You
may not receive dividends on the common shares.
Holders of our common shares are only entitled to receive such
dividends as our board of directors may declare out of funds
legally available for such payments. On March 3, 2008, we
announced that our board of directors voted to suspend payment
of dividends on our common, preferred and trust preferred
securities. In addition, as a result of the written agreement
that we and Irwin Union Bank and Trust Company entered into
on October 10, 2008, with the Federal Reserve Bank of
Chicago and the Indiana Department of Financial Institutions, we
are not permitted to (1) declare or pay any dividend, or
(2) make any distributions of interest or principal on
subordinated debentures or trust preferred securities, without
the prior written approval of these regulators. As a result we
cannot declare a dividend on our common shares. Although we can
seek to obtain a waiver of this prohibition, there is no
certainty that the Federal Reserve Bank of Chicago and the
Indiana Department of Financial Institutions will grant such a
waiver. Therefore, we may not be able to resume payments of
dividends in the future.
The
issuance of additional series of our preferred shares could
adversely affect holders of our common shares which may
negatively impact your investment.
Our board of directors is authorized to issue additional classes
or series of preferred shares without any action on the part of
the shareholders. The board of directors also has the power
without shareholder approval, to set the terms of any such
classes or series of preferred shares that may be issued,
including voting rights, dividend rights, and preferences over
our common shares with respect to dividends or upon our
dissolution,
winding-up
and liquidation and other terms. If we issue additional
preferred shares in the future that have a preference over our
common shares with respect to the payment of dividends or upon
our liquidation, dissolution, or winding up, or if we issue
preferred shares with voting rights that dilute the voting power
of our common shares, the rights of holders of our common shares
or the market price of our common shares could be adversely
affected.
We
have regulatory restrictions on our ability to receive dividends
from bank subsidiaries.
Our ability to pay dividends in the future depends on our
ability to dividend from our state-chartered bank subsidiary,
Irwin Union Bank and Trust Company, to our holding company,
for which prior approval from our regulators and additional
action by our board of directors will be necessary. As a result
of the written agreement that we and Irwin Union Bank and
Trust Company entered into on October 10, 2008, with
the Federal Reserve Bank of Chicago and the Indiana Department
of Financial Institutions, Irwin Union Bank and
Trust Company, is not permitted to (1) declare or pay
any dividend, or (2) make any distributions of interest or
principal on subordinated debentures or trust preferred
securities, without the prior written approval of these
regulators. As a result, Irwin Union Bank and Trust Company
cannot declare a dividend to us. Although Irwin Union Bank
and Trust Company can seek to obtain a waiver of this
prohibition, there is no certainty that the Federal Reserve Bank
of Chicago and the Indiana Department of Financial Institutions
will grant such a waiver.
Our shareholder rights plan, provisions in our restated articles of
incorporation, our by-laws, and Indiana law may delay or prevent an acquisition
of us by a third party.
Our board of directors has implemented a shareholder rights plan which,
combined with Indiana law, and absent further action by our board, contains
provisions which have certain anti-takeover effects. While the purpose of these
plans is to strengthen the negotiating position of the board in the event of a
hostile takeover attempt, the overall effects of the plan may be to render more
difficult or discourage a merger, tender offer or proxy contest, the assumption
of control by a holder of a larger block of our shares and the removal of
incumbent directors and key management. If triggered, the rights will cause
substantial dilution to a person or group that attempts to acquire us without
approval of our board of directors, and under certain circumstances, the rights
beneficially owned by the person or group may become void. The plan also may
have the effect of limiting the participation of certain shareholders in
transactions such as mergers or tender offers whether or not such transactions
are favored by incumbent directors and key management. This could discourage
proxy contests and may make it more difficult for you and other shareholders to
elect your own representatives as directors and take other corporate actions.
