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WTFC > SEC Filings for WTFC > Form 10-Q on 8-Nov-2012All Recent SEC Filings

Show all filings for WINTRUST FINANCIAL CORP

Form 10-Q for WINTRUST FINANCIAL CORP


8-Nov-2012

Quarterly Report


MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of financial condition as of September 30, 2012 compared with December 31, 2011 and September 30, 2011, and the results of operations for the three and nine month periods ended September 30, 2012 and 2011, should be read in conjunction with the unaudited consolidated financial statements and notes contained in this report and the Risk Factors discussed herein and under Item 1A of the Company's 2011 Annual Report on Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties and, as such, future results could differ significantly from management's 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 and Canada 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
Third Quarter Highlights
The Company recorded net income of $32.3 million for the third quarter of 2012 compared to $30.2 million in the third quarter of 2011. The results for the third quarter of 2012 demonstrate continued operating strengths as loans outstanding increased, credit quality measures improved, net interest margin remained stable and our deposit funding base mix continued its beneficial shift toward an aggregate lower cost of funds. The Company also continues to take advantage of the opportunities that have resulted from distressed credit markets
- specifically, a dislocation of assets, banks and people in the overall market. For more information, see "Overview-Recent Acquisition Transactions." The Company increased its loan portfolio, excluding covered loans and loans held for sale, from $10.3 billion at September 30, 2011 and $10.5 billion at December 31, 2011, to $11.5 billion at September 30, 2012. This increase was primarily a result of the Company's commercial banking initiative, growth in the premium finance receivables - commercial portfolio and the acquisition of a Canadian insurance premium funding company in the second quarter of 2012. The Company continues to make new loans, including in the commercial and commercial real estate sector, where opportunities that meet our underwriting standards exist. For more information regarding changes in the Company's 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 the third quarter of 2012, 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 the Company's first quarter 2012 issuance of preferred stock, see "Stock Offerings" below. At September 30, 2012, the Company had over $1.1 billion in overnight liquid funds and interest-bearing deposits with banks. The Company recorded net interest income of $132.6 million in the third quarter of 2012 compared to $118.4 million in the third quarter of 2011. The higher level of net interest income recorded in the third quarter of 2012 compared to the third quarter of 2011 resulted from an increase in average earning assets and the positive re-pricing of retail interest-bearing deposits along with a more favorable deposit mix. Average earning assets for the third quarter of 2012 increased by $1.1 billion compared to the third quarter of 2011. Average earning asset growth over the past 12 months was primarily a result of the $1.7 billion increase in average loans, excluding covered loans, partially offset by a decrease of $518.4 million in average liquidity management assets and a decrease of $82.5 million in the average balance of covered loans. The growth in average total loans, excluding covered loans, was comprised of an increase of $533.6 million in commercial loans, $407.8 million in mortgages held for sale, $260.0 million in commercial real-estate loans, $253.3 million in U.S.-originated commercial premium finance receivables, $246.8 million in Canadian-originated commercial premium finance receivables and $19.7 million in life premium finance receivables. The average earning asset growth of $1.1 billion in the third quarter of 2012 offset a 23 basis point decline in the yield on earning assets, creating an increase in total interest income of $3.3 million in the third quarter of 2012 compared to the third quarter of 2011. Funding for the average earning asset growth of $1.1 billion was provided by an increase in total average interest bearing liabilities of $290.8 million (an increase in interest-bearing deposits of $818.3 million offset by a decrease of $527.5 million of wholesale funding) and an increase of $832.3 million in the average balance of net free funds. A 37 basis point decline in the rate paid on total interest-bearing liabilities partially attributable to the pay off of instruments


