Edgar Filing: WINTRUST FINANCIAL CORP

WTFC-2013.06.30-10Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_________________________________________

FORM 10-Q

_________________________________________



þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2013



¨	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)

(847) 939-9000

(Registrant’s telephone number, including area code)

______________________________________

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 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. Yes þ 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). 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 definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):



Large accelerated filer	þ		Accelerated filer	¨
Non-accelerated filer	¨	(Do not check if a smaller reporting company)	Smaller reporting company	¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common Stock — no par value, 39,725,726 shares, as of July 31, 2013

Table of Contents

TABLE OF CONTENTS



		Page
	PART I. — FINANCIAL INFORMATION
ITEM 1.	Financial Statements	1
ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	60
ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	110
ITEM 4.	Controls and Procedures	112
	PART II. — OTHER INFORMATION
ITEM 1.	Legal Proceedings	NA
ITEM 1A.	Risk Factors	113
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	113
ITEM 3.	Defaults Upon Senior Securities	NA
ITEM 4.	Mine Safety Disclosures	NA
ITEM 5.	Other Information	NA
ITEM 6.	Exhibits	114
	Signatures	115

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PART I

ITEM 1. FINANCIAL STATEMENTS

WINTRUST FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CONDITION

	(Unaudited)						(Unaudited)
(In thousands, except share data)	June 30, 2013			December 31, 2012			June 30, 2012
Assets
Cash and due from banks	$	224,286		$	284,731		$	176,529
Federal funds sold and securities purchased under resale agreements	9,013			30,297			15,227
Interest-bearing deposits with other banks (no balance restricted for securitization investors at June 30, 2013 and December 31, 2012, and a balance restricted for securitization investors of $658,983 at June 30, 2012)	440,656			1,035,743			1,117,888
Available-for-sale securities, at fair value	1,843,824			1,796,076			1,196,702
Trading account securities	659			583			608
Federal Home Loan Bank and Federal Reserve Bank stock	79,354			79,564			92,792
Brokerage customer receivables	26,214			24,864			31,448
Mortgage loans held-for-sale, at fair value	525,027			385,033			511,566
Mortgage loans held-for-sale, at lower of cost or market	12,964			27,167			14,538
Loans, net of unearned income, excluding covered loans	12,516,892			11,828,943			11,202,842
Covered loans	454,602			560,087			614,062
Total loans	12,971,494			12,389,030			11,816,904
Less: Allowance for loan losses	106,842			107,351			111,920
Less: Allowance for covered loan losses	14,429			13,454			20,560
Net loans (no balance restricted for securitization investors at June 30, 2013 and December 31, 2012, and a balance restricted for securitization investors of $29,840 at June 30, 2012)	12,850,223			12,268,225			11,684,424
Premises and equipment, net	512,928			501,205			449,608
FDIC indemnification asset	137,681			208,160			222,568
Accrued interest receivable and other assets	573,709			511,617			710,275
Goodwill	356,871			345,401			330,896
Other intangible assets	20,137			20,947			21,213
Total assets	$	17,613,546		$	17,519,613		$	16,576,282
Liabilities and Shareholders’ Equity
Deposits:
Non-interest bearing	$	2,450,659		$	2,396,264		$	2,047,715
Interest bearing	11,915,195			12,032,280			11,009,866
Total deposits	14,365,854			14,428,544			13,057,581
Notes payable	1,729			2,093			2,457
Federal Home Loan Bank advances	585,942			414,122			564,301
Other borrowings	252,776			274,411			375,523
Secured borrowings—owed to securitization investors	—			—			360,825
Subordinated notes	10,000			15,000			15,000
Junior subordinated debentures	249,493			249,493			249,493
Trade date securities payable	577			—			19,025
Accrued interest payable and other liabilities	310,515			331,245			210,003
Total liabilities	15,776,886			15,714,908			14,854,208
Shareholders’ Equity:
Preferred stock, no par value; 20,000,000 shares authorized:
Series A - $1,000 liquidation value; 50,000 shares issued and outstanding at June 30, 2013, December 31, 2012 and June 30, 2012	49,976			49,906			49,837
Series C - $1,000 liquidation value; 126,500 shares issued and outstanding at June 30, 2013, December 31, 2012 and June 30, 2012	126,500			126,500			126,500
Common stock, no par value; $1.00 stated value; 100,000,000 shares authorized at June 30, 2013, December 31, 2012, and June 30, 2012; 37,984,485 shares issued at June 30, 2013, 37,107,684 shares issued at December 31, 2012, and 36,573,468 shares issued at June 30, 2012	37,985			37,108			36,573
Surplus	1,066,796			1,036,295			1,013,428
Treasury stock, at cost, 259,342 shares at June 30, 2013, 249,329 shares at December 31, 2012, and 236,226 shares at June 30, 2012	(8,214		)	(7,838		)	(7,374		)
Retained earnings	612,821			555,023			501,139
Accumulated other comprehensive (loss) income	(49,204		)	7,711			1,971
Total shareholders’ equity	1,836,660			1,804,705			1,722,074
Total liabilities and shareholders’ equity	$	17,613,546		$	17,519,613		$	16,576,282

See accompanying notes to unaudited consolidated financial statements.

