ) | 86,342 | (1,740 | ) | |||||||||||||||
Corporate notes: | ||||||||||||||||||||||||
Financial issuers | 1,311 | (1 | ) | 57,624 | (1,556 | ) | 58,935 | (1,557 | ) | |||||||||||||||
Other | — | — | — | — | — | — | ||||||||||||||||||
Mortgage-backed: | ||||||||||||||||||||||||
Mortgage-backed securities | 4,875 | (60 | ) | 142,301 | (4,868 | ) | 147,176 | (4,928 | ) | |||||||||||||||
Collateralized mortgage obligations | 13,198 | (13 | ) | 14,828 | (522 | ) | 28,026 | (535 | ) | |||||||||||||||
Equity securities | — | — | 9,462 | (325 | ) | 9,462 | (325 | ) | ||||||||||||||||
Total available-for-sale securities | $ | 170,847 | $ | (540 | ) | $ | 921,875 | $ | (37,440 | ) | $ | 1,092,722 | $ | (37,980 | ) | |||||||||
Held-to-maturity securities | ||||||||||||||||||||||||
U.S. Government agencies | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||
Municipal | — | — | — | — | — | — | ||||||||||||||||||
Total held-to-maturity securities | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||
The Company conducts a regular assessment of its investment securities to determine whether securities are other-than-temporarily impaired considering, among other factors, the nature of the securities, credit ratings or financial condition of the issuer, the extent and duration of the unrealized loss, expected cash flows, market conditions and the Company’s ability to hold the securities through the anticipated recovery period.
The Company does not consider securities with unrealized losses at December 31, 2015 to be other-than-temporarily impaired. The Company does not intend to sell these investments and it is more likely than not that the Company will not be required to sell these investments before recovery of the amortized cost bases, which may be the maturity dates of the securities. The unrealized losses within each category have occurred as a result of changes in interest rates, market spreads and market conditions subsequent to purchase. Securities with continuous unrealized losses existing for more than twelve months were primarily U.S. government agencies and mortgage-backed securities. Unrealized losses recognized on corporate notes and mortgage-backed securities are the result of increases in yields for similar types of securities which have a longer duration and maturity.
In 2013, the Company recorded an other-than-temporary impairment charge related to a money market preferred security. The Company recognized this charge because it estimated that it would not be able to recover its amortized basis prior to its anticipated sale of the security as a result of the Volcker Rule.
The following table provides information as to the amount of gross gains and gross losses realized and proceeds received through the sales of available-for-sale investment securities:
Years Ended December 31, | ||||||||||||
(Dollars in thousands) | 2015 | 2014 | 2013 | |||||||||
Realized gains | $ | 658 | $ | 405 | $ | 434 | ||||||
Realized losses | (335 | ) | (909 | ) | (106 | ) | ||||||
Net realized gains | $ | 323 | $ | (504 | ) | $ | 328 | |||||
Other than temporary impairment charges | — | — | (3,328 | ) | ||||||||
Gains (losses) on available-for-sale securities, net | $ | 323 | $ | (504 | ) | $ | (3,000 | ) | ||||
Proceeds from sales of available-for-sale securities, net | $ | 1,515,559 | $ | 852,330 | $ | 138,274 | ||||||
113 | ||
Net gains on available-for-sale securities resulted in income tax expense of $122,000 in 2015. Net losses on available-for-sale securities resulted in an income tax benefit included in income tax expense of $194,000 and $1.2 million in 2014 and 2013, respectively.
The amortized cost and fair value of securities as of December 31, 2015 and December 31, 2014, 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:
December 31, 2015 | December 31, 2014 | |||||||||||||||
(Dollars in thousands) | Amortized Cost | Fair Value | Amortized Cost | Fair Value | ||||||||||||
Available-for-sale securities | ||||||||||||||||
Due in one year or less | $ | 160,856 | $ | 160,756 | $ | 285,596 | $ | 285,889 | ||||||||
Due in one to five years | 166,550 | 166,468 | 172,647 | 172,885 | ||||||||||||
Due in five to ten years | 228,652 | 225,699 | 331,389 | 325,644 | ||||||||||||
Due after ten years | 13,753 | 14,182 | 653,213 | 637,811 | ||||||||||||
Mortgage-backed | 1,110,101 | 1,092,597 | 318,476 | 318,710 | ||||||||||||
Equity securities | 51,380 | 56,686 | 46,592 | 51,139 | ||||||||||||
Total available-for-sale securities | $ | 1,731,292 | $ | 1,716,388 | $ | 1,807,913 | $ | 1,792,078 | ||||||||
Held-to-maturity securities | ||||||||||||||||
Due in one year or less | $ | — | $ | — | $ | — | $ | — | ||||||||
Due in one to five years | 19,208 | 19,156 | — | — | ||||||||||||
Due in five to ten years | 96,454 | 96,091 | — | — | ||||||||||||
Due after ten years | 769,164 | 762,864 | — | — | ||||||||||||
Total held-to-maturity securities | $ | 884,826 | $ | 878,111 | $ | — | $ | — | ||||||||
At December 31, 2015 and December 31, 2014, securities having a carrying value of $1.2 billion and $1.1 billion, respectively, were pledged as collateral for public deposits, trust deposits, FHLB advances, securities sold under repurchase agreements and derivatives. At December 31, 2015, there were no securities of a single issuer, other than U.S. Government-sponsored agency securities, which exceeded 10% of shareholders’ equity.
114 | ||
(4) Loans
The following table shows the Company's loan portfolio by category as of the dates shown:
(Dollars in thousands) | December 31, 2015 | December 31, 2014 | ||||||
Balance: | ||||||||
Commercial | $ | 4,713,909 | $ | 3,924,394 | ||||
Commercial real estate | 5,529,289 | 4,505,753 | ||||||
Home equity | 784,675 | 716,293 | ||||||
Residential real estate | 607,451 | 483,542 | ||||||
Premium finance receivables—commercial | 2,374,921 | 2,350,833 | ||||||
Premium finance receivables—life insurance | 2,961,496 | 2,277,571 | ||||||
Consumer and other | 146,376 | 151,012 | ||||||
Total loans, net of unearned income, excluding covered loans | $ | 17,118,117 | $ | 14,409,398 | ||||
Covered loans | 148,673 | 226,709 | ||||||
Total loans, net of unearned income | $ | 17,266,790 | $ | 14,636,107 | ||||
Mix: | ||||||||
Commercial | 27 | % | 26 | % | ||||
Commercial real estate | 32 | 31 | ||||||
Home equity | 5 | 5 | ||||||
Residential real estate | 3 | 3 | ||||||
Premium finance receivables—commercial | 14 | 16 | ||||||
Premium finance receivables—life insurance | 17 | 16 | ||||||
Consumer and other | 1 | 1 | ||||||
Total loans, net of unearned income, excluding covered loans | 99 | % | 98 | % | ||||
Covered loans | 1 | 2 | ||||||
Total loans, net of unearned income | 100 | % | 100 | % | ||||
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 throughout the United States and Canada. 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.
Certain premium finance receivables are recorded net of unearned income. The unearned income portions of such premium finance receivables were $56.7 million and $46.9 million at December 31, 2015 and 2014, respectively. Certain life insurance premium finance receivables attributable to the life insurance premium finance loan acquisition in 2009 as well as PCI loans are recorded net of credit discounts. See “Acquired Loan Information at Acquisition,” below.
Total loans, excluding PCI loans, include net deferred loan fees and costs and fair value purchase accounting adjustments totaling $(9.2) million and $330,000 at December 31, 2015 and 2014, respectively. The net credit balance at December 31, 2015 is primarily the result of purchase accounting adjustments related to the various acquisitions during 2015.
Certain real estate loans, including mortgage loans held-for-sale, and home equity loans with balances totaling approximately $3.8 billion and $3.6 billion at December 31, 2015 and 2014, respectively, were pledged as collateral to secure the availability of borrowings from certain federal agency banks. At December 31, 2015, approximately $3.2 billion of these pledged loans are included in a blanket pledge of qualifying loans to the FHLB. The remaining $579.2 million of pledged loans was used to secure potential borrowings at the Federal Reserve Bank discount window. At December 31, 2015 and 2014, the banks borrowed $859.9 million and $733.1 million, respectively, from the FHLB in connection with these collateral arrangements. See Note 11 – Federal Home Loan Bank Advances for a summary of these borrowings.
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.
115 | ||
Acquired Loan Information at Acquisition — PCI Loans
As part of our previous acquisitions, we acquired loans for which there was evidence of credit quality deterioration since origination (PCI loans) and we determined that it was probable that the Company would be unable to collect all contractually required principal and interest payments. The following table presents the unpaid principal balance and carrying value for these acquired loans:
December 31, 2015 | December 31, 2014 | |||||||||||||||
(Dollars in thousands) | Unpaid Principal Balance | Carrying Value | Unpaid Principal Balance | Carrying Value | ||||||||||||
Bank acquisitions | $ | 326,470 | $ | 271,260 | $ | 285,809 | $ | 227,229 | ||||||||
Life insurance premium finance loans acquisition | 372,738 | 368,292 | 399,665 | 393,479 | ||||||||||||
The following table provides estimated details as of the date of acquisition on loans acquired in 2015 with evidence of credit quality deterioration since origination:
(Dollars in thousands) | North Bank | CBWGE | Suburban | Delavan | |||||||||||
Contractually required payments including interest | $ | 8,563 | $ | 38,656 | $ | 95,804 | $ | 15,791 | |||||||
Less: Nonaccretable difference | 1,027 | 4,437 | 13,888 | 1,442 | |||||||||||
Cash flows expected to be collected (1) | $ | 7,536 | $ | 34,219 | $ | 81,916 | $ | 14,349 | |||||||
Less: Accretable yield | 866 | 2,895 | 5,334 | 898 | |||||||||||
Fair value of PCI loans acquired | $ | 6,670 | $ | 31,324 | $ | 76,582 | $ | 13,451 | |||||||
(1) | Represents undiscounted expected principal and interest cash at acquisition. |
See Note 5 - Allowance for Loan Losses, Allowance for Losses on Lending-Related Commitments and Impaired Loans for further discussion regarding the allowance for loan losses associated with PCI loans at December 31, 2015.
Accretable Yield Activity — PCI Loans
Changes in expected cash flows may vary from period to period as the Company periodically updates its cash flow model assumptions for PCI loans. The factors that most significantly affect the estimates of gross cash flows expected to be collected, and accordingly the accretable yield, include changes in the benchmark interest rate indices for variable-rate products and changes in prepayment assumptions and loss estimates. The following table provides activity for the accretable yield of PCI loans.
Years Ended December 31, | ||||||||
(Dollars in thousands) | 2015 | 2014 | ||||||
Accretable yield, beginning balance | $ | 79,102 | $ | 115,909 | ||||
Acquisitions | 9,993 | — | ||||||
Accretable yield amortized to interest income | (24,115 | ) | (36,956 | ) | ||||
Accretable yield amortized to indemnification asset (1) | (13,495 | ) | (30,691 | ) | ||||
Reclassification from non-accretable difference (2) | 7,390 | 35,967 | ||||||
Increases (decreases) in interest cash flows due to payments and changes in interest rates | 5,027 | (5,127 | ) | |||||
Accretable yield, ending balance (3) | $ | 63,902 | $ | 79,102 | ||||
(1) | Represents the portion of the current period accreted yield, resulting from lower expected losses, applied to reduce the loss share indemnification asset. |
(2) | Reclassification is the result of subsequent increases in expected principal cash flows. |
(3) | As of December 31, 2015, the Company estimates that the remaining accretable yield balance to be amortized to the indemnification asset for the bank acquisitions is $6.6 million. The remainder of the accretable yield related to bank acquisitions is expected to be amortized to interest income. |
Accretion to interest income from acquired loans totaled $24.1 million and $37.0 million in 2015 and 2014, respectively. These amounts include accretion from both covered and non-covered loans, and are included together within interest and fees on loans in the Consolidated Statements of Income.
116 | ||
(5) Allowance for Loan Losses, Allowance for Losses on Lending-Related Commitments and Impaired Loans
The tables below show the aging of the Company’s loan portfolio at December 31, 2015 and 2014:
As of December 31, 2015 (Dollars in thousands) | Nonaccrual | 90+ days and still accruing | 60-89 days past due | 30-59 days past due | Current | Total Loans | ||||||||||||||||||
Loan Balances: | ||||||||||||||||||||||||
Commercial | ||||||||||||||||||||||||
Commercial and industrial | $ | 12,416 | $ | 6 | $ | 6,749 | $ | 12,930 | $ | 2,819,253 | $ | 2,851,354 | ||||||||||||
Franchise | — | — | — | — | 245,228 | 245,228 | ||||||||||||||||||
Mortgage warehouse lines of credit | — | — | — | — | 222,806 | 222,806 | ||||||||||||||||||
Community Advantage — homeowners association | — | — | — | — | 130,986 | 130,986 | ||||||||||||||||||
Aircraft | 288 | — | — | — | 5,039 | 5,327 | ||||||||||||||||||
Asset-based lending | 8 | — | 3,864 | 1,844 | 736,968 | 742,684 | ||||||||||||||||||
Tax exempt | — | — | — | — | 267,273 | 267,273 | ||||||||||||||||||
Leases | — | 535 | 748 | 4,192 | 220,599 | 226,074 | ||||||||||||||||||
Other | — | — | — | — | 3,588 | 3,588 | ||||||||||||||||||
PCI - commercial (1) | — | 892 | — | 2,510 | 15,187 | 18,589 | ||||||||||||||||||
Total commercial | $ | 12,712 | $ | 1,433 | $ | 11,361 | $ | 21,476 | $ | 4,666,927 | $ | 4,713,909 | ||||||||||||
Commercial real estate: | ||||||||||||||||||||||||
Residential construction | $ | 273 | $ | — | $ | — | $ | 45 | $ | 70,063 | $ | 70,381 | ||||||||||||
Commercial construction | 33 | — | 1,371 | 1,600 | 285,275 | 288,279 | ||||||||||||||||||
Land | 1,751 | — | — | 120 | 76,546 | 78,417 | ||||||||||||||||||
Office | 4,619 | — | 764 | 3,817 | 853,801 | 863,001 | ||||||||||||||||||
Industrial | 9,564 | — | 1,868 | 1,009 | 715,207 | 727,648 | ||||||||||||||||||
Retail | 1,760 | — | 442 | 2,310 | 863,887 | 868,399 | ||||||||||||||||||
Multi-family | 1,954 | — | 597 | 6,568 | 733,230 | 742,349 | ||||||||||||||||||
Mixed use and other | 6,691 | — | 6,723 | 7,215 | 1,712,187 | 1,732,816 | ||||||||||||||||||
PCI - commercial real estate (1) | — | 22,111 | 4,662 | 16,559 | 114,667 | 157,999 | ||||||||||||||||||
Total commercial real estate | $ | 26,645 | $ | 22,111 | $ | 16,427 | $ | 39,243 | $ | 5,424,863 | $ | 5,529,289 | ||||||||||||
Home equity | 6,848 | — | 1,889 | 5,517 | 770,421 | 784,675 | ||||||||||||||||||
Residential real estate | 12,043 | — | 1,964 | 3,824 | 586,154 | 603,985 | ||||||||||||||||||
PCI - residential real estate (1) | — | 488 | 202 | 79 | 2,697 | 3,466 | ||||||||||||||||||
Premium finance receivables | ||||||||||||||||||||||||
Commercial insurance loans | 14,561 | 10,294 | 6,624 | 21,656 | 2,321,786 | 2,374,921 | ||||||||||||||||||
Life insurance loans | — | — | 3,432 | 11,140 | 2,578,632 | 2,593,204 | ||||||||||||||||||
PCI - life insurance loans (1) | — | — | — | — | 368,292 | 368,292 | ||||||||||||||||||
Consumer and other | 263 | 211 | 204 | 1,187 | 144,511 | 146,376 | ||||||||||||||||||
Total loans, net of unearned income, excluding covered loans | $ | 73,072 | $ | 34,537 | $ | 42,103 | $ | 104,122 | $ | 16,864,283 | $ | 17,118,117 | ||||||||||||
Covered loans | 5,878 | 7,335 | 703 | 5,774 | 128,983 | 148,673 | ||||||||||||||||||
Total loans, net of unearned income | $ | 78,950 | $ | 41,872 | $ | 42,806 | $ | 109,896 | $ | 16,993,266 | $ | 17,266,790 | ||||||||||||
(1) | PCI loans represent loans acquired with evidence of credit quality deterioration since origination, in accordance with ASC 310-30. Loan agings are based upon contractually required payments. See Note 4 - Loans for further discussion of these purchased loans. |
117 | ||
As of December 31, 2014 (Dollars in thousands) | Nonaccrual | 90+ days and still accruing | 60-89 days past due | 30-59 days past due | Current | Total Loans | ||||||||||||||||||
Loan Balances: | ||||||||||||||||||||||||
Commercial | ||||||||||||||||||||||||
Commercial and industrial | $ | 9,132 | $ | 474 | $ | 3,161 | $ | 7,492 | $ | 2,194,221 | $ | 2,214,480 | ||||||||||||
Franchise | — | — | 308 | 1,219 | 250,673 | 252,200 | ||||||||||||||||||
Mortgage warehouse lines of credit | — | — | — | — | 139,003 | 139,003 | ||||||||||||||||||
Community Advantage — homeowners association | — | — | — | — | 106,364 | 106,364 | ||||||||||||||||||
Aircraft | — | — | — | — | 8,065 | 8,065 | ||||||||||||||||||
Asset-based lending | 25 | — | 1,375 | 2,394 | 802,608 | 806,402 | ||||||||||||||||||
Tax exempt | — | — | — | — | 217,487 | 217,487 | ||||||||||||||||||
Leases | — | — | 77 | 315 | 159,744 | 160,136 | ||||||||||||||||||
Other | — | — | — | — | 11,034 | 11,034 | ||||||||||||||||||
PCI - commercial (1) | — | 365 | 202 | 138 | 8,518 | 9,223 | ||||||||||||||||||
Total commercial | $ | 9,157 | $ | 839 | $ | 5,123 | $ | 11,558 | $ | 3,897,717 | $ | 3,924,394 | ||||||||||||
Commercial real estate | ||||||||||||||||||||||||
Residential construction | $ | — | $ | — | $ | 250 | $ | 76 | $ | 38,370 | $ | 38,696 | ||||||||||||
Commercial construction | 230 | — | — | 2,023 | 185,513 | 187,766 | ||||||||||||||||||
Land | 2,656 | — | — | 2,395 | 86,779 | 91,830 | ||||||||||||||||||
Office | 7,288 | — | 2,621 | 1,374 | 694,149 | 705,432 | ||||||||||||||||||
Industrial | 2,392 | — | — | 3,758 | 617,820 | 623,970 | ||||||||||||||||||
Retail | 4,152 | — | 116 | 3,301 | 723,919 | 731,488 | ||||||||||||||||||
Multi-family | 249 | — | 249 | 1,921 | 603,323 | 605,742 | ||||||||||||||||||
Mixed use and other | 9,638 | — | 2,603 | 9,023 | 1,443,853 | 1,465,117 | ||||||||||||||||||
PCI - commercial real estate (1) | — | 10,976 | 6,393 | 4,016 | 34,327 | 55,712 | ||||||||||||||||||
Total commercial real estate | $ | 26,605 | $ | 10,976 | $ | 12,232 | $ | 27,887 | $ | 4,428,053 | $ | 4,505,753 | ||||||||||||
Home equity | 6,174 | — | 983 | 3,513 | 705,623 | 716,293 | ||||||||||||||||||
Residential real estate | 15,502 | — | 267 | 6,315 | 459,224 | 481,308 | ||||||||||||||||||
PCI - residential real estate (1) | — | 549 | — | — | 1,685 | 2,234 | ||||||||||||||||||
Premium finance receivables | ||||||||||||||||||||||||
Commercial insurance loans | 12,705 | 7,665 | 5,995 | 17,328 | 2,307,140 | 2,350,833 | ||||||||||||||||||
Life insurance loans | — | — | 13,084 | 339 | 1,870,669 | 1,884,092 | ||||||||||||||||||
PCI - life insurance loans (1) | — | — | — | — | 393,479 | 393,479 | ||||||||||||||||||
Consumer and other | 277 | 119 | 293 | 838 | 149,485 | 151,012 | ||||||||||||||||||
Total loans, net of unearned income, excluding covered loans | $ | 70,420 | $ | 20,148 | $ | 37,977 | $ | 67,778 | $ | 14,213,075 | $ | 14,409,398 | ||||||||||||
Covered loans | 7,290 | 17,839 | 1,304 | 4,835 | 195,441 | 226,709 | ||||||||||||||||||
Total loans, net of unearned income | $ | 77,710 | $ | 37,987 | $ | 39,281 | $ | 72,613 | $ | 14,408,516 | $ | 14,636,107 | ||||||||||||
(1) | PCI loans represent loans acquired with evidence of credit quality deterioration since origination, in accordance with ASC 310-30. Loan agings are based upon contractually required payments. See Note 4 - Loans for further discussion of these purchased loans. |
Our ability to manage credit risk depends in large part on our ability to properly identify and manage problem loans. To do so, the Company operates a credit risk rating system under which our credit management personnel assign a credit risk rating (1 to 10 rating) to each loan at the time of origination and review loans on a regular basis.
Each loan officer is responsible for monitoring his or her loan portfolio, recommending a credit risk rating for each loan in his or her portfolio and ensuring the credit risk ratings are appropriate. These credit risk ratings are then ratified by the bank’s chief credit officer and/or concurrence credit officer. Credit risk ratings are determined by evaluating a number of factors including: a borrower’s financial strength, cash flow coverage, collateral protection and guarantees.
118 | ||
The Company’s Problem Loan Reporting system automatically includes all loans with credit risk ratings of 6 through 9. This system is designed to provide an on-going detailed tracking mechanism for each problem loan. Once management determines that a loan has deteriorated to a point where it has a credit risk rating of 6 or worse, the Company’s Managed Asset Division performs an overall credit and collateral review. As part of this review, all underlying collateral is identified and the valuation methodology is analyzed and tracked. As a result of this initial review by the Company’s Managed Asset Division, the credit risk rating is reviewed and a portion of the outstanding loan balance may be deemed uncollectible or an impairment reserve may be established. The Company’s impairment analysis utilizes an independent re-appraisal of the collateral (unless such a third-party evaluation is not possible due to the unique nature of the collateral, such as a closely-held business or thinly traded securities). In the case of commercial real estate collateral, an independent third party appraisal is ordered by the Company’s Real Estate Services Group to determine if there has been any change in the underlying collateral value. These independent appraisals are reviewed by the Real Estate Services Group and sometimes by independent third party valuation experts and may be adjusted depending upon market conditions.
Through the credit risk rating process, loans are reviewed to determine if they are performing in accordance with the original contractual terms. If the borrower has failed to comply with the original contractual terms, further action may be required by the Company, including a downgrade in the credit risk rating, movement to non-accrual status, a charge-off or the establishment of a specific impairment reserve. If we determine that a loan amount or portion thereof is uncollectible the loan’s credit risk rating is immediately downgraded to an 8 or 9 and the uncollectible amount is charged-off. Any loan that has a partial charge-off continues to be assigned a credit risk rating of an 8 or 9 for the duration of time that a balance remains outstanding. The Company undertakes a thorough and ongoing analysis to determine if additional impairment and/or charge-offs are appropriate and to begin a workout plan for the credit to minimize actual losses.
If, based on current information and events, it is probable that the Company will be unable to collect all amounts due to it according to the contractual terms of the loan agreement, a specific impairment reserve is established. In determining the appropriate charge-off for collateral-dependent loans, the Company considers the results of appraisals for the associated collateral.