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issued by the Company's securitization entity (see Note 8 "Loan Securitization" of the Financial Statements presented under Item 1 of this report for more information) more than offset the increase in average balance of net free funds, creating a $10.9 million reduction in interest expense in the third quarter of 2012 compared to the third quarter of 2011.
Non-interest income totaled $62.9 million in the third quarter of 2012 a decrease of $4.3 million, or 6%, compared to the third quarter of 2011. The decrease in the third quarter of 2012 compared to the third quarter of 2011 was primarily attributable to lower bargain purchase gains and trading losses, partially offset by higher mortgage banking and wealth management revenues. Mortgage banking revenue increased $16.7 million when compared to the third quarter of 2011. The increase in mortgage banking revenue in the current quarter as compared to the third quarter of 2011 resulted primarily from an increase in gains on sales of loans, which was driven by higher origination volumes in the current quarter due to a favorable mortgage interest rate environment. Loans sold to the secondary market were $1.1 billion in the third quarter of 2012 compared to $641.7 million in the third quarter of 2011 (see "Non-Interest Income" section later in this document for further detail).
Non-interest expense totaled $124.5 million in the third quarter of 2012, increasing $18.2 million, or 17%, compared to the third quarter of 2011. The increase compared to the third quarter of 2011 was primarily attributable to a $13.4 million increase in salaries and employee benefits. Salaries and employee benefits expense increased primarily as a result of a $9.1 million increase in bonus and commissions primarily attributable to the increase in variable pay based revenue and the Company's long-term incentive program, a $3.5 million increase in salaries caused by the addition of employees from the various acquisitions and larger staffing as the Company grows, and an $820,000 increase from employee benefits (primarily health plan and payroll taxes related). The Current Economic Environment
The Company's results during the quarter reflect an improvement in credit quality metrics as compared to recent quarters. The Company has continued to be disciplined in its approach to growth and has not sacrificed asset quality. However, the Company's results continue to be impacted by the existing stressed economic environment and depressed real estate valuations that affected both the U.S. economy, generally, and the Company's local markets, specifically. 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's provision for credit losses in the third quarter of 2012
           totaled $18.8 million, a decrease of $10.5 million when compared to
           the third quarter of 2011. Net charge-offs decreased to $17.9 in the
           third quarter of 2012 compared to $26.9 million for the same period in
           2011.



          The Company's allowance for loan losses, excluding covered loans,
           totaled $112.3 million at September 30, 2012, reflecting a decrease of
           $6.4 million, or 5%, when compared to the same period in 2011 and an
           increase of $1.9 million, or 2%, when compared to December 31, 2011.
           At September 30, 2012, approximately $55.1 million, or 49%, of the
           allowance for loan losses was associated with commercial real estate
           loans and another $27.7 million, or 25%, was associated with
           commercial loans. The decrease in the allowance for loan losses,
           excluding covered loans, in the current period compared to the prior
           year period reflects the improvements in credit quality metrics in
           2012.



          The Company has significant exposure to commercial real estate. At
           September 30, 2012, $3.7 billion, or 30%, of our loan portfolio,
           excluding covered loans, was commercial real estate, with more than
           91% located in the greater Chicago metropolitan and southeastern
           Wisconsin market areas. As of September 30, 2012, the commercial real
           estate loan portfolio was comprised of $347.3 million related to land,
           residential and commercial construction, $584.3 million related to
           office buildings, $560.7 million related to retail, $574.3 million
           related to industrial use, $363.4 million related to multi-family and
           $1.2 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
           Company's market area is diverse and covers many communities, each of
           which is impacted differently by economic forces affecting the
           Company's 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 management
           knowledge to analyze and manage the local market conditions at each of
           its banks. As of September 30, 2012, the Company had approximately
           $58.5 million of non-performing commercial real estate loans
           representing approximately 1.6% of the total commercial real estate
           loan portfolio. $16.1 million, or 28%, of the total non-performing
           commercial real estate loan portfolio related


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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, was $117.9 million (of which $58.5 million, or 50%, was related
           to commercial real estate) at September 30, 2012, a decrease of
           approximately $16.1 million compared to September 30, 2011. This
           decrease was a result of non-performing loan settlements and a lower
           level of non-performing loan inflows during the current period.



          The Company's other real estate owned, excluding covered other real
           estate owned, decreased by $29.5 million, to $67.4 million during the
           third quarter of 2012, from $96.9 million at September 30, 2011. The
           decrease in other real estate owned in the third quarter of 2012
           compared to the same period in the prior year is primarily a result of
           disposals during 2012. The $67.4 million of other real estate owned as
           of September 30, 2012 was comprised of $13.9 million of residential
           real estate development property, $45.3 million of commercial real
           estate property and $8.2 million of residential real estate property.