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WINTRUST FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

	Three Months Ended					Six Months Ended
	June 30,					June 30,
(In thousands, except per share data)	2013		2012			2013		2012
Interest income
Interest and fees on loans	$	145,983	$	144,100		$	288,097	$	287,655
Interest bearing deposits with banks	411		203			980		451
Federal funds sold and securities purchased under resale agreements	4		6			19		18
Securities	9,359		10,510			18,111		22,357
Trading account securities	8		10			13		19
Federal Home Loan Bank and Federal Reserve Bank stock	693		641			1,377		1,245
Brokerage customer receivables	188		221			362		432
Total interest income	156,646		155,691			308,959		312,177
Interest expense
Interest on deposits	13,675		17,273			28,179		35,303
Interest on Federal Home Loan Bank advances	2,821		2,867			5,585		6,451
Interest on notes payable and other borrowings	1,132		2,274			2,286		5,376
Interest on secured borrowings—owed to securitization investors	—		1,743			—		4,292
Interest on subordinated notes	52		126			111		295
Interest on junior subordinated debentures	3,142		3,138			6,261		6,295
Total interest expense	20,822		27,421			42,422		58,012
Net interest income	135,824		128,270			266,537		254,165
Provision for credit losses	15,382		20,691			31,069		38,091
Net interest income after provision for credit losses	120,442		107,579			235,468		216,074
Non-interest income
Wealth management	15,892		13,393			30,720		25,794
Mortgage banking	31,734		25,607			61,879		44,141
Service charges on deposit accounts	5,035		3,994			9,828		8,202
Gains on available-for-sale securities, net	2		1,109			253		1,925
Fees from covered call options	993		3,114			2,632		6,237
Gain on bargain purchases, net	—		(55		)	—		785
Trading gains (losses), net	3,260		(928		)	2,825		(782		)
Other	7,079		4,701			13,237		11,656
Total non-interest income	63,995		50,935			121,374		97,958
Non-interest expense
Salaries and employee benefits	79,225		68,139			156,738		137,169
Equipment	6,413		5,466			12,597		10,866
Occupancy, net	8,707		7,728			17,560		15,790
Data processing	4,358		3,840			8,957		7,458
Advertising and marketing	2,722		2,179			4,762		4,185
Professional fees	4,191		3,847			7,412		7,451
Amortization of other intangible assets	1,164		1,089			2,284		2,138
FDIC insurance	3,003		3,477			6,447		6,834
OREO expense, net	2,284		5,848			664		13,026
Other	16,120		15,572			30,885		30,027
Total non-interest expense	128,187		117,185			248,306		234,944
Income before taxes	56,250		41,329			108,536		79,088
Income tax expense	21,943		15,734			42,177		30,283
Net income	$	34,307	$	25,595		$	66,359	$	48,805
Preferred stock dividends and discount accretion	$	2,617	$	2,644		$	5,233	$	3,890
Net income applicable to common shares	$	31,690	$	22,951		$	61,126	$	44,915
Net income per common share—Basic	$	0.85	$	0.63		$	1.64	$	1.24
Net income per common share—Diluted	$	0.69	$	0.52		$	1.34	$	1.02
Cash dividends declared per common share	$	—	$	—		$	0.09	$	0.09
Weighted average common shares outstanding	37,486		36,329			37,231		36,266
Dilutive potential common shares	12,354		7,770			12,363		7,723
Average common shares and dilutive common shares	49,840		44,099			49,594		43,989

See accompanying notes to unaudited consolidated financial statements.

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WINTRUST FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)



	Three Months Ended						Six Months Ended
	June 30,						June 30,
(In thousands)	2013			2012			2013			2012
Net income	$	34,307		$	25,595		$	66,359		$	48,805
Unrealized (losses) gains on securities
Before tax	(71,463		)	7,959			(78,918		)	4,740
Tax effect	28,341			(3,160		)	31,147			(1,884		)
Net of tax	(43,122		)	4,799			(47,771		)	2,856
Less: Reclassification of net gains included in net income
Before tax	2			1,109			253			1,925
Tax effect	(1		)	(445		)	(101		)	(772		)
Net of tax	1			664			152			1,153
Net unrealized (losses) gains on securities	(43,123		)	4,135			(47,923		)	1,703
Unrealized gains on derivative instruments
Before tax	2,169			936			3,643			1,732
Tax effect	(865		)	(371		)	(1,451		)	(687		)
Net unrealized gains on derivative instruments	1,304			565			2,192			1,045
Foreign currency translation adjustment
Before tax	(8,241		)	2,701			(14,545		)	2,701
Tax effect	1,923			(600		)	3,361			(600		)
Net foreign currency translation adjustment	(6,318		)	2,101			(11,184		)	2,101
Total other comprehensive (loss) income	(48,137		)	6,801			(56,915		)	4,849
Comprehensive (loss) income	$	(13,830	)	$	32,396		$	9,444		$	53,654

See accompanying notes to unaudited consolidated financial statements.

