WTFC-2014.03.31-10Q
Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 _________________________________________
FORM 10-Q
_________________________________________
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2014
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to
Commission File Number 001-35077
_____________________________________ 
WINTRUST FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter) 
Illinois
36-3873352
(State of incorporation or organization)
(I.R.S. Employer Identification No.)
9700 W. Higgins Road, Suite 800
Rosemont, Illinois 60018
(Address of principal executive offices)

(847) 939-9000
(Registrant’s telephone number, including area code)
______________________________________ 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  þ    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  þ    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer
 
þ
 
 
Accelerated filer
 
¨
Non-accelerated filer
 
¨
(Do not check if a smaller reporting company)
 
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  þ
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Common Stock — no par value, 46,541,444 shares, as of April 30, 2014
 


Table of Contents

TABLE OF CONTENTS
 
 
 
Page
 
PART I. — FINANCIAL INFORMATION
 
ITEM 1.
ITEM 2.
ITEM 3.
ITEM 4.
 
PART II. — OTHER INFORMATION
 
ITEM 1.
ITEM 1A.
ITEM 2.
ITEM 3.
Defaults Upon Senior Securities
NA
ITEM 4.
Mine Safety Disclosures
NA
ITEM 5.
Other Information
NA
ITEM 6.
 


Table of Contents

PART I
ITEM 1. FINANCIAL STATEMENTS
WINTRUST FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
 
(Unaudited)
 
 
 
(Unaudited)
(In thousands, except share data)
March 31,
2014
 
December 31,
2013
 
March 31,
2013
Assets
 
 
 
 
 
Cash and due from banks
$
330,262

 
$
253,408

 
$
199,575

Federal funds sold and securities purchased under resale agreements
12,476

 
10,456

 
13,626

Interest-bearing deposits with other banks
540,964

 
495,574

 
685,302

Available-for-sale securities, at fair value
1,949,697

 
2,176,290

 
1,870,831

Trading account securities
1,068

 
497

 
1,036

Federal Home Loan Bank and Federal Reserve Bank stock
78,524

 
79,261

 
76,601

Brokerage customer receivables
26,884

 
30,953

 
25,614

Mortgage loans held-for-sale
215,231

 
334,327

 
380,922

Loans, net of unearned income, excluding covered loans
13,133,160

 
12,896,602

 
11,900,312

Covered loans
312,478

 
346,431

 
518,661

Total loans
13,445,638

 
13,243,033

 
12,418,973

Less: Allowance for loan losses
92,275

 
96,922

 
110,348

Less: Allowance for covered loan losses
3,447

 
10,092

 
12,272

Net loans
13,349,916

 
13,136,019

 
12,296,353

Premises and equipment, net
531,763

 
531,947

 
504,803

FDIC indemnification asset
60,298

 
85,672

 
170,696

Accrued interest receivable and other assets
549,705

 
569,619

 
485,746

Trade date securities receivable
182,600

 

 

Goodwill
373,725

 
374,547

 
343,632

Other intangible assets
18,050

 
19,213

 
19,510

Total assets
$
18,221,163

 
$
18,097,783

 
$
17,074,247

Liabilities and Shareholders’ Equity
 
 
 
 
 
Deposits:
 
 
 
 
 
Non-interest bearing
$
2,773,922

 
$
2,721,771

 
$
2,243,440

Interest bearing
12,355,123

 
11,947,018

 
11,719,317

Total deposits
15,129,045

 
14,668,789

 
13,962,757

Notes payable
182

 
364

 
31,911

Federal Home Loan Bank advances
387,672

 
417,762

 
414,032

Other borrowings
230,904

 
254,740

 
256,244

Subordinated notes

 

 
15,000

Junior subordinated debentures
249,493

 
249,493

 
249,493

Trade date securities payable

 
303,088

 
1,250

Accrued interest payable and other liabilities
283,724

 
302,958

 
317,872

Total liabilities
16,281,020

 
16,197,194

 
15,248,559

Shareholders’ Equity:
 
 
 
 
 
Preferred stock, no par value; 20,000,000 shares authorized:
 
 
 
 
 
Series A - $1,000 liquidation value; No shares issued and outstanding at March 31, 2014 and December 31, 2013, and 50,000 shares issued and outstanding at March 31, 2013

 

 
49,941

Series C - $1,000 liquidation value; 126,477 shares issued and outstanding at March 31, 2014 and December 31, 2013, and 126,500 shares issued and outstanding at March, 31, 2013
126,477

 
126,477

 
126,500

Common stock, no par value; $1.00 stated value; 100,000,000 shares authorized at March 31, 2014, December 31, 2013, and March 31, 2013; 46,332,213 shares issued at March 31, 2014, 46,181,588 shares issued at December 31, 2013, and 37,272,279 shares issued at March 31, 2013
46,332

 
46,181

 
37,272

Surplus
1,122,233

 
1,117,032

 
1,040,098

Treasury stock, at cost, 73,253 shares at March 31, 2014, 65,005 shares at December 31, 2013, and 258,572 shares at March 31, 2013
(3,380
)
 
(3,000
)
 
(8,187
)
Retained earnings
705,234

 
676,935

 
581,131

Accumulated other comprehensive loss
(56,753
)
 
(63,036
)
 
(1,067
)
Total shareholders’ equity
1,940,143

 
1,900,589

 
1,825,688

Total liabilities and shareholders’ equity
$
18,221,163

 
$
18,097,783

 
$
17,074,247

See accompanying notes to unaudited consolidated financial statements.