A continuation of real estate valuation and macroeconomic deterioration could result in higher default levels, a significant increase in foreclosure activity, and a material decline in the value of the Company's assets.
During the quarter, Management continued its strategic efforts to aggressively resolve problem loans through liquidation, rather than retention, of loans or real estate acquired as collateral through the foreclosure process. For more information regarding these efforts, see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation-Overview and Strategy" in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2011. The level of loans past due 30 days or more and still accruing interest, excluding covered loans, totaled $149.7 million as of September 30, 2012, increasing $1.8 million compared to the balance of $147.9 million as of December 31, 2011. Fluctuations from period to period in loans that are past due 30 days or more and still accruing interest are primarily the result of timing of payments for loans with near term delinquencies (i.e. 30-89 days past-due).
At September 30, 2012, the Company had a $3.2 million estimated liability on loans expected to be repurchased from loans sold to investors compared to a $7.8 million liability for similar items as of September 30, 2011. The decrease in the liability is a result of negotiated settlements and lower loss estimates on future indemnification requests. 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. For more information regarding requests for indemnification on loans sold, see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation-Overview and Strategy" in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2011.
In addition, during the third quarter of 2012, the Company restructured certain loans in the amount of $9.5 million by providing economic concessions to borrowers to better align the terms of their loans with their current ability to pay. At September 30, 2012, approximately $147.2 million in loans had terms modified, with $128.4 million of these modified loans in accruing status. Trends in Our Three Operating Segments During the Third Quarter Community Banking
Net interest income. Net interest income for the community banking segment totaled $124.7 million for the third quarter of 2012 compared to $123.0 million for the second quarter of 2012 and $109.2 million for the third quarter of 2011. The increase in net interest income in the third quarter of 2012 compared to both the second quarter of 2012 and third quarter of 2011 can be attributed to growth in earning assets, including those obtained in FDIC-assisted acquisitions as well as the ability to price interest-bearing deposits at more reasonable rates.
Funding mix and related costs. Community banking 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 and growth in non-interest bearing deposits as a result of the Company's commercial banking initiative.
Level of non-performing loans and other real estate owned. Given the current economic conditions, problem loan expenses have been at elevated levels in recent years. However, both other real-estate owned and non-performing loans decreased in the third quarter of 2012 as compared to the second quarter of 2012 and third quarter of 2011. The decrease in non-performing loans in the current quarter compared to the second quarter of 2012 and third quarter of 2011 is a result of improvement in credit quality.


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Mortgage banking revenue. Mortgage banking revenue increased $5.5 million when compared to the second quarter of 2012 and increased $16.7 million when compared to the third quarter of 2011. The increase in the current quarter as compared to the second quarter of 2012 and third quarter of 2011 resulted primarily from an increase in gains on sales of loans, which was driven by higher origination volumes in the current quarter due to a favorable mortgage interest rate environment.
For more information regarding our community banking business, please see "Overview and Strategy-Community Banking" under "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation" in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2011. Specialty Finance
Financing of Commercial Insurance Premiums. FIFC originated approximately $936.2 million in commercial insurance premium finance loans in the U.S. in the third quarter of 2012 compared to $1.1 billion in the second quarter of 2012 and $867.7 million in the third quarter of 2011. The decline in originations in the third quarter of 2012 as compared to the second quarter of 2012 is due to seasonality. When compared to the third quarter of 2011, loan originations in the current quarter increased by 8% which reflects improved market conditions as well as a continued focus on establishing new customer relationships. The Company acquired a Canadian insurance premium funding company in the second quarter of 2012. In the third quarter of 2012, the Canadian insurance premium funding company originated approximately $173.3 million in commercial insurance premium finance loans. For more information on this acquisition, see "Overview-Recent Acquisition Transactions." Financing of Life Insurance Premiums. FIFC originated approximately $79.9 million in life insurance premium finance loans in the third quarter of 2012 compared to $96.4 million in the second quarter of 2012, and compared to $91.3 million in the third quarter of 2011. The decline in originations in the third quarter of 2012 from the second quarter of 2012 and third quarter of 2011 was a result of a decrease in the demand for life insurance financing during the current period due in part to the uncertainty regarding prospective tax law changes.
For more information regarding our specialty finance business, please see "Overview and Strategy-Specialty Finance" under "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation" in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2011. Wealth Management Activities
The wealth management segment recorded higher non-interest income in the third quarter of 2012 compared to the third quarter of 2011 primarily as a result of the acquisition of a community bank trust operation as well as continued growth within the existing business. For more information on the trust operation acquisition, see "Overview-Recent Acquisition Transactions." For more information regarding our wealth management business, please see "Overview and Strategy-Wealth Management Activities" under "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation" in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2011.
Recent Acquisition Transactions
FDIC-Assisted Transactions
On September 28, 2012, the Company's wholly-owned subsidiary Old Plank Trail Bank, acquired certain assets and liabilities and the banking operations of First United Bank in an FDIC-assisted transaction. First United Bank operated four locations in Illinois; one in Crete, two in Frankfort and one in Steger, as well as one location in St. John, Indiana and had approximately $328.1 million in total assets and $316.7 million in total deposits as of the acquisition date. Old Plank Trail Bank acquired substantially all of First United Bank's assets at a discount of approximately 9.3% and assumed all of the non-brokered deposits at a premium of 0.60%. In connection with the acquisition, Old Plank Trail Bank entered into a loss sharing agreement with the FDIC whereby Old Plank Trail Bank will share in losses with the FDIC on certain loans and foreclosed real estate at First United Bank.