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WINTRUST FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)

(In thousands)	Preferred stock		Common stock		Surplus			Treasury stock			Retained earnings			Accumulated other comprehensive income (loss)			Total shareholders’ equity
Balance at December 31, 2011	$	49,768	$	35,982	$	1,001,316		$	(112	)	$	459,457		$	(2,878	)	$	1,543,533
Net income	—		—		—			—			48,805			—			48,805
Other comprehensive income, net of tax	—		—		—			—			—			4,849			4,849
Cash dividends declared on common stock	—		—		—			—			(3,261		)	—			(3,261		)
Dividends on preferred stock	—		—		—			—			(3,793		)	—			(3,793		)
Accretion on preferred stock	69		—		—			—			(69		)	—			—
Stock-based compensation	—		—		4,639			—			—			—			4,639
Issuance of Series C preferred stock	126,500		—		(3,810		)	—			—			—			122,690
Common stock issued for:
Exercise of stock options and warrants	—		420		7,676			(6,391		)	—			—			1,705
Restricted stock awards	—		110		1,692			(871		)	—			—			931
Employee stock purchase plan	—		39		1,223			—			—			—			1,262
Director compensation plan	—		22		692			—			—			—			714
Balance at June 30, 2012	$	176,337	$	36,573	$	1,013,428		$	(7,374	)	$	501,139		$	1,971		$	1,722,074
Balance at December 31, 2012	$	176,406	$	37,108	$	1,036,295		$	(7,838	)	$	555,023		$	7,711		$	1,804,705
Net income	—		—		—			—			66,359			—			66,359
Other comprehensive loss, net of tax	—		—		—			—			—			(56,915		)	(56,915		)
Cash dividends declared on common stock	—		—		—			—			(3,328		)	—			(3,328		)
Dividends on preferred stock	—		—		—			—			(5,163		)	—			(5,163		)
Accretion on preferred stock	70		—		—			—			(70		)	—			—
Stock-based compensation	—		—		4,628			—			—			—			4,628
Common stock issued for:
Acquisitions	—		648		22,422			—			—			—			23,070
Exercise of stock options and warrants	—		46		1,301			(214		)	—			—			1,133
Restricted stock awards	—		121		140			(162		)	—			—			99
Employee stock purchase plan	—		31		1,287			—			—			—			1,318
Director compensation plan	—		31		723			—			—			—			754
Balance at June 30, 2013	$	176,476	$	37,985	$	1,066,796		$	(8,214	)	$	612,821		$	(49,204	)	$	1,836,660

See accompanying notes to unaudited consolidated financial statements.

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WINTRUST FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)



	Six Months Ended
	June 30,
(In thousands)	2013			2012
Operating Activities:
Net income	$	66,359		$	48,805
Adjustments to reconcile net income to net cash provided by (used for) operating activities
Provision for credit losses	31,069			38,091
Depreciation and amortization	13,874			11,442
Stock-based compensation expense	4,628			4,639
Tax benefit from stock-based compensation arrangements	223			1,228
Excess tax benefits from stock-based compensation arrangements	(326		)	(800		)
Net amortization of premium on securities	155			4,830
Mortgage servicing rights fair value change and amortization, net	(1,456		)	(1,920		)
Originations and purchases of mortgage loans held-for-sale	(2,025,231		)	(1,568,240		)
Proceeds from sales of mortgage loans held-for-sale	1,954,766			1,392,580
Bank owned life insurance income, net of claims	(1,748		)	(1,424		)
(Increase) decrease in trading securities, net	(76		)	1,882
Net increase in brokerage customer receivables	(1,350		)	(3,523		)
Gains on mortgage loans sold	(55,326		)	(29,920		)
Gains on available-for-sale securities, net	(253		)	(1,925		)
Gain on bargain purchases, net	—			(785		)
Loss on sales of premises and equipment, net	—			471
Net (gain) loss on sales and fair value adjustments of other real estate owned	(1,926		)	10,302
Decrease (increase) in accrued interest receivable and other assets, net	35,279			(245,123		)
(Decrease) increase in accrued interest payable and other liabilities, net	(12,930		)	10,600
Net Cash Provided by (Used for) Operating Activities	5,731			(328,790		)
Investing Activities:
Proceeds from maturities of available-for-sale securities	120,803			410,640
Proceeds from sales of available-for-sale securities	84,459			1,364,546
Purchases of available-for-sale securities	(205,372		)	(1,036,877		)
Net cash paid for acquisitions	(9,350		)	(129,742		)
Divestiture of operations	(149,100		)	—
Proceeds from sales of other real estate owned	40,127			49,773
Proceeds received from the FDIC related to reimbursements on covered assets	21,483			115,280
Net decrease (increase) in interest-bearing deposits with banks	653,816			(368,166		)
Net increase in loans	(530,412		)	(487,135		)
Purchases of premises and equipment, net	(13,097		)	(27,296		)
Net Cash Provided by (Used for) Investing Activities	13,357			(108,977		)
Financing Activities:
(Decrease) increase in deposit accounts	(242,433		)	609,317
Decrease in other borrowings, net	(22,881		)	(341,111		)
Increase in Federal Home Loan Bank advances, net	172,000			90,000
Repayment of subordinated notes	(5,000		)	(20,000		)
Excess tax benefits from stock-based compensation arrangements	326			800
Net proceeds from issuance of Series C preferred stock	—			122,690
Issuance of common shares resulting from exercise of stock options, employee stock purchase plan and conversion of common stock warrants	3,457			10,646
Common stock repurchases	(376		)	(7,262		)
Dividends paid	(5,910		)	(5,261		)
Net Cash (Used for) Provided by Financing Activities	(100,817		)	459,819
Net (Decrease) Increase in Cash and Cash Equivalents	(81,729		)	22,052
Cash and Cash Equivalents at Beginning of Period	315,028			169,704
Cash and Cash Equivalents at End of Period	$	233,299		$	191,756