Our by-laws do not permit cumulative voting of shareholders in the
election of directors, allowing the holders of a majority of our outstanding
shares to control the election of all our directors. We have a staggered board,
which means that only one-third of our board can be replaced by shareholders at
any annual meeting. Directors may not be removed by shareholders. Our by-laws
also provide that only our board of directors, and not our shareholders, may
adopt, alter, amend and repeal our by-laws.
Indiana law provides several limitations that may discourage potential
acquirers from purchasing our common shares. In particular, Indiana law
prohibits business combinations with a person who acquires 10% or more of our
common shares during the five-year period after the acquisition of 10% by that
person or entity, unless the acquirer receives prior approval for the
acquisition of the shares or business combination from our board of directors.
These and other provisions of Indiana law and our governing documents are
intended to provide the board of directors with the negotiating leverage to
achieve a more favorable outcome for our shareholders in the event of an offer
for the company. However, there is no assurance that these same anti-takeover
provisions could not have the effect of delaying, deferring or preventing a
transaction or a change in control that might be in the best interest of our
shareholders.
Risks
Related to the Capital and Credit Markets
Current
levels of market volatility are unprecedented.
The capital and credit markets have been experiencing volatility
and disruption for more than 12 months. In recent weeks,
the volatility and disruption has reached unprecedented levels.
In some cases, the markets have produced downward pressure on
stock prices and credit capacity for certain issuers without
regard to those issuers’ underlying financial strength. If
the current levels of market disruption and volatility continue
or worsen, there can be no assurance that we will not experience
further adverse effects, which may be material, on our ability
to access capital and on our results of operations.
The
current economic environment poses significant challenges for us
and could adversely affect our financial condition and results
of operations.
We are operating in a challenging and uncertain economic
environment, including generally uncertain national conditions
and local conditions in our markets. Financial institutions
continue to be affected by sharp declines in the real estate
market and constrained financial markets. While we are taking
steps to decrease and limit our exposure to residential mortgage
loans, home equity loans and lines of credit, and construction
and land loans, we nonetheless retain direct exposure to the
residential and commercial real estate markets, and we are
affected by these events. Our commercial banking line of
business has a substantial portfolio of construction and land
development loans. Continued declines in real estate values,
home sales volumes and financial stress on borrowers as a result
of the uncertain economic environment, including job losses,
could have an adverse effect on our borrowers or their
customers, which could adversely affect our financial condition
and results of operations. The overall deterioration in economic
conditions, the decline in our financial performance over the
last two years, and the reduction in capital ratios at June 30,
2008 have subjected us to increased regulatory scrutiny in the
current environment. In addition, a possible national economic
recession or further deterioration in local economic conditions
in our markets could drive losses beyond that which is provided
for in our allowance for loan losses and result in the following
other consequences: loan delinquencies, problem assets and
foreclosures may increase; demand for our products and services
may decline; deposits may decrease, which would adversely impact
our liquidity position; and collateral for our loans, especially
real estate, may decline in value, in turn reducing
customers’ borrowing power, and reducing the value of
assets and collateral associated with our existing loans.
The
U.S. government’s plan to purchase large amounts of
illiquid, mortgage-backed and other securities from financial
institutions may not be effective and/or it may not be available
to us.
In response to the financial crises affecting the banking system
and financial markets and the going concern threats to the
ability of investment banks and other financial institutions,
the U.S. Congress adopted the new Emergency Economic
Stabilization Act of 2008 (“EESA”). The primary
feature of the EESA is the establishment of a troubled asset
relief program (“TARP”), under which the
U.S. Treasury Department will purchase up to
$700 billion of troubled assets, including mortgage-backed
and other securities, from financial institutions for the
purpose of stabilizing the financial markets. There can be no
assurance as to what impact it will have on the financial
markets, including the extreme levels of volatility currently
being experienced. The failure of the U.S. government to
execute this program expeditiously could have a material adverse
effect on the financial markets, which in turn could materially
and adversely affect our business, financial condition and
results of operations. Since the rules and guidelines of the
TARP have not yet been published, we are unable to assess
whether any of our assets will qualify for the program or, if
they do, whether participation in the program would be
beneficial to us.
