Regulatory Matters

The Company is a bank holding company that has elected to be treated by the FRB as a financial holding company for purposes of the Bank Holding Company Act of 1956 (as amended, 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 FRB, 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 FRB 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. In addition, under the Dodd-Frank Wall Street Reform and Consumer Protection 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.

In light of these requirements, the Company consistently monitors the capitalization of its banks, utilizing the ratios required by regulatory definition: 10.0%, 8.0%, 6.5% and 5.0% for each of 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. To maintain adequate capitalization in satisfaction of these required ratios, the Company from time to time makes subordinated loans to one or more of its subsidiary banks, with a corresponding intercompany subordinated note issued by such subsidiary bank to the Company on account of each such loan. Such subordinated indebtedness is included in the Company’s calculation of its subsidiary banks’ respective Tier 2 capital.

On April 29, 2016 the Company determined that the intercompany subordinated note agreements that the Company’s subsidiary national banks utilized to issue subordinated debt did not conform with the provisions of 12 CFR 5.47(f)(ii) and OCC Bulletin 2015-22, which were issued in early 2015. This ruling impacted four of the Company’s national bank subsidiaries: Beverly Bank & Trust Company, N.A. (“Beverly Bank”), Schaumburg Bank & Trust Company, N.A. (“Schaumburg Bank”), Barrington Bank & Trust Company, N.A. (“Barrington Bank”) and Old Plank Trail Community Bank, N.A. (“Old Plank Trail Bank”).

Accordingly, the Company recalculated the capitalization ratios of its affected subsidiary national banks to exclude subordinated debt that had been issued by such banks subsequent to January 1, 2015 from each bank’s respective Tier 2 capital. On April 29, 2016, each of these banks repaid to the Company 100% of their respective outstanding subordinated indebtedness, and the Company in turn infused corresponding amounts of capital surplus (Tier 1 capital) into the four banks as follows: (a) Beverly Bank - $13.0 million; (b) Schaumburg Bank - $10.3 million; (c) Barrington Bank - $5.0 million; and (d) Old Plank Trail Bank - $4.0 million. Following this effective substitution of Tier 1 capital for Tier 2 capital, the total capital to risk-weighted assets ratios of the four banks remained identical and each bank remains well capitalized.

In May 2016 the Company determined that certain intercompany subordinated note agreements that the Company’s Illinois-chartered banks utilized to issue subordinated debt did not qualify as Tier 2 capital due to a provision in the agreement which allowed the note holder to accelerate payment of principal. Accordingly, the subordinated notes issued after January 1, 2015 were not includable in Tier 2 capital and therefore the bank subsidiaries filed revised call reports for the periods affected. These filings impacted eight of the Company’s Illinois-chartered bank subsidiaries: Lake Forest Bank & Trust Company (“Lake Forest Bank”), Libertyville Bank & Trust Company (“Libertyville Bank”), Northbrook Bank & Trust Company (“Northbrook Bank”), St. Charles Bank & Trust Company (“St. Charles Bank”), State Bank of the Lakes, Village Bank & Trust (“Village Bank”), Wheaton Bank, and Wintrust Bank.

Accordingly, the Company recalculated the capitalization ratios of its affected Illinois-chartered banks to exclude subordinated debt that had been issued by such banks subsequent to January 1, 2015 from each bank’s respective Tier 2 capital. In May 2016, each of these banks issued replacement subordinated note agreements in a form that the Company is advised is sufficient to qualify as Tier 2 capital. Following this issuance of replacement subordinated note agreements, the total capital to risk-weighted assets ratios of the eight banks remained identical and each bank remains well capitalized.

After excluding the following outstanding amounts of subordinated debt from Tier 2 capital, the recalculated total capital to risk-weighted assets ratios for each bank were as follows:



	March 31,			December 31,			September 30,			June 30,			March 31,
(Dollars in thousands)	2016			2015			2015			2015			2015
Subordinated debt excluded from Tier 2 capital
Beverly Bank	$	13,000		$	13,000		$	11,000		$	11,000		$	1,000
Schaumburg Bank	8,500			8,500			3,500			3,500			3,500
Barrington Bank	5,000			—			—			—			—
Old Plank Trail Bank	4,000			—			—			—			—
Lake Forest Bank	10,000			10,000			10,000			14,000			14,000
Libertyville Bank	—			—			—			2,500			2,500
Northbrook Bank	12,500			6,500			6,500			7,500			7,500
St. Charles Bank	2,500			2,500			2,500			2,000			2,000
State Bank of the Lakes	3,500			3,500			3,500			3,500			2,500
Village Bank	2,500			2,500			2,500			7,000			7,000
Wheaton Bank	15,500			13,500			13,500			6,000			—
Wintrust Bank	17,000			13,000			13,000			13,000			6,000

Total capital (to risk-weighted assets) ⁽¹⁾
Beverly Bank	9.7		%	9.6		%	10.1		%	10.2		%	11.0		%
Schaumburg Bank	10.2			10.3			10.7			10.8			10.7
Barrington Bank	11.4			11.3			11.6			11.4			11.1
Old Plank Trail Bank	10.8			11.3			11.8			11.6			11.9
Lake Forest Bank	11.8			10.9			11.0			10.8			10.8
Libertyville Bank	11.7			11.5			11.2			11.3			11.0
Northbrook Bank	10.3			10.5			10.7			10.6			10.6
St. Charles Bank	11.1			10.9			10.9			10.8			10.8
State Bank of the Lakes	11.0			10.6			10.9			10.9			10.9
Village Bank	11.0			11.0			10.9			11.0			10.5
Wheaton Bank	10.2			10.1			10.4			10.6			11.5
Wintrust Bank	10.9			10.9			10.9			11.1			11.2


(1)	Note that the OCC-regulated bank subsidiaries' first quarter 2016 call reports did not require refiling as the determination to exclude the subordinated debt from the capitalization ratios as of March 31, 2016 was made prior to the filing deadline of those call reports.

The Company believes that all of its banks have effectively been consistently well capitalized at all times during 2015 and 2016. As a technical matter under these revised ratio calculations, however, Beverly was not considered to be well capitalized at December 31, 2015 or March 31, 2016. The Company considers this to be immaterial because of the amount of subordinated indebtedness that actually was held by Beverly as of both dates, respectively, notwithstanding the required recalculation to exclude subordinated indebtedness from Tier 2 capital. Nonetheless, because the Credit Agreement requires that the Company’s banks maintain certain minimum regulatory capital ratios which are higher than some of the adjusted capital ratios, the Company received waivers from the Required Lenders under the Credit Agreement, waiving any technical default that may have existed on these dates.