1

Table of Contents

WINTRUST FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
 
Three Months Ended
 
March 31,
(In thousands, except per share data)
2014
 
2013
Interest income
 
 
 
Interest and fees on loans
$
147,030

 
$
142,114

Interest bearing deposits with banks
249

 
569

Federal funds sold and securities purchased under resale agreements
4

 
15

Securities
13,114

 
8,752

Trading account securities
9

 
5

Federal Home Loan Bank and Federal Reserve Bank stock
711

 
684

Brokerage customer receivables
209

 
174

Total interest income
161,326

 
152,313

Interest expense
 
 
 
Interest on deposits
11,923

 
14,504

Interest on Federal Home Loan Bank advances
2,643

 
2,764

Interest on notes payable and other borrowings
750

 
1,154

Interest on subordinated notes

 
59

Interest on junior subordinated debentures
2,004

 
3,119

Total interest expense
17,320

 
21,600

Net interest income
144,006

 
130,713

Provision for credit losses
1,880

 
15,687

Net interest income after provision for credit losses
142,126

 
115,026

Non-interest income
 
 
 
Wealth management
16,813

 
14,828

Mortgage banking
16,428

 
30,145

Service charges on deposit accounts
5,346

 
4,793

(Losses) gains on available-for-sale securities, net
(33
)
 
251

Fees from covered call options
1,542

 
1,639

Trading losses, net
(652
)
 
(435
)
Other
6,085

 
6,158

Total non-interest income
45,529

 
57,379

Non-interest expense
 
 
 
Salaries and employee benefits
79,934

 
77,513

Equipment
7,403

 
6,184

Occupancy, net
10,993

 
8,853

Data processing
4,715

 
4,599

Advertising and marketing
2,816

 
2,040

Professional fees
3,454

 
3,221

Amortization of other intangible assets
1,163

 
1,120

FDIC insurance
2,951

 
3,444

OREO expense (income), net
3,976

 
(1,620
)
Other
13,910

 
14,765

Total non-interest expense
131,315

 
120,119

Income before taxes
56,340

 
52,286

Income tax expense
21,840

 
20,234

Net income
$
34,500

 
$
32,052

Preferred stock dividends and discount accretion
1,581

 
2,616

Net income applicable to common shares
$
32,919

 
$
29,436

Net income per common share—Basic
$
0.71

 
$
0.80

Net income per common share—Diluted
$
0.68

 
$
0.65

Cash dividends declared per common share
$
0.10

 
$
0.09

Weighted average common shares outstanding
46,195

 
36,976

Dilutive potential common shares
4,509

 
12,463

Average common shares and dilutive common shares
50,704

 
49,439

See accompanying notes to unaudited consolidated financial statements.

2

Table of Contents

WINTRUST FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
 
 
Three Months Ended
 
March 31,
(In thousands)
2014
 
2013
Net income
$
34,500

 
$
32,052

Unrealized gains (losses) on securities
 
 
 
Before tax
22,526

 
(7,455
)
Tax effect
(8,804
)
 
2,806

Net of tax
13,722

 
(4,649
)
Less: Reclassification of net (losses) gains included in net income
 
 
 
Before tax
(33
)
 
251

Tax effect
13

 
(100
)
Net of tax
(20
)
 
151

Net unrealized gains (losses) on securities
13,742

 
(4,800
)
Unrealized (losses) gains on derivative instruments
 
 
 
Before tax
(98
)
 
1,474

Tax effect
39

 
(586
)
Net unrealized (losses) gains on derivative instruments
(59
)
 
888

Foreign currency translation adjustment
 
 
 
Before tax
(9,959
)
 
(6,304
)
Tax effect
2,559

 
1,438

Net foreign currency translation adjustment
(7,400
)
 
(4,866
)
Total other comprehensive income (loss)
6,283

 
(8,778
)
Comprehensive income
$
40,783

 
$
23,274

See accompanying notes to unaudited consolidated financial statements.

3

Table of Contents

WINTRUST FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)
(In thousands)
Preferred
stock
 
Common
stock
 
Surplus
 
Treasury
stock
 
Retained
earnings
 
Accumulated
other
comprehensive
income (loss)
 
Total
shareholders’
equity
Balance at December 31, 2012
$
176,406

 
$
37,108

 
$
1,036,295

 
$
(7,838
)
 
$
555,023

 
$
7,711

 
$
1,804,705

Net income

 

 

 

 
32,052

 

 
32,052

Other comprehensive loss, net of tax

 

 

 

 

 
(8,778
)
 
(8,778
)
Cash dividends declared on common stock

 

 

 

 
(3,328
)
 

 
(3,328
)
Dividends on preferred stock

 

 

 

 
(2,581
)
 

 
(2,581
)
Accretion on preferred stock
35

 

 

 

 
(35
)
 

 

Stock-based compensation

 

 
2,413

 

 

 

 
2,413

Common stock issued for:
 
 
 
 
 
 
 
 
 
 
 
 
 
Exercise of stock options and warrants

 
9

 
320

 
(214
)
 

 

 
115

Restricted stock awards

 
111

 
90

 
(135
)
 

 

 
66

Employee stock purchase plan

 
13

 
628

 

 

 

 
641

Director compensation plan

 
31

 
352

 

 

 

 
383

Balance at March 31, 2013
$
176,441

 
$
37,272

 
$
1,040,098

 
$
(8,187
)
 
$
581,131

 
$
(1,067
)
 
$
1,825,688

Balance at December 31, 2013
$
126,477

 
$
46,181

 
$
1,117,032

 
$
(3,000
)
 
$
676,935

 
$
(63,036
)
 
$
1,900,589

Net income

 

 

 

 
34,500

 

 
34,500

Other comprehensive income, net of tax

 

 

 

 

 
6,283

 
6,283

Cash dividends declared on common stock

 

