10-Q
Table of Contents

 

 

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, 2012

OR

 

¨ 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.)

727 North Bank Lane

Lake Forest, Illinois 60045

(Address of principal executive offices)

(847) 615-4096

(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, 36,364,203 shares, as of July 31, 2012

 

 

 

 


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      52   

ITEM 3.

   Quantitative and Qualitative Disclosures About Market Risk      101   

ITEM 4.

   Controls and Procedures      103   
   PART II. — OTHER INFORMATION   

ITEM 1.

   Legal Proceedings      NA   

ITEM 1A.

   Risk Factors      103   

ITEM 2.

   Unregistered Sales of Equity Securities and Use of Proceeds      103   

ITEM 3.

   Defaults Upon Senior Securities      NA   

ITEM 4.

   Mine Safety Disclosures      NA   

ITEM 5.

   Other Information      NA   

ITEM 6.

   Exhibits      104   
   Signatures      105   


Table of Contents

PART I

ITEM 1. FINANCIAL STATEMENTS

WINTRUST FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CONDITION

 

(In thousands, except share data)    (Unaudited)
June  30,

2012
    December 31,
2011
    (Unaudited)
June 30,

2011
 

Assets

      

Cash and due from banks

   $ 176,529      $ 148,012      $ 140,434   

Federal funds sold and securities purchased under resale agreements

     15,227        21,692        43,634   

Interest-bearing deposits with other banks (balance restricted for securitization investors of $658,983 at June 30, 2012, $272,592 at December 31, 2011, and $23,276 at June 30, 2011)

     1,117,888        749,287        990,308   

Available-for-sale securities, at fair value

     1,196,702        1,291,797        1,456,426   

Trading account securities

     608        2,490        509   

Federal Home Loan Bank and Federal Reserve Bank stock

     92,792        100,434        86,761   

Brokerage customer receivables

     31,448        27,925        29,736   

Mortgage loans held-for-sale, at fair value

     511,566        306,838        133,083   

Mortgage loans held-for-sale, at lower of cost or market

     14,538        13,686        5,881   

Loans, net of unearned income, excluding covered loans

     11,202,842        10,521,377        9,925,077   

Covered loans

     614,062        651,368        408,669   
  

 

 

   

 

 

   

 

 

 

Total loans

     11,816,904        11,172,745        10,333,746   

Less: Allowance for loan losses

     111,920        110,381        117,362   

Less: Allowance for covered loan losses

     20,560        12,977        7,443   
  

 

 

   

 

 

   

 

 

 

Net loans (balance restricted for securitization investors of $29,840 at June 30, 2012, $411,532 at December 31, 2011, and $660,294 at June 30, 2011)

     11,684,424        11,049,387        10,208,941   

Premises and equipment, net

     449,608        431,512        403,577   

FDIC indemnification asset

     222,568        344,251        110,049   

Accrued interest receivable and other assets

     710,275        444,912        389,634   

Trade date securities receivable

     —          634,047        322,091   

Goodwill

     330,896        305,468        283,301   

Other intangible assets

     21,213        22,070        11,532   
  

 

 

   

 

 

   

 

 

 

Total assets

   $ 16,576,282      $ 15,893,808      $ 14,615,897   
  

 

 

   

 

 

   

 

 

 

Liabilities and Shareholders’ Equity

      

Deposits:

      

Non-interest bearing

   $ 2,047,715      $ 1,785,433      $ 1,397,433   

Interest bearing

     11,009,866        10,521,834        9,861,827   
  

 

 

   

 

 

   

 

 

 

Total deposits

     13,057,581        12,307,267        11,259,260   

Notes payable

     2,457        52,822        1,000   

Federal Home Loan Bank advances

     564,301        474,481        423,500   

Other borrowings

     375,523        443,753        432,706   

Secured borrowings—owed to securitization investors

     360,825        600,000        600,000   

Subordinated notes

     15,000        35,000        40,000   

Junior subordinated debentures

     249,493        249,493        249,493   

Trade date securities payable

     19,025        47        2,243   

Accrued interest payable and other liabilities

     210,003        187,412        134,309   
  

 

 

   

 

 

   

 

 

 

Total liabilities

     14,854,208        14,350,275        13,142,511   
  

 

 

   

 

 

   

 

 

 

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, 2012, December 31, 2011 and June 30, 2011

     49,837        49,768        49,704   

Series C - $1,000 liquidation value; 126,500 shares issued and outstanding at June 30, 2012, and no shares issued and outstanding at December 31, 2011 and June 30, 2011

     126,500        —          —     

Common stock, no par value; $1.00 stated value; 100,000,000 shares authorized; 36,573,468 shares issued at June 30, 2012, 35,981,950 shares issued at December 31, 2011, and 34,988,497 shares issued at June 30, 2011

     36,573        35,982        34,988   

Surplus

     1,013,428        1,001,316        969,315   

Treasury stock, at cost, 236,226 shares at June 30, 2012, 3,601 shares at December 31, 2011, and 1,441 shares at June 30, 2011

     (7,374     (112     (50

Retained earnings

     501,139        459,457        415,297   

Accumulated other comprehensive income (loss)

     1,971        (2,878     4,132   
  

 

 

   

 

 

   

 

 

 

Total shareholders’ equity

     1,722,074        1,543,533        1,473,386   
  

 

 

   

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 16,576,282      $ 15,893,808      $ 14,615,897   
  

 

 

   

 

 

   

 

 

 

See accompanying notes to unaudited consolidated financial statements.