Risks
Related to Our Business
We may
be adversely affected by a general deterioration in economic
conditions.
The risks associated with our business become more acute in
periods of a slowing economy or slow growth such as we
experienced in the latter half of 2007 and which has continued
into 2008. Economic declines may be accompanied by a decrease in
demand for consumer and commercial credit and declining real
estate and other asset values. The credit quality of commercial
loans and leases where the activities of the borrower or vendor
are related to housing and other real estate markets may decline
in periods of stress in these industries. Delinquencies,
foreclosures and losses generally increase during economic
slowdowns or periods of slow growth. We expect that our
servicing costs and credit losses will increase during periods
of economic slowdown or slow growth such as the one we are
presently experiencing.
Although we are in the process of exiting our home equity line
of business, we continue to have exposure to losses so long as
we hold a portfolio of loans. As such, a material decline in
real estate values may reduce the ability of borrowers to use
home equity to support borrowings and could increase the
loan-to-value ratios of loans we have previously made, thereby
weakening collateral coverage and increasing the possibility of
a loss in the event of a default. A decline in real estate
values could also materially lower runoff in our existing
portfolio, effectively extending the average life of the loans
in the portfolio (and therefore prolonging the period we are
exposed to losses).
We may
be adversely affected by interest rate changes.
We and our subsidiaries are subject to interest rate risk.
Changes in interest rates will affect the value of loans,
deposits and other interest-sensitive assets and liabilities on
our balance sheet. Our income may be at risk because changes in
interest rates also affect our net interest margin and the value
of assets and derivatives that we sell from time to time or that
are subject to either mark-to-market accounting or
lower-of-cost-or-market accounting, such as loans held for sale,
mortgage servicing rights and derivatives instruments.
Reductions in interest rates expose us to write-downs in the
carrying value of the mortgage servicing and other servicing
assets we hold on our balance sheet. Some of these assets are
recorded at the lower of their cost or market value and a
valuation allowance is recorded for any impairment. Decreasing
interest rates often lead to increased prepayments in the
underlying loans, which requires that we write down the carrying
value of these servicing assets. The change in value of these
assets, if improperly hedged or mismanaged, could adversely
affect our operating results in the period in which the
impairment occurs.
Our lines of business mainly depend on earnings derived from net
interest income. Net interest income is the difference between
interest earned on loans and investments and the interest
expense paid on other borrowings, including deposits at our
banks and other funding liabilities we have. Our interest income
and interest expense are affected by general economic conditions
and by the policies of regulatory authorities,
including the monetary policies of the Federal Reserve that
cause our funding costs and yields on new or variable rate
assets to change.
Although we take measures intended to manage the risks of
operating in changing interest rate environments, we cannot
eliminate interest rate sensitivity. Our goal is to ensure that
interest rate sensitivity does not exceed prudent levels as
determined by our board of directors in certain policies. Our
risk management techniques include modeling interest rate
scenarios, using financial hedging instruments, and
match-funding certain loan assets. There are costs and risks
associated with our risk management techniques, and these could
be substantial.
Finally, to reduce the effect interest rates have on our
businesses, we periodically invest in derivatives and other
interest-sensitive instruments. While our intent in purchasing
these instruments is to reduce our overall interest rate
sensitivity, the performance of these instruments can, at times,
cause volatility in our results either due to factors such as
basis risk between the derivatives and the hedged item, timing
of accounting recognition differences or other such factors.
Our
operations may be adversely affected if we are unable to secure
adequate funding; our use of wholesale funding sources exposes
us to potential liquidity risk.
As a result of our restructuring, including our prior
discontinuation of our mortgage banking line of business, we
have had to seek alternative funding sources to contribute to
our other lines of business, which sources in some cases are
more expensive than those previously used.