119 | ||
Non-performing loans include all non-accrual loans (8 and 9 risk ratings) as well as loans 90 days past due and still accruing interest, excluding PCI and covered loans. The remainder of the portfolio is considered performing under the contractual terms of the loan agreement. The following table presents the recorded investment based on performance of loans by class, excluding covered loans, per the most recent analysis at December 31, 2015 and 2014:
Performing | Non-performing | Total | ||||||||||||||||||||||
December 31, | December 31, | December 31, | December 31, | December 31, | December 31, | |||||||||||||||||||
(Dollars in thousands) | 2015 | 2014 | 2015 | 2014 | 2015 | 2014 | ||||||||||||||||||
Loan Balances: | ||||||||||||||||||||||||
Commercial | ||||||||||||||||||||||||
Commercial and industrial | $ | 2,838,932 | $ | 2,204,874 | $ | 12,422 | $ | 9,606 | $ | 2,851,354 | $ | 2,214,480 | ||||||||||||
Franchise | 245,228 | 252,200 | — | — | 245,228 | 252,200 | ||||||||||||||||||
Mortgage warehouse lines of credit | 222,806 | 139,003 | — | — | 222,806 | 139,003 | ||||||||||||||||||
Community Advantage—homeowners association | 130,986 | 106,364 | — | — | 130,986 | 106,364 | ||||||||||||||||||
Aircraft | 5,039 | 8,065 | 288 | — | 5,327 | 8,065 | ||||||||||||||||||
Asset-based lending | 742,676 | 806,377 | 8 | 25 | 742,684 | 806,402 | ||||||||||||||||||
Tax exempt | 267,273 | 217,487 | — | — | 267,273 | 217,487 | ||||||||||||||||||
Leases | 225,539 | 160,136 | 535 | — | 226,074 | 160,136 | ||||||||||||||||||
Other | 3,588 | 11,034 | — | — | 3,588 | 11,034 | ||||||||||||||||||
PCI - commercial (1) | 18,589 | 9,223 | — | — | 18,589 | 9,223 | ||||||||||||||||||
Total commercial | $ | 4,700,656 | $ | 3,914,763 | $ | 13,253 | $ | 9,631 | $ | 4,713,909 | $ | 3,924,394 | ||||||||||||
Commercial real estate | ||||||||||||||||||||||||
Residential construction | $ | 70,108 | $ | 38,696 | $ | 273 | $ | — | $ | 70,381 | $ | 38,696 | ||||||||||||
Commercial construction | 288,246 | 187,536 | 33 | 230 | 288,279 | 187,766 | ||||||||||||||||||
Land | 76,666 | 89,174 | 1,751 | 2,656 | 78,417 | 91,830 | ||||||||||||||||||
Office | 858,382 | 698,144 | 4,619 | 7,288 | 863,001 | 705,432 | ||||||||||||||||||
Industrial | 718,084 | 621,578 | 9,564 | 2,392 | 727,648 | 623,970 | ||||||||||||||||||
Retail | 866,639 | 727,336 | 1,760 | 4,152 | 868,399 | 731,488 | ||||||||||||||||||
Multi-family | 740,395 | 605,493 | 1,954 | 249 | 742,349 | 605,742 | ||||||||||||||||||
Mixed use and other | 1,726,125 | 1,455,479 | 6,691 | 9,638 | 1,732,816 | 1,465,117 | ||||||||||||||||||
PCI - commercial real estate (1) | 157,999 | 55,712 | — | — | 157,999 | 55,712 | ||||||||||||||||||
Total commercial real estate | $ | 5,502,644 | $ | 4,479,148 | $ | 26,645 | $ | 26,605 | $ | 5,529,289 | $ | 4,505,753 | ||||||||||||
Home equity | 777,827 | 710,119 | 6,848 | 6,174 | 784,675 | 716,293 | ||||||||||||||||||
Residential real estate | 591,942 | 465,806 | 12,043 | 15,502 | 603,985 | 481,308 | ||||||||||||||||||
PCI - residential real estate (1) | 3,466 | 2,234 | — | — | 3,466 | 2,234 | ||||||||||||||||||
Premium finance receivables | ||||||||||||||||||||||||
Commercial insurance loans | 2,350,066 | 2,330,463 | 24,855 | 20,370 | 2,374,921 | 2,350,833 | ||||||||||||||||||
Life insurance loans | 2,593,204 | 1,884,092 | — | — | 2,593,204 | 1,884,092 | ||||||||||||||||||
PCI - life insurance loans (1) | 368,292 | 393,479 | — | — | 368,292 | 393,479 | ||||||||||||||||||
Consumer and other | 145,963 | 150,617 | 413 | 395 | 146,376 | 151,012 | ||||||||||||||||||
Total loans, net of unearned income, excluding covered loans | $ | 17,034,060 | $ | 14,330,721 | $ | 84,057 | $ | 78,677 | $ | 17,118,117 | $ | 14,409,398 | ||||||||||||
(1) | PCI loans represent loans acquired with evidence of credit quality deterioration since origination, in accordance with ASC 310-30. See Note 4 - Loans for further discussion of these purchased loans. |
120 | ||
A summary of the activity in the allowance for credit losses by loan portfolio (excluding covered loans) for the years ended December 31, 2015 and 2014 is as follows:
Year Ended December 31, 2015 (Dollars in thousands) | Commercial | Commercial Real Estate | Home Equity | Residential Real Estate | Premium Finance Receivable | Consumer and Other | Total, Excluding Covered Loans | |||||||||||||||||||||
Allowance for credit losses | ||||||||||||||||||||||||||||
Allowance for loan losses at beginning of period | $ | 31,699 | $ | 35,533 | $ | 12,500 | $ | 4,218 | $ | 6,513 | $ | 1,242 | $ | 91,705 | ||||||||||||||
Other adjustments | (51 | ) | (419 | ) | — | (125 | ) | (142 | ) | — | (737 | ) | ||||||||||||||||
Reclassification to/from allowance for unfunded lending-related commitments | — | (138 | ) | — | — | — | — | (138 | ) | |||||||||||||||||||
Charge-offs | (4,253 | ) | (6,543 | ) | (4,227 | ) | (2,903 | ) | (7,060 | ) | (521 | ) | (25,507 | ) | ||||||||||||||
Recoveries | 1,432 | 2,840 | 312 | 283 | 1,304 | 159 | 6,330 | |||||||||||||||||||||
Provision for credit losses | 7,308 | 12,485 | 3,427 | 3,261 | 6,618 | 648 | 33,747 | |||||||||||||||||||||
Allowance for loan losses at period end | $ | 36,135 | $ | 43,758 | $ | 12,012 | $ | 4,734 | $ | 7,233 | $ | 1,528 | $ | 105,400 | ||||||||||||||
Allowance for unfunded lending-related commitments at period end | — | 949 | — | — | — | — | 949 | |||||||||||||||||||||
Allowance for credit losses at period end | $ | 36,135 | $ | 44,707 | $ | 12,012 | $ | 4,734 | $ | 7,233 | $ | 1,528 | $ | 106,349 | ||||||||||||||
Individually evaluated for impairment | 2,026 | 3,733 | 333 | 316 | — | 10 | 6,418 | |||||||||||||||||||||
Collectively evaluated for impairment | 34,025 | 40,625 | 11,679 | 4,416 | 7,233 | 1,518 | 99,496 | |||||||||||||||||||||
Loans acquired with deteriorated credit quality | 84 | 349 | — | 2 | — | — | 435 | |||||||||||||||||||||
Loans at period end | ||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | 18,789 | $ | 59,871 | $ | 6,847 | $ | 16,522 | $ | — | $ | 392 | $ | 102,421 | ||||||||||||||
Collectively evaluated for impairment | 4,676,531 | 5,311,419 | 777,828 | 587,463 | 4,968,125 | 144,640 | 16,466,006 | |||||||||||||||||||||
Loans acquired with deteriorated credit quality | 18,589 | 157,999 | — | 3,466 | 368,292 | 1,344 | 549,690 | |||||||||||||||||||||
Year Ended December 31, 2014 (Dollars in thousands) | Commercial | Commercial Real Estate | Home Equity | Residential Real Estate | Premium Finance Receivable | Consumer and Other | Total, Excluding Covered Loans | |||||||||||||||||||||
Allowance for credit losses | ||||||||||||||||||||||||||||
Allowance for loan losses at beginning of period | $ | 23,092 | $ | 48,658 | $ | 12,611 | $ | 5,108 | $ | 5,583 | $ | 1,870 | $ | 96,922 | ||||||||||||||
Other adjustments | (83 | ) | (665 | ) | (3 | ) | (9 | ) | (64 | ) | — | (824 | ) | |||||||||||||||
Reclassification to/from allowance for unfunded lending-related commitments | — | (56 | ) | — | — | — | — | (56 | ) | |||||||||||||||||||
Charge-offs | (4,153 | ) | (15,788 | ) | (3,895 | ) | (1,750 | ) | (5,726 | ) | (792 | ) | (32,104 | ) | ||||||||||||||
Recoveries | 1,198 | 1,334 | 535 | 335 | 1,150 | 326 | 4,878 | |||||||||||||||||||||
Provision for credit losses | 11,645 | 2,050 | 3,252 | 534 | 5,570 | (162 | ) | 22,889 | ||||||||||||||||||||
Allowance for loan losses at period end | $ | 31,699 | $ | 35,533 | $ | 12,500 | $ | 4,218 | $ | 6,513 | $ | 1,242 | $ | 91,705 | ||||||||||||||
Allowance for unfunded lending-related commitments at period end | — | 775 | — | — | — | — | 775 | |||||||||||||||||||||
Allowance for credit losses at period end | $ | 31,699 | $ | 36,308 | $ | 12,500 | $ | 4,218 | $ | 6,513 | $ | 1,242 | $ | 92,480 | ||||||||||||||
Individually evaluated for impairment | 1,936 | 3,260 | 475 | 632 | — | 26 | 6,329 | |||||||||||||||||||||
Collectively evaluated for impairment | 29,763 | 32,960 | 12,025 | 3,482 | 6,513 | 1,197 | 85,940 | |||||||||||||||||||||
Loans acquired with deteriorated credit quality | — | 88 | — | 104 | — | 19 | 211 | |||||||||||||||||||||
Loans at period end | ||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | 16,326 | $ | 87,225 | $ | 6,399 | $ | 18,365 | $ | — | $ | 372 | $ | 128,687 | ||||||||||||||
Collectively evaluated for impairment | 3,898,845 | 4,362,816 | 709,894 | 462,943 | 4,234,925 | 150,640 | 13,820,063 | |||||||||||||||||||||
Loans acquired with deteriorated credit quality | 9,223 | 55,712 | — | 2,234 | 393,479 | — | 460,648 | |||||||||||||||||||||
121 | ||
A summary of activity in the allowance for covered loan losses for the years ended December 31, 2015 and 2014 is as follows:
Years Ended | ||||||||
December 31, | December 31, | |||||||
(Dollars in thousands) | 2015 | 2014 | ||||||
Balance at beginning of period | $ | 2,131 | $ | 10,092 | ||||
Provision for covered loan losses before benefit attributable to FDIC loss share agreements | (5,350 | ) | (11,762 | ) | ||||
Benefit attributable to FDIC loss share agreements | 4,545 | 9,410 | ||||||
Net provision for covered loan losses | $ | (805 | ) | $ | (2,352 | ) | ||
(Decrease) increase in FDIC indemnification asset | (4,545 | ) | (9,410 | ) | ||||
Loans charged-off | (827 | ) | (5,521 | ) | ||||
Recoveries of loans charged-off | 7,072 | 9,322 | ||||||
Net recoveries (charge-offs) | $ | 6,245 | $ | 3,801 | ||||
Balance at end of period | $ | 3,026 | $ | 2,131 | ||||
In conjunction with FDIC-assisted transactions, the Company entered into loss share agreements with the FDIC. Additional expected losses, to the extent such expected losses result in the recognition of an allowance for loan losses, will increase the FDIC loss share asset or reduce any FDIC loss share liability. The allowance for loan losses for loans acquired in FDIC-assisted transactions is determined without giving consideration to the amounts recoverable through loss share agreements (since the loss share agreements are separately accounted for and thus presented “gross” on the balance sheet). On the Consolidated Statements of Income, the provision for credit losses is reported net of changes in the amount recoverable under the loss share agreements. Reductions to expected losses, to the extent such reductions to expected losses are the result of an improvement to the actual or expected cash flows from the covered assets, will reduce the FDIC loss share asset or increase any FDIC loss share liability. Additions to expected losses will require an increase to the allowance for loan losses, and a corresponding increase to the FDIC loss share asset or reduction to any FDIC loss share liability. See "FDIC-Assisted Transactions" within Note 7 - Business Combinations for more detail.
Impaired Loans
A summary of impaired loans, including TDRs, at December 31, 2015 and 2014 is as follows:
(Dollars in thousands) | 2015 | 2014 | ||||||
Impaired loans (included in non-performing and restructured loans): | ||||||||
Impaired loans with an allowance for loan loss required (1) | $ | 49,961 | $ | 69,487 | ||||
Impaired loans with no allowance for loan loss required | 51,294 | 57,925 | ||||||
Total impaired loans (2) | $ | 101,255 | $ | 127,412 | ||||
Allowance for loan losses related to impaired loans | $ | 6,380 | $ | 6,270 | ||||
TDRs | 51,853 | 82,275 | ||||||
Reduction of interest income from non-accrual loans | 3,006 | 2,222 | ||||||
Interest income recognized on impaired loans | 6,198 | 7,190 | ||||||
(1) | These impaired loans require an allowance for loan losses because the estimated fair value of the loans or related collateral is less than the recorded investment in the loans. |
(2) | Impaired loans are considered by the Company to be non-accrual loans, TDRs or loans with principal and/or interest at risk, even if the loan is current with all payments of principal and interest. |
122 | ||
The following tables present impaired loans evaluated for impairment by loan class as of December 31, 2015 and 2014:
As of | For the Year Ended | |||||||||||||||||||
December 31, 2015 (Dollars in thousands) | Recorded Investment | Unpaid Principal Balance | Related Allowance | Average Recorded Investment | Interest Income Recognized | |||||||||||||||
Impaired loans with a related ASC 310 allowance recorded | ||||||||||||||||||||
Commercial | ||||||||||||||||||||
Commercial and industrial | $ | 9,754 | $ | 12,498 | $ | 2,012 | $ | 10,123 | $ | 792 | ||||||||||
Franchise | — | — | — | — | — | |||||||||||||||
Mortgage warehouse lines of credit | — | — | — | — | — | |||||||||||||||
Community Advantage—homeowners association | — | — | — | — | — | |||||||||||||||
Aircraft | — | — | — | — | — | |||||||||||||||
Asset-based lending | — | — | — | — | — | |||||||||||||||
Tax exempt | — | — | — | — | — | |||||||||||||||
Leases | — | — | — | — | — | |||||||||||||||
Other | — | — | — | — | — | |||||||||||||||
Commercial real estate | ||||||||||||||||||||
Residential construction | — | — | — | — | — | |||||||||||||||
Commercial construction | — | — | — | — | — | |||||||||||||||
Land | 4,929 | 8,711 | 41 | 5,127 | 547 | |||||||||||||||
Office | 5,050 | 6,051 | 632 | 5,394 | 314 | |||||||||||||||
Industrial | 8,413 | 9,105 | 1,943 | 10,590 | 565 | |||||||||||||||
Retail | 8,527 | 9,230 | 343 | 8,596 | 386 | |||||||||||||||
Multi-family | 370 | 370 | 202 | 372 | 25 | |||||||||||||||
Mixed use and other | 7,590 | 7,708 | 570 | 7,681 | 328 | |||||||||||||||
Home equity | 423 | 435 | 333 | 351 | 16 | |||||||||||||||
Residential real estate | 4,710 | 4,799 | 294 | 4,618 | 182 | |||||||||||||||
Premium finance receivables | ||||||||||||||||||||
Commercial insurance | — | — | — | — | — | |||||||||||||||
Life insurance | — | — | — | — | — | |||||||||||||||
PCI - life insurance | — | — | — | — | — | |||||||||||||||
Consumer and other | 195 | 220 | 10 | 216 | 12 | |||||||||||||||
Impaired loans with no related ASC 310 allowance recorded | ||||||||||||||||||||
Commercial | ||||||||||||||||||||
Commercial and industrial | $ | 8,274 | $ | 9,537 | $ | — | $ | 9,510 | $ | 494 | ||||||||||
Franchise | — | — | — | — | — | |||||||||||||||
Mortgage warehouse lines of credit | — | — | — | — | — | |||||||||||||||
Community Advantage—homeowners association | — | — | — | — | — | |||||||||||||||
Aircraft | 288 | 378 | — | 375 | 27 | |||||||||||||||
Asset-based lending | 8 | 1,570 | — | 5 | 88 | |||||||||||||||
Tax exempt | — | — | — | — | — | |||||||||||||||
Leases | — | — | — | — | — | |||||||||||||||
Other | — | — | — | — | — | |||||||||||||||
Commercial real estate | ||||||||||||||||||||
Residential construction | 2,296 | 2,296 | — | 2,300 | 112 | |||||||||||||||
Commercial construction | 32 | 33 | — | 16 | 1 | |||||||||||||||
Land | 888 | 2,373 | — | 929 | 90 | |||||||||||||||
Office | 3,500 | 4,484 | — | 3,613 | 237 | |||||||||||||||
Industrial | 2,217 | 2,426 | — | 2,286 | 188 | |||||||||||||||
Retail | 2,757 | 2,925 | — | 2,897 | 129 | |||||||||||||||
Multi-family | 2,344 | 2,807 | — | 2,390 | 117 | |||||||||||||||
Mixed use and other | 10,510 | 14,060 | — | 11,939 | 624 | |||||||||||||||
Home equity | 6,424 | 7,987 | — | 5,738 | 288 | |||||||||||||||
Residential real estate | 11,559 | 13,979 | — | 11,903 | 624 | |||||||||||||||
Premium finance receivables | ||||||||||||||||||||
Commercial insurance | — | — | — | — | — | |||||||||||||||
Life insurance | — | — | — | — | — | |||||||||||||||
PCI - life insurance | — | — | — | — | — | |||||||||||||||
Consumer and other | 197 | 267 | — | 201 | 12 | |||||||||||||||
Total loans, net of unearned income, excluding covered loans | $ | 101,255 | $ | 124,249 | $ | 6,380 | $ | 107,170 | $ | 6,198 | ||||||||||
123 | ||
As of | For the Year Ended | |||||||||||||||||||
December 31, 2014 (Dollars in thousands) | Recorded Investment | Unpaid Principal Balance | Related Allowance | Average Recorded Investment | Interest Income Recognized | |||||||||||||||
Impaired loans with a related ASC 310 allowance recorded | ||||||||||||||||||||
Commercial | ||||||||||||||||||||
Commercial and industrial | $ | 9,989 | $ | 10,785 | $ | 1,915 | $ | 10,784 | $ | 539 | ||||||||||
Franchise | — | — | — | — | — | |||||||||||||||
Mortgage warehouse lines of credit | — | — | — | — | — | |||||||||||||||
Community Advantage—homeowners association | — | — | — | — | — | |||||||||||||||
Aircraft | — | — | — | — | — | |||||||||||||||
Asset-based lending | — | — | — | — | — | |||||||||||||||
Tax exempt | — | — | — | — | — | |||||||||||||||
Leases | — | — | — | — | — | |||||||||||||||
Other | — | — | — | — | — | |||||||||||||||
Commercial real estate | ||||||||||||||||||||
Residential construction | — | — | — | — | — | |||||||||||||||
Commercial construction | — | — | — | — | — | |||||||||||||||
Land | 5,011 | 8,626 | 43 | 5,933 | 544 | |||||||||||||||
Office | 11,038 | 12,863 | 305 | 11,567 | 576 | |||||||||||||||
Industrial | 195 | 277 | 15 | 214 | 13 | |||||||||||||||
Retail | 11,045 | 14,566 | 487 | 12,116 | 606 | |||||||||||||||
Multi-family | 2,808 | 3,321 | 158 | 2,839 | 145 | |||||||||||||||
Mixed use and other | 21,777 | 24,076 | 2,240 | 21,483 | 1,017 | |||||||||||||||
Home equity | 1,946 | 2,055 | 475 | 1,995 | 80 | |||||||||||||||
Residential real estate | 5,467 | 5,600 | 606 | 5,399 | 241 | |||||||||||||||
Premium finance receivables | ||||||||||||||||||||
Commercial insurance | — | — | — | — | — | |||||||||||||||
Life insurance | — | — | — | — | — | |||||||||||||||
PCI - life insurance | — | — | — | — | — | |||||||||||||||
Consumer and other | 211 | 213 | 26 | 214 | 10 | |||||||||||||||
Impaired loans with no related ASC 310 allowance recorded | ||||||||||||||||||||
Commercial | ||||||||||||||||||||
Commercial and industrial | $ | 5,797 | $ | 8,862 | $ | — | $ | 6,664 | $ | 595 | ||||||||||
Franchise | — | — | — | — | — | |||||||||||||||
Mortgage warehouse lines of credit | — | — | — | — | — | |||||||||||||||
Community Advantage—homeowners association | — | — | — | — | — | |||||||||||||||
Aircraft | — | — | — | — | — | |||||||||||||||
Asset-based lending | 25 | 1,952 | — | 87 | 100 | |||||||||||||||
Tax exempt | — | — | — | — | — | |||||||||||||||
Leases | — | — | — | — | — | |||||||||||||||
Other | — | — | — | — | — | |||||||||||||||
Commercial real estate | ||||||||||||||||||||
Residential construction | — | — | — | — | — | |||||||||||||||
Commercial construction | 2,875 | 3,085 | — | 3,183 | 151 | |||||||||||||||
Land | 10,210 | 10,941 | — | 10,268 | 430 | |||||||||||||||
Office | 4,132 | 5,020 | — | 4,445 | 216 | |||||||||||||||
Industrial | 4,160 | 4,498 | — | 3,807 | 286 | |||||||||||||||
Retail | 5,487 | 7,470 | — | 6,915 | 330 | |||||||||||||||
Multi-family | — | — | — | — | — | |||||||||||||||
Mixed use and other | 7,985 | 8,804 | — | 9,533 | 449 | |||||||||||||||
Home equity | 4,453 | 6,172 | — | 4,666 | 256 | |||||||||||||||
Residential real estate | 12,640 | 14,334 | — | 12,682 | 595 | |||||||||||||||
Premium finance receivables | ||||||||||||||||||||
Commercial insurance | — | — | — | — | — | |||||||||||||||
Life insurance | — | — | — | — | — | |||||||||||||||
PCI - life insurance | — | — | — | — | — | |||||||||||||||
Consumer and other | 161 | 222 | — | 173 | 11 | |||||||||||||||
Total loans, net of unearned income, excluding covered loans | $ | 127,412 | $ | 153,742 | $ | 6,270 | $ | 134,967 | $ | 7,190 | ||||||||||
124 | ||
Average recorded investment in impaired loans for the years ended December 31, 2015, 2014, and 2013 were $107.2 million, $135.0 million, and $170.7 million, respectively. Interest income recognized on impaired loans was $6.2 million, $7.2 million, and $8.9 million for the years ended December 31, 2015, 2014, and 2013, respectively.
TDRs
At December 31, 2015, the Company had $51.9 million in loans modified in TDRs. The $51.9 million in TDRs represents 102 credits in which economic concessions were granted to certain borrowers to better align the terms of their loans with their current ability to pay.
The Company’s approach to restructuring loans, excluding PCI loans, is built on its credit risk rating system which requires credit management personnel to assign a credit risk rating to each loan. In each case, the loan officer is responsible for recommending a credit risk rating for each loan and ensuring the credit risk ratings are appropriate. These credit risk ratings are then reviewed and approved by the bank’s chief credit officer and/or concurrence credit officer. Credit risk ratings are determined by evaluating a number of factors including a borrower’s financial strength, cash flow coverage, collateral protection and guarantees. The Company’s credit risk rating scale is one through ten with higher scores indicating higher risk. In the case of loans rated six or worse following modification, the Company’s Managed Assets Division evaluates the loan and the credit risk rating and determines that the loan has been restructured to be reasonably assured of repayment and of performance according to the modified terms and is supported by a current, well-documented credit assessment of the borrower’s financial condition and prospects for repayment under the revised terms.
A modification of a loan, excluding PCI loans, with an existing credit risk rating of 6 or worse or a modification of any other credit, which will result in a restructured credit risk rating of 6 or worse, must be reviewed for possible TDR classification. In that event, our Managed Assets Division conducts an overall credit and collateral review. A modification of these loans is considered to be a TDR if both (1) the borrower is experiencing financial difficulty and (2) for economic or legal reasons, the bank grants a concession to a borrower that it would not otherwise consider. The modification of a loan, excluding PCI loans, where the credit risk rating is 5 or better both before and after such modification is not considered to be a TDR. Based on the Company’s credit risk rating system, it considers that borrowers whose credit risk rating is 5 or better are not experiencing financial difficulties and therefore, are not considered TDRs.
All credits determined to be a TDR will continue to be classified as a TDR in all subsequent periods, unless the borrower has been in compliance with the loan’s modified terms for a period of six months (including over a calendar year-end) and the current interest rate represents a market rate at the time of restructuring. The Managed Assets Division, in consultation with the respective loan officer, determines whether the modified interest rate represented a current market rate at the time of restructuring. Using knowledge of current market conditions and rates, competitive pricing on recent loan originations, and an assessment of various characteristics of the modified loan (including collateral position and payment history), an appropriate market rate for a new borrower with similar risk is determined. If the modified interest rate meets or exceeds this market rate for a new borrower with similar risk, the modified interest rate represents a market rate at the time of restructuring. Additionally, before removing a loan from TDR classification, a review of the current or previously measured impairment on the loan and any concerns related to future performance by the borrower is conducted. If concerns exist about the future ability of the borrower to meet its obligations under the loans based on a credit review by the Managed Assets Division, the TDR classification is not removed from the loan.
TDRs are reviewed at the time of modification and on a quarterly basis to determine if a specific reserve is necessary. The carrying amount of the loan is compared to the expected payments to be received, discounted at the loan’s original rate, or for collateral dependent loans, to the fair value of the collateral. Any shortfall is recorded as a specific reserve. The Company, in accordance with ASC 310-10, continues to individually measure impairment of these loans after the TDR classification is removed.
Each TDR was reviewed for impairment at December 31, 2015 and approximately $1.8 million of impairment was present and appropriately reserved for through the Company’s normal reserving methodology in the Company’s allowance for loan losses. For TDRs in which impairment is calculated by the present value of future cash flows, the Company records interest income representing the decrease in impairment resulting from the passage of time during the respective period, which differs from interest income from contractually required interest on these specific loans. For the year ended December 31, 2015 and 2014, the Company recorded $573,000 and $724,000, respectively, in interest income representing this decrease in impairment.
TDRs may arise in which, due to financial difficulties experienced by the borrower, the Company obtains through physical possession one or more collateral assets in satisfaction of all or part of an existing credit. Once possession is obtained, the Company reclassifies the appropriate portion of the remaining balance of the credit from loans to OREO, which is included within other assets in the Consolidated Statements of Condition. For any residential real estate property collateralizing a consumer mortgage loan, the Company is considered to possess the related collateral only if legal title is obtained upon completion of foreclosure, or the borrower conveys all interest in the residential real estate property to the Company through completion of a deed in lieu of
125 | ||
foreclosure or similar legal agreement. Excluding covered OREO, at December 31, 2015, the Company had $14.2 million of foreclosed residential real estate properties included within OREO.
The tables below present a summary of the post-modification balance of loans restructured during the years ended December 31, 2015, 2014, and 2013, which represent TDRs:
Year ended December 31, 2015 | Total (1)(2) | Extension at Below Market Terms (2) | Reduction of Interest Rate (2) | Modification to Interest-only Payments (2) | Forgiveness of Debt (2) | ||||||||||||||||||||||||||||||
(Dollars in thousands) | Count | Balance | Count | Balance | Count | Balance | Count | Balance | Count | Balance | |||||||||||||||||||||||||
Commercial | |||||||||||||||||||||||||||||||||||
Commercial and industrial | — | $ | — | — | $ | — | — | $ | — | — | $ | — | — | $ | — | ||||||||||||||||||||
Commercial real estate | |||||||||||||||||||||||||||||||||||
Commercial construction | — | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||
Land | — | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||
Office | — | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||
Industrial | 1 | 169 | 1 | 169 | — | — | 1 | 169 | — | — | |||||||||||||||||||||||||
Retail | — | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||
Multi-family | — | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||
Mixed use and other | 2 | 201 | 2 | 201 | — | — | 2 | 201 | — | — | |||||||||||||||||||||||||
Residential real estate and other | 9 | 1,664 | 9 | 1,664 | 5 | 674 | 1 | 50 | — | — | |||||||||||||||||||||||||
Total loans | 12 | $ | 2,034 | 12 | $ | 2,034 | 5 | $ | 674 | 4 | $ | 420 | — | $ | — | ||||||||||||||||||||
Year ended December 31, 2014 | Total (1)(2) | Extension at Below Market Terms (2) | Reduction of Interest Rate (2) | Modification to Interest-only Payments (2) | Forgiveness of Debt (2) | ||||||||||||||||||||||||||||||
(Dollars in thousands) | Count | Balance | Count | Balance | Count | Balance | Count | Balance | Count | Balance | |||||||||||||||||||||||||
Commercial | |||||||||||||||||||||||||||||||||||
Commercial and industrial | 2 | $ | 1,549 | 1 | $ | 88 | 1 | $ | 1,461 | 2 | $ | 1,549 | — | $ | — | ||||||||||||||||||||
Commercial real estate | |||||||||||||||||||||||||||||||||||
Commercial construction | — | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||
Land | — | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||
Office | 2 | 1,510 | 2 | 1,510 | — | — | — | — | — | — | |||||||||||||||||||||||||
Industrial | 2 | 1,763 | 2 | 1,763 | 1 | 685 | 1 | 1,078 | — | — | |||||||||||||||||||||||||
Retail | 1 | 202 | 1 | 202 | — | — | — | — | — | — | |||||||||||||||||||||||||
Multi-family | 1 | 181 | — | — | 1 | 181 | — | — | — | — | |||||||||||||||||||||||||
Mixed use and other | 7 | 4,926 | 3 | 2,837 | 7 | 4,926 | 1 | 1,273 | — | — | |||||||||||||||||||||||||
Residential real estate and other | 6 | 1,836 | 5 | 1,625 | 4 | 1,138 | 1 | 220 | — | — | |||||||||||||||||||||||||
Total loans | 21 | $ | 11,967 | 14 | $ | 8,025 | 14 | $ | 8,391 | 5 | $ | 4,120 | — | $ | — | ||||||||||||||||||||
126 | ||
Year ended December 31, 2013 | Total (1)(2) | Extension at Below Market Terms (2) | Reduction of Interest Rate (2) | Modification to Interest-only Payments (2) | Forgiveness of Debt (2) | ||||||||||||||||||||||||||||||
(Dollars in thousands) | Count | Balance | Count | Balance | Count | Balance | Count | Balance | Count | Balance | |||||||||||||||||||||||||
Commercial | |||||||||||||||||||||||||||||||||||
Commercial and industrial | 6 | $ | 708 | 5 | $ | 573 | 4 | $ | 553 | 2 | $ | 185 | — | $ | — | ||||||||||||||||||||
Commercial real estate | |||||||||||||||||||||||||||||||||||
Commercial construction | 3 | 6,120 | 3 | 6,120 | — | — | 3 | 6,120 | — | — | |||||||||||||||||||||||||
Land | 3 | 2,639 | 3 | 2,639 | 2 | 287 | — | — | 1 | 73 | |||||||||||||||||||||||||
Office | 4 | 4,021 | 4 | 4,021 | 1 | 556 | — | — | — | — | |||||||||||||||||||||||||
Industrial | 1 | 949 | 1 | 949 | 1 | 949 | — | — | — | — | |||||||||||||||||||||||||
Retail | 1 | 200 | 1 | 200 | 1 | 200 | — | — | — | — | |||||||||||||||||||||||||
Multi-family | 1 | 705 | 1 | 705 | 1 | 705 | — | — | — | — | |||||||||||||||||||||||||
Mixed use and other | 6 | 5,042 | 6 | 5,042 | 5 | 4,947 | 1 | 932 | — | — | |||||||||||||||||||||||||
Residential real estate and other | 10 | 2,296 | 6 | 1,613 | 7 | 931 | 2 | 234 | 1 | 1,000 | |||||||||||||||||||||||||
Total loans | 35 | $ | 22,680 | 30 | $ | 21,862 | 22 | $ | 9,128 | 8 | $ | 7,471 | 2 | $ | 1,073 | ||||||||||||||||||||
(1) | TDRs may have more than one modification representing a concession. As such, TDRs during the period may be represented in more than one of the categories noted above. |
(2) | Balances represent the recorded investment in the loan at the time of the restructuring. |
During the year ended December 31, 2015, $2.0 million, or 12 loans, were determined to be TDRs, compared to $12.0 million, or 21 loans, and $22.7 million, or 35 loans, in the years ended 2014 and 2013, respectively. Of these loans extended at below market terms, the weighted average extension had a term of approximately 45 months in 2015 compared to 19 months in 2014 and 18 months in 2013. Further, the weighted average decrease in the stated interest rate for loans with a reduction of interest rate during the period was approximately 358 basis points, 170 basis points and 184 basis points during the years ended December 31, 2015, 2014, and 2013, respectively. Interest-only payment terms were approximately 17 months during the year ended 2015 compared to seven months and 11 months for the years ended 2014 and 2013, respectively. Additionally, no principal balances were forgiven during 2015 and 2014, compared to $1.0 million forgiven during 2013.
