e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2010
OR
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o |
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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 0-21923
WINTRUST FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
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Illinois
(State of incorporation or organization)
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36-3873352
(I.R.S. Employer Identification No.)
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727 North Bank Lane
Lake Forest, Illinois 60045
(Address of principal executive offices)
(847) 615-4096
(Registrants 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 o
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 o
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):
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Large
accelerated filer o
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Accelerated
filer þ
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Non-accelerated filer o
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act).
Yes o No þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date.
Common
Stock no par value, 31,156,846 shares, as of October 28, 2010
PART I
ITEM 1. FINANCIAL STATEMENTS
WINTRUST FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
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(Unaudited) |
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(Unaudited) |
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September 30, |
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December 31, |
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September 30, |
(In thousands, except share data) |
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2010 |
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2009 |
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2009 |
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Assets |
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Cash and due from banks |
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$ |
155,067 |
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$ |
135,133 |
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$ |
128,898 |
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Federal funds sold and securities purchased under resale agreements |
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88,913 |
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23,483 |
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22,863 |
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Interest-bearing deposits with other banks ($47,780 restricted
for securitization investors at September 30, 2010) |
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1,224,584 |
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1,025,663 |
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1,168,362 |
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Available-for-sale securities, at fair value |
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1,324,179 |
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1,255,066 |
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1,362,359 |
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Trading account securities |
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4,935 |
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33,774 |
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29,204 |
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Brokerage customer receivables |
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25,442 |
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20,871 |
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19,441 |
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Federal Home Loan Bank and Federal Reserve Bank stock |
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80,445 |
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73,749 |
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71,889 |
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Loans held-for-sale, at fair value |
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307,231 |
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265,786 |
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187,505 |
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Loans held-for-sale, at lower of cost or market |
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13,209 |
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9,929 |
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5,750 |
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Loans, net of unearned income, excluding covered loans |
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9,461,155 |
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8,411,771 |
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8,275,257 |
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Covered loans |
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353,840 |
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Total loans |
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9,814,995 |
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8,411,771 |
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8,275,257 |
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Less: Allowance for loan losses |
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110,432 |
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98,277 |
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95,096 |
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Net Loans ($635,755 restricted for securitization investors
at September 30, 2010) |
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9,704,563 |
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8,313,494 |
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8,180,161 |
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Premises and equipment, net |
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353,445 |
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350,345 |
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352,890 |
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FDIC indemnification asset |
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161,640 |
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Accrued interest receivable and other assets |
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365,496 |
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416,678 |
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315,806 |
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Goodwill |
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278,025 |
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278,025 |
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276,525 |
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Other intangible assets |
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13,194 |
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13,624 |
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14,368 |
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Total assets |
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$ |
14,100,368 |
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$ |
12,215,620 |
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$ |
12,136,021 |
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Liabilities and Shareholders Equity |
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Deposits: |
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Non-interest bearing |
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$ |
1,042,730 |
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$ |
864,306 |
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$ |
841,668 |
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Interest bearing |
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9,919,509 |
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9,052,768 |
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9,005,495 |
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Total deposits |
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10,962,239 |
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9,917,074 |
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9,847,163 |
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Notes payable |
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1,000 |
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1,000 |
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1,000 |
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Federal Home Loan Bank advances |
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414,832 |
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430,987 |
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433,983 |
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Other borrowings |
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241,522 |
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247,437 |
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252,071 |
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Secured borrowings owed to securitization investors |
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600,000 |
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Surbordinated notes |
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55,000 |
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60,000 |
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65,000 |
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Junior subordinated debentures |
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249,493 |
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249,493 |
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249,493 |
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Trade date securities payable |
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2,045 |
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Accrued interest payable and other liabilities |
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175,325 |
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170,990 |
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181,229 |
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Total liabilities |
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12,701,456 |
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11,076,981 |
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11,029,939 |
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Shareholders Equity: |
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Preferred stock, no par value; 20,000,000 shares authorized: |
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Series A $1,000 liquidation value; 50,000 shares issued
and outstanding at September 30, 2010, December 31,
2009 and September 30, 2009 |
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49,379 |
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49,379 |
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49,379 |
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Series B $1,000 liquidation value; 250,000 shares issued
and outstanding at September 30, 2010, December 31,
2009 and September 30, 2009 |
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237,855 |
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235,445 |
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234,682 |
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Common stock, no par value; $1.00 stated value; 60,000,000
shares authorized; 31,145,332 shares at September
30, 2010, 27,079,308 shares at December 31, 2009, and
26,965,411 shares at September 30, 2009 |
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31,145 |
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27,079 |
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26,965 |
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Surplus |
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682,318 |
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589,939 |
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580,988 |
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Treasury stock, at cost, 1,592 shares at September 30, 2010,
2,872,489 shares at December 31, 2009 and 2,862,343
shares at September 30, 2009 |
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(51 |
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(122,733 |
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(122,437 |
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Retained earnings |
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394,323 |
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366,152 |
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342,873 |
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Accumulated other comprehensive income (loss) |
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3,943 |
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(6,622 |
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(6,368 |
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Total shareholders equity |
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1,398,912 |
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1,138,639 |
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1,106,082 |
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Total liabilities and shareholders equity |
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$ |
14,100,368 |
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$ |
12,215,620 |
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$ |
12,136,021 |
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See accompanying notes to unaudited consolidated financial statements.
1
WINTRUST FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
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Three Months Ended |
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Nine Months Ended |
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September 30, |
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September 30, |
(In thousands, except per share data) |
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2010 |
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2009 |
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2010 |
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2009 |
Interest income |
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Interest and fees on loans |
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$ |
137,902 |
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$ |
126,448 |
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$ |
403,244 |
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$ |
343,637 |
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Interest bearing deposits with banks |
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1,339 |
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778 |
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3,828 |
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2,205 |
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Federal funds sold and securities purchased under resale agreements |
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35 |
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106 |
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118 |
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233 |
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Securities |
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7,438 |
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13,677 |
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29,668 |
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42,977 |
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Trading account securities |
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19 |
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7 |
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383 |
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86 |
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Brokerage customer receivables |
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180 |
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132 |
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484 |
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372 |
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Federal Home Loan Bank and Federal Reserve Bank stock |
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488 |
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429 |
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1,419 |
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1,275 |
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Total interest income |
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147,401 |
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141,577 |
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439,144 |
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390,785 |
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Interest expense |
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Interest on deposits |
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31,088 |
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42,806 |
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95,926 |
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132,261 |
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Interest on Federal Home Loan Bank advances |
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4,042 |
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4,536 |
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12,482 |
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13,492 |
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Interest on notes payable and other borrowings |
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1,411 |
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1,779 |
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4,312 |
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5,401 |
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Interest on secured borrowings owed to securitization investors |
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3,167 |
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9,276 |
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Interest on subordinated notes |
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265 |
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333 |
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762 |
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1,341 |
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Interest on junior subordinated debentures |
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4,448 |
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4,460 |
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13,227 |
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13,348 |
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Total interest expense |
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44,421 |
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53,914 |
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135,985 |
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165,843 |
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Net interest income |
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102,980 |
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87,663 |
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303,159 |
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224,942 |
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Provision for credit losses |
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25,528 |
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91,193 |
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95,870 |
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129,329 |
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Net interest income after provision for credit losses |
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77,452 |
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(3,530 |
) |
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207,289 |
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95,613 |
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Non-interest income |
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Wealth management |
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8,973 |
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7,501 |
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26,833 |
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20,310 |
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Mortgage banking |
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20,980 |
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13,204 |
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38,693 |
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52,032 |
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Service charges on deposit accounts |
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3,384 |
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3,447 |
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10,087 |
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9,600 |
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Gain on sales of commercial premium finance receivables |
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3,629 |
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4,147 |
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Gains (losses) on available-for-sale securities, net |
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9,235 |
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(412 |
) |
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9,673 |
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(910 |
) |
Gain on bargain purchases |
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6,593 |
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113,062 |
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43,981 |
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113,062 |
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Trading gains (losses) |
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712 |
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6,236 |
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5,147 |
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23,254 |
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Other |
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4,779 |
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4,013 |
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13,286 |
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11,064 |
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Total non-interest income |
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54,656 |
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150,680 |
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147,700 |
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232,559 |
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Non-interest expense |
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Salaries and employee benefits |
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57,014 |
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48,088 |
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156,735 |
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138,923 |
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Equipment |
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4,203 |
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4,069 |
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12,144 |
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12,022 |
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Occupancy, net |
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6,254 |
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5,884 |
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18,517 |
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17,682 |
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Data processing |
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3,891 |
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3,226 |
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10,967 |
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|
9,578 |
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Advertising and marketing |
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1,650 |
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|
1,488 |
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4,434 |
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|
4,003 |
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Professional fees |
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4,555 |
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|
4,089 |
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11,619 |
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|
9,843 |
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Amortization of other intangible assets |
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701 |
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|
677 |
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2,020 |
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|
2,040 |
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FDIC insurance |
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4,642 |
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|
4,334 |
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13,456 |
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16,468 |
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OREO expenses, net |
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4,767 |
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|
10,243 |
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11,948 |
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13,671 |
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Other |
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12,046 |
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10,465 |
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34,484 |
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29,540 |
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Total non-interest expense |
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|
99,723 |
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|
92,563 |
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|
276,324 |
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|
253,770 |
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Income before taxes |
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|
32,385 |
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|
|
54,587 |
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|
|
78,665 |
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|
74,402 |
|
Income tax expense |
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|
12,287 |
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|
22,592 |
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29,540 |
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|
29,500 |
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Net income |
|
$ |
20,098 |
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|
$ |
31,995 |
|
|
$ |
49,125 |
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|
$ |
44,902 |
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|
|
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|
Preferred stock dividends and discount accretion |
|
$ |
4,943 |
|
|
$ |
4,668 |
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|
$ |
14,830 |
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|
$ |
14,668 |
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|
|
|
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|
Net income applicable to common shares |
|
$ |
15,155 |
|
|
$ |
27,327 |
|
|
$ |
34,295 |
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|
$ |
30,234 |
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Net income per common share Basic |
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$ |
0.49 |
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|
$ |
1.14 |
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$ |
1.17 |
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$ |
1.26 |
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Net income per common share Diluted |
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$ |
0.47 |
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|
$ |
1.07 |
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|
$ |
1.12 |
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|
$ |
1.25 |
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|
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Cash dividends declared per common share |
|
$ |
0.09 |
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|
$ |
0.09 |
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$ |
0.18 |
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|
$ |
0.27 |
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|
|
|
|
|
Weighted average common shares outstanding |
|
|
31,117 |
|
|
|
24,052 |
|
|
|
29,396 |
|
|
|
23,958 |
|
Dilutive potential common shares |
|
|
988 |
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|
|
2,493 |
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|
|
1,132 |
|
|
|
323 |
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|
|
|
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Average common shares and dilutive common shares |
|
|
32,105 |
|
|
|
26,545 |
|
|
|
30,528 |
|
|
|
24,281 |
|
|
|
|
|
|
See accompanying notes to unaudited consolidated financial statements.
2
WINTRUST FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
(UNAUDITED)
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|
|
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|
Accumulated |
|
|
|
|
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|
|
|
|
|
|
|
|
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|
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|
|
|
|
other |
|
Total |
|
|
Preferred |
|
Common |
|
|
|
|
|
Treasury |
|
Retained |
|
comprehensive |
|
shareholders |
(In thousands) |
|
stock |
|
stock |
|
Surplus |
|
stock |
|
earnings |
|
income (loss) |
|
equity |
|
Balance at December 31, 2008 |
|
$ |
281,873 |
|
|
$ |
26,611 |
|
|
$ |
571,887 |
|
|
$ |
(122,290 |
) |
|
$ |
318,793 |
|
|
$ |
(10,302 |
) |
|
$ |
1,066,572 |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44,902 |
|
|
|
|
|
|
|
44,902 |
|
Other comprehensive income,
net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains on
securities, net of
reclassification
adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,154 |
|
|
|
2,154 |
|
Unrealized gains on
derivative instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,089 |
|
|
|
2,089 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49,145 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared on common
stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,463 |
) |
|
|
|
|
|
|
(6,463 |
) |
Dividends on preferred stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,480 |
) |
|
|
|
|
|
|
(12,480 |
) |
Accretion on preferred stock |
|
|
2,188 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,188 |
) |
|
|
|
|
|
|
|
|
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
5,132 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,132 |
|
Cumulative effect of change in
accounting for
other-than-temporary
impairment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
309 |
|
|
|
(309 |
) |
|
|
|
|
Common stock issued for: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options and
warrants |
|
|
|
|
|
|
175 |
|
|
|
2,482 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,657 |
|
Restricted stock awards |
|
|
|
|
|
|
73 |
|
|
|
(820 |
) |
|
|
(147 |
) |
|
|
|
|
|
|
|
|
|
|
(894 |
) |
Employee stock purchase plan |
|
|
|
|
|
|
56 |
|
|
|
635 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
691 |
|
Director compensation plan |
|
|
|
|
|
|
50 |
|
|
|
1,672 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,722 |
|
|
Balance at September 30, 2009 |
|
$ |
284,061 |
|
|
$ |
26,965 |
|
|
$ |
580,988 |
|
|
$ |
(122,437 |
) |
|
$ |
342,873 |
|
|
$ |
(6,368 |
) |
|
$ |
1,106,082 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009 |
|
$ |
284,824 |
|
|
$ |
27,079 |
|
|
$ |
589,939 |
|
|
$ |
(122,733 |
) |
|
$ |
366,152 |
|
|
$ |
(6,622 |
) |
|
$ |
1,138,639 |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49,125 |
|
|
|
|
|
|
|
49,125 |
|
Other comprehensive
income, net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains on
securities, net of
reclassification
adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,031 |
|
|
|
11,031 |
|
Unrealized losses on
derivative instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(310 |
) |
|
|
(310 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
59,846 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared on
common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,992 |
) |
|
|
|
|
|
|
(4,992 |
) |
Dividends on preferred stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,420 |
) |
|
|
|
|
|
|
(12,420 |
) |
Accretion on preferred stock |
|
|
2,410 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,410 |
) |
|
|
|
|
|
|
|
|
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
3,116 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,116 |
|
Cumulative effect of change in
accounting for
loan securitizations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,132 |
) |
|
|
(156 |
) |
|
|
(1,288 |
) |
Common stock issued for: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New issuance, net of costs |
|
|
|
|
|
|
3,795 |
|
|
|
83,791 |
|
|
|
122,831 |
|
|
|
|
|
|
|
|
|
|
|
210,417 |
|
Exercise of stock options and
warrants |
|
|
|
|
|
|
141 |
|
|
|
2,856 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,997 |
|
Restricted stock awards |
|
|
|
|
|
|
56 |
|
|
|
(83 |
) |
|
|
(149 |
) |
|
|
|
|
|
|
|
|
|
|
(176 |
) |
Employee stock purchase plan |
|
|
|
|
|
|
26 |
|
|
|
896 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
922 |
|
Director compensation plan |
|
|
|
|
|
|
48 |
|
|
|
1,803 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,851 |
|
|
Balance at September 30, 2010 |
|
$ |
287,234 |
|
|
$ |
31,145 |
|
|
$ |
682,318 |
|
|
$ |
(51 |
) |
|
$ |
394,323 |
|
|
$ |
3,943 |
|
|
$ |
1,398,912 |
|
|
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
Nine Months ended September 30, |
|
|
2010 |
|
2009 |
Other comprehensive income (loss) |
|
|
|
|
|
|
|
|
Unrealized gains (losses) on available-for-sale securities arising during the period, net |
|
$ |
26,836 |
|
|
$ |
2,435 |
|
Unrealized (losses) gains on derivative instruments arising during the period, net |
|
|
(505 |
) |
|
|
3,399 |
|
Less: Reclassification adjustment for gains (losses) included in net income, net |
|
|
9,673 |
|
|
|
(910 |
) |
Less: Income tax expense |
|
|
5,937 |
|
|
|
2,501 |
|
|
|
|
Other comprehensive income |
|
$ |
10,721 |
|
|
$ |
4,243 |
|
|
|
|
See accompanying notes to unaudited consolidated financial statements.
3
WINTRUST FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
Nine Months ended September 30, |
(In thousands) |
|
2010 |
|
2009 |
|
Operating Activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
49,125 |
|
|
$ |
44,902 |
|
Adjustments
to reconcile net income to net cash provided by (used for) operating activities |
|
|
|
|
|
|
|
|
Provision for credit losses |
|
|
95,870 |
|
|
|
129,329 |
|
Depreciation and amortization |
|
|
13,426 |
|
|
|
15,246 |
|
Stock-based compensation expense |
|
|
4,521 |
|
|
|
5,132 |
|
Tax benefit (expense) from stock-based compensation arrangements |
|
|
744 |
|
|
|
(140 |
) |
Excess tax benefits from stock-based compensation arrangements |
|
|
(1,020 |
) |
|
|
(724 |
) |
Net amortization of premium on securities |
|
|
4,674 |
|
|
|
129 |
|
Mortgage servicing rights fair value change and amortization, net |
|
|
3,724 |
|
|
|
2,057 |
|
Originations and purchases of mortgage loans held-for-sale |
|
|
(2,495,880 |
) |
|
|
(3,713,883 |
) |
Proceeds from sales of mortgage loans held-for-sale |
|
|
2,498,438 |
|
|
|
3,620,400 |
|
Originations of premium finance receivables held-for-sale |
|
|
|
|
|
|
(790,044 |
) |
Proceeds from sales and securitizations of premium finance receivables held-for-sale |
|
|
|
|
|
|
106,282 |
|
Bank owned life insurance income, net of claims |
|
|
(1,593 |
) |
|
|
(1,403 |
) |
Gain on sales of premium finance receivables |
|
|
|
|
|
|
(4,147 |
) |
Decrease (increase) in trading securities, net |
|
|
28,839 |
|
|
|
(24,805 |
) |
Net increase in brokerage customer receivables |
|
|
(4,571 |
) |
|
|
(1,540 |
) |
Gain on mortgage loans sold |
|
|
(47,283 |
) |
|
|
(38,656 |
) |
(Gain) loss on available-for-sale securities, net |
|
|
(9,673 |
) |
|
|
910 |
|
Gain on bargain purchases |
|
|
(43,981 |
) |
|
|
(113,062 |
) |
Loss on sale of premises and equipment, net |
|
|
7 |
|
|
|
366 |
|
Decrease (increase) in accrued interest receivable and other assets, net |
|
|
100,824 |
|
|
|
(34,073 |
) |
Decrease in accrued interest payable and other liabilities, net |
|
|
9 |
|
|
|
25,599 |
|
|
Net Cash Provided by (Used for) Operating Activities |
|
|
196,200 |
|
|
|
(772,125 |
) |
|
|
|
|
|
|
|
|
|
|
Investing Activities: |
|
|
|
|
|
|
|
|
Proceeds from maturities of available-for-sale securities |
|
|
907,492 |
|
|
|
1,146,564 |
|
Proceeds from sales of available-for-sale securities |
|
|
628,462 |
|
|
|
1,145,137 |
|
Purchases of available-for-sale securities |
|
|
(1,609,840 |
) |
|
|
(2,153,313 |
) |
Proceeds from sales and securitizations of premium finance receivables |
|
|
|
|
|
|
600,000 |
|
Net cash received (paid) for business combinations |
|
|
84,920 |
|
|
|
(685,456 |
) |
Net increase in interest-bearing deposits with banks |
|
|
(51,588 |
) |
|
|
(1,045,353 |
) |
Net (increase) decrease in loans |
|
|
(551,016 |
) |
|
|
122,433 |
|
Purchases of premises and equipment, net |
|
|
(15,896 |
) |
|
|
(16,404 |
) |
|
Net Cash Used for Investing Activities |
|
|
(607,466 |
) |
|
|
(886,392 |
) |
|
|
|
|
|
|
|
|
|
|
Financing Activities: |
|
|
|
|
|
|
|
|
Increase in deposit accounts |
|
|
354,941 |
|
|
|
1,470,407 |
|
Decrease in other borrowings, net |
|
|
(5,915 |
) |
|
|
(84,693 |
) |
Decrease in Federal Home Loan Bank advances, net |
|
|
(44,592 |
) |
|
|
(2,000 |
) |
Repayment of subordinated note |
|
|
(5,000 |
) |
|
|
(5,000 |
) |
Excess tax benefits from stock-based compensation arrangements |
|
|
1,020 |
|
|
|
724 |
|
Issuance of common stock, net of issuance costs |
|
|
210,417 |
|
|
|
|
|
Issuance of common shares resulting from exercise of stock options, employee stock purchase plan and
conversion of common stock warrants |
|
|
3,275 |
|
|
|
2,741 |
|
Common stock repurchases |
|
|
(149 |
) |
|
|
(147 |
) |
Dividends paid |
|
|
(17,367 |
) |
|
|
(17,658 |
) |
|
|
|
|
|
|
|
|
|
|
Net Cash Provided by Financing Activities |
|
|
496,630 |
|
|
|
1,364,374 |
|
|
Net Increase (Decrease) in Cash and Cash Equivalents |
|
|
85,364 |
|
|
|
(294,143 |
) |
Cash and Cash Equivalents at Beginning of Period |
|
|
158,616 |
|
|
|
445,904 |
|
|
Cash and Cash Equivalents at End of Period |
|
$ |
243,980 |
|
|
$ |
151,761 |
|
|
See accompanying notes to unaudited consolidated financial statements.
4
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 Companys Annual Report and Form 10-K for the year ended December 31, 2009
(2009 Form 10-K). Operating results reported for the three-month and year-to-date 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 managements 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 and the allowance for losses on
lending-related commitments, 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
Companys 2009 Form 10-K.
(2) Recent Accounting Developments
Accounting for Transfers of Financial Assets and Variable Interest Entities
In December 2009, the Financial Accounting Standards Board (FASB) issued Accounting Standards
Update (ASU) No. 2009-16, Transfers and Servicing (Topic 860) Accounting for Transfers of
Financial Assets, amending ASU No. 2009-01
(formerly FASB No. 168) The FASB Accounting Standards Codification and the Hierarchy of Generally
Accepted Accounting Principles (the Codification) for the issuance of FASB No. 166, Accounting
for Transfers of Financial Assets, an amendment of FASB Statement No. 140 and ASU No. 2009-17,
Consolidation (Topic 810) Improvements to Financial Reporting for Enterprises Involved with
Variable Interest Entities, amending the Codification to change how a company determines when an
entity that is insufficiently capitalized or is not controlled through voting (or similar rights)
should be consolidated. This guidance became effective for the Company on January 1, 2010.
ASU No. 2009-16 removed the concept of a qualifying special-purpose entity, changed the
requirements for derecognizing financial assets and requires additional disclosures about a
transferors continuing involvement in transferred financial assets. As a result of this
amendment, the Companys securitization transaction is accounted for as a secured borrowing rather
than a sale and the Companys securitization entity (FIFC Premium Funding, LLC) is no longer exempt
from consolidation.
ASU No. 2009-17 requires an ongoing assessment of the Companys involvement in the activities of
Variable Interest Entities (VIEs) and the Companys rights or obligations to receive benefits or
absorb losses that could be potentially significant in order to determine whether those VIEs will
be required to be consolidated in the Companys financial statements. In accordance with this
amendment, the Company concluded that it is the primary beneficiary of the Companys securitization
entity and began consolidating this entity on January 1, 2010. The impact of consolidating the
Companys securitization entity on January 1, 2010 resulted in a $587.1 million net increase in
total assets, a $588.4 million net increase in total liabilities and a $1.3 million net decrease in
stockholders equity (comprised of a $1.1 million decrease in retained earnings and a $156,000
decrease in accumulated other comprehensive income).
The assets of the consolidated securitization entity includes interest bearing deposits and premium
finance receivablescommercial, which are restricted to settle the obligations of the
securitization entity. Liabilities of the securitization entity include secured borrowings for
which creditors or beneficial interest holders do not have recourse to the general credit of the
Company.
5
The Companys statement of income beginning with the three months ended March 31, 2010 no longer
reflects securitization income, but instead reports interest income, net charge-offs and certain
other income associated with the securitized loan receivables in the same line items in the
Companys statement of income as non-securitized premium finance receivables-commercial.
Additionally, the Company no longer records initial gains on new securitization activity since the
transferred loans no longer receive sale accounting treatment. Also, there are no gains or losses
recorded on the revaluation of the interest-only strip receivable as that asset is not recognizable
in a transaction accounted for as a secured borrowing.
The Companys financial statements have not been retrospectively adjusted to reflect the
adjustments to Accounting Standards Codification (ASC) 860. Therefore, current period results
and balances are not comparable to prior period amounts.
Subsequent Events
In February 2010, the FASB issued ASU No. 2010-09, Subsequent Events (Topic 855): Amendments
to Certain Recognition and Disclosure Requirements, which amends certain provisions of the current
guidance, including the elimination of the requirement for disclosure of the date through which an
evaluation of subsequent events was performed in issued and revised financial statements. This
guidance was effective for interim and annual financial periods ending after February 24, 2010, and
has been applied with no material impact on the Companys financial statements.
Disclosures about Fair Value of Financial Instruments
In January 2010, the FASB issued ASU No. 2010-06, Fair Value Measurements and Disclosures (Topic
820): Improving Disclosures about Fair Value Measurements, which amends the disclosure
requirements related to recurring and nonrecurring fair value measurements. The guidance requires
new disclosures on the transfers of assets and liabilities between Level 1 (quoted prices in active
market for identical assets or liabilities) and Level 2 (significant other observable inputs) of
the fair value measurement hierarchy, including the reasons for and the timing of the transfers.
Additionally, the guidance requires a roll forward of activities on purchases, sales, issuance, and
settlements of the assets and liabilities measured using significant unobservable inputs (Level 3
fair value measurements). The guidance became effective for the Company with the reporting period
beginning January 1, 2010, except for the disclosure on the roll forward activities for Level 3
fair value measurements, which will become effective for the Company with the reporting period
beginning January 1, 2011. Other than requiring additional disclosures, the adoption of this new
guidance did not have a material impact on our consolidated financial statements. See Note 15
Fair Value of Assets and Liabilities.
Credit Quality Disclosures of Financing Receivables and Allowance for Credit Losses
In July 2010, the FASB issued ASU No. 2010-20, Fair Value Measurements and Disclosures (Topic
820): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit
Losses, which requires more information in disclosures related to the credit quality of
financing receivables and the credit reserves held against them. The new guidance requires the
Company to provide a greater level of disaggregated information about the credit quality of the
Companys loans and the allowance for loan losses as well as to disclose additional information
related to credit quality indicators, past due information, and information related to loans
modified in a troubled debt restructuring. The provisions of this ASU are effective for the
Companys reporting period ending on or after December 15, 2010. The Company is currently
evaluating the impact of adopting the new guidance on the consolidated financial statements.
(3) Business Combinations
FDIC-Assisted Transactions
On August 6, 2010, Northbrook Bank & Trust Company (Northbrook) acquired the banking operations
of Ravenswood Bank (Ravenswood) in an FDIC assisted transaction. Northbrook acquired assets with
a fair value of approximately $172 million, including $94 million of loans, and assumed liabilities
with a fair value of approximately $123 million, including $121 million of deposits. Additionally,
on April 23, 2010, the Company acquired the banking operations of two entities in FDIC assisted
transactions. Northbrook acquired assets with a fair value of approximately $157 million and
assumed liabilities with a fair value of approximately $192 million of Lincoln Park Savings Bank
(Lincoln Park). Wheaton Bank and Trust Company (Wheaton) acquired assets with a fair value of
approximately $344 million and assumed liabilities with a fair value of approximately $416 million
of Wheatland Bank (Wheatland).
Loans comprise the majority of the assets acquired in these transactions and 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.
The Company refers to the loans subject to this loss-sharing agreements as covered loans.
Covered assets include covered loans, covered OREO and certain other covered assets. At the
acquisition date, the Company estimated the fair value of the reimbursable losses to be
approximately $46.6 million for the Ravenswood acquisition, and
6
$113.8 million for the Lincoln Park and 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 FDIC indemnification asset, both 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. These
transactions resulted in bargain purchase gains of $33.1 million, $6.6 million for Ravenswood,
$22.3 million for Wheatland, and $4.2 million for Lincoln
Park, and are shown as a component of
non-interest income on the Companys Consolidated Statements of Income.
Life Insurance Premium Finance Acquisition
On July 28, 2009, FIFC, a wholly-owned subsidiary of the Company, purchased the majority of the
U.S. life insurance premium finance assets of A.I. Credit Corp. and A.I. Credit Consumer Discount
Company (the sellers), subsidiaries of American International Group, Inc. After giving effect to
post-closing adjustments, an aggregate unpaid loan balance of $949.3 million was purchased for
$685.3 million in cash. At closing, a portion of the portfolio, with an aggregate unpaid loan
balance of $321.1 million, and a corresponding portion of the purchase price of $232.8 million were
placed in escrow, pending the receipt of required third party consents. During the first quarter
of 2010, based upon receipt of consents, the escrow was terminated and remaining funds released to the
sellers and FIFC.
Also, as a part of the purchase, $84.4 million of additional life insurance premium finance assets
were available for future purchase by FIFC subject to the satisfaction of certain conditions. On
October 2, 2009, the conditions were satisfied in relation to the majority of the additional life
insurance premium finance assets and FIFC purchased $83.4 million of the $84.4 million of life
insurance premium finance assets available for an aggregate purchase price of $60.5 million in
cash.
Both life insurance premium finance asset purchases were accounted for as a single business
combination under the acquisition method of accounting as required by applicable accounting
guidance. Accordingly, the impact related to this transaction is included in the Companys
financial statements only since the effective date of acquisition. The purchased assets and assumed
liabilities were recorded at their respective acquisition date fair values, and identifiable
intangible assets were recorded at fair value. Under ASC 805, Business Combinations (ASC 805), a
gain is recorded equal to the amount by which the fair value of assets purchased exceeded the fair
value of liabilities assumed and consideration paid. As such, the Company recognized a $10.9
million bargain purchase gain in the first quarter of 2010, a $43.0 million bargain purchase gain
in the fourth quarter of 2009 and a $113.1 million bargain purchase gain in the third quarter of
2009, relating to the loans acquired for which all contingencies were removed. As of March 31,
2010, the full amount of the bargain purchase gain had been recognized into income. This gain is
shown as a component of non-interest income on the Companys Consolidated Statements of Income.
The following table summarizes the fair value of assets acquired and the resulting bargain purchase
gain at the date of acquisition:
|
|
|
|
|
(Dollars in thousands) |
|
|
|
|
Assets: |
|
|
|
|
Loans |
|
$ |
910,873 |
|
Customer list intangible |
|
|
1,800 |
|
Other assets |
|
|
150 |
|
|
|
|
|
Total assets |
|
|
912,823 |
|
|
|
|
|
|
|
|
|
|
Cash Paid |
|
|
745,916 |
|
|
|
|
|
|
|
|
|
|
Total bargain purchase gain recognized |
|
$ |
166,907 |
|
|
|
|
|
Calculation of the Fair Value of Loans Acquired Life Insurance Premium Finance Assets
The Company determined the fair value of the loans acquired with the assistance of an independent
third party valuation firm which utilized a discounted cash flow analysis to estimate the fair
value of the loan portfolio. Primary factors impacting the estimated cash flows in the valuation
model were certain income and expense items and changes in the estimated future balances of loans.
The significant assumptions used in calculating the fair value of the loans acquired included
estimating interest income, loan losses, servicing costs, costs of funding, and life of the loans.
7
Interest income on variable rate loans within the loan portfolio was determined based on the
weighted average interest rate spread plus the contractual Libor rate. Interest income on fixed
rate loans was based on the actual weighted average interest rate of the fixed rate loan portfolio.
Loan losses were estimated by first estimating the loan losses which would result from default by
either the insurance carrier or the insured and, second, estimating the probability of default for
both the insurance carrier and the insured.
Estimated losses upon default by the insurance carrier were estimated by assigning realization
rates to each type of collateral underlying the loan portfolio. Realization rates on collateral
after default by the insurance carrier were estimated for each type of collateral. Unsecured
portions of the collateral were also assigned a loss rate.
Estimated losses upon default by the insured were similar to the estimated loss rates calculated
upon default by the insurance carrier.
The probability of default of the insurance carrier was determined by assigning each insurance
carrier holding collateral underlying the portfolio a default rate from a national rating agency
and a study of historical cumulative default rates prepared by such agency.
The probability of default by individuals was estimated based upon consideration of the financial
and demographic characteristics of the insured and the economic uncertainty present at the
valuation date.
The estimated life of the loans was based on expected required fundings of life insurance premiums
and the expected life of the insured based on the age of the insured and survival curves.
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 for Ravenswood, Lincoln
Park and Wheatland, and in subsequent accounting, the Company aggregates these purchased loans into
pools of loans with common risk characteristics. 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 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.