On July 20, 2012, the Company's wholly-owned subsidiary Hinsdale Bank, assumed the deposits and banking operations of Second Federal in an FDIC-assisted transaction. Second Federal operated three locations in Illinois; two in Chicago (Brighton Park and Little Village neighborhoods) and one in Cicero, and had $168.8 million in total deposits as of the acquisition date. Hinsdale Bank assumed substantially all of Second Federal's non-brokered deposits at a premium of $100,000.

On February 10, 2012, the Company announced that its wholly-owned subsidiary bank, Barrington Bank, acquired certain assets and liabilities and the banking operations of Charter National in an FDIC-assisted transaction. Charter National operated


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two locations: one in Hoffman Estates and one in Hanover Park and had approximately $92.4 million in total assets and $90.1 million in total deposits as of the acquisition date. Barrington Bank acquired substantially all of Charter National's assets at a discount of approximately 4.1% and assumed all of the non-brokered deposits at no premium. In connection with the acquisition, Barrington Bank entered into a loss sharing agreement with the FDIC whereby Barrington Bank will share in losses with the FDIC on certain loans and foreclosed real estate at Charter National.
On July 8, 2011, the Company announced that its wholly-owned subsidiary bank, Northbrook Bank, acquired certain assets and liabilities and the banking operations of First Chicago in an FDIC-assisted transaction. First Chicago operated seven locations in Illinois: three in Chicago, one each in Bloomingdale, Itasca, Norridge and Park Ridge, and had approximately $768.9 million in total assets and $667.8 million in total deposits as of the acquisition date. Northbrook Bank acquired substantially all of First Chicago's assets at a discount of approximately 12% and assumed all of the non-brokered deposits at a premium of approximately 0.5%. In connection with the acquisition, Northbrook Bank entered into a loss sharing agreement with the FDIC whereby Northbrook Bank will share in losses with the FDIC on certain loans and foreclosed real estate at First Chicago.
On March 25, 2011, the Company announced that its wholly-owned subsidiary bank, Advantage National Bank Group ("Advantage"), acquired certain assets and liabilities and the banking operations of The Bank of Commerce ("TBOC") in an FDIC-assisted transaction. TBOC operated one location in Wood Dale, Illlinois and had approximately $174.0 million in total assets and $164.7 million in total deposits as of the acquisition date. Advantage acquired substantially all of TBOC's assets at a discount of approximately 14% and assumed all of the non-brokered deposits at a premium of approximately 0.1%. Advantage subsequently changed its name to Schaumburg Bank and Trust Company, N.A. ("Schaumburg"). In connection with the acquisition, Advantage entered into a loss sharing agreement with the FDIC whereby Advantage will share in losses with the FDIC on certain loans and foreclosed real estate at TBOC.
On February 4, 2011, the Company announced that its wholly-owned subsidiary bank, Northbrook Bank, acquired certain assets and liabilities and the banking operations of Community First Bank-Chicago ("CFBC") in an FDIC-assisted transaction. CFBC operated one location in Chicago and had approximately $50.9 million in total assets and $48.7 million in total deposits as of the acquisition date. Northbrook Bank acquired substantially all of CFBC's assets at a discount of approximately 8% and assumed all of the non-brokered deposits at a premium of approximately 0.5%. In connection with the acquisition, Northbrook Bank entered into a loss sharing agreement with the FDIC whereby Northbrook Bank will share in losses with the FDIC on certain loans and foreclosed real estate at CFBC.
Loans comprise the majority of the assets acquired in FDIC-assisted 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, 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 loss-sharing agreements as "covered loans" and use the term "covered assets" to refer to covered loans, covered OREO and certain other covered assets. At their respective acquisition dates, the Company estimated the fair value of the reimbursable losses, which were approximately $65.1 million, $13.2 million, $273.3 million, $48.9 million and $6.7 million related to the First United Bank, Charter National, First Chicago, TBOC and CFBC acquisitions, respectively. As no loans were acquired by the Company in the acquisition of Second Federal, there is no fair value of reimbursable losses. 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 assets, 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. The FDIC-assisted transactions resulted in bargain purchase gains of $6.6 million for First United Bank, $43,000 for Second Federal, $785,000 for Charter National, $27.4 million for First Chicago, $8.6 million for TBOC and $2.0 million for CFBC, which are shown as a component of non-interest income on the Company's Consolidated Statements of Income. Other Completed Transactions
Acquisition of Macquarie Premium Funding Inc. On June 8, 2012, the Company, through its wholly-owned subsidiary Lake Forest Bank and Trust Company ("Lake Forest Bank"), completed its acquisition of Macquarie Premium Funding Inc., the Canadian insurance premium funding unit of Macquarie Group. Through this transaction, Lake Forest Bank acquired approximately $213 million of gross premium finance receivables outstanding. The Company recorded goodwill of approximately $22 million on the acquisition.


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Acquisition of a Branch of Suburban Bank & Trust . . .

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