The tables below present a summary of all loans restructured in TDRs during the years ended December 31, 2015, 2014, and 2013, and such loans which were in payment default under the restructured terms during the respective periods:
Year Ended December 31, 2015 | Year Ended December 31, 2014 | Year Ended December 31, 2013 | ||||||||||||||||||||||||||||||||||||||||
Total (1)(3) | Payments in Default (2)(3) | Total (1)(3) | Payments in Default (2)(3) | Total (1)(3) | Payments in Default (2)(3) | |||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | Count | Balance | Count | Balance | Count | Balance | Count | Balance | Count | Balance | Count | Balance | ||||||||||||||||||||||||||||||
Commercial | ||||||||||||||||||||||||||||||||||||||||||
Commercial and industrial | — | $ | — | — | $ | — | 2 | $ | 1,549 | 1 | $ | 88 | 6 | $ | 708 | 1 | $ | 20 | ||||||||||||||||||||||||
Commercial real-estate | ||||||||||||||||||||||||||||||||||||||||||
Commercial construction | — | — | — | — | — | — | — | — | 3 | 6,120 | — | — | ||||||||||||||||||||||||||||||
Land | — | — | — | — | — | — | — | — | 3 | 2,639 | 1 | 215 | ||||||||||||||||||||||||||||||
Office | — | — | — | — | 2 | 1,510 | — | — | 4 | 4,021 | 1 | 1,648 | ||||||||||||||||||||||||||||||
Industrial | 1 | 169 | — | — | 2 | 1,763 | 1 | 1,078 | 1 | 949 | — | — | ||||||||||||||||||||||||||||||
Retail | — | — | — | — | 1 | 202 | — | — | 1 | 200 | — | — | ||||||||||||||||||||||||||||||
Multi-family | — | — | — | — | 1 | 181 | 1 | 181 | 1 | 705 | 1 | 705 | ||||||||||||||||||||||||||||||
Mixed use and other | 2 | 201 | 2 | 201 | 7 | 4,926 | 2 | 569 | 6 | 5,042 | 1 | 95 | ||||||||||||||||||||||||||||||
Residential real estate and other | 9 | 1,664 | 4 | 568 | 6 | 1,836 | 1 | 211 | 10 | 2,296 | — | — | ||||||||||||||||||||||||||||||
Total loans | 12 | $ | 2,034 | 6 | $ | 769 | 21 | $ | 11,967 | 6 | $ | 2,127 | 35 | $ | 22,680 | 5 | $ | 2,683 | ||||||||||||||||||||||||
(1) | Total TDRs represent all loans restructured in TDRs during the year indicated. |
(2) | TDRs considered to be in payment default are over 30 days past-due subsequent to the restructuring. |
(3) | Balances represent the recorded investment in the loan at the time of the restructuring. |
127 | ||
(6) Mortgage Servicing Rights
Following is a summary of the changes in the carrying value of MSRs, accounted for at fair value, for the years ending December 31, 2015, 2014 and 2013:
December 31, | December 31, | December 31, | ||||||||||
(Dollars in thousands) | 2015 | 2014 | 2013 | |||||||||
Balance at beginning of year | $ | 8,435 | $ | 8,946 | $ | 6,750 | ||||||
Additions from loans sold with servicing retained | 1,759 | 213 | 523 | |||||||||
Additions from acquisitions | — | 704 | — | |||||||||
Estimate of changes in fair value due to: | ||||||||||||
Payoffs and paydowns | (1,315 | ) | (976 | ) | (941 | ) | ||||||
Changes in valuation inputs or assumptions | 213 | (452 | ) | 2,614 | ||||||||
Fair value at end of year | $ | 9,092 | $ | 8,435 | $ | 8,946 | ||||||
Unpaid principal balance of mortgage loans serviced for others | $ | 939,819 | $ | 877,899 | $ | 961,619 | ||||||
The Company recognizes MSR assets upon the sale of residential real estate loans when it retains the obligation to service the loans and the servicing fee is more than adequate compensation. Additionally, in 2014, the Company recognized MSRs related to certain agricultural and farmland-related loans purchased from an unaffiliated bank. The initial recognition of MSR assets from loans sold with servicing retained and subsequent changes in fair value of all MSRs are recognized in mortgage banking revenue. MSRs are subject to changes in value from actual and expected prepayment of the underlying loans. The Company does not specifically hedge the value of its MSRs.
The Company uses a third party to assist in the valuation of a portion of MSRs. Fair values are determined by using a discounted cash flow model that incorporates the objective characteristics of the portfolio as well as subjective valuation parameters that purchasers of servicing would apply to such portfolios sold into the secondary market. The subjective factors include loan prepayment speeds, interest rates, servicing costs and other economic factors.
(7) Business Combinations
Non-FDIC Assisted Bank Acquisitions
On July 24, 2015, the Company acquired CFIS. CFIS was the parent company of CBWGE, which had four banking locations. CBWGE was merged into Wheaton Bank. The Company acquired assets with a fair value of approximately $350.5 million, including approximately $159.5 million of loans, and assumed deposits with a fair value of approximately $290.0 million. Additionally, the Company recorded goodwill of $27.6 million on the acquisition.
On July 17, 2015, the Company acquired Suburban. Suburban was the parent company of SBT, which operated ten banking locations. SBT was merged into Hinsdale Bank. The Company acquired assets with a fair value of approximately $494.7 million, including approximately $257.8 million of loans, and assumed deposits with a fair value of approximately $416.7 million. Additionally, the Company recorded goodwill of $18.8 million on the acquisition.
On July 1, 2015, the Company, through its wholly-owned subsidiary Wintrust Bank, acquired North Bank, which had two banking locations. The Company acquired assets with a fair value of $117.9 million, including approximately $51.6 million of loans, and assumed deposits with a fair value of approximately $101.0 million. Additionally, the Company recorded goodwill of $6.7 million on the acquisition.
On January 16, 2015, the Company acquired Delavan. Delavan was the parent company of Community Bank CBD, which had four banking locations. Community Bank CBD was merged into the Company's wholly-owned subsidiary Town Bank. The Company acquired assets with a fair value of approximately $224.1 million, including approximately $128.0 million of loans, and assumed liabilities with a fair value of approximately $186.4 million, including approximately $170.2 million of deposits. Additionally the Company recorded goodwill of $16.8 million on the acquisition.
On August 8, 2014, the Company, through its wholly-owned subsidiary Town Bank, acquired eleven branch offices and deposits of Talmer Bank & Trust. Subsequent to this date, the Company acquired loans from these branches as well. In total, the Company acquired assets with a fair value of approximately $361.3 million, including approximately $41.5 million of loans, and assumed liabilities with a fair value of approximately $361.3 million, including approximately $354.9 million of deposits. Additionally, the Company recorded goodwill of $9.7 million on the acquisition.
128 | ||
On July 11, 2014 the Company, through its wholly-owned subsidiary Town Bank, acquired the Pewaukee, Wisconsin branch of THE National Bank. The Company acquired assets with a fair value of approximately $94.1 million, including approximately $75.0 million of loans, and assumed deposits with a fair value of approximately $36.2 million. Additionally, the Company recorded goodwill of $16.3 million on the acquisition.
On May 16, 2014, the Company, through its wholly-owned subsidiary Hinsdale Bank acquired the Stone Park branch office and certain related deposits of Urban Partnership Bank. The Company assumed liabilities with a fair value of approximately $5.5 million, including approximately $5.4 million of deposits. Additionally, the Company recorded goodwill of $678,000 on the acquisition.
On October 18, 2013, the Company acquired Diamond Bancorp, Inc. ("Diamond"). Diamond was the parent company of Diamond Bank, FSB ("Diamond Bank"), which operated four banking locations in Chicago, Schaumburg, Elmhurst, and Northbrook, Illinois. As part of the transaction, Diamond Bank was merged into Wintrust Bank. The Company acquired assets with a fair value of approximately $172.5 million, including approximately $91.7 million of loans, and assumed liabilities with a fair value of approximately $169.1 million, including approximately $140.2 million of deposits. Additionally, the Company recorded goodwill of $8.4 million on the acquisition.
On May 1, 2013, the Company acquired First Lansing Bancorp, Inc. ("FLB"). FLB was the parent company of First National Bank of Illinois ("FNBI"), which operated seven banking locations in the south and southwest suburbs of Chicago, as well as one location in northwest Indiana. As part of this transaction, FNBI was merged into Old Plank Trail Bank. The Company acquired assets with a fair value of approximately $373.4 million, including approximately $123.0 million of loans, and assumed liabilities with a fair value of approximately $334.7 million, including approximately $331.4 million of deposits. Additionally, the Company recorded goodwill of $14.0 million on the acquisition.
FDIC Assisted Bank Acquisitions
Since 2010, the Company acquired the banking operations, including the acquisition of certain assets and the assumption of liabilities, of nine financial institutions in FDIC-assisted transactions. Loans comprise the majority of the assets acquired in nearly all of these FDIC-assisted transactions, most of which are subject to loss sharing agreements with the FDIC whereby the FDIC has agreed to reimburse the Company for 80% of losses incurred on the purchased loans, other real estate owned (“OREO”), and certain other assets. Additionally, clawback provisions within these loss share agreements with the FDIC require the Company to reimburse the FDIC in the event that actual losses on covered assets are lower than the original loss estimates agreed upon with the FDIC with respect of such assets in the loss share agreements. The Company refers to the loans subject to these loss sharing agreements as “covered loans” and uses the term “covered assets” to refer to covered loans, covered OREO and certain other covered assets. The agreements with the FDIC require that the Company follow certain servicing procedures or risk losing the FDIC reimbursement of covered asset losses.
The loans covered by the loss sharing agreements are classified and presented as covered loans and the estimated reimbursable losses are recorded as an FDIC indemnification asset in the Consolidated Statements of Condition. The Company recorded the acquired assets and liabilities at their estimated fair values at the acquisition date. The fair value for loans reflected expected credit losses at the acquisition date. Therefore, the Company will only recognize a provision for credit losses and charge-offs on the acquired loans for any further credit deterioration subsequent to the acquisition date. See Note 5 — Allowance for Loan Losses, Allowance for Losses on Lending-Related Commitments and Impaired Loans for further discussion of the allowance on covered loans.
The loss share agreements with the FDIC cover realized losses on loans, foreclosed real estate and certain other assets and require the Company to record loss share assets and liabilities that are measured separately from the loan portfolios because they are not contractually embedded in the loans and are not transferable with the loans should the Company choose to dispose of them. Fair values at the acquisition dates were estimated based on projected cash flows available for loss share based on the credit adjustments estimated for each loan pool and the loss share percentages. The loss share assets and liabilities are recorded as FDIC indemnification assets and other liabilities, respectively, on the Consolidated Statements of Condition. Subsequent to the acquisition date, reimbursements received from the FDIC for actual incurred losses will reduce the FDIC indemnification assets. Reductions to expected losses, to the extent such reductions to expected losses are the result of an improvement to the actual or expected cash flows from the covered assets, will also reduce the FDIC indemnification assets and, if necessary, increase any loss share liability when necessary reductions exceed the current value of the FDIC indemnification assets. In accordance with the clawback provision noted above, the Company may be required to reimburse the FDIC when actual losses are less than certain thresholds established for each loss share agreement. The balance of these estimated reimbursements in accordance with clawback provisions and any
129 | ||
related amortization are adjusted periodically for changes in the expected losses on covered assets. On the Consolidated Statements of Condition, estimated reimbursements from clawback provisions are recorded as a reduction to the FDIC indemnification asset or, if necessary, an increase to the loss share liability, which is included within accrued interest payable and other liabilities. Although these assets are contractual receivables from the FDIC, there are no contractual interest rates. Additional expected losses, to the extent such expected losses result in recognition of an allowance for covered loan losses, will increase the FDIC indemnification asset. The corresponding amortization is recorded as a component of non-interest income on the Consolidated Statements of Income.
The following table summarizes the activity in the Company’s FDIC loss share asset (liability) during the periods indicated:
Year Ended December 31, | ||||||||
(Dollars in thousands) | 2015 | 2014 | ||||||
Balance at beginning of period | $ | 11,846 | $ | 85,672 | ||||
Additions from acquisitions | — | — | ||||||
Additions from reimbursable expenses | 3,805 | 6,490 | ||||||
Amortization | (3,282 | ) | (5,763 | ) | ||||
Changes in expected reimbursements from the FDIC for changes in expected credit losses | (16,610 | ) | (54,554 | ) | ||||
Payments received from the FDIC | (1,859 | ) | (19,999 | ) | ||||
Balance at end of period | $ | (6,100 | ) | $ | 11,846 | |||
Divestiture of Previous FDIC-Assisted Acquisition
On February 1, 2013, the Company completed the divestiture of the deposits and current banking operations of Second Federal to an unaffiliated financial institution. Through this transaction, the Company divested approximately $149 million of related deposits.
Specialty Finance Acquisitions
On April 28, 2014, the Company, through its wholly-owned subsidiary, First Insurance Funding of Canada, Inc., completed its acquisition of Policy Billing Services Inc. and Equity Premium Finance Inc., two affiliated Canadian insurance premium funding and payment services companies. Through this transaction, the Company acquired approximately $7.4 million of premium finance receivables. The Company recorded goodwill of approximately $6.5 million on the acquisition.
Wealth Management Acquisitions
On August 8, 2014, CTC acquired the trust operations certain branches acquired from Talmer Bank & Trust. The Company recorded goodwill of $250,000 on this trust operations acquisition.
Mortgage Banking Acquisitions
On October 1, 2013, the Company acquired certain assets and assumed certain liabilities of the mortgage banking business of Surety of Sherman Oaks, California. Surety had five offices located in southern California which originated approximately $1.0 billion in the twelve months prior to the acquisition date. The Company recorded goodwill of $9.5 million on the acquisition.
PCI loans
Purchased loans acquired in a business combination are recorded at estimated fair value on their purchase date. Expected future cash flows at the purchase date in excess of the fair value of loans are recorded as interest income over the life of the loans if the timing and amount of the future cash flows is reasonably estimable (“accretable yield”). The difference between contractually required payments and the cash flows expected to be collected at acquisition is referred to as the non-accretable difference and represents probable losses in the portfolio.
In determining the acquisition date fair value of purchased impaired loans, and in subsequent accounting, the Company aggregates these purchased loans into pools of loans by common risk characteristics, such as credit risk rating and loan type. Subsequent to the purchase date, increases in cash flows over those expected at the purchase date are recognized as interest income prospectively. Subsequent decreases to the expected cash flows will result in a provision for loan losses.
130 | ||
The Company purchased a portfolio of life insurance premium finance receivables in 2009. These purchased life insurance premium finance receivables are valued on an individual basis with the accretable component being recognized into interest income using the effective yield method over the estimated remaining life of the loans. The non-accretable portion is evaluated each quarter and if the loans’ credit related conditions improve, a portion is transferred to the accretable component and accreted over future periods. In the event a specific loan prepays in whole, any remaining accretable and non-accretable discount is recognized in income immediately. If credit related conditions deteriorate, an allowance related to these loans will be established as part of the provision for credit losses.
See Note 4 — Loans, for more information on loans acquired with evidence of credit quality deterioration since origination.
(8) Goodwill and Other Intangible Assets
A summary of the Company’s goodwill assets by business segment is presented in the following table:
(Dollars in thousands) | January 1, 2015 | Goodwill Acquired | Impairment Loss | Goodwill Adjustments | December 31, 2015 | |||||||||||||||
Community banking | $ | 331,752 | $ | 69,860 | $ | — | $ | — | $ | 401,612 | ||||||||||
Specialty finance | 41,768 | — | — | (3,733 | ) | 38,035 | ||||||||||||||
Wealth management | 32,114 | — | — | — | 32,114 | |||||||||||||||
Total | $ | 405,634 | $ | 69,860 | $ | — | $ | (3,733 | ) | $ | 471,761 | |||||||||
The community banking segment's goodwill increased $69.9 million in 2015 as a result of the acquisitions of Delavan, Suburban, North Bank and CFIS. The specialty finance segment's goodwill decreased $3.7 million in 2015 as a result of foreign currency translation adjustments related to the Canadian acquisitions.
A summary of finite-lived intangible assets as of the dates shown and the expected amortization as of December 31, 2015 is as follows:
December 31, | ||||||||
(Dollars in thousands) | 2015 | 2014 | ||||||
Community banking segment: | ||||||||
Core deposit intangibles: | ||||||||
Gross carrying amount | $ | 34,841 | $ | 29,379 | ||||
Accumulated amortization | (17,382 | ) | (17,879 | ) | ||||
Net carrying amount | $ | 17,459 | $ | 11,500 | ||||
Specialty finance segment: | ||||||||
Customer list intangibles: | ||||||||
Gross carrying amount | $ | 1,800 | $ | 1,800 | ||||
Accumulated amortization | (1,052 | ) | (941 | ) | ||||
Net carrying amount | $ | 748 | $ | 859 | ||||
Wealth management segment: | ||||||||
Customer list and other intangibles: | ||||||||
Gross carrying amount | $ | 7,940 | $ | 7,940 | ||||
Accumulated amortization | (1,938 | ) | (1,488 | ) | ||||
Net carrying amount | $ | 6,002 | $ | 6,452 | ||||
Total other intangible assets, net | $ | 24,209 | $ | 18,811 | ||||
Estimated amortization | |||
Estimated—2016 | $ | 4,668 | |
Estimated—2017 | 3,876 | ||
Estimated—2018 | 3,371 | ||
Estimated—2019 | 2,855 | ||
Estimated—2020 | 2,318 | ||
The core deposit intangibles recognized in connection with prior bank acquisitions are amortized over a ten-year period on an accelerated basis. The customer list intangibles recognized in connection with the purchase of life insurance premium finance assets in 2009 are being amortized over an 18-year period on an accelerated basis while the customer list intangibles recognized
131 | ||
in connection with prior acquisitions within the wealth management segment are being amortized over a ten-year period on a straight-line basis.
Total amortization expense associated with finite-lived intangibles in 2015, 2014 and 2013 was $4.6 million, $4.7 million and $4.6 million, respectively.
(9) Premises and Equipment, Net
A summary of premises and equipment at December 31, 2015 and 2014 is as follows:
December 31, | ||||||||
(Dollars in thousands) | 2015 | 2014 | ||||||
Land | $ | 134,030 | $ | 128,766 | ||||
Buildings and leasehold improvements | 506,977 | 470,636 | ||||||
Furniture, equipment, and computer software | 173,330 | 160,659 | ||||||
Construction in progress | 12,610 | 5,737 | ||||||
$ | 826,947 | $ | 765,798 | |||||
Less: Accumulated depreciation and amortization | 234,691 | 210,570 | ||||||
Total premises and equipment, net | $ | 592,256 | $ | 555,228 | ||||
Depreciation and amortization expense related to premises and equipment totaled $31.1 million in 2015, $28.1 million in 2014 and $26.0 million in 2013.
(10) Deposits
The following is a summary of deposits at December 31, 2015 and 2014:
(Dollars in thousands) | 2015 | 2014 | ||||||
Balance: | ||||||||
Non-interest bearing | $ | 4,836,420 | $ | 3,518,685 | ||||
NOW and interest bearing demand deposits | 2,390,217 | 2,236,089 | ||||||
Wealth management deposits | 1,643,653 | 1,226,916 | ||||||
Money market | 4,041,300 | 3,651,467 | ||||||
Savings | 1,723,367 | 1,508,877 | ||||||
Time certificates of deposit | 4,004,677 | 4,139,810 | ||||||
Total deposits | $ | 18,639,634 | $ | 16,281,844 | ||||
Mix: | ||||||||
Non-interest bearing | 26 | % | 22 | % | ||||
NOW and interest bearing demand deposits | 13 | 14 | ||||||
Wealth management deposits | 9 | 8 | ||||||
Money market | 22 | 22 | ||||||
Savings | 9 | 9 | ||||||
Time certificates of deposit | 21 | 25 | ||||||
Total deposits | 100 | % | 100 | % | ||||
Wealth management deposits represent deposit balances (primarily money market accounts) at the Company’s subsidiary banks from brokerage customers of WHI, trust and asset management customers of CTC and brokerage customers from unaffiliated companies.
132 | ||
The scheduled maturities of time certificates of deposit at December 31, 2015 and 2014 are as follows:
(Dollars in thousands) | 2015 | 2014 | ||||||
Due within one year | $ | 2,851,153 | $ | 2,722,029 | ||||
Due in one to two years | 846,107 | 1,009,936 | ||||||
Due in two to three years | 148,199 | 247,418 | ||||||
Due in three to four years | 85,169 | 86,884 | ||||||
Due in four to five years | 73,440 | 69,360 | ||||||
Due after five years | 609 | 4,183 | ||||||
Total time certificate of deposits | $ | 4,004,677 | $ | 4,139,810 | ||||
The following table sets forth the scheduled maturities of time deposits in denominations of $100,000 or more at December 31, 2015 and 2014:
(Dollars in thousands) | 2015 | 2014 | ||||||
Maturing within three months | $ | 535,459 | $ | 612,936 | ||||
After three but within six months | 434,591 | 466,203 | ||||||
After six but within 12 months | 900,156 | 711,361 | ||||||
After 12 months | 709,376 | 925,921 | ||||||
Total | $ | 2,579,582 | $ | 2,716,421 | ||||
Time deposits in denominations of $250,000 or more were $1.3 billion and $1.5 billion at December 31, 2015 and 2014, respectively.
(11) Federal Home Loan Bank Advances
A summary of the outstanding FHLB advances at December 31, 2015 and 2014, is as follows:
(Dollars in thousands) | 2015 | 2014 | ||||||
0.13% advance due January 2015 | $ | — | $ | 405,550 | ||||
0.72% advance due February 2015 | — | 141,000 | ||||||
0.73% advance due February 2015 | — | 5,000 | ||||||
0.16% advance due January 2016 | 331,100 | — | ||||||
0.19% advance due January 2016 | 68,000 | — | ||||||
0.99% advance due February 2016 | 26,500 | 26,500 | ||||||
1.25% advance due February 2017 | 25,000 | 25,000 | ||||||
3.47% advance due November 2017 | 10,000 | 10,000 | ||||||
0.89% advance due December 2017 | 90,000 | — | ||||||
1.49% advance due February 2018 | 95,000 | 95,000 | ||||||
1.31% advance due August 2018 | 94,597 | — | ||||||
1.89% advance due August 2020 | 94,679 | — | ||||||
4.18% advance due February 2022 | 25,000 | 25,000 | ||||||
Total Federal Home Loan Bank advances | $ | 859,876 | $ | 733,050 | ||||
Federal Home Loan Bank advances consist of obligations of the banks and are collateralized by qualifying residential real estate and home equity loans and certain securities. The banks have arrangements with the FHLB whereby, based on available collateral, they could have borrowed an additional $931.0 million at December 31, 2015.
FHLB advances are stated at par value of the debt adjusted for unamortized fair value adjustments recorded in connection with advances acquired through acquisitions. Prepayment fees paid at the time of restructurings of FHLB advances are classified in other assets on the Consolidated Statements of Condition and are amortized as an adjustment to interest expense using the effective interest method.
Approximately $35.0 million of the FHLB advances outstanding at December 31, 2015, have varying put dates in February 2016. At December 31, 2015, the weighted average contractual interest rate on FHLB advances was 0.92%.
133 | ||
(12) Subordinated Notes
At December 31, 2015 and December 31, 2014, the Company had outstanding subordinated notes totaling $140.0 million. In 2014, the Company issued $140.0 million of subordinated notes receiving $139.1 million in net proceeds. The notes have a stated interest rate of 5.00% and mature in June 2024. Previously, the Company borrowed $75.0 million under three separate $25.0 million subordinated note agreements. Each subordinated note required annual principal payments of $5.0 million beginning in the sixth year of the note and had a term of ten years. The interest rate on each subordinated note was calculated at a rate equal to LIBOR plus 130 basis points. In 2013, the only remaining subordinated note with a balance of $10.0 million was paid off prior to maturity.
In connection with the issuance of subordinated notes in 2014, the Company incurred costs totaling $1.3 million. These costs are included in other assets and will be amortized to interest expense using a method that approximates the effective interest method. At December 31, 2015, the unamortized balances of these costs were approximately $1.1 million. These subordinated notes qualify as Tier II capital under the regulatory capital requirements, subject to restrictions.
(13) Other Borrowings
The following is a summary of other borrowings at December 31, 2015 and 2014:
(Dollars in thousands) | 2015 | 2014 | ||||||
Notes payable | $ | 67,500 | $ | — | ||||
Short-term borrowings | 63,887 | 48,566 | ||||||
Other | 19,017 | 18,822 | ||||||
Secured borrowings | 115,615 | 129,077 | ||||||
Total other borrowings | $ | 266,019 | $ | 196,465 | ||||
Notes Payable
At December 31, 2015, notes payable represented a $67.5 million term facility ("Term Facility"), which is part of a $150.0 million loan agreement with unaffiliated banks dated December 15, 2014. The agreement consists of the Term Facility and a $75.0 million revolving credit facility ("Revolving Credit Facility"). At December 31, 2015, the Company had an outstanding balance of $67.5 million compared to no outstanding balance at December 31, 2014 under the Term Facility. The Company was contractually required to borrow the entire amount of the Term Facility on June 15, 2015 and all such borrowings must be repaid by June 15, 2020. Beginning September 30, 2015, the Company was required to make straight-line quarterly amortizing payments on the Term Facility. At December 31, 2015 and 2014, the Company had no outstanding balance under the Revolving Credit Facility. In December 2015, the Company amended the loan agreement, effectively extending the maturity date on the Revolving Credit Facility from December 14, 2015 to December 12, 2016.
Borrowings under the agreement that are considered “Base Rate Loans” bear interest at a rate equal to the sum of (1) 50 basis points (in the case of a borrowing under the Revolving Credit Facility) or 75 basis points (in the case of a borrowing under the Term Facility) plus (2) the highest of (a) the federal funds rate plus 50 basis points, (b) the lender's prime rate, and (c) the Eurodollar Rate (as defined below) that would be applicable for an interest period of one month plus 100 basis points. Borrowings under the agreement that are considered “Eurodollar Rate Loans” bear interest at a rate equal to the sum of (1) 150 basis points (in the case of a borrowing under the Revolving Credit Facility) or 175 basis points (in the case of a borrowing under the Term Facility) plus (2) the LIBOR rate for the applicable period, as adjusted for statutory reserve requirements for eurocurrency liabilities (the “Eurodollar Rate”). A commitment fee is payable quarterly equal to 0.20% of the actual daily amount by which the lenders' commitment under the Revolving Credit Facility exceeded the amount outstanding under such facility.
In prior periods, the Company has had a $101.0 million loan agreement with unaffiliated banks dated as of October 30, 2009, which had been amended at least annually between 2009 and 2014. The agreement consisted of a $100.0 million revolving credit facility, maturing on October 25, 2013, and a $1.0 million term loan maturing on June 1, 2015. In 2013, the Company repaid and terminated the $1.0 million term loan, and amended the agreement, effectively extending the maturity date on the revolving credit facility from October 25, 2013 to November 6, 2014. The agreement was also amended in 2014 effectively extending the term to December 15, 2014 at which time the agreement matured. At December 31, 2014, no amount was outstanding on the $100.0 million revolving credit facility.