 

 

 
(4,620
)
 

 
(4,620
)
Dividends on preferred stock

 

 

 

 
(1,581
)
 

 
(1,581
)
Stock-based compensation

 

 
1,681

 

 

 

 
1,681

Common stock issued for:
 
 
 
 
 
 
 
 
 
 
 
 
 
Exercise of stock options and warrants

 
77

 
2,464

 
(271
)
 

 

 
2,270

Restricted stock awards

 
41

 
111

 
(109
)
 

 

 
43

Employee stock purchase plan

 
13

 
587

 

 

 

 
600

Director compensation plan

 
20

 
358

 

 

 

 
378

Balance at March 31, 2014
$
126,477

 
$
46,332

 
$
1,122,233

 
$
(3,380
)
 
$
705,234

 
$
(56,753
)
 
$
1,940,143

See accompanying notes to unaudited consolidated financial statements.

4

Table of Contents


WINTRUST FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 
Three Months Ended
 
March 31,
(In thousands)
2014
 
2013
Operating Activities:
 
 
 
Net income
$
34,500

 
$
32,052

Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
Provision for credit losses
1,880

 
15,687

Depreciation and amortization
7,753

 
6,782

Stock-based compensation expense
1,681

 
2,413

Tax benefit from stock-based compensation arrangements
3

 
200

Excess tax benefits from stock-based compensation arrangements
(156
)
 
(222
)
Net amortization of premium on securities
233

 
3,424

Mortgage servicing rights fair value change, net
253

 
(273
)
Originations and purchases of mortgage loans held-for-sale
(527,272
)
 
(974,432
)
Proceeds from sales of mortgage loans held-for-sale
658,588

 
1,033,129

Increase in trading securities, net
(571
)
 
(453
)
Net decrease (increase) in brokerage customer receivables
4,069

 
(750
)
Gains on mortgage loans sold
(12,220
)
 
(27,419
)
Losses (gains) on available-for-sale securities, net
33

 
(251
)
Loss on sales of premises and equipment, net
795

 
1

Net loss (gains) on sales and fair value adjustments of other real estate owned
2,460

 
(2,658
)
Decrease in accrued interest receivable and other assets, net
27,584

 
32,068

Decrease in accrued interest payable and other liabilities, net
(37,348
)
 
(19,617
)
Net Cash Provided by Operating Activities
162,265

 
99,681

Investing Activities:
 
 
 
Proceeds from maturities of available-for-sale securities
98,007

 
67,941

Proceeds from sales of available-for-sale securities
14,800

 
41,056

Purchases of available-for-sale securities
(349,979
)
 
(192,379
)
Divestiture of operations

 
(149,100
)
Proceeds from sales of other real estate owned
20,362

 
30,641

Proceeds received from the FDIC related to reimbursements on covered assets
9,669

 
13,932

Net (increase) decrease in interest-bearing deposits with banks
(45,390
)
 
350,441

Net increase in loans
(227,040
)
 
(52,143
)
Purchases of premises and equipment, net
(7,596
)
 
(6,508
)
Net Cash (Used for) Provided by Investing Activities
(487,167
)
 
103,881

Financing Activities:
 
 
 
Increase (decrease) in deposit accounts
460,551

 
(314,618
)
(Decrease) increase in other borrowings, net
(24,018
)
 
11,576

Decrease in Federal Home Loan Bank advances, net
(30,000
)
 

Excess tax benefits from stock-based compensation arrangements
156

 
222

Issuance of common shares resulting from exercise of stock options, employee stock purchase plan and conversion of common stock warrants
3,668

 
1,354

Common stock repurchases
(380
)
 
(349
)
Dividends paid
(6,201
)
 
(3,574
)
Net Cash Provided by (Used for) Financing Activities
403,776

 
(305,389
)
Net Increase (Decrease) in Cash and Cash Equivalents
78,874

 
(101,827
)
Cash and Cash Equivalents at Beginning of Period
263,864

 
315,028

Cash and Cash Equivalents at End of Period
$
342,738

 
$
213,201

See accompanying notes to unaudited consolidated financial statements.

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Table of Contents

WINTRUST FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of Presentation
The consolidated financial statements of Wintrust Financial Corporation and Subsidiaries (“Wintrust” or “the Company”) presented herein are unaudited, but in the opinion of management reflect all necessary adjustments of a normal or recurring nature for a fair presentation of results as of the dates and for the periods covered by the consolidated financial statements.
The accompanying consolidated financial statements are unaudited and do not include information or footnotes necessary for a complete presentation of financial condition, results of operations or cash flows in accordance with U.S. generally accepted accounting principles ("GAAP"). The consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 (“2013 Form 10-K”). Operating results reported for the three-month periods are not necessarily indicative of the results which may be expected for the entire year. Reclassifications of certain prior period amounts have been made to conform to the current period presentation.
The preparation of the financial statements requires management to make estimates, assumptions and judgments that affect the reported amounts of assets and liabilities. Management believes that the estimates made are reasonable, however, changes in estimates may be required if economic or other conditions develop differently from management’s expectations. Certain policies and accounting principles inherently have a greater reliance on the use of estimates, assumptions and judgments and as such have a greater possibility of producing results that could be materially different than originally reported. Management views critical accounting policies to be those which are highly dependent on subjective or complex judgments, estimates and assumptions, and where changes in those estimates and assumptions could have a significant impact on the financial statements. Management currently views the determination of the allowance for loan losses, allowance for covered loan losses and the allowance for losses on lending-related commitments, loans acquired with evidence of credit quality deterioration since origination, estimations of fair value, the valuations required for impairment testing of goodwill, the valuation and accounting for derivative instruments and income taxes as the accounting areas that require the most subjective and complex judgments, and as such could be the most subject to revision as new information becomes available. Descriptions of our significant accounting policies are included in Note 1 - “Summary of Significant Accounting Policies” of the Company’s 2013 Form 10-K.
(2) Recent Accounting Developments