 

1


Table of Contents

WINTRUST FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 

(In thousands, except per share data)

   2012     2011     2012     2011  

Interest income

        

Interest and fees on loans

   $ 144,100      $ 132,338      $ 287,655      $ 268,881   

Interest bearing deposits with banks

     203        870        451        1,806   

Federal funds sold and securities purchased under resale agreements

     6        23        18        55   

Securities

     10,510        11,438        22,357        20,978   

Trading account securities

     10        10        19        23   

Federal Home Loan Bank and Federal Reserve Bank stock

     641        572        1,245        1,122   

Brokerage customer receivables

     221        194        432        360   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

     155,691        145,445        312,177        293,225   
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense

        

Interest on deposits

     17,273        22,404        35,303        46,360   

Interest on Federal Home Loan Bank advances

     2,867        4,010        6,451        7,968   

Interest on notes payable and other borrowings

     2,274        2,715        5,376        5,345   

Interest on secured borrowings—owed to securitization investors

     1,743        2,994        4,292        6,034   

Interest on subordinated notes

     126        194        295        406   

Interest on junior subordinated debentures

     3,138        4,422        6,295        8,792   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

     27,421        36,739        58,012        74,905   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     128,270        108,706        254,165        218,320   

Provision for credit losses

     20,691        29,187        38,091        54,531   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provision for credit losses

     107,579        79,519        216,074        163,789   
  

 

 

   

 

 

   

 

 

   

 

 

 

Non—interest income

        

Wealth management

     13,393        10,601        25,794        20,837   

Mortgage banking

     25,607        12,817        44,141        24,448   

Service charges on deposit accounts

     3,994        3,594        8,202        6,905   

Gains on available-for-sale securities, net

     1,109        1,152        1,925        1,258   

Gain on bargain purchases, net

     (55     746        785        10,584   

Trading losses, net

     (928     (30     (782     (470

Other

     7,815        7,772        17,893        13,977   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non—interest income

     50,935        36,652        97,958        77,539   
  

 

 

   

 

 

   

 

 

   

 

 

 

Non-interest expense

        

Salaries and employee benefits

     68,139        53,079        137,169        109,178   

Equipment

     5,466        4,409        10,866        8,673   

Occupancy, net

     7,728        6,772        15,790        13,277   

Data processing

     3,840        3,147        7,458        6,670   

Advertising and marketing

     2,179        1,440        4,185        3,054   

Professional fees

     3,847        4,533        7,451        8,079   

Amortization of other intangible assets

     1,089        704        2,138        1,393   

FDIC insurance

     3,477        3,281        6,834        7,799   

OREO expenses, net

     5,848        6,577        13,026        12,385   

Other

     15,572        13,264        30,027        24,807   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non—interest expense

     117,185        97,206        234,944        195,315   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before taxes

     41,329        18,965        79,088        46,013   

Income tax expense

     15,734        7,215        30,283        17,861   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 25,595      $ 11,750      $ 48,805      $ 28,152   
  

 

 

   

 

 

   

 

 

   

 

 

 

Preferred stock dividends and discount accretion

   $ 2,644      $ 1,033      $ 3,890      $ 2,064   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income applicable to common shares

   $ 22,951      $ 10,717      $ 44,915      $ 26,088   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income per common share—Basic

   $ 0.63      $ 0.31      $ 1.24      $ 0.75   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income per common share—Diluted

   $ 0.52      $ 0.25      $ 1.02      $ 0.60   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash dividends declared per common share

   $ —        $ —        $ 0.09      $ 0.09   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares outstanding

     36,329        34,971        36,266        34,950   

Dilutive potential common shares

     7,770        8,438        7,723        8,437   
  

 

 

   

 

 

   

 

 

   

 

 

 

Average common shares and dilutive common shares

     44,099        43,409        43,989        43,387   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to unaudited consolidated financial statements.

 

2


Table of Contents

WINTRUST FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 

(In thousands)

   2012     2011     2012     2011  

Net income

   $ 25,595      $ 11,750      $ 48,805      $ 28,152   

Unrealized gains on securities

        

Before tax

     7,959        12,643        4,740        14,013   

Tax effect

     (3,160     (5,002     (1,884     (5,560
  

 

 

   

 

 

   

 

 

   

 

 

 

Net of tax

     4,799        7,641        2,856        8,453   
  

 

 

   

 

 

   

 

 

   

 

 

 

Reclassification of net gains included in net income

        

Before tax

     1,109        1,152        1,925        1,258   

Tax effect

     (445     (452     (772     (495
  

 

 

   

 

 

   

 

 

   

 

 

 

Net of tax

     664        700        1,153        763   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net unrealized gains on securities

     4,135        6,941        1,703        7,690   
  

 

 

   

 

 

   

 

 

   

 

 

 

Unrealized gains on derivative instruments

        

Before tax

     936        1,082        1,732        3,203   

Tax effect

     (371     (432     (687     (1,249
  

 

 

   

 

 

   

 

 

   

 

 

 

Net unrealized gains on derivative instruments

     565        650        1,045        1,954   
  

 

 

   

 

 

   

 

 

   

 

 

 

Foreign currency translation adjustment

        

Before tax

     2,701        —          2,701        —     

Tax effect

     (600     —          (600     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net foreign currency translation adjustment

     2,101        —          2,101        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income

     6,801        7,591        4,849        9,644   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 32,396      $ 19,341        53,654        37,796   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to unaudited consolidated financial statements.

 

3


Table of Contents

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, 2010

   $ 49,640       $ 34,864       $ 965,203      $ —        $ 392,354      $ (5,512   $ 1,436,549   

Net income

     —           —           —          —          28,152        —          28,152   

Other comprehensive income, net of tax

     —           —           —          —          —          9,644        9,644   

Cash dividends declared on common stock

     —           —           —          —          (3,145     —          (3,145

Dividends on preferred stock

     —           —           —          —          (2,000     —          (2,000

Accretion on preferred stock

     64         —           —          —          (64     —          —     

Common stock repurchases

     —           —           —          (50     —          —          (50

Stock-based compensation

     —           —           2,034        —          —          —          2,034   

Common stock issued for:

                

Exercise of stock options and warrants

     —           45         567        —          —          —          612   

Restricted stock awards

     —           25         (28     —          —          —          (3

Employee stock purchase plan

     —           29         868        —          —          —          897   

Director compensation plan

     —           25         671        —          —          —          696   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2011

   $ 49,704       $ 34,988       $ 969,315      $ (50   $ 415,297      $ 4,132      $ 1,473,386   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to unaudited consolidated financial statements.