8
(5)Available-for-sale Securities
The following tables are a summary of the available-for-sale securities portfolio as of the dates
shown:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010 |
|
|
|
|
|
|
Gross |
|
Gross |
|
|
|
|
Amortized |
|
unrealized |
|
unrealized |
|
Fair |
(Dollars in thousands) |
|
Cost |
|
gains |
|
losses |
|
Value |
U.S. Treasury |
|
$ |
2,016 |
|
|
$ |
|
|
|
$ |
(1 |
) |
|
$ |
2,015 |
|
U.S. Government agencies |
|
|
868,419 |
|
|
|
6,021 |
|
|
|
(113 |
) |
|
|
874,327 |
|
Municipal |
|
|
53,138 |
|
|
|
1,526 |
|
|
|
(23 |
) |
|
|
54,641 |
|
Corporate notes and other: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial issuers |
|
|
94,482 |
|
|
|
3,351 |
|
|
|
(1,416 |
) |
|
|
96,417 |
|
Other |
|
|
75,895 |
|
|
|
714 |
|
|
|
(23 |
) |
|
|
76,586 |
|
Mortgage-backed: (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency |
|
|
164,769 |
|
|
|
12,491 |
|
|
|
|
|
|
|
177,260 |
|
Non-agency CMOs |
|
|
3,088 |
|
|
|
13 |
|
|
|
|
|
|
|
3,101 |
|
Other equity securities |
|
|
40,567 |
|
|
|
96 |
|
|
|
(831 |
) |
|
|
39,832 |
|
|
|
|
Total available-for-sale
securities |
|
$ |
1,302,374 |
|
|
$ |
24,212 |
|
|
$ |
(2,407 |
) |
|
$ |
1,324,179 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
|
|
|
|
Gross |
|
Gross |
|
|
|
|
Amortized |
|
unrealized |
|
unrealized |
|
Fair |
(Dollars in thousands) |
|
Cost |
|
gains |
|
losses |
|
Value |
U.S. Treasury |
|
$ |
121,310 |
|
|
$ |
|
|
|
$ |
(10,494 |
) |
|
$ |
110,816 |
|
U.S. Government agencies |
|
|
579,249 |
|
|
|
550 |
|
|
|
(3,623 |
) |
|
|
576,176 |
|
Municipal |
|
|
63,344 |
|
|
|
2,195 |
|
|
|
(203 |
) |
|
|
65,336 |
|
Corporate notes and other: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial issuers |
|
|
42,241 |
|
|
|
1,518 |
|
|
|
(2,013 |
) |
|
|
41,746 |
|
Retained subordinated securities |
|
|
47,448 |
|
|
|
254 |
|
|
|
|
|
|
|
47,702 |
|
Mortgage-backed:
(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency |
|
|
205,257 |
|
|
|
11,287 |
|
|
|
|
|
|
|
216,544 |
|
Non-agency CMOs |
|
|
102,045 |
|
|
|
6,133 |
|
|
|
(194 |
) |
|
|
107,984 |
|
Non-agency CMOs Alt A |
|
|
51,306 |
|
|
|
1,025 |
|
|
|
(1,553 |
) |
|
|
50,778 |
|
Other equity securities |
|
|
37,969 |
|
|
|
15 |
|
|
|
|
|
|
|
37,984 |
|
|
|
|
Total available-for-sale
securities |
|
$ |
1,250,169 |
|
|
$ |
22,977 |
|
|
$ |
(18,080 |
) |
|
$ |
1,255,066 |
|
|
|
|
|
|
|
(1) |
|
Consisting entirely of residential mortgage-backed securities, none of which are subprime. |
The following tables present the portion of the Companys 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 September 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
$ |
2,015 |
|
|
$ |
(1 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
2,015 |
|
|
$ |
(1 |
) |
U.S. Government agencies |
|
|
98,057 |
|
|
|
(113 |
) |
|
|
|
|
|
|
|
|
|
|
98,057 |
|
|
|
(113 |
) |
Municipal |
|
|
514 |
|
|
|
(11 |
) |
|
|
333 |
|
|
|
(12 |
) |
|
|
847 |
|
|
|
(23 |
) |
Corporate notes and other: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial issuers |
|
|
21,541 |
|
|
|
(49 |
) |
|
|
4,574 |
|
|
|
(1,367 |
) |
|
|
26,115 |
|
|
|
(1,416 |
) |
Other |
|
|
18,680 |
|
|
|
(23 |
) |
|
|
|
|
|
|
|
|
|
|
18,680 |
|
|
|
(23 |
) |
Other Equity Securities |
|
|
26,776 |
|
|
|
(831 |
) |
|
|
|
|
|
|
|
|
|
|
26,776 |
|
|
|
(831 |
) |
|
|
|
|
|
|
|
Total |
|
$ |
167,583 |
|
|
$ |
(1,028 |
) |
|
$ |
4,907 |
|
|
$ |
(1,379 |
) |
|
$ |
172,490 |
|
|
$ |
(2,407 |
) |
|
|
|
|
|
|
|
9
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 Companys ability to hold the
securities through the anticipated recovery period.
The Company does not consider securities with unrealized losses at September 30, 2010 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. The corporate securities of financial issuers in this category were comprised of three
trust-preferred securities with high investment grades. These obligations have interest rates
significantly below the rates at which these types of obligations are currently issued, and have
maturity dates in 2027. Although they are currently callable by the issuers, it is unlikely that
they will be called in the near future as the interest rates are very attractive to the issuers. A
review of the issuers indicated that they have recently raised equity capital and/or have strong
capital ratios. The Company does not own any pooled trust-preferred securities.
Effective April 1, 2009, the Company adopted new guidance for the measurement and recognition of
other than temporary impairment for debt securities, which is now part of ASC 320 Investments
Debt and Equity Securities (ASC 320). The new guidance provides that if an entity does not
intend to sell, and it is more likely than not that the entity will not be required to sell a debt
security before recovery of its cost basis, impairment should be separated into (a) the amount
representing credit loss and (b) the amount related to all other factors. The amount of impairment
related to credit loss is recognized in earnings and the impairment related to other factors is
recognized in other comprehensive income (loss). To determine the amount related to credit loss,
the Company applies a method similar to that described by ASC 310, using a single best estimate of
expected cash flows. The Companys adoption of this guidance for the measurement and changes in the
amount of credit losses recognized in net income on these corporate debt securities are summarized
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September, |
|
|
Nine Months Ended September 30, |
|
(Dollars in thousands) |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Balance at beginning of period (1) |
|
$ |
(472 |
) |
|
$ |
(4,195 |
) |
|
$ |
(472 |
) |
|
$ |
(6,181 |
) |
Credit losses recognized |
|
|
|
|
|
|
(472 |
) |
|
|
|
|
|
|
(472 |
) |
Reductions for securities sold during the period |
|
|
|
|
|
|
3,043 |
|
|
|
|
|
|
|
5,029 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
(472 |
) |
|
$ |
(1,624 |
) |
|
$ |
(472 |
) |
|
$ |
(1,624 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
For the nine months ended September 30, 2009, the balance at beginning of period is as of April 1, 2009. |
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 September 30, |
|
|
Nine Months Ended September 30, |
|
(Dollars in thousands) |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Realized gains |
|
$ |
9,236 |
|
|
$ |
1,601 |
|
|
$ |
9,785 |
|
|
$ |
3,417 |
|
Realized losses |
|
|
(1 |
) |
|
|
(1,541 |
) |
|
|
(112 |
) |
|
|
(1,719 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized gains |
|
$ |
9,235 |
|
|
$ |
60 |
|
|
$ |
9,673 |
|
|
$ |
1,698 |
|
Other than temporary impairment charges |
|
|
|
|
|
|
472 |
|
|
|
|
|
|
|
2,608 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains (losses) on available- for-sale securities, net |
|
$ |
9,235 |
|
|
$ |
(412 |
) |
|
$ |
9,673 |
|
|
$ |
(910 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sales of available-for-sale securities |
|
$ |
357,808 |
|
|
$ |
73,945 |
|
|
$ |
628,462 |
|
|
$ |
1,145,137 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
The amortized cost and fair value of securities as of September 30, 2010 and December 31,
2009, 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010 |
|
|
December 31, 2009 |
|
|
|
Amortized |
|
|
Fair |
|
|
Amortized |
|
|
Fair |
|
(Dollars in thousands) |
|
Cost |
|
|
Value |
|
|
Cost |
|
|
Value |
|
Due in one year or less |
|
$ |
595,519 |
|
|
$ |
596,279 |
|
|
$ |
111,380 |
|
|
$ |
111,860 |
|
Due in one to five years |
|
|
287,700 |
|
|
|
289,520 |
|
|
|
221,294 |
|
|
|
222,152 |
|
Due in five to ten years |
|
|
56,875 |
|
|
|
58,139 |
|
|
|
328,914 |
|
|
|
318,796 |
|
Due after ten years |
|
|
153,856 |
|
|
|
160,048 |
|
|
|
192,004 |
|
|
|
188,968 |
|
Mortgage-backed |
|
|
167,857 |
|
|
|
180,361 |
|
|
|
358,608 |
|
|
|
375,306 |
|
Other equity securities |
|
|
40,567 |
|
|
|
39,832 |
|
|
|
37,969 |
|
|
|
37,984 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
available-for-sale
securities |
|
$ |
1,302,374 |
|
|
$ |
1,324,179 |
|
|
$ |
1,250,169 |
|
|
$ |
1,255,066 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2010 and December 31, 2009, securities having a carrying value of $864 million and
$865 million, 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 September 30, 2010, 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 Companys loan portfolio by category as of the dates shown:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
September 30, |
|
(Dollars in thousands) |
|
2010 |
|
|
2009 |
|
|
2009 |
|
Balance: |
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
$ |
1,952,791 |
|
|
$ |
1,743,208 |
|
|
$ |
1,643,721 |
|
Commercial real-estate |
|
|
3,331,498 |
|
|
|
3,296,698 |
|
|
|
3,392,138 |
|
Home equity |
|
|
919,824 |
|
|
|
930,482 |
|
|
|
928,548 |
|
Residential real-estate |
|
|
342,009 |
|
|
|
306,296 |
|
|
|
281,151 |
|
Premium finance receivables commercial |
|
|
1,323,934 |
|
|
|
730,144 |
|
|
|
752,032 |
|
Premium finance receivables life insurance |
|
|
1,434,994 |
|
|
|
1,197,893 |
|
|
|
1,045,653 |
|
Indirect consumer |
|
|
56,575 |
|
|
|
98,134 |
|
|
|
115,528 |
|
Other loans |
|
|
99,530 |
|
|
|
108,916 |
|
|
|
116,486 |
|
|
|
|
|
|
|
|
|
|
|
Total loans, net of unearned income,
excluding covered loans |
|
$ |
9,461,155 |
|
|
$ |
8,411,771 |
|
|
$ |
8,275,257 |
|
Covered loans |
|
|
353,840 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans |
|
$ |
9,814,995 |
|
|
$ |
8,411,771 |
|
|
$ |
8,275,257 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mix: |
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
20 |
% |
|
|
21 |
% |
|
|
20 |
% |
Commercial real-estate |
|
|
34 |
|
|
|
39 |
|
|
|
41 |
|
Home equity |
|
|
9 |
|
|
|
11 |
|
|
|
11 |
|
Residential real-estate |
|
|
3 |
|
|
|
4 |
|
|
|
4 |
|
Premium finance receivables commercial |
|
|
13 |
|
|
|
9 |
|
|
|
9 |
|
Premium finance receivables life insurance |
|
|
15 |
|
|
|
14 |
|
|
|
13 |
|
Indirect consumer |
|
|
1 |
|
|
|
1 |
|
|
|
1 |
|
Consumer and other |
|
|
1 |
|
|
|
1 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
Total loans, net of unearned income,
excluding covered loans |
|
|
96 |
% |
|
|
100 |
% |
|
|
100 |
% |
Covered loans |
|
|
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 $34.8 million at September 30, 2010, $31.8
million at December 31, 2009 and $30.1 million at September 30, 2009. Certain life insurance
premium finance receivables attributable to the life insurance premium finance loan acquisition in
the third and fourth quarters of 2009 as well as the covered loans acquired in the FDIC-assisted
acquisitions during the nine-months ended 2010 are recorded net of credit discounts. See Acquired
Loan Information at Acquisition, below. The $593.8 million increase in commercial premium finance
receivables at September 30, 2010 compared to December 31, 2009 is primarily due to the third
quarter 2009
11
securitization transaction that is now accounted for as a secured borrowing.
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 $12.6
million at September 30, 2010, $10.7 million at December 31, 2009 and $10.4 million at September
30, 2009.
The Companys 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. 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 Companys 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 FDIC-assisted bank 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
portfolio of
life insurance premium finance loans had an unpaid principal balance of $1.0 billion and a carrying
value of $910.9 million at acquisition. At September 30, 2010, the unpaid principal balance and
carrying value of these loans were $836.9 million and $765.6 million, respectively. The portfolio
of loans acquired from the Lincoln Park acquisition had an unpaid principal balance of $138.7
million and a carrying value of $105.0 million at acquisition. At September 30, 2010, the unpaid
principal balance and carrying value of these loans totaled $119.3 million and $96.0 million,
respectively. The portfolio of loans acquired from the Wheatland acquisition had an unpaid
principal balance of $284.2 million and a carrying value of $175.1 million at acquisition. At
September 30, 2010, the unpaid principal balance and carrying value of these loans totaled $235.8
million and $166.2 million, respectively. The portfolio of loans acquired from the Ravenswood
acquisition had an unpaid principal balance of $154.6 million and a carrying value of $93.9 million
at acquisition. At September 30, 2010, the unpaid principal balance and carrying value of these
loans totaled $150.6 million and $91.6 million, respectively.
The following table provides details on these loans at each acquisition:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life Insurance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premium |
|
(Dollars in thousands) |
|
Ravenswood |
|
|
Wheatland |
|
|
Lincoln Park |
|
|
Finance Loans |
|
Contractually required payments including interest |
|
$ |
168,218 |
|
|
$ |
307,103 |
|
|
$ |
165,284 |
|
|
$ |
1,032,714 |
|
Less: Nonaccretable difference |
|
|
66,051 |
|
|
|
118,660 |
|
|
|
36,304 |
|
|
|
41,281 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows expected to be collected (1) |
|
|
102,167 |
|
|
|
188,443 |
|
|
|
128,980 |
|
|
|
991,433 |
|
Less: Accretable yield |
|
|
8,243 |
|
|
|
13,296 |
|
|
|
23,980 |
|
|
|
80,560 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of loans acquired with evidence of credit quality
deterioration since origination |
|
$ |
93,924 |
|
|
$ |
175,147 |
|
|
$ |
105,000 |
|
|
$ |
910,873 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents undiscounted expected principal and interest cash flows at acquisition. |
There was no allowance for loan losses associated with this portfolio of loans at September
30, 2010 compared to an allowance of $615,000 at December 31, 2009. The allowance in prior periods
represented deterioration to the portfolio subsequent to acquisition.
12
Accretable Yield Activity
The following table provides activity for the accretable yield of these loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
September 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life Insurance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premium |
|
(Dollars in thousands) |
|
Ravenswood |
|
|
Wheatland |
|
|
Lincoln Park |
|
|
Finance Loans |
|
Accretable yield, beginning balance |
|
$ |
|
|
|
$ |
11,827 |
|
|
$ |
22,767 |
|
|
$ |
51,779 |
|
Acquisitions |
|
|
8,243 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretable yield amortized to interest income |
|
|
(710 |
) |
|
|
(1,903 |
) |
|
|
(1,358 |
) |
|
|
(8,491 |
) |
Reclassification from the nonaccretable difference (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,680 |
|
Reclassification to the nonaccretable difference (2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(52 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretable yield, ending balance |
|
$ |
7,533 |
|
|
$ |
9,924 |
|
|
$ |
21,409 |
|
|
$ |
44,916 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Reclassification from non-accretable difference represents an increase to the estimated cash flows to be collected on the underlying portfolio. |
|
(2) |
|
Reclassification to the non-accretable difference represents a decrease to the estimated cash flows to be collected on the underlying portfolio. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
September 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life Insurance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premium |
|
(Dollars in thousands) |
|
Ravenswood |
|
|
Wheatland |
|
|
Lincoln Park |
|
|
Finance Loans |
|
Accretable yield, beginning balance |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
65,026 |
|
Acquisitions |
|
|
8,243 |
|
|
|
13,296 |
|
|
|
23,980 |
|
|
|
|
|
Accretable yield amortized to interest income |
|
|
(710 |
) |
|
|
(3,372 |
) |
|
|
(2,571 |
) |
|
|
(29,287 |
) |
Reclassification from the nonaccretable difference (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,373 |
|
Reclassification to the nonaccretable difference (2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(196 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretable yield, ending balance |
|
$ |
7,533 |
|
|
$ |
9,924 |
|
|
$ |
21,409 |
|
|
$ |
44,916 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Reclassification from non-accretable difference represents an increase
to the estimated cash flows to be collected on the underlying
portfolio. |
|
(2) |
|
Reclassification to the non-accretable difference represents a
decrease to the estimated cash flows to be collected on the underlying
portfolio. |
13
(7) Allowance for Loan Losses, Allowance for Losses on Lending-Related Commitments and
Impaired Loans
The following table presents a summary of the activity in the allowance for credit losses for the
periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
(Dollars in thousands) |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Allowance for loan losses at beginning of period |
|
$ |
106,547 |
|
|
$ |
85,113 |
|
|
$ |
98,277 |
|
|
$ |
69,767 |
|
Provision for credit losses |
|
|
25,528 |
|
|
|
91,193 |
|
|
|
95,870 |
|
|
|
129,329 |
|
Other adjustments allowance for loan losses related to consolidation of
securitization entity |
|
|
|
|
|
|
|
|
|
|
1,943 |
|
|
|
|
|
Reclassification
(to)/from allowance for losses on lending-related commitments |
|
|
(206 |
) |
|
|
(1,543 |
) |
|
|
478 |
|
|
|
(1,543 |
) |
Charge-offs: |
|
|
(22,223 |
) |
|
|
(80,072 |
) |
|
|
(88,818 |
) |
|
|
(103,602 |
) |
Recoveries: |
|
|
786 |
|
|
|
405 |
|
|
|
2,682 |
|
|
|
1,145 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs, excluding covered loans |
|
$ |
(21,437 |
) |
|
$ |
(79,667 |
) |
|
$ |
(86,136 |
) |
|
$ |
(102,457 |
) |
Covered loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net charge-offs |
|
|
(21,437 |
) |
|
|
(79,667 |
) |
|
|
(86,136 |
) |
|
|
(102,457 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses at end of period |
|
$ |
110,432 |
|
|
$ |
95,096 |
|
|
$ |
110,432 |
|
|
$ |
95,096 |
|
Allowance for losses on lending-related commitments at end of period |
|
|
2,375 |
|
|
|
3,129 |
|
|
|
2,375 |
|
|
|
3,129 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for credit losses at end of period |
|
$ |
112,807 |
|
|
$ |
98,225 |
|
|
$ |
112,807 |
|
|
$ |
98,225 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A summary of non-accrual, impaired loans and loans past due greater than 90 days and still accruing
interest as of the dates shown:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
September 30, |
|
(Dollars in thousands) |
|
2010 |
|
|
2009 |
|
|
2009 |
|
Non-performing loans: |
|
|
|
|
|
|
|
|
|
|
|
|
Loans past-due greater than 90 days and still accruing interest |
|
$ |
8,432 |
|
|
$ |
7,800 |
|
|
$ |
36,937 |
|
Non-accrual loans |
|
|
125,891 |
|
|
|
124,004 |
|
|
|
194,722 |
|
|
|
|
|
|
|
|
|
|
|
Total non-performing loans, excluding covered loans |
|
$ |
134,323 |
|
|
$ |
131,804 |
|
|
$ |
231,659 |
|
Covered loans |
|
|
146,974 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-performing loans |
|
$ |
281,297 |
|
|
$ |
131,804 |
|
|
$ |
231,659 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans (included in non-performing and restructured loans): |
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans with an allowance for loan loss required (1) |
|
|
91,189 |
|
|
$ |
58,222 |
|
|
$ |
88,664 |
|
Impaired loans with no allowance for loan loss required |
|
|
99,733 |
|
|
|
82,250 |
|
|
|
86,949 |
|
|
|
|
|
|
|
|
|
|
|
Total impaired loans (included in non-performing and
restructured loans): |
|
$ |
190,922 |
|
|
$ |
140,472 |
|
|
$ |
175,613 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses related to impaired loans |
|
$ |
25,085 |
|
|
$ |
17,567 |
|
|
$ |
16,485 |
|
|
|
|
|
|
|
|
|
|
|
Restructured loans |
|
$ |
93,666 |
|
|
$ |
32,432 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
These impaired loans require an allowance for loan losses because the
estimated fair value of the loans or related collateral is less than
the recorded investment in the loans. |
The average recorded investment in impaired loans was $165.7 million and $125.8 million for
the nine months ended September 30, 2010 and 2009, respectively.
14
(8) Loan Securitization
During the third quarter of 2009, the Company entered into an off-balance sheet revolving period
securitization transaction sponsored by FIFC. In connection with the securitization, premium
finance receivables commercial were transferred to FIFC Premium Funding, LLC (the
securitization entity). Provided that certain coverage test criteria continue to be met,
principal collections on loans in the securitization entity are used to subsequently acquire and
transfer additional loans into the securitization entity during the stated revolving period.
Additionally, upon the occurrence of certain events established in the representations and
warranties, FIFC may be required to repurchase ineligible loans that were transferred to the
entity. The Companys primary continuing involvement includes servicing the loans, retaining an
undivided interest (the sellers interest) in the loans, and holding certain retained interests.
Instruments issued by the securitization entity included $600 million Class A notes that bear an
annual interest rate of one-month LIBOR plus 1.45% (the Notes) and have an expected average term
of 2.93 years with any unpaid balance due and payable in full on February 17, 2014. At the time of
issuance, the Notes were eligible collateral under the Federal Reserve Bank of New Yorks Term
Asset-Backed Securities Loan Facility (TALF). Class B and Class C notes (Subordinated
securities), which are recorded in the form of zero coupon bonds, were also issued and were
retained by the Company.
Subsequent to December 31, 2009, this securitization transaction is accounted for as a secured
borrowing and the securitization entity is treated as a consolidated subsidiary of the Company
under ASC 810 and ASC 860. See Note 2 to the Consolidated Financial Statements for a discussion of
changes to the accounting for transfers and servicing of financial assets and consolidation of
variable interest entities, including the elimination of qualifying SPEs. Accordingly, beginning on
January 1, 2010, all of the assets and liabilities of the securitization entity are included
directly on the Companys Consolidated Statements of Condition. The securitization entitys
receivables underlying third-party investors interests are recorded in loans, net of unearned
income, excluding covered loans, an allowance for loan losses was established and the related debt
issued is reported in secured borrowingsowed to securitization investors. Additionally, beginning
on January 1, 2010, certain other of the Companys retained interests in the transaction,
principally consisting of subordinated securities, cash collateral, and overcollateralization of
loans, now constitute intercompany positions, which are eliminated in the preparation of the
Companys Consolidated Statements of Condition.
Upon transfer of premium finance receivables commercial to the securitization entity, the
receivables and certain cash flows derived from them become restricted for use in meeting
obligations to the securitization entitys creditors. The securitization entity has ownership of
interest-bearing deposit balances that also have restrictions, the amounts of which are reported in
interest-bearing deposits with other banks. Investment of the interest-bearing deposit balances is
limited to investments that are permitted under the governing documents of the transaction. With
the exception of the sellers interest in the transferred receivables, the Companys interests in
the securitization entitys assets are generally subordinate to the interests of third-party
investors and, as such, may not be realized by the Company if needed to absorb deficiencies in cash
flows that are allocated to the investors in the securitization entitys debt.
The carrying values and classification of the restricted assets and liabilities relating to the
securitization activities are shown in the table below.
|
|
|
|
|
|
|
September 30, |
|
(Dollars in thousands) |
|
2010 |
|
Cash collateral accounts |
|
$ |
1,759 |
|
Collections and interest funding accounts |
|
|
46,021 |
|
|
|
|
|
Interest-bearing deposits with banks restricted for securitization investors |
|
$ |
47,780 |
|
|
|
|
|
|
Loans, net of unearned income restricted for securitization investors |
|
$ |
637,850 |
|
Allowance for loan losses |
|
|
(2,095 |
) |
|
|
|
|
Net loans restricted for securitization investors |
|
$ |
635,755 |
|
|
|
|
|
|
Other assets |
|
|
2,278 |
|
|
|
|
|
Total assets |
|
$ |
685,813 |
|
|
|
|
|
|
|
|
|
|
Secured borrowings owed to securitization investors |
|
$ |
600,000 |
|
Other liabilities |
|
|
4,442 |
|
|
|
|
|
Total liabilities |
|
$ |
604,442 |
|
|
|
|
|
The assets of the consolidated securitization entity are subject to credit, payment and
interest rate risks on the transferred premium finance receivables commercial. To protect
investors, the securitization structure includes certain features that could result in
earlier-than-expected repayment of the securities. Investors are allocated cash flows derived from
activities related to the accounts comprising the securitized pool of receivables, the amounts of
which reflect finance charges collected net of agent fees, certain fee assessments,
15
and recoveries
on charged-off accounts. From these cash flows, investors are reimbursed for charge-offs occurring
within the securitized pool of receivables and receive the contractual rate of return and FIFC is
paid a servicing fee as servicer. Any cash flows remaining in excess of these requirements are
reported to investors as net yield and remitted to the Company. A net yield rate of less than 0%
for a three month period would trigger an economic early amortization event. In addition to this
performance measurement associated with the transferred loans, there are additional performance
measurements and other events or conditions which could trigger an early amortization event. As of
September 30, 2010, no economic or other early amortization events have occurred. Apart from the
restricted assets related to securitization activities, the investors and the securitization entity
have no recourse to the Companys other assets or credit for a shortage in cash flows.
The Company continues to service the loan receivables held by the securitization entity. FIFC
receives a monthly servicing fee from the securitization entity based on a percentage of the
monthly investor principal balance outstanding. Although the fee income to FIFC offsets the fee
expense to the securitization entity and thus is eliminated in consolidation, failure to service
the transferred loan receivables in accordance with contractual requirements could lead to a
termination of the servicing rights and the loss of future servicing income.
Securitization Activity Prior to January 1, 2010
The following disclosures apply to the securitization activity of the Company prior to January 1,
2010, when transfers of receivables to the securitization entity were treated as sales in
accordance with prior GAAP.
At September 30, 2009, the outstanding balance of loans transferred to the securitization entity
was $661.3 million, of which $652.2 million were securitized and $9.1 million were maintained as
sellers interests. The sellers interest was carried at historical cost and reported as loans, net
of unearned income on the Companys Consolidated Statements of Condition.
Securitization Income
At the time of a loan securitization, the Company recorded a gain/(loss) on sale, which was
calculated as the difference between the proceeds from the sale and the book basis of the loans
sold. The book basis was determined by allocating the carrying amount of the sold loans between the
loans sold and the interests retained based on their relative fair values. Such fair values were
based on market prices at the date of transfer for the sold loans and on the estimated present
value of future cash flows for retained interests. Gains on sale from securitizations are reported
in gain on sales of premium finance receivables in the Companys Consolidated Statements of Income
and were $3.4 million in the third quarter of 2009. The income component resulting from the release
of credit reserves upon classification as held-for-sale was reported as a reduction of provision
for credit losses.
Also reported in gain on sales of premium finance receivables were changes in the fair value of the
interest-only strip. This amount was the excess cash flow from interest collections allocated to
the investors interests after deducting the interest paid on investor certificates, credit losses,
contractual servicing fees, and other expenses. Changes in the fair value of the interest-only
strip of $173,000 were reported in gain on sale of premium finance receivables in the third quarter
of 2009.
The Company retained servicing responsibilities for the transferred loans and earns a related fee.
Servicing fee income was $712,000 for the quarter ended September 30, 2009 and is reported in other
non-interest income in the Consolidated Statements of Income.
Retained Interests
The Company retained subordinated interests in the securitized loans. These interests included the
subordinated securities, overcollateralization of loans, cash reserves, a servicing asset, and an
interest-only strip. The following table presents the Companys retained interests at September 30,
2009:
|
|
|
|
|
(Dollars in thousands) |
|
|
|
|
Subordinated securities (1) |
|
$ |
48,004 |
|
Residual interests held (2) |
|
|
42,622 |
|
Servicing asset (2) |
|
|
1,336 |
|
|
|
|
|
Total retained interests |
|
$ |
91,962 |
|
|
|
|
|
|
|
|
(1) |
|
The subordinated securities were accounted for at fair value and reported as available-for-sale securities on the
Companys
Consolidated Statements of Condition with unrealized gains recorded in accumulated other comprehensive income. See
Note 15 for further discussion on fair value. |
|
(2) |
|
The residual interests and servicing asset were accounted for at fair value and reported in other assets on the Companys
Consolidated Statements of Condition. Retained interests held includes overcollateralization of loans, cash reserve
deposits,
and an interest-only strip. See Note 15 for further discussion on fair value. |
16
Key economic assumptions used in the measuring of fair value and the sensitivity of the fair value
to immediate adverse changes in those assumptions at September 30, 2009 for the Companys servicing
asset and other interests held related to securitized loans are presented in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated |
|
Residual |
|
Servicing |
(Dollars in thousands) |
|
Securities |
|
Interests |
|
Asset |
Fair value of interest held |
|
$ |
48,004 |
|
|
$ |
42,622 |
|
|
$ |
1,336 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected weighted-average life (in months) |
|
|
6.5 |
|
|
|
6.5 |
|
|
|
6.5 |
|
Decrease in fair value from: |
|
|
|
|
|
|
|
|
|
|
|
|
1 month reduction |
|
$ |
239 |
|
|
$ |
(1,206 |
) |
|
$ |
(204 |
) |
2 month reduction |
|
$ |
479 |
|
|
$ |
(2,420 |
) |
|
$ |
(403 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate assumptions |
|
|
5.97 |
% |
|
|
8.75 |
% (1) |
|
|
8.5 |
% |
Decrease in fair value from: |
|
|
|
|
|
|
|
|
|
|
|
|
100 basis point increase |
|
$ |
(257 |
) |
|
$ |
(200 |
) |
|
$ |
(3 |
) |
200 basis point increase |
|
$ |
(513 |
) |
|
$ |
(399 |
) |
|
$ |
(6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit loss assumption |
|
|
|
|
|
|
0.4 |
% |
|
|
0.4 |
% |
Decrease in fair value from: |
|
|
|
|
|
|
|
|
|
|
|
|
10% higher loss |
|
|
|
|
|
$ |
(154 |
) |
|
$ |
|
|
20% higher loss |
|
|
|
|
|
$ |
(310 |
) |
|
$ |
|
|
|
|
|
(1) |
|
Excludes the discount rate on cash reserve deposits deemed to be immaterial. |
The sensitivities in the table above are hypothetical and caution should be exercised when relying
on this data. Changes in fair value based on variations in assumptions generally cannot be
extrapolated because the relationship of the change in the assumption to the change in fair value
may not be linear.
The following table summarizes the changes in the fair value of the Companys servicing asset for
the quarter ended September 30, 2009:
|
|
|
|
|
(Dollars in thousands) |
|
|
|
|
Balance at June 30, 2009 |
|
$ |
|
|
Fair value determined upon transfer of loans |
|
|
1,795 |
|
Changes in fair value due to changes in inputs and assumptions (1) |
|
|
(470 |
) |
Other changes (2) |
|
|
11 |
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2009 |
|
$ |
1,336 |
|
|
|
|
|
|
|
|
(1) |
|
The Company measured servicing assets at fair value and reported the
change in other non-interest income. |
|
(2) |
|
Represents accretable yield reported in other non-interest income. |
The key economic assumptions used in measuring the fair value of the servicing asset included the
prepayment speed and weighted-average life, the discount rate, and default rate. The primary risk
of material changes in the value of the servicing asset resided in the potential volatility in the
economic assumptions used, particularly the prepayment speed and weighted-average life.