Borrowings under the agreements are secured by pledges of and first priority perfected security interests in the Company's equity interest in its bank subsidiaries and contain several restrictive covenants, including the maintenance of various capital adequacy levels, asset quality and profitability ratios, and certain restrictions on dividends and other indebtedness. At December 31, 2015, the Company was in compliance with all such covenants. The Revolving Credit Facility and the Term Facility are available to be
134 | ||
utilized, as needed, to provide capital to fund continued growth at the Company’s banks and to serve as an interim source of funds for acquisitions, common stock repurchases or other general corporate purposes.
Short-term Borrowings
Short-term borrowings include securities sold under repurchase agreements and federal funds purchased. These borrowings totaled $63.9 million and $48.6 million at December 31, 2015 and 2014, respectively. At December 31, 2015 and 2014, securities sold under repurchase agreements represent $58.9 million and $48.6 million, respectively, of customer sweep accounts in connection with master repurchase agreements at the banks. During 2014, additional short-term borrowings from banks and brokers totaling $180.0 million were paid off. The Company records securities sold under repurchase agreements at their gross value and does not offset positions on the Consolidated Statements of Condition. As of December 31, 2015, the Company had pledged securities related to its customer balances in sweep accounts of $88.2 million. Securities pledged for customer balances in sweep accounts and short-term borrowings from brokers are maintained under the Company’s control and consist of U.S. Government agency, mortgage-backed and corporate securities. These securities are included in the available-for-sale and held-to-maturity securities portfolios as reflected on the Company’s Consolidated Statements of Condition. The following is a summary of these securities pledged as of December 31, 2015 disaggregated by investment category and maturity, and reconciled to the outstanding balance of securities sold under repurchase agreements:
(Dollars in thousands) | Overnight Sweep Collateral | |||
Available-for-sale securities pledged | ||||
U.S. Treasury | $ | 26,315 | ||
Municipal | 824 | |||
Corporate notes: | ||||
Financial issuers | 11,884 | |||
Mortgage-backed securities | 18,089 | |||
Held-to-maturity securities pledged | ||||
U.S. Government agencies | 29,448 | |||
Municipal | 1,604 | |||
Total collateral pledged | $ | 88,164 | ||
Excess collateral | 29,277 | |||
Securities sold under repurchase agreements | $ | 58,887 | ||
Other Borrowings
Other borrowings at December 31, 2015 represent a fixed-rate promissory note issued by the Company in August 2012 ("Fixed-rate Promissory Note") related to and secured by an office building owned by the Company, and non-recourse notes issued by the Company to other banks related to certain capital leases. At December 31, 2015, the Fixed-rate Promissory Note had an outstanding balance of $18.3 million compared to $18.8 million at December 31, 2014. Under the Fixed-rate Promissory Note, the Company will make monthly principal payments and pay interest at a fixed rate of 3.75% until maturity on September 1, 2017. At December 31, 2015, the non-recourse notes related to certain capital leases totaled $732,000.
Junior subordinated amortizing notes issued by the Company in connection with the issuance of the TEU's in December 2010 were paid off in 2013. At issuance, the junior subordinated notes were recorded at their initial principal balance of $44.7 million, net of issuance costs. These notes had a stated interest rate of 9.5% and required quarterly principal and interest payments of $4.3 million, with an initial payment of $4.6 million that was paid on March 15, 2011. The issuance costs were being amortized to interest expense using the effective-interest method. The final installment payment on the notes was made as scheduled on December 15, 2013. See Note 22 — Shareholders’ Equity for further discussion of the TEUs.
Secured Borrowings
In December 2014, the Company, through its subsidiary, FIFC Canada, sold an undivided co-ownership interest in all receivables owed to FIFC Canada to an unrelated third party in exchange for a cash payment of approximately C$150 million pursuant to a receivables purchase agreement (“Receivables Purchase Agreement”). The Receivables Purchase Agreement was amended in December 2015, effectively extending the maturity date from December 15, 2015 to December 15, 2017. Additionally, at that time, the unrelated third party paid an additional C$10 million, which increased the total payments to C$160 million. These transactions were not considered sales of receivables and, as such, related proceeds received are reflected on the Company’s
135 | ||
Consolidated Statements of Condition as a secured borrowing owed to the unrelated third party and translated to the Company’s reporting currency as of the respective date. At December 31, 2015, the translated balance of the secured borrowing totaled $115.6 million compared to $129.1 million at December 31, 2014. Additionally, the interest rate under the Receivables Purchase Agreement at December 31, 2015 was 1.4452%.
(14) Junior Subordinated Debentures
As of December 31, 2015, the Company owned 100% of the common securities of eleven trusts, Wintrust Capital Trust III, Wintrust Statutory Trust IV, Wintrust Statutory Trust V, Wintrust Capital Trust VII, Wintrust Capital Trust VIII, Wintrust Capital Trust IX, Northview Capital Trust I, Town Bankshares Capital Trust I, First Northwest Capital Trust I, Suburban Illinois Capital Trust II, and Community Financial Shares Statutory Trust II (the “Trusts”) set up to provide long- term financing. The Northview, Town, First Northwest, Suburban and Community Financial Shares capital trusts were acquired as part of the acquisitions of Northview Financial Corporation, Town Bankshares, Ltd., First Northwest Bancorp, Inc., Suburban and CFIS, respectively. The Trusts were formed for purposes of issuing trust preferred securities to third-party investors and investing the proceeds from the issuance of the trust preferred securities and common securities solely in junior subordinated debentures issued by the Company (or assumed by the Company in connection with an acquisition), with the same maturities and interest rates as the trust preferred securities. The junior subordinated debentures are the sole assets of the Trusts. In each Trust, the common securities represent approximately 3% of the junior subordinated debentures and the trust preferred securities represent approximately 97% of the junior subordinated debentures.
The Trusts are reported in the Company’s consolidated financial statements as unconsolidated subsidiaries. Accordingly, in the Consolidated Statements of Condition, the junior subordinated debentures issued by the Company to the Trusts are reported as liabilities and the common securities of the Trusts, all of which are owned by the Company, are included in available-for-sale securities.
The following table provides a summary of the Company’s junior subordinated debentures as of December 31, 2015 and 2014. The junior subordinated debentures represent the par value of the obligations owed to the Trusts.
Common Securities | Trust Preferred Securities | Junior Subordinated Debentures | Rate Structure | Contractual rate at 12/31/2015 | Maturity Date | Earliest Redemption Date | |||||||||||||||||||||
(Dollars in thousands) | 2015 | 2014 | Issue Date | ||||||||||||||||||||||||
Wintrust Capital Trust III | $ | 774 | $ | 25,000 | $ | 25,774 | $ | 25,774 | L+3.25 | 3.57 | % | 04/2003 | 04/2033 | 04/2008 | |||||||||||||
Wintrust Statutory Trust IV | 619 | 20,000 | 20,619 | 20,619 | L+2.80 | 3.41 | 12/2003 | 12/2033 | 12/2008 | ||||||||||||||||||
Wintrust Statutory Trust V | 1,238 | 40,000 | 41,238 | 41,238 | L+2.60 | 3.21 | 05/2004 | 05/2034 | 06/2009 | ||||||||||||||||||
Wintrust Capital Trust VII | 1,550 | 50,000 | 51,550 | 51,550 | L+1.95 | 2.46 | 12/2004 | 03/2035 | 03/2010 | ||||||||||||||||||
Wintrust Capital Trust VIII | 1,238 | 40,000 | 41,238 | 41,238 | L+1.45 | 2.06 | 08/2005 | 09/2035 | 09/2010 | ||||||||||||||||||
Wintrust Capital Trust IX | 1,547 | 50,000 | 51,547 | 51,547 | L+1.63 | 2.14 | 09/2006 | 09/2036 | 09/2011 | ||||||||||||||||||
Northview Capital Trust I | 186 | 6,000 | 6,186 | 6,186 | L+3.00 | 3.33 | 08/2003 | 11/2033 | 08/2008 | ||||||||||||||||||
Town Bankshares Capital Trust I | 186 | 6,000 | 6,186 | 6,186 | L+3.00 | 3.33 | 08/2003 | 11/2033 | 08/2008 | ||||||||||||||||||
First Northwest Capital Trust I | 155 | 5,000 | 5,155 | 5,155 | L+3.00 | 3.61 | 05/2004 | 05/2034 | 05/2009 | ||||||||||||||||||
Suburban Illinois Capital Trust II | 464 | 15,000 | 15,464 | — | L+1.75 | 2.26 | 12/2006 | 12/2036 | 12/2011 | ||||||||||||||||||
Community Financial Shares Statutory Trust II | 109 | 3,500 | 3,609 | — | L+1.62 | 2.13 | 06/2007 | 09/2037 | 06/2012 | ||||||||||||||||||
Total | $ | 268,566 | $ | 249,493 | 2.68 | % | |||||||||||||||||||||
The junior subordinated debentures totaled $268.6 million and $249.5 million at December 31, 2015 and 2014, respectively.
The interest rates on the variable rate junior subordinated debentures are based on the three-month LIBOR rate and reset on a quarterly basis. At December 31, 2015, the weighted average contractual interest rate on the junior subordinated debentures was 2.68%. The Company entered into interest rate swaps and caps with an aggregate notional value of $225 million to hedge the variable cash flows on certain junior subordinated debentures. Two of these interest rate caps, which were purchased in 2013 with an aggregate notional amount of $90 million, replaced two interest swaps that matured in September 2013. The hedge-adjusted rate on the junior subordinated debentures as of December 31, 2015, was 3.34%. Distributions on the common and preferred securities issued by the Trusts are payable quarterly at a rate per annum equal to the interest rates being earned by the Trusts on the junior subordinated debentures. Interest expense on the junior subordinated debentures is deductible for income tax purposes.
The Company has guaranteed the payment of distributions and payments upon liquidation or redemption of the trust preferred securities, in each case to the extent of funds held by the Trusts. The Company and the Trusts believe that, taken together, the obligations of the Company under the guarantees, the junior subordinated debentures, and other related agreements provide, in
136 | ||
the aggregate, a full, irrevocable and unconditional guarantee, on a subordinated basis, of all of the obligations of the Trusts under the trust preferred securities. Subject to certain limitations, the Company has the right to defer the payment of interest on the junior subordinated debentures at any time, or from time to time, for a period not to exceed 20 consecutive quarters. The trust preferred securities are subject to mandatory redemption, in whole or in part, upon repayment of the junior subordinated debentures at maturity or their earlier redemption. The junior subordinated debentures are redeemable in whole or in part prior to maturity at any time after the earliest redemption dates shown in the table, and earlier at the discretion of the Company if certain conditions are met, and, in any event, only after the Company has obtained Federal Reserve approval, if then required under applicable guidelines or regulations.
Prior to January 1, 2015, the junior subordinated debentures, subject to certain limitations, qualified as Tier 1 regulatory capital of the Company and the amount in excess of those certain limitations could, subject to other restrictions, be included in Tier 2 capital. At December 31, 2014, all of the junior subordinated debentures, net of the common securities, were included in the Company's Tier 1 regulatory capital. In 2015, a portion of these junior subordinated debentures still qualified as Tier 1 regulatory capital of the Company and the amount in excess of those certain limitations, subject to certain restrictions, was included in Tier 2 capital. At December 31, 2015, $65.1 million and $195.4 million of the junior subordinated debentures, net of common securities, were included in the Company's Tier 1 and Tier 2 regulatory capital, respectively.
(15) Minimum Lease Commitments
The Company occupies certain facilities under operating lease agreements. Gross rental expense related to the Company’s operating leases were $15.7 million in 2015, $10.5 million in 2014, and $9.1 million in 2013. The Company also leases certain owned premises and receives rental income from such lease agreements. Gross rental income related to the Company’s buildings totaled $7.7 million, $6.9 million and $7.0 million, in 2015, 2014 and 2013, respectively. The approximate minimum annual gross rental payments and gross rental receipts under noncancelable agreements for office space with remaining terms in excess of one year as of December 31, 2015, are as follows (in thousands):
Payments | Receipts | |||||||
2016 | $ | 10,515 | $ | 5,163 | ||||
2017 | 10,139 | 3,946 | ||||||
2018 | 9,725 | 2,688 | ||||||
2019 | 8,824 | 1,729 | ||||||
2020 | 9,516 | 1,214 | ||||||
2021 and thereafter | 114,513 | 1,058 | ||||||
Total minimum future amounts | $ | 163,232 | $ | 15,798 | ||||
(16) Income Taxes
Income tax expense (benefit) for the years ended December 31, 2015, 2014 and 2013 is summarized as follows:
Years Ended December 31, | ||||||||||||
(Dollars in thousands) | 2015 | 2014 | 2013 | |||||||||
Current income taxes: | ||||||||||||
Federal | $ | 62,584 | $ | 75,945 | $ | 67,449 | ||||||
State | 9,417 | 10,397 | 16,046 | |||||||||
Foreign | (39 | ) | 4,566 | 2,196 | ||||||||
Total current income taxes | $ | 71,962 | $ | 90,908 | $ | 85,691 | ||||||
Deferred income taxes: | ||||||||||||
Federal | $ | 15,550 | $ | 466 | $ | 1,813 | ||||||
State | 5,962 | 6,113 | (114 | ) | ||||||||
Foreign | 1,542 | (2,454 | ) | (160 | ) | |||||||
Total deferred income taxes | $ | 23,054 | $ | 4,125 | $ | 1,539 | ||||||
Total income tax expense | $ | 95,016 | $ | 95,033 | $ | 87,230 | ||||||
137 | ||
The Company's income before income taxes in 2015, 2014 and 2013 includes $3.9 million, $3.8 million and $4.3 million, respectively, of foreign income attributable to its Canadian subsidiary.
The tax effect of fair value adjustments on securities available-for-sale and derivative instruments in cash flow hedges are recorded directly to shareholders' equity as part of other comprehensive income (loss) and are reflected on the Consolidated Statements of Comprehensive Income. In addition, tax expense of $1.9 million, $594,000, and $831,000 in 2015, 2014 and 2013, respectively, related to the exercise and expiration of certain stock options and vesting and issuance of restricted shares and performance stock awards pursuant to the Stock Incentive Plans and the issuance of shares pursuant to the Directors Deferred Fee and Stock Plan, was recorded directly to shareholders’ equity.
A reconciliation of the differences between taxes computed using the statutory Federal income tax rate of 35% and actual income tax expense is as follows:
Years Ended December 31, | ||||||||||||
(Dollars in thousands) | 2015 | 2014 | 2013 | |||||||||
Income tax expense based upon the Federal statutory rate on income before income taxes | $ | 88,118 | $ | 86,251 | $ | 78,554 | ||||||
Increase (decrease) in tax resulting from: | ||||||||||||
Tax-exempt interest, net of interest expense disallowance | (2,878 | ) | (1,936 | ) | (1,423 | ) | ||||||
State taxes, net of federal tax benefit | 9,996 | 10,731 | 10,355 | |||||||||
Income earned on bank owned life insurance | (1,562 | ) | (896 | ) | (1,157 | ) | ||||||
Non-deductible compensation costs | 528 | 561 | 654 | |||||||||
Meals, entertainment and related expenses | 1,283 | 1,026 | 993 | |||||||||
Foreign subsidiary, net | 148 | 775 | 588 | |||||||||
Tax benefits related to tax credit investments | (778 | ) | (1,498 | ) | (1,553 | ) | ||||||
Other, net | 161 | 19 | 219 | |||||||||
Income tax expense | $ | 95,016 | $ | 95,033 | $ | 87,230 | ||||||
138 | ||
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at December 31, 2015 and 2014 are as follows:
Years Ended December 31, | ||||||||
(Dollars in thousands) | 2015 | 2014 | ||||||
Deferred tax assets: | ||||||||
Allowance for credit losses | $ | 39,561 | $ | 35,455 | ||||
Deferred compensation | 25,492 | 19,349 | ||||||
Covered assets | 17,754 | 18,246 | ||||||
Stock-based compensation | 9,760 | 10,735 | ||||||
Other real estate owned | 7,610 | 7,546 | ||||||
Foreign net operating loss carryforward | 6,616 | 2,521 | ||||||
Federal net operating loss carryforward | 4,705 | 2,108 | ||||||
AMT credit carryforward | 1,498 | 1,177 | ||||||
Foreign tax credit carryforward | — | 302 | ||||||
Nonaccrued interest | 1,603 | 1,329 | ||||||
Mortgage banking recourse obligation | 1,565 | 1,206 | ||||||
Discount on purchased loans | 749 | — | ||||||
Net unrealized losses on securities included in other comprehensive income | 11,476 | 6,242 | ||||||
Net unrealized losses on derivatives included in other comprehensive income | 1,386 | 1,601 | ||||||
Other | 3,361 | 3,523 | ||||||
Total gross deferred tax assets | 133,136 | 111,340 | ||||||
Deferred tax liabilities: | ||||||||
Premises and equipment | 33,423 | 35,902 | ||||||
Equipment leasing | 15,089 | — | ||||||
Goodwill and intangible assets | 8,198 | 3,501 | ||||||
Fair value adjustments on loans | 6,086 | 9,444 | ||||||
Deferred loan fees and costs | 6,045 | 4,927 | ||||||
Capitalized servicing rights | 3,330 | 3,037 | ||||||
FHLB stock dividends | 904 | 1,416 | ||||||
Discount on purchased loans | — | 11,324 | ||||||
Other | 5,874 | 5,625 | ||||||
Total gross deferred liabilities | 78,949 | 75,176 | ||||||
Net deferred tax assets | $ | 54,187 | $ | 36,164 | ||||
Management has determined that a valuation allowance is not required for the deferred tax assets at December 31, 2015 because it is more likely than not that these assets could be realized through carry back to taxable income in prior years, future reversals of existing taxable temporary differences, tax planning strategies and future taxable income. This conclusion is based on the Company's historical earnings, its current level of earnings and prospects for continued growth and profitability.
The Company has a Federal AMT credit carryforward of $1.5 million which has no expiration date and a Federal NOL carryforward of $13.4 million that begins to expire in 2028 through 2034 and is subject to Internal Revenue Code Section 382 annual limitation. These credit and loss carryforwards were a result of acquisitions made in 2012, 2013 and 2015. The Company has a Foreign NOL carryforward of $25.1 million that begins to expire in 2034 through 2035. Management believes it is more likely than not that it will be able to fully utilize the Federal and Foreign NOLs and tax credits in future tax years.
The Company is required to record a liability (or a reduction of an asset) for the uncertainty associated with certain tax positions. This liability, if any, reflects the fact that the Company has not recognized the benefit associated with the tax position. The Company had no unrecognized tax benefits at December 31, 2014 and it did not have increases or decreases in unrecognized tax benefits during 2015 and does not have any tax positions for which unrecognized tax benefits must be recorded at December 31, 2015. In addition, for the year ended December 31, 2015, the Company has no interest or penalties relating to income tax positions recognized in the income statement or in the balance sheet. If the Company were to record interest and penalties associated with uncertain tax positions or as a result of an audit by a tax jurisdiction, the interest and penalties would be included in income tax expense. The Company does not believe it is reasonably possible that unrecognized tax benefits will significantly change in the next 12 months.
139 | ||
The Company and its subsidiaries are subject to U.S. federal income tax as well as income tax in numerous state jurisdictions and in Canada. In the ordinary course of business we are routinely subject to audit by the taxing authorities of these jurisdictions. Currently, the Company's U.S. federal income tax returns are open and subject to audit for the 2012 tax return year forward, and in general, the Company's state income tax returns are open and subject to audit from the 2012 tax return year forward, subject to individual state statutes of limitation. The Company's Canadian subsidiary's Canadian income tax returns are also subject to audit for the 2012 tax return year forward.
(17) Stock Compensation Plans and Other Employee Benefit Plans
Stock Incentive Plan
In May 2015, the Company’s shareholders approved the 2015 Stock Incentive Plan (“the 2015 Plan”) which provides for the issuance of up to 5,485,000 shares of common stock. The 2015 Plan replaced the 2007 Stock Incentive Plan (“the 2007 Plan”), which replaced the 1997 Stock Incentive Plan (“the 1997 Plan”). The 2015 Plan, the 2007 Plan and the 1997 Plan are collectively referred to as “the Plans.” The 2015 Plan has substantially similar terms to the 2007 Plan and the 1997 Plan. Outstanding awards under the Plans for which common shares are not issued by reason of cancellation, forfeiture, lapse of such award or settlement of such award in cash, are again available under the 2015 Plan. All grants made after the approval of the 2015 Plan will be made pursuant to the 2015 Plan. As of December 31, 2015, approximately 5.6 million shares were available for future grants (assuming the maximum number of shares are issued for the performance awards outstanding.) The Plans cover substantially all employees of Wintrust. The Compensation Committee of the Board of Directors administers all stock-based compensation programs and authorizes all awards granted pursuant to the Plans.
The Plans permit the grant of incentive stock options, non-qualified stock options, stock appreciation rights, stock awards, restricted share or unit awards, performance based awards settled in shares of common stock and other incentive awards based in whole or in part by reference to the Company’s stock price. The Company historically awarded stock-based compensation in the form of time-vested nonqualified stock options and time-vested restricted share unit awards (“restricted shares”). In general, the grants of options provide for the purchase shares of the Company’s common stock at the fair market value of the stock on the date the options are granted. Options under the 2015 Plan and the 2007 Plan generally vest ratably over periods of three to five years and have a maximum term of seven years from the date of grant. Stock options granted under the 1997 Plan provided for a maximum term of 10 years. Restricted shares entitle the holders to receive, at no cost, shares of the Company’s common stock. Restricted shares generally vest over periods of one to five years from the date of grant.
Beginning in 2011, the Company has awarded annual grants under the Long-Term Incentive Program (“LTIP”), which is administered under the Plans. The LTIP is designed in part to align the interests of management with interests of shareholders, foster retention, create a long-term focus based on sustainable results and provide participants a target long-term incentive opportunity. It is anticipated that LTIP awards will continue to be granted annually. LTIP grants to date have consisted of time-vested nonqualified stock options and performance-based stock and cash awards. Stock options granted under the LTIP have a term of sevenyears and will generally vest equally over three years based on continued service. Performance-based stock and cash awards granted under the LTIP are contingent upon the achievement of pre-established long-term performance goals set in advance by the Compensation Committee over a three-year period. These performance awards are granted at a target level, and based on the Company’s achievement of the pre-established long-term goals, the actual payouts can range from 0% to 150% (for awards granted in 2015) or 200% (for awards granted prior to 2015) of the target award. The awards vest in the quarter after the end of the performance period upon certification of the payout by the Compensation Committee of the Board of Directors. Holders of performance-based stock awards are entitled to shares of common stock at no cost.
Holders of restricted share awards and performance-based stock awards received under the Plans are not entitled to vote or receive cash dividends (or cash payments equal to the cash dividends) on the underlying common shares until the awards are vested and issued. Except in limited circumstances, these awards are canceled upon termination of employment without any payment of consideration by the Company.
Stock-based compensation is measured as the fair value of an award on the date of grant, and the measured cost is recognized over the period which the recipient is required to provide service in exchange for the award. The fair values of restricted share and performance-based stock awards are determined based on the average of the high and low trading prices on the grant date, and the fair value of stock options is estimated using a Black-Scholes option-pricing model that utilizes the assumptions outlined in the following table. Option-pricing models require the input of highly subjective assumptions and are sensitive to changes in the option’s expected life and the price volatility of the underlying stock, which can materially affect the fair value estimate. Options granted in 2013, 2014 and 2015, were primarily granted as LTIP awards. The expected life of the options granted pursuant to the LTIP awards is based on the safe harbor rule of the SEC Staff Accounting Bulletin No. 107 “Share-Based Payment” as the Company believes historical exercise data may not provide a reasonable basis to estimate the expected term of these options. Expected stock
140 | ||
price volatility is based on historical volatility of the Company’s common stock, which correlates with the expected life of the options, and the risk-free interest rate is based on comparable U.S. Treasury rates. Management reviews and adjusts the assumptions used to calculate the fair value of an option on a periodic basis to better reflect expected trends.
The following table presents the weighted average assumptions used to determine the fair value of options granted in the years ending December 31, 2015, 2014 and 2013:
2015 | 2014 | 2013 | |||||||
Expected dividend yield | 0.9 | % | 0.5 | % | 0.5 | % | |||
Expected volatility | 26.5 | % | 29.8 | % | 59.0 | % | |||
Risk-free rate | 1.3 | % | 0.8 | % | 1.0 | % | |||
Expected option life (in years) | 4.5 | 4.5 | 4.5 | ||||||
Stock based compensation is recognized based on the number of awards that are ultimately expected to vest. Forfeitures are estimated based on historical forfeiture experience. For performance-based stock awards, an estimate is made of the number of shares expected to vest as a result of actual performance against the performance criteria to determine the amount of compensation expense to be recognized. The estimate is reevaluated quarterly and total compensation expense is adjusted for any change in the current period.
Stock-based compensation expense recognized in the Consolidated Statements of Income was $9.7 million, $10.1 million and $6.7 million and the related tax benefits were $3.8 million, $4.0 million and $2.5 million in 2015, 2014 and 2013, respectively. The 2014 stock-based compensation expense includes a $2.1 million charge for a modification to the performance measurement criteria related to the 2011 LTIP performance-based stock grants that were vested and paid out in the first quarter of 2014. The cost of the modification was determined based on the stock price on the date of re-measurement and paid to the holders of the performance-based stock awards in cash.
141 | ||
A summary of the Plans’ stock option activity for the years ended December 31, 2015, 2014 and 2013 is as follows:
Stock Options | Common Shares | Weighted Average Strike Price | Remaining Contractual Term(1) | Intrinsic Value(2) ($000) | |||||||||
Outstanding at January 1, 2013 | 1,745,427 | $ | 42.31 | ||||||||||
Granted | 236,120 | 38.01 | |||||||||||
Exercised | (371,826 | ) | 40.46 | ||||||||||
Forfeited or canceled | (85,049 | ) | 44.12 | ||||||||||
Outstanding at December 31, 2013 | 1,524,672 | $ | 42.00 | 2.6 | $ | 11,021 | |||||||
Exercisable at December 31, 2013 | 1,097,836 | $ | 44.82 | 1.5 | $ | 6,165 | |||||||
Outstanding at January 1, 2014 | 1,524,672 | $ | 42.00 | ||||||||||
Granted | 447,153 | 46.38 | |||||||||||
Exercised | (176,009 | ) | 33.32 | ||||||||||
Forfeited or canceled | (177,390 | ) | 52.55 | ||||||||||
Outstanding at December 31, 2014 | 1,618,426 | $ | 43.00 | 3.5 | $ | 9,303 | |||||||
Exercisable at December 31, 2014 | 941,741 | $ | 43.35 | 2.0 | $ | 6,392 | |||||||
Outstanding at January 1, 2015 | 1,618,426 | $ | 43.00 | ||||||||||
Granted | 502,517 | 44.36 | |||||||||||
Options outstanding in acquired plans | 16,364 | 21.18 | |||||||||||
Exercised | (273,411 | ) | 42.82 | ||||||||||
Forfeited or canceled | (312,162 | ) | 52.53 | ||||||||||
Outstanding at December 31, 2015 | 1,551,734 | $ | 41.32 | 4.4 | $ | 11,433 | |||||||
Exercisable at December 31, 2015 | 720,580 | $ | 37.64 | 3.1 | $ | 8,045 | |||||||
Vested or expected to vest at December 31, 2015 | 1,534,045 | $ | 41.28 | 4.4 | $ | 11,371 | |||||||
(1) | Represents the weighted average contractual remaining life in years. |
(2) | Aggregate intrinsic value represents the total pretax intrinsic value (i.e., the difference between the Company’s stock price at year end and the option exercise price, multiplied by the number of shares) that would have been received by the option holders if they had exercised their options on the last day of the year. Options with exercise prices above the year end stock price are excluded from the calculation of intrinsic value. The intrinsic value will change based on the fair market value of the Company’s stock. |
The weighted average per share grant date fair value of options granted during the years ended December 31, 2015, 2014 and 2013 was $9.72, $11.52 and $17.49, respectively. The aggregate intrinsic value of options exercised during the years ended December 31, 2015, 2014 and 2013, was $2.5 million, $2.3 million and $1.2 million, respectively. The actual tax benefit realized for the tax deductions from option exercises totaled $985,000, $900,000 and $485,000 for 2015, 2014 and 2013, respectively. Cash received from option exercises under the Plans for the years ended December 31, 2015, 2014 and 2013 was $11.7 million, $5.9 million and $15.0 million, respectively.