 

4


Table of Contents

WINTRUST FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

     Six Months Ended June 30,  

(In thousands)

   2012     2011  

Operating Activities:

    

Net income

   $ 48,805      $ 28,152   

Adjustments to reconcile net income to net cash (used for) provided by operating activities

    

Provision for credit losses

     38,091        54,531   

Depreciation and amortization

     11,442        9,772   

Stock-based compensation expense

     4,639        2,034   

Tax benefit from stock-based compensation arrangements

     1,228        169   

Excess tax benefits from stock-based compensation arrangements

     (800     (238

Net amortization of premium on securities

     4,830        5,496   

Mortgage servicing rights fair value change and amortization, net

     (1,920     1,136   

Originations and purchases of mortgage loans held-for-sale

     (1,568,240     (1,020,626

Proceeds from sales of mortgage loans held-for-sale

     1,392,580        1,257,619   

Bank owned life insurance income, net of claims

     (1,424     (1,537

Decrease in trading securities, net

     1,882        4,370   

Net increase in brokerage customer receivables

     (3,523     (5,187

Gains on mortgage loans sold

     (29,920     (4,510

Gains on available-for-sale securities, net

     (1,925     (1,258

Gain on bargain purchases, net

     (785     (10,584

Loss on sales of premises and equipment, net

     471        —     

(Increase) decrease in accrued interest receivable and other assets, net

     (86,605     85,641   

Decrease (increase) in accrued interest payable and other liabilities, net

     10,600        (29,341
  

 

 

   

 

 

 

Net Cash (Used for) Provided by Operating Activities

     (180,574     375,639   
  

 

 

   

 

 

 

Investing Activities:

    

Proceeds from maturities of available-for-sale securities

     410,640        746,324   

Proceeds from sales of available-for-sale securities

     1,364,546        53,511   

Purchases of available-for-sale securities

     (1,036,877     (1,072,299

Net cash (paid) received for acquisitions

     (129,742     19,925   

Net increase in interest-bearing deposits with banks

     (368,166     (100,337

Net increase in loans

     (470,298     (364,474

Purchases of premises and equipment, net

     (27,296     (48,741
  

 

 

   

 

 

 

Net Cash Used for Investing Activities

     (257,193     (766,091
  

 

 

   

 

 

 

Financing Activities:

    

Increase in deposit accounts

     609,317        243,605   

(Decrease) increase in other borrowings, net

     (341,111     171,673   

Increase in Federal Home Loan Bank advances, net

     90,000        —     

Repayment of subordinated notes

     (20,000     (10,000

Excess tax benefits from stock-based compensation arrangements

     800        238   

Net proceeds from issuance of preferred stock

     122,690        —     

Issuance of common shares resulting from exercise of stock options, employee stock purchase plan and conversion of common stock warrants

     10,646        1,619   

Common stock repurchases

     (7,262     (50

Dividends paid

     (5,261     (5,145
  

 

 

   

 

 

 

Net Cash Provided by Financing Activities

     459,819        401,940   
  

 

 

   

 

 

 

Net Increase in Cash and Cash Equivalents

     22,052        11,488   

Cash and Cash Equivalents at Beginning of Period

     169,704        172,580   
  

 

 

   

 

 

 

Cash and Cash Equivalents at End of Period

   $ 191,756      $ 184,068   
  

 

 

   

 

 

 

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. 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, 2011 (“2011 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 2011 Form 10-K.

(2) Recent Accounting Developments

Goodwill Impairment Testing

In September 2011, the FASB issued ASU No. 2011-08, “Intangibles – Goodwill and Other (Topic 350): Testing Goodwill for Impairment,” which presents a qualitative approach to test goodwill for impairment. This ASU provides entities the option to assess qualitative factors to determine if impairment of goodwill exists. If examination of the qualitative factors yields a determination that it is not more likely than not that impairment exists, then it is not necessary for the Company to perform the two-step impairment test. This guidance is effective for fiscal periods beginning after December 15, 2011. The Company utilized a qualitative approach for its annual goodwill impairment test of the banking segment conducted as of June 30, 2012 and determined that it is not more likely than not that an impairment exists at that time. Adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

Presentation of Comprehensive Income

In June 2011, the FASB issued ASU No. 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income,” which amends the presentation formats permitted for reporting other comprehensive income. This ASU no longer allows other comprehensive income to be presented as part of the statement of changes in shareholder’s equity. Entities must present other comprehensive income and its components in a single statement along with net income or in a separate, consecutive statement of other comprehensive income. This guidance is effective for fiscal and interim periods beginning after December 15, 2011. However, in December 2011, the FASB issued ASU No. 2011-12 “Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05” which deferred the ASU No. 2011-05 provision requiring companies to present reclassification adjustments for each component of other comprehensive income in both net income and other comprehensive income on the face of the financial statements. This deferral does not change the requirement to present items of net income, other comprehensive income and total comprehensive income in either a continuous statement or consecutive statements as of the effective date noted above. The Company adopted ASU No. 2011-05 in the first quarter of 2012 and has included separate consolidated statements of comprehensive income in accordance with the above guidance.

 

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Amended Guidance for Fair Value Measurement and Disclosure

In May 2011, the FASB issued ASU No. 2011-04, “Fair Value Measurements (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS,” which amends the language used to describe U.S. GAAP requirements for measuring fair value and for disclosing information about fair value measurements. The amended language seeks to clarify the application of existing guidance as well as change the measurement and disclosure of a few specific items. The principles changed include measurement of financial instruments that are managed within a portfolio and application of premiums and discounts in fair value measurement. The new guidance will also require additional disclosures including expanded disclosures for measurements categorized within level three of the fair value hierarchy, disclosures for nonfinancial assets at fair value and disclosure displaying the fair value hierarchy by level for items in the statement of financial position that are not measured at fair value but for which a fair value is required to be disclosed. The guidance is effective during interim and annual periods beginning after December 15, 2011. The Company adopted this guidance in the first quarter of 2012 and has included additional disclosures to address the topics presented within this ASU. See Note 15—“Fair Value of Assets and Liabilities” for the additional disclosures.

(3) Business Combinations

FDIC-Assisted Transactions

Since April 2010, the Company has acquired the banking operations, including the acquisition of certain assets and the assumption of liabilities, of seven financial institutions in FDIC-assisted transactions.

The following table presents details related to these transactions:

 

(Dollars in thousands)

  Lincoln Park     Wheatland     Ravenswood     Community First
Bank - Chicago
    The Bank  of
Commerce
    First
Chicago
    Charter
National
 

Date of acquisition

   
 
April 23,
2010
  
  
   
 
April 23,
2010
  
  
   
 
August 6,
2010
  
  
   
 
February 4,
2011
  
  
   
 
March 25,
2011
  
  
   
 
July 8,
2011
  
  
   
 
February 10,
2012
  
  

Fair value of assets acquired, at the acquisition date

  $ 157,078      $ 343,870      $ 173,919      $ 50,891      $ 173,986      $ 768,873      $ 92,409   

Fair value of loans acquired, at the acquisition date

    103,420        175,277        97,956        27,332        77,887        330,203        45,555   

Fair value of liabilities assumed, at the acquisition date

    192,018        415,560        122,943        49,779        168,472        741,508        91,570   

Loans comprise the majority of the assets acquired in these transactions, most of which are subject to loss sharing agreements with the FDIC whereby the FDIC has agreed to reimburse the Company for 80% of losses incurred on the purchased loans, other real estate owned (“OREO”), and certain other assets. Additionally, 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.