See accompanying notes to unaudited consolidated financial statements.

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WINTRUST FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(1) Basis of Presentation

The consolidated financial statements of Wintrust Financial Corporation and Subsidiaries (“Wintrust” or “the Company”) presented herein are unaudited, but in the opinion of management reflect all necessary adjustments of a normal or recurring nature for a fair presentation of results as of the dates and for the periods covered by the consolidated financial statements.

The accompanying consolidated financial statements are unaudited and do not include information or footnotes necessary for a complete presentation of financial condition, results of operations or cash flows in accordance with U.S. generally accepted accounting principles ("GAAP"). The consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012 (“2012 Form 10-K”). Operating results reported for the three-month and six-month periods are not necessarily indicative of the results which may be expected for the entire year. Reclassifications of certain prior period amounts have been made to conform to the current period presentation.

The preparation of the financial statements requires management to make estimates, assumptions and judgments that affect the reported amounts of assets and liabilities. Management believes that the estimates made are reasonable, however, changes in estimates may be required if economic or other conditions develop differently from management’s expectations. Certain policies and accounting principles inherently have a greater reliance on the use of estimates, assumptions and judgments and as such have a greater possibility of producing results that could be materially different than originally reported. Management views critical accounting policies to be those which are highly dependent on subjective or complex judgments, estimates and assumptions, and where changes in those estimates and assumptions could have a significant impact on the financial statements. Management currently views the determination of the allowance for loan losses, 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 the most subject to revision as new information becomes available. Descriptions of our significant accounting policies are included in Note 1 - “Summary of Significant Accounting Policies” of the Company’s 2012 Form 10-K.

(2) Recent Accounting Developments

Accumulated Other Comprehensive Income Reporting by Component

In February 2013, the FASB issued ASU No. 2013-02, "Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income” which adds disclosures to make reporting of accumulated other comprehensive income more informative. Specifically, the new guidance requires a Company to identify amounts reclassified out of other comprehensive income by component. The guidance is effective for fiscal years beginning after December 15, 2012. The Company has included the required disclosures in this Form 10-Q by disclosing the reclassification amounts related to its securities, derivatives and foreign currency translation components. Other than requiring additional disclosures, adoption of this guidance did not have a material impact on our consolidated financial statements. See Note 17 - Shareholders' Equity and Earnings Per Share, for further information.

Balance Sheet Offsetting

In January 2013, the FASB issued ASU No. 2013-01, "Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities” to address the disclosure requirements within ASU No. 2011-11, "Disclosures about Offsetting Assets and Liabilities". ASU 2011-11 requires disclosure showing the Company's gross and net positions for derivatives and financial transactions that are either offset in accordance with GAAP or are subject to a master netting or similar agreement. The guidance is effective for fiscal years beginning on or after January 1, 2013. The Company has included required disclosures for the current and comparative periods as required by the new guidance. Other than requiring additional disclosures, adoption of this guidance did not have a material impact on our consolidated financial statements. See Note 14 - Derivative Financial Instruments, for further information.

