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17: R3 Consolidated Statements Of Condition (Unaudited) HTML 63K
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27: R13 Loans HTML 129K
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Lending-Related Commitments and Impaired Loans
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30: R16 Deposits HTML 73K
31: R17 Federal Home Loan Bank Advances, Other Borrowings HTML 94K
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42: R28 Loans (Tables) HTML 125K
43: R29 Allowance for Loan Losses, Allowance for Losses on HTML 1.26M
Lending-Related Commitments and Impaired Loans
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59: R45 Investment Securities (Schedule of Realized Gain HTML 50K
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60: R46 Investment Securities (Investments Classified by HTML 89K
Contractual Maturity Date) (Detail)
61: R47 Investment Securities (Narrative) (Detail) HTML 44K
62: R48 Loans (Summary of Loan Portfolio) (Detail) HTML 68K
63: R49 Loans (Schedule of Unpaid Principal Balance And HTML 46K
Carrying Value Of Acquired Loans) (Detail)
64: R50 Loans (Certain Loans Acquired in Transfer Not HTML 51K
Accounted for as Debt Securities Acquired During
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65: R51 Loans (Activity Related to Accretable Yield of HTML 56K
Loans Acquired With Evidence of Credit Quality
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66: R52 Loans (Narrative) (Detail) HTML 47K
67: R53 Allowance for Loan Losses, Allowance for Losses on HTML 227K
Lending-Related Commitments and Impaired Loans
(Schedule of Aging of the Company's Loan
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68: R54 Allowance for Loan Losses, Allowance for Losses on HTML 167K
Lending-Related Commitments and Impaired Loans
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69: R55 Allowance for Loan Losses, Allowance for Losses on HTML 120K
Lending-Related Commitments and Impaired Loans
(Summary of Activity in the Allowance for Credit
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70: R56 Allowance for Loan Losses, Allowance for Losses on HTML 50K
Lending-Related Commitments and Impaired Loans
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71: R57 Allowance for Loan Losses, Allowance for Losses on HTML 51K
Lending-Related Commitments and Impaired Loans
(Summary of Impaired Loans, Including Restructured
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72: R58 Allowance for Loan Losses, Allowance for Losses on HTML 150K
Lending-Related Commitments and Impaired Loans
(Summary of Impaired Loans by Loan Class) (Detail)
73: R59 Allowance for Loan Losses, Allowance for Losses on HTML 126K
Lending-Related Commitments and Impaired Loans
(Summary of the Post-Modification Balance of TDRs)
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74: R60 Allowance for Loan Losses, Allowance for Losses on HTML 83K
Lending-Related Commitments and Impaired Loans
(Summary of TDRs Subsequent Default Under the
Restructured Terms) (Detail)
75: R61 Allowance for Loan Losses, Allowance for Losses on HTML 73K
Lending-Related Commitments and Impaired Loans
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76: R62 Goodwill And Other Intangible Assets (Goodwill HTML 55K
Assets by Business Segment) (Detail)
77: R63 Goodwill And Other Intangible Assets (Summary of HTML 56K
Finite-Lived Intangible Assets) (Detail)
78: R64 Goodwill And Other Intangible Assets (Estimated HTML 50K
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79: R65 Goodwill And Other Intangible Assets (Narrative) HTML 57K
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80: R66 Deposits (Summary of Deposits) (Detail) HTML 65K
81: R67 Federal Home Loan Bank Advances, Other Borrowings HTML 59K
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82: R68 Federal Home Loan Bank Advances, Other Borrowings HTML 62K
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83: R69 Federal Home Loan Bank Advances, Other Borrowings HTML 124K
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84: R70 Junior Subordinated Debentures (Summary of Junior HTML 135K
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85: R71 Junior Subordinated Debentures (Narrative) HTML 74K
(Detail)
86: R72 Segment Information (Summary of Segment HTML 101K
Information) (Detail)
87: R73 Segment Information (Narrative) (Detail) HTML 41K
88: R74 Derivative Financial Instruments (Interest Rate HTML 72K
Cap Derivative Summary) (Detail)
89: R75 Derivative Financial Instruments (Schedule Of Fair HTML 78K
Value Of Derivative Financial Instruments)
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90: R76 Derivative Financial Instruments (Schedule Of Cash HTML 65K
Flow Hedging Instruments) (Detail)
91: R77 Derivative Financial Instruments (Rollforward Of HTML 45K
Amounts In Accumulated Other Comprehensive Income
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92: R78 Derivative Financial Instruments (Derivatives Used HTML 46K
To Hedge Changes In Fair Value Attributable To
Interest Rate Risk) (Detail)
93: R79 Derivative Financial Instruments (Summary Amounts HTML 49K
Included In Consolidated Statement Of Income
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94: R80 Derivative Financial Instruments (Derivative Asset HTML 81K
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95: R81 Derivative Financial Instruments (Narrative) HTML 97K
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96: R82 Fair Values Of Assets And Liabilities (Summary Of HTML 114K
Balances Of Assets And Liabilities Measured At
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97: R83 Fair Values Of Assets And Liabilities (Summary Of HTML 60K
Changes In Level 3 Assets And Liabilities Measured
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98: R84 Fair Values Of Assets And Liabilities (Summary Of HTML 63K
Assets Measured At Fair Value On A Nonrecurring
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99: R85 Fair Values Of Assets and Liabilities (Schedule Of HTML 122K
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100: R86 Fair Values Of Assets And Liabilities (Summary Of HTML 124K
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101: R87 Fair Values Of Assets And Liabilities (Narrative) HTML 108K
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102: R88 Stock-Based Compensation Plans (Weighted Average HTML 45K
Assumptions Used To Determine The Options Fair
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103: R89 Stock-Based Compensation Plans (Summary Of Stock HTML 80K
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104: R90 Stock-Based Compensation Plans (Summary Of Plans' HTML 72K
Restricted Share And Performance-Vested Stock
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105: R91 Stock-Based Compensation Plans (Narrative) HTML 73K
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107: R93 Shareholders' Equity And Earnings Per Share (Other HTML 61K
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110: R96 Regulatory Matters (Schedule Of Adjusted Total HTML 51K
Risk Based Capital Ratios) (Detail)
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(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, 48,560,301 shares, as of April 30, 2016
Federal funds sold and securities purchased under resale agreements
3,820
4,341
4,129
Interest
bearing deposits with banks
817,013
607,782
697,799
Available-for-sale securities, at fair value
770,983
1,716,388
1,721,030
Held-to-maturity
securities, at amortized cost ($924.3 million and $878.1 million fair value at March 31, 2016 and December 31, 2015, respectively)
911,715
884,826
—
Trading account securities
2,116
448
7,811
Federal
Home Loan Bank and Federal Reserve Bank stock
113,222
101,581
92,948
Brokerage customer receivables
28,266
27,631
25,287
Mortgage
loans held-for-sale
314,554
388,038
446,355
Loans, net of unearned income, excluding covered loans
17,446,413
17,118,117
14,953,059
Covered
loans
138,848
148,673
209,694
Total loans
17,585,261
17,266,790
15,162,753
Less:
Allowance for loan losses
110,171
105,400
94,446
Less: Allowance for covered loan losses
2,507
3,026
1,878
Net
loans
17,472,583
17,158,364
15,066,429
Premises and equipment, net
591,608
592,256
559,281
Lease
investments, net
89,337
63,170
383
FDIC indemnification asset
—
—
10,224
Accrued
interest receivable and other assets
647,853
597,099
526,029
Trade date securities receivable
1,008,613
—
488,063
Goodwill
484,280
471,761
420,197
Other
intangible assets
23,725
24,209
18,858
Total assets
$
23,488,168
$
22,909,348
$
20,371,566
Liabilities
and Shareholders’ Equity
Deposits:
Non-interest bearing
$
5,205,410
$
4,836,420
$
3,779,609
Interest
bearing
14,011,661
13,803,214
13,159,160
Total deposits
19,217,071
18,639,634
16,938,769
Federal
Home Loan Bank advances
799,482
853,431
406,839
Other borrowings
253,126
265,785
186,716
Subordinated
notes
138,888
138,861
138,782
Junior subordinated debentures
253,566
268,566
249,493
Trade
date securities payable
—
538
2,929
Accrued interest payable and other liabilities
407,593
390,259
316,964
Total
liabilities
21,069,726
20,557,074
18,240,492
Shareholders’ Equity:
Preferred
stock, no par value; 20,000,000 shares authorized:
Series C - $1,000 liquidation value; 126,257 shares issued and outstanding at March 31, 2016, 126,287 shares issued and outstanding at December 31, 2015, and 126,427 shares issued and outstanding at March 31, 2015
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, 2015 (“2015 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 the Company's significant accounting policies are included in Note 1 - “Summary of
Significant Accounting Policies” of the 2015 Form 10-K.
(2) Recent Accounting Developments
Revenue Recognition
In May 2014, the FASB issued ASU No. 2014-09, which created "Revenue from Contracts with Customers (Topic 606), to clarify the principles for recognizing revenue and develop a common revenue standard for customer contracts. This ASU provides guidance regarding
how an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASU also added a new subtopic to the codification, ASC 340-40, "Other Assets and Deferred Costs: Contracts with Customers" to provide guidance on costs related to obtaining and fulfilling a customer contract. Furthermore, the new standard requires disclosure of sufficient information to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. At the time
ASU No. 2014-09 was issued, the guidance was effective for fiscal years beginning after December 15, 2016. In July 2015, the FASB approved a deferral of the effective date by one year, which would result in the guidance becoming effective for fiscal years beginning after December 15, 2017.
In March 2016, the FASB issued ASU No. 2016-08, "Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)", to clarify the implementation guidance within ASU No. 2014-09 surrounding principal versus agent considerations and its impact on revenue recognition. Additionally, in April 2016, the FASB issued ASU No. 2016-10, "Revenue
from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing", to also clarify the implementation guidance within ASU No. 2014-09 related to these two topics. Like ASU No. 2014-09, this guidance is effective for fiscal years beginning after December 15, 2017.
The Company is currently evaluating the impact of adopting this new guidance on the consolidated financial statements.
Extraordinary and Unusual Items
In January 2015, the FASB
issued ASU No. 2015-01, “Income Statement - Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items,” to eliminate the concept of
extraordinary items related to separately classifying, presenting and disclosing certain events and transactions that meet the criteria for that concept. This guidance was effective for fiscal years beginning after December 15, 2015 and did not have a material impact on the Company’s consolidated financial
statements.
Consolidation
In February 2015, the FASB issued ASU No. 2015-02, “Consolidation (Topic 810): Amendments to the Consolidation Analysis,” which changes the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. This guidance was effective for fiscal years beginning after December 15, 2015 and did not have a material impact on the Company's consolidated financial statements.
Debt Issuance Costs
In
April 2015, the FASB issued ASU No. 2015-03, "Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs," to clarify the presentation of debt issuance costs within the balance sheet. This ASU requires that an entity present debt issuance costs related to a recognized debt liability on the balance sheet as a direct deduction from the carrying amount of that debt liability, not as a separate asset. The ASU does not affect the current guidance for the recognition and measurement for these debt issuance costs. Additionally, in August 2015, the FASB issued ASU No. 2015-15, "Interest - Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements (Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting," to further clarify the presentation of
debt issuance costs related to line-of-credit agreements. This ASU states the SEC would not object to an entity deferring and presenting debt issuance costs related to line-of-credit agreements as an asset on the balance sheet and subsequently amortizing these costs ratably over the term of the agreement, regardless of any outstanding borrowing under the line-of-credit agreement. This guidance was effective for fiscal years beginning after December 15, 2015 and was applied retrospectively within the Company’s consolidated financial statements. For December 31, 2015 and March 31, 2015, the Company reclassified as a direct reduction to the related debt
balance $7.8 million and $10.7 million, respectively, of debt issuance costs that were previously presented as accrued interest receivable and other assets on the Consolidated Statements of Condition.
Business Combinations
In September 2015, the FASB issued ASU No. 2015-16, "Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments," to simplify the accounting for subsequent adjustments made to provisional amounts recognized at the acquisition date of a business combination. This ASU eliminates the requirement to retrospectively account for these adjustment for all prior periods impacted. The acquirer is required to recognize these adjustments identified
during the measurement period in the reporting period in which the adjustment amount is determined. Additionally, the ASU requires an entity to present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current-period earnings that would have been recorded in previous reporting periods if the adjustment had been recognized at the acquisition date. This guidance was effective for fiscal years beginning after December 15, 2015 and did not have a material impact on the Company’s consolidated financial statements.
Financial Instruments
In January 2016, the FASB issued ASU No. 2016-01, "Financial
Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities," to improve the accounting for financial instruments. This ASU requires equity investments with readily determinable fair values to be measured at fair value with changes recognized in net income regardless of classification. For equity investments without a readily determinable fair value, the value of the investment would be measured at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer instead of fair value, unless a qualitative assessment indicates impairment. Additionally, this ASU requires the separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements. This guidance is effective for
fiscal years beginning after December 15, 2017 and is to be applied prospectively with a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The Company is currently evaluating the impact of adopting this new guidance on the consolidated financial statements.
Leases
In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)," to improve transparency and comparability across entities regarding leasing arrangements. This ASU requires the recognition of a separate lease liability representing the required lease payments over the lease term and a separate lease asset representing the
right to use the underlying asset during the same
lease term. Additionally, this ASU provides clarification regarding the identification of certain components of contracts that would represent a lease as well as requires additional disclosures to the notes of the financial statements. This guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, and is to be applied under a modified retrospective approach, including the option to apply certain
practical expedients. The Company is currently evaluating the impact of adopting this new guidance on the consolidated financial statements.
Derivatives
In March 2016, the FASB issued ASU No. 2016-05, "Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships," to clarify guidance surrounding the effect on an existing hedging relationship of a change in the counterparty to a derivative instrument that has been designated as a hedging instrument. This ASU states that a change in counterparty to such derivative instrument does not, in and of
itself, require dedesignation of that hedging relationship provided that all other hedge accounting criteria continue to be met. This guidance is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years, and is to be applied either under a prospective or a modified retrospective approach. The Company does not expect this guidance to have a material impact on the Company's consolidated financial statements.
Equity Method Investments
In March 2016, the FASB issued ASU No. 2016-07, "Investments - Equity Method
and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting," to simplify the accounting for investments qualifying for the use of the equity method of accounting. This ASU eliminates the requirement to retroactively adopt the equity method of accounting when an investment qualifies for such method as a result of an increase in the level of ownership interest or degree of influence. The ASU requires the equity method investor add the cost of acquiring the additional interest to the current basis and adopt the equity method of accounting as of that date going forward. Additionally, for available-for-sale equity securities that become qualified for equity method accounting, the ASU requires the related unrealized holding gains or losses included in accumulated other comprehensive income be recognized in earnings at the date the investment qualifies for such accounting. This guidance is effective for fiscal years beginning after December
15, 2016, including interim periods within those fiscal years, and is to be applied under a prospective approach. The Company does not expect this guidance to have a material impact on the Company's consolidated financial statements.
Employee Share-Based Compensation
In March 2016, the FASB issued ASU No. 2016-09, "Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting," to simplify the accounting for several areas of share-based payment transactions. This includes the recognition of all excess tax benefits and tax deficiencies as income tax expense instead
of surplus, the classification on the statement of cash flows of excess tax benefits and taxes paid when the employer withholds shares for tax-withholding purposes. Additionally, related to forfeitures, the ASU provides the option to estimate the number of awards that are expected to vest or account for forfeitures as they occur. This guidance is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years, and is to be applied under a modified retrospective and retrospective approach based upon the specific amendment of the ASU. The Company is currently evaluating the impact of adopting this new guidance on the consolidated financial statements.
(3)
Business Combinations
Non-FDIC Assisted Bank Acquisitions
On March 31, 2016, the Company acquired Generations Bancorp, Inc ("Generations"). Generations was the parent company of Foundations Bank, which had one banking location in Pewaukee, Wisconsin. Foundations Bank was merged into the Company's wholly-owned subsidiary Town Bank. The Company acquired assets
with a fair value of approximately $134.2 million, including approximately $67.5 million of loans, and assumed deposits with a fair value of approximately $100.1 million. Additionally, the Company recorded goodwill of $11.3 million on the acquisition. Certain purchase price allocations for Generations are preliminary. The final determination of the amounts is not expected to result in material changes to recorded amounts.
On July 24, 2015, the
Company acquired Community Financial Shares, Inc ("CFIS"). CFIS was the parent company of Community Bank - Wheaton/Glen Ellyn ("CBWGE"), which had four banking locations. CBWGE was merged into the Company's wholly-owned subsidiary Wheaton Bank & Trust Company ("Wheaton Bank"). The Company acquired assets with a fair value of approximately $350.5 million, including approximately $159.5 million of loans, and assumed deposits with a fair value of approximately $290.0 million. Additionally, the Company recorded
goodwill of $27.6 million on the acquisition.
On July 17, 2015, the Company acquired Suburban Illinois Bancorp, Inc. ("Suburban"). Suburban was the parent company of Suburban Bank & Trust Company ("SBT"), which operated ten banking locations. SBT was merged into the
Company's wholly-owned subsidiary Hinsdale Bank & Trust Company ("Hinsdale Bank"). The Company acquired assets with a fair value of approximately $494.7 million, including approximately $257.8 million of loans, and assumed deposits with a fair value of approximately $416.7 million. Additionally, the Company recorded goodwill of $18.6 million on the acquisition.
On July 1, 2015, the
Company, through its wholly-owned subsidiary Wintrust Bank, acquired North Bank, which had two banking locations. The Company acquired assets with a fair value of $117.9 million, including approximately $51.6 million of loans, and assumed deposits with a fair value of approximately $101.0 million. Additionally, the Company recorded goodwill of $6.7 million on the acquisition.
On January 16, 2015,
the Company acquired Delavan Bancshares, Inc. ("Delavan"). Delavan was the parent company of Community Bank CBD, which had four banking locations. Community Bank CBD was merged into the Company's wholly-owned subsidiary Town Bank. The Company acquired assets with a fair value of approximately $224.1 million, including approximately $128.0 million of loans, and assumed liabilities with a fair value of approximately $186.4 million, including approximately $170.2 million of deposits.
Additionally the Company recorded goodwill of $16.8 million on the acquisition.
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, 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, clawback provisions within these 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 and require the Company to record loss share assets and liabilities that 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 and liabilities are recorded as FDIC indemnification assets and other liabilities, respectively, 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 and, if necessary, increase any loss share liability when necessary reductions exceed the current value of the FDIC indemnification assets. In accordance with the clawback provision noted above, the Company may be required to reimburse the FDIC when actual losses are less than certain thresholds established for each lose
share agreement. The balance of these estimated reimbursements in accordance with clawback provisions and any related amortization are adjusted periodically for changes in the expected losses on covered assets. On the Consolidated Statements of Condition, estimated reimbursements from clawback provisions are recorded as a reduction to the FDIC indemnification asset or, if necessary, an increase to the loss share liability, which is included within accrued interest payable and other liabilities. Although these assets are contractual receivables from the FDIC and these liabilities are contractual payables to the FDIC, there are no contractual interest rates. Additional expected losses, to the extent such expected losses result in recognition of an allowance for covered loan losses, will increase the FDIC indemnification asset. The corresponding amortization is recorded as a component of non-interest income on the Consolidated Statements of Income.
Changes in expected reimbursements from the FDIC for changes in expected credit losses
(3,547
)
(3,993
)
(Payments
received from) provided to the FDIC
(363
)
2,056
Balance at end of period
$
(10,029
)
$
10,224
Purchased
Credit Impaired ("PCI") Loans
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 PCI 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 additional information on PCI loans.
(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.
In the fourth quarter of 2015, the Company transferred $862.7 million of investment securities with an unrealized loss of $14.4 million from the available-for-sale classification to the held-to-maturity classification. No investment securities
were transferred from the available-for-sale classification to the held-to-maturity classification in the first quarter of 2016.
The following table presents the portion of the Company’s available-for-sale and held-to-maturity securities portfolios which has gross unrealized losses, reflecting the length of time that individual securities have been in a continuous unrealized loss position at March 31, 2016:
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
Available-for-sale securities
U.S.
Treasury
$
75,049
$
(38
)
$
—
$
—
$
75,049
$
(38
)
U.S.
Government agencies
13,982
(10
)
1,833
(2
)
15,815
(12
)
Municipal
18,399
(40
)
6,977
(184
)
25,376
(224
)
Corporate
notes:
Financial issuers
22,952
(237
)
34,367
(1,593
)
57,319
(1,830
)
Other
—
—
—
—
—
—
Mortgage-backed:
Mortgage-backed
securities
2,038
(3
)
122,371
(1,897
)
124,409
(1,900
)
Collateralized
mortgage obligations
4,880
(42
)
7,803
(156
)
12,683
(198
)
Equity
securities
3,964
(55
)
8,599
(313
)
12,563
(368
)
Total
available-for-sale securities
$
141,264
$
(425
)
$
181,950
$
(4,145
)
$
323,214
$
(4,570
)
Held-to-maturity
securities
U.S. Government agencies
$
208,405
$
(1,455
)
$
—
$
—
$
208,405
$
(1,455
)
Municipal
15,919
(125
)
4,917
(32
)
20,836
(157
)
Total
held-to-maturity securities
$
224,324
$
(1,580
)
$
4,917
$
(32
)
$
229,241
$
(1,612
)
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, 2016 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 notes and mortgage-backed securities. Unrealized losses recognized on corporate notes and mortgage-backed securities are the result of increases in yields for similar types of securities.