Other Disclosures
The table below summarizes cash flows received from the securitization entity for the quarter ended
September 30, 2009:
|
|
|
|
|
(Dollars in thousands) |
|
|
|
|
Proceeds from new securitizations during the period |
|
$ |
600,000 |
|
Proceeds from collections reinvested in revolving securitizations |
|
|
106,282 |
|
Servicing and other fees received |
|
|
|
|
Excess spread received |
|
|
|
|
17
The following table presents quantitative information about the premium finance receivables -
commercial at September 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of |
|
|
|
|
|
|
Total |
|
|
Loans 30 days or |
|
|
Net Credit |
|
|
|
Amount of |
|
|
More Past Due |
|
|
Write-offs during |
|
(Dollars in thousands) |
|
Loans |
|
|
or on Nonaccrual |
|
|
the Quarter |
|
Premium finance receivables commercial |
|
$ |
1,404,221 |
|
|
$ |
48,177 |
|
|
$ |
2,317 |
|
Less: Premium finance receivables commercial securitized |
|
|
652,189 |
|
|
|
6,096 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premium finance receivables commercial on-balance sheet |
|
$ |
752,032 |
|
|
$ |
42,081 |
|
|
$ |
2,317 |
|
|
|
|
|
|
|
|
|
|
|
(9) Goodwill and Other Intangible Assets
A summary of the Companys goodwill assets by business segment is presented in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 1, |
|
|
Goodwill |
|
|
Impairment |
|
|
September 30, |
|
(Dollars in thousands) |
|
2010 |
|
|
Acquired |
|
|
Loss |
|
|
2010 |
|
Community banking |
|
$ |
247,601 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
247,601 |
|
Specialty finance |
|
|
16,095 |
|
|
|
|
|
|
|
|
|
|
|
16,095 |
|
Wealth management |
|
|
14,329 |
|
|
|
|
|
|
|
|
|
|
|
14,329 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
278,025 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
278,025 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
No adjustments were made to goodwill in the first nine months of 2010. Pursuant to the
acquisition of Professional Mortgage Partners (PMP) in December 2008, Wintrust may be required to
pay contingent consideration to the former owner of PMP as a result of attaining certain
performance measures through December 2011. Any contingent payments made pursuant to this
transaction would be reflected as increases in the Community banking segments goodwill.
A summary of finite-lived intangible assets as of the dates shown and the expected amortization as
of September 30, 2010 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
September 30, |
|
(Dollars in thousands) |
|
2010 |
|
|
2009 |
|
|
2009 |
|
Customer list intangibles: |
|
|
|
|
|
|
|
|
|
|
|
|
Gross carrying amount |
|
$ |
5,052 |
|
|
$ |
5,052 |
|
|
$ |
5,052 |
|
Accumulated amortization |
|
|
(3,450 |
) |
|
|
(3,307 |
) |
|
|
(3,202 |
) |
|
|
|
|
|
|
|
|
|
|
Net carrying amount |
|
$ |
1,602 |
|
|
$ |
1,745 |
|
|
$ |
1,850 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core deposit intangibles: |
|
|
|
|
|
|
|
|
|
|
|
|
Gross carrying amount |
|
$ |
29,508 |
|
|
$ |
27,918 |
|
|
$ |
27,918 |
|
Accumulated amortization |
|
|
(17,916 |
) |
|
|
(16,039 |
) |
|
|
(15,400 |
) |
|
|
|
|
|
|
|
|
|
|
Net carrying amount |
|
$ |
11,592 |
|
|
$ |
11,879 |
|
|
$ |
12,518 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other intangible assets, net |
|
$ |
13,194 |
|
|
$ |
13,624 |
|
|
$ |
14,368 |
|
|
|
|
|
|
Estimated amortization |
|
|
|
|
Actual in 9 months ended September 30, 2010 |
|
$ |
2,020 |
|
Estimated remaining in 2010 |
|
|
715 |
|
Estimated - 2011 |
|
|
2,708 |
|
Estimated - 2012 |
|
|
2,654 |
|
Estimated - 2013 |
|
|
2,573 |
|
Estimated - 2014 |
|
|
2,236 |
|
The customer list intangibles recognized in connection with the purchase of U.S. life
insurance premium finance assets in 2009 are being amortized over an 18-year period on an
accelerated basis. The customer list intangibles recognized in connection with the acquisitions of
Lake Forest Capital Management in 2003 and Wayne Hummer Asset Management Company (subsequently
renamed Wintrust Capital Management) in 2002, were being amortized over seven-year periods on an
accelerated basis and were fully amortized in the first quarter of 2010 and first quarter of 2009,
respectively.
18
The increase in core deposit intangibles from 2009 was related to the FDIC-assisted acquisitions of
Lincoln Park and Wheatland during the second quarter of 2010, and the FDIC-assisted acquisition of
Ravenswood during the third quarter of 2010. Core deposit intangibles recognized in connection with
the Companys bank acquisitions are being amortized over ten-year periods on an accelerated basis.
Total amortization expense associated with finite-lived intangibles totaled approximately $2.0
million in each of the nine months ended September 30, 2010 and 2009.
(10) Deposits
The following table is a summary of deposits as of the dates shown:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
September 30, |
|
(Dollars in thousands) |
|
2010 |
|
|
2009 |
|
|
2009 |
|
Balance: |
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest bearing |
|
$ |
1,042,730 |
|
|
$ |
864,306 |
|
|
$ |
841,668 |
|
NOW |
|
|
1,551,749 |
|
|
|
1,415,856 |
|
|
|
1,245,689 |
|
Wealth Management deposits |
|
|
710,435 |
|
|
|
971,113 |
|
|
|
935,740 |
|
Money Market |
|
|
1,746,168 |
|
|
|
1,534,632 |
|
|
|
1,468,228 |
|
Savings |
|
|
713,823 |
|
|
|
561,916 |
|
|
|
513,239 |
|
Time certificates of deposit |
|
|
5,197,334 |
|
|
|
4,569,251 |
|
|
|
4,842,599 |
|
|
|
|
|
|
|
|
|
|
|
Total deposits |
|
$ |
10,962,239 |
|
|
$ |
9,917,074 |
|
|
$ |
9,847,163 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mix: |
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest bearing |
|
|
10 |
% |
|
|
9 |
% |
|
|
9 |
% |
NOW |
|
|
14 |
|
|
|
14 |
|
|
|
13 |
|
Wealth Management deposits |
|
|
6 |
|
|
|
10 |
|
|
|
9 |
|
Money Market |
|
|
16 |
|
|
|
15 |
|
|
|
15 |
|
Savings |
|
|
7 |
|
|
|
6 |
|
|
|
5 |
|
Time certificates of deposit |
|
|
47 |
|
|
|
46 |
|
|
|
49 |
|
|
|
|
|
|
|
|
|
|
|
Total deposits |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
Wealth management deposits represent deposit balances (primarily money market accounts) at the
Companys subsidiary banks from brokerage customers of Wayne Hummer Investments, trust and asset
management customers of The Chicago Trust Company (formerly named the Wayne Hummer Trust Company)
and brokerage customers from unaffiliated companies.
19
(11) Notes Payable, Federal Home Loan Bank Advances, Other Borrowings, Secured Borrowings
and Subordinated Notes
The following table is a summary of notes payable, Federal Home Loan Bank advances, other
borrowings, secured borrowings and subordinated notes as of the dates shown:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
September 30, |
|
(Dollars in thousands) |
|
2010 |
|
|
2009 |
|
|
2009 |
|
Notes payable |
|
$ |
1,000 |
|
|
$ |
1,000 |
|
|
$ |
1,000 |
|
Federal Home Loan Bank advances |
|
|
414,832 |
|
|
|
430,987 |
|
|
|
433,983 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other borrowings: |
|
|
|
|
|
|
|
|
|
|
|
|
Securities sold under repurchase agreements |
|
|
241,522 |
|
|
|
245,640 |
|
|
|
250,263 |
|
Other |
|
|
|
|
|
|
1,797 |
|
|
|
1,808 |
|
|
|
|
|
|
|
|
|
|
|
Total other borrowings |
|
|
241,522 |
|
|
|
247,437 |
|
|
|
252,071 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured borrowings owed to securitization investors |
|
|
600,000 |
|
|
|
|
|
|
|
|
|
Subordinated notes |
|
|
55,000 |
|
|
|
60,000 |
|
|
|
65,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total notes payable, Federal Home Loan
Bank advances, other borrowings,
and subordinated notes |
|
$ |
1,312,354 |
|
|
$ |
739,424 |
|
|
$ |
752,054 |
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2010, the Company had notes payable with a $1.0 million outstanding balance,
with an interest rate of 4.50%, under a $51.0 million loan agreement (Agreement) with
unaffiliated banks. The Agreement consists of a $50.0 million revolving note, maturing on
October 29, 2010, and a $1.0 million note maturing on June 1, 2015. At September 30, 2010, there
was no outstanding balance on the $50.0 million revolving note. Borrowings under the Agreement that
are considered Base Rate Loans will bear interest at a rate equal to the higher of (1) 450 basis
points and (2) for the applicable period, the highest of (a) the federal funds rate plus 100 basis
points, (b) the lenders prime rate plus 50 basis points, and (c) the Eurodollar Rate (as defined
below) that would be applicable for an interest period of one month plus 150 basis points.
Borrowings under the Agreement that are considered Eurodollar Rate Loans will bear interest at a
rate equal to the higher of (1) the British Bankers Associations LIBOR rate for the applicable
period plus 350 basis points (the Eurodollar Rate) and (2) 450 basis points.
Commencing August 2009, a commitment fee is payable quarterly equal to 0.50% of the actual daily
amount by which the lenders commitment under the revolving note exceeds the amount outstanding
under such facility.
The Agreement is secured by the stock of some of the banks and contains several restrictive
covenants, including the maintenance of various capital adequacy levels, asset quality and
profitability ratios, and certain restrictions on dividends and other indebtedness. At September
30, 2010, the Company was in compliance with all debt covenants. The Agreement is available to be
utilized, as needed, to provide capital to fund continued growth at the Companys banks and to
serve as an interim source of funds for acquisitions, common stock repurchases or other general
corporate purposes.
Federal Home Loan Bank advances consist of fixed rate obligations of the banks and are
collateralized by qualifying residential real estate and home equity loans and certain securities.
FHLB advances are stated at par value of the debt adjusted for unamortized fair value adjustments
recorded in connection with advances acquired through acquisitions as well as unamortized
prepayment fees recorded in connection with debt restructurings. In the third quarter of 2010, the
Company restructured $36.0 million of FHLB advances, paying $1.5 million in prepayment fees, in
order to achieve lower advance interest rates. In the second quarter of 2010, the Company
restructured $146.0 million of FHLB advances, paying $6.8 million in prepayment fees. In the first
quarter of 2010, the Company restructured $38.0 million of FHLB advances, paying $1.8 million in
prepayment fees. These prepayment fees are being amortized as an adjustment to interest expense
using the effective interest method.
At September 30, 2010 securities sold under repurchase agreements represent $98.4 million of
customer balances in sweep accounts in connection with master repurchase agreements at the banks
and $143.1 million of short-term borrowings from brokers. During the third quarter of 2009, the
Company entered into an off-balance sheet securitization transaction sponsored by FIFC. In
connection with the securitization, premium finance receivables commercial were transferred to
FIFC Premium Funding, LLC, a qualifying special purpose entity (the QSPE). The QSPE issued
$600 million Class A notes that bear an annual interest rate of one-month LIBOR plus 1.45% (the
Notes) and have an expected average term of 2.93 years with any unpaid balance due and payable in
full on February 17, 2014. At the time of issuance, the Notes were eligible collateral under TALF.
The Companys
adoption of new accounting standards on January 1, 2010 resulted in the consolidation of the
20
QSPE
that was not previously recorded on the Companys Consolidated Statements of Condition. See Note 2
Recent Accounting Developments and Note 8 Loan Securitization, for more information on the
QSPE.
The subordinated notes represent three notes, issued in October 2002, April 2003 and October 2005
(funded in May 2006). The balances of the notes as of September 30, 2010 were $15.0 million, $15.0
million and $25.0 million, respectively. Each subordinated note requires annual principal payments
of $5.0 million beginning in the sixth year, with final maturities in the tenth year. The Company
may redeem the subordinated notes at any time prior to maturity. Interest on each note is
calculated at a rate equal to three-month LIBOR plus 130 basis points.
(12) Junior Subordinated Debentures
As of September 30, 2010, the Company owned 100% of the common securities of nine trusts, Wintrust
Capital Trust III, Wintrust Statutory Trust IV, Wintrust Statutory Trust V, Wintrust Capital Trust
VII, Wintrust Capital Trust VIII, Wintrust Capital Trust IX, Northview Capital Trust I, Town
Bankshares Capital Trust I, and First Northwest Capital Trust I (the Trusts) set up to provide
long-term financing. The Northview, Town and First Northwest capital trusts were acquired as part
of the acquisitions of Northview Financial Corporation, Town Bankshares, Ltd., and First Northwest
Bancorp, Inc., respectively. The Trusts were formed for purposes of issuing trust preferred
securities to third-party investors and investing the proceeds from the issuance of the trust
preferred securities and common securities solely in junior subordinated debentures issued by the
Company (or assumed by the Company in connection with an acquisition), with the same maturities and
interest rates as the trust preferred securities. The junior subordinated debentures are the sole
assets of the Trusts. In each Trust, the common securities represent approximately 3% of the junior
subordinated debentures and the trust preferred securities represent approximately 97% of the
junior subordinated debentures.
The Trusts are reported in the Companys consolidated financial statements as unconsolidated
subsidiaries. Accordingly, in the Consolidated Statements of Condition, the junior subordinated
debentures issued by the Company to the Trusts are reported as liabilities and the common
securities of the Trusts, all of which are owned by the Company, are included in available-for-sale
securities.
The following table provides a summary of the Companys junior subordinated debentures as of
September 30, 2010. The junior subordinated debentures represent the par value of the obligations
owed to the Trusts.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Junior |
|
|
|
|
|
|
|
|
|
|
|
|
Earliest |
|
|
Trust Preferred |
|
|
Subordinated |
|
|
Rate |
|
Rate at |
|
|
Issue |
|
Maturity |
|
Redemption |
(Dollars in thousands) |
|
Securities |
|
|
Debentures |
|
|
Structure |
|
9/30/10 |
|
|
Date |
|
Date |
|
Date |
Wintrust Capital Trust III |
|
$ |
25,000 |
|
|
$ |
25,774 |
|
|
L+3.25 |
|
|
3.78 |
% |
|
04/2003 |
|
04/2033 |
|
04/2008 |
Wintrust Statutory Trust IV |
|
|
20,000 |
|
|
|
20,619 |
|
|
L+2.80 |
|
|
3.09 |
% |
|
12/2003 |
|
12/2033 |
|
12/2008 |
Wintrust Statutory Trust V |
|
|
40,000 |
|
|
|
41,238 |
|
|
L+2.60 |
|
|
2.89 |
% |
|
05/2004 |
|
05/2034 |
|
06/2009 |
Wintrust Capital Trust VII |
|
|
50,000 |
|
|
|
51,550 |
|
|
L+1.95 |
|
|
2.24 |
% |
|
12/2004 |
|
03/2035 |
|
03/2010 |
Wintrust Capital Trust VIII |
|
|
40,000 |
|
|
|
41,238 |
|
|
L+1.45 |
|
|
1.74 |
% |
|
08/2005 |
|
09/2035 |
|
09/2010 |
Wintrust Capital Trust IX |
|
|
50,000 |
|
|
|
51,547 |
|
|
Fixed |
|
|
6.84 |
% |
|
09/2006 |
|
09/2036 |
|
09/2011 |
Northview Capital Trust I |
|
|
6,000 |
|
|
|
6,186 |
|
|
L+3.00 |
|
|
3.47 |
% |
|
08/2003 |
|
11/2033 |
|
08/2008 |
Town Bankshares Capital Trust I |
|
|
6,000 |
|
|
|
6,186 |
|
|
L+3.00 |
|
|
3.47 |
% |
|
08/2003 |
|
11/2033 |
|
08/2008 |
First Northwest Capital Trust I |
|
|
5,000 |
|
|
|
5,155 |
|
|
L+3.00 |
|
|
3.29 |
% |
|
05/2004 |
|
05/2034 |
|
05/2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
$ |
249,493 |
|
|
|
|
|
3.53 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The junior subordinated debentures totaled $249.5 million at September 30, 2010, December 31,
2009 and September 30, 2009.
The interest rates on the variable rate junior subordinated debentures are based on the three-month
LIBOR rate and reset on a quarterly basis. The interest rate on the Wintrust Capital Trust IX
junior subordinated debentures, currently fixed at 6.84%, changes to a variable rate equal to
three-month LIBOR plus 1.63% effective September 15, 2011. At September 30, 2010, the weighted
average contractual interest rate on the junior subordinated debentures was 3.53%. The Company
entered into $175 million of interest rate swaps to hedge the variable cash flows on certain junior
subordinated debentures. The hedge-adjusted rate on the junior subordinated debentures on September
30, 2010, was 7.00%. Distributions on the common and preferred securities issued by the Trusts are
payable quarterly at a rate per annum equal to the interest rates being earned by the Trusts on the
junior subordinated debentures. Interest expense on the junior subordinated debentures is
deductible for income tax purposes.
The Company has guaranteed the payment of distributions and payments upon liquidation or redemption
of the trust preferred securities, in each case to the extent of funds held by the Trusts. The
Company and the Trusts believe that, taken together, the
obligations of the Company under the guarantees, the junior subordinated debentures, and other
related agreements provide, in the aggregate, a full, irrevocable and unconditional guarantee, on a
subordinated basis, of all of the obligations of the Trusts under the trust preferred securities.
Subject to certain limitations, the Company has the right to defer the payment of interest on the
junior subordinated debentures at any time, or from time to time, for a period not to exceed 20
consecutive quarters. The trust preferred securities are subject to mandatory redemption, in whole
or in part, upon repayment of the junior subordinated debentures at maturity or their earlier
redemption. The junior subordinated debentures are redeemable in whole or in part prior to maturity
at any time after the earliest redemption dates shown in the table, and earlier at the discretion
of the Company if certain conditions are met, and, in any
21
event, only after the Company has
obtained Federal Reserve approval, if then required under applicable guidelines or regulations.
The junior subordinated debentures, subject to certain limitations, qualify as Tier 1 capital of
the Company for regulatory purposes. The amount of junior subordinated debentures and certain other
capital elements in excess of those certain limitations could be included in Tier 2 capital,
subject to restrictions. At September 30, 2010, all of the junior subordinated debentures, net of
the Common Securities, were included in the Companys Tier 1 regulatory capital.
(13) Segment Information
The Companys operations consist of three primary segments: community banking, specialty finance
and wealth management.
The three reportable segments are strategic business units that are separately managed as they
offer different products and services and have different marketing strategies. In addition, each
segments customer base has varying characteristics. The community banking segment has a different
regulatory environment than the specialty finance and wealth management segments. While the
Companys management monitors each of the fifteen bank subsidiaries operations and profitability
separately, as well as that of its mortgage company, these subsidiaries have been aggregated into
one reportable operating segment due to the similarities in products and services, customer base,
operations, profitability measures, and economic characteristics.
The net interest income, net revenue and segment profit of the community banking segment includes
income and related interest costs from portfolio loans that were purchased from the specialty
finance segment. For purposes of internal segment profitability analysis, management reviews the
results of its specialty finance segment as if all loans originated and sold to the community
banking segment were retained within that segments operations, thereby causing inter-segment
eliminations. See Note 3 Business Combinations, for more information on the life insurance
premium finance loan acquisition in the third and fourth quarters of 2009. Similarly, for purposes
of analyzing the contribution from the wealth management segment, management allocates a portion of
the net interest income earned by the community banking segment on deposit balances of customers of
the wealth management segment to the wealth management segment. See Note 10 Deposits, for more
information on these deposits.
The segment financial information provided in the following tables has been derived from the
internal profitability reporting system used by management to monitor and manage the financial
performance of the Company. The accounting policies of the segments are generally the same as those
described in the Summary of Significant Accounting Policies in Note 1. The Company evaluates
segment performance based on after-tax profit or loss and other appropriate profitability measures
common to each segment. Certain indirect expenses have been allocated based on actual volume
measurements and other criteria, as appropriate. Intersegment revenue and transfers are generally
accounted for at current market prices. The parent and intersegment eliminations reflect parent
company information and intersegment eliminations. In the fourth quarter of 2009, the contribution
attributable to the wealth management deposits was redefined to measure the value as an alternative
source of funding for each bank. In previous periods, the contribution from these deposits was
measured as the full net interest income contribution. The redefined measure better reflects the
value of these deposits to the Company. Prior period information has been restated to reflect these
changes.
22
The following is a summary of certain operating information for reportable segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
|
|
|
September 30, |
|
|
$ Change in |
|
|
% Change in |
|
(Dollars in thousands) |
|
2010 |
|
|
2009 |
|
|
Contribution |
|
|
Contribution |
|
Net interest income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Community banking |
|
$ |
95,373 |
|
|
$ |
84,576 |
|
|
$ |
10,797 |
|
|
|
13 |
% |
Specialty finance |
|
|
14,235 |
|
|
|
33,731 |
|
|
|
(19,496 |
) |
|
|
(58 |
) |
Wealth management |
|
|
399 |
|
|
|
1,710 |
|
|
|
(1,311 |
) |
|
|
(77 |
) |
Parent and inter-segment eliminations |
|
|
(7,027 |
) |
|
|
(32,354 |
) |
|
|
25,327 |
|
|
|
78 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net interest income |
|
$ |
102,980 |
|
|
$ |
87,663 |
|
|
|
15,317 |
|
|
|
17 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Community banking |
|
$ |
44,304 |
|
|
$ |
18,931 |
|
|
$ |
25,373 |
|
|
|
134 |
% |
Specialty finance |
|
|
745 |
|
|
|
114,292 |
|
|
|
(113,547 |
) |
|
|
(99 |
) |
Wealth management |
|
|
10,952 |
|
|
|
10,418 |
|
|
|
534 |
|
|
|
5 |
|
Parent and inter-segment eliminations |
|
|
(1,345 |
) |
|
|
7,039 |
|
|
|
(8,384 |
) |
|
|
(119 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest income |
|
$ |
54,656 |
|
|
$ |
150,680 |
|
|
|
(96,024 |
) |
|
|
(64 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Community banking |
|
$ |
139,677 |
|
|
$ |
103,507 |
|
|
$ |
36,170 |
|
|
|
35 |
% |
Specialty finance |
|
|
14,980 |
|
|
|
148,023 |
|
|
|
(133,043 |
) |
|
|
(90 |
) |
Wealth management |
|
|
11,351 |
|
|
|
12,128 |
|
|
|
(777 |
) |
|
|
(6 |
) |
Parent and inter-segment eliminations |
|
|
(8,372 |
) |
|
|
(25,315 |
) |
|
|
16,943 |
|
|
|
67 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue |
|
$ |
157,636 |
|
|
$ |
238,343 |
|
|
|
(80,707 |
) |
|
|
(34 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment profit (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Community banking |
|
$ |
22,433 |
|
|
$ |
(35,302 |
) |
|
$ |
57,735 |
|
|
|
164 |
% |
Specialty finance |
|
|
5,606 |
|
|
|
120,428 |
|
|
|
(114,822 |
) |
|
|
(95 |
) |
Wealth management |
|
|
(11 |
) |
|
|
647 |
|
|
|
(658 |
) |
|
|
(102 |
) |
Parent and inter-segment eliminations |
|
|
(7,930 |
) |
|
|
(53,778 |
) |
|
|
45,848 |
|
|
|
85 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment profit (loss) |
|
$ |
20,098 |
|
|
$ |
31,995 |
|
|
|
(11,897 |
) |
|
|
(37 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Community banking |
|
$ |
13,308,912 |
|
|
$ |
11,871,595 |
|
|
$ |
1,437,317 |
|
|
|
12 |
% |
Specialty finance |
|
|
2,915,956 |
|
|
|
2,069,415 |
|
|
|
846,541 |
|
|
|
41 |
|
Wealth management |
|
|
66,666 |
|
|
|
60,990 |
|
|
|
5,676 |
|
|
|
9 |
|
Parent and inter-segment eliminations |
|
|
(2,191,166 |
) |
|
|
(1,865,979 |
) |
|
|
(325,187 |
) |
|
|
(17 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment assets |
|
$ |
14,100,368 |
|
|
$ |
12,136,021 |
|
|
|
1,964,347 |
|
|
|
16 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
|
|
|
|
|
|
September 30, |
|
|
$ Change in |
|
|
% Change in |
|
(Dollars in thousands) |
|
2010 |
|
|
2009 |
|
|
Contribution |
|
|
Contribution |
|
Net interest income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Community banking |
|
$ |
280,834 |
|
|
$ |
216,099 |
|
|
$ |
64,735 |
|
|
|
30 |
% |
Specialty finance |
|
|
43,898 |
|
|
|
71,950 |
|
|
|
(28,052 |
) |
|
|
(39 |
) |
Wealth management |
|
|
5,378 |
|
|
|
9,449 |
|
|
|
(4,071 |
) |
|
|
(43 |
) |
Parent and inter-segment eliminations |
|
|
(26,951 |
) |
|
|
(72,556 |
) |
|
|
45,605 |
|
|
|
63 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net interest income |
|
$ |
303,159 |
|
|
$ |
224,942 |
|
|
|
78,217 |
|
|
|
35 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Community banking |
|
$ |
101,118 |
|
|
$ |
70,614 |
|
|
$ |
30,504 |
|
|
|
43 |
% |
Specialty finance |
|
|
12,928 |
|
|
|
115,746 |
|
|
|
(102,818 |
) |
|
|
(89 |
) |
Wealth management |
|
|
32,709 |
|
|
|
27,975 |
|
|
|
4,734 |
|
|
|
17 |
|
Parent and inter-segment eliminations |
|
|
945 |
|
|
|
18,224 |
|
|
|
(17,279 |
) |
|
|
(95 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest income |
|
$ |
147,700 |
|
|
$ |
232,559 |
|
|
|
(84,859 |
) |
|
|
(36 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Community banking |
|
$ |
381,952 |
|
|
$ |
286,713 |
|
|
$ |
95,239 |
|
|
|
33 |
% |
Specialty finance |
|
|
56,826 |
|
|
|
187,696 |
|
|
|
(130,870 |
) |
|
|
(70 |
) |
Wealth management |
|
|
38,087 |
|
|
|
37,424 |
|
|
|
663 |
|
|
|
2 |
|
Parent and inter-segment eliminations |
|
|
(26,006 |
) |
|
|
(54,332 |
) |
|
|
28,326 |
|
|
|
61 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue |
|
$ |
450,859 |
|
|
$ |
457,501 |
|
|
|
(6,642 |
) |
|
|
(1 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment profit (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Community banking |
|
$ |
53,060 |
|
|
$ |
(24,728 |
) |
|
$ |
77,788 |
|
|
|
315 |
% |
Specialty finance |
|
|
14,503 |
|
|
|
136,713 |
|
|
|
(122,210 |
) |
|
|
(89 |
) |
Wealth management |
|
|
2,362 |
|
|
|
3,937 |
|
|
|
(1,575 |
) |
|
|
(40 |
) |
Parent and inter-segment eliminations |
|
|
(20,800 |
) |
|
|
(71,020 |
) |
|
|
50,220 |
|
|
|
71 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment profit (loss) |
|
$ |
49,125 |
|
|
$ |
44,902 |
|
|
|
4,223 |
|
|
|
9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
23
(14) Derivative Financial Instruments
The Company enters into derivative financial instruments as part of its strategy to manage its
exposure to changes in interest rates. Derivative instruments represent contracts between parties
that result in one party delivering cash to the other party based on a notional amount and an
underlying (such as a rate, security price or price index) as specified in the contract. The amount
of cash delivered from one party to the other is determined based on the interaction of the
notional amount of the contract with the underlying. Derivatives are also implicit in certain
contracts and commitments.
The derivative financial instruments currently used by the Company to manage its exposure to
interest rate risk include: (1) interest rate swaps to manage the interest rate risk of certain
variable rate liabilities; (2) interest rate lock commitments provided to customers to fund certain
mortgage loans to be sold into the secondary market; (3) forward commitments for the future
delivery of such mortgage loans to protect the Company from adverse changes in interest rates and
corresponding changes in the value of mortgage loans available-for-sale; and (4) covered call
options related to specific investment securities to enhance the overall yield on such securities.
The Company also enters into derivatives (typically interest rate swaps) with certain qualified
borrowers to facilitate the borrowers risk management strategies and concurrently enters into
mirror-image derivatives with a third party counterparty, effectively making a market in the
derivatives for such borrowers.
As required by ASC 815, the Company recognizes derivative financial instruments in the consolidated
financial statements at fair value regardless of the purpose or intent for holding the instrument.
Derivative financial instruments are included in other assets or other liabilities, as appropriate,
on the Consolidated Statements of Condition. Changes in the fair value of derivative financial
instruments are either recognized in income or in shareholders equity as a component of other
comprehensive income depending on whether the derivative financial instrument qualifies for hedge
accounting and, if so, whether it qualifies as a fair value hedge or cash flow hedge. Generally,
changes in fair values of derivatives accounted for as fair value hedges are recorded in income in
the same period and in the same income statement line as changes in the fair values of the hedged
items that relate to the hedged risk(s). Changes in fair values of derivative financial instruments
accounted for as cash flow hedges, to the extent they are effective hedges, are recorded as a
component of other comprehensive income, net of deferred taxes, and reclassified to earnings when
the hedged transaction affects earnings. Changes in fair values of derivative financial instruments
not designated in a hedging relationship pursuant to ASC 815, including changes in fair value
related to the ineffective portion of cash flow hedges, are reported in non-interest income during
the period of the change. Derivative financial instruments are valued by a third party and are
periodically validated by comparison with valuations provided by the respective counterparties.
Fair values of certain mortgage banking derivatives (interest rate lock commitments and forward
commitments to sell mortgage loans on a best efforts basis) are estimated based on changes in
mortgage interest rates from the date of the loan commitment.
The table below presents the fair value of the Companys derivative financial instruments as well
as their classification on the Consolidated Statements of Condition as of September 30, 2010 and
December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Assets |
|
|
Derivative Liabilities |
|
|
|
Fair Value |
|
|
Fair Value |
|
|
|
Balance |
|
|
|
|
|
|
|
|
|
Balance |
|
|
|
|
|
|
|
|
Sheet |
|
September 30, |
|
|
December 31 |
|
|
Sheet |
|
September 30, |
|
|
December 31 |
|
(Dollars in thousands) |
|
Location |
|
2010 |
|
|
2009 |
|
|
Location |
|
2010 |
|
|
2009 |
|
Derivatives designated as
hedging instruments under
ASC 815: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps designated
as Cash Flow Hedges |
|
Other assets |
|
$ |
|
|
|
$ |
|
|
|
Other liabilities |
|
$ |
15,543 |
|
|
$ |
14,701 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designed as
hedging instruments under
ASC 815: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate derivatives |
|
Other assets |
|
|
18,313 |
|
|
|
7,759 |
|
|
Other liabilities |
|
|
18,999 |
|
|
|
8,076 |
|
Interest rate lock
commitments |
|
Other assets |
|
|
6,198 |
|
|
|
32 |
|
|
Other liabilities |
|
|
179 |
|
|
|
3,002 |
|
Forward commitments to sell
mortgage loans |
|
Other assets |
|
|
211 |
|
|
|
4,860 |
|
|
Other liabilities |
|
|
4,261 |
|
|
|
37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives not
designated as hedging
instruments under ASC 815 |
|
|
|
$ |
24,722 |
|
|
$ |
12,651 |
|
|
|
|
$ |
23,439 |
|
|
$ |
11,115 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives |
|
|
|
$ |
24,722 |
|
|
$ |
12,651 |
|
|
|
|
$ |
38,982 |
|
|
$ |
25,816 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24
Cash Flow Hedges of Interest Rate Risk
The Companys objectives in using interest rate derivatives are to add stability to interest income
and to manage its exposure to interest rate movements. To accomplish these objectives, the Company
primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest
rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a
counterparty in exchange for the Company making fixed-rate payments over the life of the agreements
without the exchange of the underlying notional amount. As of September 30, 2010, the Company had
five interest rate swaps with an aggregate notional amount of $175 million that were designated as
cash flow hedges of interest rate risk.
The table below provides details on each of these five interest rate swaps as of September 30,
2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010 |
|
(Dollars in thousands) |
|
Notional |
|
|
Fair Value |
|
|
Receive Rate |
|
|
Pay Rate |
|
|
Type of Hedging |
|
Maturity Date |
|
Amount |
|
|
Gain (Loss) |
|
|
(LIBOR) |
|
|
(Fixed) |
|
|
Relationship |
|
Pay Fixed, Receive Variable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 2011 |
|
$ |
20,000 |
|
|
$ |
(977 |
) |
|
|
0.29 |
% |
|
|
5.25 |
% |
|
Cash Flow |
September 2011 |
|
|
40,000 |
|
|
|
(1,955 |
) |
|
|
0.29 |
% |
|
|
5.25 |
% |
|
Cash Flow |
October 2011 |
|
|
25,000 |
|
|
|
(780 |
) |
|
|
0.53 |
% |
|
|
3.39 |
% |
|
Cash Flow |
September 2013 |
|
|
50,000 |
|
|
|
(6,542 |
) |
|
|
0.29 |
% |
|
|
5.30 |
% |
|
Cash Flow |
September 2013 |
|
|
40,000 |
|
|
|
(5,289 |
) |
|
|
0.29 |
% |
|
|
5.30 |
% |
|
Cash Flow |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
175,000 |
|
|
$ |
(15,543 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Since entering into these interest rate swaps, they have been used to hedge the variable cash
outflows associated with interest expense on the Companys junior subordinated debentures. The
effective portion of changes in the fair value of these cash flow hedges is recorded in accumulated
other comprehensive income and is subsequently reclassified to interest expense as interest
payments are made on the Companys variable rate junior subordinated debentures. The changes in
fair value (net of tax) are separately disclosed in the statements of changes in shareholders
equity as a component of comprehensive income. The ineffective portion of the change in fair value
of these derivatives is recognized directly in earnings; however, no hedge ineffectiveness was
recognized during the three and nine months ended September 30, 2010 or September 30, 2009. The
Company uses the hypothetical derivative method to assess and measure effectiveness.