Accounting for Investments in Qualified Affordable Housing Projects

In January 2014, the FASB issued ASU No. 2014-01, “Investments - Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects,” to provide guidance on accounting for investments by a reporting entity in flow-through limited liability entities that invest in affordable housing projects that qualify for the low-income housing tax credit. This ASU permits new accounting treatment, if certain conditions are met, which allows the Company to amortize the initial cost of an investment in proportion to the amount of tax credits and other tax benefits received with recognition of the investment performance in income tax expense. This guidance is effective for fiscal years beginning after December 15, 2014 and is to be applied retrospectively. The Company does not expect this guidance to have a material impact on the Company’s consolidated financial statements.

Repossession of Residential Real Estate Collateral

In January 2014, the FASB issued ASU No. 2014-04, “Receivables - Troubled Debt Restructurings by Creditors (Topic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure,” to address diversity in practice and clarify guidance regarding the accounting for an in-substance repossession or foreclosure of residential real estate collateral. This ASU clarifies that an in-substance repossession or foreclosure occurs upon either the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or the borrower conveying all interest in the residential real estate property to the creditor. Additionally, this ASU requires disclosure of both the amount of foreclosed residential real estate property held by the Company and the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure. This guidance is effective for fiscal years beginning after December 15, 2014. Other than requiring additional disclosures, the Company does not expect adoption of this guidance to have a material impact on the Company’s consolidated financial statements.


6

Table of Contents

(3) Business Combinations

Non-FDIC Assisted Bank Acquisitions

On October 18, 2013, the Company acquired Diamond Bancorp, Inc. ("Diamond"). Diamond was the parent company of Diamond Bank, FSB ("Diamond Bank"), which operated four banking locations in Chicago, Schaumburg, Elmhurst, and Northbrook, Illinois. As part of the transaction, Diamond Bank was merged into North Shore Community Bank & Trust Company ("North Shore Bank"). The Company acquired assets with a fair value of approximately $172.5 million, including approximately $91.7 million of loans, and assumed liabilities with a fair value of approximately $169.1 million, including approximately $140.2 million of deposits. Additionally, the Company recorded goodwill of $8.4 million on the acquisition.

On May 1, 2013, the Company acquired First Lansing Bancorp, Inc. ("FLB"). FLB was the parent company of First National Bank of Illinois ("FNBI"), which operated seven banking locations in the south and southwest suburbs of Chicago, as well as one location in northwest Indiana. As part of this transaction, FNBI was merged into Old Plank Trail Community Bank, N.A. ("Old Plank Trail Bank"). The Company acquired assets with a fair value of approximately $373.4 million, including approximately $123.0 million of loans, and assumed liabilities with a fair value of approximately $334.7 million, including approximately $331.4 million of deposits. Additionally, the Company recorded goodwill of $14.0 million on the acquisition.
See Note 17—Subsequent Events for discussion regarding the Company's announcements in April 2014 of the signing of a definitive agreement to acquire certain branch offices and deposits of Talmer Bank & Trust, and a branch of THE National Bank.

FDIC-Assisted Transactions
Since 2010, the Company acquired the banking operations, including the acquisition of certain assets and the assumption of liabilities, of nine financial institutions in FDIC-assisted transactions. Loans comprise the majority of the assets acquired in nearly all of these FDIC-assisted transactions since 2010, most of which are subject to loss sharing agreements with the FDIC whereby the FDIC has agreed to reimburse the Company for 80% of losses incurred on the purchased loans, other real estate owned (“OREO”), and certain other assets. Additionally, the loss share agreements with the FDIC require the Company to reimburse the FDIC in the event that actual losses on covered assets are lower than the original loss estimates agreed upon with the FDIC with respect of such assets in the loss share agreements. The Company refers to the loans subject to these loss-sharing agreements as “covered loans” and uses the term “covered assets” to refer to covered loans, covered OREO and certain other covered assets. The agreements with the FDIC require that the Company follow certain servicing procedures or risk losing the FDIC reimbursement of covered asset losses.
The loans covered by the loss sharing agreements are classified and presented as covered loans and the estimated reimbursable losses are recorded as an FDIC indemnification asset in the Consolidated Statements of Condition. The Company recorded the acquired assets and liabilities at their estimated fair values at the acquisition date. The fair value for loans reflected expected credit losses at the acquisition date. Therefore, the Company will only recognize a provision for credit losses and charge-offs on the acquired loans for any further credit deterioration subsequent to the acquisition date. See Note 7 — Allowance for Loan Losses, Allowance for Losses on Lending-Related Commitments and Impaired Loans for further discussion of the allowance on covered loans.
The loss share agreements with the FDIC cover realized losses on loans, foreclosed real estate and certain other assets. These loss share assets are measured separately from the loan portfolios because they are not contractually embedded in the loans and are not transferable with the loans should the Company choose to dispose of them. Fair values at the acquisition dates were estimated based on projected cash flows available for loss-share based on the credit adjustments estimated for each loan pool and the loss share percentages. The loss share assets are also separately measured from the related loans and foreclosed real estate and recorded as FDIC indemnification assets on the Consolidated Statements of Condition. Subsequent to the acquisition date, reimbursements received from the FDIC for actual incurred losses will reduce the FDIC indemnification assets. Reductions to expected losses, to the extent such reductions to expected losses are the result of an improvement to the actual or expected cash flows from the covered assets, will also reduce the FDIC indemnification assets. Although these assets are contractual receivables from the FDIC, there are no contractual interest rates. Additions to expected losses will require an increase to the allowance for loan losses and a corresponding increase to the FDIC indemnification assets. The corresponding accretion is recorded as a component of non-interest income on the Consolidated Statements of Income.