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)
2016
2015
Realized gains
$
2,550
$
553
Realized
losses
(1,225
)
(29
)
Net realized gains
$
1,325
$
524
Other
than temporary impairment charges
—
—
Gains on available-for-sale securities, net
$
1,325
$
524
Proceeds
from sales of available-for-sale securities
The amortized cost and fair value of securities as of March 31,
2016, December 31, 2015 and March 31, 2015, 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:
Securities
having a fair value of $1.2 billion at March 31, 2016 as well as securities having a carrying value of $1.2 billion and $1.1 billion at December 31, 2015 and March 31, 2015, respectively, were pledged as collateral for public deposits, trust deposits, FHLB advances, securities sold under repurchase agreements and derivatives. At March 31, 2016, there were no securities of a single issuer, other than U.S.
Government-sponsored agency securities, which exceeded 10% of shareholders’ equity.
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)
2016
2015
2015
Balance:
Commercial
$
4,890,246
$
4,713,909
$
4,211,932
Commercial
real estate
5,737,959
5,529,289
4,710,486
Home equity
774,342
784,675
709,283
Residential
real estate
626,043
607,451
495,925
Premium finance receivables—commercial
2,320,987
2,374,921
2,319,623
Premium
finance receivables—life insurance
2,976,934
2,961,496
2,375,654
Consumer and other
119,902
146,376
130,156
Total
loans, net of unearned income, excluding covered loans
$
17,446,413
$
17,118,117
$
14,953,059
Covered loans
138,848
148,673
209,694
Total
loans
$
17,585,261
$
17,266,790
$
15,162,753
Mix:
Commercial
28
%
27
%
28
%
Commercial
real estate
32
32
31
Home equity
4
5
5
Residential
real estate
4
3
3
Premium finance receivables—commercial
13
14
15
Premium
finance receivables—life insurance
17
17
16
Consumer and other
1
1
1
Total
loans, net of unearned income, excluding covered loans
99
%
99
%
99
%
Covered loans
1
1
1
Total
loans
100
%
100
%
100
%
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.
Certain premium finance receivables are recorded net of unearned income. The unearned income portions of such premium finance receivables were $56.9 million at March 31, 2016, $56.7 million at December 31,
2015 and $48.1 million at March 31, 2015, respectively. Certain life insurance premium finance receivables attributable to the life insurance premium finance loan acquisition in 2009 as well as PCI loans 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 $(8.9) million at March 31, 2016, $(9.2) million at December 31,
2015 and $(3.7) million at March 31, 2015. The net credit balance at these dates, is primarily the result of purchase accounting adjustments related to acquisitions in 2016 and 2015.
It is the policy of the Company to review each prospective credit in order to determine the appropriateness and, when required, the adequacy of security or collateral necessary to obtain when making a loan. The type of collateral, when required, will vary from liquid assets to real estate. The Company seeks to ensure access to collateral, in the event of default,
through adherence to state lending laws and the Company’s credit monitoring procedures.
Acquired Loan Information at Acquisition—PCI Loans
As part of our previous acquisitions, we acquired loans for which there was evidence of credit quality deterioration since origination (PCI loans) 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:
The following table
provides estimated details as of the date of acquisition on loans acquired in 2016 with evidence of credit quality deterioration since origination:
(Dollars in thousands)
Foundations
Contractually required payments including interest
$
19,350
Less: Nonaccretable difference
3,640
Cash
flows expected to be collected (1)
$
15,710
Less: Accretable yield
1,141
Fair value of PCI loans acquired
$
14,569
(1) Represents
undiscounted expected principal and interest cash at acquisition.
See Note 7—Allowance for Loan Losses, Allowance for Losses on Lending-Related Commitments and Impaired Loans for further discussion regarding the allowance for loan losses associated with PCI loans at March 31, 2016.
Accretable Yield Activity - PCI Loans
Changes in expected cash flows may vary from period to period as the Company periodically updates its cash flow model assumptions for PCI loans. 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 PCI loans:
Accretable yield amortized to indemnification asset (1)
(2,171
)
(3,576
)
Reclassification
from non-accretable difference (2)
4,193
1,103
Decreases in interest cash flows due to payments and changes in interest rates
(2,390
)
(1,224
)
Accretable
yield, ending balance (3)
$
59,218
$
70,198
(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, 2016, the Company estimates that the remaining accretable yield balance to be amortized to the indemnification asset for the bank acquisitions is $4.8 million. The remainder of the accretable yield related to bank acquisitions is expected to be amortized to interest income.
Accretion to interest income accounted
for under ASC 310-30 totaled $5.5 million and $6.1 million in the first quarter of 2016 and 2015, respectively. These amounts include accretion from both covered and non-covered loans, and are both included within interest and fees on loans in the Consolidated Statements of Income.
Total
loans, net of unearned income, excluding covered loans
$
73,072
$
34,537
$
42,103
$
104,122
$
16,864,283
$
17,118,117
Covered
loans
5,878
7,335
703
5,774
128,983
148,673
Total
loans, net of unearned income
$
78,950
$
41,872
$
42,806
$
109,896
$
16,993,266
$
17,266,790
(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.
Total
loans, net of unearned income, excluding covered loans
$
73,619
$
27,151
$
26,211
$
88,335
$
14,737,743
$
14,953,059
Covered
loans
7,079
16,434
558
6,128
179,495
209,694
Total
loans, net of unearned income
$
80,698
$
43,585
$
26,769
$
94,463
$
14,917,238
$
15,162,753
(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.
The Company's ability to manage credit risk depends in large part on our ability to properly identify and manage problem loans. To do so, the Company operates a credit risk rating system under which our credit management personnel assign a credit risk rating (1 to 10 rating) to each loan at the time of origination and review loans on a regular basis.
Each loan officer
is responsible for monitoring his or her loan portfolio, recommending a credit risk rating for each loan in his or her portfolio and ensuring the credit risk ratings are appropriate. These credit risk ratings are then ratified by the bank’s chief credit officer and/or concurrence credit officer. Credit risk ratings are determined by evaluating a number of factors including: a borrower’s financial strength, cash flow coverage, collateral protection and guarantees.
The Company’s Problem Loan Reporting system automatically includes all loans with credit risk ratings of 6 through 9. This system is designed to provide an on-going detailed tracking mechanism for each problem loan. Once management determines that a loan has deteriorated to a point where it has a credit risk rating of 6 or worse, the
Company’s Managed Asset Division performs an overall credit and collateral review. As part of this review, all underlying collateral is identified and the valuation methodology is analyzed and tracked. As a result of this initial review by the Company’s Managed Asset Division, the credit risk rating is reviewed and a portion of the outstanding loan balance may be deemed uncollectible or an impairment reserve may be established. The Company’s impairment analysis utilizes an independent re-appraisal of the collateral (unless such a third-party evaluation is not possible due to the unique nature of the collateral, such as a closely-held business or thinly traded securities). In the case of commercial real estate collateral, an independent third party appraisal is ordered by the
Company’s Real Estate Services Group to determine if there has been any change in the underlying collateral value. These independent appraisals are reviewed by the Real Estate Services Group and sometimes by independent third party valuation experts and may be adjusted depending upon market conditions.
Through the credit risk rating process, loans are reviewed to determine if they are performing in accordance with the original contractual terms. If the borrower has failed to comply with the original contractual terms, further action may be required by the Company, including a downgrade in the credit risk rating, movement to non-accrual status, a charge-off or the establishment of a specific impairment reserve. If we determine that a loan amount, or portion thereof, is uncollectible, the
loan’s credit risk rating is immediately downgraded to an 8 or 9 and the uncollectible amount is charged-off. Any loan that has a partial charge-off continues to be assigned a credit risk rating of an 8 or 9 for the duration of time that a balance remains outstanding. The Company undertakes a thorough and ongoing analysis to determine if additional impairment and/or charge-offs are appropriate and to begin a workout plan for the credit to minimize actual losses.
If, based on current information and events, it is probable
that the Company will be unable to collect all amounts due to it according to the contractual terms of the loan agreement, a specific impairment reserve is established. In determining the appropriate charge-off for collateral-dependent loans, the Company considers the results of appraisals for the associated collateral.
Non-performing loans include all non-accrual loans (8 and 9 risk ratings) as well as loans 90 days past due and still accruing interest, excluding PCI and covered loans. The remainder of the portfolio is considered performing under the contractual terms of the loan agreement. The following table presents the recorded investment based on performance of loans by class, excluding covered loans,
per the most recent analysis at March 31, 2016, December 31, 2015 and March 31, 2015:
Total
loans, net of unearned income, excluding covered loans
$
17,356,914
$
17,034,060
$
14,871,287
$
89,499
$
84,057
$
81,772
$
17,446,413
$
17,118,117
$
14,953,059
(1)
PCI
loans represent loans acquired with evidence of credit quality deterioration since origination, in accordance with ASC 310-30. See Note 6 - Loans for further discussion of these purchased loans.
A summary of activity in the allowance for credit losses by loan portfolio (excluding covered loans) for the three months ended March 31, 2016 and 2015 is as follows:
A summary of activity in the allowance for covered loan losses for the three months ended March 31, 2016 and 2015 is as follows:
Three Months Ended
March 31,
March
31,
(Dollars in thousands)
2016
2015
Balance at beginning of period
$
3,026
$
2,131
Provision for
covered loan losses before benefit attributable to FDIC loss share agreements
(1,946
)
(529
)
Benefit attributable to FDIC loss share agreements
1,557
423
Net
provision for covered loan losses
(389
)
(106
)
Decrease in FDIC indemnification asset
(1,557
)
(423
)
Loans charged-off
(230
)
(237
)
Recoveries
of loans charged-off
1,657
513
Net recoveries (charge-offs)
1,427
276
Balance at end of period
$
2,507
$
1,878
In
conjunction with FDIC-assisted transactions, the Company entered into loss share agreements with the FDIC. Additional expected losses, to the extent such expected losses result in the recognition of an allowance for loan losses, will increase the FDIC loss share asset or reduce any FDIC loss share liability. The allowance for loan losses for loans acquired in FDIC-assisted transactions is determined without giving consideration to the amounts recoverable through loss share agreements (since the loss share agreements are separately accounted for and thus presented “gross” on the balance sheet). On the Consolidated Statements of Income, the provision for credit losses is reported net of changes in the amount recoverable under the loss share agreements. 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 reduce the FDIC loss share asset or increase any FDIC loss share liability. Additions to expected losses will require an increase to the allowance for loan losses, and a corresponding increase to the FDIC loss share asset or reduction to any FDIC loss share liability. See “FDIC-Assisted Transactions” within Note 3 – Business Combinations for more detail.
Impaired Loans
A summary of impaired loans, including troubled debt restructurings ("TDRs"), is as follows:
March
31,
December 31,
March 31,
(Dollars in thousands)
2016
2015
2015
Impaired loans (included in non-performing and TDRs):
Impaired
loans with an allowance for loan loss required (1)
$
50,710
$
49,961
$
48,610
Impaired loans with no allowance for loan loss required
45,400
51,294
63,794
Total
impaired loans (2)
$
96,110
$
101,255
$
112,404
Allowance for loan losses related to impaired loans
$
7,775
$
6,380
$
6,199
TDRs
$
52,555
$
51,853
$
67,218
(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.
(2)
Impaired loans are considered by the Company to be non-accrual loans, TDRs or loans with principal and/or interest at risk, even if the loan is current with all payments of principal and interest.
Impaired loans with a related ASC 310 allowance recorded
Commercial
Commercial,
industrial and other
$
7,230
$
7,830
$
1,795
$
7,465
$
92
Asset-based
lending
—
—
—
—
—
Commercial
real estate
Construction
—
—
—
—
—
Land
4,475
8,090
29
4,734
127
Office
8,354
11,053
598
8,399
131
Industrial
1,402
1,487
559
1,406
20
Retail
10,259
12,286
371
10,294
128
Multi-family
2,266
2,363
241
2,273
26
Mixed
use and other
7,891
10,041
1,449
7,907
116
Home
equity
2,807
2,962
948
2,809
29
Residential
real estate
3,728
3,934
183
3,724
45
Consumer
and other
198
200
26
203
4
Impaired
loans with no related ASC 310 allowance recorded
Commercial
Commercial,
industrial and other
$
4,630
$
7,595
$
—
$
4,647
$
125
Asset-based
lending
—
—
—
—
—
Commercial
real estate
Construction
2,645
2,645
—
2,645
30
Land
5,134
5,868
—
5,137
62
Office
6,890
6,965
—
6,971
77
Industrial
2,772
3,134
—
2,837
55
Retail
5,053
9,130
—
5,315
105
Multi-family
777
1,199
—
778
13
Mixed
use and other
17,479
17,723
—
17,688
185
Home
equity
5,072
6,771
—
5,126
70
Residential
real estate
13,159
14,644
—
13,190
145
Consumer
and other
183
249
—
145
3
Total
impaired loans, net of unearned income
$
112,404
$
136,169
$
6,199
$
113,693
$
1,588
TDRs
At
March 31, 2016, the Company had $52.6 million in loans modified in TDRs. The $52.6 million in TDRs represents 102 credits in which economic concessions were granted to certain borrowers to better align the terms of their loans with their current ability to pay.
The Company’s approach to restructuring loans, excluding PCI loans, is built on its credit risk rating system which requires credit management personnel to assign a credit risk rating to each loan. In each case, the loan
officer is responsible for recommending a credit risk rating for each loan and ensuring the credit risk ratings are appropriate. These credit risk ratings are then reviewed and approved by the bank’s chief credit officer and/or concurrence credit officer. Credit risk ratings are determined by evaluating a number of factors including a borrower’s financial strength, cash flow coverage, collateral protection and guarantees. The Company’s credit risk rating scale is one through ten with higher scores indicating higher risk. In the case of loans rated six or worse following modification, the Company’s Managed Assets Division evaluates the loan and the credit risk rating and determines that the loan has been restructured to be reasonably assured of repayment and of performance according to the modified
terms and is supported by a current, well-documented credit assessment of the borrower’s financial condition and prospects for repayment under the revised terms.
A modification of a loan, excluding PCI loans, with an existing credit risk rating of 6 or worse or a modification of any other credit, which will result in a restructured credit risk rating of six or worse, must be reviewed for possible TDR classification. In that event, our Managed Assets Division conducts an overall credit and collateral review. A modification of these loans is considered to be a TDR if both (1) the borrower is experiencing financial difficulty and (2) for economic or legal reasons, the bank grants a concession to a borrower that it would not otherwise consider. The modification of a loan, excluding PCI loans, where the credit risk rating is 5 or better both before and after such modification is not
considered to be a TDR. Based on the Company’s credit risk rating system, it considers that borrowers whose credit risk rating is 5 or better are not experiencing financial difficulties and therefore, are not considered TDRs.
All credits determined to be a TDR will continue to be classified as a TDR in all subsequent periods, unless the borrower has been in compliance with the loan’s modified terms for a period of six months (including over a calendar year-end) and the current interest rate represents a market rate at the time of restructuring. The Managed Assets Division, in consultation with the respective loan officer,
determines whether the modified interest rate represented a current market rate at the time of restructuring. Using knowledge of current market conditions and rates, competitive pricing on recent loan originations, and an assessment of various characteristics of the modified loan (including collateral position and payment history), an appropriate market rate for a new borrower with similar risk is determined. If the modified interest rate meets or exceeds this market rate for a new borrower with similar risk, the modified interest rate represents a market rate at the time of restructuring. Additionally, before removing a loan from TDR classification, a review of the current or previously measured impairment on the loan and any concerns related to future performance by the borrower is conducted. If concerns exist about the future ability of the borrower to meet its obligations under the loans
based on a credit review by the Managed Assets Division, the TDR classification is not removed from the loan.
TDRs are reviewed at the time of the modification and on a quarterly basis to determine if a specific reserve is necessary. The carrying amount of the loan is compared to the expected payments to be received, discounted at the loan's original rate, or for collateral dependent loans, to the fair value of the collateral. Any shortfall is recorded as a specific reserve. The Company, in accordance with ASC 310-10, continues to individually measure impairment of these loans after the TDR classification is removed.
Each TDR was reviewed for impairment at March 31,
2016 and approximately $3.1 million of impairment was present and appropriately reserved for through the Company’s normal reserving methodology in the Company’s allowance for loan losses. For TDRs in which impairment is calculated by the present value of future cash flows, the Company records interest income representing the decrease in impairment resulting from the passage of time during the respective period, which differs from interest income from contractually required interest on these specific loans. During the three months ended March 31, 2016
and 2015, the Company recorded $90,000 and $193,000, respectively, in interest income representing this decrease in impairment.
TDRs may arise in which, due to financial difficulties experienced by the borrower, the Company obtains through physical possession one or more collateral assets in satisfaction of all or part of an existing credit. Once possession is obtained, the Company reclassifies the appropriate portion of the remaining balance of the credit from loans to OREO, which
is included within other assets in the Consolidated Statements of Condition. For any residential real estate property collateralizing a consumer mortgage loan, the Company is considered to possess the related collateral only if legal title is obtained upon completion of foreclosure, or the borrower conveys all interest in the residential real estate property to the Company through completion of a deed in lieu of foreclosure or similar legal agreement. Excluding covered OREO, at March 31, 2016, the Company had $13.3 million of foreclosed residential real estate properties
included within OREO.
The tables below present a summary of the post-modification balance of loans restructured during the three months ended March 31, 2016 and 2015, respectively, which represent TDRs:
TDRs
may have more than one modification representing a concession. As such, TDRs during the period may be represented in more than one of the categories noted above.
(2)
Balances represent the recorded investment in the loan at the time of the restructuring.
During the three months ended March 31, 2016, 11
loans totaling $8.7 million were determined to be TDRs, compared to three loans totaling $294,000 in the same period of 2015. Of these loans extended at below market terms, the weighted average extension had a term of approximately three months during the quarter ended March 31, 2016 compared to 17 months for the quarter ended March 31, 2015. Further, the weighted average decrease in the stated interest rate for loans with a reduction of interest rate during the period was approximately 17 basis points and 180 basis points
during the three months ending March 31, 2016 and 2015, respectively. Interest-only payment terms were approximately 24 months during the three months ending March 31, 2016. Additionally, no principal balances were forgiven in the first quarters of 2016 and 2015.
The following table presents a summary of all loans restructured in TDRs during the twelve months ended March 31, 2016 and 2015, and such loans which were in payment default under the restructured
terms during the respective periods below:
The
community banking segment's goodwill increased $11.1 million in the first three months of 2016 primarily as a result of the acquisition of Generations. The specialty finance segment's goodwill increased $1.4 million in the first three months of 2016 as a result of foreign currency translation adjustments related to the Canadian acquisitions.
The
core deposit intangibles recognized in connection with prior bank acquisitions are amortized over a ten-year period on an accelerated basis. The customer list intangibles recognized in connection with the purchase of life insurance premium finance assets in 2009 are being amortized over an 18-year period on an accelerated basis while the customer list intangibles recognized in connection with prior acquisitions within the wealth management segment are being amortized over a ten-year period on a straight-line basis.
Total amortization expense associated with finite-lived intangibles totaled approximately $1.3 million and $1.0 million for the three months
ended March 31, 2016 and 2015, respectively.
Wealth
management deposits represent deposit balances (primarily money market accounts) at the Company’s subsidiary banks from brokerage customers of Wayne Hummer Investments, trust and asset management customers of Company and brokerage customers from unaffiliated companies.
(10) Federal Home Loan Bank Advances, Other Borrowings and Subordinated Notes
The following table is a summary of notes payable, Federal Home Loan Bank advances, other borrowings and subordinated notes as of the dates shown:
Total Federal Home Loan Bank advances, other borrowings and subordinated notes
$
1,191,496
$
1,258,077
$
732,337
Federal
Home Loan Bank Advances
Federal Home Loan Bank advances consist of 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 prepayment fees paid at the time of prior restructurings of FHLB advances and unamortized fair value adjustments recorded in connection with advances acquired through acquisitions.
At March 31, 2016, notes payable represented a $63.7 million term facility ("Term Facility"), which is part of a $150.0 million loan agreement ("Credit Agreement") with unaffiliated banks dated December 15, 2014. The Credit Agreement consists of the Term Facility with an original outstanding balance of $75.0 million and a $75.0 million revolving credit facility ("Revolving Credit Facility"). At March
31, 2016, the Company had a balance of $63.7 million compared to a $67.4 million balance at December 31, 2015 and no balance at March 31, 2015 under the Term Facility. The Term Facility is stated at par of the current outstanding balance of the debt adjusted for unamortized costs paid by the Company in relation to the debt issuance. The Company was required to borrow the entire amount of the Term Facility on June 15, 2015 and
all such borrowings must be repaid by June 15, 2020. Beginning September 30, 2015, the Company was required to make straight-line quarterly amortizing payments on the Term Facility. At March 31, 2016, December 31, 2015 and March 31, 2015, the Company had no outstanding balance under the Revolving Credit Facility. As no outstanding balance exists on the Revolving Credit Facility,
unamortized costs paid by the Company in relation to the issuance of this debt are classified in other assets on the Consolidated Statements of Condition. In December 2015, the Company amended the Credit Agreement, effectively extending the maturity date on the Revolving Credit Facility from December 14, 2015 to December 12, 2016.