Subsequent Accounting for Indemnification Assets

In October 2012, the FASB issued ASU No. 2012-06, “Business Combinations (Topic 805): Subsequent Accounting for an Indemnification Asset Recognized at the Acquisition Date as a Result of a Government-Assisted Acquisition of a Financial Institution,” to address the diversity in practice and interpret guidance related to the subsequent measurement of an indemnification asset recognized in a government-assisted acquisition. These indemnification assets are recorded by the Company as FDIC indemnification assets on the Consolidated Statements of Condition. This ASU clarifies existing guidance by asserting that subsequent changes in expected cash flows related to an indemnification asset should be amortized over the shorter of the life of the indemnification agreement or the life of the underlying loan. This guidance is to be applied with respect to changes in cash flows on existing indemnification agreements as well as prospectively to new indemnification agreements. The guidance is effective for fiscal years beginning after December 15, 2012. As of January 1, 2013, the Company is accounting for its FDIC

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indemnification assets in accordance with ASU No. 2012-06. Adoption of this guidance did not have a material impact on the Company's consolidated financial statements.

(3) Business Combinations

FDIC-Assisted Transactions

In 2010 and 2011, the Company acquired the banking operations, including the acquisition of certain assets and the assumption of liabilities, of six financial institutions in FDIC-assisted transactions.

Since January 1, 2012, the Company has acquired the banking operations, including the acquisition of certain assets and the assumption of liabilities, of three financial institutions in FDIC-assisted transactions. The following table presents details related to the three recent transactions:



(Dollars in thousands)	Charter National		Second Federal		First United Bank
Date of acquisition	February 10, 2012		July 20, 2012		September 28, 2012
Fair value of assets acquired, at the acquisition date	$	92,355	$	171,625	$	328,408
Fair value of loans acquired, at the acquisition date	45,555		—		77,964
Fair value of liabilities assumed, at the acquisition date	91,570		171,582		321,734
Fair value of reimbursable losses, at the acquisition date⁽¹⁾	13,164		—		67,190
Gain on bargain purchase recognized	785		43		6,675

(1) As no assets subject to loss sharing agreements were acquired in the acquisition of Second Federal, there was no fair value of reimbursable losses.

Loans comprise the majority of the assets acquired in nearly all of these FDIC-assisted transactions since 2010, 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, the 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.

On their respective acquisition dates in 2012, the Company announced that its wholly-owned subsidiary banks, Old Plank Trail Community Bank, N.A. ("Old Plank Trail Bank"), Hinsdale Bank and Trust Company ("Hinsdale Bank") and Barrington Bank and Trust Company, N.A. ("Barrington"), acquired certain assets and liabilities and the banking operations of First United Bank of Crete, Illinois ("First United Bank"), Second Federal Savings and Loan Association of Chicago ("Second Federal") and Charter National Bank and Trust (“Charter National”), respectively, in FDIC-assisted transactions. 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 7 — 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. These loss share assets 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 are also separately measured from the related loans and foreclosed real estate and recorded as FDIC indemnification assets 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. Although these assets are contractual receivables from the FDIC, there are no contractual interest rates. Additions to expected losses will require an increase to the allowance for loan losses and a corresponding increase to the FDIC indemnification assets. The corresponding accretion is recorded as a component of non-interest income on the Consolidated Statements of Income.

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The following table summarizes the activity in the Company’s FDIC indemnification asset during the periods indicated:



	Three Months Ended						Six Months Ended
(Dollars in thousands)	June 30, 2013			June 30, 2012			June 30, 2013			June 30, 2012
Balance at beginning of period	$	170,696		$	263,212		$	208,160		$	344,251
Additions from acquisitions	—			—			—			13,164
Additions from reimbursable expenses	2,827			6,113			7,860			12,977
Amortization	(1,653		)	(1,204		)	(4,121		)	(2,780		)
Changes in expected reimbursements from the FDIC for changes in expected credit losses	(26,638		)	(12,551		)	(52,735		)	(29,764		)
Payments received from the FDIC	(7,551		)	(33,002		)	(21,483		)	(115,280		)
Balance at end of period	$	137,681		$	222,568		$	137,681		$	222,568

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.

Other Recent Bank Acquisitions

On May 1, 2013, the Company completed its acquisition of 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.

On December 12, 2012, the Company acquired HPK Financial Corporation ("HPK"). HPK was the parent company of Hyde Park Bank & Trust Company ("Hyde Park Bank"), which operated two banking locations in the Hyde Park neighborhood of Chicago, Illinois. As part of this transaction, Hyde Park Bank was merged into the Company's wholly-owned subsidiary bank, Beverly Bank & Trust Company, N.A. ("Beverly Bank"). The Company acquired assets with a fair value of approximately $371.6 million, including approximately $118.5 million of loans, and assumed liabilities with a fair value of approximately $344.1 million, including approximately $243.8 million of deposits. Additionally, the Company recorded goodwill of $12.6 million on the acquisition.

On April 13, 2012, the Company acquired a branch of Suburban Bank & Trust Company (“Suburban”) located in Orland Park, Illinois. Through this transaction, the Company acquired approximately $52 million of deposits and $3 million of loans. The Company recorded goodwill of $1.5 million on the branch acquisition.