A summary of the Plans’ restricted share activity for the years ended December 31, 2015, 2014 and 2013 is as follows:
2015 | 2014 | 2013 | |||||||||||||||||||
Restricted Shares | Common Shares | Weighted Average Grant-Date Fair Value | Common Shares | Weighted Average Grant-Date Fair Value | Common Shares | Weighted Average Grant-Date Fair Value | |||||||||||||||
Outstanding at January 1 | 146,112 | $ | 47.45 | 181,522 | $ | 43.39 | 314,226 | $ | 37.99 | ||||||||||||
Granted | 27,165 | 48.17 | 31,463 | 45.00 | 16,932 | 42.14 | |||||||||||||||
Vested and issued | (29,018 | ) | 39.33 | (60,121 | ) | 34.98 | (144,860 | ) | 31.83 | ||||||||||||
Forfeited | (6,666 | ) | 40.76 | (6,752 | ) | 37.95 | (4,776 | ) | 33.93 | ||||||||||||
Outstanding at end of year | 137,593 | $ | 49.63 | 146,112 | $ | 47.45 | 181,522 | $ | 43.39 | ||||||||||||
Vested, but not issuable at end of year | 85,000 | $ | 51.88 | 85,000 | $ | 51.88 | 85,000 | $ | 51.88 | ||||||||||||
142 | ||
A summary of the 2007 Plan’s performance-based stock award activity, based on the target level of the awards, for the years ended December 31, 2015, 2014, and 2013 is as follows:
2015 | 2014 | 2013 | |||||||||||||||||||
Performance Shares | Common Shares | Weighted Average Grant-Date Fair Value | Common Shares | Weighted Average Grant-Date Fair Value | Common Shares | Weighted Average Grant-Date Fair Value | |||||||||||||||
Outstanding at January 1 | 295,679 | $ | 38.18 | 307,512 | $ | 34.01 | 214,565 | $ | 32.08 | ||||||||||||
Granted | 106,017 | 44.35 | 93,535 | 46.86 | 106,268 | 37.90 | |||||||||||||||
Expired, canceled or forfeited | (46,573 | ) | 35.51 | (89,424 | ) | 33.78 | (13,321 | ) | 34.00 | ||||||||||||
Vested and issued | (78,590 | ) | 31.10 | (15,944 | ) | 33.25 | — | — | |||||||||||||
Outstanding at end of year | 276,533 | $ | 43.01 | 295,679 | $ | 38.18 | 307,512 | $ | 34.01 | ||||||||||||
In the first quarter of 2015, the 2012 grants vested and were paid, and in 2014, the 2011 grants vested and were paid. As previously discussed, the Compensation Committee of the Board of Directors of the Company modified the 2011 awards such that 17% of the awards were paid in shares and the remainder in cash. As a result, the remaining shares granted in connection with the 2011 awards were canceled and remain available for future use under the Plan. The Company issues new shares to satisfy its obligation to issue shares granted pursuant to the Plans.
At December 31, 2015, the maximum number of performance-based shares that could be issued on outstanding awards if performance is attained at the maximum amount (200% of target for 2013 and 2014 grants and 150% of target for 2015 grants) was approximately 503,000 shares.
The actual tax benefit realized upon the vesting of restricted shares and performance-based stock is based on the fair value of the shares on the issue date and the estimated tax benefit of the awards is based on fair value of the awards on the grant date. The actual tax benefit realized upon the vesting of restricted shares and performance-based stock in 2015, 2014 and 2013 was $517,000, $254,000 and $329,000, respectively, more than the estimated tax benefit for those shares. These differences in actual and estimated tax benefits were recorded directly to shareholders’ equity.
As of December 31, 2015, there was $11.0 million of total unrecognized compensation cost related to non-vested share based arrangements under the Plans. That cost is expected to be recognized over a weighted average period of approximately two years. The total fair value of shares vested during the years ended December 31, 2015, 2014 and 2013 was $7.9 million, $7.8 million and $7.4 million, respectively.
The Company issues new shares to satisfy its obligation to issue shares granted pursuant to the Plans.
Cash Incentive and Retention Plan
The Cash Incentive and Retention Plan (“CIRP”) allows the Company to provide cash compensation to the Company’s and its subsidiaries’ officers and employees. The CIRP is administered by the Compensation Committee of the Board of Directors. The CIRP generally provides for the grants of cash awards, which may be earned pursuant to the achievement of performance criteria established by the Compensation Committee and/or continued employment. The performance criteria, if any, established by the Compensation Committee must relate to one or more of the criteria specified in the CIRP, which includes: earnings, earnings growth, revenues, stock price, return on assets, return on equity, improvement of financial ratings, achievement of balance sheet or income statement objectives and expenses. These criteria may relate to the Company, a particular line of business or a specific subsidiary of the Company. The Company’s expense related to the CIRP was approximately $20,000 and $115,000 in 2014 and 2013. There was no expense related to CIRP in 2015. In 2015 and 2014, the Company paid $100,000 and $473,000 related to CIRP awards. No awards were paid in 2013. As of December 31, 2015, there were no outstanding awards under this plan.
Other Employee Benefits
Wintrust and its subsidiaries also provide 401(k) Retirement Savings Plans (“401(k) Plans”). The 401(k) Plans cover all employees meeting certain eligibility requirements. Contributions by employees are made through salary deferrals at their direction, subject to certain Plan and statutory limitations. Employer contributions to the 401(k) Plans are made at the employer’s discretion. Generally, participants completing 501 hours of service are eligible to share in an allocation of employer contributions. The Company’s expense for the employer contributions to the 401(k) Plans was approximately $6.4 million in 2015, $5.0 million in 2014, and $4.9 million in 2013.
143 | ||
The Wintrust Financial Corporation Employee Stock Purchase Plan (“ESPP”) is designed to encourage greater stock ownership among employees, thereby enhancing employee commitment to the Company. The ESPP gives eligible employees the right to accumulate funds over an offering period to purchase shares of common stock. All shares offered under the ESPP will be either newly issued shares of the Company or shares issued from treasury, if any. In accordance with the ESPP, beginning January 1, 2015, the purchase price of the shares of common stock will be equal to 95% of the closing price of the Company’s common stock on the last day of the offering period. Previously, the Company’s Board of Directors authorized a purchase price calculation of the lesser of 90% of fair market value per share of the common stock on the first day of the offering period or 90% of the fair market value of the common stock on the last day of the offering period. During 2015, 56,517 shares of common stock were earned by participants and no compensation expense was recorded. In 2014 and 2013, a total of 66,521 shares and 62,096 shares, respectively, were earned by participants and approximately $377,000 and $355,000, respectively, of compensation expense was recognized. The Company plans to continue to offer common stock through this ESPP on an ongoing basis. In May 2012, the Company's shareholders authorized an additional 300,000 shares of common stock that may be offered under the ESPP. At December 31, 2015, the Company had an obligation to issue 14,053 shares of common stock to participants and had 135,982 shares available for future grants under the ESPP.
As a result of the Company's acquisition of HPK in December 2012, the Company assumed the obligations of a noncontributory pension plan, (“the HPK Plan”), that covers approximately 100 participants with benefits based on years of service and compensation prior to retirement. The HPK Plan was “frozen” as of December 31, 2006, with no additional years of credit earned for service or compensation paid. As of December 31, 2015, the projected benefit obligation was $6.1 million and the fair value of the plan's assets was $4.9 million. Similarly, in connection with the Company's acquisition of Diamond in October 2013, the Company assumed the obligation of Diamond's pension plan, which covers approximately 35 participants. The Diamond Plan was "frozen" as of December 31, 2004, and only service and compensation prior to this date is considered in determining benefits. As of December 31, 2015, the projected benefit obligation was $3.1 million and the fair value of the plan's assets was $2.1 million. The Company has accrued liabilities for the unfunded portions of these plans. The Company recorded expense (benefit) of $1.4 million and ($1.1 million) in 2015 and 2014 related to these plans. There was no expense related to these plans in 2013.
The Company does not currently offer other postretirement benefits such as health care or other pension plans.
Directors Deferred Fee and Stock Plan
The Wintrust Financial Corporation Directors Deferred Fee and Stock Plan (“DDFS Plan”) allows directors of the Company and its subsidiaries to choose to receive payment of directors’ fees in either cash or common stock of the Company and to defer the receipt of the fees. The DDFS Plan is designed to encourage stock ownership by directors. All shares offered under the DDFS Plan will be either newly issued shares of the Company or shares issued from treasury. The number of shares issued is determined on a quarterly basis based on the fees earned during the quarter and the fair market value per share of the common stock on the last trading day of the preceding quarter. The shares are issued annually and the directors are entitled to dividends and voting rights upon the issuance of the shares. During 2015, 2014 and 2013, a total of 20,475 shares, 19,488 shares and 30,547 shares, respectively, were issued to directors. For those directors that elect to defer the receipt of the common stock, the Company maintains records of stock units representing an obligation to issue shares of common stock. The number of stock units equals the number of shares that would have been issued had the director not elected to defer receipt of the shares. Additional stock units are credited at the time dividends are paid, however no voting rights are associated with the stock units. The shares of common stock represented by the stock units are issued in the year specified by the directors in their participation agreements. In July 2015, the shares authorized under the DDFS Plan were increased by 150,000. At December 31, 2015, the Company has an obligation to issue 279,479 shares of common stock to directors and has 148,363 shares available for future grants under the DDFS Plan.
144 | ||
(18) Regulatory Matters
Banking laws place restrictions upon the amount of dividends that can be paid to Wintrust by the banks. Based on these laws, the banks could, subject to minimum capital requirements, declare dividends to Wintrust 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. During 2015, 2014 and 2013, cash dividends totaling $22.2 million, $77.0 million and $112.8 million, respectively, were paid to Wintrust by the banks and other subsidiaries. As of January 1, 2016, the banks had approximately $70.2 million available to be paid as dividends to Wintrust without prior regulatory approval and without reducing their capital below the well-capitalized level.
The banks are also required by the Federal Reserve Act to maintain reserves against deposits. Reserves are held either in the form of vault cash or balances maintained with the Federal Reserve Bank and are based on the average daily deposit balances and statutory reserve ratios prescribed by the type of deposit account. At December 31, 2015 and 2014, reserve balances of approximately $412.7 million and $291.0 million, respectively, were required to be maintained at the Federal Reserve Bank.
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.
Quantitative measures established by regulation to ensure capital adequacy require the Company and the banks to maintain minimum amounts and ratios of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined) and Tier 1 leverage capital (as defined) to average quarterly assets (as defined). 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 4.50% must be in the form of common equity Tier 1 capital and 6.0% 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 4.0%. In addition the Federal Reserve continues to consider the Tier 1 leverage ratio in evaluating proposals for expansion or new activities. As reflected in the following table, the Company met all minimum capital requirements at December 31, 2015 and 2014:
2015 | 2014 | |||||
Total capital to risk weighted assets | 12.2 | % | 13.0 | % | ||
Tier 1 capital to risk weighted assets | 10.0 | 11.6 | ||||
Common equity Tier 1 capital to risk weighted assets | 8.4 | N/A | ||||
Tier 1 leverage Ratio | 9.1 | 10.2 | ||||
Wintrust is designated as a financial holding company. Bank holding companies approved as financial holding companies may engage in an expanded range of activities, including the businesses conducted by its wealth management subsidiaries. As a financial holding company, Wintrust’s banks are required to maintain their capital positions at the “well-capitalized” level. As of December 31, 2015, the banks were categorized as well capitalized under the regulatory framework for prompt corrective action. The ratios required for the banks to be “well capitalized” by regulatory definition are 10.0%, 8.0%, 6.5% and 5.0% for Total capital to risk-weighted assets, Tier 1 capital to risk-weighted assets, Common equity Tier 1 capital to risk weighted assets and Tier 1 leverage ratio, respectively.
145 | ||
The banks’ actual capital amounts and ratios as of December 31, 2015 and 2014 are presented in the following table:
(Dollars in thousands) | December 31, 2015 | December 31, 2014 | ||||||||||||||||||||||||||
Actual | To Be Well Capitalized by Regulatory Definition | Actual | To Be Well Capitalized by Regulatory Definition | |||||||||||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||||
Total Capital (to Risk Weighted Assets): | ||||||||||||||||||||||||||||
Lake Forest Bank | $ | 282,921 | 11.3 | % | $ | 251,560 | 10.0 | % | $ | 245,248 | 10.9 | % | $ | 224,354 | 10.0 | % | ||||||||||||
Hinsdale Bank | 200,436 | 12.1 | 165,157 | 10.0 | 155,797 | 11.4 | 136,415 | 10.0 | ||||||||||||||||||||
Wintrust Bank | 377,015 | 11.3 | 334,596 | 10.0 | 312,223 | 11.2 | 279,295 | 10.0 | ||||||||||||||||||||
Libertyville Bank | 124,665 | 11.5 | 108,619 | 10.0 | 113,513 | 11.4 | 99,999 | 10.0 | ||||||||||||||||||||
Barrington Bank | 187,062 | 11.3 | 165,810 | 10.0 | 163,162 | 11.9 | 137,527 | 10.0 | ||||||||||||||||||||
Crystal Lake Bank | 89,476 | 11.9 | 75,314 | 10.0 | 87,138 | 12.9 | 67,482 | 10.0 | ||||||||||||||||||||
Northbrook Bank | 145,390 | 11.0 | 132,200 | 10.0 | 126,325 | 11.1 | 114,042 | 10.0 | ||||||||||||||||||||
Schaumburg Bank | 87,182 | 11.4 | 76,422 | 10.0 | 73,999 | 11.3 | 65,485 | 10.0 | ||||||||||||||||||||
Village Bank | 117,543 | 11.2 | 105,027 | 10.0 | 103,148 | 11.2 | 92,110 | 10.0 | ||||||||||||||||||||
Beverly Bank | 92,843 | 11.1 | 83,442 | 10.0 | 73,808 | 11.3 | 65,229 | 10.0 | ||||||||||||||||||||
Town Bank | 159,508 | 12.0 | 133,344 | 10.0 | 130,699 | 12.1 | 108,434 | 10.0 | ||||||||||||||||||||
Wheaton Bank | 117,373 | 11.5 | 102,479 | 10.0 | 77,366 | 11.6 | 66,920 | 10.0 | ||||||||||||||||||||
State Bank of the Lakes | 89,488 | 11.1 | 80,923 | 10.0 | 78,048 | 11.6 | 67,272 | 10.0 | ||||||||||||||||||||
Old Plank Trail Bank | 110,058 | 11.3 | 97,223 | 10.0 | 100,082 | 12.4 | 80,420 | 10.0 | ||||||||||||||||||||
St. Charles Bank | 81,524 | 11.2 | 72,812 | 10.0 | 71,123 | 11.1 | 63,912 | 10.0 | ||||||||||||||||||||
Tier 1 Capital (to Risk Weighted Assets): | ||||||||||||||||||||||||||||
Lake Forest Bank | $ | 256,126 | 10.2 | % | $ | 201,248 | 8.0 | % | $ | 231,448 | 10.3 | % | $ | 134,612 | 6.0 | % | ||||||||||||
Hinsdale Bank | 191,553 | 11.6 | 132,125 | 8.0 | 146,290 | 10.7 | 81,849 | 6.0 | ||||||||||||||||||||
Wintrust Bank | 311,322 | 9.3 | 267,677 | 8.0 | 222,845 | 8.0 | 167,577 | 6.0 | ||||||||||||||||||||
Libertyville Bank | 117,965 | 10.9 | 86,895 | 8.0 | 107,649 | 10.8 | 59,999 | 6.0 | ||||||||||||||||||||
Barrington Bank | 176,489 | 10.6 | 132,648 | 8.0 | 150,705 | 11.0 | 82,516 | 6.0 | ||||||||||||||||||||
Crystal Lake Bank | 85,521 | 11.4 | 60,251 | 8.0 | 83,788 | 12.4 | 40,489 | 6.0 | ||||||||||||||||||||
Northbrook Bank | 129,514 | 9.8 | 105,760 | 8.0 | 116,808 | 10.2 | 68,425 | 6.0 | ||||||||||||||||||||
Schaumburg Bank | 71,958 | 9.4 | 61,137 | 8.0 | 67,427 | 10.3 | 39,291 | 6.0 | ||||||||||||||||||||
Village Bank | 108,221 | 10.3 | 84,021 | 8.0 | 97,684 | 10.6 | 55,266 | 6.0 | ||||||||||||||||||||
Beverly Bank | 76,708 | 9.2 | 66,754 | 8.0 | 71,197 | 10.9 | 39,137 | 6.0 | ||||||||||||||||||||
Town Bank | 153,902 | 11.5 | 106,675 | 8.0 | 125,716 | 11.6 | 65,061 | 6.0 | ||||||||||||||||||||
Wheaton Bank | 96,799 | 9.5 | 81,983 | 8.0 | 70,632 | 10.6 | 40,152 | 6.0 | ||||||||||||||||||||
State Bank of the Lakes | 76,609 | 9.5 | 64,738 | 8.0 | 69,176 | 10.3 | 40,363 | 6.0 | ||||||||||||||||||||
Old Plank Trail Bank | 100,506 | 10.3 | 77,778 | 8.0 | 96,689 | 12.0 | 48,252 | 6.0 | ||||||||||||||||||||
St. Charles Bank | 75,348 | 10.4 | 58,250 | 8.0 | 67,588 | 10.6 | 38,347 | 6.0 | ||||||||||||||||||||
Common Equity Tier 1 Capital (to Risk Weighted Assets): | ||||||||||||||||||||||||||||
Lake Forest Bank | $ | 256,126 | 10.2 | % | $ | 163,514 | 6.5 | % | N/A | N/A | N/A | N/A | ||||||||||||||||
Hinsdale Bank | 191,553 | 11.6 | 107,352 | 6.5 | N/A | N/A | N/A | N/A | ||||||||||||||||||||
Wintrust Bank | 311,322 | 9.3 | 217,488 | 6.5 | N/A | N/A | N/A | N/A | ||||||||||||||||||||
Libertyville Bank | 117,965 | 10.9 | 70,603 | 6.5 | N/A | N/A | N/A | N/A | ||||||||||||||||||||
Barrington Bank | 176,489 | 10.6 | 107,777 | 6.5 | N/A | N/A | N/A | N/A | ||||||||||||||||||||
Crystal Lake Bank | 85,521 | 11.4 | 48,954 | 6.5 | N/A | N/A | N/A | N/A | ||||||||||||||||||||
Northbrook Bank | 129,514 | 9.8 | 85,930 | 6.5 | N/A | N/A | N/A | N/A | ||||||||||||||||||||
Schaumburg Bank | 71,958 | 9.4 | 49,674 | 6.5 | N/A | N/A | N/A | N/A | ||||||||||||||||||||
Village Bank | 108,221 | 10.3 | 68,267 | 6.5 | N/A | N/A | N/A | N/A | ||||||||||||||||||||
Beverly Bank | 76,708 | 9.2 | 54,237 | 6.5 | N/A | N/A | N/A | N/A | ||||||||||||||||||||
Town Bank | 153,902 | 11.5 | 86,674 | 6.5 | N/A | N/A | N/A | N/A | ||||||||||||||||||||
Wheaton Bank | 96,799 | 9.5 | 66,611 | 6.5 | N/A | N/A | N/A | N/A | ||||||||||||||||||||
State Bank of the Lakes | 76,609 | 9.5 | 52,600 | 6.5 | N/A | N/A | N/A | N/A | ||||||||||||||||||||
Old Plank Trail Bank | 100,506 | 10.3 | 63,195 | 6.5 | N/A | N/A | N/A | N/A | ||||||||||||||||||||
St. Charles Bank | 75,348 | 10.4 | 47,328 | 6.5 | N/A | N/A | N/A | N/A | ||||||||||||||||||||
146 | ||
(Dollars in thousands) | December 31, 2015 | December 31, 2014 | ||||||||||||||||||||||||||
Actual | To Be Well Capitalized by Regulatory Definition | Actual | To Be Well Capitalized by Regulatory Definition | |||||||||||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||||
Tier 1 Leverage Ratio: | ||||||||||||||||||||||||||||
Lake Forest Bank | $ | 256,126 | 9.1 | % | $ | 140,541 | 5.0 | % | $ | 231,448 | 9.0 | % | $ | 128,590 | 5.0 | % | ||||||||||||
Hinsdale Bank | 191,553 | 9.9 | 97,023 | 5.0 | 146,290 | 9.7 | 75,509 | 5.0 | ||||||||||||||||||||
Wintrust Bank | 311,322 | 8.9 | 174,117 | 5.0 | 222,845 | 7.4 | 149,925 | 5.0 | ||||||||||||||||||||
Libertyville Bank | 117,965 | 9.6 | 61,320 | 5.0 | 107,649 | 9.3 | 58,032 | 5.0 | ||||||||||||||||||||
Barrington Bank | 176,489 | 9.8 | 90,168 | 5.0 | 150,705 | 9.4 | 80,086 | 5.0 | ||||||||||||||||||||
Crystal Lake Bank | 85,521 | 9.4 | 45,445 | 5.0 | 83,788 | 10.3 | 40,502 | 5.0 | ||||||||||||||||||||
Northbrook Bank | 129,514 | 8.6 | 75,287 | 5.0 | 116,808 | 8.9 | 65,626 | 5.0 | ||||||||||||||||||||
Schaumburg Bank | 71,958 | 8.4 | 42,707 | 5.0 | 67,427 | 8.9 | 37,930 | 5.0 | ||||||||||||||||||||
Village Bank | 108,221 | 9.2 | 58,817 | 5.0 | 97,684 | 9.4 | 51,753 | 5.0 | ||||||||||||||||||||
Beverly Bank | 76,708 | 8.4 | 45,757 | 5.0 | 71,197 | 9.3 | 38,304 | 5.0 | ||||||||||||||||||||
Town Bank | 153,902 | 10.3 | 74,452 | 5.0 | 125,716 | 10.1 | 62,283 | 5.0 | ||||||||||||||||||||
Wheaton Bank | 96,799 | 8.1 | 59,482 | 5.0 | 70,632 | 8.8 | 40,152 | 5.0 | ||||||||||||||||||||
State Bank of the Lakes | 76,609 | 8.3 | 46,001 | 5.0 | 69,176 | 8.4 | 41,382 | 5.0 | ||||||||||||||||||||
Old Plank Trail Bank | 100,506 | 8.5 | 59,383 | 5.0 | 96,689 | 8.4 | 57,717 | 5.0 | ||||||||||||||||||||
St. Charles Bank | 75,348 | 9.4 | 39,942 | 5.0 | 67,588 | 9.8 | 34,504 | 5.0 | ||||||||||||||||||||
Wintrust’s mortgage banking division and broker/dealer subsidiary are also required to maintain minimum net worth capital requirements with various governmental agencies. The mortgage banking division’s net worth requirements are governed by the Department of Housing and Urban Development and the broker/dealer’s net worth requirements are governed by the SEC. As of December 31, 2015, these business units met their minimum net worth capital requirements.
(19) Commitments and Contingencies
The Company has outstanding, at any time, a number of commitments to extend credit. These commitments include revolving home equity line and other credit agreements, term loan commitments and standby and commercial letters of credit. Standby and commercial letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. Standby letters of credit are contingent upon the failure of the customer to perform according to the terms of the underlying contract with the third party, while commercial letters of credit are issued specifically to facilitate commerce and typically result in the commitment being drawn on when the underlying transaction is consummated between the customer and the third party.
These commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the Consolidated Statements of Condition. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company uses the same credit policies in making commitments as it does for on-balance sheet instruments. Commitments to extend commercial, commercial real estate and construction loans totaled $3.7 billion and $3.1 billion as of December 31, 2015 and 2014, respectively, and unused home equity lines totaled $855.1 million and $744.3 million as of December 31, 2015 and 2014, respectively. Standby and commercial letters of credit totaled $176.1 million at December 31, 2015 and $175.7 million at December 31, 2014.
In addition, at December 31, 2015 and 2014, the Company had approximately $473.4 million and $427.4 million, respectively, in commitments to fund residential mortgage loans to be sold into the secondary market. These lending commitments are also considered derivative instruments. The Company also enters into forward contracts for the future delivery of residential mortgage loans at specified interest rates to reduce the interest rate risk associated with commitments to fund loans as well as mortgage loans held-for-sale. These forward contracts are also considered derivative instruments and had contractual amounts of approximately $753.9 million at December 31, 2015 and $575.4 million at December 31, 2014. See Note 20 for further discussion on derivative instruments.
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. 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.
147 | ||
The Company sold approximately $4.0 billion of mortgage loans in 2015 and $3.2 billion in 2014. The liability for estimated losses on repurchase and indemnification claims for residential mortgage loans previously sold to investors was $4.0 million and $3.1 million at December 31, 2015 and 2014, respectively, and was included in other liabilities on the Consolidated Statements of Condition. Losses charged against the liability were $1.1 million in 2015 as compared to $435,000 in 2014. These losses relate to mortgages which experienced early payment and other defaults meeting certain representation and warranty recourse requirements.
The Company utilizes an out-sourced securities clearing platform and has agreed to indemnify the clearing broker of WHI for losses that it may sustain from the customer accounts introduced by WHI. As of December 31, 2015, the total amount of customer balances maintained by the clearing broker and subject to indemnification was approximately $26.7 million. 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.
In the ordinary course of business, there are legal proceedings pending against the Company and its subsidiaries. Management does not believe that a material loss related to these matters is reasonably possible.
(20) Derivative Financial Instruments
The Company primarily enters into derivative financial instruments as part of its strategy to manage its exposure to changes in interest rates. Derivative instruments represent contracts between parties that result in one party delivering cash to the other party based on a notional amount and an underlying term (such as a rate, security price or price index) as specified in the contract. The amount of cash delivered from one party to the other is determined based on the interaction of the notional amount of the contract with the underlying term. Derivatives are also implicit in certain contracts and commitments.
The derivative financial instruments currently used by the Company to manage its exposure to interest rate risk include: (1) interest rate swaps and caps to manage the interest rate risk of certain fixed and variable rate assets and variable rate liabilities; (2) interest rate lock commitments provided to customers to fund certain mortgage loans to be sold into the secondary market; (3) forward commitments for the future delivery of such mortgage loans to protect the Company from adverse changes in interest rates and corresponding changes in the value of mortgage loans held-for-sale; and (4) covered call options to economically hedge specific investment securities and receive fee income effectively enhancing the overall yield on such securities to compensate for net interest margin compression. The Company also enters into derivatives (typically interest rate swaps) with certain qualified borrowers to facilitate the borrowers’ risk management strategies and concurrently enters into mirror-image derivatives with a third party counterparty, effectively making a market in the derivatives for such borrowers. Additionally, the Company enters into foreign currency contracts to manage foreign exchange risk associated with certain foreign currency denominated assets.
The Company has purchased interest rate cap derivatives to hedge or manage its own risk exposures. Certain interest rate cap derivatives have been designated as cash flow hedge derivatives of the variable cash outflows associated with interest expense on the Company’s junior subordinated debentures and certain deposits. Other cap derivatives are not designated for hedge accounting but are economic hedges of the Company's overall portfolio, therefore any mark to market changes in the value of these caps are recognized in earnings.