Borrowings under the Credit Agreement that are considered “Base Rate Loans” bear interest at a rate equal to the sum of (1) 50 basis points
(in the case of a borrowing under the Revolving Credit Facility) or 75 basis points (in the case of a borrowing under the Term Facility) plus (2) the highest of (a) the federal funds rate plus 50 basis points, (b) the lender's prime rate, and (c) the Eurodollar Rate (as defined below) that would be applicable for an interest period of one month plus 100 basis points. Borrowings under the agreement that are considered “Eurodollar Rate Loans” bear interest at a rate equal to the sum of (1) 150 basis points (in the case of a borrowing under the Revolving Credit Facility) or 175 basis points (in the case of a borrowing under the Term Facility) plus (2) the LIBOR rate for the applicable period, as adjusted for statutory reserve requirements
for eurocurrency liabilities (the “Eurodollar Rate”). A commitment fee is payable quarterly equal to 0.20% of the actual daily amount by which the lenders' commitment under the Revolving Credit Facility exceeded the amount outstanding under such facility.
Borrowings under the Credit Agreement are secured by pledges of and first priority perfected security interests in the Company's equity interest in its bank subsidiaries and contain 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 March 31, 2016, after giving effect to the limited waiver discussed in Note 17 - Regulatory Matters, the Company was in compliance with all such covenants. The Revolving Credit Facility and the Term Facility are available to be utilized, as needed, to provide capital to fund continued growth at the Company’s banks and to serve as an interim source of funds for acquisitions, common stock repurchases or other general corporate purposes.
Short-term Borrowings
Short-term borrowings include securities sold under repurchase agreements and federal
funds purchased. These borrowings totaled $47.7 million at March 31, 2016 compared to $63.9 million at December 31, 2015 and $50.1 million at March 31, 2015. At March 31, 2016, December 31, 2015 and March 31, 2015, securities sold under repurchase agreements represent
$47.7 million, $58.9 million and $50.1 million, respectively, of customer sweep accounts in connection with master repurchase agreements at the banks. The Company records securities sold under repurchase agreements at their gross value and does not offset positions on the Consolidated Statements of Condition. As of March 31, 2016, the Company had pledged securities related to its customer balances in sweep accounts of $60.4 million. Securities pledged for customer balances in sweep accounts and short-term borrowings from
brokers are maintained under the Company’s control and consist of U.S. Government agency, mortgage-backed and corporate securities. These securities are included in the available-for-sale and held-to-maturity securities portfolios as reflected on the Company’s Consolidated Statements of Condition.
The following is a summary of these securities pledged as of March 31,
2016 disaggregated by investment category and maturity, and reconciled to the outstanding balance of securities sold under repurchase agreements:
(Dollars in thousands)
Overnight Sweep Collateral
Available-for-sale securities pledged
U.S. Treasury
$
9,992
Corporate
notes:
Financial issuers
4,937
Mortgage-backed securities
33,943
Held-to-maturity securities pledged
U.S.
Government agencies
11,547
Total collateral pledged
$
60,419
Excess collateral
12,739
Securities
sold under repurchase agreements
$
47,680
Other Borrowings
Other borrowings at March 31, 2016 represent a fixed-rate promissory note issued by the Company in August 2012 ("Fixed-Rate Promissory Note") related to and secured by an office building owned by the
Company, and non-recourse notes issued by the Company to other banks related to certain capital leases. At March 31, 2016, the Fixed-Rate Promissory Note had a balance of $18.1 million compared to a balance of $18.3 million and $18.5 million at December 31, 2015 and March 31, 2015, respectively. Under the Fixed-Rate Promissory Note, the Company will make monthly principal payments and pay interest at a fixed rate of 3.75%
until maturity on September 1, 2017. At March 31, 2016 and December 31, 2015, the non-recourse notes related to certain capital leases totaled $662,000 and $732,000, respectively.
Secured Borrowings
In December 2014, the Company, through its subsidiary, FIFC Canada, sold an undivided co-ownership interest in all receivables owed to FIFC Canada to an unrelated third party in
exchange for a cash payment of approximately C$150 million pursuant to a receivables purchase agreement (“Receivables Purchase Agreement”). The Receivables Purchase Agreement was amended in December 2015, effectively extending the maturity date from December 15, 2015 to December 15, 2017. Additionally, at that time, the unrelated third party paid an additional C$10 million, which increased the total payments to C$160 million. These transactions were not considered sales of receivables and, as such, related proceeds received are reflected on the Company’s
Consolidated Statements of Condition as a secured borrowing owed to the unrelated third party, net of unamortized debt issuance costs, and translated to the Company’s reporting currency as of the respective date. At March 31, 2016, the translated balance of the secured borrowing totaled $123.0 million compared to $115.5 million at December 31, 2015 and $118.1 million at March 31, 2015. Additionally, the interest rate under the Receivables Purchase Agreement at March 31, 2016 was 1.5322%.
Subordinated
Notes
At March 31, 2016, the Company had outstanding subordinated notes totaling $138.9 million compared to $138.9 million and $138.8 million outstanding at December 31, 2015 and March 31, 2015, respectively. The notes have a stated interest rate of 5.00% and mature in June 2024. These notes are stated at par adjusted for unamortized costs paid related to the issuance of this debt.
(11)
Junior Subordinated Debentures
As of March 31, 2016, the Company owned 100% of the common securities of eleven 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, First Northwest Capital Trust I, Suburban Illinois Capital Trust II, and Community Financial Shares Statutory Trust II (the “Trusts”) set up to provide long-term financing. The Northview, Town, First Northwest, Suburban, and Community
Financial Shares capital trusts were acquired as part of the acquisitions of Northview Financial Corporation, Town Bankshares, Ltd., First Northwest Bancorp, Inc., Suburban and CFIS, 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.
In January 2016, the Company acquired $15.0 million of the $40.0 million of trust preferred securities issued by Wintrust Capital Trust VIII from a third-party investor. The purchase effectively extinguished $15.0 million of junior subordinated debentures related to Wintrust Capital Trust VIII and resulted in a $4.3 million
gain from the early extinguishment of debt.
The Trusts are reported in the Company’s 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 Company’s junior subordinated debentures as of March 31, 2016. The junior subordinated debentures represent the par value of the obligations owed to the Trusts.
The interest rates on the variable rate junior subordinated debentures are based on the three-month LIBOR rate and reset on a quarterly basis. At March 31, 2016, the weighted average contractual interest rate
on the junior subordinated debentures was 2.83%. The Company entered into interest rate swaps and caps with an aggregate notional value of $225 million to hedge the variable cash flows on certain junior subordinated debentures. The hedge-adjusted rate on the junior subordinated debentures as of March 31, 2016, was 3.71%. 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 event, only after the Company has obtained Federal Reserve approval, if then required under applicable guidelines or regulations.
Prior to January 1, 2015,
the junior subordinated debentures, subject to certain limitations, qualified as Tier 1 regulatory capital of the Company and the amount in excess of those certain limitations could, subject to other restrictions, be included in Tier 2 capital. Starting in 2015, a portion of these junior subordinated debentures still qualified as Tier 1 regulatory capital of the Company and the amount in excess of those certain limitations, subject to certain restrictions, was included in Tier 2 capital. At December 31, 2015, $65.1 million and $195.4 million of the junior subordinated debentures, net of common securities, were included in the
Company's Tier 1 and Tier 2 regulatory capital, respectively. At March 31, 2015, $60.5 million and $181.5 million of the junior subordinated debentures, net of common securities, were included in the Company's Tier 1 and Tier 2 regulatory capital, respectively. Starting in 2016, none of the junior subordinated debentures qualified as Tier 1 regulatory capital of the Company resulting in $245.5 million of the junior subordinated debentures, net of common securities, being included in the
Company's Tier 2 regulatory capital.
(12) Segment Information
The Company’s 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 segment’s customer base has varying characteristics
and each segment has a different regulatory environment. While the Company’s management monitors each of the fifteen bank subsidiaries’ operations and profitability separately, 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.
For purposes of internal segment profitability, management allocates certain intersegment and parent company balances. Management allocates
a portion of revenues to the specialty finance segment related to loans and leases originated by the specialty finance segment and sold or assigned to the community banking segment. 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 9 — Deposits, for more information on these deposits. Finally, expenses incurred at the Wintrust parent company are allocated to each segment based on each segment's risk-weighted assets.
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 substantially similar to those described in “Summary of Significant Accounting Policies” in Note 1 of the Company’s 2015 Form 10-K. The Company evaluates segment performance based on after-tax profit or loss and other appropriate profitability measures common to each segment.
The Company primarily 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 term (such as a rate, security price or price index) 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 term. 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 and caps to manage the interest rate risk of certain fixed and variable rate assets and 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 held-for-sale; and (4) covered call options to economically hedge specific investment securities and receive fee income effectively enhancing the overall yield on such securities to compensate for net interest margin compression. 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. Additionally, the Company enters into foreign currency contracts
to manage foreign exchange risk associated with certain foreign currency denominated assets.
The Company has purchased interest rate cap derivatives to hedge or manage its own risk exposures. Certain interest rate cap derivatives have been designated as cash flow hedge derivatives of the variable cash outflows associated with interest expense on the Company’s junior subordinated debentures and certain deposits. Other cap derivatives are not designated for hedge accounting but are economic hedges of the Company's overall portfolio, therefore any mark to market changes in the value of these caps are recognized in earnings.
The
Company recognizes derivative financial instruments in the consolidated financial statements at fair value regardless of the purpose or intent for holding the instrument. The Company records derivative assets and derivative liabilities on the Consolidated Statements of Condition within accrued interest receivable and other assets and accrued interest payable and other liabilities, respectively. 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 corroborated through 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) are estimated based on changes in
mortgage interest rates from the date of the loan commitment. The fair
value of foreign currency derivatives is computed based on changes in foreign currency rates stated in the contract compared to those prevailing at the measurement date.
Total
derivatives not designated as hedging instruments under ASC 815
$
86,273
$
51,029
$
62,296
$
80,456
$
44,030
$
53,358
Total
Derivatives
$
86,337
$
51,298
$
62,984
$
81,712
$
45,019
$
55,225
Cash
Flow Hedges of Interest Rate Risk
The Company’s objectives in using interest rate derivatives are to add stability to net interest income and to manage its exposure to interest rate movements. To accomplish these objectives, the Company primarily uses interest rate swaps and interest rate caps 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. Interest rate caps
designated as cash flow hedges involve the receipt of payments at the end of each period in which the interest rate specified in the contract exceeds the agreed upon strike price.
During the first quarter of 2014, the Company designated two existing interest rate cap derivatives as cash flow hedges of variable rate deposits. The cap derivatives had notional amounts of $216.5 million and $43.5 million, respectively, both maturing in August 2016. Additionally, as of March 31, 2016,
the Company had two interest rate swaps and two interest rate caps designated as hedges of the variable cash outflows associated with interest expense on the Company’s 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 Company’s variable rate junior subordinated debentures. The changes in fair value (net of tax) are separately disclosed in the Consolidated Statements 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 months ended March 31, 2016 or March 31, 2015. The Company uses the hypothetical derivative method to assess and measure hedge effectiveness.
Amount
reclassified from accumulated other comprehensive loss to interest expense on deposits and junior subordinated debentures
723
414
Amount of loss recognized in other comprehensive income
(245
)
(975
)
Unrealized
loss at end of period
$
(3,051
)
$
(4,623
)
As of March 31, 2016, the Company estimates that during the next twelve months, $2.3 million will be reclassified from accumulated other comprehensive
loss as an increase to interest expense.
Fair Value Hedges of Interest Rate Risk
Interest rate swaps designated as fair value hedges involve the payment of fixed amounts to a counterparty in exchange for the Company receiving variable payments over the life of the agreements without the exchange of the underlying notional amount. As of March 31, 2016, the Company has four interest rate swaps with an aggregate notional amount of $20.8 million
that were designated as fair value hedges associated with fixed rate commercial and industrial and commercial franchise loans.
For derivatives designated and that qualify as fair value hedges, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in earnings. The Company includes the gain or loss on the hedged item in the same line item as the offsetting loss or gain on the related derivatives. The Company recognized a net loss of $39,000 in other income related to hedge ineffectiveness for the three months ended March 31,
2016 and a $4,000 net loss for the three months ended March 31, 2015.
On June 1, 2013, the Company de-designated a $96.5 million cap which was previously designated as a fair value hedge of interest rate risk associated with an embedded cap in one of the Company’s floating rate loans. The hedged loan was restructured which resulted in the interest rate cap no longer qualifying as an effective fair value hedge. As such, the interest rate cap derivative is no longer accounted for under hedge
accounting and all changes in the interest rate cap derivative value subsequent to June 1, 2013 are recorded in earnings. Additionally, the Company has recorded amortization of the basis in the previously hedged item as a reduction to interest income of $43,000 in the three month periods ended March 31, 2016 and 2015, respectively.
The
following table presents the gain/(loss) and hedge ineffectiveness recognized on derivative instruments and the related hedged items that are designated as a fair value hedge accounting relationship as of March 31, 2016 and 2015:
The Company does not use derivatives for speculative purposes. Derivatives not designated as hedges are used to manage the Company’s 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 Company’s banking subsidiaries execute certain derivative products (typically interest rate swaps) directly with qualified commercial borrowers to facilitate their respective risk management strategies. For example, these arrangements allow the Company’s commercial borrowers to effectively convert a variable rate loan to a fixed rate. In order to minimize the Company’s 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 non-interest income. At March 31, 2016, the Company had interest rate derivative transactions with an aggregate notional amount of approximately $3.7 billion (all interest rate swaps and caps with customers and third
parties) related to this program. These interest rate derivatives had maturity dates ranging from April 2016 to February 2045.
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 Company’s practice to enter into forward commitments for the future delivery of a portion of our residential mortgage loan production 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 Company’s mortgage banking derivatives have not been designated as being in hedge relationships. At March 31, 2016, the Company had forward commitments to sell mortgage loans with an aggregate notional amount of approximately $982.4 million and interest rate lock commitments with an aggregate notional amount of approximately $623.4 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.
Foreign Currency Derivatives—These derivatives include foreign currency contracts used to manage the foreign exchange risk associated with foreign currency denominated assets and to facilitate the respective risk management strategies of certain customer's foreign currency transactions. Foreign currency contracts, which include spot and forward contracts, represent agreements to exchange the currency of one country for the currency of another country at an agreed-upon price on an agreed-upon settlement date. As a result of fluctuations in foreign currencies, the U.S. dollar-equivalent
value of the foreign currency denominated assets or forecasted transactions increase or decrease. Gains or losses on the derivative instruments related to these foreign currency denominated assets or forecasted transactions are expected to substantially offset this variability. For certain foreign currency contracts with customers, the Company simultaneously executes offsetting derivatives with third parties. These offsetting derivatives have mirror-image terms, which result in the positions’ changes in fair value substantially offsetting through earnings each period. As of March 31, 2016the Company held foreign
currency derivatives with an aggregate notional amount of approximately $21.5 million.
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 mitigate overall interest rate risk and 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 March 31, 2016, December 31, 2015 or March 31, 2015.
As discussed above, the Company has entered into interest rate cap derivatives to protect the
Company in a rising rate environment against increased margin compression due to the repricing of variable rate liabilities and lack of repricing of fixed rate loans and/or securities. As of March 31, 2016, the Company held four interest rate cap derivative contracts, which are not designated in hedge relationships, with an aggregate notional value of $446.5 million.
Amounts included in the Consolidated Statements of Income related to derivative instruments not designated in hedge relationships were as follows:
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 Company's overall asset-liability management process, except that the credit risk related to derivatives entered into with certain
qualified borrowers is managed through the Company's 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 counterparty to terminate the derivative positions if the Company fails to maintain its status as a well or adequately capitalized institution, which would require the Company to settle its obligations under the agreements. As of March 31, 2016 the fair value of interest rate derivatives
in a net liability position that were subject to such agreements, which includes accrued interest related to these agreements, was $75.6 million. If at March 31, 2016the Company had breached any of these provisions and the derivative positions were terminated as a result, the Company 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 Company's overall asset liability management process.
The
Company records interest rate derivatives subject to master netting agreements at their gross value and does not offset derivative assets and liabilities on the Consolidated Statements of Condition. The tables below summarize the Company's interest rate derivatives and offsetting positions as of the dates shown.
Less:
Amounts offset in the Statements of Financial Condition
—
—
—
—
—
—
Net
amount presented in the Statements of Financial Condition
$
73,985
$
42,779
$
47,550
$
74,019
$
42,458
$
47,698
Gross
amounts not offset in the Statements of Financial Condition
Offsetting Derivative Positions
(156
)
(753
)
(1,563
)
(156
)
(753
)
(1,563
)
Collateral
Posted (1)
—
—
—
(73,863
)
(41,705
)
(46,135
)
Net
Credit Exposure
$
73,829
$
42,026
$
45,987
$
—
$
—
$
—
(1)
As
of March 31, 2016, December 31, 2015 and March 31, 2015, the Company posted collateral of $81.6 million, $45.5 million and $51.3 million, respectively, which resulted in excess collateral with its counterparties. For purposes of this disclosure, the amount of posted collateral is limited to the amount offsetting the derivative liability.
(14) Fair Values of Assets and Liabilities
The
Company measures, monitors and discloses certain of its assets and liabilities on a fair value basis. These financial assets and financial liabilities are 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 Company’s
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 instrument’s categorization within the above valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The Company’s 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 Company’s 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 securities are typically based on prices obtained from independent pricing vendors. Securities measured with these valuation techniques are generally classified as Level 2 of the fair value hierarchy. Typically, standard inputs such as benchmark yields, reported trades for similar securities, issuer spreads, benchmark securities, bids, offers and reference data including market research publications are used to fair value a security. When these inputs are not available, broker/dealer quotes may be obtained by the vendor to determine the fair value of the security. We review
the vendor’s pricing methodologies to determine if observable market information is being used, versus unobservable inputs. Fair value measurements using significant inputs that are unobservable in the market due to limited activity or a less liquid market are classified as Level 3 in the fair value hierarchy.
The Company’s Investment Operations Department is responsible for the valuation of Level 3 available-for-sale securities. The methodology and variables used as inputs in pricing Level 3 securities are derived from a combination of observable and
unobservable inputs. The unobservable inputs are determined through internal assumptions that may vary from period to period due to external factors, such as market movement and credit rating adjustments.
At March 31, 2016, the Company classified $70.2 million of municipal securities as Level 3. These municipal securities are bond issues for various municipal government entities primarily located in the Chicago metropolitan area and southern Wisconsin and are privately placed, non-rated bonds without CUSIP numbers. The
Company’s methodology for pricing the non-rated bonds focuses on three distinct inputs: equivalent rating, yield and other pricing terms. To determine the rating for a given non-rated municipal bond, the Investment Operations Department references a publicly issued bond by the same issuer if available. A reduction is then applied to the rating obtained from the comparable bond, as the Company believes if liquidated, a non-rated bond would be valued less than a similar bond with a verifiable rating. The reduction applied by the Company is one complete rating grade (i.e. a “AA” rating for a comparable bond would be reduced to “A” for the Company’s valuation). In the first
quarter of 2016, all of the ratings derived in the above process by Investment Operations were BBB or better, for both bonds with and without comparable bond proxies. The fair value measurement of municipal bonds is sensitive to the rating input, as a higher rating typically results in an increased valuation. The remaining pricing inputs used in the bond valuation are observable. Based on the rating determined in the above process, Investment Operations obtains a corresponding current market yield curve available to market participants. Other terms including coupon, maturity date, redemption price, number of coupon payments per year, and accrual method are obtained from the individual bond term sheets. Certain municipal bonds held by the Company at March 31, 2016 have
a call date that has passed, and are now continuously callable. When valuing these bonds, the fair value is capped at par value as the Company assumes a market participant would not pay more than par for a continuously callable bond.
At March 31, 2016, the Company held $24.1 million of equity securities classified as Level 3. The securities in Level 3 are primarily comprised of auction rate preferred securities. The Company’s valuation methodology includes modeling the contractual
cash flows of the underlying preferred securities and applying a discount to these cash flows by a market spread derived from the market price of the securities underlying debt. At March 31, 2016, the Company considered three different securities whose implied market spreads were believed to provide a proxy for the Company’s auction rate preferred securities. The market spreads ranged from 2.81%-3.13% with an average of 2.98% which was added to three-month LIBOR to be used as the discount rate input to the
Company's model. Fair value of the securities is sensitive to the discount rate utilized as a higher discount rate results in a decreased fair value measurement.
Mortgage loans held-for-sale—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 valuation model which calculates the fair value of each servicing rights based on the present value of estimated future cash flows. The Company uses a discount rate commensurate with the risk associated with each servicing rights,
given current market conditions. At March 31, 2016, the Company classified $10.1 million of mortgage servicing rights as Level 3. The weighted average discount rate used as an input to value the mortgage servicing rights at March 31, 2016 was 6.20% with discount rates applied ranging from 4%-7%. The higher the rate utilized to discount estimated future cash flows, the lower the fair value measurement. Additionally, fair value estimates include assumptions about prepayment speeds which ranged from 1%-46%
or a weighted average prepayment speed of 11.39% used as an input to value the mortgage servicing rights at March 31, 2016. Prepayment speeds are inversely related to the fair value of mortgage servicing rights as an increase in prepayment speeds results in a decreased valuation.
Derivative instruments—The Company’s derivative instruments include interest rate swaps and caps, commitments to fund mortgages for sale into the secondary market (interest rate locks), forward commitments to end investors for the sale of mortgage loans and foreign currency contracts.
Interest rate swaps and caps are valued by a third party, using models that primarily use market observable inputs, such as yield curves, and are corroborated by comparison with valuations provided by the respective counterparties. The credit risk associated with derivative financial instruments that are subject to master netting agreements is measured on a net basis by counterparty portfolio. The fair value for mortgage-related derivatives is based on changes in mortgage rates from the date of the commitments. The fair value of foreign currency derivatives is computed based on change in foreign currency rates stated in the contract compared to those prevailing at the measurement date.
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.
The aggregate remaining contractual principal balance outstanding as of March 31, 2016, December 31, 2015 and March 31, 2015 for mortgage loans held-for-sale measured at fair value under ASC 825 was $299.0 million, $372.0 million and $421.2 million, respectively, while the aggregate fair value of mortgage loans held-for-sale was $314.6 million, $388.0 million and $446.4
million, for the same respective periods, 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 March 31, 2016, December 31, 2015 and March 31, 2015.
The changes in Level 3 assets measured at fair value on a recurring basis during the three months ended March 31, 2016 and 2015
are summarized as follows:
Changes
in the balance of mortgage servicing rights are recorded as a component of mortgage banking revenue in non-interest income.
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 impairment charges on 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 March 31, 2016.
Other
real estate owned, including covered other real estate owned (1)
58,978
—
—
58,978
1,087
Total
$
124,986
$
—
$
—
$
124,986
$
3,420
(1)
Fair
value losses recognized, net on other real estate owned include valuation adjustments and charge-offs during the respective period.
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 modified in a TDR 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-dependent impaired loans.
The Company’s Managed Assets Division is primarily responsible for the valuation of Level 3 inputs of impaired loans. For more information on the Managed Assets Division review of impaired loans refer to Note 7 – Allowance for Loan Losses, Allowance for Losses on Lending-Related Commitments and Impaired Loans. At March 31,
2016, the Company had $96.1 million of impaired loans classified as Level 3. Of the $96.1 million of impaired loans, $66.0 million were measured at fair value based on the underlying collateral of the loan as shown in the table above. The remaining $30.1 million were valued based on discounted cash flows in accordance with ASC 310.
Other real estate owned (including covered 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 that are adjusted by a discount representing the estimated cost of sale and is therefore considered a Level 3 valuation.
The Company’s Managed Assets Division is primarily responsible for the valuation of Level 3 inputs for non-covered other real estate owned and covered other real estate owned.
At March 31, 2016, the Company had $59.0 million of other real estate owned classified as Level 3. The unobservable input applied to other real estate owned relates to the 10% reduction to the appraisal value representing the estimated cost of sale of the foreclosed property. A higher discount for the estimated cost of sale results in a decreased carrying value.
The valuation techniques and significant unobservable inputs used to measure both recurring and non-recurring Level 3 fair value measurements at March 31, 2016
were as follows:
(Dollars in thousands)
Fair Value
Valuation Methodology
Significant Unobservable Input
Range
of
Inputs
Weighted
Average
of Inputs
Impact to valuation
from an increased or
higher input value
Measured at fair value on a recurring basis:
Municipal
Securities
$
70,242
Bond pricing
Equivalent rating
BBB-AA+
N/A
Increase
Equity
Securities
24,054
Discounted cash flows
Discount rate
2.81%-3.13%
2.98%
Decrease
Mortgage Servicing Rights
10,128
Discounted
cash flows
Discount rate
4%-7%
6.20%
Decrease
Constant prepayment
rate (CPR)
1%-46%
11.39%
Decrease
Measured at fair value on a non-recurring basis:
Impaired
loans—collateral based
$
66,008
Appraisal value
Appraisal adjustment - cost of sale
10%
10.00%
Decrease
Other
real estate owned, including covered other real estate owned
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 table below presents the carrying amounts and estimated fair values of the Company’s financial instruments as of the dates shown:
Federal
Home Loan Bank and Federal Reserve Bank stock, at cost
113,222
113,222
101,581
101,581
92,948
92,948
Brokerage
customer receivables
28,266
28,266
27,631
27,631
25,287
25,287
Mortgage
loans held-for-sale, at fair value
314,554
314,554
388,038
388,038
446,355
446,355
Total
loans
17,585,261
18,551,606
17,266,790
18,106,829
15,162,753
15,868,532
Mortgage
servicing rights
10,128
10,128
9,092
9,092
7,852
7,852
Nonqualified
deferred compensation assets
8,926
8,926
8,517
8,517
8,718
8,718
Derivative
assets
86,337
86,337
51,298
51,298
62,984
62,984
FDIC
indemnification asset
—
—
—
—
10,224
10,224
Accrued
interest receivable and other
202,018
202,018
193,092
193,092
181,998
181,998
Total
financial assets
$
21,062,839
$
22,041,813
$
21,531,278
$
22,364,602
$
18,716,631
$
19,422,410
Financial
Liabilities
Non-maturity deposits
$
15,260,229
$
15,260,229
$
14,634,957
$
14,634,957
$
12,927,014
$
12,927,014
Deposits
with stated maturities
3,956,842
3,956,157
4,004,677
3,998,180
4,011,755
4,017,565
Federal
Home Loan Bank advances
799,482
807,265
853,431
863,437
406,839
422,305
Other
borrowings
253,126
253,126
265,785
265,785
186,716
186,716
Subordinated
notes
138,888
139,849
138,861
140,302
138,782
147,851
Junior
subordinated debentures
253,566
254,290
268,566
268,046
249,493
250,196
Derivative
liabilities
81,712
81,712
45,019
45,019
55,225
55,225
FDIC
indemnification liability
10,029
10,029
6,100
6,100
—
—
Accrued
interest payable
9,208
9,208
7,394
7,394
8,583
8,583
Total
financial liabilities
$
20,763,082
$
20,771,865
$
20,224,790
$
20,229,220
$
17,984,407
$
18,015,455
Not
all the financial instruments listed in the table above are subject to the disclosure provisions of ASC Topic 820, as certain assets and liabilities result in their carrying value approximating fair value. These include cash and cash equivalents, interest bearing deposits with banks, brokerage customer receivables, FHLB and FRB stock, FDIC indemnification asset and liability, accrued interest receivable and accrued interest payable and non-maturity deposits.
The following methods and assumptions were used by the Company in estimating fair values of financial instruments that were not previously disclosed.
Held-to-maturity securities. Held-to-maturity securities include U.S.
Government-sponsored agency securities and municipal bonds issued by various municipal government entities primarily located in the Chicago metropolitan area and southern Wisconsin. Fair values for held-to-maturity securities are typically based on prices obtained from independent pricing vendors. In accordance with ASC 820, the Company has categorized held-to-maturity securities as a Level 2 fair value measurement.
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 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 assessed 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.
In accordance with ASC 820, the Company has categorized loans as a Level 3 fair value measurement.
Deposits with stated maturities. 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. In accordance with ASC 820, the Company has categorized deposits with stated maturities as a Level 3 fair value measurement.
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. In accordance with ASC 820, the Company has categorized Federal Home Loan Bank advances as a Level 3 fair value measurement.
Subordinated notes. The fair value of the subordinated notes is based on a market price obtained from an independent pricing vendor. In accordance with ASC 820, the Company has categorized subordinated notes as a Level 2 fair value measurement.
Junior subordinated debentures. The fair value
of the junior subordinated debentures is based on the discounted value of contractual cash flows. In accordance with ASC 820, the Company has categorized junior subordinated debentures as a Level 3 fair value measurement.
(15) Stock-Based Compensation Plans
In May 2015, the Company’s shareholders approved the 2015 Stock Incentive Plan (“the 2015 Plan”) which provides for the issuance of up to 5,485,000 shares of common stock. The 2015 Plan replaced the 2007 Stock Incentive
Plan (“the 2007 Plan”) which replaced the 1997 Stock Incentive Plan (“the 1997 Plan”). The 2015 Plan, the 2007 Plan and the 1997 Plan are collectively referred to as “the Plans.” The 2015 Plan has substantially similar terms to the 2007 Plan and the 1997 Plan. Outstanding awards under the Plans for which common shares are not issued by reason of cancellation, forfeiture, lapse of such award or settlement of such award in cash, are again available under the 2015 Plan. All grants made after the approval of the 2015 Plan will be made pursuant to the 2015 Plan. The Plans cover substantially all employees of Wintrust. The Compensation Committee of the Board of Directors administers all stock-based compensation programs and authorizes all awards granted pursuant to the Plans.
The Plans permit the grant of incentive stock options, non-qualified stock options, stock
appreciation rights, stock awards, restricted share or unit awards, performance awards settled in shares of common stock and other incentive awards based in whole or in part by reference to the Company’s common stock. The Company historically awarded stock-based compensation in the form of time-vested non-qualified stock options and time-vested restricted share unit awards (“restricted shares”). The grants of options provide for the purchase of shares of the Company’s common stock at the fair market value of the stock on the date the options are granted. Stock options under the 2015 Plan and the 2007 Plan generally vest ratably over periods of three to five
years and have a maximum term of seven years from the date of grant. Stock options granted under the 1997 Plan provided for a maximum term of 10 years. Restricted shares entitle the holders to receive, at no cost, shares of the Company’s common stock. Restricted shares generally vest over periods of one to five years from the date of grant.
Beginning in 2011, the Company has awarded annual grants under the Long-Term Incentive Program (“LTIP”), which is administered under the Plans. The LTIP is designed in part to align
the interests of management with the interests of shareholders, foster retention, create a long-term focus based on sustainable results and provide participants with a target long-term incentive opportunity. It is anticipated that LTIP awards will continue to be granted annually. LTIP grants to date have consisted of time-vested non-qualified stock options and performance-based stock and cash awards. Performance-based stock and cash awards granted under the LTIP are contingent upon the achievement of pre-established long-term performance goals set in advance by the Compensation Committee over a three-year period starting at the beginning of each calendar year. These performance awards are granted at a target level, and based on the Company’s achievement of the pre-established long-term goals, the actual payouts can range from 0% to a maximum
of 150% (for awards granted in 2015 and 2016) or 200% (for awards granted prior to 2015) of the target award. The awards vest in the quarter after the end of the performance period upon certification of the payout by the Compensation Committee of the Board of Directors.
Holders of restricted share awards and performance-based stock awards received under the Plans 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 and issued. Except in limited circumstances, these awards are canceled upon termination of employment without any payment of consideration by the Company. Shares that are vested but not
issuable pursuant to deferred compensation arrangements accrue additional shares based on the value of dividends otherwise paid.
Stock-based compensation is measured as the fair value of an award on the date of grant, and the measured cost is recognized over the period which the recipient is required to provide service in exchange for the award. The fair values of restricted share and performance-based stock awards are determined based on the average of the high and low trading prices on the grant date, and the fair value of stock options is estimated 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 option's expected life and the price volatility of the underlying stock, which can materially affect the fair value estimate. Expected life of options granted since the inception of the LTIP awards has been based on the safe harbor rule of the SEC Staff Accounting Bulletin No. 107 “Share-Based Payment” as the Company believes historical exercise data may not provide a reasonable basis to estimate the expected term of these options. Expected stock price volatility is based on historical volatility of the Company's common stock, which correlates with the expected life of the options, and 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.
The following table presents the weighted average assumptions used to determine the fair value of options granted in the three month periods ending March 31, 2016 and 2015.
Stock
based compensation is recognized based upon the number of awards that are ultimately expected to vest, taking into account expected forfeitures. In addition, for performance-based awards, an estimate is made of the number of shares expected to vest as a result of actual performance against the performance criteria in the award to determine the amount of compensation expense to recognize. The estimate is reevaluated periodically and total compensation expense is adjusted for any change in estimate in the current period. Stock-based compensation expense recognized in the Consolidated Statements of Income was $2.5 million in the first quarter of 2016 and $2.2 million in the first quarter of 2015.
Represents
the remaining weighted average contractual life in years.
(2)
Aggregate intrinsic value represents the total pre-tax intrinsic value (i.e., the difference between the Company's 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. Options with exercise prices above the stock price on the last trading day of the quarter are excluded from the calculation of intrinsic value. The intrinsic value will change based on the fair market value of the
Company's stock.
The weighted average grant date fair value per share of options granted during the three months ended March 31, 2016 and March 31, 2015 was $8.60 and $9.68, respectively. The aggregate intrinsic value of options exercised during the three months ended March 31, 2016 and 2015, was $196,000 and $744,000, respectively.
A summary of the Plans' restricted share activity for the
three months ended March 31, 2016 and March 31, 2015 is presented below:
A summary of the Plans' performance-based stock award activity, based on the target level of the awards, for the three months ended March 31, 2016 and March 31, 2015 is presented below:
The
Company issues new shares to satisfy its obligation to issue shares granted pursuant to the Plans.
(16) Shareholders’ Equity and Earnings Per Share
Series D Preferred Stock
In June 2015, the Company issued and sold 5,000,000 shares of fixed-to-floating non-cumulative perpetual preferred stock, Series D, liquidation preference $25 per share (the “Series D Preferred Stock”) for $125.0 million
in a public offering. When, as and if declared, dividends on the Series D Preferred Stock are payable quarterly in arrears at a fixed rate of 6.50% per annum from the original issuance date to, but excluding, July 15, 2025, and from (and including) that date at a floating rate equal to three-month LIBOR plus a spread of 4.06% per annum.
Series C Preferred Stock
In March 2012, the Company issued and sold 126,500 shares of non-cumulative perpetual convertible preferred stock,
Series C, liquidation preference $1,000 per share (the “Series C Preferred Stock”) for $126.5 million in a public offering. When, as and if declared, dividends on the Series C Preferred Stock are payable quarterly in arrears at a rate of 5.00% per annum. The Series C Preferred Stock is convertible into common stock at the option of the holder at a conversion rate of 24.3132 shares of common stock per share of Series C Preferred Stock subject to customary anti-dilution adjustments. In the first quarter of 2016, pursuant to such terms, 30 shares of the Series C Preferred Stock were converted at the option of the respective holders into 729 shares
of the Company's common stock. In 2015, pursuant to such terms, 180 shares of the Series C Preferred Stock were converted at the option of the respective holders into 4,374 shares of the Company's common stock. On and after April 15, 2017, the Company will have the right under certain circumstances to cause the Series C Preferred Stock to be converted into common stock if the closing price of the Company’s common stock exceeds a certain amount.
Common
Stock Warrant
Pursuant to the U.S. Department of the Treasury’s (the “U.S. Treasury”) Capital Purchase Program, on December 19, 2008, the Company issued to the U.S. Treasury a warrant to exercise 1,643,295 warrant shares of Wintrust common stock at a per share exercise price of $22.82, subject to customary anti-dilution adjustments, and with a term of 10 years. In February 2011, the U.S. Treasury sold all of its interest in the warrant issued to it in a secondary underwritten public offering. During the first three months of 2016, no warrant shares were
exercised. At March 31, 2016, all remaining holders of the interest in the warrant were able to exercise 367,432 warrant shares.
Other
In July 2015, the Company issued 388,573 shares of its common stock in the acquisition of CFIS. In January 2015, the Company issued 422,122 shares of its common stock in the acquisition of Delavan.
At the
January 2016 Board of Directors meeting, a quarterly cash dividend of $0.12 per share ($0.48 on an annualized basis) was
The
following tables summarize the components of other comprehensive income (loss), including the related income tax effects, and the related amount reclassified to net income for the periods presented (in thousands).
Other
comprehensive income (loss) during the period, net of tax, before reclassifications
15,188
(149
)
6,038
21,077
Amount reclassified from accumulated
other comprehensive income (loss) into net income, net of tax
(804
)
439
—
(365
)
Amount reclassified from accumulated other comprehensive income (loss)
related to amortization of unrealized losses on investment securities transferred to held-to-maturity from available-for-sale, net of tax
2,086
—
—
2,086
Net
other comprehensive income (loss) during the period, net of tax
Less:
Preferred stock dividends and discount accretion
3,628
1,581
Net income applicable to common shares—Basic
(A)
45,483
37,471
Add:
Dividends on convertible preferred stock, if dilutive
1,578
1,581
Net income applicable to common shares—Diluted
(B)
47,061
39,052
Weighted
average common shares outstanding
(C)
48,448
47,239
Effect of dilutive potential common shares
Common
stock equivalents
750
1,158
Convertible preferred stock, if dilutive
3,070
3,075
Total
dilutive potential common shares
3,820
4,233
Weighted average common shares and effect of dilutive potential common shares
(D)
52,268
51,472
Net
income per common share:
Basic
(A/C)
$
0.94
$
0.79
Diluted
(B/D)
$
0.90
$
0.76
Potentially
dilutive common shares can result from stock options, restricted stock unit awards, stock warrants, the Company’s 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 Company’s 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 not adjusted by the associated preferred dividends.
(17) Regulatory Matters
The Company is a bank holding company that has elected to be treated by the Federal Reserve as a financial holding company for purposes of the Bank Holding Company Act of 1956 (as amended, the “BHC Act”). The activities of bank holding companies generally are limited to the business of banking, managing or controlling banks, and other activities determined by the Federal Reserve, by regulation
or order prior to November 11, 1999, to be so closely related to banking as to be a proper incident thereto. Impermissible activities for bank holding companies and their subsidiaries include activities that are related to commerce, such as retail sales of nonfinancial products or manufacturing.
As a financial holding company, we may engage in an expanded range of activities, including securities and insurance activities conducted as agent or principal that are considered to be financial in nature. Moreover, financial holding companies may engage in activities incidental or complementary to financial activities, if the Federal Reserve determines that such activities pose no substantial risk to the safety or soundness of depository institutions
or the financial system in general. Maintaining our financial holding company status requires that our subsidiary banks remain “well-capitalized” and “well-managed” as defined by regulation, and maintain at least a “satisfactory” rating under the Community Reinvestment Act. In addition, under the Dodd-Frank Wall Street Reform and Consumer Protection Act, we must also remain well-capitalized and well-managed to maintain our financial holding company status. If we or our subsidiary banks fail to continue to meet these requirements, we could be subject to restrictions on new activities and acquisitions, and/or be required to cease and possibly divest of operations that conduct existing activities that are not permissible for a bank holding company that is not a financial holding company.
In light of these requirements, the
Company consistently monitors the capitalization of its banks, utilizing the ratios required by regulatory definition: 10.0%, 8.0%, 6.5% and 5.0% for each of total capital to risk-weighted assets, Tier I capital to risk-weighted assets, common equity Tier 1 capital to risk-weighted assets and Tier 1 leverage ratio, respectively. To maintain adequate capitalization in satisfaction of these required ratios, the Company from time to time makes subordinated loans to one or more of its subsidiary banks, with a corresponding intercompany subordinated note issued by such subsidiary bank to the Company on
account of each such loan. Such subordinated indebtedness is included in the Company’s calculation of its subsidiary banks’ respective Tier 2 capital.
On April 29, 2016the Company was informed by the Office of the Comptroller of the Currency (“OCC”) that the intercompany subordinated note agreements that the Company’s subsidiary national banks utilized to issue subordinated debt did not conform with the provisions of 12 CFR 5.47(f)(ii) and OCC Bulletin 2015-22, which were issued in
early 2015. This ruling impacted four of the Company’s national bank subsidiaries: Beverly Bank & Trust Company, N.A. (“Beverly Bank”), Schaumburg Bank & Trust Company, N.A. (“Schaumburg Bank”), Barrington Bank & Trust Company, N.A. (“Barrington Bank”) and Old Plank Trail Community Bank, N.A. (“Old Plank Trail Bank”).
Accordingly, the Company has recalculated the capitalization ratios of its affected subsidiary national banks to exclude subordinated debt that had been issued by such banks subsequent to January 1, 2015 from each
bank’s respective Tier 2 capital. On April 29, 2016, each of these banks repaid to the Company 100% of their respective outstanding subordinated indebtedness, and the Company in turn infused corresponding amounts of capital surplus (Tier 1 capital) into the four banks as follows: (a) Beverly - $13.0 million; (b) Schaumburg - $10.3 million; (c) Barrington - $5.0 million; and (d) Old Plank - $4.0 million.
Following this effective
substitution of Tier 1 capital for Tier 2 capital, the total capital to risk-weighted assets ratios of the four banks remained identical and each bank remains well capitalized. After excluding the following outstanding amounts of subordinated debt from Tier 2 capital, the recalculated total capital to risk-weighted assets ratios for each bank were as follows:
March
31,
December 31,
September 30,
June 30,
March 31,
(Dollars in thousands)
2016
2015
2015
2015
2015
Subordinated
debt excluded from Tier 2 capital
Beverly Bank
$
13,000
$
13,000
$
11,000
$
11,000
$
1,000
Schaumburg
Bank
8,500
8,500
3,500
3,500
3,500
Barrington
Bank
5,000
—
—
—
—
Old
Plank Trail Bank
4,000
—
—
—
—
Total
capital (to risk-weighted assets)
Beverly Bank
9.7
%
9.6
%
10.1
%
10.2
%
11.0
%
Schaumburg
Bank
10.2
10.3
10.7
10.8
10.7
Barrington
Bank
11.4
11.3
11.6
11.4
11.1
Old
Plank Trail Bank
10.8
11.3
11.8
11.6
11.9
The
Company believes that all of its banks have effectively been consistently well capitalized at all times during 2015 and 2016. As a technical matter under these revised ratio calculations, however, Beverly was not considered to be well capitalized at December 31, 2015 or March 31, 2016. The Company considers this to be immaterial because of the amount of subordinated indebtedness that actually was held by Beverly as of both dates, respectively, notwithstanding the required recalculation to exclude subordinated indebtedness from Tier 2 capital. Nonetheless, because the Credit Agreement requires that the Company’s banks remain well capitalized under the regulatory ratios, the
Company has received a waiver from the Required Lenders under the Credit Agreement, waiving any technical default that may have existed on these dates.
The following discussion and analysis of financial condition as of March 31,
2016 compared with December 31, 2015 and March 31, 2015, and the results of operations for the three month periods ended March 31, 2016 and 2015, 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 2015 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 southern Wisconsin, and operates other financing businesses on a national basis and in 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 southern Wisconsin.
Overview
First
Quarter Highlights
The Company recorded net income of $49.1 million for the first quarter of 2016 compared to $39.1 million in the first quarter of 2015. The results for the first quarter of 2016 demonstrate continued operating strengths including strong loan and deposit growth driving higher net interest income, higher fees from customer interest rate swaps and stable credit quality metrics as well as the early extinguishment of $15.0 million of junior subordinated debentures resulting in a $4.3 million gain. In the first quarter of 2016, the
Company completed its acquisition of Generations and its one banking location in Pewaukee, Wisconsin.
The Company increased its loan portfolio, excluding covered loans and mortgage loans held-for-sale, from $15.0 billion at March 31, 2015 and $17.1 billion at December 31, 2015 to $17.4 billion at March 31, 2016. The increase in the current quarter compared to the prior
quarters was primarily a result of the Company’s commercial banking initiative, growth in the commercial, commercial real estate and life insurance premium finance receivables portfolios and the acquisition of Generations. The Company is focused on making 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 Consolidated Financial Statements in Item 1 of this report.
Management
considers the maintenance of adequate liquidity to be important to the management of risk. During the first quarter of 2016, 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. At March 31, 2016, the Company had
approximately $1.0 billion in overnight liquid funds and interest-bearing deposits with banks.
The Company recorded net interest income of $171.5 million in the first quarter of 2016 compared to $151.9 million in the first quarter of 2015. The higher level of net interest income recorded in the first quarter of 2016 compared to the first quarter of 2015 resulted primarily from a $2.5 billion increase in average loans, excluding covered
loans as well as one additional day in the quarter. The increase in average loans, excluding covered loans, and one additional day was partially offset by a 12 basis point decline in the yield on earning assets, an increase in interest bearing deposits, and an increase in FHLB advances and borrowings under the Company's term credit facility at the end of the second quarter of 2015 (see "Net Interest Income" for further detail).
Non-interest income totaled $68.8 million in the first quarter of 2016, an increase of $4.2 million, or 7%, compared to the first
quarter of 2015. The increase in the first quarter of 2016 compared to the first quarter of 2015 was primarily attributable to a $4.3 million gain from an extinguishment of debt, gains on sales of investment securities, increased operating lease income, higher interest rate swap fees and an increase in service charges on deposits (see “Non-Interest Income” for further detail).
Non-interest expense totaled $153.7 million in the first quarter of 2016, increasing $6.4 million, or 4%, compared to the first quarter of 2015. The increase
compared to the first quarter of 2015 was primarily attributable to higher salary and employee benefit costs caused by the addition of employees from the various acquisitions, and higher staffing levels as the Company grows as well as higher commissions and incentive compensation, increased equipment expense, including operating lease equipment depreciation and higher data processing expenses (see “Non-Interest Expense” for further detail).
Total
loans, excluding loans held-for-sale, excluding covered loans
17,446,413
14,953,059
17
Total loans, including loans held-for-sale, excluding covered loans
17,760,967
15,399,414
15
Total
deposits
19,217,071
16,938,769
13
Total shareholders’ equity
2,418,442
2,131,074
13
Tangible
common equity ratio (TCE) (2)
7.2
%
7.9
%
(70) bp
Tangible common equity ratio, assuming full conversion of preferred stock (2)
7.8
%
8.5
%
(70
)
Book
value per common share (2)
$
44.67
$
42.30
6
%
Tangible common book value per share (2)
34.20
33.04
4
Market
price per common share
44.34
47.68
(7
)
Excluding covered loans:
Allowance
for credit losses to total loans (5)
0.64
%
0.64
%
—
Non-performing loans to total loans
0.51
%
0.55
%
(4)
bp
(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 period’s 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.
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%.
The accounting and reporting policies 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 Company’s 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 ratio, tangible common book value per share and return on average tangible common equity. Management believes that these measures and ratios provide users of the
Company’s financial information a more meaningful view of the performance of the interest-earning assets and interest-bearing liabilities and of the Company’s 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 Company’s 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. Management considers the tangible common equity ratio and tangible book value per common share as useful measurements of the Company’s equity. The Company references the return on average tangible common
equity as a measurement of profitability.
A reconciliation of certain non-GAAP performance measures and ratios used by the Company to evaluate and measure the Company’s performance to the most directly comparable GAAP financial measures is shown below:
Three
Months Ended
March 31,
March 31,
(Dollars and shares in thousands)
2016
2015
Calculation of Net Interest Margin and Efficiency Ratio
(A)
Interest Income (GAAP)
$
192,231
$
170,357
Taxable-equivalent adjustment:
- Loans
509
327
-
Liquidity Management Assets
920
727
- Other Earning Assets
6
7
Interest Income - FTE
$
193,666
$
171,418
(B)
Interest Expense (GAAP)
20,722
18,466
Net interest income - FTE
$
172,944
$
152,952
(C)
Net Interest Income (GAAP) (A minus B)
$
171,509
$
151,891
(D) Net interest margin (GAAP-derived)
3.29
%
3.40
%
Net
interest margin - FTE
3.32
%
3.42
%
(E) Efficiency ratio (GAAP-derived)
64.34
%
68.23
%
Efficiency ratio - FTE
63.96
%
67.90
%
(F)
Net Overhead Ratio (GAAP-derived)
1.49
%
1.69
%
Calculation of Tangible Common Equity ratio (at period end)
Total shareholders’ equity
$
2,418,442
$
2,131,074
(G)
Less: Convertible preferred stock
(126,257
)
(126,427
)
Less: Non-convertible preferred stock
(125,000
)
—
Less: Intangible assets
(508,005
)
(439,055
)
(H)
Total tangible common shareholders’ equity
$
1,659,180
$
1,565,592
Total assets
$
23,488,168
$
20,371,566
Less:
Intangible assets
(508,005
)
(439,055
)
(I) Total tangible assets
$
22,980,163
$
19,932,511
Tangible
common equity ratio (H/I)
7.2
%
7.9
%
Tangible common equity ratio, assuming full conversion of convertible preferred stock ((H-G)/I)
7.8
%
8.5
%
Calculation
of book value per share
Total shareholders’ equity
$
2,418,442
$
2,131,074
Less: Preferred stock
(251,257
)
(126,427
)
(J)
Total common equity
$
2,167,185
$
2,004,647
(K) Actual common shares outstanding
48,519
47,390
Book
value per common share (J/K)
$
44.67
$
42.30
Tangible common book value per share (H/K)
$
34.20
$
33.04
Calculation
of return on average common equity
(L) Net income applicable to common shares
45,483
37,471
Add: After-tax intangible asset amortization
812
615
(M)
Tangible net income applicable to common shares
46,295
38,086
Total average shareholders' equity
2,389,770
2,114,356
Less: Average preferred stock
(251,262
)
(126,445
)
(N)
Total average common shareholders' equity
2,138,508
1,987,911
Less: Average intangible assets
(495,594
)
(436,456
)
(O) Total average tangible common shareholders’ equity
1,642,914
1,551,455
Return
on average common equity, annualized (L/N)
8.55
%
7.64
%
Return on average tangible common equity, annualized (M)/O)
The Company’s Consolidated Financial Statements are prepared in accordance with GAAP 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, 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 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 55 of the Company’s 2015 Form 10-K.
Net Income
Net
income for the quarter ended March 31, 2016 totaled $49.1 million, an increase of $10.1 million, or 26%, compared to the first quarter of 2015. On a per share basis, net income for the first quarter of 2016 totaled $0.90 per diluted common share compared to $0.76 in the first quarter of 2015.
The most significant factors impacting net income for the first quarter of 2016 as compared
to the same period in the prior year include an increase in net interest income as a result of growth in earning assets, a $4.3 million gain from an extinguishment of debt, gains on sales of investment securities, increased operating lease income, higher interest rate swap fees and an increase in service charges on deposits. These improvements were offset by an increase in non-interest expense attributable to higher salary and employee benefit costs caused by the addition of employees from the various acquisitions, and higher staffing levels as the Company grows as well as higher commissions and incentive compensation, increased equipment expense, including operating lease equipment depreciation and higher data processing expenses.
Net
Interest Income
The primary source of the Company’s revenue is net interest income. Net interest income is the difference between interest income and fees on earnings assets, such as loans and securities, and interest expense on the liabilities to fund those assets, including interest bearing deposits and other borrowings. The amount of net interest income is affected by both changes in the level of interest rates, and the amount and composition of earning assets and interest bearing liabilities. Net interest margin represents tax-equivalent net interest income as a percentage of the average earning assets during the period.
The following table presents a summary of the Company’s net interest income and related net interest margin, calculated on a fully taxable equivalent basis, for the first quarter of 2016 as compared to the fourth quarter of 2015 (sequential
quarters) and first quarter of 2015 (linked quarters):
Liquidity
management assets include available-for-sale and held-to-maturity 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 March 31, 2016, December 31, 2015 and March 31, 2015
were $1.4 million, $1.3 million and $1.1 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.
Analysis of Changes in Tax-equivalent Net Interest Income
The following table presents an analysis of the changes in the Company’s tax-equivalent net interest income comparing the three month periods ended March 31, 2016 to December 31, 2015 and March 31, 2015. 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:
First Quarter of 2016
Compared to
Fourth Quarter of 2015
First Quarter of 2016 Compared to First Quarter of 2015
(Dollars in thousands)
Tax-equivalent
net interest income for comparative period
$
168,515
$
152,952
Change due to mix and growth of earning assets and interest-bearing liabilities (volume)
3,555
21,473
Change
due to interest rate fluctuations (rate)
2,725
(3,162
)
Change due to number of days in each period
(1,851
)
1,681
Tax-equivalent net interest
income for the period ended March 31, 2016
$
172,944
$
172,944
Non-interest Income
The following table presents non-interest income by category for the periods presented:
Notable contributions to the change in non-interest income are as follows:
The increase in wealth management revenue during the current period as compared to the first quarter of 2015 is primarily attributable to growth in assets under management due to new customers. Wealth management revenue is comprised of the trust and asset management revenue of The Chicago Trust Company and Great Lakes Advisors and the brokerage commissions, managed money fees and insurance product commissions at Wayne Hummer Investments.
The decrease in mortgage banking revenue in the first quarter of 2016 as compared to the same quarter of 2015 resulted primarily from lower origination volumes in the current quarter. Mortgage loans originated or purchased for sale were $736.6 million in the current quarter as compared to $941.7 million in the first quarter of 2015. Mortgage banking revenue includes revenue from activities related to originating, selling and servicing residential real estate loans for the secondary market. Mortgage revenue is also impacted by changes in the fair value of MSRs as the Company does not hedge this change in fair value. The Company typically originates mortgage loans held-for-sale with associated
MSRs either retained or released. The Company records MSRs at fair value on a recurring basis. The table below presents additional selected information regarding mortgage banking revenue for the respective periods.
Percentage
of mortgage servicing rights to loans serviced for others
0.97
%
0.89
%
(1)
Production revenue represents revenue earned from the origination and subsequent sale of mortgages, including gains on loans sold and fees from originations, processing and other related activities.
The
increase in service charges on deposit accounts in the current quarter is mostly a result of higher account analysis fees on deposit accounts which have increased as a result of the Company's commercial banking initiative as well as additional service charges on deposit accounts from acquired institutions.
The increase in net gains on available-for-sale securities in the current quarter primarily relate to the sale of mortgage-backed securities that were held in the Company's available-for-sale securities portfolio.
The Company
has typically written call options with terms of less than three months against certain U.S. Treasury and agency securities held in its portfolio for liquidity and other purposes. Management has effectively entered into these transactions with the goal of economically hedging security positions and enhancing its overall return on its investment portfolio by using fees generated from these options to compensate for net interest margin compression. These option transactions are designed to mitigate overall interest rate risk and do not qualify as hedges pursuant to accounting guidance. Fees from covered call options decreased in the current quarter compared to the first quarter of 2015 primarily as a result of selling call options against a smaller value of underlying securities resulting in lower premiums received by the Company. There were no outstanding call option contracts
at March 31, 2016 and 2015.
The increase in operating lease income in the current quarter compared to the prior year quarter is primarily related to growth in business from the Company's leasing divisions.
The increase in other non-interest income in the current quarter as compared to the same period of 2015 is primarily due to the gain on the extinguishment of junior subordinated debentures, higher swap fee revenues resulting from interest rate hedging transactions related to both customer-based trades and the related matched trades with inter-bank dealer counterparties and higher foreign currency re-measurement
gains, partially offset by net losses on partnership investments and lower income on bank-owned life insurance.
Notable
contributions to the change in non-interest expense are as follows:
Salaries and employee benefits expense increased in the current quarter compared to the first quarter of 2015 primarily as a result of the addition of employees from acquisitions, increased staffing as the Company grows and an increase in employee benefits (primarily health plan and payroll taxes related).
Operating lease equipment depreciation increased in the current quarter compared to the first quarter of 2015 as a result of growth in business from the Company's leasing divisions.
The
decrease in occupancy expenses in the current quarter compared to the first quarter of 2015 is primarily related to higher rental income for leased premises in the current quarter. Occupancy expense includes depreciation on premises, real estate taxes, utilities and maintenance of premises, as well as net rent expense for leased premises.
Excluding the effect of acquisition-related charges, the amount of data processing expenses incurred increased in the current quarter compared to the prior year quarter due to the overall growth of loan and deposit accounts.
Marketing costs are incurred to promote the Company's brand, commercial banking capabilities, the
Company's various products, to attract loans and deposits and to announce new branch openings as well as the expansion of the Company's non-bank businesses. The level of marketing expenditures depends on the type of marketing programs utilized which are determined based on the market area, targeted audience, competition and various other factors.
The decrease in OREO expense in the current quarter compared to the same period of 2015 is primarily the result of higher gains recorded on OREO sales, fewer negative valuation adjustments of OREO properties and lower expenses to maintain OREO properties. OREO costs include all costs related to obtaining, maintaining and selling other real estate owned properties and are shown net of any gains from the sale of such properties.
The
decrease in miscellaneous expenses in the current quarter as compared to the first quarter of 2015 is primarily a result of lower loan expenses, covered asset expenses and operating losses. Miscellaneous expense includes ATM expenses, correspondent bank charges, directors' fees, telephone, travel and entertainment, corporate insurance, dues and subscriptions, problem loan expenses, operating losses and lending origination costs that are not deferred.
The
Company recorded income tax expense of $29.4 million for the three months ended March 31, 2016, compared to $24.0 million for same period of 2015. The effective tax rates were 37.4% and 38.0% for the first quarters of 2016 and 2015, respectively.
Operating Segment Results
As described in Note 12 to the Consolidated Financial Statements in Item 1, the
Company’s operations consist of three primary segments: community banking, specialty finance and wealth management. The Company’s profitability is primarily dependent on the net interest income, provision for credit losses, non-interest income and operating expenses of its community banking segment. For purposes of internal segment profitability, management allocates certain intersegment and parent company balances. Management allocates a portion of revenues to the specialty finance segment related to loans and leases originated by the specialty finance segment and sold or assigned to the community banking segment. 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. Finally, expenses incurred at the Wintrust parent company are allocated to each segment based on each segment's risk-weighted assets.
The community banking segment’s net interest income for the quarter ended March 31, 2016 totaled $141.7 million as compared to $122.7 million for the same period in 2015, an increase of $19.0 million, or 16%. The increase during the period is primarily attributable to growth in earning assets including those acquired in bank acquisitions. The community banking segment’s non-interest income totaled $45.7 million
in the first quarter of 2016, an increase of $755,000, or 2%, when compared to the first quarter of 2015 total of $44.9 million. The increase in non-interest income in the current quarter was primarily attributable to a gain on extinguishment of debt and higher fees on interest rate swaps. The community banking segment’s net income for the quarter ended March 31, 2016 totaled $34.8 million, an increase of $9.8 million as compared to net income in the first quarter of 2015 of $25.0 million.
The specialty finance segment's net interest income totaled $21.2 million for the quarter ended March 31, 2016, compared to $21.0 million for the same period in 2015, an increase of $134,000, or 1%. The increase during the period is primarily attributable to growth in earning assets. The specialty finance segment’s non-interest income totaled $12.4 million and $7.9 million for the three month periods ending March 31, 2016
and 2015, respectively . The increase in non-interest income in the current year period is primarily the result of higher originations and increased balances related to the life insurance premium finance portfolio as well as increased leasing activity since the prior year period. Our commercial premium finance operations, life insurance finance operations, accounts receivable finance operations and lease financing operation accounted for 49%, 34%, 8% and 9%, respectively, of the total revenues of our specialty finance business for the three month period ending March 31, 2016. The net income of the specialty finance segment for the quarter ended March 31, 2016 totaled $11.5 million as
compared to $11.0 million for the quarter ended March 31, 2015.
The wealth management segment reported net interest income of $4.5 million for the first quarter of 2016 compared to $4.2 million in the same quarter of 2015. Net interest income for this segment is primarily comprised of 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 customer account balances on deposit at the banks averaged $968.5
million and $878.2 million in the first three months of 2016 and 2015, respectively. This segment recorded non-interest income of $18.8 million for the first quarter of 2016, which was relatively flat compared to $18.7 million for the first quarter of 2015. Distribution of wealth management services through each bank continues to be a focus of the Company as the number of financial advisors in its banks continues to increase. The Company is committed to growing the wealth management segment in order to better service its customers and create a more diversified revenue stream. The wealth management segment’s net income
totaled $2.9 million for the first quarter of 2016 compared to $3.1 million for the first quarter of 2015.
Financial Condition
Total assets were $23.5 billion at March 31, 2016, representing an increase of $3.1 billion, or 15%, when compared to March 31, 2015 and an increase of approximately $578.8 million, or 10%
on an annualized basis, when compared to December 31, 2015. Total funding, which includes deposits, all notes and advances, including secured borrowings and the junior subordinated debentures, was $20.7 billion at March 31, 2016, $20.2 billion at December 31, 2015, and $17.9 billion at March 31, 2015. See Notes 5, 6, 9, 10 and 11 of the Consolidated Financial Statements presented under Item 1 of this report for additional period-end detail on the
Company’s interest-earning assets and funding liabilities.
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:
Total
loans, net of unearned income excluding covered loans (2)
$
17,508,593
84
%
$
16,889,922
84
%
$
15,031,917
83
%
Covered
loans
141,351
1
154,846
1
214,211
1
Total
average loans (2)
$
17,649,944
85
%
$
17,044,768
85
%
$
15,246,128
84
%
Liquidity
management assets (3)
$
3,300,138
15
%
$
3,245,393
15
%
2,868,906
16
%
Other
earning assets (4)
28,731
—
29,792
—
27,717
—
Total
average earning assets
$
20,978,813
100
%
$
20,319,953
100
%
$
18,142,751
100
%
Total
average assets
$
22,902,913
$
22,225,112
$
19,826,240
Total
average earning assets to total average assets
92
%
91
%
92
%
(1)
Includes
mortgage loans held-for-sale
(2)
Includes loans held-for-sale and non-accrual loans
(3)
Liquidity management assets include investment securities, other securities, interest earning deposits with banks, federal funds sold and securities purchased under resale agreements
(4)
Other earning
assets include brokerage customer receivables and trading account securities
Loans. Average total loans, net of unearned income, totaled $17.6 billion in the first quarter of 2016, increasing $2.4 billion, or 16%, from the first quarter of 2015 and $605.2 million, or 14% on an annualized basis, from the fourth quarter of 2015. Combined, the commercial and commercial real estate loan categories comprised 58%
and 56% of the average loan portfolio in the first quarters of 2016 and 2015, respectively. Growth realized in these categories for the first quarter of 2016 as compared to the sequential and prior year periods is primarily attributable to the various bank acquisitions and increased business development efforts.
The increase in the home equity loan portfolio during the first quarter of 2016 compared to the first quarter of 2015 is primarily attributable to the various bank acquisitions. The Company has been actively managing its home equity portfolio to ensure that diligent pricing, appraisal and other underwriting activities continue to exist. The
Company has not sacrificed asset quality or pricing standards when originating new home equity loans.
Residential real estate loans averaged $913.8 million in the first quarter of 2016, and increased $108.2 million, or 13% from the average balance of $805.6 million in same period of 2015. Additionally, compared to the quarter ended December 31, 2015, the average balance increased $7.0 million, or 3% on an annualized basis. The residential real estate loan category includes mortgage loans held-for-sale. By selling residential mortgage loans into the secondary market, the Company eliminates the interest-rate risk associated with these loans, as they are predominantly long-term fixed rate loans,
and provides a source of non-interest revenue. Average mortgage loans held-for-sale decreased when compared to the quarter ended March 31, 2015 as result of lower origination volumes due to unfavorable changes in product and channel mix as well as more competitive pricing.
Average premium finance receivables totaled $5.4 billion in the first quarter of 2016, and accounted for 30% of the Company’s average total loans. The increase during 2016 compared to both periods was the result of continued originations within the
portfolio due to the effective marketing and customer servicing. Approximately $1.5 billion of premium finance receivables were originated in the first quarter of 2016 compared to $1.6 billion during the same period of 2015. Premium finance receivables consist of a commercial portfolio and a life portfolio comprising approximately 44% and 56%, respectively, of the average total balance of premium finance receivables for the first quarter of 2016, and 49% and 51%, respectively, for the first quarter of 2015.
Other loans represent a wide variety of personal and consumer loans to individuals as well as indirect automobile and consumer loans and 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.
Covered loans represent loans acquired through the nine FDIC-assisted transactions, all of which occurred prior to 2013. These
loans are subject to loss sharing agreements with the FDIC. The FDIC has agreed to reimburse the Company for 80% of losses incurred on the purchased loans, foreclosed real estate, and certain other assets. The Company expects the covered loan portfolio to continue to decrease as these acquired loans are paid off and as loss sharing agreements expire. See Note 3 of the Consolidated Financial Statements presented under Item 1 of this report for a discussion of these acquisitions, including the aggregation of these loans by risk characteristics when determining the initial and subsequent fair value.
Liquidity management assets. Funds that are not utilized for loan originations are used
to purchase investment securities and short term money market investments, to sell as federal funds and to maintain in interest bearing deposits with banks. The balances of these assets can fluctuate based on management’s ongoing effort to manage liquidity and for asset liability management purposes.
Other earning assets. 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. WHI’s customer securities activities are transacted on either a cash or margin basis. In margin transactions, WHI, under an agreement with an out-sourced securities firm, extends credit to its customers, subject to various regulatory and internal margin requirements, collateralized
by cash and securities in customer’s 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 the agreement with the outsourced securities firm, may be required to purchase or sell financial instruments at prevailing market prices to fulfill the customer’s obligations. WHI seeks to control the risks associated with its customers’ activities by requiring customers to maintain margin collateral in compliance with various regulatory and internal guidelines. WHI monitors required margin levels daily
and, pursuant to such guidelines, requires customers to deposit additional collateral or to reduce positions when necessary.
LOAN PORTFOLIO AND ASSET QUALITY
Loan Portfolio
The following table shows the Company’s loan portfolio by category as of the dates shown:
Commercial and commercial real estate loans. Our commercial and commercial real estate loan portfolios are comprised primarily of commercial real estate loans and lines of credit for working capital purposes. The table below sets forth information regarding the types and amounts of our loans within these portfolios (excluding covered loans) as of March 31, 2016 and 2015:
Commercial
real estate—collateral location by state:
Illinois
$
4,533,361
79.0
%
$
3,750,211
79.6
%
Wisconsin
585,809
10.2
476,966
10.1
Total
primary markets
$
5,119,170
89.2
%
$
4,227,177
89.7
%
Florida
52,649
0.9
62,504
1.3
California
59,877
1.0
29,769
0.6
Arizona
39,705
0.7
13,787
0.3
Indiana
131,762
2.3
95,851
2.0
Other
334,796
5.9
281,398
6.1
Total
$
5,737,959
100.0
%
$
4,710,486
100.0
%
(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.
We make commercial loans for many purposes, including working capital lines, which are generally renewable annually and supported by business assets, personal guarantees and additional collateral. Commercial business lending is generally considered to involve a slightly higher degree of risk than traditional consumer bank lending. Primarily as a result of growth in the commercial portfolio, our allowance for loan losses in our commercial loan portfolio is $38.4 million as of March 31, 2016 compared to $33.7 million
as of March 31, 2015.
Our commercial real estate loans are generally secured by a first mortgage lien and assignment of rents on the property. Since most of our bank branches are located in the Chicago metropolitan area and southern Wisconsin, 89.2% of our commercial real estate loan portfolio is located in this region as of March 31, 2016. While commercial real estate market conditions have improved recently, a number
of specific markets continue to be under stress. We have been able to effectively manage our total non-performing commercial real estate loans. As of March 31, 2016, our allowance for loan losses related to this portfolio is $45.3 million compared to $37.0 million as of March 31, 2015.
The Company also participates in mortgage warehouse lending by providing interim funding to unaffiliated mortgage bankers to finance residential mortgages originated by such bankers for sale into the secondary market. The
Company’s loans to the mortgage bankers are secured by the business assets of the mortgage companies as well as the specific mortgage loans funded by the Company, after they have been pre-approved for purchase by third party end lenders. The Company may also provide interim financing for packages of mortgage loans on a bulk basis in circumstances where the mortgage bankers desire to competitively bid on a number of mortgages for sale as a package in the secondary market. Amounts advanced with respect to any particular mortgage loan are usually required to be repaid within 21 days. In the current period, mortgage warehouse lines increased to $193.7 million as of March 31, 2016
from $186.4 million as of March 31, 2015.
Home equity loans. Our home equity loans and lines of credit are originated by each of our banks in their local markets where we have a strong understanding of the underlying real estate value. Our banks monitor and manage these loans, and we conduct an automated review of all home equity loans and lines of credit at least twice per year. This review collects current credit performance for each home equity borrower and identifies situations where the credit strength of the borrower is declining, or where there are events that may influence repayment, such as tax liens or judgments. Our banks use this information to manage loans that may be higher risk and to determine whether
to obtain additional credit information or updated property valuations. As a result of this work and general market conditions, we have modified our home equity offerings and changed our policies regarding home equity renewals and requests for subordination. In a limited number of situations, the unused availability on home equity lines of credit was frozen.
The rates we offer on new home equity lending are based on several factors, including appraisals and valuation due diligence, in order to reflect inherent risk, and we place additional scrutiny on larger home equity requests. In a limited number of cases, we issue home equity credit together with first mortgage financing, and requests for such financing are evaluated on a combined basis. It is not our practice to advance more than 85% of the appraised value of the underlying asset, which ratio we refer to as the loan-to-value
ratio, or LTV ratio, and a majority of the credit we previously extended, when issued, had an LTV ratio of less than 80%.
Our home equity loan portfolio has performed well in light of the ongoing volatility in the overall residential real estate market.
Residential real estate mortgages. Our residential real estate portfolio predominantly includes one- to four-family adjustable rate mortgages that have repricing terms generally from one to three years, construction loans to individuals and bridge financing loans for qualifying customers. As of March 31, 2016, our residential loan portfolio totaled $626.0 million, or 4% of our
total outstanding loans.
Our adjustable rate mortgages relate to properties located principally in the Chicago metropolitan area and southern Wisconsin or vacation homes owned by local residents. These adjustable rate mortgages are often non-agency conforming. Adjustable rate mortgage loans decrease the interest rate risk we face on our mortgage portfolio. However, this risk is not eliminated due to the fact that such loans generally provide for periodic and lifetime limits on the interest rate adjustments among other features. Additionally, adjustable rate mortgages may pose a higher risk of delinquency and default because they require borrowers to make larger payments when interest rates rise. As of March 31, 2016, $12.0 million of our
residential real estate mortgages, or 1.9% of our residential real estate loan portfolio were classified as nonaccrual, $406,000 were 90 or more days past due and still accuring (0.1%), $10.3 million were 30 to 89 days past due (1.6%) and $603.4 million were current (96.4%). We believe that since our loan portfolio consists primarily of locally originated loans, and since the majority of our borrowers are longer-term customers with lower LTV ratios, we face a relatively low risk of borrower default and delinquency.
While we generally do not originate loans for
our own portfolio with long-term fixed rates due to interest rate risk considerations, we can accommodate customer requests for fixed rate loans by originating such loans and then selling them into the secondary market, for which we receive fee income. We may also selectively retain certain of these loans within the banks’ own portfolios where they are non-agency conforming, or where the terms of the loans make them favorable to retain. A portion of the loans we sold into the secondary market were sold with the servicing of those loans retained. The amount of loans serviced for others as of March 31, 2016 and 2015 was $1.0 billion and $882.3 million, respectively. All other mortgage loans sold into the secondary market were sold without the retention of servicing rights.
It
is not our current practice to underwrite, and we have no plans to underwrite, subprime, Alt A, no or little documentation loans, or option ARM loans. As of March 31, 2016, approximately $3.5 million of our mortgage loans consist of interest-only loans.
Premium finance receivables – commercial. FIFC and FIFC Canada originated approximately $1.3 billion and $1.4 billion in commercial insurance premium
finance receivables during the first quarter of 2016 and 2015, respectively. FIFC and FIFC Canada make loans to businesses to finance the insurance premiums they pay on their commercial insurance policies. The loans are originated by working through independent medium and large insurance agents and brokers located throughout the United States and Canada. 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 through third party agents and brokers and because the borrowers are located nationwide and in Canada, this segment is more susceptible to third party fraud than relationship lending. The
Company performs ongoing credit and other reviews of the agents and brokers, and performs various internal audit steps to mitigate against the risk of any fraud. 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.
Premium finance receivables—life insurance. FIFC originated approximately $209.7 million in life insurance premium finance receivables in the first quarter of 2016 as compared to $167.6 million of originations in the first quarter of 2015. The Company
continues to experience increased competition and pricing pressure within the current market. These loans are originated directly with the borrowers with assistance from life insurance carriers, independent insurance agents, financial advisors and 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.
Consumer and other. Included in the consumer and other loan category is 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. The Banks originate consumer loans in order to provide a wider
range of financial services to their customers.
Consumer loans generally have shorter terms and higher interest rates than mortgage loans but generally involve more credit risk than mortgage loans 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.
Covered loans. Covered loans represent loans acquired through the nine FDIC-assisted transactions, all of which occurred prior to 2013. These loans are subject to loss sharing agreements with the FDIC. The FDIC has agreed to reimburse the
Company for 80% of losses incurred on the purchased loans, foreclosed real estate, and certain other assets. The Company expects the covered
loan portfolio to continue to decrease as these acquired loans are paid off and as loss sharing agreements expire. See Note 3 of the Consolidated Financial Statements presented under Item 1 of this report for a discussion of these acquisitions, including the
aggregation of these loans by risk characteristics when determining the initial and subsequent fair value.
Maturities
and Sensitivities of Loans to Changes in Interest Rates
The following table classifies the commercial loan portfolios at March 31, 2016 by date at which the loans reprice or mature, and the type of rate exposure:
Our ability to manage credit risk depends in large part on our ability to properly identify and manage problem loans. To do so, the Company operates a credit risk rating system under which our credit management personnel assign a credit risk rating to each loan at the time of origination and review loans on a regular basis to determine each loan’s credit risk rating on a scale of 1 through 10 with higher scores indicating higher risk. The credit risk rating structure used is shown below:
Modest Risk (Loss Potential demonstrably low) (Very good asset quality and liquidity, strong leverage capacity)
3 Rating —
Average Risk (Loss Potential low but
no longer refutable) (Mostly satisfactory asset quality and liquidity, good leverage capacity)
4 Rating —
Above Average Risk (Loss Potential variable, but some potential for deterioration) (Acceptable asset quality, little excess liquidity, modest leverage capacity)
Special Mention (Loss Potential moderate if corrective action not taken) (Assets in this category are currently protected, potentially weak, but not to the point of substandard classification)
7 Rating —
Substandard
Accrual (Loss Potential distinct possibility that the bank may sustain some loss, but no discernable impairment) (Must have well defined weaknesses that jeopardize the liquidation of the debt)
8 Rating —
Substandard Non-accrual (Loss Potential well documented probability of loss, including potential impairment) (Must have well defined weaknesses that jeopardize the liquidation of the debt)
9 Rating —
Doubtful
(Loss Potential extremely high) (These assets have all the weaknesses in those classified “substandard” with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of current existing facts, conditions, and values, highly improbable)
10 Rating —
Loss (fully charged-off) (Loans in this category are considered fully uncollectible.)
Each loan officer is responsible for monitoring his or her loan portfolio, recommending a credit risk rating for each loan
in his or her portfolio and ensuring the credit risk ratings are appropriate. These credit risk ratings are then ratified by the bank’s chief credit officer and/or concurrence credit officer. Credit risk ratings are determined by evaluating a number of factors including, a borrower’s financial strength, cash flow coverage, collateral protection and guarantees. A third party loan review firm independently reviews a significant portion of the loan portfolio at each of the Company’s subsidiary banks to evaluate the appropriateness of the management-assigned credit risk ratings. These ratings are subject to further review at each of our bank subsidiaries by the applicable regulatory authority, including the Federal Reserve Bank of Chicago, the Office of the Comptroller of the Currency, the State
of Illinois and the State of Wisconsin and are also reviewed by our internal audit staff.
The Company’s problem loan reporting system automatically includes all loans with credit risk ratings of 6 through 9. This system is designed to provide an on-going detailed tracking mechanism for each problem loan. Once management determines that a loan has deteriorated to a point where it has a credit risk rating of 6 or worse, the Company’s Managed Asset Division performs an overall credit and collateral review. As part of this review, all underlying collateral is identified and the valuation methodology is analyzed and tracked. As a result of this initial review by the Company’s
Managed Asset Division, the credit risk rating is reviewed and a portion of the outstanding loan balance may be deemed uncollectible or an impairment reserve may be established. The Company’s impairment analysis utilizes an independent re-appraisal of the collateral (unless such a third-party evaluation is not possible due to the unique nature of the collateral, such as a closely-held business or thinly traded securities). In the case of commercial real estate collateral, an independent third party appraisal is ordered by the Company’s Real Estate Services Group to determine if there has been any change in the underlying collateral value. These independent appraisals are reviewed by the Real Estate Services Group and sometimes by independent third party valuation experts and may be adjusted depending
upon market conditions. An appraisal is ordered at least once a year for these loans, or more often if market conditions dictate. In the event that the underlying value of the collateral cannot be easily determined, a detailed valuation methodology is prepared by the Managed Asset Division. A summary of this analysis is provided to the directors’ loan committee of the bank which originated the credit for approval of a charge-off, if necessary.
Through the credit risk rating process, loans are reviewed to determine if they are performing in accordance with the original contractual terms. If the borrower has failed to comply with the original contractual terms, further action may be required by the
Company, including a downgrade in the credit risk rating, movement to non-accrual status, a charge-off or the establishment of a specific impairment reserve. In the event a collateral shortfall is identified during the credit review process, the Company will work with the borrower for a principal reduction and/or a pledge of additional collateral and/or additional guarantees. In the event that these options are not available, the loan may be subject to a downgrade of the credit risk rating. If we determine that a loan amount or portion thereof, is uncollectible the loan’s credit risk rating is immediately downgraded to an 8 or 9 and the uncollectible amount is charged-off. Any loan that has a partial charge-off continues to be assigned a credit risk rating of an 8 or 9 for the duration of time that a balance
remains outstanding. The Managed Asset Division undertakes a thorough and ongoing analysis to determine if additional impairment and/or charge-offs are appropriate and to begin a workout plan for the credit to minimize actual losses.
The Company’s approach to workout plans and restructuring loans is built on the credit-risk rating process. A modification of a loan with an existing credit risk rating of 6 or worse or a modification of any other credit, which will result in a restructured credit risk rating of 6 or worse must be reviewed for TDR classification. In that event, our Managed Assets Division conducts an overall credit and collateral review. A modification of a loan is considered to be a TDR if both (1) the borrower is experiencing financial difficulty and (2) for economic or legal
reasons, the bank grants a concession to a borrower that it would not otherwise consider. The modification of a loan where the credit risk rating is 5 or better both before and after such modification is not considered to be a TDR. Based on the Company’s credit risk rating system, it considers that borrowers whose credit risk rating is 5 or better are not experiencing financial difficulties and therefore, are not considered TDRs.
TDRs, which are by definition considered impaired loans, are reviewed at the time of modification and on a quarterly basis to determine if a specific reserve is needed. The carrying amount of the loan is compared to the expected payments to be received, discounted at the loan’s original rate, or for collateral dependent loans, to the fair value of the collateral less
the estimated cost to sell. Any shortfall is recorded as a specific reserve.
For non-TDR loans, if based on current information and events, it is probable that the Company will be unable to collect all amounts due to it according to the contractual terms of the loan agreement, a loan is considered impaired, and a specific impairment reserve analysis is performed and if necessary, a specific reserve is established. In determining the appropriate reserve for collateral-dependent loans, the Company considers the results of appraisals for the associated collateral.
The following table sets forth Wintrust’s non-performing assets and TDRs performing under the contractual terms of the loan agreement, excluding covered assets and PCI loans, as of the dates shown:
Management is pursuing the resolution of all credits in this category. At this time, management believes reserves are appropriate to absorb
inherent losses that are expected upon the ultimate resolution of these credits.
Total
loans, net of unearned income, excluding covered loans
0.4
%
0.2
%
0.1
%
0.7
%
98.6
%
100.0
%
Covered
loans
3.8
5.8
0.3
4.7
85.4
100.0
Total
loans, net of unearned income
0.5
%
0.3
%
0.1
%
0.7
%
98.4
%
100.0
%
(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.
Total
loans, net of unearned income, excluding covered loans
0.4
%
0.2
%
0.2
%
0.6
%
98.6
%
100.0
%
Covered
loans
4.0
4.9
0.5
3.9
86.7
100.0
Total
loans, net of unearned income
0.5
%
0.2
%
0.2
%
0.6
%
98.5
%
100.0
%
(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.
As of March 31, 2016, only $19.3 million of all loans, excluding covered loans, or 0.1%, were 60 to 89 days past due and $120.5 million or 0.7%, were 30 to 59 days (or one payment)
past due. As of December 31, 2015, $42.1 million of all loans, excluding covered loans, or 0.2%, were 60 to 89 days past due and $104.1 million, or 0.6%, were 30 to 59 days (or one payment) past due. Many of the commercial and commercial real estate loans shown as 60 to 89 days and 30 to 59 days past due are included on the Company’s internal problem loan reporting system. Loans on this system are closely monitored by management on a monthly basis. Commercial and commercial real estate loans with delinquencies from 30 to 89 days past-due increased $10.9 million
since December 31, 2015.
The Company's home equity and residential loan portfolios continue to exhibit low delinquency ratios. Home equity loans at March 31, 2016 that were current with regard to the contractual terms of the loan agreement represent 98.1% of the total home equity portfolio. Residential real estate loans, excluding PCI loans, at March 31, 2016 that were current with regards to the contractual terms of the loan agreements comprise 96.4%
of total residential real estate loans outstanding.
Nonperforming Loans Rollforward
The table below presents a summary of non-performing loans, excluding covered loans and PCI loans, for the periods presented:
Three Months Ended
March
31,
March 31,
(Dollars in thousands)
2016
2015
Balance at beginning of period
$
84,057
$
78,677
Additions,
net
12,166
8,980
Return to performing status
(2,006
)
(716
)
Payments received
(3,308
)
(4,369
)
Transfer
to OREO and other repossessed assets
(2,080
)
(2,540
)
Charge-offs
(533
)
(1,801
)
Net change for niche loans (1)
1,203
3,541
Balance
at end of period
$
89,499
$
81,772
(1)
This includes activity for premium finance receivables and indirect consumer loans.
PCI loans are excluded from
non-performing loans as they continue to earn interest income from the related accretable yield, independent of performance with contractual terms of the loan. See Note 7 of the Consolidated Financial Statements in Item 1 for further discussion of non-performing loans and the loan aging during the respective periods.
Allowance for Loan Losses
The allowance for loan losses represents management’s estimate of the probable and reasonably estimable loan losses that our loan portfolio is expected to incur. The allowance for loan losses is determined quarterly using a methodology that incorporates important risk characteristics of each loan, as described below under “How We Determine the Allowance for Credit Losses”
in this Item 2. This process is subject to review at each of our bank subsidiaries by the applicable regulatory authority, including the Federal Reserve Bank of Chicago, the Office of the Comptroller of the Currency, the State of Illinois and the State of Wisconsin.
Management determined that the allowance for loan losses was appropriate at March 31, 2016, and that the loan portfolio is well diversified and well secured, without undue concentration in any specific risk area. While this process involves a high degree of management judgment, the allowance for credit losses is based on a comprehensive, well documented, and consistently applied analysis of the
Company’s loan portfolio. This analysis takes into consideration all available information existing as of the financial statement date, including environmental factors such as economic, industry, geographical and political factors. The relative level of allowance for credit losses is reviewed and compared to industry peers. This review encompasses levels of total nonperforming loans, portfolio mix, portfolio concentrations, current geographic risks and overall levels of net charge-offs. Historical trending of both the Company’s results and the industry peers is also reviewed to analyze comparative significance.
Reclassification from (to) allowance for unfunded lending-related commitments
(81
)
(113
)
Charge-offs:
Commercial
671
677
Commercial
real estate
671
1,005
Home equity
1,052
584
Residential real estate
493
631
Premium
finance receivables—commercial
2,480
1,263
Premium finance receivables—life insurance
—
—
Consumer and other
107
111
Total
charge-offs
5,474
4,271
Recoveries:
Commercial
629
370
Commercial
real estate
369
312
Home equity
48
48
Residential real estate
112
76
Premium
finance receivables—commercial
787
329
Premium finance receivables—life insurance
—
—
Consumer and other
36
53
Total
recoveries
1,981
1,188
Net charge-offs
(3,493
)
(3,083
)
Allowance for loan losses at period end
$
110,171
$
94,446
Allowance
for unfunded lending-related commitments at period end
1,030
888
Allowance for credit losses at period end
$
111,201
$
95,334
Annualized
net charge-offs by category as a percentage of its own respective category’s average:
Commercial
0.00
%
0.03
%
Commercial real estate
0.02
0.06
Home
equity
0.52
0.30
Residential real estate
0.17
0.28
Premium finance receivables—commercial
0.29
0.16
Premium
finance receivables—life insurance
—
—
Consumer and other
0.20
0.13
Total loans, net of unearned income, excluding covered loans
0.08
%
0.08
%
Net
charge-offs as a percentage of the provision for credit losses
41.47
%
49.87
%
Loans at period-end, excluding covered loans
$
17,446,413
$
14,953,059
Allowance
for loan losses as a percentage of loans at period end
0.63
%
0.63
%
Allowance for credit losses as a percentage of loans at period end
0.64
%
0.64
%
The
allowance for credit losses, excluding the allowance for covered loan losses, is comprised of an allowance for loan losses, which is determined with respect to loans that we have originated, and an allowance for lending-related commitments. Our allowance for lending-related commitments is determined with respect to funds that we have committed to lend but for which funds have not yet been disbursed and is computed using a methodology similar to that used to determine the allowance for loan losses. The allowance for unfunded lending-related commitments totaled $1.0 million and $888,000 as of March 31, 2016 and March 31, 2015, respectively.
Additions to the allowance for loan losses are charged to earnings through the provision for credit losses. Charge-offs represent the amount of loans that have been determined to be uncollectible during a given period, and are deducted from the allowance for loan losses, and recoveries represent the amount of collections received from loans that had previously been charged off, and are credited to the allowance for loan losses. See Note 7 of the Consolidated Financial Statements presented under Item 1 of this report for further discussion of activity within the allowance for loan losses during the period and the relationship with respective loan balances for each loan category and the total loan portfolio, excluding covered loans.
How We Determine the Allowance for Credit Losses
The
allowance for loan losses includes an element for estimated probable but undetected losses and for imprecision in the credit risk models used to calculate the allowance. If the loan is impaired, the Company analyzes the loan for purposes of calculating our specific impairment reserves as part of the Problem Loan Reporting system review. A general reserve is separately determined for loans not considered impaired. See Note 7 of the Consolidated Financial Statements presented under Item 1 of this report for further discussion of the specific impairment reserve and general reserve as it relates to the allowance for credit losses for each loan category and the total loan portfolio, excluding covered loans.
Specific Impairment Reserves:
Loans
with a credit risk rating of a 6 through 9 are reviewed on a monthly basis to determine if (a) an amount is deemed uncollectible (a charge-off) or (b) it is probable that the Company will be unable to collect amounts due in accordance with the original contractual terms of the loan (impaired loan). If a loan is impaired, the carrying amount of the loan is compared to the expected payments to be reserved, discounted at the loan’s original rate, or for collateral dependent loans, to the fair value of the collateral less the estimated cost to sell. Any shortfall is recorded as a specific impairment reserve.
At March 31, 2016, the
Company had $96.1 million of impaired loans with $50.7 million of this balance requiring $7.8 million of specific impairment reserves. At December 31, 2015, the Company had $101.3 million of impaired loans with $50.0 million of this balance requiring $6.4 million of specific impairment reserves. The most significant fluctuations in the recorded investment of impaired loans with specific impairment from December 31, 2015
to March 31, 2016 occurred within the mixed use and other commercial real estate portfolio. The recorded investment and specific impairment reserves in this portfolio decreased $2.8 million and $277,000, respectively, which was primarily the result of two notes no longer being impaired at March 31, 2016. The increase in specific impairment reserves during the period was primarily due to two loans within the home equity portfolio becoming non-performing and requiring $1.4 million of specific impairment reserves. See Note 7 of the Consolidated Financial Statements presented under Item 1 of this report for further discussion of impaired loans and the related specific impairment reserve.
General
Reserves:
For loans with a credit risk rating of 1 through 7 that are not considered impaired loans, reserves are established based on the type of loan collateral, if any, and the assigned credit risk rating. Determination of the allowance is inherently subjective as it requires significant estimates, including the amounts and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans based on the average historical loss experience over a five-year period, and consideration of current environmental factors and economic trends, all of which may be susceptible to significant change.
We determine this component of the allowance for loan losses by classifying each loan into (i) categories based on the type of collateral that secures the loan (if
any), and (ii) one of ten categories based on the credit risk rating of the loan, as described above under “Past Due Loans and Non-Performing Assets” in this Item 2. Each combination of collateral and credit risk rating is then assigned a specific loss factor that incorporates the following factors:
•
historical loss experience;
•
changes in lending policies and procedures, including changes in underwriting standards and collection,
charge-off, and recovery practices not considered elsewhere in estimating credit losses;
•
changes in national, regional, and local economic and business conditions and developments that affect the collectibility of the portfolio;
•
changes in the nature and volume of the portfolio and in the terms of the loans;
•
changes
in the experience, ability, and depth of lending management and other relevant staff;
changes in the volume and severity of past due loans, the volume of non-accrual loans, and the volume and severity of adversely classified or graded loans;
•
changes
in the quality of the bank’s loan review system;
•
changes in the underlying collateral for collateral dependent loans;
•
the existence and effect of any concentrations of credit, and changes in the level of such concentrations; and
•
the
effect of other external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in the bank’s existing portfolio.
In the second quarter of 2012, the Company modified its historical loss experience analysis from incorporating five-year average loss rate assumptions to incorporating three−year average loss rate assumptions. The reason for the migration at that time was charge-off rates from earlier years in the five-year period were no longer relevant as that period was characterized by historically low credit losses which then built up to a peak in credit losses as a result of the stressed economic environment and depressed real estate valuations that affected both the U.S. economy, generally, and the
Company’s local markets.
In the second quarter of 2015, the Company returned to incorporating five-year average loss rate assumptions for its historical loss experience to capture an extended credit cycle. The five−year average loss rate assumption analysis is computed for each of the Company’s collateral codes. The historical loss experience is combined with the specific loss factor for each combination of collateral and credit risk rating which is then applied to each individual loan balance to determine an appropriate general reserve. The historical loss rates are updated on a quarterly basis and are driven by the performance of the portfolio and any changes to the specific loss factors are
driven by management judgment and analysis of the factors described above. The Company also analyzes the three- and four-year average historical loss rates on a quarterly basis as a comparison.
Home Equity and Residential Real Estate Loans:
The determination of the appropriate allowance for loan losses for residential real estate and home equity loans differs slightly from the process used for commercial and commercial real estate loans. The same credit risk rating system, Problem Loan Reporting system, collateral coding methodology and loss factor assignment are used. The only significant difference is in how the credit risk ratings are assigned to these loans.
The
home equity loan portfolio is reviewed on a loan by loan basis by analyzing current FICO scores of the borrowers, line availability, recent line usage, an approaching maturity and the aging status of the loan. Certain of these factors, or combination of these factors, may cause a portion of the credit risk ratings of home equity loans across all banks to be downgraded. Similar to commercial and commercial real estate loans, once a home equity loan’s credit risk rating is downgraded to a 6 through 9, the Company’s Managed Asset Division reviews and advises the subsidiary banks as to collateral valuations and as to the ultimate resolution of the credits that deteriorate to a non-accrual status to minimize losses.
Residential real estate loans that are downgraded to a credit risk rating of 6 through
9 also enter the problem loan reporting system and have the underlying collateral evaluated by the Managed Assets Division.
Premium Finance Receivables:
The determination of the appropriate allowance for loan losses for premium finance receivables is based on the assigned credit risk rating of loans in the portfolio. Loss factors are assigned to each risk rating in order to calculate an allowance for credit losses. The allowance for loan losses for these categories is entirely a general reserve.
Methodology in Assessing Impairment and Charge-off Amounts
In determining the amount of impairment or charge-offs
associated with collateral dependent loans, the Company values the loan generally by starting with a valuation obtained from an appraisal of the underlying collateral and then deducting estimated selling costs to arrive at a net appraised value. We obtain the appraisals of the underlying collateral typically on an annual basis from one of a pre-approved list of independent, third party appraisal firms. Types of appraisal valuations include “as-is”, “as-complete”, “as-stabilized”, bulk, fair market, liquidation and “retail sellout” values.
In many cases, the Company simultaneously values the underlying collateral by marketing the property to market participants interested in purchasing
properties of the same type. If the Company receives offers or indications of interest, we will analyze the
price and review market conditions to assess whether in light of such information the appraised value overstates the likely price and that a lower price would be a better assessment of the market value of the property and would enable us to liquidate the collateral. Additionally, the Company takes into account the strength of any guarantees and the ability of the borrower to
provide value related to those guarantees in determining the ultimate charge-off or reserve associated with any impaired loans. Accordingly, the Company may charge-off a loan to a value below the net appraised value if it believes that an expeditious liquidation is desirable in the circumstance and it has legitimate offers or other indications of interest to support a value that is less than the net appraised value. Alternatively, the Company may carry a loan at a value that is in excess of the appraised value if the Company has a guarantee from a borrower that the Company believes has realizable value. In evaluating the strength
of any guarantee, the Company evaluates
the financial wherewithal of the guarantor, the guarantor’s reputation, and the guarantor’s willingness and desire to work with the Company. The Company then conducts a review of the strength of a guarantee on a frequency established as the circumstances and conditions of the borrower warrant.
In circumstances where the Company has received an appraisal but has no third party offers or indications of interest, the
Company may enlist the input of realtors in the local market as to the highest valuation that the realtor believes would result in a liquidation of the property given a reasonable marketing period of approximately 90 days. To the extent that the realtors’ indication of market clearing price under such scenario is less than the net appraised valuation, the Company may take a charge-off on the loan to a valuation that is less than the net appraised valuation.
The Company may also charge-off a loan below the net appraised valuation if the Company holds a junior mortgage position in a piece of collateral whereby the risk
to acquiring control of the property through the purchase of the senior mortgage position is deemed to potentially increase the risk of loss upon liquidation due to the amount of time to ultimately market the property and the volatile market conditions. In such cases, the Company may abandon its junior mortgage and charge-off the loan balance in full.
In other cases, the Company may allow the borrower to conduct a “short sale,” which is a sale where the Company allows the borrower to sell the property at a value less than the amount of the loan. Many times, it is possible for the current owner to receive a better
price than if the property is marketed by a financial institution which the market place perceives to have a greater desire to liquidate the property at a lower price. To the extent that we allow a short sale at a price below the value indicated by an appraisal, we may take a charge-off beyond the value that an appraisal would have indicated.
Other market conditions may require a reserve to bring the carrying value of the loan below the net appraised valuation such as litigation surrounding the borrower and/or property securing our loan or other market conditions impacting the value of the collateral.
Having determined the net value based on the factors such as those noted above and compared that value to the book value of the loan, the
Company arrives at a charge-off amount or a specific reserve included in the allowance for loan losses. In summary, for collateral dependent loans, appraisals are used as the fair value starting point in the estimate of net value. Estimated costs to sell are deducted from the appraised value to arrive at the net appraised value. Although an external appraisal is the primary source of valuation utilized for charge-offs on collateral dependent loans, alternative sources of valuation may become available between appraisal dates. As a result, we may utilize values obtained through these alternating sources, which include purchase and sale agreements, legitimate indications of interest, negotiated short sales, realtor price opinions, sale of the note or support from guarantors, as the basis for charge-offs. These alternative sources of value are used only if deemed to be more representative of value based on updated information regarding collateral resolution. In addition,
if an appraisal is not deemed current, a discount to appraised value may be utilized. Any adjustments from appraised value to net value are detailed and justified in an impairment analysis, which is reviewed and approved by the Company’s Managed Assets Division.
At March 31, 2016,
the Company had $52.6 million in loans modified in TDRs. The $52.6 million in TDRs represents 102 credits in which economic concessions were granted to certain borrowers to better align the terms of their loans with their current ability to pay. The balance increased slghtly from $51.9 million representing 102 credits at December 31, 2015 and decreased from $67.2 million representing 125 credits at March 31, 2015.
Concessions
were granted on a case-by-case basis working with these borrowers to find modified terms that would assist them in retaining their businesses or their homes and attempt to keep these loans in an accruing status for the Company. Typical concessions include reduction of the interest rate on the loan to a rate considered lower than market and other modification of terms including forgiveness of a portion of the loan balance, extension of the maturity date, and/or modifications from principal and interest payments to interest-only payments for a certain period. See Note 7 of the Consolidated Financial Statements in Item 1 of this report for further discussion regarding the effectiveness of these modifications in keeping the modified loans current based upon contractual terms.
Subsequent to its
restructuring, any TDR that becomes nonaccrual or more than 90 days past-due and still accruing interest will be included in the Company’s nonperforming loans. Each TDR was reviewed for impairment at March 31, 2016 and approximately $3.1 million of impairment was present and appropriately reserved for through the Company’s normal reserving methodology in the Company’s allowance for loan losses. Additionally, at March 31, 2016, the
Company was committed to lend additional funds to borrowers totaling $20,000 under the contractual terms of TDRs.
The table below presents a summary of restructured loans for the respective periods, presented by loan category and accrual status:
March 31,
December
31,
March 31,
(Dollars in thousands)
2016
2015
2015
Accruing TDRs:
Commercial
$
5,143
$
5,613
$
6,273
Commercial
real estate
25,548
32,777
45,417
Residential real estate and other
4,258
4,354
2,997
Total
accruing TDRs
$
34,949
$
42,744
$
54,687
Non-accrual TDRs: (1)
Commercial
$
82
$
134
$
184
Commercial
real estate
14,340
5,930
8,229
Residential real estate and other
3,184
3,045
4,118
Total
non-accrual TDRs
$
17,606
$
9,109
$
12,531
Total TDRs:
Commercial
$
5,225
$
5,747
$
6,457
Commercial
real estate
39,888
38,707
53,646
Residential real estate and other
7,442
7,399
7,115
Total
TDRs
$
52,555
$
51,853
$
67,218
Weighted-average contractual interest rate of TDRs
Three
Months Ended March 31, 2015 (Dollars in thousands)
Commercial
Commercial Real Estate
Residential Real Estate and Other
Total
Balance at beginning of period
$
7,576
$
67,623
$
7,076
$
82,275
Additions
during the period
—
—
294
294
Reductions:
Charge-offs
(397
)
(1
)
(33
)
(431
)
Transferred
to OREO and other repossessed assets
(562
)
(1,519
)
—
(2,081
)
Removal of TDR loan status (1)
(76
)
(8,382
)
—
(8,458
)
Payments
received
(84
)
(4,075
)
(222
)
(4,381
)
Balance at period end
$
6,457
$
53,646
$
7,115
$
67,218
(1)
Loan
was previously classified as a TDR and subsequently performed in compliance with the loan's modified terms for a period of six months (including over a calendar year-end) at a modified interest rate which represented a market rate at the time of restructuring. Per our TDR policy, the TDR classification is removed.
In certain circumstances, the
Company is required to take action against the real estate collateral of specific loans. The Company uses foreclosure only as a last resort for dealing with borrowers experiencing financial hardships. The Company employs extensive contact and restructuring procedures to attempt to find other solutions for our borrowers. The tables below present a summary of other real estate owned, excluding covered other real estate owned, and shows the activity for the respective periods and the balance for each property type:
Total
deposits at March 31, 2016 were $19.2 billion, an increase of $2.3 billion, or 13%, compared to total deposits at March 31, 2015. See Note 9 to the Consolidated Financial Statements in Item 1 of this report for a summary of period end deposit balances.
The following table sets forth, by category, the maturity of time certificates of deposit as of March 31, 2016:
Time
Certificates of Deposit Maturity/Re-pricing Analysis As of March 31, 2016
The following table sets forth, by category, the composition of average deposit balances and the relative percentage of total average deposits for the periods presented:
Total
average deposits for the first quarter of 2016 were $18.7 billion, an increase of $2.2 billion, or 13%, from the first quarter of 2015. The increase in average deposits is primarily attributable to additional deposits associated with the Company's bank acquisitions as well as increased commercial lending relationships. The Company continues to see a beneficial shift in its deposit mix as average non-interest bearing deposits increased $1.4 billion, or 38%, in the first quarter of 2016
compared to the first quarter of 2015.
Wealth management deposits are funds from the brokerage customers of WHI, the trust and asset management customers of the Company and brokerage customers from unaffiliated companies which have been placed into deposit accounts of the banks (“wealth management deposits” in the table above). Wealth Management deposits consist primarily of money market accounts. Consistent with reasonable interest rate risk parameters, these funds have generally been invested in loan production of the banks as well as other investments suitable for banks.
Brokered Deposits
While
the Company obtains a portion of its total deposits through brokered deposits, the Company does so primarily as an asset-liability management tool to assist in the management of interest rate risk. The Company does not consider brokered deposits to be a vital component of its current liquidity resources. Historically, brokered deposits have represented a small component of the Company’s total deposits outstanding, as set forth in the table below:
March
31,
December 31,
(Dollars in thousands)
2016
2015
2015
2014
2013
Total
deposits
$
19,217,071
$
16,938,769
$
18,639,634
$
16,281,844
$
14,668,789
Brokered
deposits
947,910
926,387
862,026
718,986
476,139
Brokered
deposits as a percentage of total deposits
4.9
%
5.5
%
4.6
%
4.4
%
3.2
%
Brokered
deposits include certificates of deposit obtained through deposit brokers, deposits received through the Certificate of Deposit Account Registry Program (“CDARS”), and wealth management deposits of brokerage customers from unaffiliated companies which have been placed into deposit accounts of the banks.
Other Funding Sources
Although deposits are the Company’s primary source of funding its interest-earning assets, the Company’s ability to manage the types and terms of deposits is somewhat limited by customer preferences and market competition.
As a result, in addition to deposits and the issuance of equity securities and the retention of earnings, the Company uses several other funding sources to support its growth. These sources include short-term borrowings, notes payable, Federal Home Loan Bank advances, subordinated debt, secured borrowings and junior subordinated debentures. The Company evaluates the terms and unique characteristics of each source, as well as its asset-liability management position, in determining the use of such funding sources.
The following table sets forth, by category, the composition of the average balances of other funding sources for the quarterly periods presented:
Three Months Ended
March 31,
December
31,
March 31,
(Dollars in thousands)
2016
2015
2015
Federal Home Loan Bank advances
$
825,104
$
441,669
$
347,456
Other
borrowings:
Notes payable
67,388
71,136
—
Short-term
borrowings
55,056
65,389
53,920
Secured borrowings
116,104
114,313
122,145
Other
18,836
18,900
18,598
Total
other borrowings
$
257,384
$
269,738
$
194,663
Subordinated notes
138,870
138,852
138,773
Junior
subordinated debentures
257,687
268,566
249,493
Total other funding sources
$
1,479,045
$
1,118,825
$
930,385
FHLB
advances provide the banks with access to fixed rate funds which are useful in mitigating interest rate risk and achieving an acceptable interest rate spread on fixed rate loans or securities. Additionally, the banks have the ability to borrow shorter-term, overnight funding from the FHLB for other general purposes. FHLB advances to the banks totaled $799.5 million at March 31, 2016, compared to $853.4 million at December 31, 2015 and $406.8 million at March 31, 2015.
Notes
payable balances represent the balances on a $150 million loan agreement with unaffiliated banks consisting of a $75.0 million revolving credit facility and a $75.0 million term facility. Both loan facilities are available for corporate purposes such as to provide capital to fund continued growth at existing bank subsidiaries, possible future acquisitions and for other general corporate matters. At March 31, 2016, the Company had a balance under the term facility of $63.7 million compared to $67.4 million at December 31, 2015 and no balance at March 31, 2015.
The Company was contractually required to borrow the entire amount of the term facility on June 15, 2015 and all such borrowings must be repaid by June 15, 2020. At March 31, 2016, December 31, 2015 and March 31, 2015, the Company had no outstanding balance on the $75.0 million revolving credit facility.
Short-term borrowings include securities sold under repurchase agreements and federal funds purchased. These borrowings totaled $47.7
million at March 31, 2016 compared to $63.9 million at December 31, 2015 and $50.1 million at March 31, 2015. Securities sold under repurchase agreements represent sweep accounts for certain customers in connection with master repurchase agreements at the banks. This funding category typically fluctuates based on customer preferences and daily liquidity needs of the banks, their customers and the banks’ operating subsidiaries.
The average balance of secured borrowings represents a third party Canadian transaction ("Canadian
Secured Borrowing"). Under the Canadian Secured Borrowing, in December 2014, the Company, through its subsidiary, FIFC Canada, sold an undivided co-ownership interest in all receivables owed to FIFC Canada to an unrelated third party in exchange for a cash payment of approximately C$150 million pursuant to a receivables purchase agreement (“Receivables Purchase Agreement”). The Receivables Purchase Agreement was amended in December 2015, effectively extending the maturity date from December 15, 2015 to December 15, 2017. Additionally, at that time, the unrelated third party paid an additional C$10 million, which increased the total payments to C$160 million. The proceeds received from these transactions are reflected on the
Company’s Consolidated Statements of Condition as a secured borrowing owed to the unrelated third party and translated to the Company’s reporting currency as of the respective date. The translated balance of the Canadian Secured Borrowing under the Receivables Purchase Agreement totaled $123.0 million at March 31, 2016 compared to $115.5 million at December 31, 2015 and $118.1 million at March 31, 2015. At March 31, 2016, the interest rate of the Canadian Secured Borrowing was 1.5322%.
Other
borrowings include a fixed-rate promissory note entered into in August 2012 related to an office building complex owned by the Company and non-recourse notes issued by the Company to other banks related to certain capital leases. At March 31, 2016, the fixed-rate promissory note had a balance of $18.1 million compared to $18.3 million at December 31, 2015 and $18.5 million at March 31, 2015.
At March 31, 2016, the Company had
outstanding subordinated notes totaling $138.9 million compared to $138.9 million and $138.8 million outstanding at December 31, 2015 and March 31, 2015, respectively. The notes have a stated interest rate of 5.00% and mature in June 2024. These notes are stated at par adjusted for unamortized costs paid related to the issuance of this debt.
The
Company had $253.6 million of junior subordinated debentures outstanding as of March 31, 2016 compared to $268.6 million outstanding at December 31, 2015 and $249.5 million outstanding at March 31, 2015. The amounts reflected on the balance sheet represent the junior subordinated debentures issued to eleven trusts by the Company and equal the amount of the preferred and common securities issued by the trusts. The balance increased $19.1 million in 2015 as a result of the addition of
the Suburban Illinois Capital Trust II and Community Financial Shares Statutory Trust II acquired as a part of the acquisitions of Suburban and CFIS, respectively. Additionally, in January 2016, the Company acquired $15.0 million of the $40.0 million of trust preferred securities issued by Wintrust Capital Trust VIII from a third-party investor. The purchase effectively extinguished $15.0 million of junior subordinated debentures related to Wintrust Capital Trust VIII and resulted in a $4.3 million gain from the early extinguishment of debt. Prior to January 1, 2015, the junior subordinated debentures, subject to certain limitations, qualified as Tier 1 regulatory capital of the Company and the amount in excess of those certain
limitations could, subject to other restrictions, be included in Tier 2 capital. Starting in 2015, a portion of these junior subordinated debentures qualified as Tier 1 regulatory capital of the Company and the amount in excess of those certain limitations, subject to certain restrictions, was included in Tier 2 capital. At December 31, 2015, $65.1 million and $195.4 million of the junior subordinated debentures, net of common securities, were included in the Company's Tier 1 and Tier 2 regulatory capital, respectively. At March 31, 2015, $60.5 million and $181.5 million of the junior subordinated debentures,
net of common securities, were included in the Company's Tier 1 and Tier 2 regulatory capital, respectively. Starting in 2016, none of the junior subordinated debentures qualified as Tier 1 regulatory capital of the Company resulting in $245.5 million of the junior subordinated debentures, net of common securities, being included in the Company's Tier 2 regulatory capital.
See Notes 10 and 11 of the Consolidated Financial Statements presented under Item 1 of this report for details of period end balances and other information for these various funding sources.
Shareholders’
Equity
The following tables reflect various consolidated measures of capital as of the dates presented and the capital guidelines established by the Federal Reserve Bank for a bank holding company:
Common equity Tier 1 capital to risk-weighted assets
8.4
8.4
9.1
Total
capital to risk-weighted assets
12.1
12.2
12.5
Total average equity-to-total average assets(1)
10.4
10.6
10.7
(1)
Based
on quarterly average balances.
Minimum
Capital
Requirements
Well
Capitalized
Leverage ratio
4.0
%
5.0
%
Tier
1 capital to risk-weighted assets
6.0
8.0
Common equity Tier 1 capital to risk-weighted assets
4.5
6.5
Total capital to risk-weighted assets
8.0
10.0
The
Company’s principal sources of funds at the holding company level are dividends from its subsidiaries, borrowings under its loan agreement with unaffiliated banks and proceeds from the issuances of subordinated debt and additional equity. Refer to Notes 10, 11 and 16 of the Consolidated Financial Statements in Item 1 for further information on these various funding sources. Management is committed to maintaining the Company’s capital levels above the “Well Capitalized” levels established by the Federal Reserve for bank holding companies.
The Company’s Board of Directors approves dividends from time to time,
however, the ability to declare a dividend is limited by the Company's financial condition, the terms of the Company's 5.00% non-cumulative perpetual convertible preferred stock, Series C, the terms of the Company's fixed-to-floating rate non-cumulative perpetual preferred stock, Series D, the terms of the Company’s Trust Preferred Securities offerings and under certain financial covenants in the Company’s revolving and term facilities. In January of 2016, the
Company declared a quarterly cash dividend of $0.12 per common share. In January, April, July and October of 2015, the Company declared a quarterly cash dividend of $0.11 per common share.
See Note 16 of the Consolidated Financial Statements presented under Item 1 of this report for details on the Company’s issuance of Series D and Series C preferred stock in June 2015 and March 2012, respectively. The
Company hereby incorporates by reference Note 17 of the Consolidated Financial Statements presented under Item 1 of this report in its entirety.
LIQUIDITY
Wintrust manages the liquidity position of its banking operations to ensure that sufficient funds are available to meet customers’ needs for loans and deposit withdrawals. The liquidity to meet these demands is provided by maturing assets, liquid assets that can be converted to cash and the ability to attract funds from external sources. Liquid assets refer to money market assets such as Federal funds sold and interest bearing deposits with banks, as well as available-for-sale debt securities which are not pledged to secure public funds.
The
Company believes that it has sufficient funds and access to funds to meet its working capital and other needs. Please refer to Management's Discussion and Analysis of Financial Condition and Results of Operation - Interest-Earning Assets, -Deposits, -Other Funding Sources and -Shareholders’ Equity sections of this report for additional information regarding the Company’s liquidity position.
INFLATION
A banking organization’s assets and liabilities are primarily monetary. Changes in the rate of inflation do not have as great an impact on the financial condition of a bank as do changes in interest rates. Moreover, interest
rates do not necessarily change at the same percentage as inflation. Accordingly, changes in inflation are not expected to have a material impact on the Company. An analysis of the Company’s asset and liability structure provides the best indication of how the organization is positioned to respond to changing interest rates. See “Quantitative and Qualitative Disclosures About Market Risks” section of this report for additional information.
FORWARD-LOOKING STATEMENTS
This document contains forward-looking statements within the meaning
of federal securities laws. Forward-looking information can be identified through the use of words such as “intend,”“plan,”“project,”“expect,”“anticipate,”“believe,”“estimate,”“contemplate,”“possible,”“point,”“will,”“may,”“should,”“would” and “could.” Forward-looking statements and information are not historical facts, are premised on many factors and assumptions, and represent only management’s expectations, estimates and projections regarding future events. Similarly, these statements are not guarantees of future performance and involve certain risks and uncertainties that are difficult to predict, which may include, but are not limited to, those listed below and the Risk Factors discussed under Item 1A of the Company’s 2015
Annual Report on Form 10-K and in any of the Company’s subsequent SEC filings. The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and is including this statement for purposes of invoking these safe harbor provisions. Such forward-looking statements may be deemed to include, among other things, statements relating to the Company’s future financial performance, the performance of its loan portfolio, the expected amount of future credit reserves and charge-offs, delinquency trends, growth plans, regulatory developments, securities that the
Company may offer from time to time, and management’s long-term performance goals, as well as statements relating to the anticipated effects on financial condition and results of operations from expected developments or events, the Company’s business and growth strategies, including future acquisitions of banks, specialty finance or wealth management businesses, internal growth and plans to form additional de novo banks or branch offices. Actual results could differ materially from those addressed in the forward-looking statements as a result of numerous factors, including the following:
•
difficult economic conditions have
adversely affected our company and the financial services industry in general and further deterioration in economic conditions may materially adversely affect our business, financial condition, results of operations and cash flows;
•
since our business is concentrated in the Chicago metropolitan and southern Wisconsin market areas, further declines in the economy of this region could adversely affect our business;
•
if our allowance
for loan losses is not sufficient to absorb losses that may occur in our loan portfolio, our financial condition and liquidity could suffer;
•
a significant portion of our loan portfolio is comprised of commercial loans, the repayment of which is largely dependent upon the financial success and economic viability of the borrower;
•
a substantial portion of our loan portfolio is secured by real estate, in particular commercial real estate. Deterioration in the real estate markets could lead to additional losses, which
could have a material adverse effect on our financial condition and results of operations;
any inaccurate assumptions in our analytical and forecasting models could cause us to miscalculate our projected revenue or losses, which could adversely affect our financial condition;
•
unanticipated
changes in prevailing interest rates and the effects of changing regulation could adversely affect our net interest income, which is our largest source of income;
•
our liquidity position may be negatively impacted if economic conditions continue to suffer;
•
the financial services industry is very competitive, and if we are not able to compete effectively, we may lose market share and our business could suffer;
•
if
we are unable to compete effectively, we will lose market share and income from deposits, loans and other products may be reduced. This could adversely affect our profitability and have a material adverse effect on our business, financial condition and results of operations;
•
if we are unable to continue to identify favorable acquisitions or successfully integrate our acquisitions, our growth may be limited and our results of operations could suffer;
•
our participation in FDIC-assisted acquisitions may present additional
risks to our financial condition and results of operations;
•
an actual or perceived reduction in our financial strength may cause others to reduce or cease doing business with us, which could result in a decrease in our net interest income and fee revenues;
•
if our growth requires us to raise additional capital, that capital may not be available when it is needed or the cost of that capital may be very high;
•
disruption
in the financial markets could result in lower fair values for our investment securities portfolio;
•
our controls and procedures may fail or be circumvented;
•
new lines of business and new products and services are essential to our ability to compete but may subject us to additional risks;
•
failures
of our information technology systems may adversely affect our operations;
•
failures by or of our vendors may adversely affect our operations;
•
we issue debit cards, and debit card transactions pose a particular cybersecurity risk that is outside of our control;
•
we depend on the accuracy and
completeness of information we receive about our customers and counterparties to make credit decisions;
•
if we are unable to attract and retain experienced and qualified personnel, our ability to provide high quality service will be diminished, we may lose key customer relationships, and our results of operations may suffer;
•
we are subject to environmental liability risk associated with lending activities;
•
we
are subject to claims and legal actions which could negatively affect our results of operations or financial condition;
•
losses incurred in connection with actual or projected repurchases and indemnification payments related to mortgages that we have sold into the secondary market may exceed our financial statement reserves and we may be required to increase such reserves in the future. Increases to our reserves and losses incurred in connection with actual loan repurchases and indemnification payments could have a material adverse effect on our business, financial condition, results of operations or cash flows;
•
consumers
may decide not to use banks to complete their financial transactions, which could adversely affect our business and results of operations;
•
we may be adversely impacted by the soundness of other financial institutions;
•
de novo operations often involve significant expenses and delayed returns and may negatively impact Wintrust's profitability;
•
we
are subject to examinations and challenges by tax authorities, and changes in federal and state tax laws and changes in interpretation of existing laws can impact our financial results;
•
changes in accounting policies or accounting standards could materially adversely affect how we report our financial results and financial condition;
•
we are a bank holding company, and our sources of funds, including to pay dividends, are limited;
•
anti-takeover
provisions could negatively impact our shareholders;
•
if we fail to meet our regulatory capital ratios, we may be forced to raise capital or sell assets;
•
if our credit rating is lowered, our financing costs could increase;
•
changes in the United States’ monetary policy may restrict our ability
to conduct our business in a profitable manner;
•
legislative and regulatory actions taken now or in the future regarding the financial services industry may significantly increase our costs or limit our ability to conduct our business in a profitable manner;
•
financial reform legislation and increased regulatory rigor around mortgage-related issues may reduce our ability to market our products to consumers and may limit our ability to profitably operate our mortgage business;
•
federal,
state and local consumer lending laws may restrict our ability to originate certain mortgage loans or increase our risk of liability with respect to such loans and could increase our cost of doing business;
•
regulatory initiatives regarding bank capital requirements may require heightened capital;
•
our FDIC insurance premiums may increase, which could negatively impact our results of operations;
•
non-compliance
with the USA PATRIOT Act, Bank Secrecy Act or other laws and regulations could result in fines or sanctions;
•
our premium finance business may involve a higher risk of delinquency or collection than our other lending operations, and could expose us to losses;
widespread
financial difficulties or credit downgrades among commercial and life insurance providers could lessen the value of the collateral securing our premium finance loans and impair the financial condition and liquidity of FIFC and FIFC Canada;
•
proposed regulatory changes could significantly reduce loan volume and impair the financial condition of FIFC; and
•
our wealth management business in general, and WHI's brokerage operation, in particular, exposes us to certain risks associated with the securities industry.
Therefore,
there can be no assurances that future actual results will correspond to these forward-looking statements. The reader is cautioned not to place undue reliance on any forward-looking statement made by the Company. Any such statement speaks only as of the date the statement was made or as of such date that may be referenced within the statement. The Company undertakes no obligation to update any forward-looking statement to reflect the impact of circumstances or events that arise after the date the forward-looking statement was made. Persons are advised, however, to consult further disclosures management makes on related subjects in its reports filed with the Securities and Exchange Commission and in its press releases.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
As an ongoing part of its financial strategy, the Company attempts to manage the impact of fluctuations in market interest rates on net interest income. This effort entails providing a reasonable balance between interest rate risk, credit risk, liquidity risk and maintenance of yield. Asset-liability management policies are established and monitored by management in conjunction with the boards of directors of the banks, subject to general oversight by the Risk Management Committee of the Company’s Board of Directors. The
policies establish guidelines for acceptable limits on the sensitivity of the market value of assets and liabilities to changes in interest rates.
Interest rate risk arises when the maturity or re-pricing periods and interest rate indices of the interest earning assets, interest bearing liabilities, and derivative financial instruments are different. It is the risk that changes in the level of market interest rates will result in disproportionate changes in the value of, and the net earnings generated from, the Company’s interest earning assets, interest bearing liabilities and derivative financial instruments. The Company continuously monitors not only the organization’s current net interest margin, but
also the historical trends of these margins. In addition, management attempts to identify potential adverse changes in net interest income in future years as a result of interest rate fluctuations by performing simulation analysis of various interest rate environments. If a potential adverse change in net interest margin and/or net income is identified, management would take appropriate actions with its asset-liability structure to mitigate these potentially adverse situations. Please refer to Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for further discussion of the net interest margin.
Since the Company’s primary source of interest bearing liabilities is from customer deposits, the
Company’s ability to manage the types and terms of such deposits is somewhat limited by customer preferences and local competition in the market areas in which the banks operate. The rates, terms and interest rate indices of the Company’s interest earning assets result primarily from the Company’s strategy of investing in loans and securities that permit the Company to limit its exposure to interest rate risk, together with credit risk, while at the same time achieving an acceptable interest rate spread.
The Company’s exposure to
interest rate risk is reviewed on a regular basis by management and the Risk Management Committees of the boards of directors of the banks and the Company. The objective of the review is to measure the effect on net income and to adjust balance sheet and derivative financial instruments to minimize the inherent risk while at the same time maximize net interest income.
The following interest rate scenarios display the percentage change in net interest income over a one-year time horizon assuming increases and decreases of 100 and 200 basis points. The Static Shock Scenario results incorporate actual cash flows and repricing characteristics for balance sheet instruments following an instantaneous, parallel change in market rates based upon a static (i.e. no growth or constant) balance sheet.
Conversely, the Ramp Scenario results incorporate management’s projections of future volume and pricing of each of the product lines following a gradual, parallel change in market rates over twelve months. Actual results may differ from these simulated results due to timing, magnitude, and frequency of interest rate changes as well as changes in market conditions and management strategies. The interest rate sensitivity for both the Static Shock and Ramp Scenarios at March 31, 2016, December 31, 2015 and March 31, 2015 is as follows:
One
method utilized by financial institutions, including the Company, to manage interest rate risk is to enter into derivative financial instruments. Derivative financial instruments include interest rate swaps, interest rate caps and floors, futures, forwards, option contracts and other financial instruments with similar characteristics. Additionally, the Company enters into commitments to fund
certain
mortgage loans (interest rate locks) to be sold into the secondary market and forward commitments for the future delivery of mortgage loans to third party investors. See Note 13 of the Consolidated Financial Statements in Item 1 of this report for further information on the Company’s derivative financial instruments.
During the first quarter of 2016, the Company entered into certain covered call option transactions related to certain securities held by the Company. The Company uses these option
transactions (rather than entering into other derivative interest rate contracts, such as interest rate floors) to economically hedge positions and compensate for net interest margin compression by increasing the total return associated with the related securities through fees generated from these options. Although the revenue received from these options is recorded as non-interest income rather than interest income, the increased return attributable to the related securities from these options contributes to the Company’s overall profitability. The Company’s exposure to interest rate risk may be impacted by these transactions. To mitigate this risk, the
Company may acquire fixed rate term debt or use financial derivative instruments. There were no covered call options outstanding as of March 31, 2016.
As of the end of the period covered by this report, the
Company’s Chief Executive Officer and Chief Financial Officer carried out an evaluation under their supervision, with the participation of other members of management as they deemed appropriate, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as contemplated by Exchange Act Rule 13a-15. Based upon, and as of the date of that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective, in all material respects, in timely alerting them to material information relating to the Company (and its consolidated subsidiaries)
required to be included in the periodic reports the Company is required to file and submit to the SEC under the Exchange Act.
There were no changes in the Company’s internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)) during the period that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
The Company and its subsidiaries, from time to time, are subject to pending and threatened legal action and proceedings arising in the ordinary course of business.
In accordance with applicable accounting principles, the Company establishes an accrued liability for litigation and threatened litigation actions and proceedings when
those actions present loss contingencies which are both probable and estimable. In actions for which a loss is reasonably possible in future periods, the Company determines whether it can estimate a loss or range of possible loss. To determine whether a possible loss is estimable, the Company reviews and evaluates its material litigation on an ongoing basis, in conjunction with any outside counsel handling the matter, in light of potentially relevant factual and legal developments. This review may include information learned through the discovery process, rulings on substantive or dispositive motions, and settlement discussions.
On January 15, 2015, Lehman
Brothers Holdings, Inc. ("Lehman Holdings") sent a demand letter asserting that Wintrust Mortgage must indemnify it for losses arising from loans sold by Wintrust Mortgage to Lehman Brothers Bank, FSB under a Loan Purchase Agreement between Wintrust Mortgage, as successor to SGB Corporation, and Lehman Brothers Bank. The demand was the precursor for triggering the alternative dispute resolution process mandated by the U.S. Bankruptcy Court for the Southern District of New York. Lehman Holdings triggered the mandatory alternative dispute resolution process on October 16, 2015. On February 3, 2016, following a ruling by the federal Court of Appeals for the Tenth Circuit that was adverse to Lehman Holdings on the statute of limitations that is applicable to similar loan purchase claims, Lehman Holdings filed a complaint against Wintrust Mortgage and 150 other entities
from which it had purchased loans in the U.S. Bankruptcy Court for the Southern District of New York. The mandatory mediation was held on March 16, 2016, but did not result in a consensual resolution of a dispute. Wintrust Mortgage must respond to the complaint by May 31, 2016.
The Company has reserved an amount for the Lehman Holdings action that is immaterial to its results of operations or financial condition. Such litigation and threatened litigation actions necessarily involve substantial uncertainty and it is not possible at this time to predict the ultimate resolution or to determine whether, or to what extent, any loss with respect to these legal proceedings may exceed the amounts reserved
by the Company.
On August 28, 2015, Wintrust Mortgage received a demand from RFC Liquidating Trust asserting that that Wintrust Mortgage is liable to it for losses arising from loans sold by Wintrust Mortgage or its predecessors to Residential Funding Company LLC and/or related entities. No litigation has been initiated and the range of liability is not reasonably estimable at this time and it is not foreseeable when sufficient information will become available to provide a basis for recording a reserve, should a reserve ultimately be required.
On August 13, 2015, BMO Harris Financial Advisors (“BHFA”)
filed an arbitration demand with the FINRA seeking damages and a permanent injunction and a complaint with the Circuit Court for Cook County, Illinois seeking a temporary restraining order against one of its former financial advisors and a current financial advisor with WHI. A narrow and limited temporary injunction was entered and the matter was referred to FINRA for arbitration. In November 2015, BHFA added WHI as a co-defendant in the arbitration action, alleging that WHI tortiously interfered with BHFA’s contract with its former financial advisor. As discovery is still in the preliminary stages, the range of liability is not reasonably estimable at this time and it is not foreseeable when sufficient information will become available to provide a basis for recording a reserve, should a reserve ultimately be required. A hearing on the merits has been set for September 12 - 15,
2016.
Based on information currently available and upon consultation with counsel, management believes that the eventual outcome of any pending or threatened legal actions and proceedings will not have a material adverse effect on the operations or financial condition of the Company. However, it is possible that the ultimate resolution of these matters, if unfavorable, may be material to the results of operations or financial condition for a particular period.
Item 1A: Risk Factors
There were no material changes from the risk factors
set forth under Part I, Item 1A “Risk Factors” in the Company’s Form 10-K for the fiscal year ended December 31, 2015.
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds
No purchases of the Company’s
common shares were made by or on behalf of the Company or any “affiliated purchaser” as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934, as amended, during the three months ended March 31, 2016. There is currently no authorization to repurchase shares of outstanding common stock.
Form of Performance Award Agreement - Cash Settled under the
Company's 2015 Stock Incentive Plan
10.2
Form of Nonqualified Stock Option Agreement under the Company's 2015 Stock Incentive Plan
10.3
Form
of Performance Award Agreement - Share-Settled under the Company's 2015 Stock Incentive Plan
10.4
Form of Performance Award Agreement - Cash Settled under the Company's 2015 Stock Incentive Plan
31.1
Certification
of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
Certification
of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Includes the following financial information included in the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31,
2016, formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Statements of Condition, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Changes in Shareholders’ Equity, (v) the Consolidated Statements of Cash Flows, and (vi) Notes to Consolidated Financial Statements
Pursuant to the requirements of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.