See Note 18—Subsequent Events for discussion regarding the Company's announcement in July 2013 of the signing of a definitive agreement to acquire Diamond Bancorp, Inc. ("Diamond").

Specialty Finance Acquisition

On June 8, 2012, the Company completed its acquisition of Macquarie Premium Funding Inc., the Canadian insurance premium funding business of Macquarie Group. Through this transaction, the Company acquired approximately $213 million of gross premium finance receivables. The Company recorded goodwill of approximately $21.9 million at the time of the acquisition.

Wealth Management Acquisitions

On March 30, 2012, the Company’s wholly-owned subsidiary, The Chicago Trust Company, N.A. (“CTC”), acquired the trust operations of Suburban. Through this transaction, CTC acquired trust accounts having assets under administration of approximately $160 million, in addition to land trust accounts. The Company recorded goodwill of $1.8 million on the trust operations acquisition.

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Purchased loans with evidence of credit quality deterioration since origination

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 generally result in a provision for loan losses.

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 6—Loans, for more information on loans acquired with evidence of credit quality deterioration since origination.

(4) Cash and Cash Equivalents

For purposes of the Consolidated Statements of Cash Flows, the Company considers cash and cash equivalents to include 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.

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(5) Available-For-Sale Securities

The following tables are a summary of the available-for-sale securities portfolio as of the dates shown:



	June 30, 2013
(Dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
U.S. Treasury	$	225,200	$	134	$	(14,359	)	$	210,975
U.S. Government agencies	996,137		1,976		(39,655		)	958,458
Municipal	152,208		1,281		(3,362		)	150,127
Corporate notes and other:
Financial issuers	133,453		2,290		(2,783		)	132,960
Other	8,838		135		—			8,973
Mortgage-backed: ⁽¹⁾
Mortgage-backed securities	279,925		3,971		(14,866		)	269,030
Collateralized mortgage obligations	63,833		434		(530		)	63,737
Other equity securities	52,437		746		(3,619		)	49,564
Total available-for-sale securities	$	1,912,031	$	10,967	$	(79,174	)	$	1,843,824



	December 31, 2012
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
(Dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
U.S. Treasury	$	220,226	$	198	$	(937	)	$	219,487
U.S. Government agencies	986,186		4,839		(986		)	990,039
Municipal	107,868		2,899		(296		)	110,471
Corporate notes and other:
Financial issuers	142,205		2,452		(3,982		)	140,675
Other	13,911		220		—			14,131
Mortgage-backed: ⁽¹⁾
Mortgage-backed securities	188,485		8,805		(30		)	197,260
Collateralized mortgage obligations	73,386		928		—			74,314
Other equity securities	52,846		215		(3,362		)	49,699
Total available-for-sale securities	$	1,785,113	$	20,556	$	(9,593	)	$	1,796,076



	June 30, 2012
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
(Dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
U.S. Treasury	$	25,054	$	191	$	(2	)	$	25,243
U.S. Government agencies	636,117		4,262		(167		)	640,212
Municipal	77,397		2,414		(83		)	79,728
Corporate notes and other:
Financial issuers	143,892		2,434		(7,663		)	138,663
Other	19,311		253		—			19,564
Mortgage-backed: ⁽¹⁾
Mortgage-backed securities	205,689		12,889		—			218,578
Collateralized mortgage obligations	36,636		528		—			37,164
Other equity securities	42,726		122		(5,298		)	37,550
Total available-for-sale securities	$	1,186,822	$	23,093	$	(13,213	)	$	1,196,702


(1)	Consisting entirely of residential mortgage-backed securities, none of which are subprime.

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The following table presents the portion of the Company’s available-for-sale securities portfolio which has gross unrealized losses, reflecting the length of time that individual securities have been in a continuous unrealized loss position at June 30, 2013:



	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
U.S. Treasury	$	190,813	$	(14,359	)	$	—	$	—		$	190,813	$	(14,359	)
U.S. Government agencies	625,955		(39,654		)	6,024		(1		)	631,979		(39,655		)
Municipal	85,166		(3,360		)	618		(2		)	85,784		(3,362		)
Corporate notes and other:
Financial issuers	16,491		(301		)	63,459		(2,482		)	79,950		(2,783		)
Other	—		—			—		—			—		—
Mortgage-backed:
Mortgage-backed securities	179,965		(14,866		)	—		—			179,965		(14,866		)
Collateralized mortgage obligations	32,504		(530		)	—		—			32,504		(530		)
Other equity securities	13,171		(555		)	22,337		(3,064		)	35,508		(3,619		)
Total	$	1,144,065	$	(73,625	)	$	92,438	$	(5,549	)	$	1,236,503	$	(79,174	)

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 June 30, 2013 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 corporate securities of financial issuers and auction rate securities included in other equity securities. The corporate securities of financial issuers in this category were comprised of six fixed-to-floating rate bonds and three trust-preferred securities, all of which continue to be considered investment grade. Additionally, a review of the issuers indicated that they all have strong capital ratios.