Below is a summary of the interest rate cap derivatives held by the Company as of December 31, 2015:
(Dollars in thousands) | ||||||||
Notional | Accounting | Fair Value as of | ||||||
Effective Date | Maturity Date | Amount | Treatment | December 31, 2015 | ||||
May 3, 2012 | May 3, 2016 | $ | 215,000 | Non-Hedge Designated | $ | — | ||
August 29, 2012 | August 29, 2016 | 216,500 | Cash Flow Hedging | 3 | ||||
February 22, 2013 | August 22, 2016 | 56,500 | Non-Hedge Designated | 2 | ||||
February 22, 2013 | August 22, 2016 | 43,500 | Cash Flow Hedging | 1 | ||||
March 21, 2013 | March 21, 2017 | 100,000 | Non-Hedge Designated | 80 | ||||
May 16, 2013 | November 16, 2016 | 75,000 | Non-Hedge Designated | 14 | ||||
September 15, 2013 | September 15, 2017 | 50,000 | Cash Flow Hedging | 128 | ||||
September 30, 2013 | September 30, 2017 | 40,000 | Cash Flow Hedging | 110 | ||||
$ | 796,500 | $ | 338 | |||||
The Company recognizes derivative financial instruments in the consolidated financial statements at fair value regardless of the purpose or intent for holding the instrument. The Company records derivative assets and derivative liabilities on the Consolidated Statements of Condition within accrued interest receivable and other assets and accrued interest payable and other liabilities,
148 | ||
respectively. Changes in the fair value of derivative financial instruments are either recognized in income or in shareholders’ equity as a component of other comprehensive income depending on whether the derivative financial instrument qualifies for hedge accounting and, if so, whether it qualifies as a fair value hedge or cash flow hedge. Generally, changes in fair values of derivatives accounted for as fair value hedges are recorded in income in the same period and in the same income statement line as changes in the fair values of the hedged items that relate to the hedged risk(s). Changes in fair values of derivative financial instruments accounted for as cash flow hedges, to the extent they are effective hedges, are recorded as a component of other comprehensive income, net of deferred taxes, and reclassified to earnings when the hedged transaction affects earnings. Changes in fair values of derivative financial instruments not designated in a hedging relationship pursuant to ASC 815, including changes in fair value related to the ineffective portion of cash flow hedges, are reported in non-interest income during the period of the change. Derivative financial instruments are valued by a third party and are corroborated by comparison with valuations provided by the respective counterparties. Fair values of certain mortgage banking derivatives (interest rate lock commitments and forward commitments to sell mortgage loans) are estimated based on changes in mortgage interest rates from the date of the loan commitment. The fair value of foreign currency derivatives is computed based on changes in foreign currency rates stated in the contract compared to those prevailing at the measurement date.
The table below presents the fair value of the Company’s derivative financial instruments as of December 31, 2015 and December 31, 2014:
Derivative Assets | Derivative Liabilities | ||||||||||||||||
Fair Value | Fair Value | ||||||||||||||||
(Dollars in thousands) | December 31, 2015 | December 31, 2014 | December 31, 2015 | December 31, 2014 | |||||||||||||
Derivatives designated as hedging instruments under ASC 815: | |||||||||||||||||
Interest rate derivatives designated as Cash Flow Hedges | $ | 242 | $ | 1,390 | $ | 846 | $ | 1,994 | |||||||||
Interest rate derivatives designated as Fair Value Hedges | 27 | 52 | 143 | — | |||||||||||||
Total derivatives designated as hedging instruments under ASC 815 | $ | 269 | $ | 1,442 | $ | 989 | $ | 1,994 | |||||||||
Derivatives not designated as hedging instruments under ASC 815: | |||||||||||||||||
Interest rate derivatives | $ | 42,510 | $ | 36,399 | $ | 41,469 | $ | 34,927 | |||||||||
Interest rate lock commitments | 7,401 | 10,028 | 171 | 20 | |||||||||||||
Forward commitments to sell mortgage loans | 745 | 23 | 2,275 | 4,239 | |||||||||||||
Foreign exchange contracts | 373 | 72 | 115 | — | |||||||||||||
Total derivatives not designated as hedging instruments under ASC 815 | $ | 51,029 | $ | 46,522 | $ | 44,030 | $ | 39,186 | |||||||||
Total Derivatives | $ | 51,298 | $ | 47,964 | $ | 45,019 | $ | 41,180 | |||||||||
Cash Flow Hedges of Interest Rate Risk
The Company’s objectives in using interest rate derivatives are to add stability to net interest income and to manage its exposure to interest rate movements. To accomplish these objectives, the Company primarily uses interest rate swaps and interest rate caps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without the exchange of the underlying notional amount. Interest rate caps designated as cash flow hedges involve the receipt of payments at the end of each period in which the interest rate specified in the contract exceeds the agreed upon strike price.
During the first quarter of 2014, the Company designated two existing interest rate cap derivatives as cash flow hedges of variable rate deposits. The cap derivatives had notional amounts of $216.5 million and $43.5 million, respectively, both maturing in August 2016. Additionally, as of December 31, 2015, the Company had two interest rate swaps and two interest rate caps designated as hedges of the variable cash outflows associated with interest expense on the Company’s junior subordinated debentures. The effective portion of changes in the fair value of these cash flow hedges is recorded in accumulated other comprehensive income and is subsequently reclassified to interest expense as interest payments are made on the Company’s variable rate junior subordinated debentures. The changes in fair value (net of tax) are separately disclosed in the Consolidated Statements of Comprehensive Income. The ineffective portion of the change in fair value of these derivatives is recognized directly in earnings; however, no hedge ineffectiveness was recognized during the years ended December 31, 2015 or December 31, 2014. The Company uses the hypothetical derivative method to assess and measure hedge effectiveness.
149 | ||
The table below provides details on each of these cash flow hedges as of December 31, 2015:
(Dollars in thousands) | December 31, 2015 | |||||||
Maturity Date | Notional Amount | Fair Value Asset (Liability) | ||||||
Interest Rate Swaps: | ||||||||
September 2016 | $ | 50,000 | $ | (548 | ) | |||
October 2016 | 25,000 | (298 | ) | |||||
Total Interest Rate Swaps | $ | 75,000 | $ | (846 | ) | |||
Interest Rate Caps: | ||||||||
August 2016 | $ | 43,500 | $ | 1 | ||||
August 2016 | 216,500 | 3 | ||||||
September 2017 | 50,000 | 128 | ||||||
September 2017 | 40,000 | 110 | ||||||
Total Interest Rate Caps | $ | 350,000 | $ | 242 | ||||
Total Cash Flow Hedges | $ | 425,000 | $ | (604 | ) | |||
A rollforward of the amounts in accumulated other comprehensive loss related to interest rate derivatives designated as cash flow hedges follows:
December 31, | ||||||||
(Dollars in thousands) | 2015 | 2014 | ||||||
Unrealized loss at beginning of period | $ | (4,062 | ) | $ | (3,971 | ) | ||
Amount reclassified from accumulated other comprehensive income to interest expense on deposits and junior subordinated debentures | 2,082 | 1,974 | ||||||
Amount of loss recognized in other comprehensive income | (1,549 | ) | (2,065 | ) | ||||
Unrealized loss at end of period | $ | (3,529 | ) | $ | (4,062 | ) | ||
As of December 31, 2015, the Company estimates that during the next twelve months, $2.6 million will be reclassified from accumulated other comprehensive loss as an increase to interest expense.
Fair Value Hedges of Interest Rate Risk
Interest rate swaps designated as fair value hedges involve the payment of fixed amounts to a counterparty in exchange for the Company receiving variable payments over the life of the agreements without the exchange of the underlying notional amount. As of December 31, 2015, the Company has four interest rate swaps with an aggregate notional amount of $16.4 million that were designated as fair value hedges associated with fixed rate commercial franchise loans.
For derivatives designated and that qualify as fair value hedges, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in earnings. The Company includes the gain or loss on the hedged item in the same line item as the offsetting loss or gain on the related derivatives. The Company recognized a net loss of $16,000 and $5,000 in other income related to hedge ineffectiveness for the years ended 2015 and 2014, respectively.
On June 1, 2013, the Company de-designated a $96.5 million cap which was previously designated as a fair value hedge of interest rate risk associated with an embedded cap in one of the Company’s floating rate loans. The hedged loan was restructured which resulted in the interest rate cap no longer qualifying as an effective fair value hedge. As such, the interest rate cap derivative is no longer accounted for under hedge accounting and all changes in value subsequent to June 1, 2013 are recorded in earnings. Additionally, the Company recorded amortization of the basis in the previously hedged item as a reduction to interest income of $172,000 for both of the years ended 2015 and 2014, respectively.
150 | ||
The following table presents the gain/(loss) and hedge ineffectiveness recognized on derivative instruments and the related hedged items that are designated as a fair value hedge accounting relationship as of December 31, 2015 and 2014:
(Dollars in thousands) Derivatives in Fair Value Hedging Relationships | Location of Gain or (Loss) Recognized in Income on Derivative | Amount of Gain or (Loss) Recognized in Income on Derivative Year Ended December 31, | Amount of Gain or (Loss) Recognized in Income on Hedged Item Year Ended December 31, | Income Statement Gain/ (Loss) due to Hedge Ineffectiveness Year Ended December 31, | ||||||||||||||||||
2015 | 2014 | 2015 | 2014 | 2015 | 2014 | |||||||||||||||||
Interest rate swaps | Trading (losses)/gains, net | $ | (168 | ) | (53 | ) | $ | 152 | 48 | $ | (16 | ) | (5 | ) | ||||||||
Non-Designated Hedges
The Company does not use derivatives for speculative purposes. Derivatives not designated as hedges are used to manage the Company’s exposure to interest rate movements and other identified risks but do not meet the strict hedge accounting requirements of ASC 815. Changes in the fair value of derivatives not designated in hedging relationships are recorded directly in earnings.
Interest Rate Derivatives—The Company has interest rate derivatives, including swaps and option products, resulting from a service the Company provides to certain qualified borrowers. The Company’s banking subsidiaries execute certain derivative products (typically interest rate swaps) directly with qualified commercial borrowers to facilitate their respective risk management strategies. For example, these arrangements allow the Company’s commercial borrowers to effectively convert a variable rate loan to a fixed rate. In order to minimize the Company’s exposure on these transactions, the Company simultaneously executes offsetting derivatives with third parties. In most cases, the offsetting derivatives have mirror-image terms, which result in the positions’ changes in fair value substantially offsetting through earnings each period. However, to the extent that the derivatives are not a mirror-image and because of differences in counterparty credit risk, changes in fair value will not completely offset resulting in some earnings impact each period. Changes in the fair value of these derivatives are included in other non-interest income. At December 31, 2015, the Company had interest rate derivative transactions with an aggregate notional amount of approximately $3.4 billion (all interest rate swaps and caps with customers and third parties) related to this program. These interest rate derivatives had maturity dates ranging from January 2016 to February 2045.
Mortgage Banking Derivatives—These derivatives include interest rate lock commitments provided to customers to fund certain mortgage loans to be sold into the secondary market and forward commitments for the future delivery of such loans. It is the Company’s practice to enter into forward commitments for the future delivery of a portion of our residential mortgage loan production when interest rate lock commitments are entered into in order to economically hedge the effect of future changes in interest rates on its commitments to fund the loans as well as on its portfolio of mortgage loans held-for-sale. The Company’s mortgage banking derivatives have not been designated as being in hedge relationships. At December 31, 2015, the Company had forward commitments to sell mortgage loans with an aggregate notional amount of approximately $753.9 million and interest rate lock commitments with an aggregate notional amount of approximately $326.7 million. Additionally, the Company’s total mortgage loans held-for-sale at December 31, 2015 was $388.0 million. The fair values of these derivatives were estimated based on changes in mortgage rates from the dates of the commitments. Changes in the fair value of these mortgage banking derivatives are included in mortgage banking revenue.
Foreign Currency Derivatives—These derivatives include foreign currency contracts used to manage the foreign exchange risk associated with foreign currency denominated assets and transactions. Foreign currency contracts, which include spot and forward contracts, represent agreements to exchange the currency of one country for the currency of another country at an agreed-upon price on an agreed-upon settlement date. As a result of fluctuations in foreign currencies, the U.S. dollar-equivalent value of the foreign currency denominated assets or forecasted transactions increase or decrease. Gains or losses on the derivative instruments related to these foreign currency denominated assets or forecasted transactions are expected to substantially offset this variability. As of December 31, 2015 the Company held foreign currency derivatives with an aggregate notional amount of approximately $22.0 million.
Other Derivatives—Periodically, the Company will sell options to a bank or dealer for the right to purchase certain securities held within the banks’ investment portfolios (covered call options). These option transactions are designed primarily to mitigate overall interest rate risk and to increase the total return associated with the investment securities portfolio. These options do not qualify as hedges pursuant to ASC 815, and, accordingly, changes in fair value of these contracts are recognized as other non-interest income. There were no covered call options outstanding as of December 31, 2015 or December 31, 2014.
As discussed above, the Company has entered into interest rate cap derivatives to protect the Company in a rising rate environment against increased margin compression due to the repricing of variable rate liabilities and lack of repricing of fixed rate loans and/
151 | ||
or securities. As of December 31, 2015, the Company held four interest rate cap derivative contracts, which are not designated in hedge relationships, have an aggregate notional value of $446.5 million.
Amounts included in the Consolidated Statements of Income related to derivative instruments not designated in hedge relationships were as follows:
(Dollars in thousands) | December 31, | |||||||||
Derivative | Location in income statement | 2015 | 2014 | |||||||
Interest rate swaps and caps | Trading (losses) gains, net | $ | (454 | ) | $ | (1,675 | ) | |||
Mortgage banking derivatives | Mortgage banking revenue | (299 | ) | (2,012 | ) | |||||
Covered call options | Fees from covered call options | 15,364 | 7,859 | |||||||
Foreign exchange contracts | Trading (losses) gains, net | 186 | 68 | |||||||
Credit Risk
Derivative instruments have inherent risks, primarily market risk and credit risk. Market risk is associated with changes in interest rates and credit risk relates to the risk that the counterparty will fail to perform according to the terms of the agreement. The amounts potentially subject to market and credit risks are the streams of interest payments under the contracts and the market value of the derivative instrument and not the notional principal amounts used to express the volume of the transactions. Market and credit risks are managed and monitored as part of the Company’s overall asset-liability management process, except that the credit risk related to derivatives entered into with certain qualified borrowers is managed through the Company’s standard loan underwriting process since these derivatives are secured through collateral provided by the loan agreements. Actual exposures are monitored against various types of credit limits established to contain risk within parameters. When deemed necessary, appropriate types and amounts of collateral are obtained to minimize credit exposure.
The Company has agreements with certain of its interest rate derivative counterparties that contain cross-default provisions, which provide that if the Company defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Company could also be declared in default on its derivative obligations. The Company also has agreements with certain of its derivative counterparties that contain a provision allowing the counterparty to terminate the derivative positions if the Company fails to maintain its status as a well or adequately capitalized institution, which would require the Company to settle its obligations under the agreements. As of December 31, 2015, the fair value of interest rate derivatives in a net liability position, which includes accrued interest related to these agreements, was $43.3 million. If the Company had breached any of these provisions at December 31, 2015 it would have been required to settle its obligations under the agreements at the termination value and would have been required to pay any additional amounts due in excess of amounts previously posted as collateral with the respective counterparty.
The Company is also exposed to the credit risk of its commercial borrowers who are counterparties to interest rate derivatives with the banks. This counterparty risk related to the commercial borrowers is managed and monitored through the banks’ standard underwriting process applicable to loans since these derivatives are secured through collateral provided by the loan agreement. The counterparty risk associated with the mirror-image swaps executed with third parties is monitored and managed in connection with the Company’s overall asset liability management process.
152 | ||
The Company records interest rate derivatives subject to master netting agreements at their gross value and does not offset derivative assets and liabilities on the Consolidated Statements of Condition. The tables below summarize the Company's interest rate derivatives and offsetting positions as of the dates shown.
Derivative Assets | Derivative Liabilities | ||||||||||||||
Fair Value | Fair Value | ||||||||||||||
(Dollars in thousands) | December 31, 2015 | December 31, 2014 | December 31, 2015 | December 31, 2014 | |||||||||||
Gross Amounts Recognized | $ | 42,779 | $ | 37,841 | $ | 42,458 | $ | 36,921 | |||||||
Less: Amounts offset in the Statements of Condition | — | — | — | — | |||||||||||
Net amount presented in the Statements of Condition | $ | 42,779 | $ | 37,841 | $ | 42,458 | $ | 36,921 | |||||||
Gross amounts not offset in the Statements of Condition | |||||||||||||||
Offsetting Derivative Positions | $ | (753 | ) | $ | (2,771 | ) | $ | (753 | ) | $ | (2,771 | ) | |||
Collateral Posted (1) | — | — | (41,705 | ) | (34,150 | ) | |||||||||
Net Credit Exposure | $ | 42,026 | $ | 35,070 | $ | — | $ | — | |||||||
(1) | As of December 31, 2015 and 2014, the Company posted collateral of $45.5 million and $43.8 million, respectively which resulted in excess collateral with its counterparties. For purposes of this disclosure, the amount of posted collateral is limited to the amount offsetting the derivative liability. |
(21) Fair Value of Assets and Liabilities
The Company measures, monitors and discloses certain of its assets and liabilities on a fair value basis. These financial assets and financial liabilities are measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the observability of the inputs used to determine fair value. These levels are:
• | Level 1 — unadjusted quoted prices in active markets for identical assets or liabilities. |
• | Level 2 — inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability or inputs that are derived principally from or corroborated by observable market data by correlation or other means. |
• | Level 3 — significant unobservable inputs that reflect the Company’s own assumptions that market participants would use in pricing the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. |
A financial instrument’s categorization within the above valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the assets or liabilities. Following is a description of the valuation methodologies used for the Company’s assets and liabilities measured at fair value on a recurring basis.
Available-for-sale and trading account securities—Fair values for available-for-sale and trading securities are typically based on prices obtained from independent pricing vendors. Securities measured with these valuation techniques are generally classified as Level 2 of the fair value hierarchy. Typically, standard inputs such as benchmark yields, reported trades for similar securities, issuer spreads, benchmark securities, bids, offers and reference data including market research publications are used to fair value a security. When these inputs are not available, broker/dealer quotes may be obtained by the vendor to determine the fair value of the security. We review the vendor’s pricing methodologies to determine if observable market information is being used, versus unobservable inputs. Fair value measurements using significant inputs that are unobservable in the market due to limited activity or a less liquid market are classified as Level 3 in the fair value hierarchy.
The Company’s Investment Operations Department is responsible for the valuation of Level 3 available-for-sale securities. The methodology and variables used as inputs in pricing Level 3 securities are derived from a combination of observable and unobservable inputs. The unobservable inputs are determined through internal assumptions that may vary from period to period due to external factors, such as market movement and credit rating adjustments.
At December 31, 2015, the Company classified $68.6 million of municipal securities as Level 3. These municipal securities are bond issues for various municipal government entities primarily located in the Chicago metropolitan area and southern Wisconsin
153 | ||
and are privately placed, non-rated bonds without CUSIP numbers. The Company’s methodology for pricing the non-rated bonds focuses on three distinct inputs: equivalent rating, yield and other pricing terms. To determine the rating for a given non-rated municipal bond, the Investment Operations Department references a publicly issued bond by the same issuer if available. A reduction is then applied to the rating obtained from the comparable bond, as the Company believes if liquidated, a non-rated bond would be valued less than a similar bond with a verifiable rating. The reduction applied by the Company is one complete rating grade (i.e. a “AA” rating for a comparable bond would be reduced to “A” for the Company’s valuation). In 2015, all of the ratings derived in the above process by Investment Operations were "BBB" or better, for both bonds with and without comparable bond proxies. The fair value measurement of municipal bonds is sensitive to the rating input, as a higher rating typically results in an increased valuation. The remaining pricing inputs used in the bond valuation are observable. Based on the rating determined in the above process, Investment Operations obtains a corresponding current market yield curve available to market participants. Other terms including coupon, maturity date, redemption price, number of coupon payments per year, and accrual method are obtained from the individual bond term sheets. Certain municipal bonds held by the Company at December 31, 2015 have a call date that has passed, and are now continuously callable. When valuing these bonds, the fair value is capped at par value as the Company assumes a market participant would not pay more than par for a continuously callable bond.
At December 31, 2015, the Company held $25.2 million of equity securities classified as Level 3. The securities in Level 3 are primarily comprised of auction rate preferred securities. The Company utilizes an independent pricing vendor to provide a fair market valuation of these securities. The vendor’s valuation methodology includes modeling the contractual cash flows of the underlying preferred securities and applying a discount to these cash flows by a credit spread derived from the market price of the securities underlying debt. At December 31, 2015, the vendor considered five different securities whose implied credit spreads were believed to provide a proxy for the Company’s auction rate preferred securities. The credit spreads ranged from 1.85%-2.12% with an average of 2.01% which was added to three-month LIBOR to be used as the discount rate input to the vendor’s model. Fair value of the securities is sensitive to the discount rate utilized as a higher discount rate results in a decreased fair value measurement.
Mortgage loans held-for-sale—The fair value of mortgage loans held-for-sale is determined by reference to investor price sheets for loan products with similar characteristics.
Mortgage servicing rights—Fair value for mortgage servicing rights is determined utilizing a third party valuation model which 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. At December 31, 2015, the Company classified $9.1 million of mortgage servicing rights as Level 3. The weighted average discount rate used as an input to value the pool of mortgage servicing rights at December 31, 2015 was 9.13% with discount rates applied ranging from 9%-13%. The higher the rate utilized to discount estimated future cash flows, the lower the fair value measurement. Additionally, fair value estimates include assumptions about prepayment speeds which ranged from 8%-26% or a weighted average prepayment speed of 11.77% used as an input to value the pool of mortgage servicing rights at December 31, 2015. Prepayment speeds are inversely related to the fair value of mortgage servicing rights as an increase in prepayment speeds results in a decreased valuation.
Derivative instruments—The Company’s derivative instruments include interest rate swaps and caps, commitments to fund mortgages for sale into the secondary market (interest rate locks), forward commitments to end investors for the sale of mortgage loans and foreign currency contracts. Interest rate swaps and caps are valued by a third party, using models that primarily use market observable inputs, such as yield curves, and are validated by comparison with valuations provided by the respective counterparties. The credit risk associated with derivative financial instruments that are subject to master netting agreements is measured on a net basis by counterparty portfolio. The fair value for mortgage-related derivatives is based on changes in mortgage rates from the date of the commitments. The fair value of foreign currency derivatives is computed based on change in foreign currency rates stated in the contract compared to those prevailing at the measurement date.
Nonqualified deferred compensation assets—The underlying assets relating to the nonqualified deferred compensation plan are included in a trust and primarily consist of non-exchange traded institutional funds which are priced based by an independent third party service.
154 | ||
The following tables present the balances of assets and liabilities measured at fair value on a recurring basis for the periods presented:
December 31, 2015 | ||||||||||||||||
(Dollars in thousands) | Total | Level 1 | Level 2 | Level 3 | ||||||||||||
Available-for-sale securities | ||||||||||||||||
U.S. Treasury | $ | 306,729 | $ | — | $ | 306,729 | $ | — | ||||||||
U.S. Government agencies | 70,236 | — | 70,236 | — | ||||||||||||
Municipal | 108,595 | — | 39,982 | 68,613 | ||||||||||||
Corporate notes | 81,545 | — | 81,545 | — | ||||||||||||
Mortgage-backed | 1,092,597 | — | 1,092,597 | — | ||||||||||||
Equity securities | 56,686 | — | 31,487 | 25,199 | ||||||||||||
Trading account securities | 448 | — | 448 | — | ||||||||||||
Mortgage loans held-for-sale | 388,038 | — | 388,038 | — | ||||||||||||
Mortgage servicing rights | 9,092 | — | — | 9,092 | ||||||||||||
Nonqualified deferred compensations assets | 8,517 | — | 8,517 | — | ||||||||||||
Derivative assets | 51,298 | — | 51,298 | — | ||||||||||||
Total | $ | 2,173,781 | $ | — | $ | 2,070,877 | $ | 102,904 | ||||||||
Derivative liabilities | $ | 45,019 | $ | — | $ | 45,019 | $ | — | ||||||||
December 31, 2014 | ||||||||||||||||
(Dollars in thousands) | Total | Level 1 | Level 2 | Level 3 | ||||||||||||
Available-for-sale securities | ||||||||||||||||
U.S. Treasury | $ | 381,805 | $ | — | $ | 381,805 | $ | — | ||||||||
U.S. Government agencies | 668,316 | — | 668,316 | — | ||||||||||||
Municipal | 238,529 | — | 179,576 | 58,953 | ||||||||||||
Corporate notes | 133,579 | — | 133,579 | — | ||||||||||||
Mortgage-backed | 318,710 | — | 318,710 | — | ||||||||||||
Equity securities | 51,139 | — | 27,428 | 23,711 | ||||||||||||
Trading account securities | 1,206 | — | 1,206 | — | ||||||||||||
Mortgage loans held-for-sale | 351,290 | — | 351,290 | — | ||||||||||||
Mortgage servicing rights | 8,435 | — | — | 8,435 | ||||||||||||
Nonqualified deferred compensations assets | 7,951 | — | 7,951 | — | ||||||||||||
Derivative assets | 47,964 | — | 47,964 | — | ||||||||||||
Total | $ | 2,208,924 | $ | — | $ | 2,117,825 | $ | 91,099 | ||||||||
Derivative liabilities | $ | 41,180 | $ | — | $ | 41,180 | $ | — | ||||||||
The aggregate remaining contractual principal balance outstanding as of December 31, 2015 and 2014 for mortgage loans held- for-sale measured at fair value under ASC 825 was $372.0 million and $327.1 million, respectively, while the aggregate fair value of mortgage loans held-for-sale was $388.0 million and $351.3 million, respectively, as shown in the above tables. There were no nonaccrual loans or loans past due greater than 90 days and still accruing in the mortgage loans held-for-sale portfolio measured at fair value as of December 31, 2015 and 2014.
155 | ||
The changes in Level 3 assets measured at fair value on a recurring basis during the year ended December 31, 2015 are summarized as follows:
Equity securities | Mortgage servicing rights | ||||||||||
(Dollars in thousands) | Municipal | ||||||||||
Balance at January 1, 2015 | $ | 58,953 | $ | 23,711 | $ | 8,435 | |||||
Total net (losses) gains included in: | |||||||||||
Net income (1) | — | — | 657 | ||||||||
Other comprehensive income | (1,198 | ) | 1,488 | — | |||||||
Purchases | 33,998 | — | — | ||||||||
Issuances | — | — | — | ||||||||
Sales | — | — | — | ||||||||
Settlements | (23,140 | ) | — | — | |||||||
Net transfers into/(out of) Level 3 | — | — | — | ||||||||
Balance at December 31, 2015 | $ | 68,613 | $ | 25,199 | $ | 9,092 | |||||
(1) | Changes in the balance of mortgage servicing rights are recorded as a component of mortgage banking revenue in non-interest income. |
The changes in Level 3 assets measured at fair value on a recurring basis during the year ended December 31, 2014 are summarized as follows:
(Dollars in thousands) | Municipal | Equity securities | Mortgage servicing rights | ||||||||
Balance at January 1, 2014 | $ | 36,386 | $ | 22,163 | $ | 8,946 | |||||
Total net (losses) gains included in: | |||||||||||
Net income (1) | — | — | (1,214 | ) | |||||||
Other comprehensive income | 202 | 1,548 | — | ||||||||
Purchases | 27,437 | — | 703 | ||||||||
Issuances | — | — | — | ||||||||
Sales | — | — | — | ||||||||
Settlements | (13,954 | ) | — | — | |||||||
Net transfers into/(out of) of Level 3 (2) | 8,882 | — | — | ||||||||
Balance at December 31, 2014 | $ | 58,953 | $ | 23,711 | $ | 8,435 | |||||
(1) | Changes in the balance of mortgage servicing rights are recorded as a component of mortgage banking revenue in non-interest income. |
(2) | Transfers into Level 3 relate to a reclassification of municipal bonds in the third quarter of 2014. |
156 | ||
Also, the Company may be required, from time to time, to measure certain other financial assets at fair value on a nonrecurring basis in accordance with GAAP. These adjustments to fair value usually result from impairment charges on individual assets. For assets measured at fair value on a nonrecurring basis that were still held in the balance sheet at the end of the period, the following table provides the carrying value of the related individual assets or portfolios at December 31, 2015.
December 31, 2015 | Twelve Months Ended December 31, 2015 Fair Value Losses Recognized, net | |||||||||||||||||||
(Dollars in thousands) | Total | Level 1 | Level 2 | Level 3 | ||||||||||||||||
Impaired loans-collateral based | $ | 65,626 | $ | — | $ | — | $ | 65,626 | $ | 14,571 | ||||||||||
Other real estate owned, including covered other real estate owned (1) | 65,328 | — | — | 65,328 | 7,154 | |||||||||||||||
Total | $ | 130,954 | $ | — | $ | — | $ | 130,954 | $ | 21,725 | ||||||||||
(1) | Fair value losses recognized, net on other real estate owned include valuation adjustments and charge-offs during the respective period. |
Impaired loans—A loan is considered to be impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due pursuant to the contractual terms of the loan agreement. A loan modified in a TDR is an impaired loan according to applicable accounting guidance. 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. Impaired loans are considered a fair value measurement where an allowance is established based on the fair value of collateral. Appraised values, which may require adjustments to market-based valuation inputs, are generally used on real estate collateral-dependent impaired loans.