Due to the sale of mortgage servicing rights and the loss of
escrow deposits associated with those servicing rights, we have
increased our reliance on wholesale funding, such as Federal
Home Loan Bank borrowings, public funds, and brokered deposits
in recent quarters. Because wholesale funding sources are
affected by general capital market conditions, the availability
of funding from wholesale lenders may be dependent on the
confidence these investors have in commercial banking, franchise
finance, and consumer finance businesses. While we have
processes in place to monitor and mitigate these funding risks,
the continued availability to us of these funding sources is
uncertain, and we could be adversely impacted if our business
segments become disfavored by wholesale lenders or large
depositors. As a result of the written agreement with the Office
of Thrift Supervision, Irwin Union Bank, F.S.B. (which holds
approximately 13% of our total assets) is no longer permitted to
accept brokered deposits unless it receives the prior approval
of the Federal Deposit Insurance Corporation. Although we have
applied for approval, there is no guarantee that it will be
obtained. Moreover, even if such an approval is granted, the
written agreement would still impose limitations on Irwin Union
Bank, F.S.B.’s freedom to set rates for brokered deposits.
Our state-chartered bank subsidiary, Irwin Union Bank and
Trust Company, which is regulated by the Federal Reserve
Bank of Chicago and the Indiana Department of Financial
Institutions, does not have any regulatory restrictions on the
issuance of brokered deposits.
Brokered deposits may be difficult for us to retain or replace
at attractive rates as they mature. Our financial flexibility
could be severely constrained if we are unable to renew our
wholesale funding or if adequate financing is not available in
the future at acceptable rates of interest. We may not have
sufficient liquidity to continue to fund new loans or lease
originations, and we may need to liquidate loans or other assets
unexpectedly in order to repay obligations as they mature.
Historically, we financed or sold the majority of our second
mortgage loan originations into the secondary market through the
use of securitizations. This market closed to all participants
in the middle of 2007. We expect it to remain closed
indefinitely. We are no longer producing these loans.
If
there were an acceleration of the recording of losses on our
home equity portfolio from our current expectations, it could
have a material adverse effect on our results of operations and
capital position.
As announced in July 2008, we agreed to securitize approximately
$275 million of home equity whole loans. The securitization
is treated as a financing and, as such, the loans remain on our
balance sheet. These loans, together with the $1 billion of
residual home equity loans that currently remain on our balance
sheet, as well as an additional remaining portfolio of $40 million of home
equity whole loans, will be run-off over time. We believe our
remaining exposure, including other costs associated with a
simultaneous exit of the segment, is less than $250 million
(pre-tax). We will evaluate the performance of the loans on a
regular basis. A number of factors, including, but not limited
to, changes in regulatory or accounting interpretations, changes
to our accounting policy, or contractual triggers, could cause
us to accelerate the recognition of losses in a single period or
a small number of successive periods. If that were to occur, it
may have a material adverse affect on our results of operations
and capital position for such periods.
We
have credit risk inherent in our asset portfolios.
In our businesses, some borrowers may not repay loans that we
make to them. As all financial institutions do, we maintain an
allowance for loan and lease losses and other reserves to absorb
the level of losses that we think is probable in our portfolios.
However, our allowance for loan and lease losses may not be
sufficient to cover the loan and lease losses that we actually
may incur. While we maintain a reserve at a level management
believes is adequate, our charge-offs could exceed these
reserves. If we experience defaults by borrowers in any of our
businesses to a greater extent than anticipated, our earnings
could be negatively impacted.
We review the adequacy of these reserves and the underlying
estimates on a periodic basis and we make adjustments to the
reserves when required. However, there is still no assurance
that our actual losses will not exceed our estimates and
negatively impact our earnings. As part of our written agreement
with the Federal Reserve Bank of Chicago and the Indiana
Department of Financial Institutions, we and
Irwin Union Bank and Trust Company agreed to
review and revise as necessary our allowance for loan and lease
losses methodology to assure compliance with relevant
supervisory guidance and to develop an acceptable program for
the maintenance of an adequate allowance for loan and lease
losses going forward.