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:



	Three months ended June 30,					Six months ended June 30,
(Dollars in thousands)	2013			2012		2013			2012
Realized gains	$	3		$	1,109	$	316		$	1,937
Realized losses	(1		)	—		(63		)	(12		)
Net realized gains	$	2		$	1,109	$	253		$	1,925
Other than temporary impairment charges	—			—		—			—
Gains on available-for-sale securities, net	$	2		$	1,109	$	253		$	1,925
Proceeds from sales of available-for-sale securities	$	43,403		$	627,177	$	84,459		$	1,364,546

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The amortized cost and fair value of securities as of June 30, 2013, December 31, 2012 and June 30, 2012, 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:



	June 30, 2013				December 31, 2012				June 30, 2012
(Dollars in thousands)	Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due in one year or less	$	284,334	$	284,734	$	188,594	$	189,015	$	67,163	$	67,488
Due in one to five years	320,175		320,189		419,588		419,654		467,468		466,553
Due in five to ten years	382,837		366,341		361,037		362,135		110,465		109,780
Due after ten years	528,490		490,229		501,177		503,999		256,675		259,589
Mortgage-backed	343,758		332,767		261,871		271,574		242,325		255,742
Other equity securities	52,437		49,564		52,846		49,699		42,726		37,550
Total available-for-sale securities	$	1,912,031	$	1,843,824	$	1,785,113	$	1,796,076	$	1,186,822	$	1,196,702

Securities having a carrying value of $1.1 billion at June 30, 2013 and December 31, 2012 and $782.8 million at June 30, 2012, were pledged as collateral for public deposits, trust deposits, FHLB advances, securities sold under repurchase agreements and derivatives. At June 30, 2013, there were no securities of a single issuer, other than U.S. Government-sponsored agency securities, which exceeded 10% of shareholders’ equity.

(6) Loans

The following table shows the Company’s loan portfolio by category as of the dates shown:



	June 30,			December 31,			June 30,
(Dollars in thousands)	2013			2012			2012
Balance:
Commercial	$	3,120,576		$	2,914,798		$	2,673,181
Commercial real-estate	4,093,983			3,864,118			3,666,519
Home equity	758,260			788,474			820,991
Residential real-estate	384,961			367,213			375,494
Premium finance receivables—commercial	2,165,734			1,987,856			1,830,044
Premium finance receivables—life insurance	1,821,147			1,725,166			1,656,200
Indirect consumer	64,521			77,333			72,482
Consumer and other	107,710			103,985			107,931
Total loans, net of unearned income, excluding covered loans	$	12,516,892		$	11,828,943		$	11,202,842
Covered loans	454,602			560,087			614,062
Total loans	$	12,971,494		$	12,389,030		$	11,816,904
Mix:
Commercial	24		%	24		%	23		%
Commercial real-estate	31			31			31
Home equity	6			6			7
Residential real-estate	3			3			3
Premium finance receivables—commercial	16			16			15
Premium finance receivables—life insurance	14			14			14
Indirect consumer	1			1			1
Consumer and other	1			1			1
Total loans, net of unearned income, excluding covered loans	96		%	96		%	95		%
Covered loans	4			4			5
Total loans	100		%	100		%	100		%

Certain premium finance receivables are recorded net of unearned income. The unearned income portions of such premium finance receivables were $41.5 million at June 30, 2013, $41.1 million at December 31, 2012 and $41.9 million at June 30, 2012,

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respectively. Certain life insurance premium finance receivables attributable to the life insurance premium finance loan acquisition in 2009 as well as the covered loans acquired in the FDIC-assisted acquisitions are recorded net of credit discounts. See “Acquired Loan Information at Acquisition” below.

Indirect consumer loans include auto, boat and other indirect consumer loans. Total loans, excluding loans acquired with evidence of credit quality deterioration since origination, include net deferred loan fees and costs and fair value purchase accounting adjustments totaling $(3.6) million at June 30, 2013, $13.2 million at December 31, 2012 and $13.8 million at June 30, 2012. The net credit balance at June 30, 2013 is primarily the result of purchase accounting adjustments related to the acquisition of FNBI during the second quarter of 2013.

The Company’s loan portfolio is generally comprised of loans to consumers and small to medium-sized businesses located within the geographic market areas that the banks serve. The premium finance receivables portfolios are made to customers on a national basis and the majority of the indirect consumer loans were generated through a network of local automobile dealers. The Company strives to maintain a loan portfolio that is diverse in terms of loan type, industry, borrower and geographic concentrations. Such diversification reduces the exposure to economic downturns that may occur in different segments of the economy or in different industries.