The Company’s Managed Assets Division is primarily responsible for the valuation of Level 3 inputs of impaired loans. For more information on the Managed Assets Division review of impaired loans refer to Note 5 – Allowance for Loan Losses, Allowance for Losses on Lending-Related Commitments and Impaired Loans. At December 31, 2015, the Company had $101.3 million of impaired loans classified as Level 3. Of the $101.3 million of impaired loans, $65.6 million were measured at fair value based on the underlying collateral of the loan as shown in the table above. The remaining $35.7 million were valued based on discounted cash flows in accordance with ASC 310.
Other real estate owned (including covered 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 expense. Fair value is generally based on third party appraisals and internal estimates that are adjusted by a discount representing
the estimated cost of sale and is therefore considered a Level 3 valuation.
The Company’s Managed Assets Division is primarily responsible for the valuation of Level 3 inputs for non-covered other real estate owned and covered other real estate owned. At December 31, 2015, the Company had $65.3 million of other real estate owned classified as Level 3. The unobservable input applied to other real estate owned relates to the 10% reduction to the appraisal value representing the estimated cost of sale of the foreclosed property. A higher discount for the estimated cost of sale results in a decreased carrying value.
157 | ||
The valuation techniques and significant unobservable inputs used to measure both recurring and non-recurring Level 3 fair value measurements at December 31, 2015 were as follows:
(Dollars in thousands) | |||||||||||||
Fair Value | Valuation Methodology | Significant Unobservable Input | Range of Inputs | Weighted Average of Inputs | Impact to valuation from an increased or higher input value | ||||||||
Measured at fair value on a recurring basis: | |||||||||||||
Municipal Securities | $ | 68,613 | Bond pricing | Equivalent rating | BBB-AA+ | N/A | Increase | ||||||
Equity Securities | 25,199 | Discounted cash flows | Discount rate | 1.85%-2.12% | 2.01% | Decrease | |||||||
Mortgage Servicing Rights | 9,092 | Discounted cash flows | Discount rate | 9%-13% | 9.13% | Decrease | |||||||
Constant prepayment rate (CPR) | 8%-26% | 11.77% | Decrease | ||||||||||
Measured at fair value on a non-recurring basis: | |||||||||||||
Impaired loans—collateral based | 65,626 | Appraisal value | Appraisal adjustment - cost of sale | 10% | 10.00% | Decrease | |||||||
Other real estate owned, including covered other real-estate owned | 65,328 | Appraisal value | Appraisal adjustment - cost of sale | 10% | 10.00% | Decrease | |||||||
158 | ||
The Company is required under applicable accounting guidance to report the fair value of all financial instruments on the consolidated statements of condition, including those financial instruments carried at cost. The table below presents the carrying amounts and estimated fair values of the Company’s financial instruments as of the dates shown:
December 31, 2015 | December 31, 2014 | |||||||||||||||
(Dollars in thousands) | Carrying Value | Fair Value | Carrying Value | Fair Value | ||||||||||||
Financial Assets: | ||||||||||||||||
Cash and cash equivalents | $ | 275,795 | $ | 275,795 | $ | 230,707 | $ | 230,707 | ||||||||
Interest bearing deposits with banks | 607,782 | 607,782 | 998,437 | 998,437 | ||||||||||||
Available-for-sale securities | 1,716,388 | 1,716,388 | 1,792,078 | 1,792,078 | ||||||||||||
Held-to-maturity securities | 884,826 | 878,111 | — | — | ||||||||||||
Trading account securities | 448 | 448 | 1,206 | 1,206 | ||||||||||||
Federal Home Loan Bank and Federal Reserve Bank stock, at cost | 101,581 | 101,581 | 91,582 | 91,582 | ||||||||||||
Brokerage customer receivables | 27,631 | 27,631 | 24,221 | 24,221 | ||||||||||||
Mortgage loans held-for-sale, at fair value | 388,038 | 388,038 | 351,290 | 351,290 | ||||||||||||
Total loans | 17,266,790 | 18,106,829 | 14,636,107 | 15,346,266 | ||||||||||||
Mortgage servicing rights | 9,092 | 9,092 | 8,435 | 8,435 | ||||||||||||
Nonqualified deferred compensation assets | 8,517 | 8,517 | 7,951 | 7,951 | ||||||||||||
Derivative assets | 51,298 | 51,298 | 47,964 | 47,964 | ||||||||||||
FDIC indemnification asset | — | — | 11,846 | 11,846 | ||||||||||||
Accrued interest receivable and other | 193,092 | 193,092 | 169,156 | 169,156 | ||||||||||||
Total financial assets | $ | 21,531,278 | $ | 22,364,602 | $ | 18,370,980 | $ | 19,081,139 | ||||||||
Financial Liabilities | ||||||||||||||||
Non-maturity deposits | $ | 14,634,957 | $ | 14,634,957 | $ | 12,142,034 | $ | 12,142,034 | ||||||||
Deposits with stated maturities | 4,004,677 | 3,998,180 | 4,139,810 | 4,143,161 | ||||||||||||
Federal Home Loan Bank advances | 859,876 | 863,437 | 733,050 | 738,113 | ||||||||||||
Other borrowings | 266,019 | 266,019 | 196,465 | 197,883 | ||||||||||||
Subordinated notes | 140,000 | 140,302 | 140,000 | 143,639 | ||||||||||||
Junior subordinated debentures | 268,566 | 268,046 | 249,493 | 250,305 | ||||||||||||
Derivative liabilities | 45,019 | 45,019 | 41,180 | 41,180 | ||||||||||||
Accrued interest payable | 7,394 | 7,394 | 8,001 | 8,001 | ||||||||||||
Total financial liabilities | $ | 20,226,508 | $ | 20,223,354 | $ | 17,650,033 | $ | 17,664,316 | ||||||||
Not all of the financial instruments listed in the table above are subject to the disclosure provisions of ASC Topic 820, as certain assets and liabilities result in their carrying value approximating fair value. These include cash and cash equivalents, interest bearing deposits with banks, brokerage customer receivables, FHLB and FRB stock, FDIC indemnification asset, accrued interest receivable and accrued interest payable, and non-maturity deposits.
The following methods and assumptions were used by the Company in estimating fair values of financial instruments that were not previously disclosed.
Held-to-maturity securities. Held-to-maturity securities include U.S. Government-sponsored agency securities and municipal bonds issued by various municipal government entities primarily located in the Chicago metropolitan area and southern Wisconsin. Fair values for held-to-maturity securities are typically based on prices obtained from independent pricing vendors. In accordance with ASC 820, the Company has categorized held-to-maturity securities as a Level 2 fair value measurement.
Loans. Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are analyzed by type such as commercial, residential real estate, etc. Each category is further segmented by interest rate type (fixed and variable) and term. For variable-rate loans that reprice frequently, estimated fair values are based on carrying values. The fair value of residential loans is based on secondary market sources for securities backed by similar loans, adjusted for differences in loan characteristics. The fair value for other fixed rate loans is estimated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect credit and interest rate risks inherent in the loan. The primary impact of credit risk on the present value of the loan portfolio, however, was assessed through the use of the allowance for loan losses, which is believed to represent
159 | ||
the current fair value of probable incurred losses for purposes of the fair value calculation. In accordance with ASC 820, the Company has categorized loans as a Level 3 fair value measurement.
Deposits with stated maturities. The fair value of certificates of deposit is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently in effect for deposits of similar remaining maturities. In accordance with ASC 820, the Company has categorized deposits with stated maturities as a Level 3 fair value measurement.
Federal Home Loan Bank advances. The fair value of Federal Home Loan Bank advances is obtained from the Federal Home Loan Bank, which uses a discounted cash flow analysis based on current market rates of similar maturity debt securities to discount cash flows. In accordance with ASC 820, the Company has categorized Federal Home Loan Bank advances as a Level 3 fair value measurement.
Subordinated notes. The fair value of the subordinated notes is based on a market price obtained from an independent pricing
vendor. In accordance with ASC 820, the Company has categorized subordinated notes as a Level 2 fair value measurement.
Junior subordinated debentures. The fair value of the junior subordinated debentures is based on the discounted value of contractual cash flows. In accordance with ASC 820, the Company has categorized junior subordinated debentures as a Level 3 fair value measurement.
(22) Shareholders’ Equity
A summary of the Company’s common and preferred stock at December 31, 2015 and 2014 is as follows:
2015 | 2014 | |||||||
Common Stock: | ||||||||
Shares authorized | 100,000,000 | 100,000,000 | ||||||
Shares issued | 48,468,894 | 46,881,108 | ||||||
Shares outstanding | 48,383,279 | 46,805,055 | ||||||
Cash dividend per share | $ | 0.44 | $ | 0.40 | ||||
Preferred Stock: | ||||||||
Shares authorized | 20,000,000 | 20,000,000 | ||||||
Shares issued | 5,126,287 | 126,467 | ||||||
Shares outstanding | 5,126,287 | 126,467 | ||||||
The Company reserves shares of its authorized common stock specifically for the 2007 Plan, the ESPP and the Directors Deferred Fee and Stock Plan ("the DDFS"). The reserved shares and these plans are detailed in Note 17 - Stock Compensation Plans and Other Employee Benefit Plans. The Company also reserves its authorized common stock for conversion of convertible preferred stock and common stock warrants.
Tangible Equity Units
In December 2010, the Company sold 4.6 million 7.50% TEU's at a public offering price of $50.00 per unit. The Company received net proceeds of $222.7 million after deducting underwriting discounts and commissions and estimated offering expenses. Each tangible equity unit was composed of a prepaid common stock purchase contract and a junior subordinated amortizing note due December 15, 2013. The prepaid stock purchase contracts were recorded as surplus (a component of shareholders’ equity), net of issuance costs, and the junior subordinated amortizing notes were recorded as debt within other borrowings. Issuance costs associated with the debt component were recorded as a discount within other borrowings and were amortized over the term of the instrument to December 15, 2013 at which time they were paid off in full. The Company allocated the proceeds from the issuance of the TEU to equity and debt based on the relative fair values of the respective components of each unit.
160 | ||
The aggregate fair values assigned to each component of the TEU offering at the issuance date were as follows:
(Dollars and units in thousands, except unit price) | Equity Component | Debt Component | TEU Total | |||||||||
Units issued (1) | 4,600 | 4,600 | 4,600 | |||||||||
Unit price | $ | 40.271818 | $ | 9.728182 | $ | 50.00 | ||||||
Gross proceeds | 185,250 | 44,750 | 230,000 | |||||||||
Issuance costs, including discount | 5,934 | 1,419 | 7,353 | |||||||||
Net proceeds | $ | 179,316 | $ | 43,331 | $ | 222,647 | ||||||
Balance sheet impact | ||||||||||||
Other borrowings | — | 43,331 | 43,331 | |||||||||
Surplus | 179,316 | — | 179,316 | |||||||||
(1) | TEUs consisted of two components: one unit of the equity component and one unit of the debt component. |
The fair value of the debt component was determined using a discounted cash flow model using the following assumptions: (1) quarterly cash payments of 7.5%; (2) a maturity date of December 15, 2013; and (3) an assumed discount rate of 9.5%. The discount rate used for estimating the fair value was determined by obtaining yields for comparably-rated issuers trading in the market. The debt component was recorded at fair value, and the discount was amortized using the level yield method over the term of the instrument to the settlement date of December 15, 2013.
The fair value of the equity component was determined using Black-Scholes valuation models applied to the range of stock prices contemplated by the terms of the TEU and using the following assumptions: (1) risk-free interest rate of 0.95%; (2) expected stock price volatility in the range of 35%-45%; (3) dividend yield plus stock borrow cost of 0.85%; and (4) term of 3.02 years.
Each junior subordinated amortizing note, which had an initial principal amount of $9.728182, had a stated interest rate of 9.50% per annum, and had a scheduled final installment payment date of December 15, 2013. On each March 15, June 15, September 15 and December 15, the Company paid equal quarterly installments of $0.9375 on each amortizing note. The quarterly installment payable at March 15, 2011, however, was $0.989583. Each payment constituted a payment of interest and a partial repayment of principal. The issuance costs were amortized to interest expense using the effective-interest method.
Each prepaid common stock purchase contract automatically settled on December 15, 2013 and the Company delivered 1.3333 shares of its common stock based on the applicable market value at that time (the average of the volume weighted average price of Company common stock for the twenty (20) consecutive trading days ending on the third trading day immediately preceding December 15, 2013). Upon settlement, an amount equal to $1.00 per common share issued was reclassified from surplus to common stock.
Series A Preferred Stock
In August 2008, the Company issued and sold 50,000 shares of non-cumulative perpetual convertible preferred stock, Series A, liquidation preference $1,000 per share (the "Series A Preferred Stock") for $50 million in a private transaction. Dividends on the Series A Preferred Stock were payable quarterly in arrears at a rate of 8.00% per annum. The Series A Preferred Stock was convertible into common stock at the option of the holder at a conversion rate of 38.88 shares of common stock per share of Series A Preferred Stock. On July 19, 2013, pursuant to such terms, the holder of the Series A Preferred Stock elected to convert all 50,000 shares of Series A Preferred Stock into 1,944,000 shares of the Company's common stock, no par value.
Series C Preferred Stock
In March 2012, the Company issued and sold 126,500 shares of non-cumulative perpetual convertible preferred stock, Series C, liquidation preference $1,000 per share (the “Series C Preferred Stock”) for $126.5 million in a public offering. When, as and if declared, dividends on the Series C Preferred Stock are payable quarterly in arrears at a rate of 5.00% per annum. The Series C Preferred Stock is convertible into common stock at the option of the holder at a conversion rate of 24.3132 shares of common stock per share of Series C Preferred Stock subject to customary anti-dilution adjustments. In 2015, pursuant to such terms, 180 shares of the Series C Preferred Stock were converted at the option of the respective holders into 4,374 shares of the Company's common stock. In 2014, 10 shares of the Series C Preferred Stock were converted at the option of the respective holders into 244 shares of the Company's common stock. On and after April 15, 2017, the Company will have the right under certain circumstances to cause the Series C Preferred Stock to be converted into common stock if the closing price of the Company’s common stock exceeds a certain amount.
161 | ||
Series D Preferred Stock
In June 2015, the Company issued and sold 5,000,000 shares of fixed-to-floating non-cumulative perpetual preferred stock, Series D, liquidation preference $25 per share (the “Series D Preferred Stock”) for $125.0 million in a public offering. When, as and if declared, dividends on the Series D Preferred Stock are payable quarterly in arrears at a fixed rate of 6.50% per annum from the original issuance date to, but excluding, July 15, 2025, and from (and including) that date at a floating rate equal to three-month LIBOR plus a spread of 4.06% per annum.
Common Stock Warrants
Pursuant to the U.S. Department of the Treasury’s (the “U.S. Treasury”) Capital Purchase Program, on December 19, 2008, the Company issued to the U.S. Treasury a warrant to exercise 1,643,295 warrant shares of Wintrust common stock at a per share exercise price of $22.82, subject to customary anti-dilution adjustments, and with a term of 10 years. In February 2011, the U.S. Treasury sold all of its interest in the warrant issued to it in a secondary underwritten public offering. During 2015, certain holders of the interest in the warrant exercised 569,985 warrant shares, which resulted in 313,751 shares of common stock issued. At December 31, 2015, all remaining holders of the interest in the warrant were able to exercise 367,432 warrant shares.
Other
In July 2015, the Company issued 388,573 shares of its common stock in the acquisition of CFIS. In January 2015, the Company issued 422,122 shares of its common stock in the acquisition of Delavan. In May 2013, the Company issued 648,286 shares of its common stock in the acquisition of FNBI.
At the January 2016 Board of Directors meeting, a quarterly cash dividend of $0.12 per share ($0.48 on an annualized basis) was
declared. It was paid on February 25, 2016 to shareholders of record as of February 11, 2016.
162 | ||
The following tables summarize the components of other comprehensive income (loss), including the related income tax effects, for the years ending December 31, 2015, 2014 and 2013:
(In thousands) | Accumulated Unrealized Losses on Securities | Accumulated Unrealized Losses on Derivative Instruments | Accumulated Foreign Currency Translation Adjustments | Total Accumulated Other Comprehensive (Loss) Income | ||||||||||||
Balance at January 1, 2015 | $ | (9,533 | ) | $ | (2,517 | ) | $ | (25,282 | ) | $ | (37,332 | ) | ||||
Other comprehensive loss during the period, net of tax, before reclassification | (8,023 | ) | (941 | ) | (17,559 | ) | (26,523 | ) | ||||||||
Amount reclassified from accumulated other comprehensive income into net income, net of tax | (196 | ) | 1,265 | — | 1,069 | |||||||||||
Amount reclassified from accumulated other comprehensive income related to amortization of unrealized losses on investment securities transferred to held-to-maturity from available-for-sale | 78 | — | — | 78 | ||||||||||||
Net other comprehensive (loss) income during the period, net of tax | $ | (8,141 | ) | $ | 324 | $ | (17,559 | ) | $ | (25,376 | ) | |||||
Balance at December 31, 2015 | $ | (17,674 | ) | $ | (2,193 | ) | $ | (42,841 | ) | $ | (62,708 | ) | ||||
Balance at January 1, 2014 | $ | (53,665 | ) | $ | (2,462 | ) | $ | (6,909 | ) | $ | (63,036 | ) | ||||
Other comprehensive income (loss) during the period, net of tax, before reclassification | 43,828 | (1,244 | ) | (18,373 | ) | 24,211 | ||||||||||
Amount reclassified from accumulated other comprehensive income, net of tax | 304 | 1,189 | — | 1,493 | ||||||||||||
Net other comprehensive income (loss) during the period, net of tax | $ | 44,132 | $ | (55 | ) | $ | (18,373 | ) | $ | 25,704 | ||||||
Balance at December 31, 2014 | $ | (9,533 | ) | $ | (2,517 | ) | $ | (25,282 | ) | $ | (37,332 | ) | ||||
Balance at January 1, 2013 | $ | 6,710 | $ | (5,292 | ) | $ | 6,293 | $ | 7,711 | |||||||
Other comprehensive loss during the period, net of tax, before reclassification | (62,182 | ) | (251 | ) | (13,202 | ) | (75,635 | ) | ||||||||
Amount reclassified from accumulated other comprehensive income, net of tax | 1,807 | 3,081 | — | 4,888 | ||||||||||||
Net other comprehensive (loss) income during the period, net of tax | $ | (60,375 | ) | $ | 2,830 | $ | (13,202 | ) | $ | (70,747 | ) | |||||
Balance at December 31, 2013 | $ | (53,665 | ) | $ | (2,462 | ) | $ | (6,909 | ) | $ | (63,036 | ) | ||||
163 | ||
Amount Reclassified from Accumulated Other Comprehensive Income for the Year Ended, | ||||||||||
Details Regarding the Component of Accumulated Other Comprehensive Income | December 31, | Impacted Line on the Consolidated Statements of Income | ||||||||
2015 | 2014 | |||||||||
Accumulated unrealized losses on securities | ||||||||||
Gains (losses) included in net income | $ | 323 | $ | (504 | ) | Gains (losses) on available-for-sale securities, net | ||||
323 | (504 | ) | Income before taxes | |||||||
Tax effect | (127 | ) | 200 | Income tax expense | ||||||
Net of tax | $ | 196 | $ | (304 | ) | Net income | ||||
Accumulated unrealized losses on derivative instruments | ||||||||||
Amount reclassified to interest expense on deposits | $ | 252 | $ | — | Interest on deposits | |||||
Amount reclassified to interest expense on junior subordinated debentures | 1,830 | 1,974 | Interest on junior subordinated debentures | |||||||
(2,082 | ) | (1,974 | ) | Income before taxes | ||||||
Tax effect | 817 | 785 | Income tax expense | |||||||
Net of tax | $ | (1,265 | ) | $ | (1,189 | ) | Net income | |||
164 | ||
(23) Segment Information
The Company’s operations consist of three primary segments: community banking, specialty finance and wealth management.
The three reportable segments are strategic business units that are separately managed as they offer different products and services and have different marketing strategies. In addition, each segment’s customer base has varying characteristics and each segment has a different regulatory environment. While the Company’s management monitors each of the fifteen bank subsidiaries’ operations and profitability separately, these subsidiaries have been aggregated into one reportable operating segment due to the similarities in products and services, customer base, operations, profitability measures and economic characteristics.
For purposes of internal segment profitability, management allocates certain intersegment and parent company balances. Management allocates a portion of revenues to the specialty finance segment related to loans originated by the specialty finance segment and sold to the community banking segment. Similarly, for purposes of analyzing the contribution from the wealth management segment, management allocates a portion of the net interest income earned by the community banking segment on deposit balances of customers of the wealth management segment to the wealth management segment. See Note 10 — Deposits, for more information on these deposits. Finally, expenses incurred at the Wintrust parent company are allocated to each segment based on each segment's risk-weighted assets.
The segment financial information provided in the following tables has been derived from the internal profitability reporting system used by management to monitor and manage the financial performance of the Company. The accounting policies of the segments are substantially similar to those described in the Summary of Significant Accounting Policies in Note 1. The Company evaluates segment performance based on after-tax profit or loss and other appropriate profitability measures common to each segment.
The following is a summary of certain operating information for reportable segments:
(Dollars in thousands) | Community Banking | Specialty Finance | Wealth Management | Total Operating Segments | Intersegment Eliminations | Consolidated | ||||||||||||||||||
2015 | ||||||||||||||||||||||||
Net interest income | $ | 523,112 | $ | 85,258 | $ | 17,012 | $ | 625,382 | $ | 16,147 | $ | 641,529 | ||||||||||||
Provision for credit losses | 29,746 | 3,196 | — | 32,942 | — | 32,942 | ||||||||||||||||||
Non-interest income | 191,248 | 33,625 | 75,496 | 300,369 | (28,772 | ) | 271,597 | |||||||||||||||||
Non-interest expense | 522,199 | 47,245 | 71,600 | 641,044 | (12,625 | ) | 628,419 | |||||||||||||||||
Income tax expense | 60,488 | 26,352 | 8,176 | 95,016 | — | 95,016 | ||||||||||||||||||
Net income | $ | 101,927 | $ | 42,090 | $ | 12,732 | $ | 156,749 | $ | — | $ | 156,749 | ||||||||||||
Total assets at end of year | $ | 19,251,616 | $ | 3,116,631 | $ | 548,919 | $ | 22,917,166 | $ | — | $ | 22,917,166 | ||||||||||||
2014 | ||||||||||||||||||||||||
Net interest income | $ | 484,523 | $ | 82,415 | $ | 15,968 | $ | 582,906 | $ | 15,669 | $ | 598,575 | ||||||||||||
Provision for credit losses | 17,708 | 2,829 | — | 20,537 | — | 20,537 | ||||||||||||||||||
Non-interest income | 136,307 | 32,534 | 73,388 | 242,229 | (26,989 | ) | 215,240 | |||||||||||||||||
Non-interest expense | 444,416 | 44,320 | 69,431 | 558,167 | (11,320 | ) | 546,847 | |||||||||||||||||
Income tax expense | 60,033 | 27,167 | 7,833 | 95,033 | — | 95,033 | ||||||||||||||||||
Net income | $ | 98,673 | $ | 40,633 | $ | 12,092 | $ | 151,398 | $ | — | $ | 151,398 | ||||||||||||
Total assets at end of year | $ | 16,724,834 | $ | 2,766,017 | $ | 519,876 | $ | 20,010,727 | $ | — | $ | 20,010,727 | ||||||||||||
2013 | ||||||||||||||||||||||||
Net interest income | $ | 448,173 | $ | 73,903 | $ | 14,118 | $ | 536,194 | $ | 14,433 | $ | 550,627 | ||||||||||||
Provision for credit losses | 45,396 | 637 | — | 46,033 | — | 46,033 | ||||||||||||||||||
Non-interest income | 150,543 | 30,890 | 65,597 | 247,030 | (24,633 | ) | 222,397 | |||||||||||||||||
Non-interest expense | 409,780 | 40,529 | 62,442 | 512,751 | (10,200 | ) | 502,551 | |||||||||||||||||
Income tax expense | 55,161 | 25,508 | 6,561 | 87,230 | — | 87,230 | ||||||||||||||||||
Net income | $ | 88,379 | $ | 38,119 | $ | 10,712 | $ | 137,210 | $ | — | $ | 137,210 | ||||||||||||
Total assets at end of year | $ | 15,132,912 | $ | 2,470,832 | $ | 494,039 | $ | 18,097,783 | $ | — | $ | 18,097,783 | ||||||||||||
165 | ||
(24) Condensed Parent Company Financial Statements
Condensed parent company only financial statements of Wintrust follow:
Statements of Financial Condition
December 31, | ||||||||
(In thousands) | 2015 | 2014 | ||||||
Assets | ||||||||
Cash | $ | 116,889 | $ | 151,303 | ||||
Available-for-sale securities, at fair value | 12,243 | 10,725 | ||||||
Investment in and receivable from subsidiaries | 2,600,716 | 2,205,487 | ||||||
Loans, net of unearned income | 2,820 | 3,993 | ||||||
Less: Allowance for loan losses | — | 972 | ||||||
Net Loans | $ | 2,820 | $ | 3,021 | ||||
Goodwill | 8,371 | 8,371 | ||||||
Other assets | 149,935 | 119,739 | ||||||
Total assets | $ | 2,890,974 | $ | 2,498,646 | ||||
Liabilities and Shareholders’ Equity | ||||||||
Other liabilities | $ | 44,349 | $ | 20,509 | ||||
Subordinated notes | 140,000 | 140,000 | ||||||
Other borrowings | 85,785 | 18,822 | ||||||
Junior subordinated debentures | 268,566 | 249,493 | ||||||
Shareholders’ equity | 2,352,274 | 2,069,822 | ||||||
Total liabilities and shareholders’ equity | $ | 2,890,974 | $ | 2,498,646 | ||||
Statements of Income
Years Ended December 31, | ||||||||||||
(In thousands) | 2015 | 2014 | 2013 | |||||||||
Income | ||||||||||||
Dividends and other revenue from subsidiaries | $ | 47,639 | $ | 98,296 | $ | 114,241 | ||||||
(Losses) gains on available-for-sale securities, net | — | (33 | ) | 111 | ||||||||
Other income | 796 | 221 | 4,529 | |||||||||
Total income | $ | 48,435 | $ | 98,484 | $ | 118,881 | ||||||
Expenses | ||||||||||||
Interest expense | $ | 16,669 | $ | 12,553 | $ | 13,424 | ||||||
Salaries and employee benefits | 38,926 | 30,636 | 17,831 | |||||||||
Other expenses | 50,425 | 38,428 | 24,739 | |||||||||
Total expenses | $ | 106,020 | $ | 81,617 | $ | 55,994 | ||||||
(Loss) income before income taxes and equity in undistributed income of subsidiaries | $ | (57,585 | ) | $ | 16,867 | $ | 62,887 | |||||
Income tax benefit | 30,504 | 22,909 | 18,599 | |||||||||
(Loss) income before equity in undistributed net income of subsidiaries | $ | (27,081 | ) | $ | 39,776 | $ | 81,486 | |||||
Equity in undistributed net income of subsidiaries | 183,830 | 111,622 | 55,724 | |||||||||
Net income | $ | 156,749 | $ | 151,398 | $ | 137,210 | ||||||
166 | ||
Statements of Cash Flows
Years Ended December 31, | ||||||||||||
(In thousands) | 2015 | 2014 | 2013 | |||||||||
Operating Activities: | ||||||||||||
Net income | $ | 156,749 | $ | 151,398 | $ | 137,210 | ||||||
Adjustments to reconcile net income to net cash (used for) provided by operating activities | ||||||||||||
Provision for credit losses | (96 | ) | 945 | 1,765 | ||||||||
Losses (gains) on available-for-sale securities, net | — | 33 | (111 | ) | ||||||||
Depreciation and amortization | 8,182 | 7,756 | 3,744 | |||||||||
Deferred income tax (benefit) expense | (1,872 | ) | 2,753 | 1,217 | ||||||||
Stock-based compensation expense | 9,656 | 7,754 | 6,799 | |||||||||
Excess tax benefits from stock-based compensation arrangements | (278 | ) | (139 | ) | (112 | ) | ||||||
Increase in other assets | (45,287 | ) | (10,090 | ) | (3,882 | ) | ||||||
Increase in other liabilities | 21,840 | 7,114 | (4,517 | ) | ||||||||
Equity in undistributed net income of subsidiaries | (183,830 | ) | (111,622 | ) | (55,724 | ) | ||||||
Net Cash (Used for) Provided by Operating Activities | $ | (34,936 | ) | $ | 55,902 | $ | 86,389 | |||||
Investing Activities: | ||||||||||||
Capital contributions to subsidiaries, net | $ | (97,400 | ) | $ | (105,244 | ) | $ | (8,293 | ) | |||
Net cash paid for acquisitions, net | (51,060 | ) | — | — | ||||||||
Other investing activity, net | (24,908 | ) | (3,907 | ) | (21,206 | ) | ||||||
Net Cash Used for Investing Activities | $ | (173,368 | ) | $ | (109,151 | ) | $ | (29,499 | ) | |||
Financing Activities: | ||||||||||||
Increase (decrease) in notes payable and other borrowings, net | $ | 66,963 | $ | (517 | ) | $ | (17,860 | ) | ||||
Proceeds from the issuance of subordinated notes, net | — | 139,090 | — | |||||||||
Repayment of subordinated note | — | — | (15,000 | ) | ||||||||
Excess tax benefits from stock-based compensation arrangements | 278 | 139 | 112 | |||||||||
Net proceeds from issuance of Series D preferred stock | 120,842 | — | — | |||||||||
Issuance of common shares resulting from exercise of stock options, employee stock purchase plan and conversion of common stock warrants | 16,119 | 10,453 | 19,113 | |||||||||
Dividends paid | (29,888 | ) | (24,933 | ) | (13,893 | ) | ||||||
Common stock repurchases | (424 | ) | (549 | ) | (3,504 | ) | ||||||
Net Cash Provided by (Used For) Financing Activities | $ | 173,890 | $ | 123,683 | $ | (31,032 | ) | |||||
Net (Decrease) Increase in Cash and Cash Equivalents | $ | (34,414 | ) | $ | 70,434 | $ | 25,858 | |||||
Cash and Cash Equivalents at Beginning of Year | 151,303 | 80,869 | 55,011 | |||||||||
Cash and Cash Equivalents at End of Year | $ | 116,889 | $ | 151,303 | $ | 80,869 | ||||||
167 | ||
(25) Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per common share for 2015 , 2014 and 2013:
(In thousands, except per share data) | 2015 | 2014 | 2013 | |||||||||||
Net income | $ | 156,749 | $ | 151,398 | $ | 137,210 | ||||||||
Less: Preferred stock dividends and discount accretion | 10,869 | 6,323 | 8,395 | |||||||||||
Net income applicable to common shares—Basic | (A) | $ | 145,880 | $ | 145,075 | $ | 128,815 | |||||||
Add: Dividends on convertible preferred stock, if dilutive | 6,314 | 6,323 | 8,325 | |||||||||||
Net income applicable to common shares—Diluted | (B) | $ | 152,194 | $ | 151,398 | $ | 137,140 | |||||||
Weighted average common shares outstanding | (C) | 47,838 | 46,524 | 38,699 | ||||||||||
Effect of dilutive potential common shares: | ||||||||||||||
Common stock equivalents | 1,029 | 1,246 | 7,108 | |||||||||||
Convertible preferred stock, if dilutive | 3,070 | 3,075 | 4,141 | |||||||||||
Total dilutive potential common shares | 4,099 | 4,321 | 11,249 | |||||||||||
Weighted average common shares and effect of dilutive potential common shares | (D) | 51,937 | 50,845 | 49,948 | ||||||||||
Net income per common share: | ||||||||||||||
Basic | (A/C) | $ | 3.05 | $ | 3.12 | $ | 3.33 | |||||||
Diluted | (B/D) | 2.93 | 2.98 | 2.75 | ||||||||||
Potentially dilutive common shares can result from stock options, restricted stock unit awards, stock warrants, the Company’s convertible preferred stock, tangible equity unit shares and shares to be issued under the ESPP and the DDFS Plan, being treated as if they had been either exercised or issued, computed by application of the treasury stock method. While potentially dilutive common shares are typically included in the computation of diluted earnings per share, potentially dilutive common shares are excluded from this computation in periods in which the effect would reduce the loss per share or increase the income per share. For diluted earnings per share, net income applicable to common shares can be affected by the conversion of the Company’s convertible preferred stock. Where the effect of this conversion would reduce the loss per share or increase the income per share, net income applicable to common shares is not adjusted by the associated preferred dividends.