We
hold in our portfolio a significant number of construction, land
and home equity loans, which may pose more credit risk than
other types of mortgage loans.
We have limited offering construction and land loans to an
exception basis and have ceased offering loans and lines of
credit in the home equity line of business. In light of current
economic conditions, these types of loans are considered more
risky than other types of mortgage loans. Due to the disruptions
in credit and housing markets, many of the developers to whom we
lend experienced a dramatic decline in sales of new homes from
their projects. As a result of this unprecedented market
disruption, a material amount of our land and construction
portfolio has or may become non-performing as developers are
unable to build and sell homes in volumes large enough for
orderly repayment of loans. In addition, as home values decline,
borrowers are increasingly defaulting on home equity lines of
credit in the portfolio of these loans that we hold in run-off
mode.
We believe we have established adequate reserves on our
financial statements to cover the credit risk of these loan
portfolios. However, there can be no assurance that losses will
not exceed our reserves, and ultimately result in a material
level of charge-offs, which could adversely impact our results
of operations, liquidity and capital.
We may
be required to repurchase mortgage loans that we previously sold
because of the credit risk inherent in those
loans.
We retain limited credit exposure from the sale of mortgage
loans. When we sell mortgage loans, we make standard
representations and warranties to the transferee regarding the
loans. These representations and warranties do not assure
against credit risk associated with the transferred loans, but
if individual mortgage loans are found not to have fully
complied with the associated representations and warranties we
have made to a transferee, we may be required to repurchase the
loans from the transferee or we may make payments in lieu of
curing alleged breaches of these representations and warranties.
Given the significant delinquencies in higher
combined-loan-to-value or loan-to-value products, we expect that
claims for repurchases pursuant to contractual representation
and warranties will increase. While we have established reserves
for what we consider as probable and reasonably estimable
losses, there can be no assurance that losses will not
ultimately exceed our reserves and materially impact on our business,
financial condition and future results of our operations.
Certain
of our consumer mortgage products were not sold by many
financial institutions.
In the past, we originated high loan-to-value home equity loans
not offered by many financial institutions. For this reason, the
performance of some of our financial assets may be less
predictable than those of other lenders. We may not have
adequate experience in a variety of economic environments to
predict accurately the losses from our remaining portfolios of
these products.
We
rely heavily on our management team and key personnel, and the
unexpected loss of key managers and personnel, or significant
changes in senior management, may affect our operations
adversely.
Our overall financial performance depends heavily on the
performance of key managers and personnel. Our past success was
influenced strongly by our ability to attract and to retain
senior management that is experienced in the niches within
banking for which they are responsible. If we are not able to
retain these key managers and personnel, we may not be able to
run our operations as effectively.
Our ability to retain executive officers and the current
management teams of each of our lines of business and our
holding company continues to be important to implement our
strategies successfully. In our written agreement with the
Federal Reserve Bank of Chicago and the Indiana Department of
Financial Institutions, we agreed to engage an independent
consultant to assess the bank’s management and to take
steps by December 9, 2008, to address the independent
consultant’s findings, including hiring additional or
replacement officers, if necessary. This process was commenced
prior to the signing of the written agreement. It is possible
that these findings could result in significant changes in our
senior management team. If we are required to hire new members
of management, the restrictions that the written agreements
place on our ability to enter into and make payments pursuant to
severance agreements may make it difficult to attract persons of
high quality to fill these positions.
Our future success depends on our ability to compete effectively
in a highly competitive financial services industry.
The financial services industry, including
commercial banking and franchise finance, is highly competitive. We and our operating
subsidiaries encounter strong competition for deposits, loans and other financial services
in all of the market areas in our lines of business. Our principal competitors include
other commercial banks, savings banks, savings and loan associations, mutual funds,
money market funds, finance companies, trust companies, insurers, leasing companies,
credit unions, mortgage companies, real estate investment trusts (REITs), private issuers of
debt obligations, and suppliers of other investment alternatives, such as securities firms.
Many of our non-bank competitors are not subject to the same degree of regulation as we and
our subsidiaries are and have advantages over us in providing certain services. Many of our
competitors are significantly larger than we are and have greater access to capital and
other resources, lower operating costs, and lower cost of funds. Also, our ability to
compete effectively in our lines of business is dependent on our ability to adapt
successfully to technological changes within
the banking and financial services industry.
Our
business may be affected adversely by the highly regulated
environment in which we operate.
We and our subsidiaries are subject to extensive federal and
state regulation and supervision. Our failure to comply with
these requirements can lead to, among other remedies,
administrative enforcement actions, termination or suspension of
our licenses, rights of rescission for borrowers, and class
action lawsuits. Legislation and regulations have had, may
continue to have or may have significant impact on the financial
services industry. Legislative or regulatory changes could make
regulatory compliance more difficult or expensive for us,
causing us to change or limit some of our consumer loan products
or the way we operate our different lines of business. Future
changes could affect the profitability of some or all of our
lines of business.
Our state-chartered bank subsidiary, Irwin Union Bank and
Trust Company, entered into a memorandum of understanding,
which was considered an informal agreement, with the Federal
Reserve Bank of Chicago as of March 1, 2007 to enhance the consumer compliance
function and compliance oversight programs of Irwin Union
Bank and Trust and its subsidiaries. Irwin Union Bank and
Trust Company agreed to and did provide quarterly written
progress reports to the Federal Reserve Bank of Chicago with
respect to these matters, through the required period ending
September 30, 2007. We developed and implemented compliance
plans to address the issues raised by the Federal Reserve Bank
of Chicago. The memorandum of understanding was lifted in
September 2008.
On October 10, 2008, we entered into written agreements
with our regulators. Our holding company and our state-chartered
bank subsidiary, Irwin Union Bank and Trust Company,
entered into a written agreement with the Federal Reserve Bank
of Chicago and the Indiana Department of Financial Institutions.
Our federal savings bank subsidiary, Irwin Union Bank, F.S.B.,
entered into a written agreement with the Office of Thrift
Supervision. The failure to comply with the terms of these
written agreements could result in significant enforcement
actions against us of increasing severity, up to and including a
regulatory takeover of one or both of our bank subsidiaries.
The written agreement with the Federal Reserve Bank of Chicago
and the Indiana Department of Financial Institutions requires,
among other things, that we submit a capital plan that will
ensure our holding company and Irwin Union Bank and
Trust Company maintain sufficient capital to comply with
regulatory capital guidelines and to address the volume of our
adversely affected assets, concentration of credit, adequacy of
our allowance for loan and lease losses, planned growth and
anticipated levels of retains earnings. The written agreement
with the Office of Thrift Supervision requires, among other
things, that Irwin Union Bank, F.S.B. maintain a Tier 1
capital ratio of at least 9% and a Total Risk-Based Capital
Ratio of at least 11%.
As a result of the written agreement with the Federal Reserve
Bank of Chicago and the Indiana Department of Financial
Institutions, we and Irwin Union Bank and Trust Company are
not permitted to (1) declare or pay any dividend without
the prior approval of these regulators Federal Reserve and
Indiana Department of Financial Institutions, or (2) make
any distributions of interest or principal on subordinated
debentures or trust preferred securities, unless we obtain the
prior written approval of the Federal Reserve Bank of Chicago
and the Indiana Department of Financial Institutions. There is
no certainty that we will resume payments of dividends in the
future.
In addition, like other registrants, we are subject to the
requirements of the Sarbanes-Oxley Act of 2002. Failure to have
in place adequate programs and procedures could cause us to have
gaps in our internal control environment, putting the our
holding company and its shareholders at risk of loss.
These and other potential changes in government regulation or
policies could increase our costs of doing business and could
adversely affect our operations and the manner in which we
conduct our business.
A
deterioration in our regulatory capital position could adversely
affect us.