25
A rollforward of the amounts in accumulated other comprehensive income related to interest rate
swaps designated as cash flow hedges follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
(Dollars in thousands) |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Unrealized loss at beginning of period |
|
$ |
(15,969 |
) |
|
$ |
(15,982 |
) |
|
$ |
(15,487 |
) |
|
$ |
(20,549 |
) |
Amount reclassified from accumulated other comprehensive income to
interest expense on junior subordinated debentures |
|
|
2,124 |
|
|
|
2,090 |
|
|
|
6,516 |
|
|
|
5,492 |
|
Amount of loss recognized in other comprehensive income |
|
|
(2,146 |
) |
|
|
(3,258 |
) |
|
|
(7,020 |
) |
|
|
(2,093 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss at end of period |
|
$ |
(15,991 |
) |
|
$ |
(17,150 |
) |
|
$ |
(15,991 |
) |
|
$ |
(17,150 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
In September 2008, the Company terminated an interest rate swap with a notional amount of $25.0
million (maturing in October 2011) that was designated in a cash flow hedge and entered into a new
interest rate swap with another counterparty to effectively replace the terminated swap. The
interest rate swap was terminated by the Company in accordance with the default provisions in the
swap agreement. The unrealized loss on the interest rate swap at the date of termination is being
amortized out of other comprehensive income to interest expense over the remaining term of the
terminated swap. At September 30, 2010 accumulated other comprehensive income (loss) includes
$449,000 of unrealized loss ($276,000 net of tax) related to this terminated interest rate swap.
As of September 30, 2010, the Company estimates that during the next twelve months, $8.6 million
will be reclassified from accumulated other comprehensive income as an increase to interest
expense.
Non-Designated Hedges
The Company does not use derivatives for speculative purposes. Derivatives not designated as hedges
are used to manage the Companys exposure to interest rate movements and other identified risks but
do not meet the strict hedge accounting requirements of ASC 815. Changes in the fair value of
derivatives not designated in hedging relationships are recorded directly in earnings.
Interest Rate Derivatives The Company has interest rate derivatives, including swaps and option
products, resulting from a service the Company provides to certain qualified borrowers. The
Companys banking subsidiaries execute certain derivative products (typically interest rate swaps)
directly with qualified commercial borrowers to facilitate their respective risk management
strategies. For example, doing so allows the Companys commercial borrowers to effectively convert
a variable rate loan to a fixed rate. In order to minimize the Companys exposure on these
transactions, the Company simultaneously executes offsetting derivatives with third parties. In
most cases the offsetting derivatives have mirror-image terms, which result in the positions
changes in fair value substantially offsetting through earnings each period. However, to the extent
that the derivatives are not a mirror-image and because of differences in counterparty credit risk,
changes in fair value will not completely offset resulting in some earnings impact each period.
Changes in the fair value of these derivatives are included in other non-interest income. At
September 30, 2010, the Company had approximately 120 derivative transactions (60 with customers
and 60 with third parties) with an aggregate notional amount of approximately $460 million (all
interest rate swaps) related to this program. These interest rate derivatives had maturity dates
ranging from September 2011 to January 2033.
Mortgage Banking Derivatives These derivatives include interest rate lock commitments provided to
customers to fund certain mortgage loans to be sold into the secondary market and forward
commitments for the future delivery of such loans. It is the Companys practice to enter into
forward commitments for the future delivery of residential mortgage loans when interest rate lock
commitments are entered into in order to economically hedge the effect of future changes in
interest rates on its commitments to fund the loans as well as on its portfolio of mortgage loans
held-for-sale. The Companys mortgage banking derivatives have not been designated as being in
hedge relationships. At September 30, 2010 the Company had interest rate lock commitments with an
aggregate notional amount of approximately $619 million and forward commitments to sell mortgage
loans with an aggregate notional amount of approximately $816 million. The fair values of these
derivatives were estimated based on changes in mortgage rates from the dates of the commitments.
Changes in the fair value of these mortgage banking derivatives are included in mortgage banking
revenue.
Other Derivatives Periodically, the Company will sell options to a bank or dealer for the right
to purchase certain securities held within the Banks investment portfolios (covered call options).
These option transactions are designed primarily to increase the total return associated with the
investment securities portfolio. These options do not qualify as hedges pursuant to ASC 815, and,
accordingly, changes in fair value of these contracts are recognized as other non-interest income.
There were no covered call options outstanding as of September 30, 2010, December 31, 2009 or
September 30, 2009.
26
Amounts included in the consolidated statements of income related to derivative instruments not
designated in hedge relationships were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
(Dollars in thousands) |
|
September 30, |
|
September 30, |
Derivative |
|
Location in income statement |
|
2010 |
|
2009 |
|
2010 |
|
2009 |
Interest rate swaps and floors |
|
Other income |
|
$ |
(36 |
) |
|
$ |
(415 |
) |
|
$ |
(339 |
) |
|
$ |
(169 |
) |
Mortgage banking derivatives |
|
Mortgage banking revenue |
|
|
(4,593 |
) |
|
|
(3,836 |
) |
|
|
(13,194 |
) |
|
|
(1,649 |
) |
Covered call options |
|
Other income |
|
|
703 |
|
|
|
|
|
|
|
1,162 |
|
|
|
1,998 |
|
Credit Risk
Derivative instruments have inherent risks, primarily market risk and credit risk. Market risk is
associated with changes in interest rates and credit risk relates to the risk that the counterparty
will fail to perform according to the terms of the agreement. The amounts potentially subject to
market and credit risks are the streams of interest payments under the contracts and the market
value of the derivative instrument and not the notional principal amounts used to express the
volume of the transactions. Market and credit risks are managed and monitored as part of the
Companys overall asset-liability management process, except that the credit risk related to
derivatives entered into with certain qualified borrowers is managed through the Companys standard
loan underwriting process since these derivatives are secured through collateral provided by the
loan agreements. Actual exposures are monitored against various types of credit limits established
to contain risk within parameters. When deemed necessary, appropriate types and amounts of
collateral are obtained to minimize credit exposure.
The Company has agreements with certain of its interest rate derivative counterparties that contain
cross-default provisions, which provide that if the Company defaults on any of its indebtedness,
including default where repayment of the indebtedness has not been accelerated by the lender, then
the Company could also be declared in default on its derivative obligations. The Company also has
agreements with certain of its derivative counterparties that contain a provision allowing the
counter party to terminate the derivative positions if the Company fails to maintain its status as
a well or adequate capitalized institution, which would require the Company to settle its
obligations under the agreements. As of September 30, 2010, the fair value of interest rate
derivatives in a net liability position, which includes accrued interest related to these
agreements, was $35.5 million. As of September 30, 2010 the Company has minimum collateral posting
thresholds with certain of its derivative counterparties and has posted collateral consisting of
$12.5 million of cash and $17.3 million of securities. If the Company had breached any of these
provisions at September 30, 2010 it would have been required to settle its obligations under the
agreements at the termination value and would have been required to pay any additional amounts due
in excess of amounts previously posted as collateral with the respective counterparty.
The Company is also exposed to the credit risk of its commercial borrowers who are counterparties
to interest rate derivatives with the Banks. This counterparty risk related to the commercial
borrowers is managed and monitored through the Banks standard underwriting process applicable to
loans since these derivatives are secured through collateral provided by the loan agreement. The
counterparty risk associated with the mirror-image swaps executed with third parties is monitored
and managed in connection with the Companys overall asset liability management process.
27
(15) Fair Values of Assets and Liabilities
Effective January 1, 2008, upon adoption of SFAS No. 157, Fair Value Measurement, which is now
part of ASC 820, Fair Value Measurements and Disclosures (ASC 820), the Company began to group
financial assets and financial liabilities measured at fair value in three levels, based on the
markets in which the assets and liabilities are traded and the observability of the assumptions
used to determine fair value. These levels are:
|
|
|
Level 1 unadjusted quoted prices in active markets for identical assets or liabilities. |
|
|
|
|
Level 2 inputs other than quoted prices included in Level 1 that are observable for
the asset or liability, either directly or indirectly. These include quoted prices for
similar assets or liabilities in active markets, quoted prices for identical or similar
assets or liabilities in markets that are not active, inputs other than quoted prices
that are observable for the asset or liability or inputs that are derived principally
from or corroborated by observable market data by correlation or other means. |
|
|
|
|
Level 3 significant unobservable inputs that reflect the Companys own assumptions
that market participants would use in pricing the assets or liabilities. Level 3 assets
and liabilities include financial instruments whose value is determined using pricing
models, discounted cash flow methodologies, or similar techniques, as well as
instruments for which the determination of fair value requires significant management
judgment or estimation. |
A financial instruments categorization within the above valuation hierarchy is based upon the
lowest level of input that is significant to the fair value measurement. The Companys assessment
of the significance of a particular input to the fair value measurement in its entirety requires
judgment, and considers factors specific to the assets or liabilities. Following is a description
of the valuation methodologies used for the Companys assets and liabilities measured at fair value
on a recurring basis.
Available-for-sale and trading account securities Fair values for available-for-sale and trading
account securities are based on quoted market prices when available or through the use of
alternative approaches, such as matrix or model pricing or indicators from market makers.
Mortgage loans held-for-sale Mortgage loans originated by Wintrust Mortgage Company on or after
January 1, 2008 are carried at fair value. The fair value of mortgage loans held-for-sale is
determined by reference to investor price sheets for loan products with similar characteristics.
Mortgage servicing rights Fair value for mortgage servicing rights is determined utilizing a
third party valuation model which stratifies the servicing rights into pools based on product type
and interest rate. The fair value of each servicing rights pool is calculated based on the present
value of estimated future cash flows using a discount rate commensurate with the risk associated
with that pool, given current market conditions. Estimates of fair value include assumptions about
prepayment speeds, interest rates and other factors which are subject to change over time.
Derivative instruments The Companys derivative instruments include interest rate swaps,
commitments to fund mortgages for sale into the secondary market (interest rate locks) and forward
commitments to end investors for the sale of mortgage loans. Interest rate swaps are valued by a
third party, using models that primarily use market observable inputs, such as yield curves, and
are validated by comparison with valuations provided by the respective counterparties. The fair
value for mortgage derivatives is based on changes in mortgage rates from the date of the
commitments.
Nonqualified deferred compensation assets The underlying assets relating to the nonqualified
deferred compensation plan are included in a trust and primarily consist of non-exchange traded
institutional funds which are priced based by an independent third party service.
Retained interests from the sale of premium finance receivables The fair value of retained
interests, which include servicing rights and interest only strips, from the sale of premium
finance receivables are based on certain observable inputs such as interest rates and credits
spreads, as well as unobservable inputs such as prepayments, late payments and estimated net
charge-offs.
28
The following tables present the balances of assets and liabilities measured at fair value on a
recurring basis for the periods presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010 |
|
(Dollars in thousands) |
|
Total |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
Available-for-sale securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury |
|
$ |
2,015 |
|
|
$ |
|
|
|
$ |
2,015 |
|
|
$ |
|
|
U.S. Government agencies |
|
|
874,327 |
|
|
|
|
|
|
|
874,327 |
|
|
|
|
|
Municipal |
|
|
54,641 |
|
|
|
|
|
|
|
38,716 |
|
|
|
15,925 |
|
Corporate notes and other |
|
|
173,003 |
|
|
|
|
|
|
|
167,511 |
|
|
|
5,492 |
|
Mortgage-backed |
|
|
180,361 |
|
|
|
|
|
|
|
177,034 |
|
|
|
3,327 |
|
Equity securities (1) |
|
|
39,832 |
|
|
|
|
|
|
|
11,566 |
|
|
|
28,266 |
|
Trading account securities |
|
|
4,935 |
|
|
|
58 |
|
|
|
786 |
|
|
|
4,091 |
|
Mortgage loans held-for-sale |
|
|
307,231 |
|
|
|
|
|
|
|
307,231 |
|
|
|
|
|
Mortgage servicing rights |
|
|
5,179 |
|
|
|
|
|
|
|
|
|
|
|
5,179 |
|
Nonqualified deferred compensations assets |
|
|
3,211 |
|
|
|
|
|
|
|
3,211 |
|
|
|
|
|
Derivative assets |
|
|
24,722 |
|
|
|
|
|
|
|
24,722 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,669,457 |
|
|
$ |
58 |
|
|
$ |
1,607,119 |
|
|
$ |
62,280 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities |
|
$ |
38,982 |
|
|
$ |
|
|
|
$ |
38,982 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009 |
|
(Dollars in thousands) |
|
Total |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
Available-for-sale securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury |
|
$ |
112,896 |
|
|
$ |
|
|
|
$ |
112,896 |
|
|
$ |
|
|
U.S. Government agencies |
|
|
655,024 |
|
|
|
|
|
|
|
655,024 |
|
|
|
|
|
Municipal |
|
|
66,900 |
|
|
|
|
|
|
|
49,257 |
|
|
|
17,643 |
|
Corporate notes and other |
|
|
100,506 |
|
|
|
|
|
|
|
48,120 |
|
|
|
52,386 |
|
Mortgage-backed |
|
|
390,670 |
|
|
|
|
|
|
|
226,931 |
|
|
|
163,739 |
|
Equity securities (1) |
|
|
28,870 |
|
|
|
|
|
|
|
3,181 |
|
|
|
25,689 |
|
Trading account securities |
|
|
29,204 |
|
|
|
208 |
|
|
|
1,432 |
|
|
|
27,564 |
|
Mortgage loans held-for-sale |
|
|
187,505 |
|
|
|
|
|
|
|
187,505 |
|
|
|
|
|
Mortgage servicing rights |
|
|
6,030 |
|
|
|
|
|
|
|
|
|
|
|
6,030 |
|
Nonqualified deferred compensations assets |
|
|
2,660 |
|
|
|
|
|
|
|
2,660 |
|
|
|
|
|
Derivative assets |
|
|
11,429 |
|
|
|
|
|
|
|
11,429 |
|
|
|
|
|
Retained interests from the sale/securitization of
premium finance receivables |
|
|
43,958 |
|
|
|
|
|
|
|
|
|
|
|
43,958 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,635,652 |
|
|
$ |
208 |
|
|
$ |
1,298,435 |
|
|
$ |
337,009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities |
|
$ |
29,798 |
|
|
$ |
|
|
|
$ |
29,798 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Excludes the common securities issued by trusts formed by the Company in conjunction with Trust Preferred Securities offerings. |
The aggregate remaining contractual principal balance outstanding as of September 30, 2010 and
2009 for mortgage loans held-for-sale measured at fair value under ASC 825 was $297.2 million and
$182.0 million, respectively, while the aggregate fair value of mortgage loans held-for-sale was
$307.2 million and $187.5 million, respectively, as shown in the above tables. There were no
nonaccrual loans or loans past due greater than 90 days and still accruing in the mortgage loans
held-for-sale portfolio measured at fair value as of September 30, 2010 and 2009.
29
The changes in Level 3 available-for-sale securities measured at fair value on a recurring basis
during the three months and nine months ended September 30, 2010 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate |
|
|
|
|
|
|
|
|
|
|
|
|
|
notes and |
|
|
Mortgage- |
|
|
Equity |
|
(Dollars in thousands) |
|
Municipal |
|
|
other debt |
|
|
backed |
|
|
securities |
|
Balance at June 30, 2010 |
|
$ |
14,028 |
|
|
$ |
11,352 |
|
|
$ |
145,331 |
|
|
$ |
26,891 |
|
Total net gains (losses) included in: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (1) |
|
|
|
|
|
|
(1 |
) |
|
|
(6,947 |
) |
|
|
|
|
Other comprehensive income |
|
|
|
|
|
|
(834 |
) |
|
|
2 |
|
|
|
(825 |
) |
Purchases, issuances, sales and settlements, net |
|
|
1,897 |
|
|
|
|
|
|
|
(129,499 |
) |
|
|
2,200 |
|
Net transfers into/ (out) of Level 3 |
|
|
|
|
|
|
(5,025 |
) |
|
|
(5,560 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2010 |
|
$ |
15,925 |
|
|
$ |
5,492 |
|
|
$ |
3,327 |
|
|
$ |
28,266 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2010 |
|
$ |
17,152 |
|
|
$ |
51,194 |
|
|
$ |
158,449 |
|
|
$ |
26,800 |
|
Total net gains (losses) included in: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (1) |
|
|
|
|
|
|
(34 |
) |
|
|
(6,947 |
) |
|
|
|
|
Other comprehensive income |
|
|
|
|
|
|
1 |
|
|
|
2,522 |
|
|
|
(825 |
) |
Purchases, issuances, sales and settlements, net |
|
|
(1,227 |
) |
|
|
(40,644 |
) |
|
|
(145,871 |
) |
|
|
2,291 |
|
Net transfers into/ (out) of Level 3 |
|
|
|
|
|
|
(5,025 |
) |
|
|
(4,826 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2010 |
|
$ |
15,925 |
|
|
$ |
5,492 |
|
|
$ |
3,327 |
|
|
$ |
28,266 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Income for Municipal and Corporate notes and other debt is recognized as a component of interest income on securities. |
The changes in Level 3 for assets and liabilities not included in the preceding table measured
at fair value on a recurring basis during the three months and nine months ended September 30, 2010
are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading |
|
|
Mortgage |
|
|
|
|
|
|
Account |
|
|
servicing |
|
|
Retained |
|
(Dollars in thousands) |
|
Securities |
|
|
rights |
|
|
interests |
|
Balance at June 30, 2010 |
|
$ |
36,809 |
|
|
$ |
5,437 |
|
|
$ |
|
|
Total net gains (losses) included in: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (1) |
|
|
(28,688 |
) |
|
|
(258 |
) |
|
|
|
|
Other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
Purchases, issuances, sales and settlements, net |
|
|
(4,030 |
) |
|
|
|
|
|
|
|
|
Net transfers into/ (out) of Level 3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2010 |
|
$ |
4,091 |
|
|
$ |
5,179 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2010 |
|
$ |
31,924 |
|
|
$ |
6,745 |
|
|
$ |
43,541 |
|
Total net gains (losses) included in: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (1) |
|
|
(23,803 |
) |
|
|
(1,566 |
) |
|
|
|
|
Other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
Purchases, issuances, sales and settlements, net |
|
|
(4,030 |
) |
|
|
|
|
|
|
(43,541 |
) |
Net transfers into/ (out) of Level 3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2010 |
|
$ |
4,091 |
|
|
$ |
5,179 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Income for trading account securities is recognized as a component of trading income in
non-interest income and trading account securities interest income. Changes in the balance of
mortgage servicing rights are recorded as a component of mortgage banking revenue in non-interest
income. |
30
The changes in Level 3 available-for-sale securities measured at fair value on a recurring
basis during the three months and nine months ended September 30, 2009 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate |
|
|
|
|
|
|
|
|
|
U.S. Govt. |
|
|
|
|
|
|
notes and |
|
|
Mortgage- |
|
|
Equity |
|
(Dollars in thousands) |
|
agencies |
|
|
Municipal |
|
|
other debt |
|
|
backed |
|
|
securities |
|
Balance at June 30, 2009 |
|
$ |
|
|
|
$ |
8,355 |
|
|
$ |
4,378 |
|
|
$ |
167,376 |
|
|
$ |
25,681 |
|
Total net gains (losses) included in: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (1) |
|
|
|
|
|
|
(112 |
) |
|
|
4 |
|
|
|
|
|
|
|
|
|
Other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,045 |
|
|
|
|
|
Purchases, issuances, sales and settlements, net |
|
|
|
|
|
|
9,400 |
|
|
|
48,004 |
|
|
|
(8,682 |
) |
|
|
8 |
|
Net transfers into/ (out) of Level 3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2009 |
|
$ |
|
|
|
$ |
17,643 |
|
|
$ |
52,386 |
|
|
$ |
163,739 |
|
|
$ |
25,689 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2009 |
|
$ |
110 |
|
|
$ |
9,373 |
|
|
$ |
1,395 |
|
|
$ |
4,010 |
|
|
$ |
26,104 |
|
Total net gains (losses) included in: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (1) |
|
|
|
|
|
|
(112 |
) |
|
|
8 |
|
|
|
|
|
|
|
|
|
Other comprehensive income |
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
3,598 |
|
|
|
|
|
Purchases, issuances, sales and settlements, net |
|
|
|
|
|
|
10,531 |
|
|
|
50,983 |
|
|
|
156,131 |
|
|
|
43 |
|
Net transfers into/ (out) of Level 3 |
|
|
(109 |
) |
|
|
(2,149 |
) |
|
|
|
|
|
|
|
|
|
|
(458 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2009 |
|
$ |
|
|
|
$ |
17,643 |
|
|
$ |
52,386 |
|
|
$ |
163,739 |
|
|
$ |
25,689 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Income for Municipal and Corporate notes and other debt is recognized as a component of interest income on securities. |
The changes in Level 3 for assets and liabilities not included in the preceding table measured
at fair value on a recurring basis during the three months and nine months ended September 30, 2009
are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading |
|
|
Mortgage |
|
|
|
|
|
|
Account |
|
|
servicing |
|
|
Retained |
|
(Dollars in thousands) |
|
Securities |
|
|
rights |
|
|
interests |
|
Balance at June 30, 2009 |
|
$ |
21,422 |
|
|
$ |
6,278 |
|
|
$ |
|
|
Total net gains (losses) included in: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (1) |
|
|
5,992 |
|
|
|
(248 |
) |
|
|
59 |
|
Other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
Purchases, issuances, sales and settlements, net |
|
|
150 |
|
|
|
|
|
|
|
43,899 |
|
Net transfers into/ (out) of Level 3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2009 |
|
$ |
27,564 |
|
|
$ |
6,030 |
|
|
$ |
43,958 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2009 |
|
$ |
3,075 |
|
|
$ |
3,990 |
|
|
$ |
1,229 |
|
Total net gains (losses) included in: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (1) |
|
|
22,293 |
|
|
|
2,040 |
|
|
|
59 |
|
Other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
Purchases, issuances, sales and settlements, net |
|
|
2,196 |
|
|
|
|
|
|
|
42,670 |
|
Net transfers into/ (out) of Level 3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2009 |
|
$ |
27,564 |
|
|
$ |
6,030 |
|
|
$ |
43,958 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Income for trading account securities is recognized as a component of trading income in non-interest income and trading
account securities interest income. Changes in the balance of mortgage servicing rights are recorded as a component of
mortgage banking revenue in non-interest income. Income for retained interests is recorded as a component of gain on sales
of premium finance receivables or miscellaneous income in non-interest income. |
31
Also, the Company may be required, from time to time, to measure certain other financial
assets at fair value on a nonrecurring basis in accordance with GAAP. These adjustments to fair
value usually result from application of lower of cost or market accounting or impairment charges
of individual assets. For assets measured at fair value on a nonrecurring basis that were still
held in the balance sheet at the end of the period, the following table provides the carrying value
of the related individual assets or portfolios at September 30, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Nine Months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ended |
|
|
Ended |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
September 30, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value |
|
|
Fair Value |
|
|
|
September 30, 2010 |
|
|
Losses |
|
|
Losses |
|
(Dollars in thousands) |
|
Total |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Recognized |
|
|
Recognized |
|
Impaired loans |
|
$ |
190,922 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
190,922 |
|
|
$ |
10,342 |
|
|
$ |
29,666 |
|
Other real estate owned |
|
|
76,654 |
|
|
|
|
|
|
|
|
|
|
|
76,654 |
|
|
|
3,243 |
|
|
|
15,219 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
267,576 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
267,576 |
|
|
$ |
13,585 |
|
|
$ |
44,885 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans A loan is considered to be impaired when, based on current information and
events, it is probable that the Company will be unable to collect all amounts due pursuant to the
contractual terms of the loan agreement. A loan restructured in a troubled debt restructuring is an
impaired loan according to applicable accounting guidance. Impairment is measured by estimating
the fair value of the loan based on the present value of expected cash flows, the market price of
the loan, or the fair value of the underlying collateral. Impaired loans are considered a fair
value measurement where an allowance is established based on the fair value of collateral.
Appraised values, which may require adjustments to market-based valuation inputs, are generally
used on real estate collateral-dependant impaired loans.
Other real estate owned Other real estate owned is comprised of real estate acquired in partial
or full satisfaction of loans and is included in other assets. Other real estate owned is recorded
at its estimated fair value less estimated selling costs at the date of transfer, with any excess
of the related loan balance over the fair value less expected selling costs charged to the
allowance for loan losses. Subsequent changes in value are reported as adjustments to the carrying
amount and are recorded in other non-interest expense. Gains and losses upon sale, if any, are also
charged to other non-interest expense. Fair value is generally based on third party appraisals and
internal estimates and is therefore considered a Level 3 valuation.
32
The Company is required under applicable accounting guidance to report the fair value of all
financial instruments on the consolidated statements of condition, including those financial
instruments carried at cost. The carrying amounts and estimated fair values of the Companys
financial instruments as of the dates shown:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2010 |
|
|
At December 31, 2009 |
|
|
|
Carrying |
|
|
Fair |
|
|
Carrying |
|
|
Fair |
|
(Dollars in thousands) |
|
Value |
|
|
Value |
|
|
Value |
|
|
Value |
|
Financial Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
243,980 |
|
|
$ |
243,980 |
|
|
$ |
158,616 |
|
|
$ |
158,616 |
|
Interest bearing deposits with banks |
|
|
1,224,584 |
|
|
|
1,224,584 |
|
|
|
1,025,663 |
|
|
|
1,025,663 |
|
Available-for-sale securities |
|
|
1,324,179 |
|
|
|
1,324,179 |
|
|
|
1,255,066 |
|
|
|
1,255,066 |
|
Trading account securities |
|
|
4,935 |
|
|
|
4,935 |
|
|
|
33,774 |
|
|
|
33,774 |
|
Brokerage customer receivables |
|
|
25,442 |
|
|
|
25,442 |
|
|
|
20,871 |
|
|
|
20,871 |
|
Federal Home Loan Bank and Federal
Reserve Bank stock, at cost |
|
|
80,445 |
|
|
|
80,445 |
|
|
|
73,749 |
|
|
|
73,749 |
|
Mortgage loans held-for-sale, at fair value |
|
|
307,231 |
|
|
|
307,231 |
|
|
|
265,786 |
|
|
|
265,786 |
|
Loans held-for-sale, at lower of cost or
market |
|
|
13,209 |
|
|
|
13,457 |
|
|
|
9,929 |
|
|
|
10,033 |
|
Total loans |
|
|
9,814,995 |
|
|
|
10,015,582 |
|
|
|
8,411,771 |
|
|
|
8,403,305 |
|
Mortgage servicing rights |
|
|
5,179 |
|
|
|
5,179 |
|
|
|
6,745 |
|
|
|
6,745 |
|
Nonqualified deferred compensation assets |
|
|
3,211 |
|
|
|
3,211 |
|
|
|
2,827 |
|
|
|
2,827 |
|
Retained interests from the
sale/securitization of premium finance
receivables |
|
|
|
|
|
|
|
|
|
|
43,541 |
|
|
|
43,541 |
|
Derivative assets |
|
|
24,722 |
|
|
|
24,722 |
|
|
|
12,651 |
|
|
|
12,651 |
|
FDIC indemnification asset |
|
|
161,640 |
|
|
|
161,640 |
|
|
|
|
|
|
|
|
|
Accrued interest receivable and other |
|
|
135,704 |
|
|
|
135,704 |
|
|
|
129,774 |
|
|
|
129,774 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial assets |
|
$ |
13,369,456 |
|
|
$ |
13,570,291 |
|
|
$ |
11,450,763 |
|
|
$ |
11,442,401 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-maturity deposits |
|
$ |
5,764,905 |
|
|
$ |
5,764,905 |
|
|
$ |
5,347,823 |
|
|
$ |
5,347,823 |
|
Deposits with stated maturities |
|
|
5,197,334 |
|
|
|
5,257,220 |
|
|
|
4,569,251 |
|
|
|
4,616,658 |
|
Notes payable |
|
|
1,000 |
|
|
|
1,000 |
|
|
|
1,000 |
|
|
|
1,000 |
|
Federal Home Loan Bank advances |
|
|
414,832 |
|
|
|
450,772 |
|
|
|
430,987 |
|
|
|
446,663 |
|
Subordinated notes |
|
|
55,000 |
|
|
|
55,000 |
|
|
|
60,000 |
|
|
|
60,000 |
|
Other borrowings |
|
|
241,522 |
|
|
|
241,522 |
|
|
|
247,437 |
|
|
|
247,347 |
|
Secured borrowings owed to
securitization investors |
|
|
600,000 |
|
|
|
600,334 |
|
|
|
|
|
|
|
|
|
Junior subordinated debentures |
|
|
249,493 |
|
|
|
251,943 |
|
|
|
249,493 |
|
|
|
245,990 |
|
Derivative liabilities |
|
|
38,982 |
|
|
|
38,982 |
|
|
|
25,816 |
|
|
|
25,816 |
|
Accrued interest payable and other |
|
|
17,868 |
|
|
|
17,868 |
|
|
|
15,669 |
|
|
|
15,669 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial liabilities |
|
$ |
12,580,936 |
|
|
$ |
12,679,546 |
|
|
$ |
10,947,476 |
|
|
$ |
11,006,966 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following methods and assumptions were used by the Company in estimating fair values of
financial instruments that were not previously disclosed.
Cash and cash equivalents. Cash and cash equivalents include cash and demand balances from banks,
Federal funds sold and securities purchased under resale agreements. The carrying value of cash and
cash equivalents approximates fair value due to the short maturity of those instruments.
Interest bearing deposits with banks. The carrying value of interest bearing deposits with banks
approximates fair value due to the short maturity of those instruments.
Brokerage customer receivables. The carrying value of brokerage customer receivables approximates
fair value due to the relatively short period of time to repricing of variable interest rates.
Loans held-for-sale, at lower of cost or market. Fair value is based on either quoted prices for
the same or similar loans, or values obtained from third parties, or is estimated for portfolios of
loans with similar financial characteristics.
Loans. Fair values are estimated for portfolios of loans with similar financial characteristics.
Loans are analyzed by type such as commercial, residential real estate, etc. Each category is
further segmented by interest rate type (fixed and variable) and term. For variable-rate loans that
reprice frequently, estimated fair values are based on carrying values. The fair value of
residential loans is
33
based on secondary market sources for securities backed by similar loans, adjusted for
differences in loan characteristics. The fair value for other fixed rate loans is estimated by
discounting scheduled cash flows through the estimated maturity using estimated market discount
rates that reflect credit and interest rate risks inherent in the loan. The primary impact of
credit risk on the present value of the loan portfolio, however, was accommodated through the use
of the allowance for loan losses, which is believed to represent the current fair value of probable
incurred losses for purposes of the fair value calculation.
FDIC indemnification asset. The fair value of the FDIC indemnification asset is based on the
discounted value of cash flows to be received from the FDIC.
Accrued interest receivable and accrued interest payable. The carrying values of accrued interest
receivable and accrued interest payable approximate market values due to the relatively short
period of time to expected realization.
Deposit liabilities. The fair value of deposits with no stated maturity, such as non-interest
bearing deposits, savings, NOW accounts and money market accounts, is equal to the amount payable
on demand as of period-end (i.e. the carrying value). The fair value of certificates of deposit is
based on the discounted value of contractual cash flows. The discount rate is estimated using the
rates currently in effect for deposits of similar remaining maturities.
Notes payable. The carrying value of notes payable approximates fair value due to the relatively
short period of time to repricing of variable interest rates.
Federal Home Loan Bank advances. The fair value of Federal Home Loan Bank advances is obtained from
the Federal Home Loan Bank which uses a discounted cash flow analysis based on current market rates
of similar maturity debt securities to discount cash flows.
Subordinated notes. The carrying value of the subordinated notes payable approximates fair value
due to the relatively short period of time to repricing of variable interest rates.
Other borrowings. Carrying value of other borrowings approximates fair value due to the relatively
short period of time to maturity or repricing.
Junior subordinated debentures. The fair value of the junior subordinated debentures is based on
the discounted value of contractual cash flows.