7

Table of Contents

The following table summarizes the activity in the Company’s FDIC indemnification asset during the periods indicated:
 
Three Months Ended
(Dollars in thousands)
March 31, 2014
 
March 31, 2013
Balance at beginning of period
$
85,672

 
$
208,160

Additions from acquisitions

 

Additions from reimbursable expenses
1,282

 
5,033

Amortization
(1,603
)
 
(2,468
)
Changes in expected reimbursements from the FDIC for changes in expected credit losses
(15,384
)
 
(26,097
)
Payments received from the FDIC
(9,669
)
 
(13,932
)
Balance at end of period
$
60,298

 
$
170,696

Divestiture of Previous FDIC-Assisted Acquisition
On February 1, 2013, the Company completed the divestiture of the deposits and current banking operations of Second Federal Savings and Loan Association of Chicago ("Second Federal") to an unaffiliated financial institution. Through this transaction, the Company divested approximately $149 million of related deposits.

Mortgage Banking Acquisitions

On October 1, 2013, the Company acquired certain assets and assumed certain liabilities of the mortgage banking business of Surety Financial Services ("Surety") of Sherman Oaks, California. Surety had five offices located in southern California which originated approximately $1.0 billion in the twelve months prior to the acquisition date. The Company recorded goodwill of $9.5 million on the acquisition.

Purchased loans with evidence of credit quality deterioration since origination
Purchased loans acquired in a business combination are recorded at estimated fair value on their purchase date. Expected future cash flows at the purchase date in excess of the fair value of loans are recorded as interest income over the life of the loans if the timing and amount of the future cash flows is reasonably estimable (“accretable yield”). The difference between contractually required payments and the cash flows expected to be collected at acquisition is referred to as the non-accretable difference and represents probable losses in the portfolio.
In determining the acquisition date fair value of purchased impaired loans, and in subsequent accounting, the Company aggregates these purchased loans into pools of loans by common risk characteristics, such as credit risk rating and loan type. Subsequent to the purchase date, increases in cash flows over those expected at the purchase date are recognized as interest income prospectively. Subsequent decreases to the expected cash flows will generally result in a provision for loan losses.
The Company purchased a portfolio of life insurance premium finance receivables in 2009. These purchased life insurance premium finance receivables are valued on an individual basis with the accretable component being recognized into interest income using the effective yield method over the estimated remaining life of the loans. The non-accretable portion is evaluated each quarter and if the loans’ credit related conditions improve, a portion is transferred to the accretable component and accreted over future periods. In the event a specific loan prepays in whole, any remaining accretable and non-accretable discount is recognized in income immediately. If credit related conditions deteriorate, an allowance related to these loans will be established as part of the provision for credit losses.
See Note 6—Loans, for more information on loans acquired with evidence of credit quality deterioration since origination.
(4) Cash and Cash Equivalents
For purposes of the Consolidated Statements of Cash Flows, the Company considers cash and cash equivalents to include cash on hand, cash items in the process of collection, non-interest bearing amounts due from correspondent banks, federal funds sold and securities purchased under resale agreements with original maturities of three months or less.


8

Table of Contents

(5) Available-For-Sale Securities
The following tables are a summary of the available-for-sale securities portfolio as of the dates shown:
 
 
March 31, 2014
(Dollars in thousands)
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
U.S. Treasury
$
354,109

 
$
263

 
$
(14,194
)
 
$
340,178

U.S. Government agencies
874,845

 
3,286

 
(49,856
)
 
828,275

Municipal
175,028

 
3,439

 
(3,167
)
 
175,300

Corporate notes:
 
 
 
 
 
 
 
Financial issuers
129,413

 
2,306

 
(1,735
)
 
129,984

Other
4,986

 
100

 
(3
)
 
5,083

Mortgage-backed: (1)
 
 
 
 
 
 
 
Mortgage-backed securities
371,825

 
3,919

 
(13,188
)
 
362,556

Collateralized mortgage obligations
55,190

 
356

 
(799
)
 
54,747

Other equity securities
50,570

 
3,543

 
(539
)
 
53,574

Total available-for-sale securities
$
2,015,966

 
$
17,212

 
$
(83,481
)
 
$
1,949,697

 
 
December 31, 2013
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
(Dollars in thousands)
 
 
 
U.S. Treasury
$
354,262

 
$
141

 
$
(18,308
)
 
$
336,095

U.S. Government agencies
950,086

 
1,680

 
(56,078
)
 
895,688

Municipal
154,463

 
2,551

 
(4,298
)
 
152,716

Corporate notes:
 
 
 
 
 
 
 
Financial issuers
129,362

 
1,993

 
(2,411
)
 
128,944

Other
5,994

 
105

 
(5
)
 
6,094

Mortgage-backed: (1)
 
 
 
 
 
 
 
Mortgage-backed securities
562,708

 
3,537

 
(18,047
)
 
548,198

Collateralized mortgage obligations
57,711

 
258

 
(942
)
 
57,027

Other equity securities
50,532

 
1,493

 
(497
)
 
51,528

Total available-for-sale securities
$
2,265,118

 
$
11,758

 
$
(100,586
)
 
$
2,176,290

 
 
March 31, 2013
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
(Dollars in thousands)
 
 
 
U.S. Treasury
$
220,215

 
$
190

 
$
(2,760
)
 