The banking industry, in general, is heavily regulated, and we
and our subsidiaries are extensively regulated under state and
federal law. Regulations of the Federal Reserve, the Indiana
Department of Financial Institutions, the Office of Thrift
Supervision and the Federal Deposit Corporation that apply to us
specify minimum capital ratio requirements that must be
maintained by bank holding companies, banks and thrifts to be
considered a “well-capitalized” institution. In
addition, these regulators reserve the right to reclassify
institutions that meet these standards into a lower capital
category (i.e., less than “well-capitalized”) at their
own discretion based on safety and soundness considerations. As
of June 30, 2008, our holding company, Irwin Financial
Corporation, and its state-chartered bank subsidiary, Irwin
Union Bank and Trust Company, met the applicable regulatory
standard of a “well-capitalized” institution under the
relevant capital regulations that apply to them. As a result of
the written agreement with the Office of Thrift Supervision, our
federal savings bank subsidiary, Irwin Union Bank, F.S.B., is
considered “adequately capitalized,” although we
presently expect to continue to have capital levels above those
agreed to in the written agreement applicable to the savings
bank. As a result, the savings bank, which holds approximately
13% of our total assets is no longer permitted to accept
brokered deposits unless it receives the prior approval of the
Federal Deposit Insurance Corporation. Although we have applied
for approval, there is no guarantee that it will be obtained.
Our other banking subsidiary, Irwin Union Bank and
Trust Company, a state chartered bank regulated by the
Federal Reserve Bank of Chicago and the Indiana Department of
Financial Institutions, does not have any regulatory
restrictions on the issuance of brokered deposits
Irwin Union Bank, F.S.B could be assessed higher premiums by the
Federal Deposit Insurance Fund and required to pay its
regulators increased assessment and application fees. In
addition, if Irwin Union Bank and Trust Company were no
longer considered “well-capitalized,” it would also be
subject to these higher fees, and it might lose access to public
funds in the state of Indiana, which could adversely affect our
liquidity and results of operations. Moreover, if we were
considered an “undercapitalized” institution, we could
be subject to certain prompt corrective action requirements,
regulatory controls and restrictions, which become more
extensive as an institution becomes more severely
undercapitalized. If such actions were to be taken, it could
adversely affect our business and we may have more limited
access to the capital markets.
The
soundness of other financial institutions could adversely affect
us.
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 we
routinely execute transactions with counterparties in the
financial services industry, including brokers and dealers,
commercial banks, investment banks, mutual and hedge funds, and
other institutional clients. Many of these transactions expose
us to credit risk in the event of default by our counterparty or
client. In addition, our credit risk may be exacerbated when the
collateral held by us cannot be realized or is liquidated at
prices not sufficient to recover the full amount of the loan or
derivative exposure due us. There is no assurance that any such
losses would not materially and adversely affect our results of
operations or earnings.
We are the defendant in class actions and other lawsuits that could subject us
to material liability.
Our subsidiaries have been named as defendants in lawsuits that
allege we violated state and federal laws in the course of making loans and leases. Among
the allegations are that we charged impermissible and excessive rates and fees
and participated in fraudulent financing. Some of these cases either seek or have attained
class action status, which generally involves a large number of plaintiffs and could result
in potentially increased amounts of loss. We have
not established reserves for all of these
lawsuits due to either lack of probability of loss or inability to accurately estimate
potential loss. If decided against us, the lawsuits have the potential to affect us
materially.
Our business may be affected adversely by Internet fraud.
We are inherently
exposed to many types of operational risk, including those caused by the use of computer,
internet and telecommunications systems.
These may manifest themselves in the form of
fraud by employees, by customers, other outside entities targeting us and/or our customers
that use our internet banking, electronic banking or some other form of our
telecommunications
systems. Given the growing level of use of electronic, internet-based,
and networked systems to conduct business directly or indirectly with our clients,
certain fraud losses may not be avoidable regardless of the preventative and
detection systems in place.