(26) Quarterly Financial Summary (Unaudited)
The following is a summary of quarterly financial information for the years ended December 31, 2015 and 2014:
2015 Quarters | 2014 Quarters | |||||||||||||||||||||||||||||||
(In thousands, except per share data) | First | Second | Third | Fourth | First | Second | Third | Fourth | ||||||||||||||||||||||||
Interest income | $ | 170,357 | 175,241 | 185,379 | 187,487 | $ | 161,326 | 166,550 | 170,676 | 172,715 | ||||||||||||||||||||||
Interest expense | 18,466 | 18,349 | 19,839 | 20,281 | 17,320 | 17,370 | 19,006 | 18,996 | ||||||||||||||||||||||||
Net interest income | 151,891 | 156,892 | 165,540 | 167,206 | 144,006 | 149,180 | 151,670 | 153,719 | ||||||||||||||||||||||||
Provision for credit losses | 6,079 | 9,482 | 8,322 | 9,059 | 1,880 | 6,660 | 5,864 | 6,133 | ||||||||||||||||||||||||
Net interest income after provision for credit losses | 145,812 | 147,410 | 157,218 | 158,147 | 142,126 | 142,520 | 145,806 | 147,586 | ||||||||||||||||||||||||
Non-interest income, excluding net securities gains (losses) | 64,017 | 77,037 | 65,051 | 65,169 | 45,562 | 54,438 | 58,105 | 57,639 | ||||||||||||||||||||||||
Net securities gains (losses) | 524 | (24 | ) | (98 | ) | (79 | ) | (33 | ) | (336 | ) | (153 | ) | 18 | ||||||||||||||||||
Non-interest expense | 147,318 | 154,297 | 159,974 | 166,829 | 131,315 | 133,591 | 138,500 | 143,441 | ||||||||||||||||||||||||
Income before taxes | 63,035 | 70,126 | 62,197 | 56,408 | 56,340 | 63,031 | 65,258 | 61,802 | ||||||||||||||||||||||||
Income tax expense | 23,983 | 26,295 | 23,842 | 20,896 | 21,840 | 24,490 | 25,034 | 23,669 | ||||||||||||||||||||||||
Net income | $ | 39,052 | 43,831 | 38,355 | 35,512 | $ | 34,500 | 38,541 | 40,224 | 38,133 | ||||||||||||||||||||||
Preferred stock dividends and discount accretion | 1,581 | 1,580 | 4,079 | 3,629 | 1,581 | 1,581 | 1,581 | 1,580 | ||||||||||||||||||||||||
Net income applicable to common shares | $ | 37,471 | 42,251 | 34,276 | 31,883 | $ | 32,919 | 36,960 | 38,643 | 36,553 | ||||||||||||||||||||||
Net income per common share: | ||||||||||||||||||||||||||||||||
Basic | $ | 0.79 | $ | 0.89 | $ | 0.71 | $ | 0.66 | $ | 0.71 | $ | 0.79 | $ | 0.83 | $ | 0.78 | ||||||||||||||||
Diluted | 0.76 | 0.85 | 0.69 | 0.64 | 0.68 | 0.76 | 0.79 | 0.75 | ||||||||||||||||||||||||
Cash dividends declared per common share | 0.11 | 0.11 | 0.11 | 0.11 | 0.10 | 0.10 | 0.10 | 0.10 | ||||||||||||||||||||||||
168 | ||
(27) Subsequent Events
On January 14, 2016, the Company announced the signing of a definitive agreement to acquire Generations Bancorp, Inc. ("Generations"). Generations is the parent company of Foundations Bank which operates one banking location in Pewaukee, Wisconsin. At September 30, 2015, Foundations Bank had approximately $125 million in assets, approximately $72 million in loans, and approximately $97 million in deposits.
On January 21, 2016, the Company acquired $15.0 million of trust preferred securities issued by Wintrust Capital Trust VIII from a third-party investor. The purchase effectively extinguished $15.0 million of junior subordinated debentures related to Wintrust Capital Trust VIII and resulted in a $4.3 million gain.
169 | ||
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
The Company made no changes in or had no disagreements with its independent accountants during the two most recent fiscal years or any subsequent interim period.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
As of the end of the period covered by this Annual Report on Form 10-K, management of the Company, under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as defined under Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”). Based upon, and as of the date of that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective, in ensuring the information relating to the Company (and its consolidated subsidiaries) required to be disclosed by the Company in the reports it files or submits under the Exchange Act was recorded, processed, summarized and reported in a timely manner.
Changes in Internal Control Over Financial Reporting
There were no changes in the Company’s internal control over financial reporting that occurred during the quarter ended December 31, 2015 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
170 | ||
Report on Management’s Assessment of Internal Control Over Financial Reporting
Wintrust Financial Corporation is responsible for the preparation, integrity, and fair presentation of the consolidated financial statements included in this Annual Report on Form 10-K. The consolidated financial statements and notes included in this Annual Report on Form 10-K have been prepared in conformity with generally accepted accounting principles in the United States and necessarily include some amounts that are based on management’s best estimates and judgments.
We, as management of Wintrust Financial Corporation, are responsible for establishing and maintaining adequate internal control over financial reporting that is designed to produce reliable financial statements in conformity with generally accepted accounting principles in the United States. The system of internal control over financial reporting as it relates to the financial statements is evaluated for effectiveness by management and tested for reliability through a program of internal audits. Actions are taken to correct potential deficiencies as they are identified. Any system of internal control, no matter how well designed, has inherent limitations, including the possibility that a control can be circumvented or overridden and misstatements due to error or fraud may occur and not be detected. Also, because of changes in conditions, internal control effectiveness may vary over time. Accordingly, even an effective system of internal control will provide only reasonable assurance with respect to financial statement preparation.
Management assessed the Company’s system of internal control over financial reporting as of December 31, 2015, in relation to criteria for the effective internal control over financial reporting as described in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (COSO Criteria). Based on this assessment, management concludes that, as of December 31, 2015, its system of internal control over financial reporting is effective and meets the criteria of the COSO Criteria. Ernst & Young LLP, the independent registered public accounting firm, that audited the Company's financial statements included in this Annual Report on Form 10-K, has issued an attestation report on management’s assessment of the Corporation’s internal control over financial reporting. Their report expresses an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2015.
/s/ Edward J. Wehmer | /s/ David L. Stoehr | |
Edward J. Wehmer | David L. Stoehr | |
President and | Executive Vice President & | |
Chief Executive Officer | Chief Financial Officer | |
Rosemont, Illinois
February 29, 2016
171 | ||
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of Wintrust Financial Corporation and subsidiaries
We have audited Wintrust Financial Corporation and subsidiaries’ internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). Wintrust Financial Corporation and subsidiaries’ management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Report on Management’s Assessment of Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.
We conducted our audit 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 effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Wintrust Financial Corporation and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the 2015 consolidated financial statements of condition of Wintrust Financial Corporation and subsidiaries as of December 31, 2015 and 2014, and the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2015 of Wintrust Financial Corporation and subsidiaries and our report dated February 29, 2016 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Chicago, Illinois
February 29, 2016
172 | ||
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required in response to this item will be contained in the Company’s Proxy Statement for its Annual Meeting of Shareholders to be held May 26, 2016 (the “Proxy Statement”) under the captions “Election of Directors,” “Executive Officers of the Company,” “Board of Directors’ Committees and Governance” and “Section 16(a) Beneficial Ownership Reporting Compliance” and is incorporated herein by reference.
The Company has adopted a Corporate Code of Ethics which complies with the rules of the SEC and the listing standards of the NASDAQ Global Select Market. The code applies to all of the Company’s directors, officers and employees and is posted on the Company’s website (www.wintrust.com), under the "Corporate Governance" section of the "Investor Relations" tab. The Company will post on its website any amendments to, or waivers from, its Corporate Code of Ethics as the code applies to its directors or executive officers.
ITEM 11. EXECUTIVE COMPENSATION
The information required in response to this item will be contained in the Company’s Proxy Statement under the captions “Executive Compensation,” “Director Compensation” "Compensation Committee Interlocks and Insider Participation" and “Compensation Committee Report” and is incorporated herein by reference. The information included under the heading “Compensation Committee Report” in the Proxy Statement shall not be deemed “soliciting” materials or to be “filed” with the SEC or subject to Regulation 14A or 14C, or to the liabilities of Section 18 of the Securities Exchange Act of 1934, as amended.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to security ownership of certain beneficial owners and management is incorporated by reference to the materials under the caption “Security Ownership of Certain Beneficial Owners, Directors and Management” that will be included in the Company’s Proxy Statement.
The following table summarizes information as of December 31, 2015, relating to the Company’s equity compensation plans pursuant to which common stock is authorized for issuance:
EQUITY COMPENSATION PLAN INFORMATION | ||||||||||
Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants and rights (a) | Weighted-average exercise price of outstanding options, warrants and rights (b) | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c) | |||||||
Equity compensation plans approved by security holders | ||||||||||
WTFC 1997 Stock Incentive Plan, as amended | 170,809 | $ | 25.51 | — | ||||||
WTFC 2007 Stock Incentive Plan | 1,979,858 | $ | 29.77 | — | ||||||
WTFC 2015 Stock Incentive Plan | 25,231 | $ | 19.18 | 5,594,550 | ||||||
WTFC Employee Stock Purchase Plan | — | — | 150,035 | |||||||
WTFC Directors Deferred Fee and Stock Plan | — | — | 427,842 | |||||||
2,175,898 | $ | 29.31 | 6,172,427 | |||||||
Equity compensation plans not approved by security holders (1) | ||||||||||
N/A | — | — | — | |||||||
Total | 2,175,898 | $ | 29.31 | 6,172,427 | ||||||
(1) | Excludes 16,364 shares of the Company's common stock issuable pursuant to the exercise of options granted under the plan of Delavan Bancshares, Inc. The weighted average exercise price of these options is $21.18. No additional awards will be made under this plan. |
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
The information required in response to this item will be contained in the Company’s Proxy Statement under the caption “Related Party Transactions” and is incorporated herein by reference.
173 | ||
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required in response to this item will be contained in the Company’s Proxy Statement under the caption “Audit and Non-Audit Fees Paid” and is incorporated herein by reference.
174 | ||
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Documents filed as part of this Annual Report on Form 10-K.
1 | Financial Statements |
The following financial statements of Wintrust Financial Corporation, incorporated herein by reference to Item 8, Financial Statements and Supplementary Data:
• | Consolidated Statements of Condition as of December 31, 2015 and 2014 |
• | Consolidated Statements of Income for the Years Ended December 31, 2015, 2014 and 2013 |
• | Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2015, 2014 and 2013 |
• | Consolidated Statements of Changes in Shareholders’ Equity for the Years Ended December 31, 2015, 2014 and 2013 |
• | Consolidated Statements of Cash Flows for the Years Ended December 31, 2015, 2014 and 2013 |
• | Notes to Consolidated Financial Statements |
• | Report of Independent Registered Public Accounting Firm |
2 | Financial Statement Schedules |
Financial statement schedules have been omitted as they are not applicable or the required information is shown in the Consolidated Financial Statements or notes thereto.
3 | Exhibits (Exhibits marked with a “*” denote management contracts or compensatory plans or arrangements) |
3.1 | Amended and Restated Articles of Incorporation of the Company, as amended (incorporated by reference to Exhibit 3.1 of the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2006, Exhibits 3.1 and 3.2 of the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 29, 2011 and Exhibit 3.1 of the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2012). |
3.2 | Amended and Restated Certificate of Designations of the Company filed on December 18, 2008 with the Secretary of State of the State of Illinois designating the preferences, limitations, voting powers and relative rights of the Series A Preferred Stock (incorporated by reference to Exhibit 3.2 of the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 24, 2008). |
3.3 | Certificate of Designations of the Company filed on March 15, 2012 with the Secretary of State of the State of Illinois designating the preferences, limitations, voting powers and relative rights of the Series C Preferred Stock (incorporated by reference to Exhibit 3.1 of the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on March 19, 2012). |
3.4 | Certificate of Designations of the Company filed on June 24, 2015 with the Secretary of State of the State of Illinois designating the preferences, limitations, voting powers and relative rights of the Series D Preferred Stock (incorporated by reference to Exhibit 3.1 of the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on June 25, 2015. |
3.5 | Amended and Restated By-laws of the Company, as amended (incorporated by reference to Exhibit 3.2 of the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on April 8, 2015). |
4.1 | Certain instruments defining the rights of the holders of long-term debt of the Company and certain of its subsidiaries, none of which authorize a total amount of indebtedness in excess of 10% of the total assets of the Company and its subsidiaries on a consolidated basis, have not been filed as Exhibits. The Company hereby agrees to furnish a copy of any of these agreements to the Securities and Exchange Commission upon request. |
4.2 | Warrant Agreement, dated as of February 8, 2011, between the Company and Wells Fargo Bank, N.A. as Warrant Agent (incorporated by reference to Exhibit 4.1 of the Company’s Registration Statement on Form 8-A filed with the Securities and Exchange Commission on February 9, 2011). |
4.3 | Form of Warrant (incorporated herein by reference to Exhibit 4.1 of the Company’s Registration Statement on Form 8-A filed with the Securities and Exchange Commission on February 9, 2011). |
175 | ||
4.4 | Junior Subordinated Indenture, dated December 10, 2010, between the Company and U.S. Bank National Association, as trustee (incorporated by reference to Exhibit 4.1 of the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 10, 2010). |
4.5 | Subordinated Indenture, dated June 13, 2014, between the Company and U.S. Bank National Association, as trustee (incorporated by reference to Exhibit 4.1 of the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on June 13, 2014). |
4.6 | First Supplemental Indenture, dated June 13, 2014 between the Company and U.S. Bank National Association, as trustee (incorporated by reference to Exhibit 4.2 of the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on June 13, 2014). |
4.7 | Form of 5.000% Subordinated Note due 2024 (incorporated by reference to Exhibit A in Exhibit 4.2 of the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on June 13, 2014). |
10.1 | Credit Agreement, dated as of December 15, 2014, among the Company, the lenders named therein, and Wells Fargo Bank, National Association, as administrative agent (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 19, 2014). |
10.2 | First Amendment to Credit Agreement, dated as of October 29, 2015, among the Company, the lenders named therein, and Wells Fargo Bank, National Association, as administrative agent. |
10.3 | Second Amendment to Credit Agreement, dated as of December 14, 2015, among the Company, the lenders named therein, and Wells Fargo Bank, National Association, as administrative agent. |
10.4 | Receivables Purchase Agreement, dated as of December 16, 2014, by and among First Insurance Funding of Canada Inc. and CIBC Mellon Trust Company, in its capacity as Trustee of PLAZA Trust (incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 19, 2014). |
10.5 | First Amending Agreement to the Receivables Purchase Agreement, dated December 15, 2015, by and among First Insurance Funding of Canada Inc. and CIBC Mellon Trust Company, in its capacity as Trustee of PLAZA Trust. |
10.6 | Performance Guarantee, made as of December 16, 2014, by the Company in favor of CIBC Mellon Trust Company, in its capacity as trustee of PLAZA Trust (incorporated by reference to Exhibit 10.3 of the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 19, 2014). |
10.7 | Junior Subordinated Indenture, dated as of August 2, 2005, between the Company and Wilmington Trust Company, as trustee (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on August 4, 2005). |
10.8 | Amended and Restated Trust Agreement, dated as of August 2, 2005, among the Company, as depositor, Wilmington Trust Company, as property trustee and Delaware trustee, and the Administrative Trustees listed therein (incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on August 4, 2005). |
10.9 | Guarantee Agreement, dated as of August 2, 2005, between the Company, as Guarantor, and Wilmington Trust Company, as trustee (incorporated by reference to Exhibit 10.3 of the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on August 4, 2005). |
10.10 | Indenture, dated as of September 1, 2006, between the Company and LaSalle Bank National Association, as trustee (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on September 6, 2006). |
10.11 | Amended and Restated Declaration of Trust, dated as of September 1, 2006, among the Company, as depositor, LaSalle Bank National Association, as institutional trustee, Christiana Bank & Trust Company, as Delaware trustee, and the Administrators listed therein (incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on September 6, 2006). |
10.12 | Guarantee Agreement, dated as of September 1, 2006, between the Company, as Guarantor, and LaSalle Bank National Association, as trustee (incorporated by reference to Exhibit 10.3 of the Company’s Current Report on Form 8- K filed with the Securities and Exchange Commission on September 6, 2006). |
176 | ||
10.13 | Amended and Restated Employment Agreement, dated December 19, 2008, between the Company and Edward J. Wehmer, President and Chief Executive Officer (incorporated by reference to Exhibit 10.4 of the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 24, 2008).* |
10.14 | Amended and Restated Employment Agreement, dated December 19, 2008, between the Company and David A. Dykstra, Senior Executive Vice President and Chief Operating Officer (incorporated by reference to Exhibit 10.5 of the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 24, 2008).* |
10.15 | Amended and Restated Employment Agreement, dated December 19, 2008, between the Company and Richard B. Murphy, Executive Vice President and Chief Credit Officer (incorporated by reference to Exhibit 10.7 of the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 24, 2008).* |
10.16 | Amended and Restated Employment Agreement, dated December 19, 2008, between the Company and David L. Stoehr, Executive Vice President and Chief Financial Officer (incorporated by reference to Exhibit 10.6 of the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 24, 2008).* | |
10.17 | Employment Agreement, dated August 30, 2011, between the Company and Lisa Reategui (incorporated by reference to Exhibit 10.18 of the Company's Annual Report on Form 10-K for the year ending December 31, 2011).* | |
10.18 | Employment Agreement, dated August 11, 2008, between the Company and Timothy Crane.* | |
10.19 | First Amendment to Employment Agreement, dated November 30, 2010, between the Company and Timothy Crane.* |
10.20 | Wintrust Financial Corporation 1997 Stock Incentive Plan (incorporated by reference to Appendix A of the Proxy Statement relating to the May 22, 1997 Annual Meeting of Shareholders of the Company).* |
10.21 | First Amendment to Wintrust Financial Corporation 1997 Stock Incentive Plan (incorporated by reference to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2000).* |
10.22 | Second Amendment to Wintrust Financial Corporation 1997 Stock Incentive Plan adopted by the Board of Directors on January 24, 2002 (incorporated by reference to Exhibit 99.3 of the Company’s Registration Statement on Form S-8 filed with the Securities and Exchange Commission on July 1, 2004).* |
10.23 | Third Amendment to Wintrust Financial Corporation 1997 Stock Incentive Plan adopted by the Board of Directors on May 27, 2004 (incorporated by reference to Exhibit 99.4 of the Company’s Registration Statement on Form S-8 filed with the Securities and Exchange Commission on July 1, 2004).* |
10.24 | Wintrust Financial Corporation 2007 Stock Incentive Plan, as amended (incorporated by reference to Exhibit 4.6 to the Company’s Registration Statement on Form S-8, filed with the Securities and Exchange Commission on November 8, 2011).* |
10.25 | Form of Nonqualified Stock Option Agreement under the Company’s 2007 Stock Incentive Plan (incorporated by reference to Exhibit 10.31 of the Company’s Annual Report on Form 10-K for the year ending December 31, 2006).* |
10.26 | Form of Restricted Stock Unit Award Agreement under the Company’s 2007 Stock Incentive Plan (incorporated by reference to Exhibit 10.32 of the Company’s Annual Report on Form 10-K for the year ending December 31, 2006).* |
10.27 | Form of Performance Share Unit Award - Stock Settled under the Company's 2007 Stock Incentive Plan (incorporated by reference to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2013).* |
10.28 | Form of Performance Share Unit Award - Cash Settled under the Company's 2007 Stock Incentive Plan (incorporated by reference to Exhibit 10.2 of the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2013).* |
10.29 | Form of Performance Cash Award under the Company's 2007 Stock Incentive Plan (incorporated by reference to Exhibit 10.3 of the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2013).* |
10.30 | Form of Performance Share Unit Award - Shares Settled - Deferral Option under the Company’s 2007 Stock Incentive Plan. |
10.31 | Form of Performance Share Unit Award - Cash Settled - Deferral Option under the Company’s 2007 Stock Incentive Plan. |
177 | ||
10.32 | Wintrust Financial Corporation Employee Stock Purchase Plan, as amended (incorporated by reference to Annex A of the Company's definitive Proxy Statement filed with the Securities and Exchange Commission on April 24, 2012).* |
10.33 | Wintrust Financial Corporation Directors Deferred Fee and Stock Plan (incorporated by reference to Appendix B of the Proxy Statement relating to the May 24, 2001 Annual Meeting of Shareholders of the Company).* |
10.34 | Wintrust Financial Corporation 2005 Directors Deferred Fee and Stock Plan, as amended and restated (incorporated by reference to Exhibit 99.1 of the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on July 29, 2014).* |
10.35 | Form of Cash Incentive and Retention Award Agreement under the Company’s 2008 Long-Term Cash and Incentive Retention Plan with no Minimum Payout (incorporated by reference to Exhibit 10.3 of the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2008).* |
10.36 | Form of Director Indemnification Agreement (incorporated by reference to Exhibit 10.2 of the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2009). | |
10.37 | Form of Officer Indemnification Agreement (incorporated by reference to Exhibit 10.3 of the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2009). | |
10.38 | Wintrust Financial Corporation 2015 Stock Incentive Plan (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on June 1, 2015). | |
12.1 | Computation of Ratio of Earnings to Fixed Charges. | |
12.2 | Computation of Ratio of Earnings to Fixed Charges and Preferred Stock Dividends. | |
21.1 | Subsidiaries of the Registrant. | |
23.1 | Consent of Independent Registered Public Accounting Firm. | |
31.1 | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2 | Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1 | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
101.INS | XBRL Instance Document (1) | |
101.SCH | XBRL Taxonomy Extension Schema Document | |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | |
(1) | Includes the following financial information included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015, formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Statements of Condition, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Changes in Shareholders’ Equity, (v) the Consolidated Statements of Cash Flows, and (vi) Notes to Consolidated Financial Statements. |
178 | ||
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
WINTRUST FINANCIAL CORPORATION (Registrant) | ||||||
February 29, 2016 | By: | /s/ EDWARD J. WEHMER | ||||
Edward J. Wehmer, President and | ||||||
Chief Executive Officer | ||||||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
/s/ PETER D. CRIST Peter D. Crist | Chairman of the Board of Directors | February 29, 2016 | ||
/s/ EDWARD J. WEHMER Edward J. Wehmer | President, Chief Executive Officer and Director (Principal Executive Officer) | February 29, 2016 | ||
/s/ DAVID L. STOEHR David L. Stoehr | Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) | February 29, 2016 | ||
/s/ BRUCE K. CROWTHER Bruce K. Crowther | Director | February 29, 2016 | ||
/s/ JOSEPH F. DAMICO Joseph F. Damico | Director | February 29, 2016 | ||
/s/ ZED S. FRANCIS, III Zed S. Francis, III | Director | February 29, 2016 | ||
/s/ MARLA F. GLABE Marla F. Glabe | Director | February 29, 2016 | ||
/s/ H. PATRICK HACKETT, JR. H. Patrick Hackett, Jr. | Director | February 29, 2016 | ||
/s/ SCOTT K. HEITMANN Scott K. Heitmann | Director | February 29, 2016 | ||
/s/ CHARLES H. JAMES III Charles H. James III | Director | February 29, 2016 | ||
/s/ ALBIN F. MOSCHNER Albin F. Moschner | Director | February 29, 2016 | ||
/s/ CHRISTOPHER J. PERRY Christopher J. Perry | Director | February 29, 2016 | ||
/s/ INGRID S. STAFFORD Ingrid S. Stafford | Director | February 29, 2016 | ||
/s/ GARY D. "JOE" SWEENEY Gary D. "Joe" Sweeney | Director | February 29, 2016 | ||
/s/ SHEILA G. TALTON Sheila G. Talton | Director | February 29, 2016 | ||
179 | ||