On February 10, 2012, the Company announced that its wholly-owned subsidiary bank, Barrington Bank, acquired certain assets and liabilities and the banking operations of Charter National Bank and Trust (“Charter National”) in an FDIC-assisted transaction. At the acquisition date, the Company estimated the fair value of the reimbursable losses to be approximately $13.2 million. In 2011, the Company estimated the fair value of the reimbursable losses to be approximately $273.3 million for the First Chicago Bank & Trust (“First Chicago”) acquisition, $48.9 million for The Bank of Commerce (“TBOC”) acquisition and $6.7 million for the Community First Bank-Chicago (“CFBC”) acquisition, at their respective acquisition dates. For the three acquisitions subject to loss share agreements in 2010, the Company estimated the fair value of the reimbursable losses to be approximately $44.0 million for the Ravenswood Bank (“Ravenswood”) acquisition, and $113.8 million for the Lincoln Park Savings Bank (“Lincoln Park”) and Wheatland Bank (“Wheatland”) acquisitions. The agreements with the FDIC require that the Company follow certain servicing procedures or risk losing the FDIC reimbursement of covered asset losses.

The loans covered by the loss sharing agreements are classified and presented as covered loans and the estimated reimbursable losses are recorded as an FDIC indemnification asset in the Consolidated Statements of Condition. The Company recorded the acquired assets and liabilities at their estimated fair values at the acquisition date. The fair value for loans reflected expected credit losses at the acquisition date. Therefore, the Company will only recognize a provision for credit losses and charge-offs on the acquired loans for any further credit deterioration subsequent to the acquisition date. See Note 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 Charter National acquisition resulted in bargain purchase gain of approximately $785,000. The 2011 transactions resulted in bargain purchase gains of a total of $38.0 million, including $27.4 million for First Chicago, $8.6 million for TBOC and $2.0 million for CFBC. In 2010, FDIC-assisted transactions resulted in bargain purchase gains of a total of $33.3 million, including $6.8 million for Ravenswood, $22.3 million for Wheatland, and $4.2 million for Lincoln Park. Bargain purchase gains are shown as a component of non-interest income on the Company’s Consolidated Statements of Income.

 

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Table of Contents

As stated above, in conjunction with FDIC-assisted transactions, the Company entered into loss share agreements with the FDIC. These agreements 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.

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,
2012
    June 30,
2011
    June 30,
2012
    June 30,
2011
 

Balance at beginning of period

   $ 263,212      $ 124,785      $ 344,251      $ 118,182   

Additions from acquisitions

     —          7,381        13,164        55,526   

Additions from reimbursable expenses

     6,113        2,057        12,977        5,071   

Accretion

     (1,204     305        (2,780     664   

Changes in expected reimbursements from the FDIC for changes in expected credit losses

     (12,551     (2,760     (29,764     (12,166

Payments received from the FDIC

     (33,002     (21,719     (115,280     (57,228
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 222,568      $ 110,049      $ 222,568      $ 110,049   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other Bank Acquisitions

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.

On September 30, 2011, the Company acquired Elgin State Bancorp, Inc. (“ESBI”). ESBI was the parent company of Elgin State Bank, which operated three banking locations in Elgin, Illinois. As part of this transaction, Elgin State Bank was merged into the Company’s wholly-owned subsidiary bank, St. Charles Bank & Trust Company (“St. Charles”). St. Charles acquired assets with a fair value of approximately $263.2 million, including $146.7 million of loans, and assumed liabilities with a fair value of approximately $248.4 million, including $241.1 million of deposits. Additionally, the Company recorded goodwill of $5.0 million on the acquisition.

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 $22.1 million on the acquisition.

Wealth Management Acquisitions

On March 30, 2012, the Company’s wholly-owned subsidiary, The Chicago Trust Company, N.A. (“CTC”), completed its previously announced acquisition of 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.

On July 1, 2011, the Company acquired Great Lakes Advisors, Inc. (“Great Lakes Advisors”), a Chicago-based investment manager with approximately $2.4 billion in assets under management. The Company acquired assets with a fair value of approximately $26.0 million and assumed liabilities with a fair value of approximately $8.8 million. The Company recorded goodwill of $15.7 million on the acquisition.

 

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Table of Contents

Mortgage Banking Acquisitions

On April 13, 2011, the Company acquired certain assets and assumed certain liabilities of the mortgage banking business of River City Mortgage, LLC (“River City”) of Bloomington, Minnesota. Licensed to originate loans in five states, and with offices in Minnesota, Nebraska and North Dakota, River City originated nearly $500 million in mortgage loans in 2010.

On February 3, 2011, the Company acquired certain assets and assumed certain liabilities of the mortgage banking business of Woodfield Planning Corporation (“Woodfield”) of Rolling Meadows, Illinois. With offices in Rolling Meadows, Illinois and Crystal Lake, Illinois, Woodfield originated approximately $180 million in mortgage loans in 2010.

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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Table of Contents

(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, 2012  

(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)

          

Agency

     205,689         12,889         —          218,578   

Non-agency CMOs

     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   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

     December 31, 2011  
            Gross      Gross        
     Amortized      unrealized      unrealized     Fair  

(Dollars in thousands)

   Cost      gains      losses     Value  

U.S. Treasury

   $ 16,028       $ 145       $ —        $ 16,173   

U.S. Government agencies

     760,533         5,596         (213     765,916   

Municipal

     57,962         2,159         (23     60,098   

Corporate notes and other:

          

Financial issuers

     149,229         1,914         (8,499     142,644   

Other

     27,070         287         (65     27,292   

Mortgage-backed: (1)

          

Agency

     206,549         12,078         (15     218,612   

Non-agency CMOs

     29,767         175         (3     29,939   

Other equity securities

     37,595         48         (6,520     31,123   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total available-for-sale securities

   $ 1,284,733       $ 22,402       $ (15,338   $ 1,291,797   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

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

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, 2012:

 

     Continuous unrealized     Continuous unrealized        
     losses existing for     losses existing for        
     less than 12 months     greater than 12 months     Total  
     Fair      Unrealized     Fair      Unrealized     Fair      Unrealized  

(Dollars in thousands)

   value      losses     value      losses     value      losses  

U.S. Treasury

   $ 3,997       $ (2   $ —         $ —        $ 3,997       $ (2

U.S. Government agencies

     105,306         (167     —           —          105,306         (167

Municipal

     12,873         (83     —           —          12,873         (83

Corporate notes and other:

               

Financial issuers

     49,814         (3,427     51,711         (4,236     101,525         (7,663

Other

     —           —          —           —          —           —     

Mortgage-backed:

               

Agency

     —           —          —           —          —           —     

Non-agency CMOs

     —           —          —           —          —           —     

Other equity securities

     25,121         (5,298     —           —          25,121         (5,298
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 197,111       $ (8,977   $ 51,711       $ (4,236   $ 248,822       $ (13,213
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

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Table of Contents

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, 2012 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 comprised of corporate securities of financial issuers. The corporate securities of financial issuers in this category included five 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 each 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)

   2012      2011      2012     2011  

Realized gains

   $ 1,109       $ 1,152       $ 1,937      $ 1,258   

Realized losses

     —           —           (12     —     
  

 

 

    

 

 

    

 

 

   

 

 

 

Net realized gains

   $ 1,109       $ 1,152       $ 1,925      $ 1,258   

Other than temporary impairment charges

     —           —           —          —     
  

 

 

    

 

 

    

 

 

   

 

 

 

Gains on available- for-sale securities, net

   $ 1,109       $ 1,152       $ 1,925      $ 1,258   
  

 

 

    

 

 

    

 

 

   

 

 

 

Proceeds from sales of available-for-sale securities

   $ 627,177       $ 3,369       $ 1,364,546      $ 53,511   
  

 

 

    

 

 

    

 

 

   

 

 

 

The amortized cost and fair value of securities as of June 30, 2012 and December 31, 2011, 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, 2012      December 31, 2011  
     Amortized      Fair      Amortized      Fair  

(Dollars in thousands)

   Cost      Value      Cost      Value  

Due in one year or less

   $ 67,163       $ 67,488       $ 121,400       $ 121,662   

Due in one to five years

     467,468         466,553         532,828         530,632   

Due in five to ten years

     110,465         109,780         95,279         95,508   

Due after ten years

     256,675         259,589         261,315         264,321   

Mortgage-backed

     242,325         255,742         236,316         248,551   

Other equity securities

     42,726         37,550         37,595         31,123   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available-for-sale securities

   $ 1,186,822       $ 1,196,702       $ 1,284,733       $ 1,291,797   
  

 

 

    

 

 

    

 

 

    

 

 

 

At June 30, 2012 and December 31, 2011, securities having a carrying value of $782.8 million and $1.1 billion, respectively which include securities traded but not yet settled, were pledged as collateral for public deposits, trust deposits, FHLB advances, securities sold under repurchase agreements and derivatives. At June 30, 2012, there were no securities of a single issuer, other than U.S. Government-sponsored agency securities, which exceeded 10% of shareholders’ equity.

 

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Table of Contents

(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)

   2012     2011     2011  

Balance:

      

Commercial

   $ 2,673,181      $ 2,498,313      $ 2,132,436   

Commercial real estate

     3,666,519        3,514,261        3,374,668   

Home equity

     820,991        862,345        880,702   

Residential real estate

     375,494        350,289        329,381   

Premium finance receivables—commercial

     1,830,044        1,412,454        1,429,436   

Premium finance receivables—life insurance

     1,656,200        1,695,225        1,619,668   

Indirect consumer

     72,482        64,545        57,718   

Consumer and other

     107,931        123,945        101,068   
  

 

 

   

 

 

   

 

 

 

Total loans, net of unearned income, excluding covered loans

   $ 11,202,842      $ 10,521,377      $ 9,925,077   

Covered loans

     614,062        651,368        408,669   
  

 

 

   

 

 

   

 

 

 

Total loans

   $ 11,816,904      $ 11,172,745      $ 10,333,746   
  

 

 

   

 

 

   

 

 

 

Mix:

      

Commercial

     23     22     20

Commercial real estate

     31        31        33   

Home equity

     7        8        8   

Residential real estate

     3        3        3   

Premium finance receivables—commercial

     15        13        14   

Premium finance receivables—life insurance

     14        15        16   

Indirect consumer

     1        1        1   

Consumer and other

     1        1        1   
  

 

 

   

 

 

   

 

 

 

Total loans, net of unearned income, excluding covered loans

     95     94     96

Covered loans

     5        6        4   
  

 

 

   

 

 

   

 

 

 

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 $41.9 million at June 30, 2012, $34.6 million at December 31, 2011 and $37.3 million at June 30, 2011, 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 starting in 2010 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 $13.8 million at June 30, 2012, $12.8 million at December 31, 2011 and $12.9 million at June 30, 2011.

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 Company serves. The premium finance receivables portfolios are made to customers in the United States and Canada on a national basis and the majority of the indirect consumer loans were generated through a network of local automobile dealers. As a result, the Company strives to maintain a loan portfolio that is diverse in terms of loan type, industry, borrower and geographic concentrations. Such diversification reduces the exposure to economic downturns that may occur in different segments of the economy or in different industries.

It is the policy of the Company to review each prospective credit in order to determine the appropriateness and, when required, the adequacy of security or collateral necessary to obtain when making a loan. The type of collateral, when required, will vary from liquid assets to real estate. The Company seeks to 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 acquisition of a portfolio of life insurance premium finance loans in 2009 as well as the bank acquisitions starting in 2010, 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.

 

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The following table presents the unpaid principal balance and carrying value for loans acquired with evidence of credit quality deterioration since origination:

 

     June 30, 2012      December 31, 2011  
     Unpaid             Unpaid         
     Principal      Carrying      Principal      Carrying  

(Dollars in thousands)

   Balance      Value      Balance      Value  

Bank acquisitions

   $ 726,721       $ 557,387       $ 866,874       $ 596,946   

Life insurance premium finance loans acquisition

     571,963         544,963         632,878         598,463   

For loans acquired with evidence of credit quality deterioration since origination as a result of acquisitions during the six months ended June 30, 2012, the following table provides estimated details on these loans at the date of acquisition:

 

     Charter  

(Dollars in thousands)

   National  

Contractually required payments including interest

   $ 40,475   

Less: Nonaccretable difference

     11,855   
  

 

 

 

Cash flows expected to be collected (1)

     28,620   

Less: Accretable yield

     2,288   
  

 

 

 

Fair value of loans acquired with evidence of credit quality deterioration since origination

   $ 26,332   
  

 

 

 

 

(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, 2012.

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     Three Months Ended  
     June 30, 2012     June 30, 2011  
           Life Insurance           Life Insurance  
     Bank     Premium     Bank     Premium  

(Dollars in thousands)

   Acquisitions     Finance Loans     Acquisitions     Finance Loans  

Accretable yield, beginning balance

   $ 182,222      $ 15,848      $ 91,332      $ 25,543   

Acquisitions

     —          —          (2,005     —     

Accretable yield amortized to interest income

     (13,387     (2,749     (7,977     (5,122

Accretable yield amortized to indemnification asset (1)

     (18,063     —          (5,591     —     

Reclassification from non-accretable difference (2)

     7,590        1,145        1,831        3,673   

Increases in interest cash flows due to payments and changes in interest rates

     13,439        382        3,158        797   
  

 

 

   

 

 

   

 

 

   

 

 

 

Accretable yield, ending balance (3)

   $ 171,801      $ 14,626      $ 80,748      $ 24,891   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(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, 2012, the Company estimates that the remaining accretable yield balance to be amortized to the indemnification asset for the bank acquisitions is $88.2 million. The remainder of the accretable yield related to bank acquisitions is expected to be amortized to interest income.

 

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Table of Contents
     Six Months Ended     Six Months Ended  
     June 30, 2012     June 30, 2011  
           Life Insurance           Life Insurance  
     Bank     Premium     Bank     Premium  

(Dollars in thousands)

   Acquisitions     Finance Loans     Acquisitions     Finance Loans  

Accretable yield, beginning balance

   $ 173,120      $ 18,861      $ 39,809      $ 33,315   

Acquisitions

     2,288        —          5,102        —     

Accretable yield amortized to interest income

     (28,279     (6,486     (15,049     (14,174

Accretable yield amortized to indemnification asset (1)

     (39,440     —          (12,678     —     

Reclassification from non-accretable difference (2)

     49,191        1,145        50,675        3,857   

Increases in interest cash flows due to payments and changes in interest rates

     14,921        1,106        12,889        1,893   
  

 

 

   

 

 

   

 

 

   

 

 

 

Accretable yield, ending balance (3)

   $ 171,801      $ 14,626      $ 80,748      $ 24,891   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(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, 2012, the Company estimates that the remaining accretable yield balance to be amortized to the indemnification asset for the bank acquisitions is $88.2 million. The remainder of the accretable yield related to bank acquisitions is expected to be amortized to interest income.

 

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Table of Contents

(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, 2012, December 31, 2011 and June 30, 2011:

 

            90+ days      60-89      30-59                
As of June 30, 2012           and still      days past      days past                

(Dollars in thousands)

   Nonaccrual      accruing      due      due      Current      Total Loans  

Loan Balances:

                 

Commercial

                 

Commercial and industrial

   $ 27,911       $ —         $ 5,557       $ 17,227       $ 1,570,366       $ 1,621,061   

Franchise

     1,792         —           —           —           176,827         178,619   

Mortgage warehouse lines of credit

     —           —           —           —           123,804         123,804   

Community Advantage—homeowners association

     —           —           —           —           73,289         73,289   

Aircraft

     428         —           —           170         22,205         22,803   

Asset-based lending

     342         —           172         1,074         487,619         489,207   

Municipal

     —           —           —           —           79,708         79,708   

Leases

     —           —           —           1         77,805         77,806   

Other

     —           —           —           —           1,842         1,842   

Purchased non-covered commercial (1)

     —           486         —           57         4,499         5,042   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

     30,473         486         5,729         18,529         2,617,964         2,673,181   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Commercial real-estate:

                 

Residential construction

     892         —           6,041         5,773         32,020         44,726   

Commercial construction

     3,011         —           13,131         330         140,223         156,695   

Land

     13,459         —           3,276         6,044         142,490         165,269   

Office

     4,796         —           891         1,868         562,879         570,434   

Industrial

     1,820         —           3,158         1,320         591,919         598,217   

Retail

     8,158         —           1,351         6,657         546,617         562,783   

Multi-family

     3,312         —           151         1,447         332,871         337,781   

Mixed use and other

     20,629         —           15,530         16,063         1,126,930         1,179,152   

Purchased non-covered commercial real-estate (1)

     —           2,232         2,352         1,057         45,821         51,462   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial real-estate

     56,077         2,232         45,881         40,559         3,521,770         3,666,519   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Home equity

     10,583         —           2,182         3,195         805,031         820,991   

Residential real estate

     9,387         —           3,765         1,558         360,128         374,838   

Purchased non-covered residential real estate (1)

     —           —           —           —           656         656   

Premium finance receivables

                 

Commercial insurance loans

     7,404         5,184         4,796         7,965         1,804,695         1,830,044   

Life insurance loans

     —           —           —           30         1,111,207         1,111,237   

Purchased life insurance loans (1)

     —           —           —           —           544,963         544,963   

Indirect consumer

     132         234         51         312         71,753         72,482   

Consumer and other

     1,446         —           483         265         105,669         107,863   

Purchased non-covered consumer and other (1)

     —           —           —           —           68         68   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans, net of unearned income, excluding covered loans

   $ 115,502       $ 8,136       $ 62,887       $ 72,413       $ 10,943,904       $ 11,202,842   

Covered loans

     —           145,115         14,658         7,503         446,786         614,062   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans, net of unearned income

   $ 115,502       $ 153,251       $ 77,545       $ 79,916       $ 11,390,690       $ 11,816,904   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Purchased loans represent loans acquired with evidence of credit quality deterioration since origination, in accordance with ASC 310-30. Loan agings are based upon contractually required payments.

 

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Table of Contents
            90+ days      60-89      30-59                
As of December 31, 2011           and still      days past      days past                

(Dollars in thousands)

   Nonaccrual      accruing      due      due      Current      Total Loans  

Loan Balances:

                 

Commercial

                 

Commercial and industrial

   $ 16,154       $ —         $ 7,496       $ 15,797       $ 1,411,004       $ 1,450,451   

Franchise

     1,792         —           —           —           140,983         142,775   

Mortgage warehouse lines of credit

     —           —           —           —           180,450         180,450   

Community Advantage—homeowners association

     —           —           —           —           77,504         77,504   

Aircraft

     —           —           709         170         19,518         20,397   

Asset-based lending

     1,072         —           749         11,026         452,890         465,737   

Municipal

     —           —           —           —           78,319         78,319   

Leases

     —           —           —           431         71,703         72,134   

Other

     —           —           —           —           2,125         2,125   

Purchased non-covered commercial (1)

     —           589         74         —           7,758         8,421   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

     19,018         589         9,028         27,424         2,442,254         2,498,313   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Commercial real-estate

                 

Residential construction

     1,993         —           4,982         1,721         57,115         65,811   

Commercial construction

     2,158         —           —           150         167,568         169,876   

Land

     31,547         —           4,100         6,772         136,112         178,531   

Office

     10,614         —           2,622         930         540,280         554,446   

Industrial

     2,002         —           508         4,863         548,429         555,802   

Retail

     5,366         —           5,268         8,651         517,444         536,729   

Multi-family

     4,736         —           3,880         347         305,594         314,557   

Mixed use and other

     8,092         —           7,163         20,814         1,050,585         1,086,654   

Purchased non-covered commercial real-estate (1)

     —           2,198         —           252         49,405         51,855   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial real-estate

     66,508         2,198         28,523         44,500         3,372,532         3,514,261   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Home equity

     14,164         —           1,351         3,262         843,568         862,345   

Residential real estate

     6,619         —           2,343         3,112         337,522         349,596   

Purchased non-covered residential real estate (1)

     —           —           —           —           693         693   

Premium finance receivables

                 

Commercial insurance loans

     7,755         5,281         3,850         13,787         1,381,781         1,412,454   

Life insurance loans

     54         —           —           423         1,096,285         1,096,762   

Purchased life insurance loans (1)

     —           —           —           —           598,463         598,463   

Indirect consumer

     138         314         113         551         63,429         64,545   

Consumer and other

     233         —           170         1,070         122,393         123,866   

Purchased non-covered consumer and other (1)

     —           —           —           2         77         79   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans, net of unearned income, excluding covered loans

   $ 114,489       $ 8,382       $ 45,378       $ 94,131       $ 10,258,997       $ 10,521,377   

Covered loans

     —           174,727         25,507         24,799         426,335         651,368   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans, net of unearned income

   $ 114,489       $ 183,109       $ 70,885       $ 118,930       $ 10,685,332       $ 11,172,745   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Purchased loans represent loans acquired with evidence of credit quality deterioration since origination, in accordance with ASC 310-30. Loan agings are based upon contractually required payments.

 

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Table of Contents
As of June 30, 2011         90+ days
and still
   

60-89

days past

   

30-59

days past

             

(Dollars in thousands)

  Nonaccrual     accruing     due     due     Current     Total Loans  

Loan Balances:

           

Commercial

           

Commercial and industrial

  $ 22,289      $ —        $ 7,164      $ 23,754      $ 1,309,455      $ 1,362,662   

Franchise

    1,792        —          —          —          112,342        114,134   

Mortgage warehouse lines of credit

    —          —          —          —          68,477        68,477   

Community Advantage—homeowners association

    —          —          —          —          73,929        73,929   

Aircraft

    —          —          —          —          21,231        21,231   

Asset-based lending

    2,087        —          —          2,415        361,594        366,096   

Municipal

    —          —          —          —          63,296        63,296   

Leases

    —          —          —          763        61,772        62,535   

Other

    —          —          —          —          76        76   

Purchased non-covered commercial (1)

    —          —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial

    26,168        —          7,164        26,932        2,072,172        2,132,436   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Commercial real-estate

           

Residential construction

    3,011        —          938        5,245        81,561        90,755   

Commercial construction

    2,453        —          7,579        7,075        120,540        137,647   

Land

    33,980        —          10,281        8,076        160,597        212,934   

Office

    17,503        —          1,648        3,846        509,385        532,382   

Industrial

    2,470        —          2,689        2,480        506,895        514,534   

Retail

    8,164        —          3,778        14,806        498,040        524,788   

Multi-family

    4,947        —          4,628        3,836        302,740        316,151   

Mixed use and other

    17,265        —          9,350        4,201        1,014,661        1,045,477   

Purchased non-covered commercial real-estate (1)

    —          —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial real-estate

    89,793        —          40,891        49,565        3,194,419        3,374,668   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Home equity

    15,853        —          1,502        4,081        859,266        880,702   

Residential real estate

    7,379        —          1,272        949        319,781        329,381   

Purchased non-covered residential real estate (1)

    —          —          —          —          —          —     

Premium finance receivables

           

Commercial insurance loans

    10,309        4,446        5,089        7,897        1,401,695        1,429,436   

Life insurance loans

    670        324        4,873        3,254        957,808        966,929   

Purchased life insurance loans (1)

    —          —          —          —          652,739        652,739   

Indirect consumer

    89        284        98        531        56,716        57,718   

Consumer and other

    757        —          123        418        99,770        101,068   

Purchased non-covered consumer and other (1)

    —          —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans, net of unearned income, excluding covered loans

  $ 151,018      $ 5,054      $ 61,012      $ 93,627      $ 9,614,366      $ 9,925,077   

Covered loans

    —          121,271        5,643        11,899        269,856        408,669   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans, net of unearned income

  $ 151,018      $ 126,325      $ 66,655      $ 105,526      $ 9,884,222      $ 10,333,746   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Purchased loans represent loans acquired with evidence of credit quality deterioration since origination, in accordance with ASC 310-30. Loan agings are based upon contractually required payments.

Our ability to manage credit risk depends in large part on our ability to properly identify and manage problem loans. To do so, we operate a credit risk rating system under which our credit management personnel assign a credit risk rating (1 to 10 rating) to each loan at the time of origination and review loans on a regular basis.

Each loan officer is responsible for monitoring his or her loan portfolio, recommending a credit risk rating for each loan in his or her portfolio and ensuring the credit risk ratings are appropriate. These credit risk ratings are then ratified by the bank’s chief credit officer and/or concurrence credit officer. Credit risk ratings are determined by evaluating a number of factors including: a borrower’s financial strength, cash flow coverage, collateral protection and guarantees.

The Company’s Problem Loan Reporting system automatically includes all loans with credit risk ratings of 6 through 9. This system is designed to provide an on-going detailed tracking mechanism for each problem loan. Once management determines that a loan has deteriorated to a point where it has a credit risk rating of 6 or worse, the Company’s Managed Asset Division performs an overall credit and collateral review. As part of this review, all underlying collateral is identified and the valuation methodology is analyzed and tracked. As a result of this initial review by the Company’s Managed Asset Division, the credit risk rating is reviewed and a

 

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portion of the outstanding loan balance may be deemed uncollectible or an impairment reserve may be established. The Company’s impairment analysis utilizes an independent re-appraisal of the collateral (unless such a third-party evaluation is not possible due to the unique nature of the collateral, such as a closely-held business or thinly traded securities). In the case of commercial real estate collateral, an independent third party appraisal is ordered by the Company’s Real Estate Services Group to determine if there has been any change in the underlying collateral value. These independent appraisals are reviewed by the Real Estate Services Group and sometimes by independent third party valuation experts and may be adjusted depending upon market conditions.

Through the credit risk rating process, loans are reviewed to determine if they are performing in accordance with the original contractual terms. If the borrower has failed to comply with the original contractual terms, further action may be required by the Company, including a downgrade in the credit risk rating, movement to non-accrual status, a charge-off or the establishment of a specific impairment reserve. If we determine that a loan amount, or portion thereof, is uncollectible, the loan’s credit risk rating is immediately downgraded to an 8 or 9 and the uncollectible amount is charged-off. Any loan that has a partial charge-off continues to be assigned a credit risk rating of an 8 or 9 for the duration of time that a balance remains outstanding. The Company undertakes a thorough and ongoing analysis to determine if additional impairment and/or charge-offs are appropriate and to begin a workout plan for the credit to minimize actual losses.

If, based on current information and events, it is probable that the Company will be unable to collect all amounts due to it according to the contractual terms of the loan agreement, a specific impairment reserve is established. In determining the appropriate charge-off for collateral-dependent loans, the Company considers the results of appraisals for the associated collateral.

Non-performing loans include all non-accrual loans (8 and 9 risk ratings) as well as loans 90 days past due and still accruing interest, excluding loans acquired with evidence of credit quality deterioration since origination. The remainder of the portfolio not classified as non-performing are considered performing under the contractual terms of the loan agreement. The following table presents the recorded investment based on performance of loans by class, excluding covered loans, per the most recent analysis at June 30, 2012, December 31, 2011, and June 30, 2011:

 

    Performing     Non-performing     Total  
    June 30,     December 31,     June 30,     June 30,     December 31,     June 30,     June 30,     December 31,     June 30,  

(Dollars in thousands)

  2012     2011     2011     2012     2011     2011     2012     2011     2011  

Loan Balances:

                 

Commercial

                 

Commercial and industrial

  $ 1,593,150      $ 1,434,297      $ 1,340,373      $ 27,911      $ 16,154      $ 22,289      $ 1,621,061      $ 1,450,451      $ 1,362,662   

Franchise

    176,827        140,983        112,342        1,792        1,792        1,792        178,619        142,775        114,134   

Mortgage warehouse lines of credit

    123,804        180,450        68,477        —          —          —          123,804        180,450        68,477   

Community Advantage—homeowners association

    73,289        77,504        73,929        —          —          —          73,289        77,504        73,929   

Aircraft

    22,375        20,397        21,231        428        —          —          22,803        20,397        21,231   

Asset-based lending

    488,865        464,665        364,009        342        1,072        2,087        489,207        465,737        366,096   

Municipal

    79,708        78,319        63,296        —          —          —          79,708        78,319        63,296   

Leases

    77,806        72,134        62,535        —          —          —          77,806        72,134        62,535   

Other

    1,842        2,125        76        —          —          —          1,842        2,125        76   

Purchased non-covered commercial (1)

    5,042        8,421        —          —          —          —          5,042        8,421        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial

    2,642,708        2,479,295        2,106,268        30,473        19,018        26,168        2,673,181        2,498,313        2,132,436   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Commercial real-estate

                 

Residential construction

    43,834        63,818        87,744        892        1,993        3,011        44,726        65,811        90,755   

Commercial construction

    153,684        167,718        135,194        3,011        2,158        2,453        156,695        169,876        137,647   

Land

    151,810        146,984        178,954        13,459        31,547        33,980        165,269        178,531        212,934   

Office

    565,638        543,832        514,879        4,796        10,614        17,503        570,434        554,446        532,382   

Industrial

    596,397        553,800        512,064        1,820        2,002        2,470        598,217        555,802        514,534   

Retail

    554,625        531,363        516,624        8,158        5,366        8,164        562,783        536,729        524,788   

Multi-family

    334,469        309,821        311,204        3,312        4,736        4,947        337,781        314,557        316,151   

Mixed use and other

    1,158,523        1,078,562        1,028,212        20,629        8,092        17,265        1,179,152        1,086,654        1,045,477   

Purchased non-covered commercial real-estate (1)

    51,462        51,855        —          —          —          —          51,462        51,855        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial real-estate

    3,610,442        3,447,753        3,284,875        56,077        66,508        89,793        3,666,519        3,514,261        3,374,668   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Home equity

    810,408        848,181        864,849        10,583        14,164        15,853        820,991        862,345        880,702   

Residential real estate

    365,451        342,977        322,002        9,387        6,619        7,379        374,838        349,596        329,381   

Purchased non-covered residential real estate (1)

    656        693        —          —          —          —          656        693        —     

Premium finance receivables

                 

Commercial insurance loans

    1,817,456        1,399,418        1,414,681        12,588        13,036        14,755        1,830,044        1,412,454        1,429,436   

Life insurance loans

    1,111,237        1,096,708        965,935        —          54        994        1,111,237        1,096,762        966,929   

Purchased life insurance loans (1)

    544,963        598,463        652,739        —          —          —          544,963        598,463        652,739   

Indirect consumer

    72,116        64,093        57,345        366        452        373        72,482        64,545        57,718   

Consumer and other

    106,417        123,633        100,311        1,446        233        757        107,863        123,866        101,068   

Purchased non-covered consumer and other (1)

    68        79        —          —          —          —          68        79        —