(16) Stock-Based Compensation Plans
The 2007 Stock Incentive Plan (the 2007 Plan), which was approved by the Companys shareholders
in January 2007, permits the grant of incentive stock options, nonqualified stock options, rights
and restricted share awards, as well as the conversion of outstanding options of acquired companies
to Wintrust options. The 2007 Plan initially provided for the issuance of up to 500,000 shares of
common stock, and in May 2009 the Companys shareholders approved an additional 325,000 shares of
common stock that may be offered under the 2007 Plan. All grants made after 2006 were made pursuant
to the 2007 Plan, and as of September 30, 2010, 164,033 shares were available for future grant. The
2007 Plan replaced the Wintrust Financial Corporation 1997 Stock Incentive Plan (the 1997 Plan)
which had substantially similar terms. The 2007 Plan and the 1997 Plan are collectively referred to
as the Plans. The Plans cover substantially all employees of Wintrust.
The Company typically awards stock-based compensation in the form of stock options and restricted
share awards. Stock options provide the holder of the option the right to purchase shares of
Wintrusts common stock at the fair market value of the stock on the date the options are granted.
Options generally vest ratably over a five-year period and expire at such time as the Compensation
Committee determines at the time of grant. The 2007 Plan provides for a maximum term of seven years
from the date of grant while the 1997 Plan provided for a maximum term of ten years. Restricted
share awards entitle the holders to receive, at no cost, shares of the Companys common stock.
Restricted share awards generally vest over periods of one to five years from the date of grant.
Holders of the restricted share awards are not entitled to vote or receive cash dividends (or cash
payments equal to the cash dividends) on the underlying common shares until the awards are vested.
Except in limited circumstances, these awards are canceled upon termination of employment without
any payment of consideration by the Company.
Stock-based compensation cost is measured as the fair value of an award on the date of grant and is
recognized on a straight-line basis over the vesting period. The fair value of restricted share
awards is determined based on the average of the high and low trading prices on the grant date. The
fair value of stock options is estimated at the date of grant using a Black-Scholes option-pricing
model that utilizes the assumptions outlined in the following table. Option-pricing models require
the input of highly subjective assumptions and are sensitive to changes in the options expected
life and the price volatility of the underlying stock, which can materially affect the fair value
estimate. Expected life is based on historical exercise and termination behavior as well as the
term of the option, and expected stock price volatility is based on historical volatility of the
Companys common stock, which correlates with the expected term of the options. The risk-free
interest rate is based on comparable U.S. Treasury rates. Management reviews and adjusts the
assumptions used to calculate the fair value of an option on a periodic basis to better reflect
expected trends.
34
The following table presents the weighted average assumptions used to determine the fair value of
options granted in the nine months ending September 30, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
September 30, 2010 |
|
September 30, 2009 |
Expected dividend yield |
|
|
0.5 |
% |
|
|
2.0 |
% |
Expected volatility |
|
|
48.3 |
% |
|
|
45.7 |
% |
Risk-free rate |
|
|
2.7 |
% |
|
|
2.4 |
% |
Expected option life (in years) |
|
|
6.2 |
|
|
|
5.9 |
|
Stock based compensation is recognized based upon the number of awards that are ultimately expected
to vest. As a result, compensation expense recognized for stock options and restricted share awards
was reduced for estimated forfeitures prior to vesting. Forfeiture rates are estimated for each
type of award based on historical forfeiture experience. Estimated forfeitures will be reassessed
in subsequent periods and may change based on new facts and circumstances.
Compensation cost charged to income for stock options was $349,000 and $830,000 in the third
quarters of 2010 and 2009, respectively, and $1.3 million and $2.6 million for the 2010 and 2009
year-to-date periods, respectively. Compensation cost charged to income for restricted share awards
was $672,000 and $872,000 in the third quarters of 2010 and 2009, respectively, and $2.0 million
and $2.6 million for the nine months ended September 30, 2010 and 2009, respectively.
A summary of stock option activity under the Plans for the nine months ended September 30, 2010 and
September 30, 2009 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
Remaining |
|
Intrinsic |
|
|
Common |
|
Average |
|
Contractual |
|
Value (2) |
Stock Options |
|
Shares |
|
Strike Price |
|
Term (1) |
|
($000) |
Outstanding at January 1, 2010 |
|
|
2,156,209 |
|
|
$ |
37.61 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
66,365 |
|
|
|
34.63 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(141,362 |
) |
|
|
15.23 |
|
|
|
|
|
|
|
|
|
Forfeited or canceled |
|
|
(42,736 |
) |
|
|
51.46 |
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2010 |
|
|
2,038,476 |
|
|
$ |
38.78 |
|
|
|
3.4 |
|
|
$ |
7,884 |
|
|
Exercisable at September 30, 2010 |
|
|
1,792,223 |
|
|
$ |
39.41 |
|
|
|
3.2 |
|
|
$ |
7,290 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
Remaining |
|
Intrinsic |
|
|
Common |
|
Average |
|
Contractual |
|
Value (2) |
Stock Options |
|
Shares |
|
Strike Price |
|
Term (1) |
|
($000) |
Outstanding at January 1, 2009 |
|
|
2,388,174 |
|
|
$ |
35.61 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
43,500 |
|
|
|
17.85 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(174,863 |
) |
|
|
11.72 |
|
|
|
|
|
|
|
|
|
Forfeited or canceled |
|
|
(72,879 |
) |
|
|
34.72 |
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2009 |
|
|
2,183,932 |
|
|
$ |
37.20 |
|
|
|
4.1 |
|
|
$ |
7,491 |
|
|
Exercisable at September 30, 2009 |
|
|
1,833,581 |
|
|
$ |
36.44 |
|
|
|
3.8 |
|
|
$ |
7,029 |
|
|
|
|
|
(1) |
|
Represents the weighted average contractual life remaining in years. |
|
(2) |
|
Aggregate intrinsic value represents the total pre-tax intrinsic
value (i.e., the difference between the Companys average of the
high and low stock price on the last trading day of the quarter and
the option exercise price, multiplied by the number of shares) that
would have been received by the option holders if they had
exercised their options on the last day of the quarter. This amount
will change based on the fair market value of the Companys stock. |
The weighted average grant date fair value per share of options granted during the nine months
ended September 30, 2010 and 2009 was $16.39 and $6.92, respectively. The aggregate intrinsic value
of options exercised during the nine months ended September 30, 2010 and 2009, was $2.8 million and
$1.9 million, respectively.
35
A summary of restricted share award activity under the Plans for the nine months ended September
30, 2010 and September 30, 2009 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
Nine Months Ended |
|
|
September 30, 2010 |
|
September 30, 2009 |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Average |
|
|
|
|
|
Average |
|
|
Common |
|
Grant-Date |
|
Common |
|
Grant-Date |
Restricted Shares |
|
Shares |
|
Fair Value |
|
Shares |
|
Fair Value |
Outstanding at January 1 |
|
|
208,430 |
|
|
$ |
43.24 |
|
|
|
262,997 |
|
|
$ |
44.09 |
|
Granted |
|
|
137,656 |
|
|
|
35.66 |
|
|
|
18,550 |
|
|
|
20.01 |
|
Vested and issued |
|
|
(52,170 |
) |
|
|
43.71 |
|
|
|
(73,798 |
) |
|
|
40.64 |
|
Forfeited |
|
|
(635 |
) |
|
|
34.74 |
|
|
|
(1,625 |
) |
|
|
30.56 |
|
|
Outstanding at September 30 |
|
|
293,281 |
|
|
$ |
39.63 |
|
|
|
206,124 |
|
|
$ |
43.37 |
|
|
Vested, but not issuable at September 30 |
|
|
85,000 |
|
|
$ |
51.88 |
|
|
|
|
|
|
$ |
|
|
|
In the third quarter of 2009, the Company began paying a portion of the base pay of certain
executives in the Companys stock. Shares issued under this arrangement are granted under the Plan.
In the third quarter of 2010, 1,404 shares were granted under this arrangement at an average stock
price of $31.16 per share, and for the nine months ended September 30, 2010, 3,866 shares were
granted at an average stock price of $33.95 per share. In the third quarter of 2009, 1,588 shares
were granted under this arrangement at an average stock price of $27.55 per share. The number of
shares granted as of each payroll date is based on the average of the high and low price of the
Companys common stock on such date.
As of September 30, 2010, there was $7.9 million of total unrecognized compensation cost related to
non-vested share based arrangements under the Plans. That cost is expected to be recognized over a
weighted average period of approximately two years.
The Company issues new shares to satisfy option exercises, vesting of restricted shares and
issuance of base pay salary shares.
(17) Shareholders Equity and Earnings Per Share
Common Stock Offering
In March 2010, the Company issued through a public offering a total of 6,670,000 shares of its
common stock at $33.25 per share. Net proceeds to the Company totaled $210.4 million.
Series A Preferred Stock
In August 2008, the Company issued and sold 50,000 shares of non-cumulative perpetual convertible
preferred stock, Series A, liquidation preference $1,000 per share (the Series A Preferred Stock)
for $50 million in a private transaction. If declared, dividends on the Series A Preferred Stock
are payable quarterly in arrears at a rate of 8.00% per annum. The Series A Preferred Stock is
convertible into common stock at the option of the holder at a conversion rate of 38.88 shares of
common stock per share of Series A Preferred Stock. On and after August 26, 2010, the Series A
Preferred Stock are subject to mandatory conversion into common stock in connection with a
fundamental transaction, or on and after August 26, 2013 if the closing price of the Companys
common stock exceeds a certain amount.
Series B Preferred Stock
Pursuant to the U.S. Department of the Treasurys (the U.S. Treasury) Capital Purchase Program,
on December 19, 2008, the Company issued to the U.S. Treasury, in exchange for aggregate
consideration of $250 million, (i) 250,000 shares of the Companys fixed rate cumulative perpetual
preferred Stock, Series B, liquidation preference $1,000 per share (the Series B Preferred
Stock), and (ii) a warrant to purchase 1,643,295 shares of Wintrust common stock at a per share
exercise price of $22.82 and with a term of 10 years. The Series B Preferred Stock will pay a
cumulative dividend at a coupon rate of 5% for the first five years and 9% thereafter. The Series B
Preferred Stock can, with the approval of the Federal Reserve, be redeemed.
The relative fair values of the preferred stock and the warrant issued to the U.S. Treasury in
conjunction with the Companys participation in the Capital Purchase Program were determined
through an analysis, as of the valuation date of December 19, 2008, of the fair value of the
warrants and the fair value of the preferred stock, and an allocation of the relative fair value of
each to the $250 million of total proceeds.
36
The fair value of the warrant was determined using a binomial lattice valuation model. The
assumptions used in arriving at the fair value of the warrant using that valuation method, derived
as of the valuation date, were as follows:
|
|
|
|
|
Company stock price as of the valuation date |
|
$ |
20.06 |
|
Contractual strike price of warrant |
|
$ |
22.82 |
|
Expected term based on contractual term |
|
|
10 years |
|
Expected volatility based on 10-year historical volatility of the Companys stock |
|
|
37 |
% |
Expected annual dividend yield |
|
|
1 |
% |
Risk-free rate based on 10-year U.S. Treasury strip rate |
|
|
2.72 |
% |
Using that model, each of the 1,643,295 shares underlying the warrant was valued at $8.33 and,
correspondingly, the aggregate fair value of the warrant was $13.7 million.
The fair value of the preferred stock was determined using a discounted cash flow model which
discounted the contractual principal balance of $250 million and the contractual dividend payment
of 5% for the first five years at a 13% discount rate. The discount rate was derived from the
average and median yields on existing fixed rate preferred stock issuances of eleven different
commercial banks in the central United States, which average and median results approximated 13% on
the date of valuation. Using this methodology, the fair value of the preferred stock was estimated
to be $181.8 million.
In relative terms, a summary of the above valuation is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Relative |
|
|
|
Amount |
|
Fair Value |
|
Fair value of preferred stock |
|
$ |
181.8 million |
|
|
|
93.0 |
% |
Fair value of warrants |
|
$ |
13.7 million |
|
|
|
7.0 |
% |
|
|
|
|
|
|
|
Total fair value |
|
$ |
195.5 million |
|
|
|
100.0 |
% |
Applying the relative value percentages of 93% for the preferred stock and 7% for the warrants to
the total proceeds of $250 million, the resulting valuation of the preferred stock and warrants at
the date of issuance is as follows:
|
|
|
|
|
Proceeds allocated to Preferred Stock ($250 million multiplied by 93%) |
|
$ |
232.5 million |
|
Proceeds allocated to Warrants ($250 million multiplied by 7%) |
|
$ |
17.5 million |
|
For as long as any shares of Series B Preferred Stock are outstanding, the ability of the Company
to declare or pay dividends or distributions on, or purchase, redeem or otherwise acquire for
consideration, shares of its common stock or other securities, including trust preferred
securities, will be subject to restrictions. The U.S. Treasurys consent is required for any
increase in common dividends per share from the amount of the Companys semiannual cash dividend of
$0.18 per share, until the third anniversary of the purchase agreement with the U.S. Treasury
unless prior to such third anniversary the Series B Preferred Stock is redeemed in whole or the
U.S. Treasury has transferred all of the Series B Preferred Stock to third parties.
37
Earnings per Share
The following table shows the computation of basic and diluted earnings per share for the periods
indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
|
For the Nine Months |
|
|
|
|
|
|
|
Ended September 30, |
|
|
Ended September 30, |
|
(In thousands, except per share data) |
|
|
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Net income |
|
|
|
|
|
$ |
20,098 |
|
|
$ |
31,995 |
|
|
$ |
49,125 |
|
|
$ |
44,902 |
|
Less: Preferred stock dividends and discount accretion |
|
|
|
|
|
|
4,943 |
|
|
|
4,668 |
|
|
|
14,830 |
|
|
|
14,668 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income applicable to common shares Basic |
|
|
(A |
) |
|
|
15,155 |
|
|
|
27,327 |
|
|
|
34,295 |
|
|
|
30,234 |
|
Add: Dividends on convertible preferred stock |
|
|
|
|
|
|
|
|
|
|
1,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income applicable to common shares Diluted |
|
|
(B |
) |
|
|
15,155 |
|
|
|
28,327 |
|
|
|
34,295 |
|
|
|
30,234 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
|
(C |
) |
|
|
31,117 |
|
|
|
24,052 |
|
|
|
29,396 |
|
|
|
23,958 |
|
Effect of dilutive potential common shares |
|
|
|
|
|
|
988 |
|
|
|
2,493 |
|
|
|
1,132 |
|
|
|
323 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares and effect of dilutive
potential common
shares |
|
|
(D |
) |
|
|
32,105 |
|
|
|
26,545 |
|
|
|
30,528 |
|
|
|
24,281 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
(A/C |
) |
|
$ |
0.49 |
|
|
$ |
1.14 |
|
|
$ |
1.17 |
|
|
$ |
1.26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
(B/D |
) |
|
$ |
0.47 |
|
|
$ |
1.07 |
|
|
$ |
1.12 |
|
|
$ |
1.25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Potentially dilutive common shares can result from stock options, restricted stock unit awards,
stock warrants (including the warrants issued to the U.S. Treasury), the Companys convertible
preferred stock and shares to be issued under the Employee Stock Purchase Plan and the Directors
Deferred Fee and Stock Plan, being treated as if they had been either exercised or issued, computed
by application of the treasury stock method. While potentially dilutive common shares are typically
included in the computation of diluted earnings per share, potentially dilutive common shares are
excluded from this computation in periods in which the effect would reduce the loss per share or
increase the income per share. For diluted earnings per share, net income applicable to common
shares can be affected by the conversion of the Companys convertible preferred stock. Where the
effect of this conversion would reduce the loss per share or increase the income per share, net
income applicable to common shares is adjusted by the associated preferred dividends.
(18) Subsequent Events
On October 22, 2010, the Companys wholly-owned subsidiary bank, Wheaton, acquired a branch of
First National Bank of Brookfield that is located in Naperville, Illinois. Through this
transaction, subject to final adjustments, Wheaton acquired approximately $23 million of deposits,
approximately $11 million of performing loans, the property, bank facility and various other
assets. This branch will operate as Naperville Bank & Trust.
38
ITEM 2
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of financial condition as of September 30, 2010, compared
with December 31, 2009 and September 30, 2009, and the results of operations for the nine month
periods ended September 30, 2010 and 2009, should be read in conjunction with the unaudited
consolidated financial statements and notes contained in this report and the Risk Factors discussed
under Item 1A of the Companys 2009 Annual Report on Form 10-K and Part II, Item 1A of this
Quarterly Report on Form 10-Q. This discussion contains forward-looking statements that involve
risks and uncertainties and, as such, future results could differ significantly from managements
current expectations. See the last section of this discussion for further information on
forward-looking statements.
Introduction
Wintrust is a financial holding company that provides traditional community banking services,
primarily in the Chicago metropolitan area and southeastern Wisconsin, and operates other financing
businesses on a national basis through several non-bank subsidiaries. Additionally, Wintrust offers
a full array of wealth management services primarily to customers in the Chicago metropolitan area
and southeastern Wisconsin.
Overview
The Current Economic Environment
Both the U.S. economy and the Companys local markets continue to face challenging conditions in
2010. The credit crisis that began in 2008 continues, resulting in high unemployment and depressed
home values throughout the Chicago metropolitan area and southeastern Wisconsin. The stress of the
existing economic environment and the depressed real estate valuations in the Companys markets
continue to impact the Companys business in 2010. In response to these conditions, Management
continues to carefully monitor the impact on the Company of the financial markets, the depressed
values of real property and other assets, loan performance, default rates and other financial and
macro-economic indicators in order to navigate the challenging economic environment. In particular:
|
|
|
The Company created a dedicated division in 2008, the Managed Assets Division, to
focus on resolving problem asset situations. Comprised of experienced lenders, the
Managed Assets Division takes control of managing the Companys more significant
problem assets and also conducts ongoing reviews and evaluations of all significant
problem assets, including the formulation of action plans and updates on recent
developments. |
|
|
|
The Companys provision for credit losses in the third quarter of 2010 totaled
$25.5 million, a decrease of $65.7 million when compared to the third quarter of 2009.
The provision for credit losses in the first nine months of 2010 totaled $95.9 million,
a decrease of $33.5 million when compared to the first nine months of 2009. Net
charge-offs decreased to $21.4 million in the third quarter of 2010 (of which $18.3
million related to commercial and commercial real estate loans), compared to $79.7
million for the same period in 2009 (of which $74.5 million related to commercial and
commercial real estate loans). Net charge-offs decreased to $86.1 million in the first
nine months of 2010 (of which $59.1 million related to commercial and commercial real
estate loans), compared to $102.5 million for the same period in 2009 (of which $91.9
million related to commercial and commercial real estate loans). |
|
|
|
The Company increased its allowance for loan losses to $110.4 million at September
30, 2010, reflecting an increase of $15.3 million, or 16%, when compared to the same
period in 2009 and an increase of $12.2 million, or 12%, when compared to December 31,
2009. At September 30, 2010, approximately $56.5 million, or 51%, of the allowance for
loan losses was associated with commercial real estate loans and another $32.0 million,
or 29%, was associated with commercial loans. |
|
|
|
During the third quarter of 2010, Wintrust had significant exposure to commercial
real estate. At September 30, 2010, $3.3 billion, or 34%, of our loan portfolio was
commercial real estate, with more than 91% located in the greater Chicago metropolitan
and southeastern Wisconsin market areas. The commercial real estate loan portfolio was
comprised of $545.9 million related to land, residential and commercial construction,
$537.9 million related to office buildings loans, $492.6 million related to retail
loans, $472.6 million related to industrial use loans, $279.1 million related to
multi-family loans and $1.0 billion related to mixed use and other use types. In
analyzing the commercial real estate market, the Company does not rely upon the
assessment of broad market statistical data, in large part because the Companys market
area is diverse and
covers many communities, each of which is impacted differently by economic forces affecting
the Companys general market area. As such, the extent of the decline in real estate
valuations can vary meaningfully among the different types of commercial and other real
estate loans made by the Company. The Company uses its multi-chartered structure and local |
39
|
|
|
management knowledge to analyze and manage the local market conditions at each of its
banks. Despite these efforts, as of September 30, 2010, the Company had approximately $83.3
million of non-performing commercial real estate loans representing approximately 3% of the
total commercial real estate loan portfolio. $43.3 million, or 52%, of the total
non-performing commercial real estate loan portfolio related to the land, residential and
commercial construction sector which remains under stress due to the significant oversupply
of new homes in certain portions of our market area. |
|
|
|
Total non-performing loans (loans on non-accrual status and loans more than 90 days
past due and still accruing interest), excluding covered loans, were $134.3 million (of
which $83.3 million, or 62%, was related to commercial real estate) at September 30,
2010, a decrease of $97.3 million compared to September 30, 2009. Non-performing loans
declined as a result of selling such loans to third parties, charging loans off or down
to fair value, collections, and transfers to other real estate owned. |
|
|
|
The Companys other real estate owned, excluding covered other real estate owned,
increased by $36.1 million, to $76.7 million during the third quarter of 2010, from
$40.6 million at September 30, 2009. These changes were largely caused by the increase
in properties acquired in foreclosure or received through a deed in lieu of foreclosure
related to residential real estate development and commercial real estate loans.
Specifically, the $76.7 million of other real estate owned as of September 30, 2010 was
comprised of $22.6 million of residential real estate development property, $45.3
million of commercial real estate property and $8.8 million of residential real estate
property. |
During 2009, Management implemented a strategic effort to aggressively resolve problem loans
through liquidation, rather than retention, of loans or real estate acquired as collateral through
the foreclosure process. This strategic effort continued into the third quarter of 2010.
Management believes that some financial institutions have taken a longer term view of problem loan
situations, hoping to realize higher values on acquired collateral through extended marketing
efforts or an improvement in market conditions. Management believed that the distressed
macro-economic conditions would continue to exist in 2010 and that the banking industrys increase
in non-performing loans would eventually lead to many properties being sold by financial
institutions, thus saturating the market and possibly driving fair values of non-performing loans
and foreclosed collateral further downwards. Accordingly, during 2009 and continuing through the
third quarter of 2010, the Company attempted to liquidate as many non-performing loans and assets
as possible. The impact of those decisions and actions included a decline in non-performing loans
in the third quarter of 2010 from the same period in the prior year, an increase in the overall
level of the allowance for loan losses and an increase in other real estate owned as the Company
acquired properties for ultimate sale through foreclosure or deeds in lieu of foreclosure.
Management believes these actions will serve the Company well in the future as they protect the
Company from further valuation deterioration and permit Management to spend less time on resolution
of problem loans and more time on growing the Companys core business and the evaluation of other
opportunities presented by this volatile economic environment. The Company continues to take
advantage of the opportunities that many times result from distressed credit markets
specifically, a dislocation of assets, banks and people in the overall market.
The level of loans past due 30 days or more and still accruing interest, excluding covered loans,
totaled $158.3 million as of September 30 2010, increasing $21.6 million compared to the balance of
$136.7 million as of June 30, 2010. Management is very cognizant of the volatility in and the
fragile nature of the national and local economic conditions and that some borrowers can experience
severe difficulties and default suddenly even if they have never previously been delinquent in loan
payments. Accordingly, Management believes that the current economic conditions will continue to
apply stress to the quality of the Companys loan portfolio. Accordingly, Management plans to
continue to direct significant attention toward the prompt identification, management and
resolution of problem loans.
During the third quarter of 2010, the Company restructured certain loans by providing economic
concessions to borrowers to better align the terms of their loans with their current ability to
pay. At September 30, 2010, approximately $93.7 million in loans had terms modified, with $74.0
million of these modified loans in accruing status. These actions helped financially stressed
borrowers maintain their homes or businesses and kept these loans in an accruing status for the
Company. The Company considers restructuring loans when it appears that both the borrower and the
Company can benefit and preserve a solid and sustainable relationship.
An acceleration or significantly extended continuation in real estate valuation and macroeconomic
deterioration could result in higher default levels, a significant increase in foreclosure
activity, a material decline in the value of the Companys assets, or any combination of more than
one of these trends could have a material adverse effect on the Companys financial condition or
results of operations.
A positive result of the economic environment was that our mortgage banking operation benefited
from the low interest rate environment during 2009 and 2010 as demand for mortgage loans increased
due to the fall in interest rates. The interest rate environment coupled with the acquisition of
additional staff and infrastructure resulted in the higher levels of loan originations and
loan sales in 2009. Through the first nine months of 2010 loan originations have been lower than
in the same period in 2009. However, the Company has realized an increase in gains on sales of
loans, which has been driven by better pricing realized as a result of the company utilizing
mandatory execution of forward commitments with investors in 2010. The increase in gains on sales
was
40
partially offset by changes in the fair market value of mortgage servicing rights, valuation
fluctuations of mortgage banking derivatives and fair value accounting for certain residential
mortgage loans held for sale and an increase in loss indemnification claims by purchasers of the
Companys loans. The Company enters into residential mortgage loan sale agreements with investors
in the normal course of business. These agreements provide recourse to investors through certain
representations concerning credit information, loan documentation, collateral and insurability.
Investors request the Company to indemnify them against losses on certain loans or to repurchase
loans which the investors believe do not comply with applicable representations. An increase in
requests for loss indemnification can negatively impact mortgage banking revenue as additional
recourse expense. Fewer requests from investors for loss indemnification occurred in the current
quarter as compared to the second quarter of 2010. The Company recognized $1.4 million of expense
in the third quarter of 2010, a decrease of $3.3 million compared to the second quarter of 2010 and
has recognized $9.6 million on a year-to-date basis in 2010. The
Company has established an $8.7 million estimated liability, as of
September 30, 2010, on loans expected to be
repurchased from loans sold to investors is based on trends in repurchase and indemnification
requests, actual loss experience, known and inherent risks in the loan, and current economic
conditions. The Companys practice is generally not to retain long-term fixed rate mortgages on
its balance sheet in order to mitigate interest rate risk and consequently sells most of such
mortgages into the secondary market.
Prior to its participation in the U.S. Treasurys Capital Purchase Program, the Company was
well-capitalized and in 2009 and 2010, the Companys capital ratios exceeded the minimum regulatory
levels required for it to be considered well-capitalized. The Companys participation in the CPP
provided the Company with additional capital to expand its franchise through growth in loans and
deposits. Further, to support the Companys growth and take advantage of other opportunities, in
March 2010, the Company issued through a public offering a total of 6,670,000 shares of its common
stock at $33.25 per share. Net proceeds to the Company totaled $210.4 million.
In total, the Company increased its loan portfolio, excluding covered loans, from $8.3 billion at
September 30, 2009 to $9.5 billion at September 30, 2010. This increase was primarily a result of
the securitization transaction that is accounted for as a secured borrowing as of January 1, 2010
as well as growth in the premium finance receivables life insurance portfolio. The Company
continues to make new loans, including in the commercial and commercial real estate sector, where
opportunities that meet our underwriting standards exist. The withdrawal of many banks in our area
from active lending combined with our strong local relationships has presented us with
opportunities to make new loans to well qualified borrowers who have been displaced from other
institutions. For more information regarding changes in the Companys loan portfolio, see
Financial Condition Interest Earning Assets and Note 6 (Loans) of the Financial Statements
presented under Item 1 of this report.
Management considers the maintenance of adequate liquidity to be important to the management of
risk. Accordingly, during 2009 and 2010, the Company continued its practice of maintaining
appropriate funding capacity to provide the Company with adequate liquidity for its ongoing
operations. In this regard, the Company benefited from its strong deposit base, a liquid short-term
investment portfolio and its access to funding from a variety of external funding sources,
including exceptional sources provided or facilitated by the federal government for the benefit of
U.S. financial institutions. Among such sources was the Federal Reserve Bank of New Yorks Term
Asset-Backed Securities Loan Facility (the TALF). In September 2009 the Company securitized a
portion of its property and casualty premium finance loan portfolio of $600 million, which was
facilitated by the premium finance loans being eligible collateral under the TALF. The Federal
Reserve Bank of New York ceased making new loans under the TALF on June 30, 2010.
The Company also benefited from its maintenance of fifteen separate banking charters, which allow
the Company to offer its MaxSafe® product. Through the MaxSafe® product, the Company offers its
customers the ability to maintain a depository account at each of the Companys banking charters
and thus receive fifteen times the ordinary FDIC limit, with the Company attending to much of the
administrative difficulties this would ordinarily require. While the FDIC insurance limit, formerly
$100,000 per depositor at each banking charter, has been raised by the FDIC to $250,000 per
depositor at each banking charter, the MaxSafe® product has allowed the Company to attract large
amounts of high quality deposits as financial distress has affected a number of banking
institutions. At September 30, 2010, the Company had over $1 billion in overnight liquid funds and
interest-bearing deposits with banks. Redeployment of a portion of liquid assets into higher
yielding assets while continuing to maintain adequate liquidity remains a key priority for 2010.
Community Banking
As of September 30, 2010, our community banking franchise consisted of 15 community banks (the
banks) with 85 locations. Through these banks, we provide banking and financial services
primarily to individuals, small to mid-sized businesses, local governmental units and institutional
clients residing primarily in the banks local service areas. These services include traditional
deposit products such as demand, NOW, money market, savings and time deposit accounts, as well as a
number of unique deposit products targeted to specific market segments. The banks also offer home
equity, home mortgage, consumer, real estate and commercial loans, safe deposit facilities, ATMs,
internet banking and other innovative and traditional services specially tailored to meet the needs
of customers in their market areas. Profitability of our community banking franchise is primarily
driven by our net
interest income and margin, our funding mix and related costs, the level of non-performing loans
and other real estate owned, the amount of mortgage banking revenue and our history of establishing
de novo banks.
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Net interest income and margin. The primary source of our revenue is net interest income. Net
interest income is the difference between interest income and fees on earning assets, such as loans
and securities, and interest expense on liabilities to fund those assets, including deposits and
other borrowings. Net interest income can change significantly from period to period based on
general levels of interest rates, customer prepayment patterns, the mix of interest-earning assets
and the mix of interest-bearing and non-interest bearing deposits and borrowings.
Funding mix and related costs. Our most significant source of funding is core deposits, which are
comprised of non-interest bearing deposits, non-brokered interest-bearing transaction accounts,
savings deposits and domestic time deposits. Our branch network is our principal source of core
deposits, which generally carry lower interest rates than wholesale funds of comparable maturities.
Our profitability has been bolstered in recent quarters as fixed term certificates of deposit have
been renewing at lower rates given the historically low interest rate levels in place recently.
Level of non-performing loans and other real estate owned. The level of non-performing loans and
other real estate owned can significantly impact our profitability as these loans and other real
estate owned do not accrue any income, can be subject to charge-offs and write-downs due to
deteriorating market conditions and generally result in additional legal and collections expenses.
Given the current economic conditions, these costs, specifically problem loan expenses, have been
at elevated levels in recent quarters.
Mortgage banking revenue. Our community banking franchise is also influenced by the level of fees
generated by the origination of residential mortgages and the sale of such mortgages into the
secondary market. This revenue is significantly impacted by the level of interest rates associated
with home mortgages. Recently, such interest rates have been historically low and customer
refinancings have been high, although not as high as in the first nine months of 2009.
Additionally, in December 2008, we acquired certain assets and assumed certain liabilities of the
mortgage banking business of Professional Mortgage Partners (PMP). As a result of the
acquisition, we significantly increased the capacity of our mortgage-origination operations,
primarily in the Chicago metropolitan market. The PMP transaction also changed the mix of our
mortgage origination business in the Chicago market, resulting in a relatively greater portion of
that business being retail, rather than wholesale, oriented. Costs in the mortgage business are
variable as they primarily relate to commissions paid to originators.
Establishment of de novo operations. Our historical financial performance has been affected by
costs associated with growing market share in deposits and loans, establishing and acquiring banks,
opening new branch facilities and building an experienced management team. Our financial
performance generally reflects the improved profitability of our banking subsidiaries as they
mature, offset by the costs of establishing and acquiring banks and opening new branch facilities.
From our experience, it generally takes over 13 months for new banks to achieve operational
profitability depending on the number and timing of branch facilities added.
In determining the timing of the formation of de novo banks, the opening of additional branches of
existing banks, and the acquisition of additional banks, we consider many factors, particularly our
perceived ability to obtain an adequate return on our invested capital driven largely by the then
existing cost of funds and lending margins, the general economic climate and the level of
competition in a given market. We began to slow the rate of growth of new locations in 2007 due to
tightening net interest margins on new business which, in the opinion of management, did not
provide enough net interest spread to be able to garner a sufficient return on our invested
capital. From the second quarter of 2008 to the first quarter of 2010, we did not establish a new
banking location either through a de novo opening or through an acquisition, due to the financial
system crisis and recessionary economy and our decision to utilize our capital to support our
existing franchise rather than deploy our capital for expansion through new locations which tend to
operate at a loss in the early months of operation. Thus, while expansion activity during the past
three years has been at a level below earlier periods in our history, we have resumed the formation
of additional branches and acquisitions of additional banks. On April 23, 2010, two of the
Companys wholly-owned subsidiary banks, Northbrook Bank & Trust Company and Wheaton Bank & Trust
Company, in two FDIC-assisted transactions, respectively acquired certain assets and liabilities
and the banking operations of Lincoln Park Savings Bank (Lincoln Park) and Wheatland Bank
(Wheatland). On August 6, 2010, Northbrook Bank & Trust Company, in an FDIC-assisted
transaction, acquired certain assets and liabilities and the banking operations of Ravenswood Bank
(Ravenswood). Additionally, on October 22, 2010, Wheaton Bank & Trust Company acquired certain
assets and liabilities of the banking operations of a branch of First National Bank of Brookfield.
This branch will be operated as Naperville Bank & Trust.
In addition to the factors considered above, before we engage in expansion through de novo branches
or banks we must first make a determination that the expansion fulfills our objective of enhancing
shareholder value through potential future earnings growth and enhancement of the overall franchise
value of the Company. Generally, we believe that, in normal market conditions, expansion through de
novo growth is a better long-term investment than acquiring banks because the cost to bring a de
novo location to profitability is generally substantially less than the premium paid for the
acquisition of a healthy bank. Each opportunity to expand is unique from a cost and benefit
perspective. Factors including the valuation of our stock, other economic market conditions, the
size and scope of the particular expansion opportunity and competitive landscape all influence the
decision to expand via de novo growth or through acquisition.
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Specialty Finance
Through our specialty finance segment, we offer financing of insurance premiums for businesses and
individuals; accounts receivable financing, value-added, out-sourced administrative services; and
other specialty finance businesses. We conduct our specialty finance businesses through indirect
non-bank subsidiaries. Our wholly owned subsidiary, First Insurance Funding Corporation (FIFC)
engages in the premium finance receivables business, our most significant specialized lending
niche, including commercial insurance premium finance and life insurance premium finance.
Financing of Commercial Insurance Premiums
FIFC originated approximately $772.9 million in commercial insurance premium finance receivables in
the third quarter of 2010. FIFC makes loans to businesses to finance the insurance premiums they
pay on their commercial insurance policies. The loans are originated by FIFC working through
independent medium and large insurance agents and brokers located throughout the United States. The
insurance premiums financed are primarily for commercial customers purchases of liability,
property and casualty and other commercial insurance. This lending involves relatively rapid
turnover of the loan portfolio and high volume of loan originations. Because of the indirect nature
of this lending and because the borrowers are located nationwide, this segment is more susceptible
to third party fraud than relationship lending. In the second quarter of 2010, fraud perpetrated
against a number of premium finance companies in the industry, including the property and casualty
division of our premium financing subsidiary, increased both the Companys net charge-offs and
provision for credit losses by $15.7 million. Actions have been taken by the Company to decrease
the likelihood of this type of loss from recurring in this line of business for the Company by the
enhancement of various control procedures to mitigate the risks associated with this lending. The
Company has conducted a thorough review of the premium finance commercial portfolio and found no
signs of similar situations.
The majority of these loans are purchased by the banks in order to more fully utilize their lending
capacity as these loans generally provide the banks with higher yields than alternative
investments. Historically, FIFC originations that were not purchased by the banks were sold to
unrelated third parties with servicing retained. However, during the third quarter of 2009, FIFC
initially sold $695 million in commercial premium finance receivables to our indirect subsidiary,
FIFC Premium Funding I, LLC, which in turn sold $600 million in aggregate principal amount of notes
backed by such premium finance receivables in a securitization transaction sponsored by FIFC.
Subsequent to December 31, 2009, this securitization transaction is accounted for as a secured
borrowing and the securitization entity is treated as a consolidated subsidiary of the Company.
Accordingly, beginning on January 1, 2010, all of the assets and liabilities of the securitization
entity are included directly on the Companys Consolidated Statements of Condition.
The primary driver of profitability related to the financing of commercial insurance premiums is
the net interest spread that FIFC can produce between the yields on the loans generated and the
cost of funds allocated to the business unit. The commercial insurance premium finance business is
a competitive industry and yields on loans are influenced by the market rates offered by our
competitors. We fund these loans either through the securitization facility described above or
through our deposits, the cost of which is influenced by competitors in the retail banking markets
in the Chicago and Milwaukee metropolitan areas.
Financing of Life Insurance Premiums
In 2007, FIFC began financing life insurance policy premiums generally for high net-worth
individuals. In July 2009, FIFC expanded this niche lending business segment when it purchased a
portfolio of domestic life insurance premium finance loans for an aggregate purchase price of
$685.3 million. Also, as part of the purchase, an aggregate of $84.4 million of additional life
insurance premium finance assets were available for future purchase by FIFC subject to the
satisfaction of certain conditions. On October 2, 2009, the conditions were satisfied in relation
to the majority of the additional life insurance premium finance assets and FIFC purchased $83.4
million of the $84.4 million of life insurance premium finance assets available for an aggregate
purchase price of $60.5 million in cash.
FIFC originated approximately $115.0 million in life insurance premium finance receivables in the
third quarter of 2010. These loans are originated directly with the borrowers with assistance from
life insurance carriers, independent insurance agents, financial advisors and/or legal counsel. The
life insurance policy is the primary form of collateral. In addition, these loans often are secured
with a letter of credit, marketable securities or certificates of deposit. In some cases, FIFC may
make a loan that has a partially unsecured position. Similar to the commercial insurance premium
finance receivables, the majority of life insurance premium finance receivables are purchased by
the banks in order to more fully utilize their lending capacity as these loans generally provide
the banks with higher yields than alternative investments.
As with the commercial premium finance business, the primary driver of profitability related to the
financing of life insurance premiums is the net interest spread that FIFC can produce between the
yields on the loans generated and the cost of funds allocated to the business unit.
Profitability of financing both commercial and life insurance premiums is also meaningfully
impacted by leveraging information technology systems, maintaining operational efficiency and
increasing average loan size, each of which allows us to expand our loan volume without significant
capital investment.
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Wealth Management Activities
We currently offer a full range of wealth management services including trust and investment
services, asset management and securities brokerage services, through three separate subsidiaries
including Wayne Hummer Investments, LLC, The Chicago Trust Company and Wintrust Capital Management.
In October 2010, the Company changed the name of its trust and investment services subsidiary,
Wayne Hummer Trust Company, N.A., to The Chicago Trust Company. Additionally, the Companys asset
management company, Wayne Hummer Asset Management, changed its name to Wintrust Capital Management.
The primary influences on the profitability of the wealth management business can be associated
with the level of commission received related to the trading performed by the brokerage customers
for their accounts and the amount of assets under management for which asset management and trust
units receive a management fee for advisory, administrative and custodial services. As such,
revenues are influenced by a rise or fall in the debt and equity markets and the resultant increase
or decrease in the value of our client accounts on which our fees are based. The commissions
received by the brokerage unit are not as directly influenced by the directionality of the debt and
equity markets but rather the desire of our customers to engage in trading based on their
particular situations and outlooks of the market or particular stocks and bonds. Profitability in
the brokerage business is impacted by commissions which fluctuate over time.
Federal Government, Federal Reserve and FDIC Programs
Since October of 2008, the federal government, the Federal Reserve Bank of New York (the New York
Fed) and the FDIC have made a number of programs available to banks and other financial
institutions in an effort to ensure a well-functioning U.S. financial system. We participate in
three of these programs: the CPP, administered by the Treasury, TALF, created by the New York Fed,
and the Temporary Liquidity Guarantee Program (TLGP), created by the FDIC.
Participation in Capital Purchase Program. In October 2008, the Treasury announced that it intended
to use a portion of the initial funds allocated to it pursuant to the Troubled Asset Relief Program
(TARP), created by the Emergency Economic Stabilization Act of 2008, to invest directly in
financial institutions through the newly-created CPP. At that time, U.S. Treasury Secretary Henry
Paulson stated that the program was designed to attract broad participation by healthy
institutions which have plenty of capital to get through this period, but are not positioned to
lend as widely as is necessary to support our economy. Our management believed at the time of the
CPP investment, as it does now, that Treasurys CPP investment was not necessary for the Companys
short or long-term health. However, the CPP investment presented an opportunity for us. By
providing us with a significant source of relatively inexpensive capital, the Treasurys CPP
investment allows us to accelerate our growth cycle and expand lending.
Consequently, we applied for CPP funds and our application was accepted by Treasury. As a result,
on December 19, 2008, we entered into an agreement with the U.S. Department of the Treasury to
participate in Treasurys CPP, pursuant to which we issued and sold preferred stock and a warrant
to Treasury in exchange for aggregate consideration of $250 million (the CPP investment). As a
result of the CPP investment, our total risk based capital ratio as of December 31, 2008 increased
from 10.3% to 13.1%. To be considered well capitalized, we must maintain a total risk-based
capital ratio in excess of 10%. The terms of our agreement with Treasury impose significant
restrictions upon us, including increased scrutiny by Treasury, banking regulators and Congress,
additional corporate governance requirements, restrictions upon our ability to repurchase stock and
pay dividends and, as a result of increasingly stringent regulations issued by Treasury following
the closing of the CPP investment, significant restrictions upon executive compensation. Pursuant
to the terms of the agreement between Treasury and us, Treasury is permitted to amend the agreement
unilaterally in order to comply with any changes in applicable federal statutes.
The CPP investment provided the Company with additional capital resources which in turn permitted
the expansion of the flow of credit to U.S. consumers and businesses beyond what we would have done
without the CPP funding. The capital itself is not loaned to our borrowers but represents
additional shareholders equity that has been leveraged by the Company to permit it to provide new
loans to qualified borrowers and raise deposits to fund the additional lending without incurring
excessive risk.
Due to the combination of our prior decisions in appropriately managing our risks, the capital
support provided from the August 2008 private issuance of $50 million of convertible preferred
stock and the March 2010 common stock issuance of $210 million, as well as the additional capital
support from the CPP, we have been able to take advantage of opportunities when they have arisen
and our banks continue to be active lenders within their communities. Without the additional funds
from the CPP, our prudent management philosophy and strict underwriting standards likely would have
required us to continue to restrain lending due to the need to preserve capital during these
uncertain economic conditions.
For additional information on the terms of the preferred stock and the warrant, see Note 17 of the
Consolidated Financial Statements.
TALF-Eligible Issuance. In September 2009, our indirect subsidiary, FIFC Premium Funding I, LLC,
sold $600 million in aggregate principal amount of its Series 2009-A Premium Finance Asset Backed
Notes, Class A (the Notes), which were issued in a securitization transaction sponsored by FIFC.
FIFC Premium Funding I, LLCs obligations under the Notes are secured by revolving loans made to
buyers of property and casualty insurance policies to finance the related premiums payable by the
buyers to the insurance companies for the policies. At the time of issuance, the Notes were
eligible collateral under TALF and certain investors
44
therefore received non-recourse funding from
the New York Fed in order to purchase the Notes. As a result, FIFC believes it received greater
proceeds at lower interest rates from the securitization than it otherwise would have received in
non-TALF-eligible transactions. The Federal Reserve Bank of New York ceased making new loans under
the TALF on June 30, 2010. As a result, it is possible that funding our growth will be more costly
if we pursue similar transactions in the future. However, as is true in the case of the CPP
investment, management views the TALF-eligible securitization as a funding mechanism offering us
the ability to accelerate our growth plan, rather than one essential to the maintenance of our
well capitalized status.
Increased FDIC Insurance for Non-Interest-Bearing Transaction Accounts. In November 2008, the FDIC
adopted a final rule establishing the TLGP. The TLGP provided two limited guarantee programs: One,
the Debt Guarantee Program, that guaranteed newly-issued senior unsecured debt, and another, the
Transaction Account Guarantee program (TAG) that guaranteed certain noninterest-bearing
transaction accounts at insured depository institutions. All insured depository institutions that
offer noninterest-bearing transaction accounts had the option to participate in either program. We
did not participate in the Debt Guarantee Program. In December 2008, each of our subsidiary banks
elected to participate in the TAG, which provides unlimited FDIC insurance coverage for the entire
account balance in exchange for an additional insurance premium to be paid by the depository
institution for accounts with balances in excess of the current FDIC insurance limit of $250,000.
Although this additional insurance coverage was initially scheduled to expire on December 31, 2009,
in October 2009 and April 2010, the FDIC notified depository institutions that it was extending the
TAG program for additional six month periods at the option of participating banks. In each case,
our subsidiary banks determined that it was in their best interest to continue participation in the
TAG program and opted to participate for each additional six-month period. Unless further
extended, the additional insurance coverage provided by the TAG is scheduled to expire at December
31, 2010. Upon expiration of the TAG, a provision of the Dodd-Frank Wall Street Reform and
Consumer Protection Act (the Dodd-Frank Act), which takes effect on December 31, 2010, will
provide unlimited Federal insurance of the net amount of non-interest-bearing transaction accounts
at all insured depository institutions through December 31, 2012. The unlimited FDIC coverage
provided under the Dodd-Frank Act applies to a more narrowly defined set of non-interest-bearing
transaction accounts than the TAG. Specifically, transaction accounts that earn de minimis
interest and accounts on which institutions reserve a right to require advance notice of
withdrawals (e.g., NOW Accounts) are covered by the unlimited Federal deposit insurance provided
under the TAG, but will not continue to be covered by unlimited Federal deposit insurance under the
Dodd-Frank Act.
Financial Regulatory Reform
In July 2010, the President signed into law the Dodd-Frank Act, which contains a comprehensive set
of provisions designed to govern the practices and oversight of financial institutions and other
participants in the financial markets. While final rulemaking under the Dodd-Frank Act will occur
over the course of several years, changes mandated by the Dodd-Frank Act, as well as other
legislative and regulatory changes, could have a significant impact on us by, for example,
requiring us to change our business practices, requiring us to meet more stringent capital,
liquidity and leverage ratio requirements, limiting our ability to pursue business opportunities,
imposing additional costs on us, limiting fees we can charge for services, impacting the value of
our assets, or otherwise adversely affecting our businesses. These changes may also require us to
invest significant management attention and resources in order to comply with new statutory and
regulatory requirements. Given the uncertainty associated with the manner in which the provisions
of the Dodd-Frank Act will be implemented by the various regulatory agencies, the full extent of
the impact that such requirements will have on our operations is unclear.
The Dodd-Frank Act also addresses risks to the economy and the financial system. It contemplates
enhanced regulation of derivatives, restrictions on and additional disclosure of executive
compensation, additional corporate governance requirements, and oversight of credit rating
agencies. It also strengthens the ability of the regulatory agencies to supervise and examine bank
holding companies and their subsidiaries. Effective July 2011, the Dodd-Frank Act requires a bank
holding company that elects treatment as a financial holding company, including us, to be both
well-capitalized and well-managed in addition to the existing requirement that a financial holding
companys subsidiary banks be well-capitalized and well-managed. Bank holding companies and banks
must also be both well-capitalized and well-managed in order to engage in interstate bank
acquisitions.
Among other things, the Dodd-Frank Act requires the issuance of new banking regulations regarding
the establishment of minimum leverage and risk-based capital requirements for bank holding
companies and banks. These regulations, which are required to be effective within 18 months from
the enactment of the Dodd-Frank Act, are required to be no less stringent than current capital
requirements applied to insured depository institutions and may, in fact, be higher when
established by the agencies. Although Wintrusts outstanding trust preferred securities will
remain eligible for Tier 1 capital treatment, any future issuances of trust preferred securities
will not be Tier 1
capital. The Dodd-Frank Act also requires the regulatory agencies to seek to make capital
requirements for bank holding companies and insured institutions countercyclical, so that capital
requirements increase in times of economic expansion and decrease in times of economic contraction.
The Dodd-Frank Act may also require us to conduct annual stress tests, in accordance with future
regulations. Any such testing would result in increased compliance costs.
Certain provisions of the Dodd-Frank Act have near-term effect on the Company. In particular,
effective one year from the date of enactment, the Dodd-Frank Act eliminates U.S. federal
prohibitions on paying interest on demand deposits, thus allowing businesses to have interest
bearing checking accounts. Depending upon market response, this change could have an adverse
impact on our interest expense. In addition, the Dodd-Frank Act includes provisions that change
the assessment base for federal deposit insurance from the amount of insured deposits to total
consolidated assets less tangible capital, eliminate the maximum size of the deposit insurance fund
(the DIF), eliminate the requirement that the FDIC pay dividends to depository institutions when
the reserve ratio exceeds certain thresholds, and increase the minimum reserve ratio of the DIF
from 1.15% to 1.35%, which will generally require an increase in the level of assessments for
institutions with assets in excess of $10 billion. The applicability of increased assessments to
the Company may depend upon regulations issued by banking regulators, who are granted significant
rulemaking discretion by the Dodd-Frank Act.
Additionally, the Dodd-Frank Act establishes the Bureau of Consumer Financial Protection (the
Bureau) within the Federal Reserve, which will regulate consumer financial products and services.
On July 21, 2011, the consumer financial protection functions currently assigned to the federal
banking and other designated agencies will shift to the Bureau. The Bureau will have broad
rulemaking authority over a wide range of consumer protection laws that apply to banks and thrifts,
including the authority to prohibit unfair, deceptive or abusive practices to ensure that all
consumers have access to markets for consumer financial products and services, and that such
markets are fair, transparent and competitive. In particular, the Bureau may enact sweeping reforms
in the mortgage broker industry which may increase the costs of engaging in these activities for
all market participants, including our subsidiaries. The Bureau will have broad supervisory,
examination and enforcement authority. In addition, state attorneys general and other state
officials will be authorized to enforce consumer protection rules issued by the Bureau.
45
The Dodd-Frank Act weakens federal preemption available for national banks and eliminates federal
preemption for subsidiaries of national banks, which may subject the Companys national banks and
their subsidiaries, including Wintrust Mortgage Company, to additional state regulation. With
regard to mortgage lending, the Dodd-Frank Act imposes new requirements regarding the origination
and servicing of residential mortgage loans. The law creates a variety of new consumer
protections, including limitations on the manner by which loan originators may be compensated and
an obligation of the part of lenders to assess and verify a borrowers ability to repay a
residential mortgage loan.
The Dodd-Frank Act also enhances provisions relating to affiliate and insider lending restrictions
and loans to one borrower limitations. Federal banking law currently limits a national banks
ability to extend credit to one person (or group of related persons) in an amount exceeding certain
thresholds. The Dodd-Frank Act expands the scope of these restrictions to include credit exposure
arising from derivative transactions, repurchase agreements, and securities lending and borrowing
transactions. It also eventually will prohibit state-chartered banks (including certain of the
Companys banking subsidiaries) from engaging in derivative transactions unless the state lending
limit laws take into account credit exposure to such transactions.
Recent Actions Related to Capital and Liquidity
In December 2009, the Basel Committee on Banking Supervision released two consultative documents
proposing significant changes to bank capital, leverage and liquidity requirements, commonly
referred to as Basel III.
In September 2010, the Group of Governors and Heads of Supervision, the oversight body of the Basel
Committee, announced minimum capital ratios and transition periods and endorsed the statements the
Committee released in July 2010. The announcement provides that: (i) the minimum requirement for
the Tier 1 common equity ratio will be increased from the current 2% level to 4.5%, to be phased in
by January 1, 2015, and (ii) the minimum requirement for the Tier 1 capital ratio will be increased
from 4% to 6%, to be phased in by January 1, 2015.
In addition, Basel III includes a capital conservation buffer that requires banking organizations
to maintain an additional 2.5% of Tier 1 common equity to total risk weighted assets on top of the
minimum requirement, which will be phased in between January 1, 2016 and January 1, 2019. The
capital conservation buffer is designed to absorb losses in periods of financial and economic
distress and, while banks are allowed to draw on the buffer during periods of stress, if a banks
regulatory capital ratios approach the minimum requirement, the bank will be subject to constraints
on earnings distributions. In addition, Basel III includes a countercyclical buffer within a range
of 0% 2.5%, which would be implemented according to national circumstances.
These capital requirements are supplemented under Basel III by a non-risk-based leverage ratio. A
minimum Tier 1 leverage ratio of 3% will be tested during the parallel run period starting January
1, 2013. Based on the results of the parallel run period, any final adjustments would be carried
out in the first half of 2017.
The Basel III liquidity proposals have three main elements: (i) a liquidity coverage ratio
designed to ensure that a bank maintains an adequate level of unencumbered high-quality assets
sufficient to meet the banks liquidity needs over a 30-day time horizon under an acute liquidity
stress scenario, (ii) a net stable funding ratio designed to promote more medium and long-term
funding of the assets and activities of banks over a one-year time horizon, and (iii) a set of
monitoring tools that the Basel Committee indicates should be considered as the minimum types of
information that banks should report to supervisors. After an observation period beginning in 2011,
the liquidity coverage ratio will become effective on January 1, 2015. The revised net stable
funding ratio will become effective January 1, 2018.
The U.S. federal banking agencies expressed support for the agreements reached by the Group of
Governors and Heads of Supervision set forth in the announcement made in September 2010. While the
announcement provided clarity on the minimum capital levels, many of the details of the new
framework will remain unclear until the final release is issued. The Basel Committee is expected to
release the final detailed requirements later this year. Implementation of any final provisions of
Basel III in the U.S. will require implementing regulations and guidelines by U.S. banking
regulators, which may differ in significant ways from the
recommendations published by the Basel Committee. It is unclear how U.S. banking regulators will
define well-capitalized in their implementation of Basel III.
We are not able to predict at this time the content of capital and liquidity guidelines or
regulations that may be adopted by regulatory agencies having authority over us and our
subsidiaries or the impact that any changes in regulation would have on us. If new standards
require us or our banking subsidiaries to maintain more capital, with common equity as a more
predominant component, or manage the configuration of our assets and liabilities in order to comply
with formulaic liquidity requirements, such regulation could significantly impact our return on
equity, financial condition, operations, capital position and ability to pursue business
opportunities.
Acquisition of the Life Insurance Premium Finance Business
Overview
As previously described, on July 28, 2009 our subsidiary FIFC purchased the majority of the U.S.
life insurance premium finance assets of subsidiaries of American International Group, Inc. Life
insurance premium finance loans are generally used for estate planning purposes of high net worth
borrowers, and, as described below, are collateralized by life insurance policies and their related
cash surrender value and are often additionally secured by letters of credit, annuities, cash and
marketable securities. Based upon an analysis of the payment patterns of the acquired life
insurance premium finance loans over a seven year period, the Company believes that the average
expected life of such loans is 5 to 7 years.
46
Credit Risk
The Company believes that its life insurance premium finance loans tend to have a lower level of
risk and delinquency than the Companys commercial and residential real estate loans because of the
nature of the collateral. The life insurance policy is the primary form of collateral. If cash
surrender value is not sufficient, then letters of credit, marketable securities or certificates of
deposit are used to provide additional security. Since the collateral is highly liquid and
generally has a value in excess of the loan amount, any defaults or delinquencies are generally
cured relatively quickly by the borrower or the collateral is generally liquidated in an
expeditious manner to satisfy the loan obligation. Greater than 95% of loans are fully secured.
However, less than 5% of the loans are partially unsecured and in those cases, a greater risk
exists for default. No loans are originated on a fully unsecured basis.
Fair Market Valuation at Date of Purchase and Allowance for Loan Losses
ASC 805, Business Combinations (ASC 805), requires acquired loans to be recorded at fair market
value. The application of ASC 805 requires incorporation of credit related factors directly into
the fair value of the loans recorded at the acquisition date, thereby eliminating separate
recognition of the acquired allowance for loan losses on the acquirers balance sheet. Accordingly,
the Company established a credit discount for each loan as part of the determination of the fair
market value of such loan in accordance with those accounting principles at the date of
acquisition. See Note 6 of the Financial Statements presented under Item 1 of this report for a
detailed roll-forward of the aggregate credit discounts established and any activity associated
with balances since the dates of acquisition. Any adverse changes in the deemed collectible nature
of a loan would subsequently be provided through a charge to the income statement through a
provision for credit losses and a corresponding establishment of an allowance for loan losses.
There was no allowance for loan losses associated with this portfolio of loans at September 30,
2010.
FDIC-Assisted Transactions Acquisition of Lincoln Park Bank, Wheatland Bank and Ravenswood Bank
On August 6, 2010, Northbrook Bank & Trust Company acquired the banking operations of Ravenswood in
an FDIC-assisted transaction. Northbrook acquired assets with a fair value of approximately $172
million, including $94 million of loans, and assumed liabilities with a fair value of approximately
$123 million, including $121 million of deposits. Additionally, on April 23, 2010, the Company
acquired the banking operations of two entities in FDIC-assisted transactions. Northbrook acquired
assets with a fair value of approximately $157 million and assumed liabilities with a fair value of
approximately $192 million of Lincoln Park. Wheaton Bank and Trust Company acquired assets with a
fair value of approximately $344 million and assumed liabilities with a fair value of approximately
$416 million of Wheatland.
Loans comprise the majority of the assets acquired in these transactions and 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.
The Company refers to the loans subject to this loss-sharing agreements as covered loans.
Covered assets include covered loans, covered OREO and certain other covered assets. At the
acquisition date, the Company estimated the fair value of the reimbursable losses to be
approximately $46.6 million for the Ravenswood acquisition, and $113.8 million for the Lincoln Park
and 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 FDIC indemnification asset, both 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. These
transactions resulted in a bargain purchase gains of $33.1 million, $6.6 million for Ravenswood,
$22.3 million for Wheatland, and $4.2 million for Lincoln Park, and is shown as a component of
non-interest income on the Companys Consolidated Statements of Income.
Acquisition
of a branch of the First National Bank of Brookfield
On October 22, 2010, the Companys wholly-owned subsidiary bank, Wheaton, acquired a branch of
First National Bank of Brookfield that is located in Naperville, Illinois. Through this
transaction, subject to final adjustments, Wheaton acquired approximately $23 million of deposits,
approximately $11 million of performing loans, the property, bank facility and various other
assets. This branch will operate as Naperville Bank & Trust.
47
RESULTS OF OPERATIONS
Earnings Summary
The Companys key operating measures for 2010, as compared to the same period last year, are shown
below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
Three Months |
|
Percentage (%) or |
|
|
Ended |
|
Ended |
|
Basis Point (bp) |
(Dollars in thousands, except per share data) |
|
September 30, 2010 |
|
September 30, 2009 |
|
Change |
Net income |
|
$ |
20,098 |
|
|
$ |
31,995 |
|
|
|
(37 |
)% |
Net income per common share Diluted |
|
|
0.47 |
|
|
|
1.07 |
|
|
|
(56 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue (1) |
|
|
157,636 |
|
|
|
238,343 |
|
|
|
(34 |
) |
Net interest income |
|
|
102,980 |
|
|
|
87,663 |
|
|
|
17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core pre-tax earnings (2) (6) |
|
|
47,572 |
|
|
|
37,137 |
|
|
|
28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin (2) |
|
|
3.22 |
% |
|
|
3.25 |
% |
|
(3 |
)bp |
Net overhead ratio (3) |
|
|
1.28 |
|
|
|
(1.95 |
) |
|
|
323 |
|
Efficiency ratio (2) (4) |
|
|
67.01 |
|
|
|
38.69 |
|
|
|
2,832 |
|
Return on average assets |
|
|
0.57 |
|
|
|
1.08 |
|
|
|
(51 |
) |
Return on average common equity |
|
|
5.44 |
|
|
|
13.79 |
|
|
|
(835 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months |
|
Nine Months |
|
Percentage (%) or |
|
|
Ended |
|
Ended |
|
Basis Point (bp) |
(Dollars in thousands, except per share data) |
|
September 30, 2010 |
|
September 30, 2009 |
|
Change |
Net income |
|
$ |
49,125 |
|
|
$ |
44,902 |
|
|
|
9 |
% |
Net income per common share Diluted |
|
|
1.12 |
|
|
|
1.25 |
|
|
|
(10 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue (1) |
|
|
450,859 |
|
|
|
457,501 |
|
|
|
(1 |
) |
Net interest income |
|
|
303,159 |
|
|
|
224,942 |
|
|
|
35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core pre-tax earnings (2) (6) |
|
|
137,287 |
|
|
|
81,996 |
|
|
|
67 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin (2) |
|
|
3.34 |
% |
|
|
2.98 |
% |
|
36 |
bp |
Net overhead ratio (3) |
|
|
1.29 |
|
|
|
0.25 |
|
|
|
104 |
|
Efficiency ratio (2) (4) |
|
|
62.45 |
|
|
|
55.15 |
|
|
|
730 |
|
Return on average assets |
|
|
0.49 |
|
|
|
0.54 |
|
|
|
(5 |
) |
Return on average common equity |
|
|
4.43 |
|
|
|
5.16 |
|
|
|
(73 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
At end of period |
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
14,100,368 |
|
|
$ |
12,136,021 |
|
|
|
16 |
% |
Total loans |
|
|
9,814,995 |
|
|
|
8,275,257 |
|
|
|
19 |
|
Total loans, including loans held-for-sale |
|
|
10,135,435 |
|
|
|
8,468,512 |
|
|
|
20 |
|
Total deposits |
|
|
10,962,239 |
|
|
|
9,847,163 |
|
|
|
11 |
|
Junior subordinated debentures |
|
|
249,493 |
|
|
|
249,493 |
|
|
|
|
|
Total shareholders equity |
|
|
1,398,912 |
|
|
|
1,106,082 |
|
|
|
26 |
|
Tangible common equity ratio (TCE) (2) |
|
|
5.9 |
% |
|
|
4.5 |
% |
|
146 |
bp |
Book value per common share |
|
|
35.70 |
|
|
|
34.10 |
|
|
|
5 |
% |
Market price per common share |
|
|
32.41 |
|
|
|
27.96 |
|
|
|
16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excluding covered loans: |
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses to total loans (5) |
|
|
1.17 |
% |
|
|
1.15 |
% |
|
2 |
bp |
Allowance for credit losses to total loans (5) |
|
|
1.19 |
|
|
|
1.19 |
|
|
|
|
|
Non-performing loans to total loans |
|
|
1.42 |
|
|
|
2.80 |
|
|
|
(138 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Including covered loans: |
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses to total loans (5) |
|
|
1.13 |
% |
|
|
1.15 |
% |
|
(2 |
)bp |
Allowance for credit losses to total loans (5) |
|
|
1.15 |
|
|
|
1.19 |
|
|
|
(4 |
) |
Non-performing loans to total loans |
|
|
2.87 |
|
|
|
2.80 |
|
|
|
7 |
|
|
|
|
(1) |
|
Net revenue is net interest income plus non-interest income. |
|
(2) |
|
See following section titled, Supplementary Financial Measures/Ratios for additional information on this performance
measure/ratio. |
|
(3) |
|
The net overhead ratio is calculated by netting total non-interest expense and total non-interest income, annualizing this amount,
and dividing by that periods total average assets. A lower ratio indicates a higher degree of efficiency. |
|
(4) |
|
The efficiency ratio is calculated by dividing total non-interest expense by tax-equivalent net revenues (less securities gains or
losses). A lower ratio indicates more efficient revenue generation. |
|
(5) |
|
The allowance for credit losses includes both the allowance for loan losses and the allowance for lending-related commitments. |
|
(6) |
|
Core pre-tax earnings is adjusted to exclude the provision for credit losses and certain significant items. |
48
Certain returns, yields, performance ratios, and quarterly growth rates are annualized in
this presentation and throughout this report to represent an annual time period. This is done for
analytical purposes to better discern for decision-making purposes underlying performance trends
when compared to full-year or year-over-year amounts. For example, balance sheet growth rates are
most often expressed in terms of an annual rate. As such, 5% growth during a quarter would
represent an annualized growth rate of 20%.
Supplemental Financial Measures/Ratios
The accounting and reporting polices of Wintrust conform to generally accepted accounting
principles (GAAP) in the United States and prevailing practices in the banking industry. However,
certain non-GAAP performance measures and ratios are used by management to evaluate and measure the
Companys performance. These include taxable-equivalent net interest income (including its
individual components), net interest margin (including its individual components), the efficiency
ratio, tangible common equity and core pre-tax earnings. Management believes that these measures
and ratios provide users of the Companys financial information with a more meaningful view of the
performance of interest-earning assets and interest-bearing liabilities and of the Companys
operating efficiency. Other financial holding companies may define or calculate these measures and
ratios differently.
Management reviews yields on certain asset categories and the net interest margin of the Company
and its banking subsidiaries on a fully taxable-equivalent (FTE) basis. In this non-GAAP
presentation, net interest income is adjusted to reflect tax-exempt interest income on an
equivalent before-tax basis. This measure ensures comparability of net interest income arising from
both taxable and tax-exempt sources. Net interest income on a FTE basis is also used in the
calculation of the Companys efficiency ratio. The efficiency ratio, which is calculated by
dividing non-interest expense by total taxable-equivalent net revenue (less securities gains or
losses), measures how much it costs to produce one dollar of revenue. Securities gains or losses
are excluded from this calculation to better match revenue from daily operations to operational
expenses. Core pre-tax earnings is adjusted to exclude the provision for credit losses and certain
significant items.
A reconciliation of certain non-GAAP performance measures and ratios used by the Company to
evaluate and measure the Companys performance to the most directly comparable GAAP financial
measures is shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
(Dollars in thousands) |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
(A) Interest Income (GAAP) |
|
$ |
147,401 |
|
|
$ |
141,577 |
|
|
$ |
439,144 |
|
|
$ |
390,785 |
|
Taxable-equivalent adjustment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- Loans |
|
|
85 |
|
|
|
93 |
|
|
|
254 |
|
|
|
360 |
|
- Liquidity management assets |
|
|
324 |
|
|
|
413 |
|
|
|
1,051 |
|
|
|
1,314 |
|
- Other earning assets |
|
|
7 |
|
|
|
9 |
|
|
|
16 |
|
|
|
30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Income FTE |
|
$ |
147,817 |
|
|
$ |
142,092 |
|
|
$ |
440,465 |
|
|
$ |
392,489 |
|
(B) Interest Expense (GAAP) |
|
|
44,421 |
|
|
|
53,914 |
|
|
|
135,985 |
|
|
|
165,843 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income FTE |
|
|
103,396 |
|
|
|
88,178 |
|
|
|
304,480 |
|
|
|
226,646 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(C) Net Interest Income (GAAP) (A minus B) |
|
$ |
102,980 |
|
|
$ |
87,663 |
|
|
$ |
303,159 |
|
|
$ |
224,942 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(D) Net interest margin (GAAP) |
|
|
3.20 |
% |
|
|
3.23 |
% |
|
|
3.32 |
% |
|
|
2.95 |
% |
Net interest margin FTE |
|
|
3.22 |
% |
|
|
3.25 |
% |
|
|
3.34 |
% |
|
|
2.98 |
% |
(E) Efficiency ratio (GAAP) |
|
|
67.20 |
% |
|
|
38.77 |
% |
|
|
62.63 |
% |
|
|
55.36 |
% |
Efficiency ratio FTE |
|
|
67.01 |
% |
|
|
38.69 |
% |
|
|
62.45 |
% |
|
|
55.15 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Calculation of Tangible Common Equity ratio (at period end) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity |
|
$ |
1,398,912 |
|
|
$ |
1,106,082 |
|
|
|
|
|
|
|
|
|
Less: Preferred stock |
|
|
(287,234 |
) |
|
|
(284,061 |
) |
|
|
|
|
|
|
|
|
Less: Intangible assets |
|
|
(291,219 |
) |
|
|
(290,893 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(F) Total tangible shareholders equity |
|
$ |
820,459 |
|
|
$ |
531,128 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
14,100,368 |
|
|
$ |
12,136,021 |
|
|
|
|
|
|
|
|
|
Less: Intangible assets |
|
|
(291,219 |
) |
|
|
(290,893 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(G) Total tangible assets |
|
$ |
13,809,149 |
|
|
$ |
11,845,128 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tangible common equity ratio (F/G) |
|
|
5.9 |
% |
|
|
4.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes |
|
$ |
32,385 |
|
|
$ |
54,587 |
|
|
$ |
78,665 |
|
|
$ |
74,402 |
|
Add: Provision for credit losses |
|
|
25,528 |
|
|
|
91,193 |
|
|
|
95,870 |
|
|
|
129,329 |
|
Add: OREO expenses, net |
|
|
4,767 |
|
|
|
10,243 |
|
|
|
11,948 |
|
|
|
13,671 |
|
Add: Recourse obligation on loans previously sold |
|
|
1,432 |
|
|
|
|
|
|
|
9,605 |
|
|
|
|
|
Less: Gain on bargain purchases |
|
|
(6,593 |
) |
|
|
(113,062 |
) |
|
|
(43,981 |
) |
|
|
(113,062 |
) |
Less: Trading (gains) losses |
|
|
(712 |
) |
|
|
(6,236 |
) |
|
|
(5,147 |
) |
|
|
(23,254 |
) |
Less: (Gains) losses on available-for-sale securities, net |
|
|
(9,235 |
) |
|
|
412 |
|
|
|
(9,673 |
) |
|
|
910 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core pre-tax earnings |
|
$ |
47,572 |
|
|
$ |
37,137 |
|
|
$ |
137,287 |
|
|
$ |
81,996 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49
Critical Accounting Policies
The Companys Consolidated Financial Statements are prepared in accordance with generally accepted
accounting principles in the United States and prevailing practices of the banking industry.
Application of these principles requires management to make estimates, assumptions, and judgments
that affect the amounts reported in the financial statements and accompanying notes. Certain
policies and accounting principles inherently have a greater reliance on the use of estimates,
assumptions and judgments, and as such have a greater possibility that changes in those estimates
and assumptions could produce financial results that are materially different than originally
reported. Estimates, assumptions and judgments are necessary when assets and liabilities are
required to be recorded at fair value, when a decline in the value of an asset not carried on the
financial statements at fair value warrants an impairment write-down or valuation reserve to be
established, or when an asset or liability needs to be recorded contingent upon a future event, are
based on information available as of the date of the financial statements; accordingly, as
information changes, the financial statements could reflect different estimates and assumptions.
Management views critical accounting policies to be those which are highly dependent on subjective
or complex judgments, estimates and assumptions, and where changes in those estimates and
assumptions could have a significant impact on the financial statements. Management currently views
critical accounting policies to include the determination of the allowance for loan losses and the
allowance for losses on lending-related commitments, estimations of fair value, the valuations
required for impairment testing of goodwill, the valuation and accounting for derivative
instruments and income taxes as the accounting areas that require the most subjective and complex
judgments, and as such could be most subject to revision as new information becomes available. For
a more detailed discussion on these critical accounting policies, see Summary of Critical
Accounting Policies beginning on page 39 of the Companys 2009 Form 10-K.
Net Income
Net income for the quarter ended September 30, 2010 totaled $20.1 million, a decrease of $11.9
million, or 37%, compared to the third quarter of 2009, and an increase of approximately $7.1
million, or 54%, compared to the second quarter of 2010. On a per share basis, net income for the
third quarter of 2010 totaled $0.47 per diluted common share, a decrease of $0.60 per share as
compared to the 2009 third quarter total of $1.07 per diluted common share. Compared to the second
quarter of 2010, net income per diluted common share in the third quarter of 2010 increased $0.22,
or 88%. Primarily as a result of the Companys issuance of 6.67 million common shares for net
proceeds of $210.4 million in the first quarter of 2010, average common shares and dilutive common
shares in the third quarter of 2010 increased by approximately 5.6 million shares, or 21%, compared
to the same period in 2009.
The most significant factors affecting net income for the third quarter of 2010 as compared to the
same period in the prior year include a decrease in gain on bargain purchases as a result of the
third quarter 2009 acquisition of the life insurance premium finance portfolio, offset by a
decrease in the provision for credit losses and interest expense on deposits as well as increased
mortgage banking revenues and interest income on loans. The return on average common equity for the
third quarter of 2010 was 5.44%, compared to 13.79% for the prior year third quarter and 2.98% for
the second quarter of 2010.
Net income for the first nine months of 2010 totaled $49.1 million, an increase of $4.2 million, or
9.4%, compared to $44.9 million for the same period in 2009. On a per share basis, net income per
diluted common share was $1.12 for the first nine months of 2010, a decrease of $0.13 per share
compared to $1.25 for the first nine months of 2009. Return on average common equity for the first
nine months of 2010 was 4.43% versus 5.16% for the same period of 2009.
Net Interest Income
Net interest income, which represents the difference between interest income and fees on earning
assets and interest expense on deposits and borrowings, is the major source of earnings for the
Company. Interest rate fluctuations and the volume and mix of interest-earning assets and
interest-bearing liabilities impact net interest income. Net interest margin represents
tax-equivalent net interest income as a percentage of the average earning assets during the period.
50
Quarter Ended September 30, 2010 compared to the Quarter Ended September 30, 2009
The following table presents a summary of the Companys net interest income and related net
interest margin, calculated on a fully taxable equivalent basis, for the third quarter of 2010 as
compared to the third quarter of 2009 (linked quarters):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
|
For the Three Months Ended |
|
|
|
September 30, 2010 |
|
|
September 30, 2009 |
|
(Dollars in thousands) |
|
Average |
|
|
Interest |
|
|
Rate |
|
|
Average |
|
|
Interest |
|
|
Rate |
|
|
|
|
Liquidity management assets (1) (2) (7) |
|
$ |
2,802,964 |
|
|
$ |
9,625 |
|
|
|
1.36 |
% |
|
$ |
2,078,330 |
|
|
$ |
15,403 |
|
|
|
2.94 |
% |
Other earning assets (2) (3) (7) |
|
|
34,263 |
|
|
|
205 |
|
|
|
2.37 |
|
|
|
24,874 |
|
|
|
148 |
|
|
|
2.36 |
|
Loans, net of unearned income (2) (4) (7) |
|
|
9,603,561 |
|
|
|
134,016 |
|
|
|
5.54 |
|
|
|
8,665,281 |
|
|
|
126,541 |
|
|
|
5.79 |
|
Covered loans |
|
|
325,751 |
|
|
|
3,971 |
|
|
|
4.84 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total earning assets (7) |
|
$ |
12,766,539 |
|
|
$ |
147,817 |
|
|
|
4.59 |
% |
|
$ |
10,768,485 |
|
|
$ |
142,092 |
|
|
|
5.24 |
% |
|
|
|
|
|
Allowance for loan losses |
|
|
(113,631 |
) |
|
|
|
|
|
|
|
|
|
|
(85,300 |
) |
|
|
|
|
|
|
|
|
Cash and due from banks |
|
|
154,078 |
|
|
|
|
|
|
|
|
|
|
|
109,645 |
|
|
|
|
|
|
|
|
|
Other assets |
|
|
1,208,771 |
|
|
|
|
|
|
|
|
|
|
|
1,004,690 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
14,015,757 |
|
|
|
|
|
|
|
|
|
|
$ |
11,797,520 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits |
|
$ |
9,823,525 |
|
|
$ |
31,088 |
|
|
|
1.26 |
% |
|
$ |
8,799,578 |
|
|
$ |
42,806 |
|
|
|
1.93 |
% |
Federal Home Loan Bank advances |
|
|
414,789 |
|
|
|
4,042 |
|
|
|
3.87 |
|
|
|
434,134 |
|
|
|
4,536 |
|
|
|
4.14 |
|
Notes payable and other borrowings |
|
|
232,991 |
|
|
|
1,411 |
|
|
|
2.40 |
|
|
|
245,352 |
|
|
|
1,779 |
|
|
|
2.88 |
|
Secured borrowings owed to securitization investors |
|
|
600,000 |
|
|
|
3,167 |
|
|
|
2.09 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated notes |
|
|
55,000 |
|
|
|
265 |
|
|
|
1.89 |
|
|
|
65,000 |
|
|
|
333 |
|
|
|
2.01 |
|
Junior subordinated notes |
|
|
249,493 |
|
|
|
4,448 |
|
|
|
6.98 |
|
|
|
249,493 |
|
|
|
4,460 |
|
|
|
6.99 |
|
|
|
|
|
|
Total interest-bearing liabilities |
|
$ |
11,375,798 |
|
|
$ |
44,421 |
|
|
|
1.55 |
% |
|
$ |
9,793,557 |
|
|
$ |
53,914 |
|
|
|
2.18 |
% |
|
|
|
|
|
Non-interest bearing liabilities |
|
|
1,005,170 |
|
|
|
|
|
|
|
|
|
|
|
775,202 |
|
|
|
|
|
|
|
|
|
Other liabilities |
|
|
243,282 |
|
|
|
|
|
|
|
|
|
|
|
158,666 |
|
|
|
|
|
|
|
|
|
Equity |
|
|
1,391,507 |
|
|
|
|
|
|
|
|
|
|
|
1,070,095 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity |
|
$ |
14,015,757 |
|
|
|
|
|
|
|
|
|
|
$ |
11,797,520 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate spread (5) (7) |
|
|
|
|
|
|
|
|
|
|
3.04 |
% |
|
|
|
|
|
|
|
|
|
|
3.06 |
% |
Net free funds/contribution (6) |
|
$ |
1,390,741 |
|
|
|
|
|
|
|
0.18 |
% |
|
$ |
974,928 |
|
|
|
|
|
|
|
0.19 |
% |
|
|
|
|
|
Net interest income/Net interest margin (7) |
|
|
|
|
|
$ |
103,396 |
|
|
|
3.22 |
% |
|
|
|
|
|
$ |
88,178 |
|
|
|
3.25 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Liquidity management assets include available-for-sale securities, interest earning
deposits with banks, federal funds sold and securities purchased under resale agreements. |
|
(2) |
|
Interest income on tax-advantaged loans, trading securities and securities reflects
a tax-equivalent adjustment based on a marginal federal corporate tax rate of 35%. The total
adjustments for the three months ended September 30, 2010 and 2009 were $416,000 and $515,000,
respectively. |
|
(3) |
|
Other earning assets include brokerage customer receivables and trading account
securities. |
|
(4) |
|
Loans, net of unearned income, include loans held-for-sale and non-accrual loans. |
|
(5) |
|
Interest rate spread is the difference between the yield earned on earning assets
and the rate paid on interest-bearing liabilities. |
|
(6) |
|
Net free funds are the difference between total average earning assets and total
average interest-bearing liabilities. The estimated contribution to net interest margin from net
free funds is calculated using the rate paid for total interest-bearing liabilities. |
|
(7) |
|
See Supplemental Financial Measures/Ratios for additional information on this
performance ratio. |
The higher level of net interest income recorded in the third quarter of 2010 compared to the third
quarter of 2009 was primarily attributable to the impact of the acquisition of the life insurance
premium finance assets in the second half of 2009 and lower retail deposit costs. Approximately
$714 million of the increase in average total loans is attributable to life insurance premium
finance loans including those purchased in the transaction or originated by the Company.
In the third quarter of 2010, the yield on earning assets decreased 65 basis points as the yield on
liquidity management assets declined by 158 basis points and the rate on interest-bearing
liabilities decreased 63 basis points compared to the third quarter of 2009. Retail deposit
re-pricing opportunities over the past 12 months, due to a sustained low interest rate environment
and more stable financial markets, contributed to the majority of this decreased cost. The rate
paid on interest-bearing deposits decreased 67 basis points when compared to the third quarter of
2009.
51
Quarter Ended September 30, 2010 compared to the Quarter Ended June 30, 2010
The following table presents a summary of the Companys net interest income and related net
interest margin, calculated on a fully taxable equivalent basis, for the third quarter of 2010 as
compared to the second quarter of 2010 (sequential quarters):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
|
For the Three Months Ended |
|
|
|
September 30, 2010 |
|
|
June 30, 2010 |
|
(Dollars in thousands) |
|
Average |
|
|
Interest |
|
|
Rate |
|
|
Average |
|
|
Interest |
|
|
Rate |
|
|
|
|
Liquidity management assets (1) (2) (7) |
|
$ |
2,802,964 |
|
|
$ |
9,625 |
|
|
|
1.36 |
% |
|
$ |
2,613,179 |
|
|
$ |
13,305 |
|
|
|
2.04 |
% |
Other earning assets (2) (3) (7) |
|
|
34,263 |
|
|
|
205 |
|
|
|
2.37 |
|
|
|
62,874 |
|
|
|
515 |
|
|
|
3.28 |
|
Loans, net of unearned income (2) (4) (7) |
|
|
9,603,561 |
|
|
|
134,016 |
|
|
|
5.54 |
|
|
|
9,356,033 |
|
|
|
133,207 |
|
|
|
5.71 |
|
Covered loans |
|
|
325,751 |
|
|
|
3,971 |
|
|
|
4.84 |
|
|
|
210,030 |
|
|
|
2,682 |
|
|
|
5.12 |
|
|
|
|
|
|
Total earning assets (7) |
|
$ |
12,766,539 |
|
|
$ |
147,817 |
|
|
|
4.59 |
% |
|
$ |
12,242,116 |
|
|
$ |
149,709 |
|
|
|
4.91 |
% |
|
|
|
|
|
Allowance for loan losses |
|
|
(113,631 |
) |
|
|
|
|
|
|
|
|
|
|
(108,764 |
) |
|
|
|
|
|
|
|
|
Cash and due from banks |
|
|
154,078 |
|
|
|
|
|
|
|
|
|
|
|
137,531 |
|
|
|
|
|
|
|
|
|
Other assets |
|
|
1,208,771 |
|
|
|
|
|
|
|
|
|
|
|
1,119,654 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
14,015,757 |
|
|
|
|
|
|
|
|
|
|
$ |
13,390,537 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits |
|
$ |
9,823,525 |
|
|
$ |
31,088 |
|
|
|
1.26 |
% |
|
$ |
9,348,541 |
|
|
$ |
31,626 |
|
|
|
1.36 |
% |
Federal Home Loan Bank advances |
|
|
414,789 |
|
|
|
4,042 |
|
|
|
3.87 |
|
|
|
417,835 |
|
|
|
4,094 |
|
|
|
3.93 |
|
Notes payable and other borrowings |
|
|
232,991 |
|
|
|
1,411 |
|
|
|
2.40 |
|
|
|
217,751 |
|
|
|
1,439 |
|
|
|
2.65 |
|
Secured borrowings owed to securitization investors |
|
|
600,000 |
|
|
|
3,167 |
|
|
|
2.09 |
|
|
|
600,000 |
|
|
|
3,115 |
|
|
|
2.08 |
|
Subordinated notes |
|
|
55,000 |
|
|
|
265 |
|
|
|
1.89 |
|
|
|
57,198 |
|
|
|
256 |
|
|
|
1.77 |
|
Junior subordinated notes |
|
|
249,493 |
|
|
|
4,448 |
|
|
|
6.98 |
|
|
|
249,493 |
|
|
|
4,404 |
|
|
|
6.98 |
|
|
|
|
|
|
Total interest-bearing liabilities |
|
$ |
11,375,798 |
|
|
$ |
44,421 |
|
|
|
1.55 |
% |
|
$ |
10,890,818 |
|
|
$ |
44,934 |
|
|
|
1.65 |
% |
|
|
|
|
|
Non-interest bearing liabilities |
|
|
1,005,170 |
|
|
|
|
|
|
|
|
|
|
|
932,046 |
|
|
|
|
|
|
|
|
|
Other liabilities |
|
|
243,282 |
|
|
|
|
|
|
|
|
|
|
|
195,984 |
|
|
|
|
|
|
|
|
|
Equity |
|
|
1,391,507 |
|
|
|
|
|
|
|
|
|
|
|
1,371,689 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity |
|
$ |
14,015,757 |
|
|
|
|
|
|
|
|
|
|
$ |
13,390,537 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate spread (5) (7) |
|
|
|
|
|
|
|
|
|
|
3.04 |
% |
|
|
|
|
|
|
|
|
|
|
3.26 |
% |
Net free funds/contribution (6) |
|
$ |
1,390,741 |
|
|
|
|
|
|
|
0.18 |
% |
|
$ |
1,351,298 |
|
|
|
|
|
|
|
0.17 |
% |
|
|
|
|
|
Net interest income/Net interest margin (7) |
|
|
|
|
|
$ |
103,396 |
|
|
|
3.22 |
% |
|
|
|
|
|
$ |
104,775 |
|
|
|
3.43 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Liquidity management assets include available-for-sale securities, interest earning
deposits with banks, federal funds sold and securities purchased under resale agreements. |
|
(2) |
|
Interest income on tax-advantaged loans, trading securities and securities reflects
a tax-equivalent adjustment based on a marginal federal corporate tax rate of 35%. The total
adjustments for the three months ended September 30, 2010 and June 30, 2010 were $416,000 and
$461,000, respectively. |
|
(3) |
|
Other earning assets include brokerage customer receivables and trading account
securities. |
|
(4) |
|
Loans, net of unearned income, include loans held-for-sale and non-accrual loans. |
|
(5) |
|
Interest rate spread is the difference between the yield earned on earning assets
and the rate paid on interest-bearing liabilities. |
|
(6) |
|
Net free funds are the difference between total average earning assets and total
average interest-bearing liabilities. The estimated contribution to net interest margin from net
free funds is calculated using the rate paid for total interest-bearing liabilities. |
|
(7) |
|
See Supplemental Financial Measures/Ratios for additional information on this
performance ratio. |
The decline in net interest margin in the third quarter of 2010 compared to the second quarter of
2010 was primarily caused by $3.2 million less accretion on the purchased life insurance premium
finance portfolio as less prepayments occurred (reduced net interest margin by 10 basis points),
higher balances and lower yields on liquidity management assets (reduced net interest margin by 14
basis points), the negative impact of selling certain collateralized mortgage obligations (reduced
net interest margin by nine basis points), offset by lower costs for interest-bearing deposits
(increased net interest margin by 11 basis points) and higher contribution from net free funds
(increased net interest margin by 1 basis point). The decline in the yield on loans is primarily
attributable to reduced accretion on the purchased life insurance premium finance portfolio.
52
Nine months Ended September 30, 2010 compared to the Nine months Ended September 30, 2009
The following table presents a summary of the Companys net interest income and related net
interest margin, calculated on a fully taxable equivalent basis, for the first nine months of 2010
as compared to the first nine months of 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended |
|
|
For the Nine Months Ended |
|
|
|
September 30, 2010 |
|
|
September 30, 2009 |
|
(Dollars in thousands) |
|
Average |
|
|
Interest |
|
|
Rate |
|
|
Average |
|
|
Interest |
|
|
Rate |
|
|
|
|
Liquidity management assets (1) (2) (7) |
|
$ |
2,592,751 |
|
|
$ |
36,084 |
|
|
|
1.86 |
% |
|
$ |
1,923,869 |
|
|
$ |
48,004 |
|
|
|
3.34 |
% |
Other earning assets (2) (3) (7) |
|
|
50,192 |
|
|
|
883 |
|
|
|
2.35 |
|
|
|
23,242 |
|
|
|
488 |
|
|
|
2.81 |
|
Loans, net of unearned income (2) (4) (7) |
|
|
9,371,291 |
|
|
|
396,845 |
|
|
|
5.66 |
|
|
|
8,244,336 |
|
|
|
343,997 |
|
|
|
5.58 |
|
Covered loans |
|
|
178,492 |
|
|
|
6,653 |
|
|
|
4.98 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total earning assets (7) |
|
$ |
12,192,726 |
|
|
$ |
440,465 |
|
|
|
4.83 |
% |
|
$ |
10,191,447 |
|
|
$ |
392,489 |
|
|
|
5.15 |
% |
|
|
|
|
|
Allowance for loan losses |
|
|
(109,982 |
) |
|
|
|
|
|
|
|
|
|
|
(76,886 |
) |
|
|
|
|
|
|
|
|
Cash and due from banks |
|
|
135,476 |
|
|
|
|
|
|
|
|
|
|
|
103,164 |
|
|
|
|
|
|
|
|
|
Other assets |
|
|
1,104,240 |
|
|
|
|
|
|
|
|
|
|
|
936,468 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
13,322,460 |
|
|
|
|
|
|
|
|
|
|
$ |
11,154,193 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits |
|
$ |
9,358,313 |
|
|
$ |
95,926 |
|
|
|
1.37 |
% |
|
$ |
8,217,631 |
|
|
$ |
132,261 |
|
|
|
2.15 |
% |
Federal Home Loan Bank advances |
|
|
420,554 |
|
|
|
12,482 |
|
|
|
3.97 |
|
|
|
435,359 |
|
|
|
13,492 |
|
|
|
4.14 |
|
Notes payable and other borrowings |
|
|
225,579 |
|
|
|
4,312 |
|
|
|
2.56 |
|
|
|
266,264 |
|
|
|
5,401 |
|
|
|
2.71 |
|
Secured borrowings owed to securitization investors |
|
|
600,000 |
|
|
|
9,276 |
|
|
|
2.07 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated notes |
|
|
57,381 |
|
|
|
762 |
|
|
|
1.75 |
|
|
|
67,198 |
|
|
|
1,341 |
|
|
|
2.63 |
|
Junior subordinated notes |
|
|
249,493 |
|
|
|
13,227 |
|
|
|
6.99 |
|
|
|
249,498 |
|
|
|
13,348 |
|
|
|
7.05 |
|
|
|
|
|
|
Total interest-bearing liabilities |
|
$ |
10,911,320 |
|
|
$ |
135,985 |
|
|
|
1.66 |
% |
|
$ |
9,235,950 |
|
|
$ |
165,843 |
|
|
|
2.40 |
% |
|
|
|
|
|
Non-interest bearing liabilities |
|
|
934,734 |
|
|
|
|
|
|
|
|
|
|
|
754,666 |
|
|
|
|
|
|
|
|
|
Other liabilities |
|
|
155,795 |
|
|
|
|
|
|
|
|
|
|
|
97,130 |
|
|
|
|
|
|
|
|
|
Equity |
|
|
1,320,611 |
|
|
|
|
|
|
|
|
|
|
|
1,066,447 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity |
|
$ |
13,322,460 |
|
|
|
|
|
|
|
|
|
|
$ |
11,154,193 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate spread (5) (7) |
|
|
|
|
|
|
|
|
|
|
3.17 |
% |
|
|
|
|
|
|
|
|
|
|
2.75 |
% |
Net free funds/contribution (6) |
|
$ |
1,281,406 |
|
|
|
|
|
|
|
0.17 |
% |
|
$ |
955,497 |
|
|
|
|
|
|
|
0.23 |
% |
|
|
|
|
|
Net interest income/Net interest margin (7) |
|
|
|
|
|
$ |
304,480 |
|
|
|
3.34 |
% |
|
|
|
|
|
$ |
226,646 |
|
|
|
2.98 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Liquidity management assets include available-for-sale securities, interest earning
deposits with banks, federal funds sold and securities purchased under resale agreements. |
|
(2) |
|
Interest income on tax-advantaged loans, trading securities and securities reflects
a tax-equivalent adjustment based on a marginal federal corporate tax rate of 35%. The total
adjustments for the nine months ended September 30, 2010 and 2009 were $1.3 million and $1.7
million, respectively. |
|
(3) |
|
Other earning assets include brokerage customer receivables and trading account
securities. |
|
(4) |
|
Loans, net of unearned income, include loans held-for-sale and non-accrual loans. |
|
(5) |
|
Interest rate spread is the difference between the yield earned on earning assets
and the rate paid on interest-bearing liabilities. |
|
(6) |
|
Net free funds are the difference between total average earning assets and total
average interest-bearing liabilities. The estimated contribution to net interest margin from net
free funds is calculated using the rate paid for total interest-bearing liabilities. |
|
(7) |
|
See Supplemental Financial Measures/Ratios for additional information on this
performance ratio. |
Tax-equivalent net interest income for the first nine months of 2010 totaled $304.5 million, an
increase of $77.9 million, or 34%, as compared to the $226.6 million recorded in the first nine
months of 2009. The higher level of net interest income recorded was primarily attributable to the
impact of the acquisition of the life insurance premium finance assets in the second half of 2009
and lower retail deposit costs. Approximately $996 million of the increase in average total loans
is attributable to life insurance premium finance loans including those purchased in the
transaction or originated by the Company.
In the first nine months of 2010, the yield on earning assets decreased 32 basis points as the
yield on liquidity management assets declined by 148 basis points and the rate on interest-bearing
liabilities decreased 74 basis points compared to the first nine months of 2009. Retail deposit
re-pricing opportunities over the past 12 months, due to a sustained low interest rate environment
and more stable financial markets, contributed to the majority of this decreased cost. The rate
paid on interest-bearing deposits decreased 78 basis points when compared to the first nine months
of 2009.
53
Analysis of Changes in Tax-equivalent Net Interest Income
The following table presents an analysis of the changes in the Companys tax-equivalent net
interest income comparing the three-month periods ended September 30, 2010 and June 30, 2010, the
nine month periods ended September 30, 2010 and September 30, 2009 and the three-month periods
ended September 30, 2010 and September 30, 2009. The reconciliations set forth the changes in the
tax-equivalent net interest income as a result of changes in volumes, changes in rates and
differing number of days in each period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter |
|
|
First Nine Months |
|
|
Third Quarter |
|
|
|
of 2010 |
|
|
of 2010 |
|
|
of 2010 |
|
|
|
Compared to |
|
|
Compared to |
|
|
Compared to |
|
|
|
Second Quarter |
|
|
First Nine Months |
|
|
Third Quarter |
|
(Dollars in thousands) |
|
of 2010 |
|
|
of 2009 |
|
|
of 2009 |
|
Tax-equivalent net interest income for comparative period |
|
$ |
104,775 |
|
|
$ |
226,646 |
|
|
$ |
88,178 |
|
Change due to mix and growth of earning assets and interest-bearing liabilities (volume) |
|
|
3,965 |
|
|
|
33,803 |
|
|
|
9,722 |
|
Change due to interest rate fluctuations (rate) |
|
|
(6,483 |
) |
|
|
44,031 |
|
|
|
5,496 |
|
Change due to number of days in each period |
|
|
1,139 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax-equivalent net interest income for the period ended September 30, 2010 |
|
$ |
103,396 |
|
|
$ |
304,480 |
|
|
$ |
103,396 |
|
|
|
|
|
|
|
|
|
|
|
54
Non-interest Income
For the third quarter of 2010, non-interest income totaled $54.7 million, a decrease of $96.0
million, or 64%, compared to the third quarter of 2009. The decrease was primarily attributable to
the bargain purchase gain related to the life insurance premium finance loan acquisition in the
third quarter of 2009 and lower trading gains, partially offset by an increase in mortgage banking
revenue and gains on available-for-sale securities. For the first nine months of 2010,
non-interest income totaled $147.7 million, a decrease of $84.9 million, or 36%, compared to the
first nine months of 2009.
The following table presents non-interest income by category for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
|
|
|
September 30 |
|
|
$ |
|
|
% |
|
(Dollars in thousands) |
|
2010 |
|
|
2009 |
|
|
Change |
|
|
Change |
|
Brokerage |
|
$ |
5,806 |
|
|
$ |
4,593 |
|
|
$ |
1,213 |
|
|
|
26 |
|
Trust and asset management |
|
|
3,167 |
|
|
|
2,908 |
|
|
|
259 |
|
|
|
9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total wealth management |
|
|
8,973 |
|
|
|
7,501 |
|
|
|
1,472 |
|
|
|
20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage banking |
|
|
20,980 |
|
|
|
13,204 |
|
|
|
7,776 |
|
|
|
59 |
|
Service charges on deposit accounts |
|
|
3,384 |
|
|
|
3,447 |
|
|
|
(63 |
) |
|
|
(2 |
) |
Gains on sales of premium finance receivables |
|
|
|
|
|
|
3,629 |
|
|
|
(3,629 |
) |
|
|
(100 |
) |
Gains (losses) on available-for-sale securities |
|
|
9,235 |
|
|
|
(412 |
) |
|
|
9,647 |
|
|
NM |
|
Gain on bargain purchases |
|
|
6,593 |
|
|
|
113,062 |
|
|
|
(106,469 |
) |
|
|
(94 |
) |
Trading gains |
|
|
712 |
|
|
|
6,236 |
|
|
|
(5,524 |
) |
|
|
(89 |
) |
Other: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fees from covered call options |
|
|
703 |
|
|
|
|
|
|
|
703 |
|
|
NM |
|
Bank Owned Life Insurance |
|
|
552 |
|
|
|
552 |
|
|
|
|
|
|
|
|
|
Administrative services |
|
|
744 |
|
|
|
527 |
|
|
|
217 |
|
|
|
41 |
|
Miscellaneous |
|
|
2,780 |
|
|
|
2,934 |
|
|
|
(154 |
) |
|
|
(5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other |
|
|
4,779 |
|
|
|
4,013 |
|
|
|
766 |
|
|
|
19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Non-Interest Income |
|
$ |
54,656 |
|
|
$ |
150,680 |
|
|
$ |
(96,024 |
) |
|
|
(64 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
|
|
|
|
|
|
September 30 |
|
|
$ |
|
|
% |
|
(Dollars in thousands) |
|
2010 |
|
|
2009 |
|
|
Change |
|
|
Change |
|
Brokerage |
|
$ |
17,072 |
|
|
$ |
12,693 |
|
|
$ |
4,379 |
|
|
|
34 |
|
Trust and asset management |
|
|
9,761 |
|
|
$ |
7,617 |
|
|
|
2,144 |
|
|
|
28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total wealth management |
|
|
26,833 |
|
|
|
20,310 |
|
|
|
6,523 |
|
|
|
32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage banking |
|
|
38,693 |
|
|
|
52,032 |
|
|
|
(13,339 |
) |
|
|
(26 |
) |
Service charges on deposit accounts |
|
|
10,087 |
|
|
|
9,600 |
|
|
|
487 |
|
|
|
5 |
|
Gains on sales of premium finance receivables |
|
|
|
|
|
|
4,147 |
|
|
|
(4,147 |
) |
|
|
(100 |
) |
Gains (losses) on available-for-sale securities |
|
|
9,673 |
|
|
|
(910 |
) |
|
|
10,583 |
|
|
NM |
|
Gain on bargain purchases |
|
|
43,981 |
|
|
|
113,062 |
|
|
|
(69,081 |
) |
|
|
(61 |
) |
Trading gains |
|
|
5,147 |
|
|
|
23,254 |
|
|
|
(18,107 |
) |
|
|
(78 |
) |
Other: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fees from covered call options |
|
|
1,162 |
|
|
|
1,998 |
|
|
|
(836 |
) |
|
|
(42 |
) |
Bank Owned Life Insurance |
|
|
1,593 |
|
|
|
1,403 |
|
|
|
190 |
|
|
|
14 |
|
Administrative services |
|
|
2,034 |
|
|
|
1,463 |
|
|
|
571 |
|
|
|
39 |
|
Miscellaneous |
|
|
8,497 |
|
|
|
6,200 |
|
|
|
2,297 |
|
|
|
37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other |
|
|
13,286 |
|
|
|
11,064 |
|
|
|
2,222 |
|
|
|
20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Non-Interest Income |
|
$ |
147,700 |
|
|
$ |
232,559 |
|
|
$ |
(84,859 |
) |
|
|
(36 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
55
Wealth management revenue is comprised of the trust and asset management revenue of Wintrust
Capital Management and the asset management fees, brokerage commissions, trading commissions and
insurance product commissions at Wayne Hummer Investments and The Chicago Trust Company. Wealth
management revenue totaled $9.0 million in the third quarter of 2010 and $7.5 million in the third
quarter of 2009. Increased asset valuations due to equity market improvements have helped revenue
growth from trust and asset management activities. Additionally, the improvement in the equity
markets overall have led to the increase of the brokerage component of wealth management revenue as
customer trading activity has increased.
Mortgage banking revenue includes revenue from activities related to originating, selling and
servicing residential real estate loans for the secondary market. For the quarter ended September
30, 2010, this revenue source totaled $21.0 million, an increase of $7.8 million when compared to
the third quarter of 2009. For the first nine months of 2010, mortgage banking revenue totaled
$38.7 million, a decrease of $13.3 million when compared to the first nine months of 2009.
Mortgages originated and sold totaled $1.1 billion in the third quarter of 2010 compared to $732
million in the second quarter of 2010 and $960 million in the third quarter of 2009. The increase
in mortgage banking revenue in the third quarter of 2010 as compared to the third quarter of 2009
resulted primarily from an increase in gains on sales of loans, which was driven by higher
origination volumes and better pricing realized as a result of the company utilizing mandatory
execution of forward commitments with investors in 2010. The increase in gains on sales was
partially offset by changes in the fair market value of mortgage servicing rights, valuation
fluctuations of mortgage banking derivatives and fair value accounting for certain residential
mortgage loans held for sale and an increase in loss indemnification claims by purchasers of the
Companys loans. The Company enters into residential mortgage loan sale agreements with investors
in the normal course of business. These agreements provide recourse to investors through certain
representations concerning credit information, loan documentation, collateral and insurability.
Investors request the Company to indemnify them against losses on certain loans or to repurchase
loans which the investors believe do not comply with applicable representations. An increase in
requests for loss indemnification can negatively impact mortgage banking revenue as additional
recourse expense. Fewer requests from investors for loss indemnification occurred in the current
quarter as compared to the second quarter of 2009. The company recognized $1.4 million of expense
in the third quarter of 2010, a decrease of $3.3 million compared to the second quarter of 2010.
However, on a year-to-date basis, higher recourse expense has been recorded in 2010 as compared to
2009, based on a larger volume of investor loss indemnification
requests. The Company has established an $8.7 million estimated
liability, as of September 30, 2010, on loans expected to be repurchased from loans previously sold to investors is based on trends in
repurchase and indemnification requests, actual loss experience, known and inherent risks in the
loan, and current economic conditions.
A summary of the mortgage banking revenue components is shown below:
Mortgage banking revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
(Dollars in thousands) |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Mortgage loans originated and sold |
|
$ |
1,076,736 |
|
|
$ |
960,218 |
|
|
$ |
2,495,880 |
|
|
$ |
3,713,883 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans serviced |
|
|
787,923 |
|
|
|
715,351 |
|
|
|
|
|
|
|
|
|
Fair value of mortgage servicing rights (MSRs) |
|
|
5,179 |
|
|
|
6,030 |
|
|
|
|
|
|
|
|
|
MSRs as a percentage of loans serviced |
|
|
0.66 |
% |
|
|
0.84 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sales of loans |
|
$ |
28,096 |
|
|
$ |
13,957 |
|
|
$ |
59,287 |
|
|
$ |
54,187 |
|
Derivative/Fair value, net |
|
|
(4,212 |
) |
|
|
86 |
|
|
|
(7,200 |
) |
|
|
(98 |
) |
Mortgage servicing rights |
|
|
(1,472 |
) |
|
|
(839 |
) |
|
|
(3,789 |
) |
|
|
(2,057 |
) |
Recourse obligation on loans previously sold |
|
|
(1,432 |
) |
|
|
|
|
|
|
(9,605 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage banking revenue |
|
$ |
20,980 |
|
|
$ |
13,204 |
|
|
$ |
38,693 |
|
|
$ |
52,032 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sales of loans as a percentage of loans sold (1) |
|
|
2.22 |
% |
|
|
1.46 |
% |
|
|
2.09 |
% |
|
|
1.46 |
% |
|
|
|
(1) |
|
Includes derivative/fair value, net |
All mortgage loan servicing by the Company is performed by four of its subsidiary banks. Mortgage
servicing rights are carried on the balance sheet at fair value. All loans originated and sold
into the secondary market by its mortgage subsidiary, Wintrust Mortgage Company, have been sold
with mortgage servicing rights released (sold to the investors).
56
Service charges on deposit accounts totaled $3.4 million for the third quarter of 2010, an decrease
of $63,000, or 2%, when compared to the same quarter of 2009. On a year-to-date basis, service
charges on deposit accounts totaled $10.1 million, an increase of $487,000 or 5%, when compared to
the same period of 2009. The majority of deposit service charges relates to customary fees on
overdrawn accounts and returned items. The level of service charges received is substantially
below peer group levels, as management believes in the philosophy of providing high quality service
without encumbering that service with numerous activity charges.
As a result of the new accounting requirements beginning January 1, 2010, loans transferred into
the securitization facility are accounted for as collateral for a secured borrowing rather than a
sale. Therefore, the Company no longer recognizes gains on sales of premium finance receivables for
loans transferred into the securitization. Gains recognized in the third quarter and the first
nine months of 2009 relate to the clean up calls on previous sales of premium finance receivables
commercial to unrelated third parties.
The Company recognized a $9.2 million net gain on available-for-sale securities in the third
quarter of 2010 compared to a net loss of $412,000 in the prior year quarter. For the nine months
ended September 30, 2010 and 2009, the Company recognized net gains of $9.7 million and net losses
of $910,000, respectively. The net gains in the third quarter of 2010 and in the first nine months
of 2009 primarily related to the sale of certain collateralized mortgage obligations. Net gains
(losses) on available-for-sale securities include other-than-temporary impairment (OTTI) charges
recognized in income. In the first quarter of 2009, the Company recognized $2.1 million of OTTI
charges on certain corporate debt investment securities. For the quarter and nine months ended
September 30, 2010, the Company recognized no OTTI charges on corporate debt investment securities.
See Note 5 of the Financial Statements presented under Item 1 of this report for details of OTTI
charges.
The gain on bargain purchases of $6.6 million recognized in the third quarter of 2010 relates to
the FDIC-assisted bank acquisition during the period. On August 6, 2010, the Company announced
that its wholly-owned subsidiary bank, Northbrook, in a FDIC-assisted transaction, had acquired
certain assets and liabilities and the banking operations of Ravenswood. For the nine months ended
September 30, 2010, the Company recognized $44.0 million of bargain purchase gains as a result of
the bank acquisition noted above as well as the acquisition of the life insurance premium finance
receivable portfolio and other FDIC-assisted bank acquisitions in the first six months of 2010. In
the first quarter of 2010, third party consents were received and all remaining funds held in
escrow for the purchase of the life insurance premium finance receivable portfolio were released,
resulting in recognition of the remaining deferred bargain purchase gain.
Trading gains of $712,000 were recognized by the Company in the third quarter of 2010 compared to
gains of $6.2 million in the third quarter of 2009. On a year-to-date basis, trading gains totaled
$5.1 million, a decrease of $18.1 million, or 78%, when compared to the same period of 2009. Lower
trading income in 2010 resulted primarily from realizing larger market value increases in the prior
year on certain collateralized mortgage obligations held in trading.
Other non-interest income for the third quarter of 2010 totaled $4.8 million, compared to $4.0
million in the third quarter of 2009. Fees from certain covered call option transactions increased
by $703,000 in the third quarter of 2010 as compared to the same period in the prior year. On a
year-to-date basis, other non-interest income totaled $13.3 million, an increase of $2.2 million,
or 20% when compared to the same period of 2009. Historically, compression in the net interest
margin was effectively offset, as has consistently been the case, by the Companys covered call
strategy. In 2010 management chose to engage in limited covered call option activity.
57
Non-interest Expense
Non-interest expense for the third quarter of 2010 totaled $99.7 million and increased
approximately $7.2 million, or 8%, from the third quarter 2009. On a year-to-date basis,
non-interest expense for 2010 totaled $276.3 million and increased $22.6 million, or 9%, over the
same period in 2009. The following table presents non-interest expense by category for the periods
presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
|
|
|
September 30 |
|
|
$ |
|
|
% |
|
(Dollars in thousands) |
|
2010 |
|
|
2009 |
|
|
Change |
|
|
Change |
|
Salaries and employee benefits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries |
|
$ |
30,537 |
|
|
$ |
28,189 |
|
|
|
2,348 |
|
|
|
8 |
|
Commissions and bonus |
|
|
17,366 |
|
|
|
11,887 |
|
|
|
5,479 |
|
|
|
46 |
|
Benefits |
|
|
9,111 |
|
|
|
8,012 |
|
|
|
1,099 |
|
|
|
14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total salaries and employee benefits |
|
|
57,014 |
|
|
|
48,088 |
|
|
|
8,926 |
|
|
|
19 |
|
Equipment |
|
|
4,203 |
|
|
|
4,069 |
|
|
|
134 |
|
|
|
3 |
|
Occupancy, net |
|
|
6,254 |
|
|
|
5,884 |
|
|
|
370 |
|
|
|
6 |
|
Data processing |
|
|
3,891 |
|
|
|
3,226 |
|
|
|
665 |
|
|
|
21 |
|
Advertising and marketing |
|
|
1,650 |
|
|
|
1,488 |
|
|
|
162 |
|
|
|
11 |
|
Professional fees |
|
|
4,555 |
|
|
|
4,089 |
|
|
|
466 |
|
|
|
11 |
|
Amortization of other intangible assets |
|
|
701 |
|
|
|
677 |
|
|
|
24 |
|
|
|
4 |
|
FDIC insurance |
|
|
4,642 |
|
|
|
4,334 |
|
|
|
308 |
|
|
|
7 |
|
OREO expenses, net |
|
|
4,767 |
|
|
|
10,243 |
|
|
|
(5,476 |
) |
|
|
(53 |
) |
Other: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commissions - 3rd party brokers |
|
|
979 |
|
|
|
843 |
|
|
|
136 |
|
|
|
16 |
|
Postage |
|
|
1,254 |
|
|
|
1,139 |
|
|
|
115 |
|
|
|
10 |
|
Stationery and supplies |
|
|
812 |
|
|
|
769 |
|
|
|
43 |
|
|
|
6 |
|
Miscellaneous |
|
|
9,001 |
|
|
|
7,714 |
|
|
|
1,287 |
|
|
|
17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other |
|
|
12,046 |
|
|
|
10,465 |
|
|
|
1,581 |
|
|
|
15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Non-Interest Expense |
|
$ |
99,723 |
|
|
$ |
92,563 |
|
|
$ |
7,160 |
|
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
|
|
|
|
|
|
September 30 |
|
|
$ |
|
|
% |
|
(Dollars in thousands) |
|
2010 |
|
|
2009 |
|
|
Change |
|
|
Change |
|
Salaries and employee benefits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries |
|
$ |
88,334 |
|
|
$ |
80,421 |
|
|
|
7,913 |
|
|
|
10 |
|
Commissions and bonus |
|
|
40,064 |
|
|
|
33,751 |
|
|
|
6,313 |
|
|
|
19 |
|
Benefits |
|
|
28,337 |
|
|
|
24,751 |
|
|
|
3,586 |
|
|
|
14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total salaries and employee benefits |
|
|
156,735 |
|
|
|
138,923 |
|
|
|
17,812 |
|
|
|
13 |
|
Equipment |
|
|
12,144 |
|
|
|
12,022 |
|
|
|
122 |
|
|
|
1 |
|
Occupancy, net |
|
|
18,517 |
|
|
|
17,682 |
|
|
|
835 |
|
|
|
5 |
|
Data processing |
|
|
10,967 |
|
|
|
9,578 |
|
|
|
1,389 |
|
|
|
15 |
|
Advertising and marketing |
|
|
4,434 |
|
|
|
4,003 |
|
|
|
431 |
|
|
|
11 |
|
Professional fees |
|
|
11,619 |
|
|
|
9,843 |
|
|
|
1,776 |
|
|
|
18 |
|
Amortization of other intangible assets |
|
|
2,020 |
|
|
|
2,040 |
|
|
|
(20 |
) |
|
|
(1 |
) |
FDIC insurance |
|
|
13,456 |
|
|
|
16,468 |
|
|
|
(3,012 |
) |
|
|
(18 |
) |
OREO expenses, net |
|
|
11,948 |
|
|
|
13,671 |
|
|
|
(1,723 |
) |
|
|
(13 |
) |
Other: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commissions - 3rd party brokers |
|
|
3,037 |
|
|
|
2,338 |
|
|
|
699 |
|
|
|
30 |
|
Postage |
|
|
3,593 |
|
|
|
3,466 |
|
|
|
127 |
|
|
|
4 |
|
Stationery and supplies |
|
|
2,305 |
|
|
|
2,330 |
|
|
|
(25 |
) |
|
|
(1 |
) |
Miscellaneous |
|
|
25,549 |
|
|
|
21,406 |
|
|
|
4,143 |
|
|
|
19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other |
|
|
34,484 |
|
|
|
29,540 |
|
|
|
4,944 |
|
|
|
17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Non-Interest Expense |
|
$ |
276,324 |
|
|
$ |
253,770 |
|
|
$ |
22,554 |
|
|
|
9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits comprised 57% of total non-interest expense in the third quarter of
2010 and 52% in the third quarter of 2009. Salaries and employee benefits expense increased $8.9
million, or 19%, in the third quarter of 2010 compared to the third quarter of 2009 primarily as a
result of a $5.5 million increase in bonus and commissions as variable pay based revenue increased
(mortgage banking and wealth management), a $2.3 million increase in salaries caused by the
additional employees from the three
58
FDIC-assisted transactions and larger staffing as the Company grows and a $1.1 million increase
from employee benefits (primarily health plan related). On a year-to-date basis, salaries and
employee benefits increased $17.8 million, or 13%, compared to the same period in 2009 primarily as
a result of increases in base compensation and higher incentive compensation expenses in 2010.
Equipment expense, which includes furniture, equipment and computer software depreciation and
repairs and maintenance costs, totaled $4.2 million for the third quarter of 2010 representing a 3%
increase compared to the same period of 2009. On a year-to-date basis, equipment expense was $12.1
million in 2010, a increase of $122,000, or 1%, compared to the same period of 2009. These
increases are primarily a result of increased repairs and maintenance costs in 2010 compared to
2009, offset by a decrease in depreciation expense in 2010.
Occupancy expense for the third quarter of 2010 was $6.3 million, an increase of $370,000, or 6%,
compared to the same period of 2009. Occupancy expense includes depreciation on premises, real
estate taxes, utilities, and maintenance of premises, as well as net rent expense for leased
premises. On a year-to-date basis, occupancy expense was $18.5 million in 2010, an increase of
$835,000, or 5%, compared to the same period of 2009. These increases are primarily the result of
rent expense on additional leased premises in 2010.
Data processing expenses totaled $3.9 million in the third quarter of 2010, representing an
increase of $665,000, or 21%, compared to the third quarter of 2009. On a year-to-date basis, data
processing expense was $11.0 million in 2010, an increase of $1.4 million, or 15%, compared to the
same period of 2009. These increases are primarily due to the overall growth of loan and deposit
accounts as well as from additional expenses incurred for FDIC-assisted transactions in 2010.
Professional fees include legal, audit and tax fees, external loan review costs and normal
regulatory exam assessments. Professional fees for the third quarter of 2010 were $4.6 million, an
increase of $466,000, or 11%, compared to the same period in 2009. On a year-to-date basis,
professional fees were $11.6 million in 2010, an increase of $1.8 million, or 18%, compared to the
same period of 2009. These increases are primarily a result of increased legal costs related to
non-performing assets and recent bank acquisitions.
FDIC insurance totaled $4.6 million in the third quarter of 2010, an increase of $308,000 compared
to $4.3 million in the third quarter of 2009. On a year-to-date basis, FDIC insurance was $13.5
million in 2010, a decrease of $3.0 million, or 18%, compared to the same period of 2009. The
increase in FDIC insurance expense in the current quarter is primarily the result of the higher
level of deposits at the Companys banks. The reduction in year-to-date FDIC insurance expense is
primarily the result of the FDIC imposing an industry-wide special assessment on financial
institutions in the prior year second quarter.
OREO expenses include all costs related with obtaining, maintaining and selling of other real
estate owned properties. This expense in the current quarter and in the year-to-period ended
September 30, 2010 decreased $5.5 million and $1.7 million, respectively, compared to the same
periods in the prior year. These decreases in OREO expenses are primarily related to lower
valuation adjustments of properties held in OREO in 2010 compared to 2009.
Miscellaneous expense includes expenses such as ATM expenses, correspondent bank charges,
directors fees, telephone, travel and entertainment, corporate insurance, dues and subscriptions,
problem loan expenses and lending origination costs that are not deferred. Miscellaneous expenses
in the third quarter of 2010 increased $1.3 million, or 17%, compared to the same period in the
prior year. On a year-to-date basis, miscellaneous expense increased $4.1 million, or 19%,
compared to the same period in the prior year. The increase in the current quarter and
year-to-date period ended September 30, 2010 compared to the same periods in the prior year is
primarily attributable to the general growth in the Companys business.
Income Taxes
The Company recorded income tax expense of $12.3 million for the three months ended September 30,
2010, compared to $22.6 million for same period of 2009. Income tax expense was $29.5 million for
the nine months ended September 30, 2010 and for the nine months ended September 30, 2009. The
effective tax rates were 37.9% and 41.4% for the third quarters of 2010 and 2009, respectively and
37.6% and 39.6% for the 2010 and 2009 year-to-date periods, respectively. The higher effective tax
rates in the 2009 quarterly and year-to-date periods as compared to the same periods of 2010, are
primarily a result of a higher level of state taxes accrued in the 2009 period.
Operating Segment Results
As described in Note 13 to the Consolidated Financial Statements, the Companys operations consist
of three primary segments: community banking, specialty finance and wealth management. The
Companys profitability is primarily dependent on the net interest income, provision for credit
losses, non-interest income and operating expenses of its community banking segment. The net
interest income of the community banking segment includes interest income and related interest
costs from portfolio loans that were purchased from the specialty finance segment. For purposes of
internal segment profitability analysis, management reviews the results of its specialty finance
segment as if all loans originated and sold to the community banking segment were retained within
that segments operations.
59
Similarly, for purposes of analyzing the contribution from the wealth management segment,
management allocates a portion of the net interest income earned by the community banking segment
on deposit balances of customers of the wealth management segment to the wealth management segment.
(See wealth management deposits discussion in the Deposits section of this report for more
information on these deposits.)
The community banking segments net interest income for the quarter ended September 30, 2010
totaled $95.4 million as compared to $84.6 million for the same period in 2009, an increase of
$10.8 million, or 13%. On a year-to-date basis, net interest income totaled $280.8 million for the
first nine months of 2010, an increase of $64.7 million, or 30%, as compared to the $216.1 million
recorded last year. These increases are primarily attributable to the three FDIC-assisted bank
acquisitions and the ability to raise interest-bearing deposits at more reasonable rates. The
community banking segments non-interest income totaled $44.3 million in the third quarter of 2010,
an increase of $25.4 million, or 134%, when compared to the third quarter of 2009 total of $18.9
million. On a year-to-date basis, the segments non-interest income totaled $101.1 million in the
first nine months of 2010, an increase of $30.5 million, or 43%, when compared to the first nine
months of 2009 total of $70.6 million. This increase is primarily attributable to the $6.6 million
of bargain purchase gain in the third quarter of 2010 related to the Ravenswood FDIC-assisted bank
acquisition, higher mortgage banking revenues and gain on the sale of certain collateralized
mortgage obligations. The year-to-date increase in non-interest income is primarily attributable
to the $33.1 million of bargain purchase gains related to the three FDIC-assisted bank acquisitions
in 2010, and the gain on the sale of certain collateralized mortgage obligations in the third
quarter of 2010, partially offset by lower mortgage banking revenues. The community banking
segments net income for the quarter ended September 30, 2010 totaled $22.4 million, an increase of
$57.7 million, as compared to a net loss in the third quarter of 2009 of $35.3 million. The
after-tax profit for the nine months ended September 30, 2010, totaled $53.1 million, an increase
of $77.8 million, or 315% as compared to the prior year net loss of $24.7 million. In the third
quarter of 2009, additional provision for loan losses was recorded in the community banking segment
to accommodate for additional net charge-offs and valuation write-downs of other real estate owned.
Net interest income for the specialty finance segment totaled $14.2 million for the quarter ended
September 30, 2010, compared to $33.7 million for the same period in 2009, a decrease of $19.5
million or 58%. On a year-to-date basis, net interest income totaled $43.9 million for the first
nine months of 2010, a decrease of $28.0 million, or 39%, as compared to the $71.9 million recorded
last year. These decreases in net interest income are primarily attributable to interest expense on
$600 million of secured borrowings issued by the Companys securitization entity in 2009.
Beginning on January 1, 2010, all of the assets and liabilities of the securitization entity are
included directly on the Companys Consolidated Statements of Condition. Prior to 2010, these
borrowings were recorded off-balance sheet in a qualified special purpose entity. See the Other
Funding Sources section of this report for more information on these secured borrowings. The
specialty finance segments non-interest income totaled $745,000 for the quarter ended September
30, 2010, compared to $114.3 million for the same period in 2009, a decrease of $113.5 million. The
non-interest income decreased $102.8 million to $12.9 million in the first nine months of 2010 as
compared to the same period in the prior year. These decreases are attributable to the impact of
the life insurance premium finance receivable portfolio bargain purchase gain in the third quarter
of 2009. See Note 3 of the Financial Statements presented under Item 1 of this report for a
discussion of the bargain purchase. The after-tax profit of the specialty finance segment for the
quarter ended September 30, 2010 totaled $5.6 million as compared an after-tax profit of $120.4
million for the quarter ended September 30, 2009. The specialty finance segments after-tax profit
for the nine months ended September 30, 2010 totaled $14.5 million, a decrease of $122.2 million,
or 89%, as compared to the prior year total of $136.7 million. The decrease in net income in 2010
compared to 2009 is a result of the life insurance premium finance receivable bargain purchase gain
in 2009 and, in the second quarter of 2010, fraud perpetrated against a number of premium finance
companies in the industry, including the property and casualty division of our premium financing
subsidiary, which increased the provision for credit losses by $15.7 million.
The wealth management segment reported net interest income of $399,000 for the third quarter of
2010 compared to $1.7 million in the same quarter of 2009. Net interest income is comprised of the
net interest earned on brokerage customer receivables at WHI and an allocation of the net interest
income earned by the community banking segment on non-interest bearing and interest-bearing wealth
management customer account balances on deposit at the banks (wealth management deposits). The
allocated net interest income included in this segments profitability was $264,000 ($151,000 after
tax) in the third quarter of 2010 compared to a profit of $1.6 million ($1.0 million after tax) in
the third quarter of 2009. On a year-to-date basis, net interest income totaled $5.4 million for
the first nine months of 2010, a decrease of $4.0 million or 43%, as compared to the $9.4 million
recorded last year. The allocated net interest income included in this segments profitability was
$5.0 million ($3.1 million after tax) in the first nine months of 2010 and $9.0 million ($5.6
million after tax) in the first nine months of 2009. This segment recorded non-interest income of
$11.0 million for the third quarter of 2010 compared to $10.4 million for the third quarter of
2009. On a year-to-date basis, non-interest income totaled $32.7 million for the first nine months
of 2010, a decrease of $4.7 million or 17%, as compared to the $28.0 million recorded last year.
The wealth management segments net loss totaled $11,000 for the third quarter of 2010 compared to
net income of $647,000 for the third quarter of 2009. This segments after-tax net income for the
nine months ended September 30, 2010, totaled $2.4 million compared to $3.9 million for the nine
months ended September 30, 2009, a decrease of $1.5 million.
FINANCIAL CONDITION
Total assets were $14.1 billion at September 30, 2010, representing an increase of $2.0 billion, or
16%, when compared to September 30, 2009 and approximately $392 million, or 11% on an annualized
basis, when compared to June 30, 2010. Total funding, which includes deposits, all notes and
advances, including the junior subordinated debentures, was $12.5 billion at September 30, 2010,
60
$10.8 billion at September 30, 2009 and $12.2 billion at June 30, 2010. See Notes 5, 6, 10, 11 and
12 of the Financial Statements presented under Item 1 of this report for additional period-end
detail on the Companys interest-earning assets and funding liabilities.
Interest-Earning Assets
The following table sets forth, by category, the composition of average earning asset balances and
the relative percentage of total average earning assets for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
September 30, 2010 |
|
|
June 30, 2010 |
|
|
September 30, 2009 |
|
(Dollars in thousands) |
|
Balance |
|
|
Percent |
|
|
Balance |
|
|
Percent |
|
|
Balance |
|
|
Percent |
|
Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
$ |
1,846,013 |
|
|
|
15 |
% |
|
$ |
1,792,307 |
|
|
|
15 |
% |
|
$ |
1,639,293 |
|
|
|
15 |
% |
Commercial real estate |
|
|
3,347,963 |
|
|
|
26 |
|
|
|
3,341,735 |
|
|
|
27 |
|
|
|
3,431,518 |
|
|
|
32 |
|
Home equity |
|
|
923,333 |
|
|
|
7 |
|
|
|
924,307 |
|
|
|
7 |
|
|
|
918,576 |
|
|
|
9 |
|
Residential real estate (1) |
|
|
604,272 |
|
|
|
5 |
|
|
|
528,540 |
|
|
|
4 |
|
|
|
499,708 |
|
|
|
5 |
|
Premium finance receivables (2) |
|
|
2,722,567 |
|
|
|
21 |
|
|
|
2,580,778 |
|
|
|
21 |
|
|
|
1,938,645 |
|
|
|
18 |
|
Indirect consumer loans |
|
|
62,655 |
|
|
|
1 |
|
|
|
75,709 |
|
|
|
1 |
|
|
|
124,552 |
|
|
|
1 |
|
Other loans |
|
|
96,758 |
|
|
|
1 |
|
|
|
112,657 |
|
|
|
1 |
|
|
|
112,989 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans, net of
unearned income (3)
excluding covered
loans |
|
$ |
9,603,561 |
|
|
|
76 |
% |
|
$ |
9,356,033 |
|
|
|
76 |
% |
|
$ |
8,665,281 |
|
|
|
81 |
% |
Covered loans |
|
|
325,751 |
|
|
|
2 |
|
|
|
210,030 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total average loans (3) |
|
$ |
9,929,312 |
|
|
|
78 |
% |
|
$ |
9,566,063 |
|
|
|
78 |
% |
|
$ |
8,665,281 |
|
|
|
81 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liquidity management assets (4) |
|
$ |
2,802,964 |
|
|
|
22 |
|
|
|
2,613,179 |
|
|
|
21 |
|
|
|
2,078,330 |
|
|
|
19 |
|
Other earning assets (5) |
|
$ |
34,263 |
|
|
|
|
|
|
|
62,874 |
|
|
|
1 |
|
|
|
24,874 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total average earning
assets |
|
$ |
12,766,539 |
|
|
|
100 |
% |
|
$ |
12,242,116 |
|
|
|
100 |
% |
|
$ |
10,768,485 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total average assets |
|
$ |
14,015,757 |
|
|
|
|
|
|
$ |
13,390,537 |
|
|
|
|
|
|
$ |
11,797,520 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total average earning
assets to total average
assets |
|
|
|
|
|
|
91 |
% |
|
|
|
|
|
|
91 |
% |
|
|
|
|
|
|
91 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes mortgage loans held-for-sale |
|
(2) |
|
Includes loans held-for-sale |
|
(3) |
|
Includes loans held-for-sale and non-accrual loans |
|
(4) |
|
Liquidity management assets include available-for-sale securities, other securities,
interest earning deposits with banks, federal funds sold and securities purchased under
resale agreements |
|
(5) |
|
Other earning assets include brokerage customer receivables and trading account
securities |
Total average earning assets for the third quarter of 2010 increased $2.0 billion, or 19%, to $12.8
billion, compared to the third quarter of 2009, and increased
$524 million, or 17% on an annualized
basis, compared to the second quarter of 2010. The ratio of total average earning assets as a
percent of total average assets was 91% at September 30, 2010 and 2009 and June 30, 2010.
Total average loans during the third quarter of 2010 increased $1.3 billion, or 15%, over the
previous year third quarter. Approximately $784 million of this increase relates to the premium
finance receivables portfolio. This increase primarily relates to the purchase of a portfolio of
domestic life insurance premium finance loans in the third and fourth quarters of 2009.
Indirect consumer loans are comprised primarily of automobile loans originated at Hinsdale Bank.
These loans are financed from networks of unaffiliated automobile dealers located throughout the
Chicago metropolitan area with which the Company had established relationships. The risks
associated with the Companys portfolios are diversified among many individual borrowers. Like
other consumer loans, the indirect consumer loans are subject to the Banks established credit
standards. Management regards substantially all of these loans as prime quality loans. In the third
quarter of 2008, the Company, as a result of competitive pricing pressures, ceased the origination
of indirect automobile loans through Hinsdale Bank. However, as a result of current favorable
pricing opportunities coupled with reduced competition in the indirect consumer auto business, the
Company will be re-entering this business with originations through Hinsdale Bank.
Other loans represent a wide variety of personal and consumer loans to individuals as well as
high-yielding short-term accounts receivable financing to clients in the temporary staffing
industry located throughout the United States. Consumer loans generally have shorter terms and
higher interest rates than mortgage loans but generally involve more credit risk due to the type
and nature of the collateral. Additionally, short-term accounts receivable financing may also
involve greater credit risks than generally associated with the loan portfolios of more traditional
community banks depending on the marketability of the collateral. Lower activity from existing
61
clients and slower growth in new customer relationships due to sluggish economic conditions have
led to a decrease in short-term accounts receivable financing in the last few years.
Covered loans represent loans acquired in FDIC-assisted transactions in the second and third
quarters of 2010. Loans comprised the majority of the assets acquired in these acquisitions and
are subject to a loss sharing agreement with the FDIC whereby the FDIC has agreed to reimburse the
Company for 80% of losses incurred on the purchased loans, foreclosed real estate, and certain
other assets. See Note 3 to the financial statements of Item 1 of this report for a discussion of
these acquisitions.
Liquidity management assets include available-for-sale securities, other securities, interest
earning deposits with banks, federal funds sold and securities purchased under resale agreements.
The balances of these assets can fluctuate based on managements ongoing effort to manage liquidity
and for asset liability management purposes.
Other
earning assets include brokerage customer receivables and trading
account securities. In the normal course of business Wayne
Hummer Investments, LLC (WHI) activities involve the execution, settlement, and financing
of various securities transactions. WHIs customer securities activities are transacted on either a
cash or margin basis. In margin transactions, WHI, under an agreement with the out-sourced
securities firm, extends credit to its customers, subject to various regulatory and internal margin
requirements, collateralized by cash and securities in customers accounts. In connection with
these activities, WHI executes and the out-sourced firm clears customer transactions relating to
the sale of securities not yet purchased, substantially all of which are transacted on a margin
basis subject to individual exchange regulations. Such transactions may expose WHI to
off-balance-sheet risk, particularly in volatile trading markets, in the event margin requirements
are not sufficient to fully cover losses that customers may incur. In the event a customer fails to
satisfy its obligations, WHI under an agreement with the outsourced securities firm, may be
required to purchase or sell financial instruments at prevailing market prices to fulfill the
customers obligations. WHI seeks to control the risks associated with its customers