$
217,645

U.S. Government agencies
975,386

 
2,960

 
(4,631
)
 
973,715

Municipal
107,947

 
2,628

 
(316
)
 
110,259

Corporate notes:
 
 
 
 
 
 
 
Financial issuers
136,761

 
2,569

 
(2,280
)
 
137,050

Other
11,628

 
195

 

 
11,823

Mortgage-backed: (1)
 
 
 
 
 
 
 
Mortgage-backed securities
294,728

 
7,360

 
(3,194
)
 
298,894

Collateralized mortgage obligations
68,496

 
897

 
(5
)
 
69,388

Other equity securities
52,413

 
745

 
(1,101
)
 
52,057

Total available-for-sale securities
$
1,867,574

 
$
17,544

 
$
(14,287
)
 
$
1,870,831


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

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Table of Contents

The following table presents the portion of the Company’s available-for-sale securities portfolio which has gross unrealized losses, reflecting the length of time that individual securities have been in a continuous unrealized loss position at March 31, 2014:
 
 
Continuous unrealized
losses existing for
less than 12 months
 
Continuous unrealized
losses existing for
greater than 12 months
 
Total
(Dollars in thousands)
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
U.S. Treasury
$

 
$

 
$
185,969

 
$
(14,194
)
 
$
185,969

 
$
(14,194
)
U.S. Government agencies
463,254

 
(42,295
)
 
54,128

 
(7,561
)
 
517,382

 
(49,856
)
Municipal
61,280

 
(2,683
)
 
9,484

 
(484
)
 
70,764

 
(3,167
)
Corporate notes:
 
 
 
 
 
 
 
 
 
 
 
Financial issuers
1,327

 
(10
)
 
57,474

 
(1,725
)
 
58,801

 
(1,735
)
Other
997

 
(3
)
 

 

 
997

 
(3
)
Mortgage-backed:
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities
137,042

 
(1,352
)
 
137,661

 
(11,836
)
 
274,703

 
(13,188
)
Collateralized mortgage obligations
21,045

 
(275
)
 
11,944

 
(524
)
 
32,989

 
(799
)
Other equity securities
8,296

 
(213
)
 
5,674

 
(326
)
 
13,970

 
(539
)
Total
$
693,241

 
$
(46,831
)
 
$
462,334

 
$
(36,650
)
 
$
1,155,575

 
$
(83,481
)

The Company conducts a regular assessment of its investment securities to determine whether securities are other-than-temporarily impaired considering, among other factors, the nature of the securities, credit ratings or financial condition of the issuer, the extent and duration of the unrealized loss, expected cash flows, market conditions and the Company’s ability to hold the securities through the anticipated recovery period.

The Company does not consider securities with unrealized losses at March 31, 2014 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 treasury notes, mortgage-backed securities, and agency bonds. Unrealized losses recognized on treasury notes, mortgage backed securities and agency bonds are the result of increases in yields for similar types of securities which have a longer duration and maturity.
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 March 31,
(Dollars in thousands)
2014
 
2013
Realized gains
$
55

 
$
313

Realized losses
(88
)
 
(62
)
Net realized (losses) gains
$
(33
)
 
$
251

Other than temporary impairment charges

 

(Losses) gains on available-for-sale securities, net
$
(33
)
 
$
251

Proceeds from sales of available-for-sale securities
$
14,800

 
$
41,056




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Table of Contents

The amortized cost and fair value of securities as of March 31, 2014, December 31, 2013 and March 31, 2013, 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:
 
 
March 31, 2014
 
December 31, 2013
 
March 31, 2013
(Dollars in thousands)
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
Due in one year or less
$
203,749

 
$
203,942

 
$
268,847

 
$
269,168

 
$
247,388

 
$
247,836

Due in one to five years
338,130

 
338,980

 
358,108

 
358,357

 
337,431

 
338,633

Due in five to ten years
344,296

 
330,546

 
350,372

 
330,020

 
357,677

 
356,871

Due after ten years
652,206

 
605,352

 
616,840

 
561,992

 
509,441

 
507,152

Mortgage-backed
427,015

 
417,303

 
620,419

 
605,225

 
363,224

 
368,282

Other equity securities
50,570

 
53,574

 
50,532

 
51,528

 
52,413

 
52,057

Total available-for-sale securities
$
2,015,966

 
$
1,949,697

 
$
2,265,118

 
$
2,176,290

 
$
1,867,574

 
$
1,870,831

Securities having a carrying value of $1.2 billion at March 31, 2014, $1.2 billion at December 31, 2013 and $1.1 billion March 31, 2013, were pledged as collateral for public deposits, trust deposits, FHLB advances, securities sold under repurchase agreements and derivatives. At March 31, 2014, there were no securities of a single issuer, other than U.S. Government-sponsored agency securities, which exceeded 10% of shareholders’ equity.

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Table of Contents

(6) Loans
The following table shows the Company’s loan portfolio by category as of the dates shown:
 
March 31,
 
December 31,
 
March 31,
(Dollars in thousands)
2014
 
2013
 
2013
Balance:
 
 
 
 
 
Commercial
$
3,439,197

 
$
3,253,687

 
$
2,872,695

Commercial real-estate
4,262,255

 
4,230,035

 
3,990,465

Home equity
707,748

 
719,137

 
759,218

Residential real-estate
426,769

 
434,992

 
360,652

Premium finance receivables—commercial
2,208,361

 
2,167,565

 
1,997,160

Premium finance receivables—life insurance
1,929,334

 
1,923,698

 
1,753,512

Consumer and other
159,496

 
167,488

 
166,610

Total loans, net of unearned income, excluding covered loans
$
13,133,160

 
$
12,896,602

 
$
11,900,312

Covered loans
312,478

 
346,431

 
518,661

Total loans
$
13,445,638

 
$
13,243,033

 
$
12,418,973

Mix:
 
 
 
 
 
Commercial
26
%
 
25
%
 
23
%
Commercial real-estate
32

 
32

 
32

Home equity
5

 
5

 
6

Residential real-estate
3

 
3

 
3

Premium finance receivables—commercial
17

 
16

 
16

Premium finance receivables—life insurance
14

 
15

 
14

Consumer and other
1

 
1

 
2

Total loans, net of unearned income, excluding covered loans
98
%
 
97
%
 
96
%
Covered loans
2

 
3

 
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 $40.3 million at March 31, 2014, $41.9 million at December 31, 2013 and $40.0 million at March 31, 2013, respectively. Certain life insurance premium finance receivables attributable to the life insurance premium finance loan acquisition in 2009 as well as purchased credit impaired ("PCI") loans acquired with evidence of credit quality deterioration since origination are recorded net of credit discounts. See “Acquired Loan Information at Acquisition” below.
Total loans, excluding PCI loans, include net deferred loan fees and costs and fair value purchase accounting adjustments totaling $(6.2) million at March 31, 2014, $(9.2) million at December 31, 2013 and $10.5 million at March 31, 2013. The net credit balances at March 31, 2014 and December 31, 2013 are primarily the result of purchase accounting adjustments related to the acquisition of FNBI and Diamond during 2013.
The Company’s loan portfolio is generally comprised of loans to consumers and small to medium-sized businesses located within the geographic market areas that the banks serve. The premium finance receivables portfolios are made to customers throughout the United States and Canada. The Company strives to maintain a loan portfolio that is diverse in terms of loan type, industry, borrower and geographic concentrations. Such diversification reduces the exposure to economic downturns that may occur in different segments of the economy or in different industries.
It is the policy of the Company to review each prospective credit in order to determine the appropriateness and, when required, the adequacy of security or collateral necessary to obtain when making a loan. The type of collateral, when required, will vary from liquid assets to real estate. The Company seeks to ensure access to collateral, in the event of default, through adherence to state lending laws and the Company’s credit monitoring procedures.

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Table of Contents

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

The following table presents the unpaid principal balance and carrying value for these acquired loans:
 
 
March 31, 2014
 
December 31, 2013
 
Unpaid
Principal
 
Carrying
 
Unpaid
Principal
 
Carrying
(Dollars in thousands)
Balance
 
Value
 
Balance
 
Value
Bank acquisitions
$
407,157

 
$
303,362

 
$
453,944

 
$
338,517

Life insurance premium finance loans acquisition
424,680

 
413,202

 
437,155

 
423,906

See Note 7—Allowance for Loan Losses, Allowance for Losses on Lending-Related Commitments and Impaired Loans for further discussion regarding the allowance for loan losses associated with PCI loans at March 31, 2014.
Accretable Yield Activity
Changes in expected cash flows may vary from period to period as the Company periodically updates its cash flow model assumptions for loans acquired with evidence of credit quality deterioration since origination. The factors that most significantly affect the estimates of gross cash flows expected to be collected, and accordingly the accretable yield, include changes in the benchmark interest rate indices for variable-rate products and changes in prepayment assumptions and loss estimates. The following table provides activity for the accretable yield of loans acquired with evidence of credit quality deterioration since origination:
 
 
Three Months Ended
March 31, 2014
 
Three Months Ended
March 31, 2013
(Dollars in thousands)
Bank Acquisitions
 
Life Insurance
Premium Finance Loans
 
Bank
Acquisitions
 
Life Insurance
Premium
Finance Loans
Accretable yield, beginning balance
$
107,655

 
$
8,254

 
$
143,224

 
$
13,055

Acquisitions

 

 
(78
)
 

Accretable yield amortized to interest income
(7,770
)
 
(1,771
)
 
(9,577
)
 
(2,019
)
Accretable yield amortized to indemnification asset (1)
(5,648
)
 

 
(8,706
)
 

Reclassification from non-accretable difference (2)
8,580

 

 
5,412

 

(Decreases) increases in interest cash flows due to payments and changes in interest rates
(5,143
)
 
78

 
(8,550
)
 
182

Accretable yield, ending balance (3)
$
97,674

 
$
6,561

 
$
121,725

 
$
11,218

 
(1)
Represents the portion of the current period accreted yield, resulting from lower expected losses, applied to reduce the loss share indemnification asset.
(2)
Reclassification is the result of subsequent increases in expected principal cash flows.
(3)
As of March 31, 2014, the Company estimates that the remaining accretable yield balance to be amortized to the indemnification asset for the bank acquisitions is $28.1 million. The remainder of the accretable yield related to bank acquisitions is expected to be amortized to interest income.

Accretion to interest income from loans acquired in bank acquisitions totaled $7.8 million and $9.6 million in the first quarter of 2014 and 2013, respectively. These amounts include accretion from both covered and non-covered loans, and are included together within interest and fees on loans in the Consolidated Statements of Income.


13

Table of Contents

(7) Allowance for Loan Losses, Allowance for Losses on Lending-Related Commitments and Impaired Loans
The tables below show the aging of the Company’s loan portfolio at March 31, 2014December 31, 2013 and March 31, 2013:
As of March 31, 2014
 
 
90+ days and still accruing
 
60-89 days past due
 
30-59 days past due
 
 
 
 
(Dollars in thousands)
Nonaccrual
 
 
 
 
Current
 
Total Loans
Loan Balances:
 
 
 
 
 
 
 
 
 
 
 
Commercial
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
11,112

 
$
387

 
$
2,235

 
$
16,150

 
$
1,965,425

 
$
1,995,309

Franchise

 

 

 
75

 
221,026

 
221,101

Mortgage warehouse lines of credit

 

 

 

 
60,809

 
60,809

Community Advantage—homeowners association

 

 

 

 
91,414

 
91,414

Aircraft

 

 

 

 
8,840

 
8,840

Asset-based lending
670

 

 

 
10,573

 
729,425

 
740,668

Tax exempt

 

 

 

 
177,973

 
177,973

Leases

 

 

 

 
121,986

 
121,986

Other

 

 

 

 
10,261

 
10,261

PCI - commercial (1)

 
1,079

 

 
865

 
8,892

 
10,836

Total commercial
11,782

 
1,466

 
2,235

 
27,663

 
3,396,051

 
3,439,197

Commercial real-estate:
 
 
 
 
 
 
 
 
 
 
 
Residential construction

 

 
680

 
27

 
35,690

 
36,397

Commercial construction
844

 

 

 

 
150,786

 
151,630

Land
2,405

 

 
2,682

 
3,438

 
99,445

 
107,970

Office
6,970

 

 
1,672

 
8,868

 
633,655

 
651,165

Industrial
6,101

 

 
1,114

 
2,706

 
615,139

 
625,060

Retail
9,540

 

 
217

 
3,089

 
664,584

 
677,430

Multi-family
1,327

 

 

 
3,820

 
570,616

 
575,763

Mixed use and other
6,546

 

 
6,626

 
10,744

 
1,337,320

 
1,361,236

PCI - commercial real-estate (1)

 
21,073

 
2,791

 
6,169

 
45,571

 
75,604

Total commercial real-estate
33,733

 
21,073

 
15,782

 
38,861

 
4,152,806

 
4,262,255

Home equity
7,311

 

 
1,650

 
4,972

 
693,815

 
707,748

Residential real estate
14,385

 

 
946

 
4,889

 
403,474

 
423,694

PCI - residential real estate (1)

 
1,414

 

 
248

 
1,413

 
3,075

Premium finance receivables
 
 
 
 
 
 
 
 
 
 
 
Commercial insurance loans
14,517

 
6,808

 
5,600

 
20,777

 
2,160,659

 
2,208,361

Life insurance loans

 

 

 
4,312

 
1,511,820

 
1,516,132

PCI - life insurance loans (1)

 

 

 

 
413,202

 
413,202

Consumer and other
1,144

 
57

 
213

 
550

 
157,290

 
159,254

PCI - consumer and other (1)

 
48

 

 
20

 
174

 
242

Total loans, net of unearned income, excluding covered loans
$
82,872

 
$
30,866

 
$
26,426

 
$
102,292

 
$
12,890,704

 
$
13,133,160

Covered loans
9,136

 
35,831

 
6,682

 
7,042

 
253,787

 
312,478

Total loans, net of unearned income
$
92,008

 
$
66,697

 
$
33,108

 
$
109,334

 
$
13,144,491

 
$
13,445,638


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

14

Table of Contents

As of December 31, 2013
 
 
90+ days and still accruing
 
60-89 days past due
 
30-59 days past due
 
 
 
 
(Dollars in thousands)
Nonaccrual
 
 
 
 
Current
 
Total Loans
Loan Balances:
 
 
 
 
 
 
 
 
 
 
 
Commercial
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
10,143

 
$

 
$
4,938

 
$
7,404

 
$
1,813,721

 
$
1,836,206

Franchise

 

 
400

 

 
219,983

 
220,383

Mortgage warehouse lines of credit

 

 

 

 
67,470

 
67,470

Community Advantage—homeowners association

 

 

 

 
90,894

 
90,894

Aircraft

 

 

 

 
10,241

 
10,241

Asset-based lending
637

 

 
388

 
1,878

 
732,190

 
735,093

Tax exempt

 

 

 

 
161,239

 
161,239

Leases

 

 

 
788

 
109,043

 
109,831

Other

 

 

 

 
11,147

 
11,147

PCI - commercial (1)

 
274

 
156

 
1,685

 
9,068

 
11,183

Total commercial
10,780

 
274

 
5,882

 
11,755

 
3,224,996

 
3,253,687

Commercial real-estate
 
 
 
 
 
 
 
 
 
 
 
Residential construction
149

 

 

 

 
38,351

 
38,500

Commercial construction
6,969

 

 

 
505

 
129,232

 
136,706

Land
2,814

 

 
4,224

 
619

 
99,128

 
106,785

Office
10,087

 

 
2,265

 
3,862

 
626,027

 
642,241

Industrial
5,654

 

 
585

 
914

 
626,785

 
633,938

Retail
10,862

 

 
837

 
2,435

 
642,125

 
656,259

Multi-family
2,035

 

 

 
348

 
564,154

 
566,537

Mixed use and other
8,088

 
230

 
3,943

 
15,949

 
1,344,244

 
1,372,454

PCI - commercial real-estate (1)

 
18,582

 
3,540

 
5,238

 
49,255

 
76,615

Total commercial real-estate
46,658

 
18,812

 
15,394

 
29,870

 
4,119,301

 
4,230,035

Home equity
10,071

 

 
1,344

 
3,060

 
704,662

 
719,137

Residential real-estate
14,974

 

 
1,689

 
5,032

 
410,430

 
432,125

PCI - residential real-estate (1)

 
1,988

 

 

 
879

 
2,867

Premium finance receivables
 
 
 
 
 
 
 
 
 
 
 
Commercial insurance loans
10,537

 
8,842

 
6,912

 
24,094

</