It is the policy of the Company to review each prospective credit in order to determine the appropriateness and, when required, the adequacy of security or collateral necessary to obtain when making a loan. The type of collateral, when required, will vary from liquid assets to real estate. The Company seeks to ensure access to collateral, in the event of default, through adherence to state lending laws and the Company’s credit monitoring procedures.

Acquired Loan Information at Acquisition—Loans with evidence of credit quality deterioration since origination

As part of our previous acquisitions, we acquired loans for which there was evidence of credit quality deterioration since origination and we determined that it was probable that the Company would be unable to collect all contractually required principal and interest payments.

The following table presents the unpaid principal balance and carrying value for these acquired loans:



	June 30, 2013				December 31, 2012
	Unpaid Principal		Carrying		Unpaid Principal		Carrying
(Dollars in thousands)	Balance		Value		Balance		Value
Bank acquisitions	$	549,781	$	416,733	$	674,868	$	503,837
Life insurance premium finance loans acquisition	492,221		474,450		536,503		514,459

For loans acquired with evidence of credit quality deterioration since origination as a result of acquisitions during the six months ended June 30, 2013, the following table provides estimated details on these loans at the date of acquisition:



(Dollars in thousands)	FNBI
Contractually required payments including interest	$	32,022
Less: Nonaccretable difference	8,890
Cash flows expected to be collected ⁽¹⁾	23,132
Less: Accretable yield	2,055
Fair value of loans acquired with evidence of credit quality deterioration since origination	$	21,077


(1)	Represents undiscounted expected principal and interest cash flows at acquisition.

See Note 7—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 loans acquired with evidence of credit quality deterioration since origination at June 30, 2013.

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Accretable Yield Activity

Changes in expected cash flows may vary from period to period as the Company periodically updates its cash flow model assumptions for loans acquired with evidence of credit quality deterioration since origination. 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 loans acquired with evidence of credit quality deterioration since origination:



	Three Months Ended June 30, 2013						Three Months Ended June 30, 2012
(Dollars in thousands)	Bank Acquisitions			Life Insurance Premium Finance Loans			Bank Acquisitions			Life Insurance Premium Finance Loans
Accretable yield, beginning balance	$	121,725		$	11,218		$	182,222		$	15,848
Acquisitions	2,055			—			—			—
Accretable yield amortized to interest income	(9,347		)	(2,254		)	(13,387		)	(2,749		)
Accretable yield amortized to indemnification asset ⁽¹⁾	(11,906		)	—			(18,063		)	—
Reclassification from non-accretable difference ⁽²⁾	30,792			1,007			7,590			1,145
(Decreases) increases in interest cash flows due to payments and changes in interest rates	(2,463		)	316			13,439			382
Accretable yield, ending balance ⁽³⁾	$	130,856		$	10,287		$	171,801		$	14,626



	Six Months Ended June 30, 2013						Six Months Ended June 30, 2012
(Dollars in thousands)	Bank Acquisitions			Life Insurance Premium Finance Loans			Bank Acquisitions			Life Insurance Premium Finance Loans
Accretable yield, beginning balance	$	143,224		$	13,055		$	173,120		$	18,861
Acquisitions	1,977			—			2,288			—
Accretable yield amortized to interest income	(18,924		)	(4,273		)	(28,279		)	(6,486		)
Accretable yield amortized to indemnification asset ⁽¹⁾	(20,612		)	—			(39,440		)	—
Reclassification from non-accretable difference ⁽²⁾	36,204			1,007			49,191			1,145
(Decreases) increases in interest cash flows due to payments and changes in interest rates	(11,013		)	498			14,921			1,106
Accretable yield, ending balance ⁽³⁾	$	130,856		$	10,287		$	171,801		$	14,626


(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 June 30, 2013, the Company estimates that the remaining accretable yield balance to be amortized to the indemnification asset for the bank acquisitions is $52.2 million. The remainder of the accretable yield related to bank acquisitions is expected to be amortized to interest income.

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(7) 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 June 30, 2013, December 31, 2012 and June 30, 2012:



As of June 30, 2013			90+ days and still accruing		60-89 days past due		30-59 days past due
(Dollars in thousands)	Nonaccrual								Current		Total Loans
Loan Balances:
Commercial
Commercial and industrial	$	15,432	$	—	$	2,940	$	9,933	$	1,423,823	$	1,452,128
Franchise	—		—		—		450		201,790		202,240
Mortgage warehouse lines of credit	—		—		—		—		174,422		174,422
Community Advantage—homeowners association	—		—		—		—		83,003		83,003
Aircraft	—		—		—		—		13,174		13,174
Asset-based lending	1,816		100		2,305		7,127		919,106		930,454
Tax exempt	—		—		—		—		151,492		151,492
Leases	—		—		—		—		102,409		102,409
Other	—		—		—		—		98		98
Purchased non-covered commercial ⁽¹⁾	—		190		—		1,632		9,334		11,156
Total commercial	17,248		290		5,245		19,142		3,078,651		3,120,576
Commercial real-estate: