e10vk
Table of Contents

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
     
þ   Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2010
     
o   Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Transition Period from      to                    
Commission File Number 001-35077
Wintrust Financial Corporation
(Exact name of registrant as specified in its charter)
     
Illinois
(State of incorporation or organization)
  36-3873352
(I.R.S. Employer Identification No.)
727 North Bank Lane
Lake Forest, Illinois 60045

(Address of principal executive offices)
Registrant’s telephone number, including area code: (847) 615-4096
Securities registered pursuant to Section 12(b) of the Act:
     
Title of Each Class   Name of Each Exchange on Which Registered
     
Common Stock, no par value
Warrants (expiring December 19, 2018)
  The NASDAQ Global Select Market
The NASDAQ Global Select Market
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. þ Yes o No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. o Yes þ No
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 for 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. þ Yes o 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). þ Yes o No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o Yes o 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 definition of “large accelerated filer” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
             
Large accelerated filer þ   Accelerated filer o   Non-accelerated filer o
(Do not check if a smaller reporting company)
  Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). o Yes þ No
The aggregate market value of the voting stock held by non-affiliates of the registrant on June 30, 2010 (the last business day of the registrant’s most recently completed second quarter), determined using the closing price of the common stock on that day of $33.34, as reported by the NASDAQ Global Select Market, was $1,015,807,187.
As of February 23, 2011, the registrant had 34,939,523 shares of Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Company’s Annual Meeting of Shareholders to be held on May 26, 2011 are incorporated by reference into Part III.
 
 

 


 

TABLE OF CONTENTS
             
        Page  
PART I
  Business     3  
  Risk Factors     18  
  Unresolved Staff Comments     28  
  Properties     28  
  Legal Proceedings     28  
  [Removed and Reserved.]     28  
 
           
PART II
 
           
  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities     28  
  Selected Financial Data     31  
  Management’s Discussion and Analysis of Financial Condition and Results of Operation     32  
  Quantitative and Qualitative Disclosures About Market Risk     84  
  Financial Statements and Supplementary Data     85  
  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure     146  
  Controls and Procedures     146  
  Other Information     149  
 
           
PART III
 
           
  Directors, Executive Officers and Corporate Governance     149  
  Executive Compensation     149  
  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters     150  
  Certain Relationships and Related Transactions, and Director Independence     150  
  Principal Accountant Fees and Services     150  
 
           
PART IV
 
           
  Exhibits and Financial Statement Schedules     151  
 
  Signatures     157  
 EX-10.17
 EX-10.42
 EX-12.1
 EX-12.2
 EX-13.1
 EX-21.1
 EX-23.1
 EX-31.1
 EX-31.2
 EX-32.1
 EX-99.1
 EX-99.2
 EX-101 INSTANCE DOCUMENT
 EX-101 SCHEMA DOCUMENT
 EX-101 CALCULATION LINKBASE DOCUMENT
 EX-101 LABELS LINKBASE DOCUMENT
 EX-101 PRESENTATION LINKBASE DOCUMENT
 EX-101 DEFINITION LINKBASE DOCUMENT

 


Table of Contents

PART I
ITEM I. BUSINESS
Overview
Wintrust Financial Corporation, an Illinois corporation (“we,” “Wintrust” or “the Company”), which was incorporated in 1992, is a financial holding company based in Lake Forest, Illinois, with total assets of approximately $14.0 billion as of December 31, 2010. We conduct our businesses through three segments: community banking, specialty finance and wealth management.
We provide community-oriented, personal and commercial banking services to customers located in the Chicago metropolitan area and in southeastern Wisconsin through our fifteen wholly owned banking subsidiaries (collectively, the “banks”), as well as the origination and purchase of residential mortgages for sale into the secondary market through our wholly-owned subsidiary, Wintrust Mortgage Corporation (“WMC”). For the years ended December 31, 2010, 2009 and 2008, the community banking segment had net revenues of $520 million, $393 million and $309 million, respectively, and net income (loss) of $71 million, $(26 million) and $38 million, respectively. The community banking segment had total assets of $13.3 billion, $12.0 billion and $10.4 billion as of December 31, 2010, 2009 and 2008, respectively. The community banking segment accounted for 85% of our net revenues for the year ended December 31, 2010. All of these measurements are based on our reportable segments and do not reflect intersegment eliminations.
We provide specialty finance services, including financing for the payment of commercial insurance premiums and life insurance premiums (“premium finance receivables”) on a national basis through our wholly owned subsidiary, First Insurance Funding Corporation (“FIFC”), and short-term accounts receivable financing (“Tricom finance receivables”) and outsourced administrative services through our wholly owned subsidiary, Tricom, Inc. of Milwaukee (“Tricom”). For the years ended December 31, 2010, 2009 and 2008, the specialty finance segment had net revenues of $104 million, $249 million and $80 million, respectively, and net income of $46 million, $121 million and $35 million, respectively. The specialty finance segment had total assets of $2.9 billion, $2.2 billion and $1.4 billion as of December 31, 2010, 2009 and 2008, respectively. It accounted for 17% of our net revenues for the year ended December 31, 2010. All of these measurements are based on our reportable segments and do not reflect intersegment eliminations.
We provide a full range of wealth management services primarily to customers in the Chicago metropolitan area and in southeastern Wisconsin through three separate subsidiaries, including The Chicago Trust Company, N.A. (“CTC”), Wayne Hummer Investments, LLC (“WHI”) and Wintrust Capital Management, LLC (“WCM”). For the years ended December 31, 2010, 2009 and 2008, the wealth management segment had net revenues of $58 million, $51 million and $47 million, respectively, and net income of $7 million, $6 million and $5 million, respectively. The wealth management segment had total assets of $65 million, $62 million and $56 million as of December 31, 2010, 2009 and 2008, respectively. It accounted for 9% of our net revenues for the year ended December 31, 2010. All of these measurements are based on our reportable segments and do not reflect intersegment eliminations.
Our Business
Community Banking
Through our banks, we provide community-oriented, personal and commercial banking services to customers located in the Chicago metropolitan area and in southeastern Wisconsin. Our customers include individuals, small to mid-sized businesses, local governmental units and institutional clients residing primarily in the banks’ local service areas. The banks have a community banking and marketing strategy. In keeping with this strategy, the banks provide highly personalized and responsive service, a characteristic of locally-owned and managed institutions. As such, the banks compete for deposits principally by offering depositors a variety of deposit programs, convenient office locations, hours and other services, and for loan originations primarily through the interest rates and loan fees they charge, the efficiency and quality of services they provide to borrowers and the variety of their loan and cash management products. Using our decentralized corporate structure to our advantage, in 2008, we announced the creation of our MaxSafe® deposit accounts, which provide customers with expanded Federal Deposit Insurance Corporation (“FDIC”) insurance coverage by spreading a customer’s deposit across our fifteen banks. This product differentiates our banks from many of our competitors that have consolidated their bank charters into branches. In 2010, we opened a downtown Chicago office to work with each of our banks to capture core commercial and industrial business. Our commercial and industrial lenders in our downtown office operate in close partnership with lenders at our community banks. By combining our expertise in the commercial and industrial sector with our high level of personal service and full suite of banking products, we believe we create another point of differentiation from both

3


Table of Contents

our larger and smaller competitors. The banks also offer home equity, home mortgage, consumer, and real estate loans, safe deposit facilities, ATMs, internet banking and other innovative and traditional services specially tailored to meet the needs of customers in their market areas.
We developed our banking franchise through de novo organization of nine banks and the purchase of seven banks, one of which was merged into an existing Wintrust bank. The organizational efforts began in 1991, when a group of experienced bankers and local business people identified an unfilled niche in the Chicago metropolitan area retail banking market. As large banks acquired smaller ones and personal service was subjected to consolidation strategies, the opportunity increased for locally owned and operated, highly personal service-oriented banks. As a result, Lake Forest Bank and Trust Company (“Lake Forest Bank”) was founded in December 1991 to service the Lake Forest and Lake Bluff communities. We furthered our growth strategy in 2010 by purchasing, through certain of our banking subsidiaries, seven banking locations through three FDIC-assisted transactions. As of December 31, 2010, we had 86 banking locations.
We now own fifteen banks, including nine Illinois-chartered banks, Lake Forest Bank, Hinsdale Bank and Trust Company (“Hinsdale Bank”), North Shore Community Bank and Trust Company (“North Shore Bank”), Libertyville Bank and Trust Company (“Libertyville Bank”), Northbrook Bank & Trust Company (“Northbrook Bank”), Village Bank & Trust (“Village Bank”), Wheaton Bank & Trust Company (“Wheaton Bank”), State Bank of The Lakes and St. Charles Bank & Trust Company (“St. Charles Bank”). In addition, we have one Wisconsin-chartered bank, Town Bank, and five nationally chartered banks, Barrington Bank and Trust Company, N.A. (“Barrington Bank”), Crystal Lake Bank & Trust Company, N.A. (“Crystal Lake Bank”), Advantage National Bank Group (“Advantage Bank”), Beverly Bank & Trust Company, N.A. (“Beverly Bank”) and Old Plank Trail Community Bank, N.A. (“Old Plank Trail Bank”).
Each Bank is subject to regulation, supervision and regular examination by: (1) the Secretary of the Illinois Department of Financial and Professional Regulation (“Illinois Secretary”) and the Board of Governors of the Federal Reserve System (“Federal Reserve”) for Illinois-chartered banks; (2) the Office of the Comptroller of the Currency (“OCC”) for nationally-chartered banks or (3) the Wisconsin Department of Financial Institutions (“Wisconsin Department”) and the Federal Reserve for Town Bank.
We also engage in the origination and purchase of residential mortgages for sale into the secondary market through our wholly owned subsidiary, WMC, and provide other loan closing services to a network of mortgage brokers. Mortgage banking operations are also performed within each of the banks. WMC sells many of its loans with servicing released. Some of our banks engage in loan servicing, as a portion of the loans sold by the banks into the secondary market are sold with the servicing of those loans retained. WMC maintains principal origination offices in a number of other states, including Illinois, and originates loans in states through correspondent channels. WMC also established offices at several of the banks and provides the banks with the ability to use an enhanced loan origination and documentation system. This allows WMC and the banks to better utilize existing operational capacity and improve the product offering for the banks’ customers. In December 2008, WMC acquired certain assets and assumed certain liabilities of the mortgage banking business of Professional Mortgage Partners (“PMP”).
We also offer several niche lending products through the banks. These include Barrington Bank’s Community Advantage program which provides lending, deposit and cash management services to condominium, homeowner and community associations, Hinsdale Bank’s mortgage warehouse lending program which provides loan and deposit services to mortgage brokerage companies located predominantly in the Chicago metropolitan area, Crystal Lake Bank’s North American Aviation Financing division which provides small aircraft lending, Lake Forest Bank’s franchise lending program which provides lending primarily to restaurant franchisees and Hinsdale Bank’s indirect auto lending program which originates new and used automobile loans, generated through a network of automobile dealers located in the Chicago metropolitan area, secured by new and used vehicles and diversified among many individual borrowers. We did not originate indirect auto loans from the third quarter of 2008 through the third quarter of 2010, but have restarted loans under this program as market conditions have become more favorable. These other specialty loans generated through divisions of the banks comprised approximately 4.2% of our loan and lease portfolio at December 31, 2010.
Specialty Finance
We conduct our specialty finance businesses through indirect non-bank subsidiaries. Our wholly owned subsidiary, FIFC, engages in the premium finance receivables business, our most significant specialized lending niche, including commercial insurance premium finance and life insurance premium finance.

4


Table of Contents

FIFC makes loans to businesses to finance the insurance premiums they pay on their commercial insurance policies. Approved medium and large insurance agents and brokers located throughout the United States assist FIFC in arranging each commercial premium finance loan between the borrower and FIFC. FIFC evaluates each loan request according to its underwriting criteria including the amount of the down payment on the insurance policy, the term of the loan, the credit quality of the insurance company providing the financed insurance policy, the interest rate, the borrower’s previous payment history, if any, and other factors deemed appropriate. Upon approval of the loan by FIFC, the borrower makes a down payment on the financed insurance policy, which is generally done by providing payment to the agent or broker, who then forwards it to the insurance company. FIFC may either forward the financed amount of the remaining policy premiums directly to the insurance carrier or to the agent or broker for remittance to the insurance carrier on FIFC’s behalf. In some cases the agent or broker may hold our collateral, in the form of the proceeds of the unearned insurance premium from the insurance company, and forward it to FIFC in the event of a default by the borrower. Because the agent or broker is the primary contact to the ultimate borrowers who are located nationwide and because proceeds and our collateral may be handled by the agent or brokers during the term of the loan, FIFC may be more susceptible to third party (i.e., agent or broker) fraud. 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. However, in the second quarter of 2010, fraud perpetrated against a number of premium finance companies in the industry, including the property and casualty division of our premium financing subsidiary, increased both our net charge-offs and provision for credit losses by $15.7 million. Actions have been taken by us to decrease the likelihood of this type of loss from recurring in this line of business for us. We have conducted a thorough review of the premium finance—commercial portfolio and found no signs of similar situations.
In 2007, FIFC expanded and began financing life insurance policy premiums for high net-worth individuals. 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. In 2009, FIFC significantly expanded its life insurance premium finance business by purchasing a portfolio of domestic life insurance premium finance loans with an aggregate unpaid principal balance of approximately $1.0 billion and certain related assets from two affiliates of American International Group, Inc. (“AIG”), for an aggregate purchase price of $745.9 million.
Through our wholly owned subsidiary, Tricom, we provide high-yielding, short-term accounts receivable financing and value-added, outsourced administrative services, such as data processing of payrolls, billing and cash management services to the temporary staffing industry. Tricom’s clients, located throughout the United States, provide staffing services to businesses in diversified industries. During 2010, Tricom processed payrolls with associated client billings of approximately $300.9 million and contributed approximately $6.3 million to our revenue, net of interest expense.
Wealth Management Activities
We offer a full range of wealth management services through three separate subsidiaries, including trust and investment services, asset management and securities brokerage services. In February 2002, we acquired WHI and Wayne Hummer Asset Management Company (“WHAMC”), later renamed as WCM, which are headquartered in Chicago. Soon thereafter, in order to further expand our wealth management business, we acquired Lake Forest Capital Management Company, a registered investment advisor with approximately $300 million of assets under management at the time of acquisition and, in 2009, further added to our capabilities in this area with the purchase of certain assets and assumption of certain liabilities of Advanced Investment Partners, LLC which specializes in the active management of domestic equity investment strategies and expands WCM’s institutional investment business. At December 31, 2010, the Company’s wealth management subsidiaries had approximately $10.2 billion of assets under management, which includes $1.5 billion of assets owned by the Company and its subsidiary banks.
CTC, our trust subsidiary, offers trust and investment management services to clients through offices located in downtown Chicago and at various banking offices of our fifteen banks. CTC is subject to regulation, supervision and regular examination by the OCC.
WHI, our registered broker/dealer subsidiary, has been in operations since 1931. Through WHI, we provide a full range of private client and securities brokerage services to clients located primarily in the Midwest. WHI is headquartered in downtown Chicago, operates an office in Appleton, Wisconsin, and as of December 31, 2010, established branch locations in offices at a majority of our banks. WHI also provides a full range of investment services to clients through a network of relationships with community-based financial institutions primarily located in Illinois.
WCM, our registered investment adviser, provides money management services and advisory services to individuals, mutual funds and institutional municipal and tax-exempt organizations. WCM also provides portfolio management and financial supervision for a wide range of pension and profit-sharing plans as well as money management and advisory services to CTC.

5


Table of Contents

Strategy and Competition
Historically, we have executed a growth strategy through branch openings and de novo bank formations, expansion of our wealth management and premium finance business, development of specialized earning asset niches and acquisitions of other community-oriented banks or specialty finance companies. However, beginning in 2006, we made a decision to slow our growth due to unfavorable credit spreads, loosened underwriting standards by many of our competitors, and intense price competition. In August 2008, we raised $50 million of private equity. This investment was followed shortly by an investment by the U.S. Department of Treasury (“Treasury”) of $250 million through the Capital Purchase Program (“CPP”). The CPP investment was not necessary for our short-or long-term health. However, the CPP investment presented an opportunity for the Company. By providing us with a significant source of relatively inexpensive capital, the Treasury’s CPP investment allowed us to accelerate our growth cycle, expand lending and meet former Treasury Secretary Paulson’s stated purpose for the program, which was “designed to attract broad participation by healthy institutions” that “have plenty of capital to get through this period, but are not positioned to lend as widely as is necessary to support our economy.”
With this additional $300 million of additional capital, we began to increase our lending and deposits in late 2008. This additional capital allowed us to be in a position to take advantage of opportunities in a disrupted marketplace during 2009 and 2010 by:
    Increasing our lending as other financial institutions pulled back;
    Hiring quality lenders and other staff away from larger and smaller institutions that may have substantially deviated from a customer-focused approach or who may have substantially limited the ability of their staff to provide credit or other services to their customers;
    Investing in dislocated assets such as the purchased life insurance premium finance portfolio and certain collateralized mortgage obligations; and
    Purchasing banks and banking assets either directly or through the FDIC—assisted process in areas key to our geographic expansion
In March 2010, we further strengthened our capital position through a public offering of 6,670,000 shares of our common stock at $33.25 per share. Our net proceeds totaled $210.3 million. In December 2010, we sold an additional 3,685,897 shares of our common stock at $30.00 per share and 4.6 million 7.5% tangible equity units at a public offering price of $50.00 per unit (“the concurrent offerings”). We received net proceeds of $327.5 million from the concurrent offerings. Together, our capital offerings aggregated nearly $540 million in net proceeds.
On December 22, 2010, we repurchased all 250,000 shares of our Fixed Rate Cumulative Perpetual Preferred Stock, Series B (the “Series B Preferred Stock”) which we issued to the Treasury under the Troubled Asset Relief Program (“TARP”) CPP. The Series B Preferred Stock was repurchased at a price of $251.3 million, which included accrued and unpaid dividends of $1.3 million.
Our strategy and competitive position for each of our business segments is summarized in further detail, below.
Community Banking
We compete in the commercial banking industry through our banks in the communities they serve. The commercial banking industry is highly competitive and the banks face strong direct competition for deposits, loans and other financial related services. The banks compete with other commercial banks, thrifts, credit unions and stockbrokers. Some of these competitors are local, while others are statewide or nationwide.
As a mid-size financial services company, we expect to benefit from greater access to financial and managerial resources than our smaller local competitors while maintaining our commitment to local decision-making and to our community banking philosophy. In particular, we are able to provide a wider product selection and larger credit facilities than many of our smaller competitors, and we believe our service offerings help us in recruiting talented staff. Since the beginning of 2009, we have added more than 50 lenders throughout the community banking organization, many of whom have joined us because of our ability to offer a range of products and level of services which compete effectively with both larger and smaller market participants. We have continued to expand our product delivery systems, including a wide variety of electronic banking options for our retail and commercial customers which allow us to provide a level of service typically associated with much larger banking institutions. Consequently, management views technology as a great equalizer to offset some of the inherent advantages of its significantly larger competitors. Additionally, we have access to public capital markets whereas many of our local competitors are privately held and may have limited capital raising capabilities.

6


Table of Contents

We also believe we are positioned to compete effectively with other larger and more diversified banks, bank holding companies and other financial services companies due to the multi-chartered approach that pushes accountability for building a franchise and a high level of customer service down to each of our banking franchises. Additionally, we believe that we provide a relatively complete portfolio of products that is responsive to the majority of our customers’ needs through the retail and commercial operations supplied by our banks, and through our mortgage and wealth management operations. The breadth of our product mix allows us to compete effectively with our larger competitors while our multi-chartered approach with local and accountable management provides for what we believe is superior customer service relative to our larger and more centralized competitors.
WMC, as well as the mortgage banking functions within the banks, competes with large mortgage brokers as well as other banking organizations. The mortgage banking business is very competitive and significantly impacted by changes in mortgage interest rates. We believe that mortgage banking revenue will be a continuous source of revenue, but the level of revenue will be impacted by changes in and the general level of mortgage interest rates.
In 2010, we furthered our growth strategy by purchasing, through certain of our banking subsidiaries, a number of additional banks and banking locations. In three FDIC-assisted transactions, we purchased a total of seven new banking locations, five in Chicago, one in Mount Prospect and one in Naperville, Illinois. Each of these acquisitions allowed us to expand our franchise into strategic locations on a cost-effective basis. In addition, our wholly-owned subsidiary bank, Wheaton Bank, agreed to acquire a branch located in Naperville, Illinois. We believe that these strategic acquisitions will allow us to grow into contiguous markets which we do not currently service and expand our footprint.
Specialty Finance
FIFC encounters intense competition from numerous other firms, including a number of national commercial premium finance companies, companies affiliated with insurance carriers, independent insurance brokers who offer premium finance services and other lending institutions. Some of its competitors are larger and have greater financial and other resources. FIFC competes with these entities by emphasizing a high level of knowledge of the insurance industry, flexibility in structuring financing transactions, and the timely funding of qualifying contracts. We believe that our commitment to service also distinguishes us from our competitors. Additionally, we believe that FIFC’s acquisition of a large life insurance premium finance portfolio and related assets in 2009 enhanced our ability to market and sell life insurance premium finance products.
Tricom competes with numerous other firms, including a small number of similar niche finance companies and payroll processing firms, as well as various finance companies, banks and other lending institutions. Tricom’s management believes that its commitment to service distinguishes it from competitors. To the extent that other finance companies, financial institutions and payroll processing firms add greater programs and services to their existing businesses, Tricom’s operations could be negatively affected.
Wealth Management Activities
Our wealth management companies (CTC, WHI and WCM) compete with larger wealth management subsidiaries of other larger bank holding companies as well as with other trust companies, brokerage and other financial service companies, stockbrokers and financial advisors. We believe we can successfully compete for trust, asset management and brokerage business by offering personalized attention and customer service to small to midsize businesses and affluent individuals. We continue to recruit and hire experienced professionals from the larger Chicago area wealth management companies, which is expected to help in attracting new customer relationships.
Employees
At December 31, 2010, the Company and its subsidiaries employed a total of 2,588 full-time-equivalent employees. The Company provides its employees with comprehensive medical and dental benefit plans, life insurance plans, 401(k) plans and an employee stock purchase plan. The Company considers its relationship with its employees to be good.
Available Information
The Company’s internet address is www.wintrust.com. The Company makes available at this address, free of charge, its annual report on Form 10-K, its annual reports to shareholders, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after such material is electronically filed with, or furnished to, the Securities and Exchange Commission (“SEC”).

7


Table of Contents

Supervision and Regulation
Bank holding companies, banks and investment firms are extensively regulated under federal and state law. References under this heading to applicable statutes or regulations are brief summaries or portions thereof which do not purport to be complete and which are qualified in their entirety by reference to those statutes and regulations and regulatory interpretations thereof. Any change in applicable laws or regulations may have a material effect on the business of commercial banks and bank holding companies, including the Company, the banks, FIFC, CTC, WHI, WCM, Tricom and WMC. The supervision, regulation and examination of banks and bank holding companies by bank regulatory agencies are intended primarily for the protection of depositors rather than stockholders of banks and bank holding companies. This section discusses recent regulatory developments impacting the Company and its subsidiaries, including the Emergency Economic Stabilization Act and the Temporary Liquidity Guarantee Program (“TLGP”). Following that presentation, the discussion turns to the regulation and supervision of the Company and its subsidiaries under various federal and state rules and regulations applicable to bank holding companies, broker-dealer and investment advisors.
Extraordinary Government Programs
During the past three years, the federal government, the Federal Reserve Bank of New York (the “New York Fed”) and the FDIC have made a number of programs available to banks and other financial institutions in an effort to ensure a well-functioning U.S. financial system. The Company participated in three such programs. Two of these programs, the CPP of the Treasury and the New York Fed’s Term Asset-Backed Securities Loan Facility (“TALF”), have provided the Company with a significant amount of relatively inexpensive funding, which the Company used to accelerate its growth cycle and expand lending.
Capital Purchase Program. In October 2008, the Treasury announced that it intended to use a portion of the initial funds allocated to it pursuant to the Emergency Economic Stabilization Act of 2008, to invest directly in financial institutions through the newly-created CPP which was “designed to attract broad participation by healthy institutions” which “have plenty of capital to get through this period, but are not positioned to lend as widely as is necessary to support our economy.” In December 2008, the Company sold the Treasury $250 million in the Company’s Series B Preferred Stock, and warrants to purchase the Company’s common stock.
On December 22, 2010, the Company repurchased all the shares of Series B Preferred Stock. The Series B Preferred Stock was repurchased at a price of $251.3 million, which included accrued and unpaid dividends of $1.3 million. In addition, on February 14, 2011, the Treasury sold, through an underwritten public offering to purchasers other than the Company, all of the Company’s warrants that it had received in connection with the CPP investment.
Participation in the CPP placed a number of restrictions on the Company, including limitations on the ability to increase dividends and restrictions on the compensation of its employees and executives. Participation in the CPP also subjected the Company to increased oversight by the Treasury, banking regulators and Congress. As a result of the Company’s exit from the CPP, these restrictions have been terminated.
TALF-Eligible Issuance. In addition, in September 2009, one of the Company’s subsidiaries sold $600 million in aggregate principal amount of its asset-backed notes in a securitization transaction sponsored by FIFC. The asset backed notes are eligible collateral under TALF and certain investors therefore received non-recourse funding from the New York Fed in order to purchase the notes. As a result, FIFC believes it received greater proceeds at lower interest rates from the securitization than it otherwise would have received in non-TALF-eligible transactions.
Increased FDIC Insurance for Non-Interest-Bearing Transaction Accounts. Each of our bank subsidiaries have also benefited from federal programs which provide increased FDIC insurance coverage for certain deposit accounts. At present, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) and implementing regulations issued by the FDIC provide unlimited federal insurance of the net amount of certain non-interest-bearing transaction accounts at all insured depository institutions, including our bank subsidiaries, through December 31, 2012. After December 31, 2012, depositors will receive federal insurance up to the standard maximum deposit insurance amount of $250,000, which increased amount was made permanent by the Dodd-Frank Act.
For more information regarding our participation in these programs, see “Management’s Discussion and Analysis of Financial Conditions and Results of Operations—Federal Government, Federal Reserve and FDIC Programs.”

8


Table of Contents

Bank Regulation; Bank Holding Company and Subsidiary Regulations
General. Lake Forest Bank, Hinsdale Bank, North Shore Bank, Libertyville Bank, Northbrook Bank, Village Bank, Wheaton Bank, State Bank of The Lakes and St. Charles Bank are Illinois-chartered banks and as such they and their subsidiaries are subject to supervision and examination by the Illinois Secretary. Each of these Illinois-chartered banks is a member of the Federal Reserve and, as such, is subject to additional examination by the Federal Reserve as their primary federal regulator. Barrington Bank, Crystal Lake Bank, Advantage Bank, Beverly Bank, Old Plank Trail Bank and CTC are federally-chartered and are subject to supervision and examination by the OCC pursuant to the National Bank Act and regulations promulgated thereunder. Town Bank is a Wisconsin-chartered bank and a member of the Federal Reserve, and as such is subject to supervision by the Wisconsin Department and the Federal Reserve.
Financial Holding Company Regulations. The Company 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, including regulations promulgated by the Federal Reserve (the “BHC Act”), as augmented by the provisions of the Gramm-Leach-Bliley Act (the “GLB Act”), which established a comprehensive framework to permit affiliations among commercial banks, insurance companies and securities firms. The Company became a financial holding company in 2002. Bank holding companies that elect to be treated as financial holding companies may engage in an expanded range of activities, including the businesses conducted by the wealth management subsidiaries. Financial holding companies, unlike traditional bank holding companies, can engage in certain activities without prior Federal Reserve approval, subject to certain post-commencement notice procedures. Effective July 2011, the Dodd-Frank Act requires a bank holding company that elects treatment as a financial holding company, including us, to be both well-capitalized and well-managed. This is in addition to the existing requirement that a financial holding company’s subsidiary banks be well-capitalized and well-managed as defined in the applicable regulatory standards. If these conditions are not maintained, and the financial holding company fails to correct any deficiency within 180 days, the Federal Reserve may require the Company to either divest control of its banking subsidiaries or, at the election of the Company, cease to engage in any activities not permissible for a bank holding company that is not a financial holding company. Moreover, during the period of non-compliance, the Federal Reserve can place any limitations on the financial holding company that it believes to be appropriate. Furthermore, if the Federal Reserve determines that a financial holding company has not maintained at least a satisfactory rating under the Community Reinvestment Act at all of its controlled banking subsidiaries, the Company will not be able to commence any new financial activities or acquire a company that engages in such activities, although the Company will still be allowed to engage in activities closely related to banking and make investments in the ordinary course of conducting merchant banking activities. In April 2008, the Company was notified that one of its bank subsidiaries received a needs to improve rating, therefore, the Company is subject to restrictions on further expansion in certain situations.
Federal Reserve Regulations. The Company continues to be subject to supervision and regulation by the Federal Reserve under the BHC Act. The Company is required to file with the Federal Reserve periodic reports and such additional information as the Federal Reserve may require pursuant to the BHC Act. The Federal Reserve examines the Company and may examine the banks and the Company’s other subsidiaries.
The BHC Act requires prior Federal Reserve approval for, among other things, the acquisition by a bank holding company of direct or indirect ownership or control of more than 5% of the voting shares or substantially all the assets of any bank, or for a merger or consolidation of a bank holding company with another bank holding company. With certain exceptions for financial holding companies, the BHC Act prohibits a bank holding company from acquiring direct or indirect ownership or control of voting shares of any company which is not a business that is financial in nature or incidental thereto, and from engaging directly or indirectly in any activity that is not financial in nature or incidental thereto. Also, as discussed below, the Federal Reserve expects bank holding companies to maintain strong capital positions while experiencing growth. The Federal Reserve, as a matter of policy, may require a bank holding company to be well-capitalized at the time of filing an acquisition application and upon consummation of the acquisition.
Under the BHC Act and Federal Reserve regulations, the banks are prohibited from engaging in certain tying arrangements in connection with an extension of credit, lease, sale of property or furnishing of services. That means that, except with respect to traditional banking products (loans, deposits or trust services), the banks may not condition a customer’s purchase of services on the purchase of other services from any of the banks or other subsidiaries of the Company.
It has been the policy of the Federal Reserve that the Company is expected to act as a source of financial and managerial strength to its subsidiaries, and to commit resources to support the subsidiaries. The Federal Reserve has taken the position that in implementing this policy, it may require the Company to provide such support even when the Company otherwise would not consider itself able to do so. The Dodd-Frank Act

9


Table of Contents

codified the requirement of holding companies, like the Company, to serve as a source of financial strength to their subsidiary depository institutions, which statutory requirement will go into effect in July 2011.
Interstate Acquisitions. The Dodd-Frank Act amended the BHC Act to require that a bank holding company be well-capitalized and well-managed, not merely adequately capitalized and adequately managed, in order to acquire a bank located outside of the bank holding company’s home state. This amendment will take effect in July 2011.
Federal Reserve Capital Requirements. The Federal Reserve has adopted risk-based capital requirements for assessing capital adequacy of all bank holding companies, including financial holding companies. These standards define regulatory capital and establish minimum capital ratios in relation to assets, both on an aggregate basis and as adjusted for credit risks and off-balance sheet exposures. Under the Federal Reserve’s risk-based guidelines, capital is classified into two categories. For bank holding companies, Tier 1 capital, or “core” capital, consists of common stockholders’ equity, qualifying noncumulative perpetual preferred stock including related surplus, qualifying cumulative perpetual preferred stock including related surplus (subject to certain limitations), minority interests in the common equity accounts of consolidated subsidiaries and qualifying trust preferred securities, and is reduced by goodwill, specified intangible assets and certain other items (“Tier 1 Capital”). Tier 2 capital, or “supplementary” capital, consists of the following items, all of which are subject to certain conditions and limitations: the allowance for credit losses; perpetual preferred stock and related surplus; hybrid capital instruments; unrealized holding gains on marketable equity securities; perpetual debt and mandatory convertible debt securities; term subordinated debt and intermediate-term preferred stock.
Under the Federal Reserve’s capital guidelines, bank holding companies are required to maintain a minimum ratio of qualifying total capital to risk-weighted assets of 8.0%, of which at least 4.0% must be in the form of Tier 1 Capital. The Federal Reserve also requires a minimum leverage ratio of Tier 1 Capital to total assets of 3.0% for strong bank holding companies (those rated a composite “1” under the Federal Reserve’s rating system). For all other bank holding companies, the minimum ratio of Tier 1 Capital to total assets is 4%. In addition, the Federal Reserve continues to consider the Tier 1 leverage ratio (Tier 1 capital to average quarterly assets) in evaluating proposals for expansion or new activities.
In its capital adequacy guidelines, the Federal Reserve emphasizes that the foregoing standards are supervisory minimums and that banking organizations generally are expected to operate well above the minimum ratios. These guidelines also provide that banking organizations experiencing growth, whether internally or through acquisition, are expected to maintain strong capital positions substantially above the minimum levels. In light of the recent financial turmoil, it is generally expected that capital requirements will be revisited on a national and international basis.
As of December 31, 2010, the Company’s total capital to risk-weighted assets ratio was 13.8%, its Tier 1 Capital to risk-weighted asset ratio was 12.5% and its leverage ratio was 10.1%. Capital requirements for the banks generally parallel the capital requirements previously noted for bank holding companies. Each of the banks is subject to applicable capital requirements on a separate company basis. The federal banking regulators must take prompt corrective action with respect to FDIC-insured depository institutions that do not meet minimum capital requirements. There are five capital tiers: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized.” As of December 31, 2010, each of the Company’s banks was categorized as “well capitalized.” In order to maintain the Company’s designation as a financial holding company, each of the banks is required to maintain capital ratios at or above the “well capitalized” levels.
Dividend Limitations. Because the Company’s consolidated net income consists largely of net income of the banks and its non-bank subsidiaries, the Company’s ability to pay dividends depends upon its receipt of dividends from these entities. Federal and state statutes and regulations impose restrictions on the payment of dividends by the Company, the banks and its non-bank subsidiaries. (See Financial Institution Regulation Generally — Dividends for further discussion of dividend limitations.)
Federal Reserve policy provides that a bank holding company should not pay dividends unless (i) the bank holding company’s net income over the last four quarters (net of dividends paid) is sufficient to fully fund the dividends, (ii) the prospective rate of earnings retention appears consistent with the capital needs, asset quality and overall financial condition of the bank holding company and its subsidiaries and (iii) the bank holding company will continue to meet minimum required capital adequacy ratios. The policy also provides that a bank holding company should inform the Federal Reserve reasonably in advance of declaring or paying a dividend that exceeds earnings for the period for which the dividend is being paid or that could result in a material adverse change to the bank holding company’s capital structure. Additionally, the Federal Reserve possesses enforcement powers over bank holding companies and their non-bank subsidiaries to prevent or remedy actions that represent unsafe or unsound practices or violations of applicable statutes and regulations. Among these powers is the ability to prohibit or limit the payment of dividends by bank holding companies.

10


Table of Contents

Bank Regulation; Federal Deposit Insurance Act
General. The deposits of the banks are insured by the Deposit Insurance Fund under the provisions of the Federal Deposit Insurance Act, as amended (the “FDIA”), and the banks are, therefore, also subject to supervision and examination by the FDIC. The FDIA requires that the appropriate federal regulatory authority (the Federal Reserve in the case of Lake Forest Bank, North Shore Bank, Hinsdale Bank, Libertyville Bank, Northbrook Bank, Village Bank, Wheaton Bank, State Bank of The Lakes, Town Bank and St. Charles Bank and the OCC in the case of Barrington Bank, Crystal Lake Bank, Advantage Bank, Beverly Bank, Old Plank Trail Bank, and CTC) approve any merger and/or consolidation by or with an insured bank, as well as the establishment or relocation of any bank or branch office and any change-in-control of an insured bank that is not subject to review by the Federal Reserve as a holding company regulator. The FDIA also gives the Federal Reserve, the OCC and the other federal bank regulatory agencies power to issue cease and desist orders against banks, holding companies or persons regarded as “institution affiliated parties.” A cease and desist order can either prohibit such entities from engaging in certain unsafe and unsound bank activity or can require them to take certain affirmative action. The appropriate federal regulatory authority with respect to each bank also supervises compliance with the provisions of federal law and regulations which, in addition to other requirements, place restrictions on loans by FDIC-insured banks to their directors, executive officers and principal shareholders.
Prompt Corrective Action. The FDIA requires the federal banking regulators to take prompt corrective action with respect to depository institutions that fall below minimum capital standards and prohibits any depository institution from making any capital distribution that would cause it to be undercapitalized. Institutions that are not adequately capitalized may be subject to a variety of supervisory actions including, but not limited to, restrictions on growth, investment activities, capital distributions and management fees and will be required to submit a capital restoration plan which, to be accepted by the regulators, must be guaranteed in part by any company having control of the institution (such as the Company). In other respects, the FDIA provides for enhanced supervisory authority, including authority for the appointment of a conservator or receiver for undercapitalized institutions. The capital-based prompt corrective action provisions of the FDIA and their implementing regulations generally apply to all FDIC-insured depository institutions. However, federal banking agencies have indicated that, in regulating bank holding companies, the agencies may take appropriate action at the holding company level based on their assessment of the effectiveness of supervisory actions imposed upon subsidiary insured depository institutions pursuant to the prompt corrective action provisions of the FDIA.
Standards for Safety and Soundness. The FDIA requires the federal bank regulatory agencies to prescribe standards of safety and soundness, by regulations or guidelines, relating generally to operations and management, asset growth, asset quality, earnings, stock valuation and compensation. The federal bank regulatory agencies have adopted a set of guidelines prescribing safety and soundness standards pursuant to the FDIA. The guidelines establish general standards relating to internal controls and information systems, informational security, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, and compensation, fees and benefits. In general, the guidelines require, among other things, appropriate systems and practices to identify and manage the risks and exposures specified in the guidelines. The guidelines prohibit excessive compensation as an unsafe and unsound practice and describe compensation as excessive when the amounts paid are unreasonable or disproportionate to the services performed by an executive officer, employee, director or principal shareholder. Additional restrictions on compensation applied to the Company as a result of its participation in the CPP. As a result of the Company’s exit from the CPP, these restrictions have been terminated. See “—Extraordinary Government Programs — Capital Purchase Program.” However, the Dodd-Frank Act also imposes restrictions on and additional disclosure regarding incentive compensation. In addition, each of the Federal Reserve and the OCC adopted regulations that authorize, but do not require, the Federal Reserve or the OCC, as the case may be, to order an institution that has been given notice by the Federal Reserve or the OCC, as the case may be, that it is not satisfying any of such safety and soundness standards to submit a compliance plan. If, after being so notified, an institution fails to submit an acceptable compliance plan or fails in any material respect to implement an accepted compliance plan, the Federal Reserve or the OCC, as the case may be, must issue an order directing action to correct the deficiency and may issue an order directing other actions of the types to which an under-capitalized association is subject under the “prompt corrective action” provisions of the FDIA. If an institution fails to comply with such an order, the Federal Reserve or the OCC, as the case may be, may seek to enforce such order in judicial proceedings and to impose civil money penalties. The Federal Reserve, the OCC and the other federal bank regulatory agencies also adopted guidelines for asset quality and earnings standards.
Other FDIA Provisions. A range of other provisions in the FDIA include requirements applicable to: closure of branches; additional disclosures to depositors with respect to terms and interest rates applicable to deposit accounts; uniform regulations for extensions of credit secured by real estate; restrictions on activities of and investments by state-chartered banks; modification of accounting standards to conform to generally accepted accounting principles including the reporting of off-balance sheet items and supplemental disclosure of estimated

11


Table of Contents

fair market value of assets and liabilities in financial statements filed with the banking regulators; increased penalties in making or failing to file assessment reports with the FDIC; greater restrictions on extensions of credit to directors, officers and principal shareholders; and increased reporting requirements on agricultural loans and loans to small businesses.
In addition, the federal banking agencies adopted a final rule, which modified the risk-based capital standards, to provide for consideration of interest rate risk when assessing the capital adequacy of a bank. Under this rule, federal regulators and the FDIC must explicitly include a bank’s exposure to declines in the economic value of its capital due to changes in interest rates as a factor in evaluating a bank’s capital adequacy. The federal banking agencies also have adopted a joint agency policy statement providing guidance to banks for managing interest rate risk. The policy statement emphasizes the importance of adequate oversight by management and a sound risk management process. The assessment of interest rate risk management made by the banks’ examiners will be incorporated into the banks’ overall risk management rating and used to determine the effectiveness of management.
Insurance of Deposit Accounts. Under the FDIA, as an FDIC-insured institution, each of the banks is required to pay deposit insurance premiums based on the risk it poses to the Deposit Insurance Fund (“DIF”). Each institution’s assessment rate depends on the capital category and supervisory category to which it is assigned. The FDIC has authority to raise or lower assessment rates on insured deposits in order to achieve statutorily required reserve ratios in the DIF and to impose special additional assessments. In light of the significant increase in depository institution failures in 2008, 2009 and 2010 and the temporary increase of general deposit insurance limits to $250,000 per depositor (made permanent by the Dodd-Frank Act), the DIF incurred substantial losses during the last three years. Accordingly, the FDIC took action during 2009 to revise its risk-based assessment system, to collect certain special assessments, and to accelerate the payment of assessments. Under the current risk-based assessment system, adjusted deposit insurance assessments can range from a low of 7 basis points to a high of 77.5 basis points. In addition, on September 30, 2009, the FDIC collected a special assessment from each insured institution, and on November 12, 2009, the FDIC approved a final rule requiring that insured institutions prepay 13 quarters of deposit insurance premiums. The banks made their prepayments of $59.8 million on December 30, 2009. These prepaid premiums are recorded as a prepaid expense on our financial statements. As a result of all these actions, the banks paid a total of $77.8 million in deposit insurance premiums in 2009. The Dodd-Frank Act also contains several provisions that affect deposit insurance premiums, including a change in the assessment base for federal deposit insurance from the amount of insured deposits to average total consolidated assets less average tangible equity and an increase in the minimum reserve ratio of the DIF from 1.15% to 1.35% of insured deposits (with the FDIC having until September 30, 2020 to meet the new minimum). On February 7, 2011, the FDIC adopted a final rule implementing these deposit insurance provisions of the Dodd-Frank Act. Under the final rule, which will go into effect on April 1, 2011, the change in the assessment base definition is accompanied by a change in assessment rates, which will initially range from 2.5 basis points to 45 basis points. The FDIC has indicated that these changes will generally not require an increase in the level of assessments, and may result in decreased assessments, for depository institutions (such as each of our bank subsidiaries) with less than $10 billion in assets. However, there is a risk that the banks’ deposit insurance premiums will continue to increase if failures of insured depository institutions continue to deplete the DIF.
In addition, the Deposit Insurance Fund Act of 1996 authorizes the Financing Corporation (“FICO”) to impose assessments on DIF assessable deposits in order to service the interest on FICO’s bond obligations. The amount assessed is in addition to the amount, if any, paid for deposit insurance under the FDIC’s risk-related assessment rate schedule. FICO assessment rates may be adjusted quarterly to reflect a change in assessment base. The FICO annualized assessment rate is 1.02 cents per $100 of deposits for the first quarter of 2011.
Deposit insurance may be terminated by the FDIC upon a finding that an institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. Such terminations can only occur, if contested, following judicial review through the federal courts. The management of each of the banks does not know of any practice, condition or violation that might lead to termination of deposit insurance.
Under the “cross-guarantee” provision of the FDIA, as augmented by the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (“FIRREA”), insured depository institutions such as the banks may be liable to the FDIC with respect to any loss or reasonably anticipated loss incurred by the FDIC resulting from the default of, or FDIC assistance to, any commonly controlled insured depository institution. The banks are commonly controlled within the meaning of the FIRREA cross-guarantee provision.
De Novo Branching. The Dodd-Frank Act amended the FDIA and the National Bank Act to allow national banks and state banks to establish de novo branches in states other than the bank’s home state.

12


Table of Contents

Bank Regulation; Additional Regulation of Dividends
As Illinois state-chartered banks, Lake Forest Bank, North Shore Bank, Hinsdale Bank, Libertyville Bank, Northbrook Bank, Village Bank, Wheaton Bank, State Bank of The Lakes and St. Charles Bank, each may not pay dividends in an amount greater than its current net profits after deducting bad debts out of undivided profits provided that its surplus equals or exceeds its capital. For the purpose of determining the amount of dividends that an Illinois bank may pay, bad debts are defined as debts upon which interest is past due and unpaid for a period of six months or more unless such debts are well-secured and in the process of collection. As a Wisconsin state-chartered bank, Town Bank may declare dividends out of its undivided profits, after provision for payment of all expenses, losses, required reserves, taxes and interest. In addition, if Town Bank’s dividends declared and paid in either of the prior two years exceeded net income for such year, then the bank may not declare a dividend that exceeds year-to-date net income except with written consent of the Wisconsin Division of Financial Institutions. Furthermore, federal regulations also prohibit any Federal Reserve member bank, including each of the Company’s Illinois-chartered banks and Town Bank, from declaring dividends in any calendar year in excess of its net income for the year plus the retained net income for the preceding two years, less any required transfers to the surplus account unless there is approval by the Federal Reserve. Similarly, as national associations supervised by the OCC, Barring-ton Bank, Crystal Lake Bank, Beverly Bank, Advantage Bank, Old Plank Trail Bank and CTC may not declare dividends in any year in excess of its net income for the year plus the retained net income for the preceding two years, minus the sum of any transfers required by the OCC and any transfers required to be made to a fund for the retirement of any preferred stock, nor may any of them declare a dividend in excess of undivided profits. Furthermore, the OCC may, after notice and opportunity for hearing, prohibit the payment of a dividend by a national bank if it determines that such payment would constitute an unsafe or unsound practice or if it determines that the institution is undercapitalized.
In addition to the foregoing, the ability of the Company, the banks and CTC to pay dividends may be affected by the various minimum capital requirements and the capital and noncapital standards established under the FDIA, as described above. The right of the Company, its shareholders and its creditors to participate in any distribution of the assets or earnings of its subsidiaries is further subject to the prior claims of creditors of the respective subsidiaries. The Company’s ability to pay dividends is likely to be dependent on the amount of dividends paid by the banks. No assurance can be given that the banks will, in any circumstances, pay dividends to the Company.
Bank Regulation; Other Regulation of Financial Institutions
Anti-Money Laundering. On October 26, 2001, the USA PATRIOT Act of 2001 (the “PATRIOT Act”) was enacted into law, amending in part the Bank Secrecy Act (“BSA”). The BSA and the PATRIOT Act contain anti-money laundering (“AML”) and financial transparency laws as well as enhanced information collection tools and enforcement mechanics for the U.S. government, including: standards for verifying customer identification at account opening; rules to promote cooperation among financial institutions, regulators, and law enforcement entities in identifying parties that may be involved in terrorism or money laundering; reports by nonfinancial entities and businesses filed with the Treasury’s Financial Crimes Enforcement Network for transactions exceeding $10,000; and due diligence requirements for financial institutions that administer, maintain, or manage private bank accounts or correspondence accounts for non-U.S. persons. Each Bank is subject to the PATRIOT Act and, therefore, is required to provide its employees with AML training, designate an AML compliance officer and undergo an annual, independent audit to assess the effectiveness of its AML Program. The Company has established policies, procedures and internal controls that are designed to comply with these AML requirements.
Protection of Client Information. Many aspects of the Company’s business are subject to increasingly comprehensive legal requirements concerning the use and protection of certain client information including those adopted pursuant to the GLB Act as well as the Fair and Accurate Credit Transactions Act of 2003 (the “FACT Act”). Provisions of the GLB Act require a financial institution to disclose its privacy policy to customers and consumers, and require that such customers or consumers be given a choice (through an opt-out notice) to forbid the sharing of nonpublic personal information about them with certain nonaffiliated third persons. The Company and each of the banks have a written privacy notice that is delivered to each of their customers when customer relationships begin, and annually thereafter, in compliance with the GLB Act. In accordance with that privacy notice, the Company and each of the banks protect the security of information about their customers, educate their employees about the importance of protecting customer privacy, and allow their customers to remove their names from the solicitation lists they use and share with others. The Company and each of the banks require business partners with whom they share such information to have adequate security safeguards and to abide by the redisclosure and reuse provisions of the GLB Act. The Company and each of the banks have developed and implemented programs to fulfill the expressed requests of customers and consumers to opt out of information sharing subject to the GLB Act. The federal banking regulators have interpreted the

13


Table of Contents

requirements of the GLB Act to require banks to take, and the Company and the banks are subject to state law requirements that require them to take, certain actions in the event that certain information about customers is compromised. If the federal or state regulators of the financial subsidiaries establish further guidelines for addressing customer privacy issues, the Company and/or each of the banks may need to amend their privacy policies and adapt their internal procedures. The Company and the banks may also be subject to additional requirements under state laws.
Moreover, like other lending institutions, each of the banks utilizes credit bureau data in their underwriting activities. Use of such data is regulated under the Fair Credit Report Act (the “FCRA”), including credit reporting, prescreening, sharing of information between affiliates, and the use of credit data. The FCRA was amended by the FACT Act in 2003, which imposes a number of regulatory requirements, some of which have become effective, some of which became effective in 2008, and some of which are still in the process of being implemented by federal regulators. In particular, in 2008, compliance with new rules restricting the ability of corporate affiliates to share certain customer information for marketing purposes became mandatory, as did compliance with rules requiring institutions to develop and implement written identity theft prevention programs. The Company and the banks may also be subject to additional requirements under state laws.
Community Reinvestment. Under the Community Reinvestment Act (“CRA”), a financial institution has a continuing and affirmative obligation, consistent with the safe and sound operation of such institution, to help meet the credit needs of its entire community, including low and moderate-income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution’s discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the CRA. However, institutions are rated on their performance in meeting the needs of their communities. Performance is judged in three areas: (a) a lending test, to evaluate the institution’s record of making loans in its assessment areas; (b) an investment test, to evaluate the institution’s record of investing in community development projects, affordable housing and programs benefiting low or moderate income individuals and business; and (c) a service test, to evaluate the institution’s delivery of services through its branches, ATMs and other offices. The CRA requires each federal banking agency, in connection with its examination of a financial institution, to assess and assign one of four ratings to the institution’s record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications by the institution, including applications for charters, branches and other deposit facilities, relocations, mergers, consolidations, acquisitions of assets or assumptions of liabilities, and bank and savings association acquisitions. An unsatisfactory record of performance may be the basis for denying or conditioning approval of an application by a financial institution or its holding company. The CRA also requires that all institutions make public disclosure of their CRA ratings. Each of the banks received a “satisfactory” rating from the Federal Reserve, the OCC or the FDIC on their most recent CRA performance evaluations except for one Bank that received a “needs improvement” rating. Because one of the banks received a “needs improvement” rating on its most recent CRA performance evaluation, and given the Company’s financial holding company status, the Company is now subject to restrictions on further expansion of the Company’s or the banks’ activities.
Federal Reserve System. The banks are subject to Federal Reserve regulations requiring depository institutions to maintain interest-bearing reserves against their transaction accounts (primarily NOW and regular checking accounts). As of December 30, 2010, the first $10.7 million of otherwise reservable balances (subject to adjustments by the Federal Reserve for each of the banks) are exempt from the reserve requirements. A 3% reserve ratio applies to balances over $10.7 million up to and including $58.8 million and a 10% reserve ratio applies to balances in excess of $58.8 million.
Brokered Deposits. Well capitalized institutions are not subject to limitations on brokered deposits, while adequately capitalized institutions are able to accept, renew or rollover brokered deposits only with a waiver from the FDIC and subject to certain restrictions on the rate paid on such deposits. Undercapitalized institutions are not permitted to accept brokered deposits. An adequately capitalized institution that receives a waiver is not permitted to offer interest rates on brokered deposits significantly exceeding the market rates in the institution’s home area or nationally, and undercapitalized institutions may not solicit any deposits by offering such rates. Each of the banks is eligible to accept brokered deposits (as a result of their capital levels) and may use this funding source from time to time when management deems it appropriate from an asset/liability management perspective.
Enforcement Actions. Federal and state statutes and regulations provide financial institution regulatory agencies with great flexibility to undertake enforcement action against an institution that fails to comply with regulatory requirements, particularly capital requirements. Possible enforcement actions include the imposition of a capital plan and capital directive to civil money penalties, cease and desist orders, receivership, conservatorship or the termination of deposit insurance.
Compliance with Consumer Protection Laws. The banks are also subject to many federal consumer protection statutes and regulations including the Truth in Lending Act, the Truth in Savings Act, the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Electronic Fund Transfer Act, the Federal Trade Commission Act and analogous state statutes, the Fair Housing Act, the Real Estate Settlement Procedures Act, the

14


Table of Contents

Soldiers’ and Sailors’ Civil Relief Act and the Home Mortgage Disclosure Act. WMC must also comply with many of these consumer protection statutes and regulations. Violation of these statutes can lead to significant potential liability, in litigation by consumers as well as enforcement actions by regulators. Among other things, these acts:
    require creditors to disclose credit terms in accordance with legal requirements;
    require banks to disclose deposit account terms and electronic fund transfer terms in accordance with legal requirements;
 
    limit consumer liability for unauthorized transactions;
    impose requirements and limitations on the users of credit reports and those who provide information to credit reporting agencies;
    prohibit discrimination against an applicant in any consumer or business credit transaction;
    prohibit unfair or deceptive acts or practices;
    require banks to collect and report applicant and borrower data regarding loans for home purchases or improvement projects;
    require lenders to provide borrowers with information regarding the nature and cost of real estate settlements;
    prohibit certain lending practices and limit escrow amounts with respect to real estate transactions; and
    prescribe possible penalties for violations of the requirements of consumer protection statutes and regulations.
During the past three years, federal regulators finalized a number of significant amendments to the regulations implementing these statutes. Among other things, the Federal Reserve has adopted new rules applicable to the banks (and in some cases, WMC) that govern various aspects of consumer credit and rules that govern practices and disclosures with respect to overdraft programs. These rules may affect the profitability of our consumer banking activities.
There are currently pending proposals to further amend some of these statutes and their implementing regulations, and there may be additional proposals or final amendments in 2011 or beyond. In addition, federal and state regulators have issued, and may in the future issue, guidance on these requirements, or other aspects of the Company’s business. The developments may impose additional burdens on the Company and its subsidiaries.
Transactions with Affiliates. Transactions between a bank and its holding company or other affiliates are subject to various restrictions imposed by state and federal regulatory agencies. Such transactions include loans and other extensions of credit, purchases of or investments in securities and other assets, and payments of fees or other distributions. In general, these restrictions limit the amount of transactions between an institution and an affiliate of such institution, as well as the aggregate amount of transactions between an institution and all of its affiliates, and require transactions with affiliates to be on terms comparable to those for transactions with unaffiliated entities. Transactions between banking affiliates may be subject to certain exemptions under applicable federal law.
Limitations on Ownership. Under the Illinois Banking Act, any person who acquires 25% or more of the Company’s stock may be required to obtain the prior approval of the Illinois Secretary. Similarly, under the Federal Change in Bank Control Act, a person must give 60 days written notice to the Federal Reserve and may be required to obtain the prior regulatory consent of the Federal Reserve before acquiring control of 10% or more of any class of the Company’s outstanding stock. Generally, an acquisition of more than 10% of the Company’s stock by a corporate entity, including a corporation, partnership or trust, and more than 5% of the Company’s stock by a bank holding company, would require prior Federal Reserve approval under the BHC Act.
Enhanced Supervisory Procedures for De Novo Banks. In August 2009, the FDIC adopted enhanced supervisory procedures for de novo banks, which extended the special supervisory period for such banks from three to seven years. Throughout the de novo period, newly chartered banks will be subject to higher capital requirements, more frequent examinations and other requirements.
Broker-Dealer and Investment Adviser Regulation
WHI and WCM are subject to extensive regulation under federal and state securities laws. WHI is registered as a broker-dealer with the SEC and in all 50 states, the District of Columbia and the U.S. Virgin Islands. Both WHI and WCM are registered as investment advisers with the SEC. In addition, WHI is a member of several self-regulatory organizations (“SRO”), including the Financial Industry Regulatory Authority (“FINRA”), the Chicago Stock Exchange and the NASDAQ Stock Market. Although WHI is required to be registered with the SEC, much of its regulation has been delegated to SROs that the SEC oversees, including FINRA and the national securities exchanges. In addition to SEC rules and regulations, the SROs adopt rules, subject to approval of the SEC, that govern all aspects of business in the securities industry and conduct periodic examinations of member firms. WHI is also subject to regulation by state securities commissions in states in which it conducts business. WHI and WCM are registered only with the SEC as investment advisers, but certain of their advisory personnel are subject to regulation by state securities regulatory agencies.

15


Table of Contents

As a result of federal and state registrations and SRO memberships, WHI is subject to over-lapping schemes of regulation which cover all aspects of its securities businesses. Such regulations cover, among other things, minimum net capital requirements; uses and safekeeping of clients’ funds; record-keeping and reporting requirements; supervisory and organizational procedures intended to assure compliance with securities laws and to prevent improper trading on material nonpublic information; personnel-related matters, including qualification and licensing of supervisory and sales personnel; limitations on extensions of credit in securities transactions; clearance and settlement procedures; “suitability” determinations as to certain customer transactions; limitations on the amounts and types of fees and commissions that may be charged to customers; and regulation of proprietary trading activities and affiliate transactions. Violations of the laws and regulations governing a broker-dealer’s actions can result in censures, fines, the issuance of cease-and-desist orders, revocation of licenses or registrations, the suspension or expulsion from the securities industry of a broker-dealer or its officers or employees, or other similar actions by both federal and state securities administrators, as well as the SROs.
As a registered broker-dealer, WHI is subject to the SEC’s net capital rule and the net capital requirements of various SROs. Net capital rules, which specify minimum capital requirements, are generally designed to measure general financial integrity and liquidity and require that at least a minimum amount of net assets be kept in relatively liquid form. Rules of FINRA and other SROs also impose limitations and requirements on the transfer of member organizations’ assets. Compliance with net capital requirements may limit the Company’s operations requiring the intensive use of capital. These requirements restrict the Company’s ability to withdraw capital from WHI, which in turn may limit its ability to pay dividends, repay debt or redeem or purchase shares of its own outstanding stock. WHI is a member of the Securities Investor Protection Corporation (“SIPC”), which subject to certain limitations, serves to oversee the liquidation of a member brokerage firm, and to return missing cash, stock and other securities owed to the firm’s brokerage customers, in the event a member broker-dealer fails. The general SIPC protection for customers’ securities accounts held by a member broker-dealer is up to $500,000 for each eligible customer, including a maximum of $250,000 for cash claims. SIPC does not protect brokerage customers against investment losses.
WCM, and WHI in its capacity as an investment adviser, are subject to regulations covering matters such as transactions between clients, transactions between the adviser and clients, custody of client assets and management of mutual funds and other client accounts. The principal purpose of regulation and discipline of investment firms is the protection of customers, clients and the securities markets rather than the protection of creditors and stockholders of investment firms. Sanctions that may be imposed for failure to comply with laws or regulations governing investment advisers include the suspension of individual employees, limitations on an adviser’s engaging in various asset management activities for specified periods of time, the revocation of registrations, other censures and fines.
Monetary Policy and Economic Conditions. The earnings of banks and bank holding companies are affected by general economic conditions and also by the credit policies of the Federal Reserve. Through open market transactions, variations in the discount rate and the establishment of reserve requirements, the Federal Reserve exerts considerable influence over the cost and availability of funds obtainable for lending or investing. The Federal Reserve’s monetary policies and other government programs have affected the operating results of all commercial banks in the past and are expected to do so in the future. The Company and the banks cannot fully predict the nature or the extent of any effects which fiscal or monetary policies may have on their business and earnings.
Beginning in 2008 and continuing into 2010, there was significant disruption of credit markets on a national and global scale. Liquidity in credit markets was severely depressed. Major financial institutions sought bankruptcy protection, and a number of banks have failed and been placed into receivership or acquired. Other major financial institutions — including Fannie Mae, Freddie Mac, and AIG — have been entirely or partially nationalized by the federal government. The economic conditions in 2008 and 2009 have also affected consumers and businesses, including their ability to repay loans. This has been particularly true in the mortgage area. Real estate values have decreased in many areas of the country. There has been a large increase in mortgage defaults and foreclosure filings on a nationwide basis.
In response to these events, there have also been an unprecedented number of governmental initiatives designed to respond to the stresses experienced in financial markets in 2008 and 2009. Treasury, the Federal Reserve, the FDIC and other agencies have taken a number of steps to enhance the liquidity support available to financial institutions. The Company and the banks have participated in some of these programs, such as the CPP under the TARP. There have been other initiatives that have had an effect on credit markets generally, even though the Company has not participated. Most of these programs were discontinued in 2010. Federal and state regulators have also issued guidance encouraging banks and other mortgage lenders to make accommodations and re-work mortgage loans in order to avoid foreclosure. Additional guidance and other modifications issued under these foreclosure mitigation programs may affect the Company in 2011.

16


Table of Contents

Supplemental Statistical Data
The following statistical information is provided in accordance with the requirements of The Securities Act Industry Guide 3, Statistical Disclosure by Bank Holding Companies, which is part of Regulation S-K as promulgated by the SEC. This data should be read in conjunction with the Company’s Consolidated Financial Statements and notes thereto, and Management’s Discussion and Analysis which are contained in this Form 10-K.
Investment Securities Portfolio
The following table presents the carrying value of the Company’s available-for-sale securities portfolio, by investment category, as of December 31, 2010, 2009 and 2008 (in thousands):
                         
    2010   2009   2008
         
U.S. Treasury
  $ 96,097       110,816        
U.S. Government agencies
    884,055       576,176       298,729  
Municipal
    52,303       65,336       59,295  
Corporate notes and other:
                       
Financial issuers
    187,007       41,746       9,052  
Retained subordinated securities
          47,702        
Other
    74,908             23,434  
Mortgage-backed:
                       
Agency
    158,653       216,544       281,094  
Non-agency CMOs
    3,028       107,984       4,213  
Non-agency CMOs — Alt A
          50,778        
Other equity securities
    40,251       37,984       37,787  
         
Total available-for-sale securities
  $ 1,496,302       1,255,066       713,604  
       
Tables presenting the carrying amounts and gross unrealized gains and losses for securities available-for-sale at December 31, 2010 and 2009 are included by reference to Note 3 to the Consolidated Financial Statements included in the 2010 Annual Report to Shareholders, which is incorporated herein by reference. The fair value of available-for-sale securities as of December 31, 2010, by maturity distribution, is as follows (in thousands):
                                                         
                    From 5                
    Within   From 1   to 10   After   Mortgage-   Other    
    1 year   to 5 years   years   10 years   backed   Equities   Total
 
U.S. Treasury
  $       2,011       94,086                         96,097  
U.S. Government agencies
    555,393       202,497       18,182       107,983                   884,055  
Municipal
    13,393       15,129       10,242       13,539                   52,303  
Corporate notes and other:
                                                       
Financial issuers
    29,237       66,082       63,428       28,260                   187,007  
Other
    49,964       24,944                               74,908  
Mortgage-backed: (1)
                                                       
Agency
                            158,653             158,653  
Non-agency CMOs
                            3,028             3,028  
Other equity securities
                                  40,251       40,251  
                 
Total available-for-sale securities  
  $ 647,987       310,663       185,938       149,782       161,681       40,251       1,496,302  
 
(1)   Consisting entirely of residential mortgage-backed securities, none of which are subprime.

17


Table of Contents

The weighted average yield for each range of maturities of securities, on a tax-equivalent basis, is shown below as of December 31, 2010:
                                                         
                    From 5                
    Within   From 1   to 10   After   Mortgage-   Other    
    1 year   to 5 years   years   10 years   backed   Equities   Total
 
U.S. Treasury
          0.32 %     2.34 %                       2.30 %
U.S. Government agencies
    0.43 %     0.61 %     0.54 %     4.13 %                 0.92 %
Municipal
    2.75 %     5.11 %     5.67 %     3.84 %                 4.28 %
Corporate notes and other:
                                                       
Financial issuers
    0.90 %     3.20 %     4.16 %     5.77 %                 3.56 %
Other
    0.66 %     2.29 %                             1.20 %
Mortgage-backed: (1)
                                                       
Agency
                            5.37 %           5.37 %
Non-agency CMOs
                            4.37 %           4.37 %
Other equity securities
                                  2.99 %     2.99 %
                 
Total available-for-sale securities  
    0.51 %     1.52 %     2.95 %     4.45 %     5.35 %     2.99 %     2.04 %
               
(1)   Consisting entirely of residential mortgage-backed securities, none of which are subprime.
ITEM 1A. RISK FACTORS
An investment in our securities is subject to risks inherent to our business. The material risks and uncertainties that management believes affect Wintrust are described below. Before making an investment decision, you should carefully consider the risks and uncertainties described below together with all of the other information included or incorporated by reference in this report. Additional risks and uncertainties that management is not aware of or that management currently deems immaterial may also impair Wintrust’s business operations. This report is qualified in its entirety by these risk factors. If any of the following risks actually occur, our financial condition and results of operations could be materially and adversely affected. If this were to happen, the value of our securities could decline significantly, and you could lose all or part of your investment.
Difficult economic conditions have adversely affected our company and the financial services industry in general and further deterioration may adversely affect our financial condition and results of operations.
The U.S. economy was in a recession from the third quarter of 2008 to the second quarter of 2009, and economic activity continues to be restrained. The housing and real estate markets have also been experiencing extraordinary slowdowns since 2007. Additionally, unemployment rates remained historically high during these periods. These factors have had a significant negative effect on us and other companies in the financial services industry. As a lending institution, our business is directly affected by the ability of our borrowers to repay their loans, as well as by the value of collateral, such as real estate, that secures many of our loans. Market turmoil has led to an increase in charge-offs and has negatively impacted consumer confidence and the level of business activity. Net charge-offs were $109.7 million in 2010 and $137.4 million in 2009. Non-performing loans increased to $142.1 million as of December 31, 2010 from $131.8 million as of December 31, 2009 and our balance of other real estate owned (“OREO”) was $71.2 million at December 31, 2010 and $80.2 million at December 31, 2009. Continued weakness or further deterioration in the economy, real estate markets or unemployment rates, particularly in the markets in which we operate, will likely diminish the ability of our borrowers to repay loans that we have given them, the value of any collateral securing such loans and may cause increases in delinquencies, problem assets, charge-offs and provision for credit losses, all of which could materially adversely affect our financial condition and results of operations. Further, the underwriting and credit monitoring policies and procedures that we have adopted may not prevent losses that could have a material adverse effect on our business, financial condition, results of operations and cash flows.

18


Table of Contents

Since our business is concentrated in the Chicago metropolitan area and southeast Wisconsin metropolitan areas, further declines in the economy of this region could adversely affect our business.
Except for our premium finance business and certain other niche businesses, our success depends primarily on the general economic conditions of the specific local markets in which we operate. Unlike larger national or other regional banks that are more geographically diversified, we provide banking and financial services to customers primarily in the Chicago metropolitan and southeast Wisconsin metropolitan areas. The local economic conditions in these areas significantly impact the demand for our products and services as well as the ability of our customers to repay loans, the value of the collateral securing loans and the stability of our deposit funding sources. Specifically, most of the loans in our portfolio are secured by real estate located in the Chicago metropolitan area. Our local market area has experienced recent negative changes in overall market conditions relating to real estate valuation. These market conditions are exacerbated by the liquidation of troubled assets into the market, which creates additional supply and drives appraised valuations of real estate much lower. Further declines in economic conditions, including inflation, recession, unemployment, changes in securities markets or other factors with impact on these local markets could, in turn, have a material adverse effect on our financial condition and results of operations. Continued deterioration in the real estate markets where collateral for mortgage loans is located could adversely affect the borrower’s ability to repay the loan and the value of the collateral securing the loan, and in turn the value of our assets.
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.
We maintain an allowance for loan losses that is intended to absorb credit losses that we expect to incur in our loan portfolio. At each balance sheet date, our management determines the amount of the allowance for loan losses based on our estimate of probable and reasonably estimable losses in our loan portfolio, taking into account probable losses that have been identified relating to specific borrowing relationships, as well as probable losses inherent in the loan portfolio and credit undertakings that are not specifically identified.
Because our allowance for loan losses represents an estimate of probable losses, there is no certainty that it will be adequate over time to cover credit losses in the portfolio, particularly in the case of continued adverse changes in the economy, market conditions, or events that adversely affect specific customers. For example, in 2010, we charged off $109.7 million in loans (net of recoveries) and increased our allowance for loan losses from $98.3 million at December 31, 2009 to $113.9 million at December 31, 2010 as a result of the economic recession and financial crisis. Our allowance for loan losses, excluding covered loans, represents 1.19% of total loans outstanding at December 31, 2010, compared to 1.17% at December 31, 2009. Estimating loan loss allowances for our newer banks is more difficult because rapidly growing and de novo bank loan portfolios are, by their nature, unseasoned. Therefore, our newer bank subsidiaries may be more susceptible to changes in estimates, and to losses exceeding estimates, than banks with more seasoned loan portfolios.
Although we believe our loan loss allowance is adequate to absorb probable and reasonably estimable losses in our loan portfolio, if our estimates are inaccurate and our actual loan losses exceed the amount that is anticipated, our financial condition and liquidity could be materially adversely affected.
For more information regarding our allowance for loan losses, see “Allowance for Loan Losses” under Management’s Discussion and Analysis of Financial Condition and Results of Operations.
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.
Wintrust is exposed to interest rate risk in its core banking activities of lending and deposit taking, since changes in prevailing interest rates affect the value of our assets and liabilities. Such changes may adversely affect our net interest income, which is the difference between interest income and interest expense. Net interest income represents our largest source of net income, and was $415.8 million and $311.9 million for the years ended December 31, 2010 and 2009, respectively. In particular, our net interest income is affected by the fact that assets and liabilities reprice at different times and by different amounts as interest rates change.
Each of our businesses may be affected differently by a given change in interest rates. For example, we expect the results of our mortgage banking business in selling loans into the secondary market would be negatively impacted during periods of rising interest rates, whereas falling interest rates could have a negative impact on the net interest spread earned as we would be unable to lower the rates on many interest bearing deposit accounts of our customers to the same extent as many of our higher yielding asset classes.

19


Table of Contents

Additionally, increases in interest rates may adversely influence the growth rate of loans and deposits, the quality of our loan portfolio, loan and deposit pricing, the volume of loan originations in our mortgage banking business and the value that we can recognize on the sale of mortgage loans in the secondary market.
We seek to mitigate our interest rate risk through several strategies, which may not be successful. For example, with the relatively low interest rates that prevailed in past years, we were able to augment the total return of our investment securities portfolio by selling call options on fixed-income securities that we own. We recorded fee income of approximately $29.0 million for the year ended December 31, 2008. However, during 2010 and 2009, we had fewer opportunities to use this mitigation methodology due to lower than acceptable security yields and related option pricing and recorded fee income of approximately $2.2 million and $2.0 million for the years ended December 31, 2010 and 2009, respectively. We also mitigate our interest rate risk by entering into interest rate swaps and other interest rate derivative contracts from time to time with counterparties. To the extent that the market value of any derivative contract moves to a negative market value, we are subject to loss if the counterparty defaults. In the future, there can be no assurance that such mitigation strategies will be available or successful.
In addition, effective one year from the date of enactment, the Dodd-Frank Act eliminates U.S. federal prohibitions on paying interest on demand deposits, thus allowing businesses to have interest bearing checking accounts. Depending upon market response, this change could have an adverse impact on our interest expense.
Our liquidity position may be negatively impacted if economic conditions continue to suffer.
Liquidity is a measure of whether our cash flows and liquid assets are sufficient to satisfy current and future financial obligations, such as demand for loans, deposit withdrawals and operating costs. Our liquidity position is affected by a number of factors, including the amount of cash and other liquid assets on hand, payment of interest and dividends on debt and equity instruments that we have issued, capital we inject into our bank subsidiaries, proceeds we raise through the issuance of securities, our ability to draw upon our revolving credit facility and dividends received from our banking subsidiaries. Our future liquidity position may be adversely affected by multiple factors, including:
    if our banking subsidiaries report net losses or their earnings are weak relative to our cash flow needs;
    if it is necessary for us to make capital injections to our banking subsidiaries;
    if changes in regulations require us to maintain a greater level of capital, as more fully described below;
    if we are unable to access our revolving credit facility due to a failure to satisfy financial and other covenants; or
    if we are unable to raise additional capital on terms that are satisfactory to us.
Continued weakness or worsening of the economy, real estate markets or unemployment levels may increase the likelihood that one or more of these events occurs. If our liquidity becomes limited, it may have a material adverse effect on our results of operations and financial condition.
If we fail to meet our regulatory capital ratios, we may be forced to raise capital or sell assets.
As a banking institution, we are subject to regulations that require us to maintain certain capital ratios, such as the ratio of our Tier 1 capital to our risk-based assets. If our regulatory capital ratios decline, as a result of decreases in the value of our loan portfolio or otherwise, we will be required to improve such ratios by either raising additional capital or by disposing of assets. If we choose to dispose of assets, we cannot be certain that we will be able to do so at prices that we believe to be appropriate, and our future operating results could be negatively affected. If we choose to raise additional capital, we may accomplish this by selling additional shares of common stock, or securities convertible into or exchangeable for common stock, which could significantly dilute the ownership percentage of holders of our common stock and cause the market price of our common stock to decline. Additionally, events or circumstances in the capital markets generally may increase our capital costs and impair our ability to raise capital at any given time.
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.
We are already subject to extensive federal and state regulation and supervision. The cost of compliance with such laws and regulations can be substantial and adversely affect our ability to operate profitably. While we are unable to predict the scope or impact of any potential legislation or regulatory action, bills that would result in significant changes to financial institutions have been introduced in Congress and it is possible that such legislation or implementing regulations could significantly increase our regulatory compliance costs, impede the efficiency of our internal business processes, negatively impact the

20


Table of Contents

recoverability of certain of our recorded assets, require us to increase our regulatory capital, interfere with our executive compensation plans, or limit our ability to pursue business opportunities in an efficient manner including our plan for de novo growth and growth through acquisitions.
President Obama signed into law the Dodd-Frank Act on July 21, 2010. This new law will significantly change the current bank regulatory structure and affect the lending, deposit, investment, trading and operating activities of financial institutions and their holding companies. The Dodd-Frank Act requires various federal agencies to adopt a broad range of new rules and regulations, including heightened capital requirements, and to prepare numerous studies and reports for Congress. Although the impact of the Dodd-Frank Act will depend, in part, on the form of these rules and regulations, we expect compliance with the new law to increase our cost of doing business, and may reduce our ability to generate revenue-producing assets.
The Dodd-Frank Act weakens federal preemption available for national banks and eliminates federal preemption for subsidiaries of national banks, which may subject the Company’s national banks and their subsidiaries, including WMC, to additional state regulation. With regard to mortgage lending, the Dodd-Frank Act imposes new requirements regarding the origination and servicing of residential mortgage loans. The law creates a variety of new consumer protections, including limitations on the manner by which loan originators may be compensated and an obligation of the part of lenders to assess and verify a borrower’s “ability to repay” a residential mortgage loan.
The Dodd-Frank Act also enhances provisions relating to affiliate and insider lending restrictions and loans to one borrower limitations. Federal banking law currently limits a national bank’s ability to extend credit to one person (or group of related persons) in an amount exceeding certain thresholds. The Dodd-Frank Act expands the scope of these restrictions to include credit exposure arising from derivative transactions, repurchase agreements, and securities lending and borrowing transactions. It also eventually will prohibit state-chartered banks (including certain of the Company’s banking subsidiaries) from engaging in derivative transactions unless the state lending limit laws take into account credit exposure to such transactions.
Additional provisions of the Dodd-Frank Act are described in this report under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview and Strategy—Financial Regulatory Reform.”
Given the uncertainty associated with the manner in which the provisions of the Dodd-Frank Act will be implemented by the various regulatory agencies, the full extent of the impact that its requirements will have on our operations is unclear. However, its requirements may, individually or in the aggregate, have an adverse effect upon the Company’s results of operations, cash flows and financial position.
Financial reform legislation may reduce our ability to market our products to consumers and may limit our ability to profitably operate our mortgage business.
The Dodd-Frank Act also establishes the Bureau of Consumer Financial Protection (the “Bureau”) within the Federal Reserve, which will regulate consumer financial products and services. On July 21, 2011, the consumer financial protection functions currently assigned to the federal banking and other designated agencies will shift to the Bureau. The Bureau will have broad rulemaking authority over a wide range of consumer protection laws that apply to banks and thrifts, including the authority to prohibit “unfair, deceptive or abusive practices” to ensure that all consumers have access to markets for consumer financial products and services, and that such markets are fair, transparent and competitive. In particular, the Bureau may enact sweeping reforms in the mortgage broker industry which may increase the costs of engaging in these activities for all market participants, including our subsidiaries. The Bureau will have broad supervisory, examination and enforcement authority. In addition, state attorneys general and other state officials will be authorized to enforce consumer protection rules issued by the Bureau.
Recently enacted financial reform legislation will result in heightened capital requirements and is expected to increase our costs of doing business.
The Dodd-Frank Act requires the issuance of new banking regulations regarding the establishment of minimum leverage and risk-based capital requirements for bank holding companies and banks. These regulations, which are required to be effective within 18 months from the enactment of the Dodd-Frank Act, are required to be no less stringent than current capital requirements applied to insured depository institutions and may, in fact, be higher when established by the agencies. Although Wintrust’s outstanding trust preferred securities will remain eligible for Tier 1 capital treatment, any future issuances of trust preferred securities will not be Tier 1 capital. The Dodd-Frank Act also requires the regulatory agencies to seek to make capital requirements for bank holding companies and insured institutions countercyclical, so that capital requirements increase in times of economic expansion and decrease in

21


Table of Contents

times of economic contraction. The Dodd-Frank Act may also require us to conduct annual stress tests, in accordance with future regulations. Any such testing would result in increased compliance costs.
International initiatives regarding bank capital requirements may require heightened capital
In December 2010 and January 2011, the Basel Committee on Banking Supervision published reforms regarding changes to bank capital, leverage and liquidity requirements, commonly referred to as “Basel III.” If implemented without change by U.S. banking regulators, the provisions of Basel III may have significant impact on requirements including heightened requirements regarding Tier 1 common equity, and alterations to bank liquidity standards. For more detail, regarding the Basel III initiative, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview and Strategy— Recent Actions Related to Capital and Liquidity.”
We are not able to predict at this time the content of capital and liquidity guidelines or regulations that may be adopted by regulatory agencies having authority over us and our subsidiaries or the impact that any changes in regulation would have on us. If new standards require us or our banking subsidiaries to maintain more capital, with common equity as a more predominant component, or manage the configuration of our assets and liabilities in order to comply with formulaic liquidity requirements, such regulation could significantly impact our return on equity, financial condition, operations, capital position and ability to pursue business opportunities.
Our FDIC insurance premiums may increase, which could negatively impact our results of operations.
Recent insured institution failures, as well as deterioration in banking and economic conditions, have significantly increased FDIC loss provisions, resulting in a decline of its deposit insurance fund to historical lows. The FDIC expects a higher rate of insured institution failures in the next few years compared to recent years; thus, the reserve ratio may continue to decline. In addition, the Emergency Economic Stabilization Act of 2008, as amended, increased the limit on FDIC coverage to $250,000 through December 31, 2013 (made permanent by the Dodd-Frank Act).
These developments have caused our FDIC insurance premiums to increase, and may cause additional increases. On September 30, 2009, the FDIC collected a special assessment from each insured institution, and additional assessments are possible. In addition, on November 12, 2009, the FDIC approved a final rule requiring that insured institutions prepay 13 quarters of estimated deposit insurance premiums. The banks made their prepayments on December 30, 2009. These prepaid premiums are recorded as a prepaid expense on our financial statements.
Certain provisions of the Dodd-Frank Act may further effect our FDIC insurance premiums. The Dodd-Frank Act includes provisions that change the assessment base for federal deposit insurance from the amount of insured deposits to total consolidated assets less tangible capital, eliminate the maximum size of the DIF, eliminate the requirement that the FDIC pay dividends to depository institutions when the reserve ratio exceeds certain thresholds, and increase the minimum reserve ratio of the DIF from 1.15% to 1.35%, which will generally require an increase in the level of assessments for institutions with assets in excess of $10 billion. The applicability of increased assessments to the Company may depend upon regulations issued by banking regulators, who are granted significant rulemaking discretion by the Dodd-Frank Act.
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 position, results of operation or cash flows.
We engage in the origination and purchase of residential mortgages for sale into the secondary market. In connection with such sales, we make certain representations and warranties, which, if breached, may require us to repurchase such loans, substitute other loans or indemnify the purchasers of such loans for actual losses incurred in respect of such loans. Due, in part, to recent increased mortgage payment delinquency rates and declining housing prices, we have been receiving such requests for loan repurchases and indemnification payments relating to the representations and warranties with respect to such loans. We have been able to reach settlements with a number of purchasers, and believe that we have established appropriate reserves with respect to indemnification requests. While we have recently received fewer requests for indemnification, it is possible that the number of such requests will increase or that we will not be able to reach settlements with respect to such requests in the future. Accordingly, it is possible that losses incurred in connection with loan repurchases and indemnification payments may be in excess of our financial statement reserves, and we may be required to increase such reserves and may sustain additional losses associated with such loan repurchases and indemnification payments in the future. Increases to our reserves and losses incurred by us in connection with actual loan repurchases and indemnification payments in excess of our reserves could have a material adverse effect on our business, financial position, results of operations or cash flows.

22


Table of Contents

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.
We face competition in attracting and retaining deposits, making loans, and providing other financial services (including wealth management services) throughout our market area. Our competitors include national, regional and other community banks, and a wide range of other financial institutions such as credit unions, government-sponsored enterprises, mutual fund companies, insurance companies, factoring companies and other non-bank financial companies. Many of these competitors have substantially greater resources and market presence than Wintrust and, as a result of their size, may be able to offer a broader range of products and services as well as better pricing for those products and services than we can. The financial services industry could become even more competitive as a result of legislative, regulatory and technological changes and continued consolidation. Also, technology has lowered barriers to entry and made it possible for non-banks to offer products and services traditionally provided by banks, such as automatic transfer and payment systems, and for banks that do not have a physical presence in our markets to compete for deposits. 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 financial condition and results of operations.
Our ability to compete successfully depends on a number of factors, including, among other things:
    the ability to develop, maintain and build upon long-term customer relationships based on top quality service and high ethical standards;
    the scope, relevance and pricing of products and services offered to meet customer needs and demands;
 
    the ability to expand our market position;
    the rate at which we introduce new products and services relative to our competitors;
 
    customer satisfaction with our level of service; and
 
    industry and general economic trends.
Failure to perform in any of these areas could significantly weaken our competitive position, which could adversely affect our growth and profitability, which, in turn, could have a material adverse effect on our financial condition and results of operations.
Our premium finance business may involve a higher risk of delinquency or collection than our other lending operations, and could expose us to losses.
We provide financing for the payment of commercial insurance premiums and life insurance premiums on a national basis through our wholly owned subsidiary, First Insurance Funding Corporation (“FIFC”). Commercial insurance premium finance loans involve a different, and possibly higher, risk of delinquency or collection than life insurance premium finance loans and the loan portfolios of our bank subsidiaries because these loans are issued primarily through relationships with a large number of unaffiliated insurance agents and because the borrowers are located nationwide. As a result, risk management and general supervisory oversight may be difficult. As of December 31, 2010, we had $1.3 billion of commercial insurance premium finance loans outstanding, which represented 13% of our total loan portfolio as of such date.
FIFC may also be more susceptible to third party fraud with respect to commercial insurance premium finance loans because these loans are originated and many times funded through relationships with unaffiliated insurance agents and brokers. In the second quarter of 2010, fraud perpetrated against a number of premium finance companies in the industry, including the property and casualty division of FIFC, increased both the Company’s net charge-offs and provision for credit losses by $15.7 million. Acts of fraud are difficult to detect and deter, and we cannot assure investors that FIFC’s risk management procedures and controls will prevent losses from fraudulent activity. We may be exposed to the risk of loss in our premium finance business because of fraud, the possibility of insolvency of insurance carriers that are in possession of unearned insurance premiums that represent our collateral or that our collateral value is not ultimately enough to cover our outstanding balance in the event that a borrower defaults, which could result in a material adverse effect on our financial condition and results of operations. Additionally, to the extent that affiliates of insurance carriers, banks, and other lending institutions add greater service and flexibility to their financing practices in the future, our competitive position and results of operations could be adversely affected. There can be no assurance that FIFC will be able to continue to compete successfully in its markets.

23


Table of Contents

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.
In the past several years, we have completed numerous acquisitions of banks, other financial service related companies and financial service related assets, including acquisitions of troubled financial institutions, as more fully described below. We may continue to make such acquisitions in the future. Win-trust seeks merger or acquisition partners that are culturally similar and have experienced management and possess either significant market presence or have potential for improved profitability through financial management, economies of scale or expanded services. Failure to successfully identify and complete acquisitions likely will result in Wintrust achieving slower growth. Acquiring other banks, businesses or branches involves various risks commonly associated with acquisitions, including, among other things:
    potential exposure to unknown or contingent liabilities or asset quality issues of the target company;
    difficulty and expense of integrating the operations and personnel of the target company;
    potential disruption to our business, including diversion of our management’s time and attention;
    the possible loss of key employees and customers of the target company;
    difficulty in estimating the value of the target company; and
    potential changes in banking or tax laws or regulations that may affect the target company.
Acquisitions typically involve the payment of a premium over book and market values, and, therefore, some dilution of Win-trust’s tangible book value and net income per common share may occur in connection with any future transaction. Furthermore, failure to realize the expected revenue increases, cost savings, increases in geographic or product presence, and/or other projected benefits from an acquisition could have a material adverse effect on our financial condition and results of operations. Furthermore, we may face competition from other financial institutions with respect to proposed FDIC-assisted transactions.
Our participation in FDIC-assisted acquisitions may present additional risks to our financial condition and results of operations.
As part of our growth strategy, we have made opportunistic partial acquisitions of troubled financial institutions in transactions facilitated by the FDIC, including our recent acquisitions of Lincoln Park Bank, Wheatland Bank, Ravenswood Bank and Community First Bank-Chicago through our bank subsidiaries. These acquisitions, and any future FDIC-assisted transactions we may undertake, involve greater risk than traditional acquisitions because they are typically conducted on an accelerated basis, allowing less time for us to prepare for and evaluate possible transactions, or to prepare for integration of an acquired institution. These transactions also present risks of customer loss, strain on management resources related to collection and management of problem loans and problems related to the integration of operations and personnel of the acquired financial institutions. As a result, there can be no assurance that we will be able to successfully integrate the financial institutions we acquire, or that we will realize the anticipated benefits of the acquisitions. Additionally, while the FDIC may agree to assume certain losses in transactions that it facilitates, there can be no assurances that we would not be required to raise additional capital as a condition to, or as a result of, participation in an FDIC-assisted transaction. Any such transactions and related issuances of stock may have dilutive effect on earnings per share and share ownership.
We are also subject to certain risks relating to our loss sharing agreements with the FDIC. Under a loss sharing agreement, the FDIC generally agrees to reimburse the acquiring bank for a portion of any losses relating to covered assets of the acquired financial institution. This is an important financial term of any FDIC-assisted transaction, as troubled financial institutions often have poorer asset quality. As a condition to reimbursement, however, the FDIC requires the acquiring bank to follow certain servicing procedures. A failure to follow servicing procedures or any other breach of a loss sharing agreement by us could result in the loss of FDIC reimbursement. While we have established a group dedicated to servicing the loans covered by the FDIC loss sharing agreements, there can be no assurance that we will be able to comply with the FDIC servicing procedures. In addition, reimbursable losses and recoveries under loss sharing agreements are based on the book value of the relevant loans and other assets as determined by the FDIC

24


Table of Contents

as of the effective dates of the acquisitions. The amount that the acquiring banks realize on these assets could differ materially from the carrying value that will be reflected in our financial statements, based upon the timing and amount of collections on the covered loans in future periods. Any failure to receive reimbursement, or any material differences between the amount of reimbursements that we do receive and the carrying value reflected in our financial statements, could have a material negative effect on our financial condition and results of operations.
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.
FIFC’s premium finance loans are primarily secured by the insurance policies financed by the loans. These insurance policies are written by a large number of insurance companies geographically dispersed throughout the country. To the extent that commercial or life insurance providers experience widespread difficulties or credit downgrades, the value of our collateral will be reduced. If one or more large nationwide insurers were to fail, the value of our portfolio could be significantly negatively impacted. A significant downgrade in the value of the collateral supporting our premium finance business could impair our ability to create liquidity for this business, which, in turn could negatively impact our ability to expand.
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.
Our customers rely upon our financial strength and stability and evaluate the risks of doing business with us. If we experience diminished financial strength or stability, actual or perceived, including due to market or regulatory developments, announced or rumored business developments or results of operations, or a decline in stock price, customers may withdraw their deposits or otherwise seek services from other banking institutions and prospective customers may select other service providers. The risk that we may be perceived as less creditworthy relative to other market participants is increased in the current market environment, where the consolidation of financial institutions, including major global financial institutions, is resulting in a smaller number of much larger counterparties and competitors. If customers reduce their deposits with us or select other service providers for all or a portion of the services that we provide them, net interest income and fee revenues will decrease accordingly, and could have a material adverse effect on our results of operations.
Consumers may decide not to use banks to complete their financial transactions, which could adversely affect our business and results of operations.
Technology and other changes are allowing parties to complete financial transactions that historically have involved banks through alternative methods. For example, consumers can now maintain funds that would have historically been held as bank deposits in brokerage accounts or mutual funds. Consumers can also complete transactions such as paying bills and transferring funds directly without the assistance of banks. The process of eliminating banks as intermediaries could result in the loss of fee income, as well as the loss of customer deposits and the related income generated from those deposits. The loss of these revenue streams and the lower cost deposits as a source of funds could have a material adverse effect on our financial condition and results of operations.
If we are unable to attract and retain experienced and qualified personnel, our ability to provide high quality service will be diminished and our results of operations may suffer.
We believe that our future success depends, in part, on our ability to attract and retain experienced personnel, including our senior management and other key personnel. Our business model is dependent upon our ability to provide high quality, personal service at our community banks. In addition, as a holding company that conducts its operations through our subsidiaries, we are focused on providing entrepreneurial-based compensation to the chief executives of each our business units. As a Company with start-up and growth oriented operations, we are cognizant that to attract and retain the managerial talent necessary to operate and grow our businesses we often have to compensate our executives with a view to the business we expect them to manage, rather than the size of the business they currently manage. Accordingly, executive compensation restrictions such as those we were subject to during our participation in the CPP, as well any restrictions we may subject to in the future, may negatively impact our ability to retain and attract senior management. The loss of any of our senior managers or other key personnel, or our inability to identify, recruit and retain such personnel, could materially and adversely affect our business, operating results and financial condition.

25


Table of Contents

If we fail to comply with certain of our covenants under our securitization facility, the holders of the related notes could declare a rapid amortization event, which would require us to repay any outstanding amounts immediately, which could significantly impair our liquidity.
In September 2009, our indirect subsidiary, FIFC Premium Funding I, LLC, sold $600 million in aggregate principal amount of its Series 2009-A Premium Finance Asset Backed Notes, Class A (the “Notes”), which were issued in a securitization transaction sponsored by FIFC. The related indenture contains certain financial and other covenants that must be met in order to continue to sell notes into the facility. In addition, if any of these covenants are breached, the holders of the Notes may, under certain circumstances, declare a rapid amortization event, which would require us to repay any outstanding notes immediately. Such an event could significantly impair our liquidity.
De novo operations and branch openings often involve significant expenses and delayed returns and may negatively impact Wintrust’s profitability.
Our financial results have been and will continue to be impacted by our strategy of de novo bank formations and branch openings. While the recent financial crisis and interest rate environment has caused us to open fewer de novo banks, we expect to undertake additional de novo bank formations or branch openings when market conditions improve. Based on our experience, we believe that it generally takes over 13 months for de novo banks to first achieve operational profitability, depending on the number of banking facilities opened, the impact of organizational and overhead expenses, the start-up phase of generating deposits and the time lag typically involved in redeploying deposits into attractively priced loans and other higher yielding earning assets. However, it may take longer than expected or than the amount of time Wintrust has historically experienced for new banks and/or banking facilities to reach profitability, and there can be no guarantee that these new banks or branches will ever be profitable. Moreover, the FDIC’s recent issuance extending the enhanced supervisory period for de novo banks from three to seven years, including higher capital requirements during this period, could also delay a new bank’s ability to contribute to the Company’s earnings and impact the Company’s willingness to expand through de novo bank formation. To the extent we undertake additional de novo bank, branch and business formations, our level of reported net income, return on average equity and return on average assets will be impacted by startup costs associated with such operations, and it is likely to continue to experience the effects of higher expenses relative to operating income from the new operations. These expenses may be higher than we expected or than our experience has shown, which could have a material adverse effect on our financial condition and results of operations.
Failures of our operational systems may adversely effect our operations.
We are increasingly depending upon computer and other information technology systems to manage our business. We rely upon information technology systems to process, record and monitor and disseminate information about our operations. In some cases, we depend on third parties to provide or maintain these systems. If any of our financial, accounting or other data processing systems fail or have other significant shortcomings, we could be materially adversely affected. Security breaches in our online banking systems could also have an adverse effect on our reputation and could subject us to possible liability. Our systems may also be affected by events that are beyond our control, which may include, for example, computer viruses, electrical or telecommunications outages or other damage to our property or assets. Although we take precautions against malfunctions and security breaches, our efforts may not be adequate to prevent problems that could materially adversely effect our business operations.
Changes in accounting policies or accounting standards could materially adversely affect how we report our financial results and condition.
Our accounting policies are fundamental to understanding our financial results and condition. Some of these policies require use of estimates and assumptions that affect the value of our assets or liabilities and financial results. Some of our accounting policies are critical because they require management to make difficult, subjective and complex judgments about matters that are inherently uncertain and because it is likely that materially different amounts would be reported under different conditions or using different assumptions. If such estimates or assumptions underlying our financial statements are incorrect, we may experience material losses. From time to time, the Financial Accounting Standards Board and the SEC change the financial accounting and reporting standards that govern the preparation of our financial statements. These changes can be hard to predict and can materially impact how we record and report our financial condition and results of operations. In some cases, we could be required to apply a new or revised standard retroactively, resulting in the restatement of prior period financial statements.

26


Table of Contents

Anti-takeover provisions could negatively impact our stockholders.
Certain provisions of our articles of incorporation, by-laws and Illinois law may have the effect of impeding the acquisition of control of Wintrust by means of a tender offer, a proxy fight, open-market purchases or otherwise in a transaction not approved by our board of directors. For example, our board of directors may issue additional authorized shares of our capital stock to deter future attempts to gain control of Wintrust, including the authority to determine the terms of any one or more series of preferred stock, such as voting rights, conversion rates and liquidation preferences. As a result of the ability to fix voting rights for a series of preferred stock, the board has the power, to the extent consistent with its fiduciary duty, to issue a series of preferred stock to persons friendly to management in order to attempt to block a merger or other transaction by which a third party seeks control, and thereby assist the incumbent board of directors and management to retain their respective positions. In addition, our articles of incorporation expressly elect to be governed by the provisions of Section 7.85 of the Illinois Business Corporation Act, which would make it more difficult for another party to acquire us without the approval of our board of directors. The ability of a third party to acquire us is also limited under applicable banking regulations.
The Bank Holding Company Act of 1956 requires any “bank holding company” (as defined in that Act) to obtain the approval of the Federal Reserve prior to acquiring more than 5% of our outstanding common stock. Any person other than a bank holding company is required to obtain prior approval of the Federal Reserve to acquire 10% or more of our outstanding common stock under the Change in Bank Control Act of 1978. Any holder of 25% or more of our outstanding common stock, other than an individual, is subject to regulation as a bank holding company under the Bank Holding Company Act. For purposes of calculating ownership thresholds under these banking regulations, bank regulators would likely at least take the position that the minimum number of shares, and could take the position that the maximum number of shares, of Wintrust common stock that a holder is entitled to receive pursuant to securities convertible into or settled in Wintrust common stock, including pursuant to Wintrust’s tangible equity units or warrants to purchase Wintrust common stock held by such holder, must be taken into account in calculating a stockholder’s aggregate holdings of Wintrust common stock.
These provisions may have the effect of discouraging a future takeover attempt that is not approved by our board of directors but which our individual shareholders may deem to be in their best interests or in which our shareholders may receive a substantial premium for their shares over then-current market prices. As a result, shareholders who might desire to participate in such a transaction may not have an opportunity to do so. Such provisions will also render the removal of our current board of directors or management more difficult.

27


Table of Contents

ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
The Company’s executive offices are located in the banking facilities of Lake Forest Bank. Certain corporate functions are also located at the various bank subsidiaries.
The Company’s banks operate through 86 banking facilities, the majority of which are owned. The Company owns 133 automatic teller machines, the majority of which are housed at banking locations. The banking facilities are located in communities throughout the Chicago metropolitan area and southern Wisconsin. Excess space in certain properties is leased to third parties.
The Company’s wealth management subsidiaries have one location in downtown Chicago, one in Appleton, Wisconsin, and one in Florida, all of which are leased, as well as office locations at various banks. WMC has 27 locations in eight states, all of which are leased, as well as office locations at various banks. FIFC has one location in Northbrook, Illinois which is owned and three which are leased. Tricom has one location in Menomonee Falls, Wisconsin which is owned. WITS has one location in Villa Park, Illinois which is owned as well as an office location at one of the banks. In addition, the Company owns other real estate acquired for further expansion that, when considered in the aggregate, is not material to the Company’s financial position.
ITEM 3. LEGAL PROCEEDINGS
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. Any such litigation currently pending against the Company or its subsidiaries is incidental to the Company’s business and, based on information currently available to management, management believes the outcome of such actions or proceedings will not have a material adverse effect on the operations or financial position of the Company.
ITEM 4. [REMOVED AND RESERVED.]
PART II
ITEM 5.   MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
The Company’s common stock is traded on The NASDAQ Global Select Stock Market under the symbol WTFC. The following table sets forth the high and low sales prices reported on NASDAQ for the common stock by fiscal quarter during 2010 and 2009.
                                 
    2010   2009
    High   Low   High   Low
           
Fourth Quarter
  $ 33.97     $ 28.40     $ 33.87     $ 25.00  
Third Quarter
    37.25       27.79       29.73       14.66  
Second Quarter
    44.93       33.05       22.75       11.80  
First Quarter
    38.47       29.86       20.90       9.70  
         
Performance Graph
The following performance graph compares the five-year percentage change in the Company’s cumulative shareholder return on common stock compared with the cumulative total return on composites of (1) all NASDAQ Global Select Market stocks for United States companies (broad market index) and (2) all NASDAQ Global Select Market bank stocks (peer group index). Cumulative total return is computed by dividing the sum of the cumulative amount of dividends for the measurement period and the difference between the Company’s share price at the end and the beginning of the measurement period by the share price at the beginning of the measurement period. The NASDAQ Global Select Market for United States companies’ index comprises all domestic common shares traded on the NASDAQ Global Select Market and the NASDAQ Small-Cap Market. The NASDAQ Global Select Market bank stocks index comprises all banks traded on the NASDAQ Global Select Market and the NASDAQ Small-Cap Market.

28


Table of Contents

This graph and other information furnished in the section titled “Performance Graph” under this Part II, Item 5 of this Form 10-K shall not be deemed to be “soliciting” materials or to be “filed” with the Securities and Exchange Commission or subject to Regulation 14A or 14C, or to the liabilities of Section 18 of the Securities Exchange Act of 1934, as amended.
Total Return Performance
(PERFORMANCE GRAPH)
                                                 
    2005   2006   2007   2008   2009   2010
     
Wintrust Financial Corporation
    100.00       87.98       61.44       39.22       58.33       62.74  
NASDAQ — Total US
    100.00       109.84       119.14       57.41       82.53       97.95  
NASDAQ — Bank Index
    100.00       112.23       88.95       64.86       54.35       64.29  
 

29


Table of Contents

Approximate Number of Equity Security Holders
As of February 23, 2011 there were approximately 1,505 shareholders of record of the Company’s common stock.
Dividends on Common Stock
The Company’s Board of Directors approved the first semiannual dividend on the Company’s common stock in January 2000 and has continued to approve a semi-annual dividend since that time. The payment of dividends is subject to statutory restrictions and restrictions arising under the terms of our 8.00% Non-Cumulative Perpetual Convertible Preferred Stock, Series A (the “Series A Preferred Stock”), the Company’s Trust Preferred Securities offerings, the Company’s 7.5% tangible equity units and under certain financial covenants in the Company’s credit agreement. Under the terms of the Company’s revolving credit facility entered into on October 29, 2010, the Company is prohibited from paying dividends on any equity interests, including its common stock and preferred stock, if such payments would cause the Company to be in default under its credit facility.
Following is a summary of the cash dividends paid in 2010 and 2009:
             
        Dividend
Record Date   Payable Date   per Share
     
February 12, 2009
  February 26, 2009   $ 0.18  
August 13, 2009
  August 27, 2009   $ 0.09  
February 11, 2010
  February 25, 2010   $ 0.09  
August 12, 2010
  August 26, 2010   $ 0.09  
In January 2011, the Company’s Board of Directors approved a semi-annual dividend of $0.09 per share. The dividend was paid on February 24, 2011 to shareholders of record as of February 10, 2011.
Because the Company’s consolidated net income consists largely of net income of the banks and certain wealth management subsidiaries, the Company’s ability to pay dividends depends upon its receipt of dividends from these entities. The banks’ ability to pay dividends is regulated by banking statutes. See “Bank Regulation; Additional Regulation of Dividends” on page 13 of this Form 10-K. During 2010, 2009 and 2008, the banks paid $11.5 million, $100.0 million and $73.2 million, respectively, in dividends to the Company.
Reference is made to Note 20 to the Consolidated Financial Statements and “Liquidity and Capital Resources” contained in this Form 10-K for a description of the restrictions on the ability of certain subsidiaries to transfer funds to the Company in the form of dividends.
Recent Sales of Unregistered Securities
None.
Issuer Purchases of Equity Securities
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 year ended December 31, 2010. There is currently no authorization to repurchase shares of outstanding common stock.

30


Table of Contents

ITEM 6. SELECTED FINANCIAL DATA
                                         
    Years Ended December 31,
    2010   2009   2008   2007   2006
    (dollars in thousands, except per share data)
Selected Financial Condition Data (at end of year):
                                       
Total assets
  $ 13,980,156     $ 12,215,620     $ 10,658,326     $ 9,368,859     $ 9,571,852  
Total loans, excluding covered loans
    9,599,886       8,411,771       7,621,069       6,801,602       6,496,480  
Total deposits
    10,803,673       9,917,074       8,376,750       7,471,441       7,869,240  
Junior subordinated debentures
    249,493       249,493       249,515       249,662       249,828  
Total shareholders’ equity
    1,436,549       1,138,639       1,066,572       739,555       773,346  
 
 
                                       
Selected Statements of Income Data:
                                       
Net interest income
  $ 415,836     $ 311,876     $ 244,567     $ 261,550     $ 248,886  
Net revenue (1)
    607,996       629,523       344,245       341,493       339,926  
Core pre-tax earnings (2)
    196,544       122,803       94,410       95,552       102,566  
Net income
    63,329       73,069       20,488       55,653       66,493  
Net income per common share — Basic
    1.08       2.23       0.78       2.31       2.66  
Net income per common share — Diluted
    1.02       2.18       0.76       2.24       2.56  
 
 
                                       
Selected Financial Ratios and Other Data:
                                       
Performance Ratios:
                                       
Net interest margin (2)
    3.37 %     3.01 %     2.81 %     3.11 %     3.10 %
Non-interest income to average assets
    1.42       2.78       1.02       0.85       1.02  
Non-interest expense to average assets
    2.82       3.01       2.63       2.57       2.56  
Net overhead ratio (3)
    1.40       0.23       1.60       1.72       1.54  
Efficiency ratio (2)(4)
    63.77       54.44       73.00       71.05       66.94  
Return on average assets
    0.47       0.64       0.21       0.59       0.74  
Return on average common equity
    3.01       6.70       2.44       7.64       9.47  
 
                                       
Average total assets
  $ 13,556,612     $ 11,415,322     $ 9,753,220     $ 9,442,277     $ 8,925,557  
Average total shareholders’ equity
    1,352,135       1,081,792       779,437       727,972       701,794  
Average loans to average deposits ratio (excluding covered loans)
    91.1 %     90.5 %     94.3 %     90.1 %     82.2 %
Average loans to average deposits ratio (including covered loans)
    93.4 %     90.5 %     94.3 %     90.1 %     82.2 %
 
                                       
Common Share Data (at end of year):
                                       
Market price per common share
  $ 33.03     $ 30.79     $ 20.57     $ 33.13     $ 48.02  
Book value per common share (2)
  $ 32.73     $ 35.27     $ 33.03     $ 31.56     $ 30.38  
Tangible common book value per share (2)
  $ 25.80     $ 23.22     $ 20.78     $ 19.02     $ 18.97  
Common shares outstanding
    34,864,068       24,206,819       23,756,674       23,430,490       25,457,935  
 
                                       
Other Data (at end of year): (8)
                                       
Leverage ratio
    10.1 %     9.3 %     10.6 %     7.7 %     8.2 %
Tier 1 capital to risk-weighted assets
    12.5       11.0       11.6       8.7       9.8  
Total capital to risk-weighted assets
    13.8       12.4       13.1       10.2       11.3  
Tangible common equity ratio (TCE) (2)(7)
    8.0       4.7       4.8       4.9       5.2  
Allowance for credit losses (5)
  $ 118,037     $ 101,831     $ 71,353     $ 50,882     $ 46,512  
Credit discounts on purchased premium finance receivables — life insurance (6)
    23,227       37,323                    
Non-performing loans
    142,132       131,804       136,094       71,854       36,874  
Allowance for credit losses to total loans (5)
    1.23 %     1.21 %     0.94 %     0.75 %     0.72 %
Non-performing loans to total loans
    1.48       1.57       1.79       1.06       0.57  
 
                                       
Number of:
                                       
Bank subsidiaries
    15       15       15       15       15  
Non-bank subsidiaries
    8       8       7       8       8  
Banking offices
    86       78       79       77       73  
 
(1)   Net revenue is net interest income plus non-interest income.
 
(2)   See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Non-GAAP Financial Measures/Ratios,” of the Company’s 2010
 
    Form 10-K for a reconciliation of this performance measure/ratio to GAAP.
 
(3)   The net overhead ratio is calculated by netting total non-interest expense and total non-interest income and dividing by that period’s average total 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 unfunded lending-related commitments.
 
(6)   Represents the credit discounts on purchased life insurance premium finance loans.
 
(7)   Total shareholders’ equity minus preferred stock and total intangible assets divided by total assets minus total intangible assets
 
(8)   Asset quality ratios exclude covered loans.

31


Table of Contents

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 in Item 1A on page 18 of this Form 10-K. 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:
    negative economic conditions that adversely affect the economy, housing prices, the job market and other factors that may affect the Company’s liquidity and the performance of its loan portfolios, particularly in the markets in which it operates;
 
    the extent of defaults and losses on the Company’s loan portfolio, which may require further increases in its allowance for credit losses;
 
    estimates of fair value of certain of the Company’s assets and liabilities, which could change in value significantly from period to period;
 
    changes in the level and volatility of interest rates, the capital markets and other market indices that may affect, among other things, the Company’s liquidity and the value of its assets and liabilities;
 
    a decrease in the Company’s regulatory capital ratios, including as a result of further declines in the value of its loan portfolios, or otherwise;
 
    legislative or regulatory changes, particularly changes in regulation of financial services companies and/or the products and services offered by financial services companies, including those resulting from the Dodd-Frank Act;
 
    restrictions upon our ability to market our products to consumers and limitations on our ability to profitably operate our mortgage business resulting from the Dodd-Frank Act;
 
    increased costs of compliance, heightened regulatory capital requirements and other risks associated with changes in regulation and the current regulatory environment, including the Dodd-Frank Act;
 
    changes in capital requirements resulting from the Basel II and III initiatives;
 
    increases in the Company’s FDIC insurance premiums, or the collection of special assessments by the FDIC;
 
    losses incurred in connection with repurchases and indemnification payments related to mortgages;
 
    competitive pressures in the financial services business which may affect the pricing of the Company’s loan and deposit products as well as its services (including wealth management services);
 
    delinquencies or fraud with respect to the Company’s premium finance business;
 
    failure to identify and complete favorable acquisitions in the future or unexpected difficulties or developments related to the integration of recent or future acquisitions;
 
    unexpected difficulties and losses related to FDIC-assisted acquisitions, including those resulting from our loss-sharing arrangements with the FDIC;
 
    credit downgrades among commercial and life insurance providers that could negatively affect the value of collateral securing the Company’s premium finance loans;
 
    any negative perception of the Company’s reputation or financial strength;
 
    the loss of customers as a result of technological changes allowing consumers to complete their financial transactions without the use of a bank;
 
    the ability of the Company to attract and retain senior management experienced in the banking and financial services industries;
 
    the Company’s ability to comply with covenants under its securitization facility and credit facility;
 
    unexpected difficulties or unanticipated developments related to the Company’s strategy of de novo bank formations and openings, which typically require over 13 months of operations before becoming profitable due to the impact of organizational and overhead expenses, startup phase of generating deposits and the time lag typically involved in redeploying deposits into attractively priced loans and other higher yielding earning assets;

32


Table of Contents

    changes in accounting standards, rules and interpretations and the impact on the Company’s financial statements;
 
    adverse effects on our operational systems resulting from failures, human error or tampering;
 
    significant litigation involving the Company; and
 
    the ability of the Company to receive dividends from its subsidiaries.
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 or on behalf of Wintrust. 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 release revisions to these forward-looking statements or reflect events or circumstances after the date of this Form 10-K. Persons are advised, however, to consult further disclosures management makes on related subjects in its reports filed with the SEC and in its press releases.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion highlights the significant factors affecting the operations and financial condition of Wintrust for the three years ended December 31, 2010. This discussion and analysis should be read in conjunction with the Company’s Consolidated Financial Statements and Notes thereto, and Selected Financial Highlights appearing elsewhere within this Form 10-K.
OPERATING SUMMARY
Wintrust’s key measures of profitability and balance sheet changes are shown in the following table (dollars in thousands, except per share data):
                                         
                            % or   % or
    Years Ended   basis point   basis point
    December 31,   (bp)change   (bp)change
    2010   2009   2008   2009 to 2010   2008 to 2009
     
Net income
  $ 63,329     $ 73,069     $ 20,488       (13 )%     257 %
Net income per common share — Diluted
  $ 1.02     $ 2.18     $ 0.76       (53 )%     187 %
Core pre-tax earnings (1)
  $ 196,544     $ 122,803     $ 94,410       60 %     30 %
Net revenue (2)
  $ 607,996     $ 629,523     $ 344,245       (3 )%     83 %
Net interest income
  $ 415,836     $ 311,876     $ 244,567       33 %     28 %
Net interest margin (1)
    3.37 %     3.01 %     2.81 %   36 bp     20 bp  
Net overhead ratio (3)
    1.40 %     0.23 %     1.60 %   117 bp     (137)bp  
Efficiency ratio (1)(4)
    63.77 %     54.44 %     73.00 %   933 bp     (1,856)bp  
Return on average assets
    0.47 %     0.64 %     0.21 %   (17)bp     43 bp  
Return on average common equity
    3.01 %     6.70 %     2.44 %   (369)bp     426 bp  
 
                                       
At end of period:
                                       
Total assets
  $ 13,980,156     $ 12,215,620     $ 10,658,326       14 %     15 %
Total loans,excluding covered loans
  $ 9,599,886     $ 8,411,771     $ 7,621,069       14 %     10 %
Total loans, including loans held-for sale, excluding covered loans
  $ 9,971,333     $ 8,687,486     $ 7,682,185       15 %     13 %
Total deposits
  $ 10,803,673     $ 9,917,074     $ 8,376,750       9 %     18 %
Total shareholders’ equity
  $ 1,436,549     $ 1,138,639     $ 1,066,572       26 %     7 %
Book value per common share (1)
  $ 32.73     $ 35.27     $ 33.03       (7 )%     7 %
Tangible book value per common share (1)
  $ 25.80     $ 23.22     $ 20.78       11 %     12 %
Market price per common share
  $ 33.03     $ 30.79     $ 20.57       7 %     50 %
 
(1)   See “Non-GAAP Financial Measures/Ratios” for additional information on this performance measure/ratio.
 
(2)   Net revenue is net interest income plus non-interest income.
 
(3)   The net overhead ratio is calculated by netting total non-interest expense and total non-interest income 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 revenue (excluding securities gains or losses). A lower ratio indicates more efficient revenue generation.
Please refer to the Consolidated Results of Operations section later in this discussion for an analysis of the Company’s operations for the past three years.

33


Table of Contents

NON-GAAP FINANCIAL MEASURES/RATIOS
The accounting and reporting policies of the Company 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) and the efficiency ratio. Management believes that these measures and ratios provide users of the Company’s financial information with 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 the 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. These measures are computed excluding the impact of preferred stock and intangible assets. Core pre-tax earnings is a significant metric in assessing the Company’s core operating performance.

34


Table of Contents

The following table presents 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 for the last 5 years.
                                         
    Years Ended December 31,
(Dollars and shares in thousands, except per share data)   2010   2009   2008   2007   2006
     
Calculation of Net Interest Margin and Efficiency Ratio
(A) Interest income (GAAP)
  $ 593,107       527,614       514,723       611,557       557,945  
Taxable-equivalent adjustment
                                       
- Loans
    334       462       645       826       409  
- Liquidity management assets
    1,377       1,720       1,795       2,388       1,195  
- Other earnings assets
    17       38       47       13       17  
     
Interest income - FTE
  $ 594,835       529,834       517,210       614,784       559,566  
(B) Interest Expense (GAAP)
    177,271       215,738       270,156       350,007       309,059  
     
Net interest income - FTE
  $ 417,564       314,096       247,054       264,777       250,507  
     
 
                                       
(C) Net interest income (GAAP) (A minus B)
  $ 415,836       311,876       244,567       261,550       248,886  
 
                                       
(D) Net interest margin (GAAP)
    3.35 %     2.99 %     2.78 %     3.07 %     3.07 %
Net interest margin - FTE
    3.37 %     3.01 %     2.81 %     3.11 %     3.10 %
 
                                       
(E) Efficiency ratio (GAAP)
    63.95 %     54.64 %     73.52 %     71.74 %     67.28 %
Efficiency ratio - FTE
    63.77 %     54.44 %     73.00 %     71.06 %     66.96 %
 
                                       
Calculation of Tangible Common Equity ratio (at period end)
                                       
Total shareholders’ equity
  $ 1,436,549       1,138,639       1,066,572       739,555       773,346  
Less: Preferred stock
    (49,640 )     (284,824 )     (281,873 )            
Less: Intangible assets
    (293,765 )     (291,649 )     (290,918 )     (293,941 )     (290,535 )
     
(F) Total tangible common shareholders’ equity
  $ 1,093,144       562,166       493,781       445,614       482,811  
     
 
                                       
Total assets
  $ 13,980,156       12,215,620       10,658,326       9,368,859       9,571,852  
Less: Intangible assets
    (293,765 )     (291,649 )     (290,918 )     (293,941 )     (290,535 )
     
(G) Total tangible assets
  $ 13,686,391       11,923,971       10,367,408       9,074,918       9,281,317  
     
 
                                       
Tangible common equity ratio (F/G)
    8.0 %     4.7 %     4.8 %     4.9 %     5.2 %
 
                                       
Calculation of Core Pre-Tax Earnings
                                       
Income before taxes
  $ 100,807       117,504       30,641       83,824       104,241  
Add: Provision for credit losses
    124,664       167,932       57,441       14,879       7,057  
Add: OREO expenses, net
    19,331       18,963       2,023       111       36  
Add: Recourse obligation on loans previously sold
    10,970       937                    
Less: Gain on bargain purchases
    (44,231 )     (156,013 )                  
Less: Trading (gains) losses
    (5,165 )     (26,788 )     134       (265 )     (8,751 )
Less: (Gains) losses on available-for-sale securities, net
    (9,832 )     268       4,171       (2,997 )     (17 )
     
Core pre-tax earnings
  $ 196,544       122,803       94,410       95,552       102,566  
     
 
                                       
Calculation of book value per common share
                                       
Total shareholders’ equity
  $ 1,436,549       1,138,639       1,066,572       739,555       773,346  
Less: Preferred stock
    (49,640 )     (284,824 )     (281,873 )            
     
(H) Total common equity
  $ 1,386,909       853,815       784,699       739,555       773,346  
     
 
                                       
Actual common shares outstanding
    34,864       24,207       23,757       23,430       25,458  
Add: Tangible equity unit conversion shares
    7,512                          
     
(I) Common shares for book value calculation
    42,376       24,207       23,757       23,430       25,458  
     
 
                                       
Book value per common share (H/I)
  $ 32.73       35.27       33.03       31.56       30.38  
Tangible book value per common share (F/I)
  $ 25.80       23.22       20.78       19.02       18.97  

35


Table of Contents

OVERVIEW AND STRATEGY
Wintrust is a financial holding company that provides traditional community banking services, primarily in the Chicago metropolitan area and southeastern Wisconsin, and operates other financing businesses on a national basis through several non-bank subsidiaries. Additionally, Wintrust offers a full array of wealth management services primarily to customers in the Chicago metropolitan area and southeastern Wisconsin.
The Current Economic Environment
Both the U.S. economy and the Company’s local markets faced challenging conditions in 2010. The credit crisis that began in 2008 continued, resulting in high unemployment and depressed home values throughout the Chicago metropolitan area and southeastern Wisconsin. The stress of the existing economic environment and the depressed real estate valuations in the Company’s markets continued to impact the Company’s business in 2010. In response to these conditions, Management continued to carefully monitor the impact on the Company of the financial markets, the depressed values of real property and other assets, loan performance, default rates and other financial and macro-economic indicators in order to navigate the challenging economic environment. In particular:
    The Company created a dedicated division in 2008, the Managed Assets Division, to focus on resolving problem asset situations. Comprised of experienced lenders, the Managed Assets Division takes control of managing the Company’s more significant problem assets and also conducts ongoing reviews and evaluations of all significant problem assets, including the formulation of action plans and updates on recent developments.
 
    The Company’s 2010 provision for credit losses totaled $124.7 million, a decrease of $43.3 million when compared to 2009. Net charge-offs decreased to $109.7 million in 2010 (of which $78.4 million related to commercial and commercial real estate loans), compared to $137.4 million in 2009 (of which $122.9 million related to commercial and commercial real estate loans).
 
    The Company increased its allowance for loan losses to $113.9 million at December 31, 2010, reflecting an increase of $15.6 million, or 16%, when compared to 2009. At December 31, 2010, approximately $62.5 million, or 55%, of the allowance for loan losses was associated with commercial real estate loans and another $31.8 million, or 28%, was associated with commercial loans.
 
    Wintrust has significant exposure to commercial real estate. At December 31, 2010, $3.3 billion, or 34%, of our loan portfolio was commercial real estate, with more than 91% located in the Chicago metropolitan area and southeastern Wisconsin market areas. The commercial real estate loan portfolio was comprised of $487.8 million related to land, residential and commercial construction, $535.3 million related to office buildings loans, $510.5 million related to retail loans, $500.3 million related to industrial use loans, $291.0 million related to multi-family loans and $1.0 billion related to mixed use and other use types. In analyzing the commercial real estate market, the Company does not rely upon the assessment of broad market statistical data, in large part because the Company’s market area is diverse and covers many communities, each of which is impacted differently by economic forces affecting the Company’s general market area. As such, the extent of the decline in real estate valuations can vary meaningfully among the different types of commercial and other real estate loans made by the Company. The Company uses its multi-chartered structure and local management knowledge to analyze and manage the local market conditions at each of its banks. Despite these efforts, as of December 31, 2010, the Company had approximately $94.0 million of non-performing commercial real estate loans representing approximately 3% of the total commercial real estate loan portfolio. $49.4 million, or 53%, of the total non-performing commercial real estate loan portfolio related to the land, residential and commercial construction sector which remains under stress due to the significant oversupply of new homes in certain portions of our market area.
 
    Total non-performing loans (loans on non-accrual status and loans more than 90 days past due and still accruing interest), excluding covered loans, were $142.1 million (of which $94.0 million, or 66%, was related to commercial real estate) at December 31, 2010, an increase of $10.3 million compared to December 31, 2009. Non-performing loans increased as a result of deteriorating real estate conditions and stress in the overall economy in 2010.
 
    The Company’s other real estate owned, excluding covered other real estate owned, decreased by $9.0 million, to $71.2 million during 2010, from $80.2 million at December 31, 2009. These changes were largely caused by disposal and resolution of properties in 2010. Specifically, the $71.2 million of other real estate owned as of December 31, 2010 was comprised of $17.8 million of residential real estate development property, $47.7 million of commercial real estate property and $5.7 million of residential real estate property.
 
    Following the acquisition of banks in FDIC-assisted transactions, the Company created a dedicated division called the Purchased Assets Division to manage the loan portfolios acquired in such transactions. These loan portfolios are covered by loss sharing agreements with the FDIC, and recovery under these agreements requires detailed reporting on at least a quarterly basis. Comprised of experienced lenders and finance staff, the Purchased Assets Division enables the Company to effectively and efficiently manage the special risk associated with these transactions.

36


Table of Contents

During 2009, Management implemented a strategic effort to aggressively resolve problem loans through liquidation, rather than retention, of loans or real estate acquired as collateral through the foreclosure process. This strategic effort continued in 2010. Management believes that some financial institutions have taken a longer term view of problem loan situations, hoping to realize higher values on acquired collateral through extended marketing efforts or an improvement in market conditions. Management believed that the distressed macro-economic conditions would continue to exist in 2010 and that the banking industry’s increase in non-performing loans would eventually lead to many properties being sold by financial institutions, thus saturating the market and possibly driving fair values of non-performing loans and foreclosed collateral further downwards. Accordingly, during 2009 and continuing through 2010, the Company attempted to liquidate as many non-performing loans and assets as possible. Management believes these actions will serve the Company well in the future by providing some protection for the Company from further valuation deterioration and permitting Management to spend less time on resolution of problem loans and more time on growing the Company’s core business and the evaluation of other opportunities presented by this volatile economic environment. The Company continues to take advantage of the opportunities that many times result from distressed credit markets - specifically, a dislocation of assets, banks and people in the overall market.
The level of loans past due 30 days or more and still accruing interest, excluding covered loans, totaled $146.9 million as of December 31 2010, increasing $38.3 million compared to the balance of $108.6 million as of December 31, 2009. Management is very cognizant of the volatility in and the fragile nature of the national and local economic conditions and that some borrowers can experience severe difficulties and default suddenly even if they have never previously been delinquent in loan payments. Accordingly, Management believes that the current economic conditions will continue to apply stress to the quality of the Company’s loan portfolio. Accordingly, Management plans to continue to direct significant attention toward the prompt identification, management and resolution of problem loans.
Additionally in 2010, the Company restructured certain loans by providing economic concessions to borrowers to better align the terms of their loans with their current ability to pay. At December 31, 2010, approximately $101.2 million in loans had terms modified, with $81.1 million of these modified loans in accruing status. These actions helped financially stressed borrowers maintain their homes or businesses and kept these loans in an accruing status for the Company. The Company considers restructuring loans when it appears that both the borrower and the Company can benefit and preserve a solid and sustainable relationship.
An acceleration or significantly extended continuation in real estate valuation and macroeconomic deterioration could result in higher default levels, a significant increase in foreclosure activity, a material decline in the value of the Company’s assets, or any combination of more than one of these trends could have a material adverse effect on the Company’s financial condition or results of operations.
A positive result of the economic environment was that our mortgage banking operation benefited from the low interest rate environment during 2009 and 2010 as demand for mortgage loans increased due to the fall in interest rates. The interest rate environment coupled with the acquisition of additional staff and infrastructure resulted in the higher levels of loan originations and loan sales in 2009. Though loan originations were lower in 2010 compared to 2009, the Company realized an increase in gains on sales of loans, which was driven by better pricing realized as a result of the Company utilizing mandatory execution of forward commitments with investors in 2010. The increase in gains on sales was partially offset by changes in the fair market value of mortgage servicing rights, valuation fluctuations of mortgage banking derivatives, fair value accounting for certain residential mortgage loans held for sale and an increase in loss indemnification claims by purchasers of the Company’s loans. The Company enters into residential mortgage loan sale agreements with investors in the normal course of business. The Company’s practice is generally not to retain long-term fixed rate mortgages on its balance sheet in order to mitigate interest rate risk, and consequently sells most of such mortgages into the secondary market. These agreements provide recourse to investors through certain representations concerning credit information, loan documentation, collateral and insurability. Investors request the Company to indemnify them against losses on certain loans or to repurchase loans which the investors believe do not comply with applicable representations. An increase in requests for loss indemnification can negatively impact mortgage banking revenue as additional recourse expense. The Company recognized an additional $11.0 million of expense related to loss indemnification claims in 2010 for loans previously sold, an increase of $10.1 million compared to 2009 primarily as a result of increased repurchase demands from investors. The Company has established an $8.9 million estimated liability, as of December 31, 2010 on loans expected to be repurchased from loans sold to investors, which is based on trends in repurchase and indemnification requests, actual loss experience, known and inherent risks in the loan and current economic conditions.

37


Table of Contents

In total, the Company increased its loan portfolio, excluding covered loans, from $8.4 billion at December 31, 2009 to $9.6 billion at December 31, 2010. This increase was primarily a result of the change in accounting method for the Company’s securitization transaction which is accounted for as a secured borrowing as of January 1, 2010, the Company’s commercial banking initiative, as well as growth in the premium finance receivables — life insurance portfolio. The Company continues to make new loans, including in the commercial and commercial real estate sector, where opportunities that meet our underwriting standards exist. The withdrawal of many banks in our area from active lending combined with our strong local relationships has presented us with opportunities to make new loans to well qualified borrowers who have been displaced from other institutions. For more information regarding changes in the Company’s loan portfolio, see “Analysis of Financial Condition — Interest Earning Assets” and Note 4 (“Loans”) of the Consolidated Financial Statements.
Management considers the maintenance of adequate liquidity to be important to the management of risk. Accordingly, during 2009 and 2010, the Company continued its practice of maintaining appropriate funding capacity to provide the Company with adequate liquidity for its ongoing operations. In this regard, the Company benefited from its strong deposit base, a liquid short-term investment portfolio and its access to funding from a variety of external funding sources, including exceptional sources provided or facilitated by the federal government for the benefit of U.S. financial institutions. Among such sources was the New York Fed’s TALF. In September 2009 the Company securitized a portion of its property and casualty premium finance loan portfolio of $600 million, which was facilitated by the premium finance loans being eligible collateral under the TALF. The New York Fed ceased making new loans under the TALF on June 30, 2010.
The Company also benefited from its maintenance of fifteen separate banking charters, which allow the Company to offer its MaxSafe® product. Through the MaxSafe® product, the Company offers its customers the ability to maintain a depository account at each of the Company’s banking charters and thus receive fifteen times the ordinary FDIC limit, with the Company attending to much of the administrative difficulties this would ordinarily require. While the FDIC insurance limit, formerly $100,000 per depositor at each banking charter, has been raised by the FDIC to $250,000 per depositor at each banking charter, the MaxSafe® product has allowed the Company to attract large amounts of high quality deposits as financial distress has affected a number of banking institutions. At December 31, 2010, the Company had over $1 billion in overnight liquid funds and interest-bearing deposits with banks.
Community Banking
As of December 31, 2010, our community banking franchise consisted of 15 community banks with 86 locations. Through these banks, we provide banking and financial services primarily to individuals, small to mid-sized businesses, local governmental units and institutional clients residing primarily in the banks’ local service areas. These services include traditional deposit products such as demand, NOW, money market, savings and time deposit accounts, as well as a number of unique deposit products targeted to specific market segments. The banks also offer home equity, home mortgage, consumer, real estate and commercial loans, safe deposit facilities, ATMs, internet banking and other innovative and traditional services specially tailored to meet the needs of customers in their market areas. Profitability of our community banking franchise is primarily driven by our net interest income and margin, our funding mix and related costs, the level of non-performing loans and other real estate owned, the amount of mortgage banking revenue and our history of establishing de novo banks.
Net interest income and margin. The primary source of our revenue is net interest income. Net interest income is the difference between interest income and fees on earning assets, such as loans and securities, and interest expense on liabilities to fund those assets, including deposits and other borrowings. Net interest income can change significantly from period to period based on general levels of interest rates, customer prepayment patterns, the mix of interest-earning assets and the mix of interest-bearing and non-interest bearing deposits and borrowings.
Funding mix and related costs. Our most significant source of funding is core deposits, which are comprised of non-interest bearing deposits, non-brokered interest-bearing transaction accounts, savings deposits and domestic time deposits. Our branch network is our principal source of core deposits, which generally carry lower interest rates than wholesale funds of comparable maturities. Our profitability has been bolstered in recent quarters as fixed term certificates of deposit have been renewing at lower rates given the historically low interest rate levels in place recently and growth in non-interest bearing deposits as a result of the Company’s commercial banking initiative.
Level of non-performing loans and other real estate owned. The level of non-performing loans and other real estate owned can significantly impact our profitability as these loans and other real estate owned do not accrue any income, can be subject to charge-offs and write-downs due to deteriorating market conditions and generally result in additional legal and collections expenses. Given the current economic conditions, these costs, specifically problem loan expenses, have been at elevated levels in recent quarters.

38


Table of Contents

Mortgage banking revenue. Our community banking franchise is also influenced by the level of fees generated by the origination of residential mortgages and the sale of such mortgages into the secondary market. This revenue is significantly impacted by the level of interest rates associated with home mortgages. In 2010, interest rates have been historically low and customer refinancings have been high, although not as high as in 2009. Additionally, in December 2008, we acquired certain assets and assumed certain liabilities of the mortgage banking business of PMP. As a result of the acquisition, we significantly increased the capacity of our mortgage-origination operations, primarily in the Chicago metropolitan market. The PMP transaction also changed the mix of our mortgage origination business in the Chicago market, resulting in a relatively greater portion of that business being retail, rather than wholesale, oriented. Costs in the mortgage business are variable as they primarily relate to commissions paid to originators.
Establishment of de novo operations. Our historical financial performance has been affected by costs associated with growing market share in deposits and loans, establishing and acquiring banks, opening new branch facilities and building an experienced management team. Our financial performance generally reflects the improved profitability of our banking subsidiaries as they mature, offset by the costs of establishing and acquiring banks and opening new branch facilities. From our experience, it generally takes over 13 months for new banks to achieve operational profitability depending on the number and timing of branch facilities added.
In determining the timing of the formation of de novo banks, the opening of additional branches of existing banks, and the acquisition of additional banks, we consider many factors, particularly our perceived ability to obtain an adequate return on our invested capital driven largely by the then existing cost of funds and lending margins, the general economic climate and the level of competition in a given market. We began to slow the rate of growth of new locations in 2007 due to tightening net interest margins on new business which, in the opinion of management, did not provide enough net interest spread to be able to garner a sufficient return on our invested capital. From the second quarter of 2008 to the first quarter of 2010, we did not establish a new banking location either through a de novo opening or through an acquisition, due to the financial system crisis and recessionary economy and our decision to utilize our capital to support our existing franchise rather than deploy our capital for expansion through new locations which tend to operate at a loss in the early months of operation. Thus, while expansion activity during the past three years has been at a level below earlier periods in our history, we have resumed the formation of additional branches and acquisitions of additional banks. On April 23, 2010, two of the Company’s wholly-owned subsidiary banks, Northbrook Bank and Wheaton Bank, in two FDIC-assisted transactions, respectively acquired certain assets and liabilities and the banking operations of Lincoln Park Savings Bank (“Lincoln Park”) and Wheatland Bank (“Wheatland”). On August 6, 2010, Northbrook Bank, in an FDIC-assisted transaction, acquired certain assets and liabilities and the banking operations of Ravenswood Bank (“Ravenswood”). Additionally, on October 22, 2010, Wheaton Bank acquired certain assets and liabilities of the banking operations of a branch located in Naperville, Illinois. This branch operates as Naperville Bank & Trust (“Naperville”).
In addition to the factors considered above, before we engage in expansion through de novo branches or banks we must first make a determination that the expansion fulfills our objective of enhancing shareholder value through potential future earnings growth and enhancement of the overall franchise value of the Company. Generally, we believe that, in normal market conditions, expansion through de novo growth is a better long-term investment than acquiring banks because the cost to bring a de novo location to profitability is generally substantially less than the premium paid for the acquisition of a healthy bank. Each opportunity to expand is unique from a cost and benefit perspective. FDIC-assisted acquisitions offer a unique opportunity for the Company to expand into new and existing markets in a non-traditional manner. Potential FDIC-assisted acquisitions are reviewed in a similar manner as a de novo branch or bank opportunities, however, with an immediate enhancement of shareholder value. Factors including the valuation of our stock, other economic market conditions, the size and scope of the particular expansion opportunity and competitive landscape all influence the decision to expand via de novo growth or through acquisition.
Specialty Finance
Through our specialty finance segment, we offer financing of insurance premiums for businesses and individuals; accounts receivable financing, value-added, out-sourced administrative services; and other specialty finance businesses. We conduct our specialty finance businesses through indirect non-bank subsidiaries. Our wholly owned subsidiary, FIFC engages in the premium finance receivables business, our most significant specialized lending niche, including commercial insurance premium finance and life insurance premium finance.

39


Table of Contents

Financing of Commercial Insurance Premiums
FIFC originated approximately $3.2 billion in commercial insurance premium finance receivables in 2010. FIFC makes loans to businesses to finance the insurance premiums they pay on their commercial insurance policies. The loans are originated by FIFC working through independent medium and large insurance agents and brokers located throughout the United States. The insurance premiums financed are primarily for commercial customers’ purchases of liability, property and casualty and other commercial insurance. This lending involves relatively rapid turnover of the loan portfolio and high volume of loan originations. Because of the indirect nature of this lending and because the borrowers are located nationwide, this segment is more susceptible to third party fraud than relationship lending. In the second quarter of 2010, fraud perpetrated against a number of premium finance companies in the industry, including the property and casualty division of our premium financing subsidiary, increased both the Company’s net charge-offs and provision for credit losses by $15.7 million. Actions have been taken by the Company to decrease the likelihood of this type of loss from recurring in this line of business for the Company by the enhancement of various control procedures to mitigate the risks associated with this lending. The Company has conducted a thorough review of the premium finance — commercial portfolio and found no signs of similar situations.
The majority of these loans are purchased by the banks in order to more fully utilize their lending capacity as these loans generally provide the banks with higher yields than alternative investments. Historically, FIFC originations that were not purchased by the banks were sold to unrelated third parties with servicing retained. However, during the third quarter of 2009, FIFC initially sold $695 million in commercial premium finance receivables to our indirect subsidiary, FIFC Premium Funding I, LLC, which in turn sold $600 million in aggregate principal amount of notes backed by such premium finance receivables in a securitization transaction sponsored by FIFC. Subsequent to December 31, 2009, this securitization transaction is accounted for as a secured borrowing and the securitization entity is treated as a consolidated subsidiary of the Company. Accordingly, beginning on January 1, 2010, all of the assets and liabilities of the securitization entity are included directly on the Company’s Consolidated Statements of Condition.
The primary driver of profitability related to the financing of commercial insurance premiums is the net interest spread that FIFC can produce between the yields on the loans generated and the cost of funds allocated to the business unit. The commercial insurance premium finance business is a competitive industry and yields on loans are influenced by the market rates offered by our competitors. We fund these loans either through the securitization facility described above or through our deposits, the cost of which is influenced by competitors in the retail banking markets in the Chicago and Milwaukee metropolitan areas.
Financing of Life Insurance Premiums
In 2007, FIFC began financing life insurance policy premiums generally for high net-worth individuals. In 2009, FIFC expanded this niche lending business segment when it purchased a portfolio of domestic life insurance premium finance loans for an aggregate purchase price of $745.9 million.
FIFC originated approximately $456.5 million in life insurance premium finance receivables in 2010. These loans are originated directly with the borrowers with assistance from life insurance carriers, independent insurance agents, financial advisors and/or legal counsel. The life insurance policy is the primary form of collateral. In addition, these loans often are secured with a letter of credit, marketable securities or certificates of deposit. In some cases, FIFC may make a loan that has a partially unsecured position. Similar to the commercial insurance premium finance receivables, the majority of life insurance premium finance receivables are purchased by the banks in order to more fully utilize their lending capacity as these loans generally provide the banks with higher yields than alternative investments.
As with the commercial premium finance business, the primary driver of profitability related to the financing of life insurance premiums is the net interest spread that FIFC can produce between the yields on the loans generated and the cost of funds allocated to the business unit.
Profitability of financing both commercial and life insurance premiums is also meaningfully impacted by leveraging information technology systems, maintaining operational efficiency and increasing average loan size, each of which allows us to expand our loan volume without significant capital investment.
Wealth Management Activities
We currently offer a full range of wealth management services including trust and investment services, asset management and securities brokerage services, through three separate subsidiaries including WHI, CTC and WCM. In October 2010, the Company changed the name of its trust and investment services subsidiary, Wayne Hummer Trust Company, N.A., to the Chicago Trust Company, N.A. Additionally, the Company’s asset management company, Wayne Hummer Asset Management Company, changed its name to Wintrust Capital Management, LLC.
The primary influences on the profitability of the wealth management business can be associated with the level of commission received related to the trading performed by the brokerage customers for their accounts and the amount of assets under management for which asset management and trust units receive a management fee for advisory, administrative and custodial services. As such, revenues are influenced by a rise or fall in the debt and equity markets and the resultant increase or decrease in the value of our client accounts on which our fees are based. The

40


Table of Contents

commissions received by the brokerage unit are not as directly influenced by the directionality of the debt and equity markets but rather the desire of our customers to engage in trading based on their particular situations and outlooks of the market or particular stocks and bonds. Profitability in the brokerage business is impacted by commissions which fluctuate over time.
Federal Government, Federal Reserve and FDIC Programs
During the last several years, the federal government, the New York Fed and the FDIC have made a number of programs available to banks and other financial institutions in an effort to ensure a well-functioning U.S. financial system. The Company has participated in three of such programs: the CPP, administered by the Treasury, the TALF, created by the New York Fed, and the TLGP, created by the FDIC. The Company also benefits from provisions of the Dodd-Frank Act which increase the deposit insurance limit on certain depository accounts at its bank subsidiaries. A summary of the Company’s participation in each of these programs follows.
Participation in Capital Purchase Program. In October 2008, the Treasury announced that it intended to use a portion of the initial funds allocated to it pursuant to the Emergency Economic Stabilization Act of 2008, to invest directly in financial institutions through the newly-created CPP. In December 2008, the Company entered into an agreement with the U.S. Department of the Treasury to participate in the CPP, pursuant to which the Company issued and sold 250,000 shares of its Series B Preferred Stock and a warrant (the “warrant”) to purchase 1,643,295 shares of its common stock to Treasury in exchange for aggregate consideration of $250 million (the “CPP investment”).
As a result of the CPP investment, our total risk based capital ratio as of December 31, 2008 increased from 10.3% to 13.1%. To be considered “well capitalized,” we must maintain a total risk-based capital ratio in excess of 10%. The terms of our agreement with Treasury imposed significant restrictions upon us, including increased scrutiny by Treasury, banking regulators and Congress, additional corporate governance requirements, restrictions upon our ability to repurchase stock and pay dividends and, as a result of increasingly stringent regulations issued by Treasury following the closing of the CPP investment, significant restrictions upon executive compensation. On December 22, 2010, the Company repurchased all the shares of Series B Preferred Stock from Treasury at a price of $251.3 million, which included accrued and unpaid dividends of $1.3 million.
For additional information on the terms of the preferred stock and the warrant, see Notes 24 and 29 of the Consolidated Financial Statements.
TALF-Eligible Issuance. In September 2009, the Company’s indirect subsidiary, FIFC Premium Funding I, LLC, sold $600 million in aggregate principal amount of its Series 2009-A Premium Finance Asset Backed Notes, Class A (the “Notes”), which were issued in a securitization transaction sponsored by FIFC. FIFC Premium Funding I, LLC’s obligations under the Notes are secured by premium finance receivables made to buyers of property and casualty insurance policies to finance the related premiums payable by the buyers to the insurance companies for the policies. At the time of issuance, the Notes were eligible collateral under TALF and certain investors therefore received non-recourse funding from the New York Fed in order to purchase the Notes. Although, as a result, FIFC believes it received greater proceeds at lower interest rates from the securitization than it otherwise would have received in non-TALF-eligible transactions, the Company’s management views the TALF-eligible securitization as a mechanism to accelerate the Company’s growth plan, rather than one essential to the maintenance of the Company’s “well capitalized” status.
Increased FDIC Insurance for Non-Interest-Bearing Transaction Accounts. Each of our bank subsidiaries have also benefited from two federal programs which provide increased FDIC insurance coverage for certain deposit accounts. From December 2008 until the termination of the program in December 2010, our subsidiary banks participated in the FDIC’s Transaction Account Guarantee (“TAG”) program, which provided unlimited FDIC insurance coverage for the entire account balance in exchange for an additional insurance premium to be paid by the depository institution for certain accounts with balances in excess of the current FDIC insurance limit of $250,000. Although the TAG expired in 2010, the Dodd-Frank Act and implementing regulations issued by the FDIC presently provide unlimited Federal insurance of the net amount of certain non-interest-bearing transaction accounts at all insured depository institutions through December 31, 2012. After December 31, 2012, depositors will receive Federal insurance up to the standard maximum deposit insurance amount of $250,000, which increased amount was made permanent by the Dodd-Frank Act.

41


Table of Contents

Financial Regulatory Reform
In July 2010, the President signed into law the Dodd-Frank Act, which contains a comprehensive set of provisions designed to govern the practices and oversight of financial institutions and other participants in the financial markets. While final rulemaking under the Dodd-Frank Act will occur over the course of several years, changes mandated by the Dodd-Frank Act, as well as other legislative and regulatory changes, could have a significant impact on us by, for example, requiring us to change our business practices, requiring us to meet more stringent capital, liquidity and leverage ratio requirements, limiting our ability to pursue business opportunities, imposing additional costs on us, limiting fees we can charge for services, impacting the value of our assets, or otherwise adversely affecting our businesses. These changes may also require us to invest significant management attention and resources in order to comply with new statutory and regulatory requirements. Given the uncertainty associated with the manner in which the provisions of the Dodd-Frank Act will be implemented by the various regulatory agencies, the full extent of the impact that such requirements will have on our operations is unclear.
The Dodd-Frank Act also addresses risks to the economy and the financial system. It contemplates enhanced regulation of derivatives, restrictions on and additional disclosure of executive compensation, additional corporate governance requirements, and oversight of credit rating agencies. It also strengthens the ability of the regulatory agencies to supervise and examine bank holding companies and their subsidiaries. Effective July 2011, the Dodd-Frank Act requires a bank holding company that elects treatment as a financial holding company, including us, to be both well-capitalized and well-managed in addition to the existing requirement that a financial holding company’s subsidiary banks be well-capitalized and well-managed. Bank holding companies and banks must also be both well-capitalized and well-managed in order to engage in interstate bank acquisitions.
Among other things, the Dodd-Frank Act requires the issuance of new banking regulations regarding the establishment of minimum leverage and risk-based capital requirements for bank holding companies and banks. These regulations, which are required to be effective within 18 months from the enactment of the Dodd-Frank Act, are required to be no less stringent than current capital requirements applied to insured depository institutions and may, in fact, be higher when established by the agencies. Although Wintrust’s outstanding trust preferred securities will remain eligible for Tier 1 capital treatment, any future issuances of trust preferred securities will not be Tier 1 capital. The Dodd-Frank Act also requires the regulatory agencies to seek to make capital requirements for bank holding companies and insured institutions countercyclical, so that capital requirements increase in times of economic expansion and decrease in times of economic contraction. The Dodd-Frank Act may also require us to conduct annual stress tests, in accordance with future regulations. Any such testing would result in increased compliance costs.
Certain provisions of the Dodd-Frank Act have near-term effect on the Company. In particular, effective one year from the date of enactment, the Dodd-Frank Act eliminates U.S. federal prohibitions on paying interest on demand deposits, thus allowing businesses to have interest bearing checking accounts. Depending upon market response, this change could have an adverse impact on our interest expense. In addition, the Dodd-Frank Act includes provisions that change the assessment base for federal deposit insurance from the amount of insured deposits to average total consolidated assets less average tangible capital, eliminate the maximum size of the deposit insurance fund (the “DIF”), eliminate the requirement that the FDIC pay dividends to depository institutions when the reserve ratio exceeds certain thresholds, and increase the minimum reserve ratio of the DIF from 1.15% to 1.35%. The FDIC adopted a final rule implementing these changes to the DIF on February 7, 2011. The FDIC has indicated that these changes will generally not require an increase in the level of assessments, and may result in decreased assessments, for depository institutions (such as each of our bank subsidiaries) with less than $10 billion in assets.
In addition, the Dodd-Frank Act gave the Federal Reserve Board the authority to establish rules regarding interchange fees charged for electronic debit transactions by payment card issuers, such as our bank subsidiaries, and to enforce a new statutory requirement that such fees be reasonable and proportional to the actual cost of a transaction to the issuer. The Federal Reserve recently proposed capping such fees at seven to 12 cents, subject to adjustment for fraud prevention costs.
Additionally, the Dodd-Frank Act establishes the Bureau within the Federal Reserve, which will regulate consumer financial products and services. On July 21, 2011, many of the consumer financial protection functions currently assigned to the federal banking and other designated agencies will shift to the Bureau. The Bureau will have broad rulemaking authority over a wide range of consumer protection laws that apply to banks and thrifts, including the authority to prohibit “unfair, deceptive or abusive practices” to ensure that all consumers have access to markets for consumer financial products and services, and that such markets are fair, transparent and competitive. In particular, the Bureau may enact sweeping reforms in the mortgage broker industry which may increase the costs of engaging in these activities for all market participants, including our subsidiaries. The Bureau will have broad supervisory, examination and enforcement authority. In addition, state attorneys general and other state officials will be authorized to enforce consumer protection rules issued by the Bureau.

42


Table of Contents

The Dodd-Frank Act weakens federal preemption available for national banks and eliminates federal preemption for subsidiaries of national banks, which may subject the Company’s national banks and their subsidiaries, including WMC, to additional state regulation. With regard to mortgage lending, the Dodd-Frank Act imposes new requirements regarding the origination and servicing of residential mortgage loans. The law creates a variety of new consumer protections, including limitations on the manner by which loan originators may be compensated and an obligation on the part of lenders to assess and verify a borrower’s “ability to repay” a residential mortgage loan.
The Dodd-Frank Act also enhances provisions relating to affiliate and insider lending restrictions and loans to one borrower limitations. Federal banking law currently limits a national bank’s ability to extend credit to one person (or group of related persons) in an amount exceeding certain thresholds. The Dodd-Frank Act expands the scope of these restrictions to include credit exposure arising from derivative transactions, repurchase agreements, and securities lending and borrowing transactions. It also eventually will prohibit state-chartered banks (including certain of the Company’s banking subsidiaries) from engaging in derivative transactions unless the state lending limit laws take into account credit exposure to such transactions.
Recent Actions Related to Capital and Liquidity
In December 2010 and January 2011, the Basel Committee on Banking Supervision published reforms regarding changes to bank capital, leverage and liquidity requirements, commonly referred to as “Basel III.” If implemented without change by U.S. banking regulators, the provisions of Basel III may have significant impact on requirements including heightened requirements regarding Tier 1 common equity, and alterations to bank liquidity standards.
While the U.S. federal banking agencies have expressed support for the Basel III initiative, implementation of any final provisions of Basel III in the U.S. will require implementing regulations and guidelines by U.S. banking regulators, which may differ in significant ways from the recommendations published by the Basel Committee. For example, it is unclear how U.S. banking regulators would define “well-capitalized” in any implementation of Basel III.
We are not able to predict at this time the content of capital and liquidity guidelines or regulations that may be adopted by regulatory agencies having authority over us and our subsidiaries or the impact that any changes in regulation would have on us. If new standards require us or our banking subsidiaries to maintain more capital, with common equity as a more predominant component, or manage the configuration of our assets and liabilities in order to comply with formulaic liquidity requirements, such regulation could significantly impact our return on equity, financial condition, operations, capital position and ability to pursue business opportunities.
Acquisition of the Life Insurance Premium Finance Business
Overview
As previously described, on July 28, 2009 our subsidiary FIFC purchased the majority of the U.S. life insurance premium finance assets of subsidiaries of American International Group, Inc. Life insurance premium finance loans are generally used for estate planning purposes of high net worth borrowers, and, as described below, are collateralized by life insurance policies and their related cash surrender value and are often additionally secured by letters of credit, annuities, cash and marketable securities.

43


Table of Contents

Credit Risk
The Company believes that its life insurance premium finance loans have a lower level of risk and delinquency than the Company’s commercial and residential real estate loans because of the nature of the collateral. The life insurance policy is the primary form of collateral. If cash surrender value is not sufficient, then letters of credit, marketable securities or certificates of deposit are used to provide additional security. Since the collateral is highly liquid and generally has a value in excess of the loan amount, any defaults or delinquencies are generally cured relatively quickly by the borrower or the collateral is generally liquidated in an expeditious manner to satisfy the loan obligation. Greater than 95% of loans are fully secured. However, less than 5% of the loans are partially unsecured and in those cases, a greater risk exists for default. No loans are originated on a fully unsecured basis.
Fair Market Valuation at Date of Purchase and Allowance for Loan Losses
ASC 805, “Business Combinations” (ASC 805), requires acquired loans to be recorded at fair market value. The application of ASC 805 requires incorporation of credit related factors directly into the fair value of the loans recorded at the acquisition date, thereby eliminating separate recognition of the acquired allowance for loan losses on the acquirer’s balance sheet. Accordingly, the Company established a credit discount for each loan as part of the determination of the fair market value of such loan in accordance with those accounting principles at the date of acquisition. Any adverse changes in the deemed collectible nature of a loan would subsequently be provided through a charge to the income statement through a provision for credit losses and a corresponding establishment of an allowance for loan losses. There was no allowance for loan losses associated with this portfolio of loans at December 31, 2010 compared to an allowance of $615,000 at December 31, 2009.
FDIC-Assisted Transactions — Acquisition of Lincoln Park Bank, Wheatland Bank and Ravenswood Bank
On August 6, 2010, Northbrook Bank acquired the banking operations of Ravenswood in an FDIC-assisted transaction. Northbrook Bank acquired assets with a fair value of approximately $174 million, and assumed liabilities with a fair value of approximately $123 million. Additionally, on April 23, 2010, the Company acquired the banking operations of two entities in FDIC-assisted transactions. Northbrook Bank acquired assets with a fair value of approximately $157 million and assumed liabilities with a fair value of approximately $192 million of Lincoln Park. Wheaton Bank acquired assets with a fair value of approximately $344 million and assumed liabilities with a fair value of approximately $416 million of Wheatland.
Loans comprise the majority of the assets acquired in these transactions and are subject to loss sharing agreements with the FDIC whereby the FDIC has agreed to reimburse the Company for 80% of losses incurred on the purchased loans, other real estate owned (“OREO”), and certain other assets. The Company refers to the loans subject to this loss-sharing agreements as “covered loans.” Covered assets include covered loans, covered OREO and certain other covered assets. At each acquisition date, the Company estimated the fair value of the reimbursable losses to be approximately $44.0 million for the Ravenswood acquisition, and $113.8 million for the Lincoln Park and Wheatland acquisitions. The agreements with the FDIC require that the Company follow certain servicing procedures or risk losing the FDIC reimbursement of covered asset losses.
The loans covered by the loss sharing agreements are classified and presented as covered loans and the estimated reimbursable losses are recorded as FDIC indemnification asset, both in the Consolidated Statements of Condition. The Company recorded the acquired assets and liabilities at their estimated fair values at the acquisition date. The fair value for loans reflected expected credit losses at the acquisition date, therefore the Company will only recognize a provision for credit losses and charge-offs on the acquired loans for any further credit deterioration. These transactions resulted in a bargain purchase gains of $33.3 million, $6.8 million for Ravenswood, $22.3 million for Wheat-land, and $4.2 million for Lincoln Park, and is shown as a component of non-interest income on the Company’s Consolidated Statements of Income.
The Company created a dedicated division in 2010, the Purchased Assets Division. Comprised of experienced lenders and finance staff, the Purchased Asset Division is responsible for managing the loan portfolios acquired in FDIC-assisted transactions in addition to managing the financial and regulatory reporting of these transactions. For operations acquired in FDIC-assisted transactions, detailed reporting needs to be submitted to the FDIC on at least a quarterly basis for any assets which are subject to the loss-sharing agreements mentioned above. Reporting on the status of covered assets may continue for five to ten years from the date of acquisition depending on the type of assets acquired.
Acquisition of a branch of the First National Bank of Brookfield
On October 22, 2010, the Company’s wholly-owned subsidiary bank, Wheaton Bank, acquired a branch of First National Bank of Brookfield that is located in Naperville, Illinois. Through this transaction, Wheaton Bank acquired approximately $23 million of deposits, approximately $11 million of performing loans, the property, bank facility and various other assets. This branch operates as Naperville Bank & Trust.

44


Table of Contents

SUMMARY OF CRITICAL ACCOUNTING POLICIES
The Company’s Consolidated Financial Statements are prepared in accordance with generally accepted accounting principles in the United States and prevailing practices of the banking industry. Application of these principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in the financial statements and accompanying notes. Certain policies and accounting principles inherently have a greater reliance on the use of estimates, assumptions and judgments, and as such have a greater possibility that changes in those estimates and assumptions could produce financial results that are materially different than originally reported. Estimates, assumptions and judgments are necessary when assets and liabilities are required to be recorded at fair value, when a decline in the value of an asset not carried on the financial statements at fair value warrants an impairment write-down or valuation reserve to be established, or when an asset or liability needs to be recorded contingent upon a future event, are based on information available as of the date of the financial statements; accordingly, as information changes, the financial statements could reflect different estimates and assumptions.
A summary of the Company’s significant accounting policies is presented in Note 1 to the Consolidated Financial Statements. These policies, along with the disclosures presented in the other financial statement notes and in this Management’s Discussion and Analysis section, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. Management views critical accounting policies to be those which are highly dependent on subjective or complex judgments, estimates and assumptions, and where changes in those estimates and assumptions could have a significant impact on the financial statements. Management currently views critical accounting policies to include the determination of the allowance for loan losses and the allowance for losses on lending-related commitments, estimations of fair value, the valuations required for impairment testing of goodwill, the valuation and accounting for derivative instruments and income taxes as the accounting areas that require the most subjective and complex judgments, and as such could be most subject to revision as new information becomes available.
Allowance for Loan Losses and Allowance for Losses on Lending-Related Commitments
The allowance for loan losses represents management’s estimate of probable credit losses inherent in the loan portfolio. Determining the amount of the allowance for loan losses is considered a critical accounting estimate because it requires significant judgment and the use of estimates related to the amount and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans based on historical loss experience, and consideration of current economic trends and conditions, all of which are susceptible to significant change. The loan portfolio also represents the largest asset type on the consolidated balance sheet. The Company also maintains an allowance for lending-related commitments, specifically unfunded loan commitments and letters of credit, which relates to certain amounts the Company is committed to lend but for which funds have not yet been disbursed. See Note 1 to the Consolidated Financial Statements and the section titled “Credit Risk and Asset Quality” later in this report for a description of the methodology used to determine the allowance for loan losses and the allowance for lending-related commitments.
Estimations of Fair Value
A portion of the Company’s assets and liabilities are carried at fair value on the Consolidated Statements of Condition, with changes in fair value recorded either through earnings or other comprehensive income in accordance with applicable accounting principles generally accepted in the United States. These include the Company’s trading account securities, available-for-sale securities, derivatives, mortgage loans held-for-sale, mortgage servicing rights and retained interests from the sale of premium finance receivables. The estimation of fair value also affects certain other mortgage loans held-for-sale, which are not recorded at fair value but at the lower of cost or market. The determination of fair value is important for certain other assets, including goodwill and other intangible assets, impaired loans, and other real estate owned that are periodically evaluated for impairment using fair value estimates.
Fair value is generally defined as the amount at which an asset or liability could be exchanged in a current transaction between willing, unrelated parties, other than in a forced or liquidation sale. Fair value is based on quoted market prices in an active market, or if market prices are not available, is estimated using models employing techniques such as matrix pricing or discounting expected cash flows. The significant assumptions used in the models, which include assumptions for interest rates, discount rates, prepayments and credit losses, are independently verified against observable market data where possible. Where observable market data is not available, the estimate of fair value becomes more subjective and involves a high degree of judgment. In this circumstance, fair value is estimated based on management’s judgment regarding the value that market participants would assign to the asset or liability. This valuation process takes into consideration factors such as market illiquidity. Imprecision in estimating these factors can impact the amount recorded on the balance sheet for a particular asset or liability with related impacts to earnings or other comprehensive income. See Note 23 to the Consolidated Financial Statements later in this report for a further discussion of fair value measurements.

45


Table of Contents

Impairment Testing of Goodwill
The Company performs impairment testing of goodwill on an annual basis or more frequently when events warrant. Valuations are estimated in good faith by management through the use of publicly available valuations of comparable entities or discounted cash flow models using internal financial projections in the reporting unit’s business plan.
The goodwill impairment analysis involves a two-step process. The first step is a comparison of the reporting unit’s fair value to its carrying value. If the carrying value of a reporting unit was determined to have been higher than its fair value, the second step would have to be performed to measure the amount of impairment loss. The second step allocates the fair value to all of the assets and liabilities of the reporting unit, including any unrecognized intangible assets, in a hypothetical analysis that would calculate the implied fair value of goodwill. If the implied fair value of goodwill is less than the recorded goodwill, the Company would record an impairment charge for the difference.
The goodwill impairment analysis requires management to make subjective judgments in determining if an indicator of impairment has occurred. Events and factors that may significantly affect the analysis include: a significant decline in the Company’s expected future cash flows, a substantial increase in the discount factor, a sustained, significant decline in the Company’s stock price and market capitalization, a significant adverse change in legal factors or in the business climate. Other factors might include changing competitive forces, customer behaviors and attrition, revenue trends, cost structures, along with specific industry and market conditions. Adverse change in these factors could have a significant impact on the recoverability of intangible assets and could have a material impact on the Company’s consolidated financial statements.
Derivative Instruments
The Company utilizes derivative instruments to manage risks such as interest rate risk or market risk. The Company’s policy prohibits using derivatives for speculative purposes.
Accounting for derivatives differs significantly depending on whether a derivative is designated as a hedge, which is a transaction intended to reduce a risk associated with a specific asset or liability or future expected cash flow at the time it is purchased. In order to qualify as a hedge, a derivative must be designated as such by management. Management must also continue to evaluate whether the instrument effectively reduces the risk associated with that item. To determine if a derivative instrument continues to be an effective hedge, the Company must make assumptions and judgments about the continued effectiveness of the hedging strategies and the nature and timing of forecasted transactions. If the Company’s hedging strategy were to become ineffective, hedge accounting would no longer apply and the reported results of operations or financial condition could be materially affected.
Income Taxes
The Company is subject to the income tax laws of the U.S., its states and other jurisdictions where it conducts business. These laws are complex and subject to different interpretations by the taxpayer and the various taxing authorities. In determining the provision for income taxes, management must make judgments and estimates about the application of these inherently complex laws, related regulations and case law. In the process of preparing the Company’s tax returns, management attempts to make reasonable interpretations of the tax laws. These interpretations are subject to challenge by the tax authorities upon audit or to reinterpretation based on management’s ongoing assessment of facts and evolving case law. Management reviews its uncertain tax positions and recognition of the benefits of such positions on a regular basis.
On a quarterly basis, management assesses the reasonableness of its effective tax rate based upon its current best estimate of net income and the applicable taxes expected for the full year. Deferred tax assets and liabilities are reassessed on a quarterly basis, if business events or circumstances warrant.
CONSOLIDATED RESULTS OF OPERATIONS
The following discussion of Wintrust’s results of operations requires an understanding that a majority of the Company’s bank subsidiaries have been started as new banks since December 1991. Wintrust is still a relatively young company that has a strategy of continuing to build its customer base and securing broad product penetration in each marketplace that it serves. The Company has expanded its banking franchise from three banks with five offices in 1994 to 15 banks with 86 offices at the end of 2010. FIFC has matured from its limited operations in 1991 to a company that generated, on a national basis, $3.7 billion in premium finance receivables in 2010. In addition, the wealth management companies have been building a team of experienced professionals who are located within a majority of the banks. These expansion activities have understandably suppressed faster, opportunistic earnings. However, as the Company matures and its existing banks become more profitable, the start-up costs associated with bank and branch openings and other new financial services ventures will not have as significant an impact on earnings as in prior periods.

46


Table of Contents

Earnings Summary
Net income for the year ended December 31, 2010, totaled $63.3 million, or $1.02 per diluted common share, compared to $73.1 million, or $2.18 per diluted common share, in 2009, and $20.5 million, or $0.76 per diluted common share, in 2008. During 2010, net income decreased by $9.8 million while earnings per diluted common share decreased by $1.16. During 2009, net income increased by $52.6 million while earnings per diluted common share increased by $1.42. Financial results in 2010 decreased from 2009 as a result of fewer bargain purchase gains in 2010 partially offset by increases in interest income on loans as well as decreases in the provision for credit losses. Financial results in 2009 were driven by growth in earning assets, gains on bargain purchases of acquired life insurance premium finance loans, record mortgage banking revenues, partially offset by higher provision for credit losses, FDIC insurance premiums, and OREO 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 earning 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. In order to compare the tax-exempt asset yields to taxable yields, interest income in the following discussion and tables is adjusted to tax-equivalent yields based on the marginal corporate Federal tax rate of 35%.
Tax-equivalent net interest income in 2010 totaled $417.6 million, up from $314.1 million in 2009 and $247.1 million in 2008, representing an increase of $103.5 million, or 33%, in 2010 and an increase of $67.0 million, or 27%, in 2009. The table presented later in this section, titled “Changes in Interest Income and Expense,” presents the dollar amount of changes in interest income and expense, by major category, attributable to changes in the volume of the balance sheet category and changes in the rate earned or paid with respect to that category of assets or liabilities for 2010 and 2009. Average earning assets increased $2.0 billion, or 19%, in 2010 and $1.6 billion, or 19%, in 2009. Loans are the most significant component of the earning asset base as they earn interest at a higher rate than the other earning assets. Average loans, excluding covered loans, increased $1.1 billion, or 14%, in 2010 and $1.1 billion, or 15%, in 2009. Total average loans, excluding covered loans, as a percentage of total average earning assets were 76%, 80% and 82% in 2010, 2009 and 2008, respectively. The average yield on loans, excluding covered loans, was 5.67% in 2010, 5.59% in 2009 and 6.13% in 2008, reflecting an increase of 8 basis points in 2010 and a decrease of 54 basis points in 2009. The higher loan yield in 2010 compared to 2009 resulted primarily from higher accretion on the purchased life insurance portfolio as more prepayments occurred in 2010. The lower loan yield in 2009 compared to 2008 was a result of the low interest rate environment. The average rate paid on interest bearing deposits, the largest component of the Company’s interest bearing liabilities, was 1.32% in 2010, 2.03% in 2009 and 3.13% in 2008, representing a decrease of 71 basis points in 2010 and 110 basis points in 2009. The lower level of interest bearing deposits rate in 2010 was due to downward re-pricing of retail deposits during the year. The lower level of interest bearing deposits rate in 2009 was due to a record low interest rate environment throughout the year compared to 2008. In 2008, the Company also expanded its MaxSafe® suite of products (primarily certificates of deposit and money market accounts) which, due to the Company’s fifteen individual bank charters, offer a customer higher FDIC insurance than a customer can achieve at a single charter bank. These MaxSafe® products can typically be priced at lower rates than other certificates of deposit or money market accounts due to the convenience of obtaining the higher FDIC insurance coverage by visiting only one location.
Net interest margin, which reflects net interest income as a percent of average earning assets, increased to 3.37% in 2010 compared to 3.01% in 2009. The increase in net interest margin in 2010 compared to 2009 was primarily caused by lower costs for interest-bearing deposits (increased net interest margin by 58 basis points), an additional $24.4 million of accretion on the purchased life insurance portfolio as more prepayments occurred throughout 2010 (increased net interest margin by 23 points) and lower costs for wholesale funding (increased net interest margin by 10 basis points), offset by higher balances and lower yields on liquidity management assets, including the negative impact of selling certain collateralized mortgage obligations (reduced net interest margin by 33 basis points), lower yields on loans (reduced net interest margin by 17 basis points) and lower contribution from net free funds (reduced net interest margin by five basis points).
Net interest income and net interest margin were also affected by amortization of valuation adjustments to earning assets and interest-bearing liabilities of acquired businesses. Under the acquisition method of accounting, assets and liabilities of acquired businesses are required to be recognized at their estimated fair value at the date of acquisition. These valuation adjustments represent the difference between the estimated fair value and the carrying value of assets and liabilities acquired. These adjustments are amortized into interest income and interest expense based upon the estimated remaining lives of the assets and liabilities acquired, typically on an accelerated basis.

47


Table of Contents

Average Balance Sheets, Interest Income and Expense, and Interest Rate Yields and Costs
The following table sets forth the average balances, the interest earned or paid thereon, and the effective interest rate, yield or cost for each major category of interest-earning assets and interest-bearing liabilities for the years ended December 31, 2010, 2009 and 2008. The yields and costs include loan origination fees and certain direct origination costs that are considered adjustments to yields. Interest income on non-accruing loans is reflected in the year that it is collected, to the extent it is not applied to principal. Such amounts are not material to net interest income or the net change in net interest income in any year. Non-accrual loans are included in the average balances. Net interest income and the related net interest margin have been adjusted to reflect tax-exempt income, such as interest on municipal securities and loans, on a tax-equivalent basis. This table should be referred to in conjunction with this analysis and discussion of the financial condition and results of operations (dollars in thousands):
                                                                         
    Years Ended December 31,
    2010   2009   2008
                    Average                   Average                   Average
    Average           Yield/   Average           Yield/   Average           Yield/
    Balance   Interest   Rate   Balance   Interest   Rate   Balance   Interest   Rate
     
Assets
                                                                       
Interest bearing deposits with banks
  $ 1,202,750       5,171       0.43 %   $ 605,644       3,574       0.59 %   $ 28,677     $ 341       1.19 %
Securities
    1,402,255       40,211       2.87       1,392,346       59,091       4.24       1,439,642       69,895       4.86  
Federal funds sold and securities purchased under resale agreements
    49,008       157       0.32       88,663       271       0.31       63,963       1,333       2.08  
     
Total liquidity management assets (1)(6)
    2,654,013       45,539       1.72       2,086,653       62,936       3.02       1,532,282       71,569       4.67  
     
Other earning assets (1)(2)(6)
    45,021       1,067       2.37       23,979       659       2.75       23,052       1,147       4.98  
Loans, net of unearned income (1)(3)(6)
    9,473,589       537,534       5.67       8,335,421       466,239       5.59       7,245,609       444,494       6.13  
Covered loans
    232,206       10,695       4.61                                      
     
Total earning assets(6)
    12,404,829       594,835       4.80       10,446,053       529,834       5.07       8,800,943       517,210       5.88  
     
Allowance for loan losses
    (111,503 )                     (82,029 )                     (57,656 )                
Cash and due from banks
    137,547                       108,471                       117,923                  
Other assets
    1,125,739                       942,827                       892,010                  
     
Total assets
  $ 13,556,612                     $ 11,415,322                     $ 9,753,220                  
 
 
                                                                       
Liabilities and Shareholders’ Equity
                                                                       
Deposits — interest bearing:
                                                                       
NOW accounts
  $ 1,508,063       8,840       0.59 %   $ 1,136,008       8,168       0.72 %   $ 1,011,402     $ 13,101       1.30 %
Wealth management deposits
    734,837       2,263       0.31       907,013       6,301       0.69       622,842       14,583       2.34  
Money market accounts
    1,666,554       12,196       0.73       1,375,767       17,779       1.29       904,245       20,357       2.25  
Savings accounts
    619,024       3,655       0.59       457,139       4,385       0.96       319,128       3,164       0.99  
Time deposits
    4,881,472       96,825       1.98       4,543,154       134,626       2.96       4,156,600       168,232       4.05  
     
Total interest bearing deposits
    9,409,950       123,779       1.32       8,419,081       171,259       2.03       7,014,217       219,437       3.13  
     
 
                                                                       
Federal Home Loan Bank advances
    418,981       16,520       3.94       434,520       18,002       4.14       435,761       18,266       4.19  
Notes payable and other borrowings
    229,569       5,943       2.59       258,322       7,064       2.73       387,377       10,718       2.77  
Secured borrowings — owed to securitization investors
    600,000       12,365       2.06                                      
Subordinated notes
    56,370       995       1.74       66,205       1,627       2.42       74,589       3,486       4.60  
Junior subordinated debentures
    249,493       17,668       6.98       249,497       17,786       7.03       249,575       18,249       7.19  
     
Total interest bearing liabilities
    10,964,363       177,270       1.61       9,427,625       215,738       2.29       8,161,519       270,156       3.31  
     
 
                                                                       
Non-interest bearing deposits
    984,416                       788,034                       672,924                  
Other liabilities
    255,698                       117,871                       139,340                  
Equity
    1,352,135                       1,081,792                       779,437                  
     
Total liabilities and shareholders’ equity
  $ 13,556,612                     $ 11,415,322                     $ 9,753,220                  
 
 
                                                                       
Interest rate spread(4)(6)
                    3.19 %                     2.78 %                     2.57 %
Net free funds/contribution (5)
  $ 1,440,466               0.18 %   $ 1,018,428               0.23 %   $ 639,424               0.24 %
Net interest income/Net interest margin (6)
          $ 417,565       3.37 %           $ 314,096       3.01 %           $ 247,054       2.81 %
 
 
(1)   Interest income on tax-advantaged loans, trading account securities and securities reflects a tax-equivalent adjustment based on a marginal federal corporate tax rate of 35%. The total adjustments for the twelve months ended December 31, 2010 and 2009 were $1.7 million and $2.2 million, respectively.
 
(2)   Other earning assets include brokerage customer receivables and trading account securities.
 
(3)   Loans, net of unearned income, include mortgages held-for-sale and non-accrual loans.
 
(4)   Interest rate spread is the difference between the yield earned on earning assets and the rate paid on interest-bearing liabilities.
 
(5)   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.
 
(6)   See “Supplemental Financial Measures/Ratios” for additional information on this performance measure/ratio.

48


Table of Contents

Changes In Interest Income and Expense
The following table shows the dollar amount of changes in interest income (on a tax-equivalent basis) and expense by major categories of interest-earning assets and interest-bearing liabilities attributable to changes in volume or rate for the periods indicated (in thousands):
                                                 
    Years Ended December 31,
    2010 Compared to 2009   2009 Compared to 2008
    Change   Change           Change   Change    
    Due to   Due to   Total   Due to   Due to   Total
    Rate   Volume   Change   Rate   Volume   Change
     
Interest income:
                                               
Interest bearing deposits with banks
  $ (1,176 )     2,773       1,597     $ (256 )     3,490       3,234  
Securities
    (19,188 )     308       (18,880 )     (8,441 )     (2,363 )     (10,804 )
Federal funds sold and securities purchased under resale agreement
    8       (122 )     (114 )     (1,434 )     371       (1,063 )
     
Total liquidity management assets
    (20,356 )     2,959       (17,397 )     (10,131 )     1,498       (8,633 )
     
Other earning assets
    (102 )     510       408       (530 )     42       (488 )
Loans, net of unearned income
    6,758       64,537       71,295       (40,751 )     62,496       21,745  
Covered loans
          10,695       10,695                    
     
Total interest income
    (13,700 )     78,701       65,001       (51,412 )     64,036       12,624  
     
 
                                               
Interest expense:
                                               
Deposits — interest bearing:
                                               
NOW accounts
    (1,822 )     2,494       672       (6,366 )     1,432       (4,934 )
Wealth management deposits
    (1,982 )     (2,056 )     (4,038 )     (13,058 )     4,776       (8,282 )
Money market accounts
    (8,806 )     3,223       (5,583 )     (10,659 )     8,082       (2,577 )
Savings accounts
    (2,000 )     1,270       (730 )     (99 )     1,320       1,221  
Time deposits
    (48,078 )     10,277       (37,801 )     (47,950 )     14,344       (33,606 )
     
Total interest expense — deposits
    (62,688 )     15,208       (47,480 )     (78,132 )     29,954       (48,178 )
     
Federal Home Loan Bank advances
    (851 )     (631 )     (1,482 )     (173 )     (91 )     (264 )
Notes payable and other borrowings
    (398 )     (723 )     (1,121 )     1,963       (5,617 )     (3,654 )
Secured borrowings — owed to
                                               
securitization investors
          12,365       12,365                    
Subordinated notes
    (413 )     (219 )     (632 )     (1,496 )     (364 )     (1,860 )
Junior subordinated debentures
    (118 )           (118 )     (407 )     (56 )     (463 )
     
Total interest expense
    (64,468 )     26,000       (38,468 )     (78,245 )     23,826       (54,419 )
     
Net interest income
  $ 50,768       52,701       103,469     $ 26,833       40,210       67,043  
     
The changes in net interest income are created by changes in both interest rates and volumes. In the table above, volume variances are computed using the change in volume multiplied by the previous year’s rate. Rate variances are computed using the change in rate multiplied by the previous year’s volume. The change in interest due to both rate and volume has been allocated between factors in proportion to the relationship of the absolute dollar amounts of the change in each. The change in interest in 2009 compared to 2008 due to one less day resulting from the 2008 leap year has been allocated entirely to the change due to volume.

49


Table of Contents

Non-Interest Income
Non-interest income totaled $192.2 million in 2010, $317.6 million in 2009 and $99.7 million in 2008, reflecting a decrease of 40% in 2010 compared to 2009 and an increase of 219% in 2009 compared to 2008.
The following table presents non-interest income by category for 2010, 2009 and 2008 (in thousands):
                                                         
    Years ended December 31,   2010 compared to 2009   2009 compared to 2008
    2010   2009   2008   $ Change   % Change   $ Change   % Change
     
Brokerage
  $ 23,713       17,726       18,649     $ 5,987       34 %   $ (923 )     (5 )%
Trust and asset management
    13,228       10,631       10,736       2,597       24       (105 )     (1 )
     
Total wealth management
    36,941       28,357       29,385       8,584       30       (1,028 )     (3 )
     
Mortgage banking
    61,378       68,527       21,258       (7,149 )     (10 )     47,269       222  
Service charges on deposit accounts
    13,433       13,037       10,296       396       3       2,741       27  
Gain on sales of premium finance receivables
          8,576       2,524       (8,576 )     (100 )     6,052       240  
Gains (losses) on available
- for-sale securities
    9,832       (268 )     (4,171 )     10,100     NM       3,903       94  
Fees from covered call options
    2,235       1,998       29,024       237       12       (27,026 )     (93 )
Gain on bargain purchases
    44,231       156,013             (111,782 )     (72 )     156,013     NM
Trading gains
    5,165       26,788       (134 )     (21,623 )     (81 )     26,922     NM
Other:
                                                       
Bank Owned Life Insurance
    2,404       2,044       1,622       360       18       422       26  
Administrative services
    2,749       1,975       2,941       774       39       (966 )     (33 )
Miscellaneous
    13,792       10,600       6,933       3,192       30       3,667       53  
     
Total other
    18,945       14,619       11,496       4,326       30       3,123       27  
     
Total non-interest income
  $ 192,160       317,647       99,678     $ (125,487 )     (40 )%   $ 217,969       219 %
     
 
NM — Not Meaningful
Wealth management is comprised of the trust and asset management revenue of the CTC, the asset management fees, brokerage commissions, trading commissions and insurance product commissions at WHI and WCM.
Brokerage revenue is directly impacted by trading volumes. In 2010, brokerage revenue totaled $23.7 million, reflecting an increase of $6.0 million, or 34%, compared to 2009. The increase in brokerage revenue can be attributed to the improvement in equity markets resulting in increased customer trading activity. In 2009, brokerage revenue totaled $17.7 million reflecting a decrease of $923,000, or 5%, compared to 2008 as a result of overall uncertainties surrounding the equity markets in 2009.
Trust and asset management revenue totaled $13.2 million in 2010, an increase of $2.6 million, or 24%, compared to 2009. In 2009, trust and asset management fees totaled $10.6 million and decreased $105,000, or 1%, compared to 2008. Trust and asset management fees are based primarily on the market value of the assets under management or administration. Increased asset valuations due to equity market improvements helped growth from trust and asset management activities in 2010. Starting in 2008 and continuing into 2009, decreased asset valuations due to equity market declines hindered the revenue growth from trust and asset management activities.
Mortgage banking revenue includes revenue from activities related to originating, selling and servicing residential real estate loans for the secondary market. Mortgage banking revenue totaled $61.4 million in 2010, $68.5 million in 2009, and $21.3 million in 2008, reflecting a decrease of $7.1 million, or 10%, in 2010, and an increase of $47.3 million, or 222%, in 2009. Mortgages originated and sold totaled $3.7 billion in 2010 compared to $4.7 billion in 2009 and $1.6 billion in 2008. The decrease in mortgage banking revenue in 2010 compared to 2009 resulted primarily from an increase in loss indemnification claims, as described below, and lower origination volumes, partially offset by higher margins on sales of loans primarily driven by utilizing mandatory execution of forward commitments with investors in 2010. The Company enters into residential mortgage loan sale agreements with investors in the normal course of business. These agreements provide recourse to investors through certain representations concerning credit information, loan documentation, collateral and insurability. Investors request the Company to indemnify them against losses on certain loans or to repurchase loans which the investors believe do not comply with applicable representations. An increase in requests for loss indemnification can negatively impact mortgage banking revenue as additional recourse expense. The Company recognized an additional $11.0 million of recourse expense related to loss indemnification claims in 2010 for loans previously sold, an increase of $10.1 million over the $0.9 million of such expense recorded in 2009. This liability for loans expected to be repurchased is based on trends in repurchase and indemnification requests, actual loss experience, known and inherent risks in the loans that have been sold, and current economic conditions.

50


Table of Contents

A summary of mortgage banking activities is shown below:
                         
    Years Ended December 31,
(Dollars in thousands)   2010   2009   2008
     
Mortgage loans originated and sold
  $ 3,746,127       4,666,506       1,553,929  
 
                       
Mortgage loans serviced for others
  $ 942,224       738,372       527,450  
Fair value of mortgage servicing rights (MSRs)
  $ 8,762       6,745       3,990  
MSRs as a percentage of loans serviced
    0.93 %     0.91       0.76  
 
                       
Gains on sales of loans and other fees
  $ 75,303       71,495       23,622  
Mortgage servicing rights fair value adjustments
    (2,955 )     (2,031 )     (2,364 )
Recourse obligation on loans previously sold
    (10,970 )     (937 )      
     
Total mortgage banking revenue
  $ 61,378       68,527       21,258  
     
 
                       
Gain on sales of loans and other fees as a percentage of loans sold
    2.01 %     1.53       1.52  
 
Service charges on deposit accounts totaled $13.4 million in 2010, $13.0 million in 2009 and $10.3 million in 2008, reflecting an increase of 3% in 2010 and 27% in 2009. The majority of deposit service charges relate to customary fees on overdrawn accounts and returned items. The level of service charges received is substantially below peer group levels, as management believes in the philosophy of providing high quality service without encumbering that service with numerous activity charges.
As a result of the new accounting requirements beginning January 1, 2010, loans transferred into the securitization facility are accounted for as a secured borrowing rather than a sale. Therefore, the Company no longer recognizes gains on sales of premium finance receivables for loans transferred into the securitization. Gain on sales of premium finance receivables of $8.6 million in 2009 is mainly attributable to the transfer of $1.2 billion of premium finance receivables — commercial to a revolving securitization during the year. The gain on sales of premium finance receivables of $2.5 million in 2008 relate to the sale of premium finance receivables to unrelated third parties.
The Company recognized $9.8 million of net gains on available-for-sale securities in 2010 compared to a net loss of $268,000 in 2009 and a net loss of $4.2 million in 2008. The net gains in 2010 primarily relate to the sale of certain collateralized mortgage obligations. Included in net gains (losses) on available-for-sale securities are non-cash other-than-temporary-impairment (“OTTI”) charges recognized in income. The Company did not have any OTTI charges in 2010. OTTI charges on certain corporate debt investment securities were $2.6 million in 2009 and $8.2 million in 2008.
Fees from covered call option transactions totaled $2.2 million in 2010, $2.0 million in 2009 and $29.0 million in 2008. 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. Historically, Management has effectively entered into these transactions with the goal of 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 increase the total return associated with holding certain investment securities and do not qualify as hedges pursuant to accounting guidance. In 2010 and 2009, Management chose to engage in minimal covered call option activity due to lower than acceptable security yields. In 2008, the interest rate environment was conducive to entering into a significantly higher level of covered call option transactions. There were no outstanding call option contracts at December 31, 2010, December 31, 2009 or December 31, 2008.
Gain on bargain purchases totaled $44.2 million in 2010, a decrease of $111.8 million from the $156.0 million of bargain purchase gains recognized in 2009. In 2010, the gains on bargain purchases primarily resulted from three FDIC-assisted bank acquisitions as well as the acquisition of the life insurance premium finance receivable portfolio. In 2010, third party consents were received and all remaining funds held in escrow for the purchase of the life insurance premium finance receivable portfolio were released, resulting in recognition of the remaining deferred bargain purchase gain. The gain on bargain purchase of $156.0 million recognized in 2009 resulted from the acquisition of the life insurance premium finance receivable portfolio. See Note 8 — Business Combinations for a discussion of the transaction and gain calculation.
The Company recognized $5.2 million of trading gains in 2010, $26.8 million in 2009 and a trading loss of $134,000 in 2008. The decrease in trading gains in 2010 compared to 2009 resulted primarily from realizing larger market value increases in 2009 on certain collateralized mortgage obligations which were sold in July 2010. The Company purchased these securities at a significant discount in

51


Table of Contents

the first quarter of 2009. These securities increased in value after their purchase due to market spreads tightening, increased mortgage prepayments due to the favorable mortgage rate environment and lower than projected default rates.
Bank owned life insurance (“BOLI”) generated non-interest income of $2.4 million in 2010, $2.0 million in 2009 and $1.6 million in 2008. This income typically represents adjustments to the cash surrender value of BOLI policies. The Company initially purchased BOLI to consolidate existing term life insurance contracts of executive officers and to mitigate the mortality risk associated with death benefits provided for in executive employment contracts and in connection with certain deferred compensation arrangements. The Company has also assumed additional BOLI since then as the result of the acquisition of certain banks. The cash surrender value of BOLI totaled $92.2 million at December 31, 2010 and $89.0 million at December 31, 2009, and is included in other assets.
Administrative services revenue generated by Tricom was $2.7 million in 2010, $2.0 million in 2009 and $2.9 million in 2008. This revenue comprises income from administrative services, such as data processing of payrolls, billing and cash management services, to temporary staffing service clients located throughout the United States. Tricom also earns interest and fee income from providing high-yielding, short-term accounts receivable financing to this same client base, which is included in the net interest income category.
Miscellaneous other non-interest income totaled $13.8 million in 2010, $10.6 million in 2009 and $6.9 million in 2008. Miscellaneous income includes loan servicing fees, service charges, swap fees and other fees. The increase in miscellaneous other income in recent years can be primarily attributed to increases in ATM fees and swap fees.
Non-Interest Expense
Non-interest expense totaled $382.5 million in 2010, and increased $38.4 million, or 11%, compared to 2009. In 2009, non-interest expense totaled $344.1 million, and increased $87.9 million, or 34%, compared to 2008.
The following table presents non-interest expense by category for 2010, 2009 and 2008 (in thousands):
                                                         
    Years ended December 31,   2010 compared to 2009   2009 compared to 2008
    2010   2009   2008   $ Change   % Change   $ Change   % Change
     
Salaries and employee benefits:
                                                       
Salaries
  $ 120,210       108,847       95,172     $ 11,363       10 %   $ 13,675       14 %
Commissions and bonus
    58,107       45,503       23,055       12,604       28       22,448       97  
Benefits
    37,449       32,528       26,860       4,921       15       5,668       21  
     
Total salaries and employee benefits
    215,766       186,878       145,087       28,888       15       41,791       29  
Equipment
    16,529       16,119       16,215       410       3       (96 )     (1 )
Occupancy, net
    24,444       23,806       22,918       638       3       888       4  
Data processing
    15,355       12,982       11,573       2,373       18       1,409       12  
Advertising and marketing
    6,315       5,369       5,351       946       18       18        
Professional fees
    16,394       13,399       8,824       2,995       22       4,575       52  
Amortization of other intangible assets
    2,739       2,784       3,129       (45 )     (2 )     (345 )     (11 )
FDIC Insurance
    18,028       21,199       5,600       (3,171 )     (15 )     15,599       279  
OREO expenses, net
    19,331       18,963       2,023       368       2       16,940     NM
Other:
                                                       
Commissions - 3rd party brokers
    4,003       3,095       3,769       908       29       (674 )     (18 )
Postage
    4,813       4,833       4,120       (20 )           713       17  
Stationery and supplies
    3,374       3,189       3,005       185       6       184       6  
Miscellaneous
    35,434       31,471       24,549       3,963       13       6,922       28  
     
Total other
    47,624       42,588       35,443       5,036       12       7,145       20  
     
Total non-interest expense
  $ 382,525       344,087       256,163     $ 38,438       11 %   $ 87,924       34 %
     
 
NM — Not Meaningful
Salaries and employee benefits is the largest component of non-interest expense, accounting for 56% of the total in 2010, 54% of the total in 2009 and 57% in 2008. For the year ended December 31, 2010, salaries and employee benefits totaled $215.8 million and increased $28.9 million, or 15%, compared to 2009. This increase can be attributed to a $12.6 million increase in commissions and bonus as variable pay based revenue increased (primarily wealth management revenue and mortgage banking revenue from gains on loans sold), an $11.4 million increase in salaries resulting from additional employees from the three FDIC-assisted transactions and larger staffing as the company grows, and a $4.9 million increase in employee benefits (primarily health plan related). For the year

52


Table of Contents

ended December 31, 2009, salaries and employee benefits totaled $186.9 million, and increased $41.8 million, or 29%, compared to 2008. Salaries and employee benefits increased in 2009 as compared to 2008 as a result of a $22.4 million increase in commissions and bonus, a $13.7 million increase in salaries and a $5.7 million increase in employee benefits. Specifically, WMC accounted for approximately $22.0 million of the increase in variable pay commissions and bonus and approximately $10.0 million of the increase in salaries, both primarily due to the increase in mortgage origination volumes and the impact of the PMP transaction.
Equipment expense, which includes furniture, equipment and computer software, depreciation and repairs and maintenance costs, totaled $16.5 million in 2010, $16.1 million in 2009 and $16.2 million in 2008, reflecting an increase of 3% in 2010 and a decrease of 1% in 2009.
Occupancy expense for the years 2010, 2009 and 2008 was $24.4 million, $23.8 million and $22.9 million, respectively, reflecting increases of 3% in 2010 and 4% in 2009. Occupancy expense includes depreciation on premises, real estate taxes, utilities and maintenance of premises, as well as net rent expense for leased premises. The increase in 2010 is primarily the result of rent expense on additional leased premises and depreciation on owned locations which were obtained in the three FDIC-asssisted acqusitions.
Data processing expenses totaled $15.4 million in 2010, $13.0 million in 2009 and $11.6 million in 2008, representing increases of 18% in 2010 and 12% in 2009. The increases are primarily due to the overall growth of loan and deposit accounts as well as additional expenses incurred for FDIC-assisted transactions in 2010.
Advertising and marketing expenses totaled $6.3 million for 2010, $5.4 million for 2009 and $5.4 million for 2008. Marketing costs are necessary to promote the Company’s commercial banking capabilities, the Company’s MaxSafe® suite of products, to announce new branch openings as well as the expansion of the wealth management business, to continue to promote community-based products and to attract loans and deposits. 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. Management continues to utilize mass market media promotions as well as targeted marketing programs in certain market areas.
Professional fees include legal, audit and tax fees, external loan review costs and normal regulatory exam assessments. These fees totaled $16.4 million in 2010, $13.4 million in 2009 and $8.8 million in 2008. The increases for 2010 and 2009 are primarily related to increased legal costs related to non-performing assets and acquisition related activities.
Amortization of other intangibles assets relates to the amortization of core deposit premiums and customer list intangibles established in connection with certain business combinations. See Note 9 of the Consolidated Financial Statements for further information on these intangible assets.
FDIC insurance totaled $18.0 million in 2010, $21.2 million in 2009 and $5.6 million in 2008. The decrease in 2010 compared to 2009 is a result of an industry-wide special assessment imposed on financial institutions by the FDIC in the second quarter of 2009. Additionally, on December 30, 2009, FDIC insured institutions were required to prepay 13 quarters of estimated deposit insurance premiums. The Company recorded the prepaid deposit insurance premiums as an asset and is expensing them over the three year assessment period.
OREO expenses include all costs associated with obtaining, maintaining and selling other real estate owned properties. This expense was $19.3 million in 2010, $19.0 million in 2009, and $2.0 million in 2008. While relatively unchanged in 2010 compared to 2009, OREO expenses increased significantly in 2009 compared to 2008 due to the declining real estate market which resulted in a higher number of OREO properties as well as losses on sales of OREO properties.
Commissions paid to third party brokers primarily represent the commissions paid on revenue generated by WHI through its network of unaffiliated banks. The increase in this expense corresponds with the increase in brokerage revenue.
Miscellaneous non-interest expense includes ATM expenses, correspondent banking charges, directors’ fees, telephone, travel and entertainment, corporate insurance, dues and subscriptions and lending origination costs that are not deferred. This category increased $4.0 million, or 13%, in 2010 and increased $6.9 million, or 28%, in 2009. The increase in 2010 compared to 2009 is mainly attributable to the general growth in the Company’s business. The increase in 2009 compared to 2008 is primarily attributable to increased loan expenses related to mortgage banking activities, a higher level of problem loan expenses and general growth in the Company’s business.
Income Taxes
The Company recorded income tax expense of $37.5 million in 2010, $44.4 million in 2009 and $10.2 million in 2008. The effective tax rates were 37.2%, 37.8% and 33.1% in 2010, 2009 and 2008, respectively. The lower effective tax rate in 2008 compared to 2009 and 2010 is primarily a result of a lower level of pre-tax net income in 2008 relative to tax-advantaged earnings than in 2009 and 2010. Please refer to Note 18 to the Consolidated Financial Statements for further discussion and analysis of the Company’s tax position, including a reconciliation of the tax expense computed at the statutory tax rate to the Company’s actual tax expense.

53


Table of Contents

Operating Segment Results
As described in Note 25 to the Consolidated Financial Statements, 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. The net interest income of the community banking segment includes interest income and related interest costs from portfolio loans that were purchased from the specialty finance segment. For purposes of internal segment profitability analysis, management reviews the results of its specialty finance segment as if all loans originated and sold to the community banking segment were retained within that segment’s operations. Similarly, for purposes of analyzing the contribution from the wealth management segment, management allocates a portion of the net interest income earned by the community banking segment on deposit balances of customers of the wealth management segment to the wealth management segment. (See “wealth management deposits” discussion in the Deposits and Other Funding Sources section of this report for more information on these deposits.)
The community banking segment’s net interest income for the year ended December 31, 2010 totaled $386.6 million as compared to $300.6 million for the same period in 2009, an increase of $86.0 million, or 29%. The increase in 2010 compared to 2009 was primarily attributable to the three FDIC-assisted bank acquisitions and the ability to gather interest-bearing deposits at more reasonable rates. The increase in net interest income in 2009 when compared to the total of $237.4 million in 2008 was $63.2 million, or 27%. The increase in 2009 compared to 2008 was primarily attributable to the acquisition of the life insurance premium finance portfolio and lower costs of interest-bearing deposits. Total loans, excluding covered loans, increased 5% in 2010, and 18% in 2009. Provision for credit losses decreased to $105.0 million in 2010 compared to $165.3 million in 2009 and $56.6 million in 2008. Provision for credit losses decreased in 2010 compared to 2009 because of improved credit quality ratios in 2010. The community banking segment’s non-interest income totaled $133.1 million in 2010, an increase of $40.5 million, or 44%, when compared to the 2009 total of $92.6 million. This increase was primarily attributable to bargain purchase gains from the three FDIC-assisted acquisitions. In 2009, non-interest income for the community banking segment increased $21.4 million, or 30% when compared to the 2008 total of $71.2 million. This increase was primarily attributable to an increase in mortgage banking revenue offset by lower levels of fees from covered call options. The community banking segment’s net income for the year ended December 31, 2010 totaled $71.4 million, an increase of $97.3 million, compared to a net loss of $25.9 million in 2009. Net loss for the year ended December 31, 2009 of $25.9 million was a $63.9 million decrease in net income as compared to net income in 2008 of $38.0 million.
The specialty finance segment’s net interest income totaled $89.9 million for the year ended December 31, 2010, an increase of $20.0 million, or 29%, over the $69.9 million in 2009. The decrease in net interest income in 2009 when compared to the total of $74.3 million in 2008 was $4.4 million, or 6%. The specialty finance segment’s non-interest income totaled $13.6 million for the year ended December 31, 2010 and decreased $148.5 million from the $162.1 million in 2009. The decrease in non-interest income in 2010 is primarily a result of the bargain purchase gain recognized in 2009 from the acquisition of the life insurance premium finance receivable portfolio and the gains recognized on the securitization of commercial premium finance receivables. See the “Overview and Strategy – Specialty Finance” section of this report and Note 8 of the Consolidated Financial Statements for a discussion of the bargain purchase. Net after-tax profit of the specialty finance segment totaled $45.6 million, $120.4 million and $34.9 million for the years ended December 31, 2010, 2009 and 2008, respectively. The decrease in net income in 2010 compared to 2009 is a result of the life insurance premium finance receivable bargain purchase gain in 2009 and, in the second quarter of 2010, fraud perpetrated against a number of premium finance companies in the industry, including the property and casualty division of our premium financing subsidiary, which increased the provision for credit losses by $15.7 million.
The wealth management segment reported net interest income of $12.3 million for 2010 and 2009 compared to $10.4 million for 2008. Net interest income is comprised of the net interest earned on brokerage customer receivables at WHI and an allocation of a portion 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. The allocated net interest income included in this segment’s profitability was $11.8 million ($7.3 million after tax) in 2010, $11.8 million ($7.3 million after tax) in 2009 and $9.4 million ($5.9 million after tax) in 2008. The increase in 2009 compared to 2008 is mainly due to the equity market improvements that have helped revenue growth from trust and asset management activities. During the fourth quarter of 2009, the contribution attributable to the wealth management deposits was redefined to measure the value as an alternative source of funding for each bank. In previous periods, the contribution from these deposits was measured as the full net interest income contribution. The redefined measure better reflects the value of these deposits to the Company.

54


Table of Contents

Wealth management customer account balances on deposit at the banks averaged $617.4 million, $634.4 million and $624.4 million in 2010, 2009 and 2008, respectively. This segment recorded non-interest income of $45.4 million for 2010 as compared to $38.3 million for 2009 and $36.3 million for 2008. Distribution of wealth management services through each bank continues to be a focus of the Company as the number of brokers in its banks continues to increase. Wintrust is committed to growing the wealth management segment in order to better service its customers and create a more diversified revenue stream. This segment reported net income of $6.9 million for 2010 compared to $5.6 million for 2009 and $5.3 million for 2008.
ANALYSIS OF FINANCIAL CONDITION
Total assets were $14.0 billion at December 31, 2010, representing an increase of $1.8 billion, or 14%, when compared to December 31, 2009. Total funding, which includes deposits, all notes and advances, including secured borrowings and the junior subordinated debentures, was $12.4 billion at December 31, 2010 and $10.9 billion at December 31, 2009. See Notes 3, 4, and 11 through 15 of the Consolidated Financial Statements for additional period-end detail on the Company’s interest-earning assets and funding liabilities.
Interest-Earning Assets
The following table sets forth, by category, the composition of average earning assets and the relative percentage of each category to total average earning assets for the periods presented (dollars in thousands):
                                                 
    Years Ended December 31,
    2010   2009   2008
    Average   Percent   Average   Percent   Average   Percent
    Balance   of Total   Balance   of Total   Balance   of Total
     
Loans:
                                               
Commercial
  $ 1,828,897       15 %   $ 1,584,868       15 %   $ 1,359,600       15 %
Commercial real estate
    3,332,850       27       3,405,136       33       3,220,924       37  
Home equity
    922,907       7       919,233       9       772,361       9  
Residential real estate (1)
    587,629       5       503,910       5       335,714       4  
Premium finance receivables (2)
    2,622,935       21       1,653,786       16       1,178,421       13  
Indirect consumer loans
    70,295       1       134,757       1       215,453       2  
Other loans
    108,076       1       133,731       1       163,136       2  
     
Total loans, net of unearned income excluding covered loans (3)
    9,473,589       77       8,335,421       80       7,245,609       82  
Covered loans
    232,206       2                          
     
Total loans, net of unearned income (3)
    9,705,795       79       8,335,421       80       7,245,609       82  
Liquidity management assets (4)
    2,654,013       21       2,086,653       20       1,532,282       18  
Other earning assets (5)
    45,021             23,979             23,052        
     
Total average earning assets
  $ 12,404,829       100 %   $ 10,446,053       100 %   $ 8,800,943       100 %
     
Total average assets
  $ 13,556,612             $ 11,415,322             $ 9,753,220          
     
Total average earning assets to total average assets
            92 %             92 %             90 %
 
 
(1)   Includes mortgage loans held-for-sale
 
(2)   Includes premium finance receivables held-for-sale
 
(3)   Includes mortgage loans held-for-sale, premium finance receivables held-for-sale and non-accrual loans
 
(4)   Liquidity management assets include available-for-sale securities, other securities, interest earning deposits with banks, federal funds sold and securities purchased under resale agreements
 
(5)   Other earning assets include brokerage customer receivables and trading account securities
Average earning assets increased $2.0 billion, or 19%, in 2010 and $1.6 billion, or 19%, in 2009. Average earning assets comprised 92% of average total assets in 2010 and 2009, and 90% of average total assets in 2008.

55


Table of Contents

Loans. Average total loans, net of unearned income, totaled $9.7 billion and increased $1.4 billion, or 16%, in 2010 and $1.1 billion, or 15%, in 2009. Average commercial loans totaled $1.8 billion in 2010, and increased $244.0 million, or 15%, over the average balance in 2009, while average commercial real estate loans totaled $3.3 billion in 2010, slightly decreasing $72.3 million, or 2%, since 2009. From 2008 to 2009, average commercial loans increased $225.3 million, or 17%, while average commercial real estate loans increased $184.2 million, or 6%. The growth realized in these categories for 2010 and 2009 is primarily attributable to increased business development efforts. Combined, these categories comprised 42% of the average loan portfolio in 2010 and 48% in 2009.
Home equity loans averaged $922.9 million in 2010, and increased $3.7 million, or 0.4%, when compared to the average balance in 2009. Home equity loans averaged $919.2 million in 2009, and increased $146.9 million, or 19%, when compared to the average balance in 2008. Unused commitments on home equity lines of credit totaled $829.9 million at December 31, 2010 and $854.2 million at December 31, 2009. The 19% increase in average home equity loans in 2009 was primarily a result of new loan originations and borrowers exhibiting a greater propensity to borrow on their existing lines of credit. As a result of economic conditions, the Company has been actively managing its home equity portfolio to ensure that diligent pricing, appraisal and other underwriting activities continue to exist.
Residential real estate loans averaged $587.6 million in 2010, and increased $83.7 million, or 17%, from the average balance in 2009. In 2009, residential real estate loans averaged $503.9 million, and increased $168.2 million, or 50%, from the average balance of $335.7 million in 2008. This 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. The majority of the increase in residential mortgage loans in the last two years is a result of higher mortgage loan originations. The increase in originations resulted from the interest rate environment and the positive impact of the PMP transaction, completed at the end of 2008.
Average premium finance receivables totaled $2.6 billion in 2010, and accounted for 21% of the Company’s average total loans. In 2010, average premium finance receivables increased $969.1 million, or 59%, from the average balance of $1.7 billion in 2009. In 2009, average premium finance receivables increased $475.4 million, or 40%, compared to 2008. The increase in the average balance of premium finance receivables in 2010 is a result of recording the securitization receivables on the statement of condition effective January 1, 2010 and significant originations within the portfolio during the period. The increase in the average balance of premium finance receivables in 2009 compared to 2008 is primarily a result of FIFC’s purchase of a portfolio of domestic life insurance premium finance loans in 2009 with a fair value of $910.9 million. Historically, the majority of premium finance receivables, commercial and life insurance, were 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. FIFC originations of commercial premium finance receivables that were not purchased by the banks were typically sold to unrelated third parties with servicing retained. During the third quarter of 2009, FIFC initially sold $695 million in commercial premium finance receivables to our indirect subsidiary, FIFC Premium Funding I, LLC, which in turn sold $600 million in aggregate principal amount of notes backed by such commercial premium finance receivables in a securitization transaction sponsored by FIFC. Under the terms of the securitization, FIFC has the right, but not the obligation, to securitize additional receivables in the future and is responsible for the servicing, administration and collection of securitized receivables and related security in accordance with FIFC’s credit and collection policy. FIFC’s obligations under the securitization are subject to customary covenants, including the obligation to file and amend financing statements; the obligation to pay costs and expenses; the obligation to indemnify other parties for its breach or failure to perform; the obligation to defend the right, title and interest of the transferee of the conveyed receivables against third party claims; the obligation to repurchase the securitized receivables if certain representations fail to be true and correct and receivables are materially and adversely affected thereby; the obligation to maintain its corporate existence and licenses to operate; and the obligation to qualify the securitized notes under the securities laws. In the event of a default by FIFC under certain of these obligations, the ability to add loans to securitization facility could terminate.

56


Table of Contents

Indirect consumer loans are comprised primarily of automobile loans originated at Hinsdale Bank. These loans are financed from networks of unaffiliated automobile dealers located throughout the Chicago metropolitan area with which the Company had established relationships. The risks associated with the Company’s portfolios are diversified among many individual borrowers. Like other consumer loans, the indirect consumer loans are subject to the banks’ established credit standards. Management regards substantially all of these loans as prime quality loans. In the third quarter of 2008, as a result of competitive pricing pressures, the Company ceased the origination of indirect automobile loans through Hinsdale Bank. However, as a result of current favorable pricing opportunities coupled with reduced competition in the indirect consumer automobile lending business, the Company re-entered this business with originations through Hinsdale Bank in the fourth quarter of 2010. At December 31, 2010, the average maturity of indirect automobile loans is estimated to be approximately 27 months. During 2010, 2009 and 2008 average indirect consumer loans totaled $70.3 million, $134.8 million and $215.5 million, respectively.
Other loans represent a wide variety of personal and consumer loans to individuals as well as high-yielding short-term accounts receivable financing to clients in the temporary staffing industry located throughout the United States. Consumer loans generally have shorter terms and higher interest rates than mortgage loans but generally involve more credit risk due to the type and nature of the collateral. Additionally, short-term accounts receivable financing may also involve greater credit risks than generally associated with the loan portfolios of more traditional community banks depending on the marketability of the collateral.
Covered loans represent loans acquired in FDIC-assisted transactions in the second and third quarters of 2010. 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. See Note 8 — Business Combinations for a discussion of these acquisitions.
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 fluctuate frequently based on deposit inflows, the level of other funding services and loan demand. Average liquidity management assets accounted for 21% of total average earning assets in 2010, 20% in 2009 and 18% in 2008. Average liquidity management assets increased $567.4 million in 2010 compared to 2009, and increased $554.4 million in 2009 compared to 2008. The balances of liquidity management 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 at WHI. In the normal course of business, 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 the 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 an 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.

57


Table of Contents

Deposits and Other Funding Sources
The dynamics of community bank balance sheets are generally dependent upon the ability of management to attract additional deposit accounts to fund the growth of the institution. As the banks and branch offices are still relatively young, the generation of new deposit relationships to gain market share and establish themselves in the community as the bank of choice is particularly important. When determining a community to establish a de novo bank, the Company generally will enter a community where it believes the new bank can gain the number one or two position in deposit market share. This is usually accomplished by initially paying competitively high deposit rates to gain the relationship and then by introducing the customer to the Company’s unique way of providing local banking services.
Deposits. Total deposits at December 31, 2010, were $10.8 billion, increasing $886.6 million, or 9%, compared to the $9.9 billion at December 31, 2009. Average deposit balances in 2010 were $10.4 billion, reflecting an increase of $1.2 billion, or 13%, compared to the average balances in 2009. During 2009, average deposits increased $1.5 billion, or 20%, compared to the prior year.
The increase in year end and average deposits in 2010 over 2009 reflects the Company’s efforts to increase its deposit base. During 2010, a majority of the increase can be attributed to the Company’s acqusitions including approximately $400 million of deposits in the Wheatland acquisition, approximately $160 million of deposits in the Lincoln Park acquisition and approximately $120 million of deposits in the Ravenswood acquisition.
The following table presents the composition of average deposits by product category for each of the last three years (dollars in thousands):
                                                 
    Years Ended December 31,
    2010   2009   2008
    Average   Percent   Average   Percent   Average   Percent
    Balance   of Total   Balance   of Total   Balance   of Total
     
Non-interest bearing deposits
  $ 984,416       9 %   $ 788,034       9 %   $ 672,924       9 %
NOW accounts
    1,508,063       15       1,136,008       12       1,011,402       13  
Wealth management deposits
    734,837       7       907,013       10       622,842       8  
Money market accounts
    1,666,554       16       1,375,767       15       904,245       12  
Savings accounts
    619,024       6       457,139       5       319,128       4  
Time certificates of deposit
    4,881,472       47       4,543,154       49       4,156,600       54  
     
Total deposits
  $ 10,394,366       100 %   $ 9,207,115       100 %   $ 7,687,141       100 %
 
Wealth management deposits are funds from the brokerage customers of WHI, the trust and asset management customers of CTC and brokerage customers from unaffiliated companies which have been placed into deposit accounts (primarily money market accounts) of the banks (“wealth management deposits” in table above). Average wealth management deposits decreased $172.2 million in 2010, of which $157.0 million was attributable to brokerage customers from unaffiliated companies. Consistent with reasonable interest rate risk parameters, the funds have generally been invested in loan production of the banks as well as other investments suitable for banks.

58


Table of Contents

The following table presents average deposit balances for each Bank and the relative percentage of total consolidated average deposits held by each Bank during each of the past three years (dollars in thousands):
                                                 
    Years Ended December 31,
    2010   2009   2008
    Average   Percent   Average   Percent   Average   Percent
    Balance   of Total   Balance   of Total   Balance   of Total
     
Lake Forest Bank
  $ 1,411,511       14 %   $ 1,146,196       12 %   $ 1,046,069       14 %
Hinsdale Bank
    1,116,568       11       1,086,748       12       949,658       12  
North Shore Bank
    1,136,925       11       980,079       11       768,081       10  
Libertyville Bank
    904,783       9       882,366       10       781,708       10  
Barrington Bank
    886,261       8       776,009       8       694,471       9  
Northbrook Bank
    845,114       8       692,329       8       570,401       7  
Village Bank
    634,211       6       592,043       6       463,433       6  
Town Bank
    595,454       6       571,568       6       483,331       6  
Wheaton Bank
    593,409       6       353,845       4       268,174       4  
State Bank of The Lakes
    562,418       5       546,774       6       467,857       6  
Crystal Lake Bank
    555,920       5       536,091       6       469,022       6  
Advantage Bank
    370,890       4       353,938       4       286,722       4  
Beverly Bank
    297,878       3       246,474       3       169,732       2  
Old Plank Trail Bank
    257,336       2       248,121       3       166,675       2  
St. Charles Bank
    225,688       2       194,534       1       101,807       2  
     
Total deposits
  $ 10,394,366       100 %   $ 9,207,115       100 %   $ 7,687,141       100 %
     
Percentage increase from prior year
            13 %             20 %             5 %
 
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, as well as the retention of earnings, the Company uses several other funding sources to support its growth. These other sources include short-term borrowings, notes payable, FHLB 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 composition of average other funding sources in 2010, 2009 and 2008 is presented in the following table (dollars in thousands):
                                                 
    Years Ended December 31,
    2010   2009   2008
    Average   Percent   Average   Percent   Average   Percent
    Balance   of Total   Balance   of Total   Balance   of Total
     
Notes payable
  $ 1,000       %   $ 1,000       %   $ 50,799       4 %
Federal Home Loan Bank advances
    418,981       27       434,520       43       435,761       38  
Subordinated notes
    56,370       4       66,205       7       74,589       7  
Secured borrowings — owed to securitization investors
    600,000       39                          
Short-term borrowings
    226,028       14       255,504       25       334,714       29  
Junior subordinated debentures
    249,493       16       249,497       25       249,575       22  
Other
    2,541             1,818             1,863        
     
Total other funding sources
  $ 1,554,413       100 %   $ 1,008,544       100 %   $ 1,147,301       100 %
 

59


Table of Contents

Notes payable balances represent the balances on a credit agreement with an unaffiliated bank. This $51 million credit facility is 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 December 31, 2010 and 2009, the Company had $1.0 million of notes payable outstanding. See Note 12 to the Consolidated Financial Statements for further discussion of the terms of this credit facility.
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. FHLB advances to the banks totaled $423.5 million at December 31, 2010, and $431.0 million at December 31, 2009. See Note 13 to the Consolidated Financial Statements for further discussion of the terms of these advances.
The Company borrowed $75.0 million under three separate $25.0 million subordinated note agreements. Each subordinated note requires annual principal payments of $5.0 million beginning in the sixth year of the note and has terms of ten years with final maturity dates in 2012, 2013 and 2015. These notes qualify as Tier II regulatory capital. Subordinated notes totaled $50.0 million and $60.0 million at December 31, 2010 and 2009, respectively. See Note 14 to the Consolidated Financial Statements for further discussion of the terms of the notes.
Beginning in 2010, the Company accounted for its third quarter 2009 securitization transaction as a secured borrowing. Secured borrowings totaled $600.0 million at December 31, 2010 and $0 at December 31, 2009. See Note 6 to the Consolidated Financial Statements for further discussion.
Short-term borrowings include securities sold under repurchase agreements and federal funds purchased. These borrowings totaled $217.3 million and $245.6 million at December 31, 2010 and 2009, respectively. Securities sold under repurchase agreements represent sweep accounts for certain customers in connection with master repurchase agreements at the banks as well as short-term borrowings from banks and brokers. This funding category fluctuates based on customer preferences and daily liquidity needs of the banks, their customers and the banks’ operating subsidiaries. See Note 15 to the Consolidated Financial Statements for further discussion of these borrowings.
The Company has $249.5 million of junior subordinated debentures outstanding as of December 31, 2010 and 2009. The amounts reflected on the balance sheet represent the junior subordinated debentures issued to nine trusts by the Company and equal the amount of the preferred and common securities issued by the trusts. See Note 16 of the Consolidated Financial Statements for further discussion of the Company’s junior subordinated debentures. Junior subordinated debentures, subject to certain limitations, currently qualify as Tier 1 regulatory capital. Interest expense on these debentures is deductible for tax purposes, resulting in a cost-efficient form of regulatory capital.
Debt issued by the Company in conjunction with its tangible equity unit offering in December 2010 is recorded within other borrowings. The total proceeds attributed to the debt component of the offering, net of issuance costs, was $43.3 million. See Note 24 to the Consolidated Financial Statements for further discussion of these units.
Shareholders’ Equity. Total shareholders’ equity was $1.4 billion at December 31, 2010, an increase of $297.9 million from the December 31, 2009 total of $1.1 billion. The increase in 2010 was primarily the result of $494.4 million from the issuance of common stock and tangible equity units in March and December of 2010, $42.1 million of earnings (net income of $63.3 million less preferred and common stock dividends of $21.2 million), offset by a reduction in preferred stock of $250.0 million.
Changes in shareholders’ equity from 2008 to 2009 included approximately $50.0 million of earnings (net income of $73.1 million less preferred stock dividends of $16.6 million and common stock dividends of $6.5 million), $11.7 million increase from the issuance of shares of the Company’s common stock (and related tax benefit) pursuant to various stock compensation plans and $6.9 million credited to surplus for stock-based compensation costs, and $4.0 million in net unrealized gains from available-for-sale securities and cash flow hedges, net of tax.

60


Table of Contents

LOAN PORTFOLIO AND ASSET QUALITY
Loan Portfolio
The following table shows the Company’s loan portfolio by category as of December 31 for each of the five previous fiscal years (in thousands):
                                                                                 
    2010   2009   2008   2007   2006
            % of           % of           % of           % of           % of
    Amount   Total   Amount   Total   Amount   Total   Amount   Total   Amount   Total
     
Commercial
  $ 2,049,326       21 %     1,743,209       21       1,423,583       19       1,321,960       20       1,300,221       20  
Commercial real estate
    3,338,007       34       3,296,697       39       3,355,081       44       3,086,701       45       2,768,216       43  
Home equity
    914,412       9       930,482       11       896,438       12       678,298       10       666,471       10  
Residential real estate
    353,336       3       306,296       4       262,908       3       226,686       3       207,059       35  
Premium finance receivables — commercial
    1,265,500       13       730,144       9       1,243,858       16       1,069,781       16       1,165,846       18  
Premium finance receivables — life insurance
    1,521,886       15       1,197,893       14       102,728       2       8,404                    
Indirect consumer loans
    51,147       1       98,134       1       175,955       2       241,393       4       249,534       4  
Consumer and other
    106,272       1       108,916       1       160,518       2       168,379       2       139,133       2  
     
Total loans, net of unearned income, excluding covered loans
  $ 9,599,886       97 %     8,411,771       100       7,621,069       100       6,801,602       100       6,496,480       100  
Covered loans
    334,353       3                                                  
     
Total loans, net of unearned income
  $ 9,934,239       100 %     8,411,771       100       7,621,069       100       6,801,602       100       6,496,480       100  
 

61


Table of Contents

The tables below set forth information regarding the types, amounts and performance of our loans within the commercial and commercial real estate portfolios as of December 31, 2010 and 2009:
                                         
                            >90 Days   Allowance
As of December 31, 2010           % of   Non-   Past Due and   for Loan Losses
(Dollars in thousands)   Balance   Total Loans   accrual   still accruing   Allocation
     
Commercial:
                                       
Commercial and industrial
  $ 1,653,394       17.2 %   $ 16,339     $ 478     $ 28,316  
Franchise
    119,488       1.2                   1,153  
Mortgage warehouse lines of credit
    131,306       1.4                   1,177  
Community Advantage — homeowner associations
    75,542       0.8                   323  
Aircraft
    24,618       0.3                   315  
Other
    44,978       0.5       43             493  
     
Total Commercial
  $ 2,049,326       21.4 %   $ 16,382     $ 478     $ 31,777  
     
Commercial Real Estate:
                                       
Residential construction
  $ 95,947       1.0 %   $ 10,010     $     $ 2,597  
Commercial construction
    131,672       1.4       1,820             4,035  
Land
    260,189       2.7       37,602             14,261  
Office
    535,331       5.6       12,718             8,005  
Industrial
    500,301       5.2       3,480             5,213  
Retail
    510,527       5.3       3,265             5,985  
Multi-family
    290,954       3.0       4,794             5,479  
Mixed use and other
    1,013,086       10.6       20,274             17,043  
     
Total Commercial Real Estate Loans
  $ 3,338,007       34.8 %   $ 93,963     $     $ 62,618  
     
Total Commercial and Commercial Real Estate
  $ 5,387,333       56.2 %   $ 110,345     $ 478     $ 94,395  
     
Commercial Real Estate—collateral location by state:
                                       
Illinois
  $ 2,695,581       80.8 %                        
Wisconsin
    356,696       10.7                          
                             
Total primary markets
  $ 3,052,277       91.5 %                        
                             
Florida
    52,457       1.6                          
Arizona
    42,100       1.3                          
Indiana
    47,828       1.4                          
Other (no individual state greater than 0.5%)
    143,345       4.2                          
                             
Total
  $ 3,338,007       100.0 %                        
                             
                                         
                            >90 Days   Allowance
As of December 31, 2009           % of   Non-   Past Due and   for Loan Losses
(Dollars in thousands)   Balance   Total Loans   accrual   still accruing   Allocation
     
Commercial:
                                       
Commercial and industrial
  $ 1,361,225       16.2 %   $ 15,094     $ 561     $ 22,579  
Franchise
    133,953       1.6                   2,118  
Mortgage warehouse lines of credit
    121,781       1.4                   1,643  
Community Advantage — homeowner associations
    67,086       0.8                   161  
Aircraft
    41,654       0.5                   167  
Other
    17,510       0.2       1,415             1,344  
     
Total Commercial
  $ 1,743,209       20.7 %   $ 16,509     $ 561     $ 28,012  
     
Commercial Real Estate:
                                       
Residential construction
  $ 174,423       2.1 %   $ 14,065     $     $ 5,065  
Commercial construction
    308,580       3.5       5,232             6,304  
Land
    326,720       3.9       41,297             12,228  
Office
    467,587       5.6       2,675             5,221  
Industrial
    444,891       5.3       3,753             5,612  
Retail
    452,760       5.4       431             4,959  
Multi-family
    241,710       2.9       288             1,565  
Mixed use and other
    880,026       10.5       12,898             9,998  
     
Total Commercial Real Estate Loans
  $ 3,296,697       39.2 %   $ 80,639     $     $ 50,952  
     
Total Commercial and Commercial Real Estate
  $ 5,039,906       59.9 %   $ 97,148     $ 561     $ 78,964  
     
Commercial Real Estate—collateral location by state:
                                       
Illinois
  $ 2,641,291       80.1 %                        
Wisconsin
    366,862       11.1                          
                             
Total primary markets
  $ 3,008,153       91.2 %                        
                             
Florida
    45,655       1.4                          
Arizona
    46,257       1.4                          
Indiana
    46,099       1.4                          
Other (no individual state greater than 0.9%)
    150,533       4.6                          
                             
Total
  $ 3,296,697       100.0 %                        
                             

62


Table of Contents

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 southeastern Wisconsin, 91.5% of our commercial real estate loan portfolio is located in this region. Commercial real estate market conditions continued to be under stress in 2010, and we expected this trend to continue. As of December 31, 2010, our allowance for loan losses related to this portfolio is $62.6 million.
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; loans to condominium and homeowner associations originated through Barrington Bank’s Community Advantage program; small aircraft financing, an earning asset niche developed at Crystal Lake Bank; and franchise lending at Lake Forest Bank. Commercial business lending is generally considered to involve a higher degree of risk than traditional consumer bank lending, and as a result of the economic recession, allowance for loan losses in our commercial loan portfolio is $31.8 million as of December 31, 2010. 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. End lender re-payments are sent directly to the Company upon end-lenders’ acceptance of final loan documentation. 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 sell a number of mortgages as a package in the secondary market. Typically, the Company will serve as sole funding source for its mortgage warehouse lending customers under short-term revolving credit agreements. Amounts advanced with respect to any particular mortgage loan are usually required to be repaid within 21 days.
Despite poor economic conditions generally, and the particularly difficult conditions in the U.S. residential real estate market experienced since 2008, our mortgage warehouse lending business has expanded due to the high demand for mortgage re-financings given the historically low interest rate environment and the fact that many of our competitors exited the market in late 2008 and early 2009. The expansion of this business has caused our mortgage warehouse lines to increase to $131.3 million as of December 31, 2010 from $121.8 million as of December 31, 2009. Our allowance for loan losses with respect to these loans is $1.2 million as of December 31, 2010. Since the inception of this business, the Company has not suffered any related loan losses on these loans.
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 deterioration in the overall residential real estate market. The number of new home equity line of credit commitments originated by us has decreased due to declines in housing valuations that have decreased the amount of equity against which homeowners may borrow, and a decline in homeowners’ desire to use their remaining equity as collateral.
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 December 31, 2010, our residential loan portfolio totaled $353.3 million, or 3% of our total outstanding loans.
Our adjustable rate mortgages relate to properties located principally in the Chicago metropolitan area and southeastern Wisconsin or vacation homes owned by local residents, and may have terms based on differing indexes. These adjustable rate mortgages are often non-agency conforming because the outstanding balance of these loans exceeds the maximum balance that can be sold into the secondary market. Adjustable rate mortgage loans decrease the interest rate risk we face on our mortgage portfolio. However, this risk is not eliminated because,

63


Table of Contents

among other things, such loans generally provide for periodic and lifetime limits on the interest rate adjustments. 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. To date, we have not seen a significant elevation in delinquencies and foreclosures in our residential loan portfolio. As of December 31, 2010, $6.1 million of our residential real estate mortgages, or 1.7% of our residential real estate loan portfolio, were classified as nonaccrual, $10.1 million were 30 to 89 days past due (2.8%) and $337.2 million were current (95.5%). 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, or by selectively retaining 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 December 31, 2010 and 2009 was $937.7 million and $738.4 million, respectively. All other mortgage loans sold into the secondary market were sold without the retention of servicing rights.
It is not our practice to underwrite, and we have no plans to underwrite, subprime, Alt A, no or little documentation loans, or option ARM loans. As of December 31, 2010, approximately $46.6 million of our mortgages consist of interest-only loans. To date, we have not participated in any mortgage modification programs.
Premium finance receivables — commercial. FIFC originated approximately $3.2 billion in commercial insurance premium finance receivables during 2010. FIFC makes loans to businesses to finance the insurance premiums they pay on their commercial insurance policies. The loans are originated by FIFC working through independent medium and large insurance agents and brokers located throughout the United States. The insurance premiums financed are primarily for commercial customers’ purchases of liability, property and casualty and other commercial insurance.
This lending involves relatively rapid turnover of the loan portfolio and high volume of loan originations. Because of the indirect nature of this lending and because the borrowers are located nationwide, this segment is more susceptible to third party fraud than relationship lending. In the second quarter of 2010, a fraud perpetrated against a number of premium finance companies in the industry, including the property and casualty division of our premium financing subsidiary, increased both the Company’s net charge-offs and provision for credit losses by $15.7 million. Actions have been taken by the Company to decrease the likelihood of this type of loss from recurring in this line of business for the Company by the enhancement of various control procedures to mitigate the risks associated with this lending. The Company has conducted a thorough review of the premium finance — commercial portfolio and found no signs of similar situations.
The majority of these loans are purchased by the banks in order to more fully utilize their lending capacity as these loans generally provide the banks with higher yields than alternative investments. Historically, FIFC originations that were not purchased by the banks were sold to unrelated third parties with servicing retained. However, during the third quarter of 2009, FIFC initially sold $695 million in commercial premium finance receivables to our indirect subsidiary, FIFC Premium Funding I, LLC, which in turn sold $600 million in aggregate principal amount of notes backed by such premium finance receivables in a securitization transaction sponsored by FIFC. Subsequent to December 31, 2009, this securitization transaction is accounted for as a secured borrowing and the securitization entity is treated as a consolidated subsidiary of the Company. See Note 6 of the Consolidated Financial Statements presented under Item 8 of this report for further discussion of this securitization transaction. Accordingly, beginning on January 1, 2010, all of the assets and liabilities of the securitization entity are included directly on the Company’s Consolidated Statements of Condition.
Premium finance receivables — life insurance. In 2007, FIFC began financing life insurance policy premiums generally for high net-worth individuals. In 2009, FIFC expanded this niche lending business segment when it purchased a portfolio of domestic life insurance premium finance loans for a total aggregate purchase price of $745.9 million. See Note 8 of the Consolidated Financial Statements presented under Item 8 of this report for further discussion of this business combination.

64


Table of Contents

FIFC originated approximately $456.5 million in life insurance premium finance receivables in 2010. 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.
Indirect consumer loans. As part of its strategy to pursue specialized earning asset niches to augment loan generation within the banks’ target markets, the Company established fixed-rate automobile loan financing at Hinsdale Bank funded indirectly through unaffiliated automobile dealers. The risks associated with the Company’s portfolios are diversified among many individual borrowers. Like other consumer loans, the indirect consumer loans are subject to the banks’ established credit standards. Management regards substantially all of these loans as prime quality loans. In the third quarter of 2008, the Company, as a result of competitive pricing pressures, ceased the origination of indirect automobile loans through Hinsdale Bank. However, as a result of current favorable pricing opportunities coupled with reduced competition in the indirect consumer auto business, the Company re-entered this business in the fourth quarter of 2010 with originations through Hinsdale Bank. At December 31, 2010, the average actual maturity of indirect automobile loans is estimated to be approximately 27 months.
Other Loans. Included in the 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.
Foreign. The Company had no loans to businesses or governments of foreign countries at any time during 2010.
Maturities and Sensitivities of Loans to Changes In Interest Rates
The following table classifies the commercial loan portfolios at December 31, 2010 by date at which the loans reprice (in thousands):
                                 
    One year   From one   Over    
    or less   to five years   five years   Total
     
Commercial
  $ 1,690,079       301,141       58,106       2,049,326  
Commercial real estate
    2,455,291       842,771       39,945       3,338,007  
Total premium finance receivables, net of unearned income (1)
    1,558,137             22,845       1,580,982  
 
 
(1)   Includes the commercial portion of the premium finance receivables — life insurance portfolio.
Of those loans repricing after one year, approximately $1.1 billion have fixed rates.

65


Table of Contents

Past Due Loans and Non-performing Assets
Our ability to manage credit risk depends in large part on our ability to properly identify and manage problem loans. To do so, we operate a credit risk rating system under which our credit management personnel assign a credit risk rating 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:
     
1 Rating
Minimal Risk (Loss Potential — none or extremely low) (Superior asset quality, excellent liquidity, minimal leverage)
 
   
2 Rating
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)
 
   
5 Rating
Management Attention Risk (Loss Potential moderate if corrective action not taken) (Generally
acceptable
asset quality, somewhat strained liquidity, minimal leverage capacity)
 
   
6 Rating
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.)
In the first quarter of 2010, the Company modified its credit risk rating scale to the above 1 through 10 risk ratings. Prior to this, the Company employed a 1 through 9 credit risk rating scale. The main change is that the Company now has two separate credit risk ratings for substandard loans. They are Substandard — Accrual (credit risk rating 7) and Substandard — Nonaccrual (credit risk rating 8). Previously, there was only one risk rating for loans classified as substandard. This change allows the Company to better monitor the credit risk of the portfolio.
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 or the directors’ loan committee. 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 OCC, the State of Illinois and the State of Wisconsin and our internal audit staff.

66


Table of Contents

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.
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.

67


Table of Contents

Non-Performing Assets, excluding covered assets
The following table sets forth Wintrust’s non-performing assets, excluding covered assets, as of the dates shown:
(Dollars in thousands)
                                         
    2010   2009   2008   2007   2006
     
Loans past due greater than 90 days and still accruing:
                                       
Commercial
  $ 478       561       65       806       908  
Commercial real estate
                14,588       13,877       7,010  
Home equity
                617       51       211  
Residential real estate
          412                   97  
Premium finance receivables – commercial
    8,096       6,271       9,339       8,703       4,306  
Premium finance receivables – life insurance
                             
Indirect consumer
    318       461       679       517       297  
Consumer and other
    1       95       97       59       536  
     
Total loans past due greater than 90 days and still accruing
    8,893       7,800       25,385       24,013       13,365  
     
 
Non-accrual loans:
                                       
Commercial
    16,382       16,509       8,651       8,037       3,274  
Commercial real estate
    93,963       80,639       83,147       24,869       9,659  
Home equity
    7,425       8,883       828       1,325       619  
Residential real estate
    6,085       3,779       5,700       1,890       1,119  
Premium finance receivables – commercial
    8,587       11,878       11,454       10,725       8,112  
Premium finance receivables – life insurance
    354       704                    
Indirect consumer
    191       995       913       560       376  
Consumer and other
    252       617       16       435       350  
     
Total non-accrual
    133,239       124,004       110,709       47,841       23,509  
     
 
Total non-performing loans:
                                       
Commercial
    16,860       17,070       8,716       8,843       4,182  
Commercial real estate
    93,963       80,639       97,735       38,746       16,669  
Home equity
    7,425       8,883       1,445       1,376       830  
Residential real estate
    6,085       4,191       5,700       1,890       1,216  
Premium finance receivables – commercial
    16,683       18,149       20,793       19,428       12,418  
Premium finance receivables – life insurance
    354       704                    
Indirect consumer
    509       1,456       1,592       1,077       673  
Consumer and other
    253       712       113       494       886  
     
Total non-performing loans
    142,132       131,804       136,094       71,854       36,874  
Other real estate owned
    71,214       80,163       32,572       3,858       572  
     
Total non-performing assets
    213,346       211,967       168,666       75,712       37,446  
     
 
Total non-performing loans by category as a percent of its own respective category’s
                                       
year end balance:
                                       
Commercial
    0.82 %     0.98 %     0.61 %     0.67 %     0.32 %
Commercial real estate
    2.81       2.45       2.91       1.26       0.60  
Home equity
    0.81       0.95       0.16       0.20       0.12  
Residential real estate
    1.72       1.37       2.17       0.83       0.59  
Premium finance receivables – commercial
    1.32       2.49       1.67       1.82       1.07  
Premium finance receivables – life insurance
    0.02       0.06                    
Indirect consumer
    0.99       1.48       0.90       0.45       0.27  
Consumer and other
    0.24       0.65       0.07       0.29       0.64  
     
Total non-performing loans
    1.48 %     1.57 %     1.79 %     1.06 %     0.57 %
     
 
Total non-performing assets, excluding covered assets, as a percentage of total assets
    1.53 %     1.74 %     1.58 %     0.81 %     0.39 %
Allowance for loan losses as a percentage of non-performing loans
    80.14 %     74.56 %     51.26 %     70.13 %     124.90 %
 

68


Table of Contents

Non-performing Commercial and Commercial Real Estate
The commercial non-performing loan category totaled $16.9 million as of December 31, 2010 compared to $17.1 million as of December 31, 2009, while the commercial real estate loan category totaled $94.0 million as of December 31, 2010 compared to $80.6 million as of December 31, 2009.
Management is pursuing the resolution of all credits in this category. At this time, management believes reserves are adequate to absorb inherent losses that may occur upon the ultimate resolution of these credits.
Non-performing Residential Real Estate and Home Equity
The non-performing residential real estate and home equity loans totaled $13.5 million as of December 31, 2010. The balance increased $436,000 from December 31, 2009. The December 31, 2010 non-performing balance is comprised of $6.1 million of residential real estate (22 individual credits) and $7.4 million of home equity loans (26 individual credits). On average, this is approximately three non-performing residential real estate loans and home equity loans per chartered bank within the Company. The Company believes control and collection of these loans is very manageable. At this time, management believes reserves are adequate to absorb inherent losses that may occur upon the ultimate resolution of these credits.
Non-performing Commercial Premium Finance Receivables
The table below presents the level of non-performing property and casualty premium finance receivables as of December 31, 2010 and 2009, and the amount of net charge-offs for the years then ended.
(Dollars in thousands)
                 
    December 31,
    2010   2009
     
Non-performing premium finance receivables — commercial
  $ 16,683     $ 18,149  
- as a percent of premium finance receivables — commercial outstanding
    1.32 %     2.49 %
 
               
Net charge-offs of premium finance receivables — commercial
  $ 22,224     $ 7,502  
- as a percent of average premium finance receivables — commercial
    1.74 %     0.67 %
 

69


Table of Contents

Fluctuations in this category may occur due to timing and nature of account collections from insurance carriers. The Company’s underwriting standards, regardless of the condition of the economy, have remained consistent. We anticipate that net charge-offs and non-performing asset levels in the near term will continue to be at levels that are within acceptable operating ranges for this category of loans. Management is comfortable with administering the collections at this level of non-performing property and casualty premium finance receivables and believes reserves are adequate to absorb inherent losses that may occur upon the ultimate resolution of these credits. In the second quarter of 2010, fraud perpetrated against a number of premium finance companies in the industry, including the property and casualty division of our premium financing subsidiary, increased both our net charge-offs and our provision for credit losses by $15.7 million. The remaining net charge-offs of premium finance receivables were $6.5 million for 2010, which is 0.51% of average premium finance receivables.
Non-performing Indirect Consumer Loans
Total non-performing indirect consumer loans were $509,000 at December 31, 2010, compared to $1.5 million at December 31, 2009. The ratio of these non-performing loans to total indirect consumer loans was 0.99% at December 31, 2010 compared to 1.48% at December 31, 2009. Net charge-offs as a percent of total indirect consumer loans were 1.09% for the year ended December 31, 2010 compared to 1.24% in the same period in 2009. The indirect consumer loan portfolio has decreased 48% since December 31, 2009 to a balance of $51.1 million at December 31, 2010.
Loan Portfolio Aging
The following table shows, as of December 31, 2010, only 1.5% of the entire portfolio, excluding covered loans, is in a non-performing (non-accrual or greater than 90 days past due and still accruing interest) with only 1.5% either one or two payments past due. In total, 97% of the Company’s total loan portfolio, excluding covered loans, as of December 31, 2010 is current according to the original contractual terms of the loan agreements.

70


Table of Contents

The tables below show the aging of the Company’s loan portfolio at December 31, 2010 and 2009:
As of December 31, 2010
(Dollars in thousands)
                                                 
            90+ days                
    Non-   and still   60-89 days   30-59 days        
    Accrual   accruing   past due   past due   Current   Total Loans
     
Loan Balances:
                                               
Commercial
                                               
Commercial and industrial
  $ 16,339       478       4,577       12,774       1,619,226       1,653,394  
Franchise
                      2,250       117,238       119,488  
Mortgage warehouse lines of credit
                            131,306       131,306  
Community Advantage – homeowners association
                            75,542       75,542  
Aircraft
                178       1,000       23,440       24,618  
Other
    43                         44,935       44,978  
     
Total commercial
    16,382       478       4,755       16,024       2,011,687       2,049,326  
     
Commercial real estate
                                               
Residential construction
    10,010             96       1,801       84,040       95,947  
Commercial construction
    1,820                   1,481       128,371       131,672  
Land
    37,602             6,815       11,915       203,857       260,189  
Office
    12,718             9,121       3,202       510,290       535,331  
Industrial
    3,480             686       2,276       493,859       500,301  
Retail
    3,265             4,088       3,839       499,335       510,527  
Multi-family
    4,794             1,573       3,062       281,525       290,954  
Mixed use and other
    20,274             8,481       15,059       969,272       1,013,086  
     
Total commercial real estate
  $ 93,963             30,860       42,635       3,170,549       3,338,007  
     
Home equity loans
    7,425             2,181       7,098       897,708       914,412  
Residential real estate loans
    6,085             1,836       8,224       337,191       353,336  
Premium finance receivables
                                               
Commercial insurance loans
    8,587       8,096       6,076       16,584       1,226,157       1,265,500  
Life insurance loans
    180                         826,119       826,299  
Purchased life insurance loans
    174                         695,413       695,587  
Indirect consumer
    191       318       301       918       49,419       51,147  
Consumer and other
    252       1       109       379       105,531       106,272  
     
Total loans, net of unearned income, excluding covered loans
  $ 133,239       8,893       46,118       91,862       9,319,774       9,599,886  
Covered loans
          117,161       7,352       22,744       187,096       334,353  
     
Total loans, net of unearned income
  $ 133,239       126,054       53,470       114,606       9,506,870       9,934,239  
     
 
                                               
Aging as a % of Loan Balance:
                                               
Commercial
                                               
Commercial and industrial
    1.0 %     %     0.3 %     0.8 %     97.9 %     100.0 %
Franchise
                      1.9       98.1       100.0  
Mortgage warehouse lines of credit
                            100.0       100.0  
Community Advantage – homeowners association
                            100.0       100.0  
Aircraft
                0.7       4.1       95.2       100.0  
Other
    0.1                         99.9       100.0  
     
Total commercial
    0.8             0.2       0.8       98.2       100.0  
     
Commercial real estate
                                               
Residential construction
    10.4             0.1       1.9       87.6       100.0  
Commercial construction
    1.4                   1.1       97.5       100.0  
Land
    14.5             2.6       4.6       78.3       100.0  
Office
    2.4             1.7       0.6       95.3       100.0  
Industrial
    0.7             0.1       0.5       98.7       100.0  
Retail
    0.6             0.8       0.8       97.8       100.0  
Multi-family
    1.6             0.5       1.1       96.8       100.0  
Mixed use and other
    2.0             0.8       1.5       95.7       100.0  
     
Total commercial real estate
    2.8             0.9       1.3       95.0       100.0  
     
Home equity
    0.8             0.2       0.8       98.2       100.0  
Residential real estate
    1.7             0.5       2.3       95.5       100.0  
Premium finance receivables
                                               
Commercial insurance loans
    0.7       0.6       0.5       1.3       96.9       100.0  
Life insurance loans
                            100.0       100.0  
Purchased life insurance loans
                            100.0       100.0  
Indirect consumer
    0.4       0.6       0.6       1.8       96.6       100.0  
Consumer and other
    0.2             0.1       0.4       99.3       100.0  
     
Total loans, net of unearned income, excluding covered loans
    1.4 %     0.1 %     0.5 %     1.0 %     97.0 %     100.0 %
Covered loans
          35.0       2.2       6.8       56.0       100.0  
     
Total loans, net of unearned income
    1.3 %     1.3 %     0.5 %     1.2 %     95.7 %     100.0 %
 

71


Table of Contents

As of December 31, 2009
(Dollars in thousands)
                                                 
            90+ days                
    Non-   and still   60-89 days   30-59 days        
    Accrual   accruing   past due   past due   Current   Total Loans
     
Loan Balances:
                                               
Commercial
                                               
Commercial and industrial
  $ 15,094       561       5,526       2,990       1,337,054       1,361,225  
Franchise
                            133,953       133,953  
Mortgage warehouse lines of credit
                            121,781       121,781  
Community Advantage – homeowners association
                            67,086       67,086  
Aircraft
                      178       41,476       41,654  
Other
    1,415             1,220             14,875       17,510  
     
Total commercial
    16,509       561       6,746       3,168       1,716,225       1,743,209  
     
Commercial real estate
                                               
Residential construction
    14,065             1,877       6,332       152,149       174,423  
Commercial construction
    5,232                   15,070       288,278       308,580  
Land
    41,297             8,548       2,468       274,407       326,720  
Office
    2,675                   1,324       463,588       467,587  
Industrial
    3,753                   1,141       439,997       444,891  
Retail
    431             2,978       1,050       448,301       452,760  
Multi-family
    288             627       9,372       231,423       241,710  
Mixed use and other
    12,898             4,517       4,464       858,147       880,026  
     
Total commercial real estate
  $ 80,639             18,547       41,221       3,156,290       3,296,697  
     
Home equity loans
    8,883             894       2,107       918,598       930,482  
Residential real estate loans
    3,779       412       406       3,043       298,656       306,296  
Premium finance receivables
                                               
Commercial insurance loans
    11,878       6,271       3,975       9,639       698,381       730,144  
Life insurance loans
                            365,555       365,555  
Purchased life insurance loans
    704             5,385       1,854       824,395       832,338  
Indirect consumer
    995       461       614       2,143       93,921       98,134  
Consumer and other
    617       95       511       537       107,156       108,916  
     
Total loans, net of unearned income, excluding covered loans
  $ 124,004       7,800       37,078       63,712       8,179,177       8,411,771  
Covered loans
                                   
     
Total loans, net of unearned income
  $ 124,004       7,800       37,078       63,712       8,179,177       8,411,771  
     
 
                                               
Aging as a % of Loan Balance:
                                               
Commercial
                                               
Commercial and industrial
    1.1 %     %     0.4 %     0.2 %     98.3 %     100.0 %
Franchise
                            100.0       100.0  
Mortgage warehouse lines of credit
                            100.0       100.0  
Community Advantage – homeowners association
                            100.0       100.0  
Aircraft
                      0.4       99.6       100.0  
Other
    8.1             7.0             84.9       100.0  
     
Total commercial
    0.9             0.4       0.2       98.5       100.0  
     
Commercial real estate
                                               
Residential construction
    8.1             1.1       3.6       87.2       100.0  
Commercial construction
    1.7                   4.9       93.4       100.0  
Land
    12.6             2.6       0.8       84.0       100.0  
Office
    0.6                   0.3       99.1       100.0  
Industrial
    0.8                   0.3       98.9       100.0  
Retail
    0.1             0.7       0.2       99.0       100.0  
Multi-family
    0.1             0.3       3.9       95.7       100.0  
Mixed use and other
    1.5             0.5       0.5       97.5       100.0  
     
Total commercial real estate
    2.4             0.6       1.3       95.7       100.0  
     
Home equity
    1.0             0.1       0.2       98.7       100.0  
Residential real estate
    1.2       0.1       0.1       1.0       97.6       100.0  
Premium finance receivables
                                               
Commercial insurance loans
    1.6       0.9       0.5       1.3       95.7       100.0  
Life insurance loans
                            100.0       100.0  
Purchased life insurance loans
    0.1             0.6       0.2       99.1       100.0  
Indirect consumer
    1.0       0.5       0.6       2.2       95.7       100.0  
Consumer and other
    0.6       0.1       0.5       0.5       98.3       100.0  
     
Total loans, net of unearned income, excluding covered loans
    1.5 %     0.1 %     0.4 %     0.8 %     97.2 %     100.0 %
Covered loans
                                   
     
Total loans, net of unearned income
    1.5 %     0.1 %     0.4 %     0.8 %     97.2 %     100.0 %
 

72


Table of Contents

As of December 31, 2010, only $46.1 million of all loans, excluding covered loans, or 0.5%, were 60 to 89 days past due and $91.9 million, or 1.0%, were 30 to 59 days (or one payment) past due. As of December 31, 2009, $37.1 million of all loans, excluding covered loans, or 0.4%, were 60 to 89 days past due and $63.7 million, or 0.8%, were 30 to 59 days (or one payment) past due.
The majority 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. Near-term delinquencies (30 to 59 days past due) increased $14.3 million since December 31, 2009.
The Company’s home equity and residential loan portfolios continue to exhibit low delinquency ratios. Home equity loans at December 31, 2010 that are current with regard to the contractual terms of the loan agreement represent 98.2% of the total home equity portfolio. Residential real estate loans at December 31, 2010 that are current with regards to the contractual terms of the loan agreements comprise 95.5% of total residential real estate loans outstanding.
The ratio of non-performing commercial premium finance receivables fluctuates throughout the year due to the nature and timing of canceled account collections from insurance carriers. Due to the nature of collateral for commercial premium finance receivables, it customarily takes 60-150 days to convert the collateral into cash. Accordingly, the level of non-performing commercial premium finance receivables is not necessarily indicative of the loss inherent in the portfolio. In the event of default, Wintrust has the power to cancel the insurance policy and collect the unearned portion of the premium from the insurance carrier. In the event of cancellation, the cash returned in payment of the unearned premium by the insurer should generally be sufficient to cover the receivable balance, the interest and other charges due. Due to notification requirements and processing time by most insurance carriers, many receivables will become delinquent beyond 90 days while the insurer is processing the return of the unearned premium. Management continues to accrue interest until maturity as the unearned premium is ordinarily sufficient to pay-off the outstanding balance and contractual interest due.
Non-performing Loans Rollforward
The table below presents a summary of non-performing loans, excluding covered loans, as of December 31, 2010 and shows the changes in the balance during 2010:
(Dollars in thousands)
         
    December 31,  
    2010  
Balance at beginning of period
  $ 131,804  
Additions, net
    173,461  
Return to performing status
    (4,914 )
Payments received
    (30,513 )
Transfer to OREO
    (68,663 )
Charge-offs
    (55,220 )
Net change for niche loans (1)
    (3,823 )
 
     
Balance at end of period
  $ 142,132  
 
     
 
(1)   Includes activity for premium finance receivables, mortgages held for investment by WMC and indirect consumer loans.

73


Table of Contents

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.” 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 OCC, the State of Illinois and the State of Wisconsin.
The following table sets forth the allocation of the allowance for loan losses and the allowance for losses on lending-related commitments by major loan type and the percentage of loans in each category to total loans for the past five fiscal years (dollars in thousands):
                                                                                 
    2010     2009     2008     2007     2006  
            % of Loan             % of Loan             % of Loan             % of Loan             % of Loan  
            Type to             Type to             Type to             Type to             Type to  
            Total             Total             Total             Total             Total  
    Amount     Loans     Amount     Loans     Amount     Loans     Amount     Loans     Amount     Loans  
     
Allowance for loan losses allocation:
                                                                               
Commercial
  $ 31,777       21 %   $ 28,012       21 %   $ 17,495       19 %   $ 16,185       20 %   $ 15,224       20 %
Commercial real estate
    62,618       34       50,952       39       39,490       44       22,810       45       17,719       43  
Home equity
    6,213       9       9,013       11       3,067       12       2,057       10       1,985       10  
Residential real estate
    5,107       3       3,139       4       1,698       3       1,290       3       1,381       3  
Consumer and other
    1,343       1       1,977       1       1,661       2       1,475       2       1,889       2  
Premium finance receivables – commercial
    5,482       13       2,836       9       4,358       16       3,643       16       4,838       18  
Premium finance receivables – life insurance
    837       15       980       14       308       2       29                    
Indirect consumer loans
    526       1       1,368       1       1,690       2       2,900       4       3,019       4  
Covered loans
          3                                                  
 
Total allowance for loan losses
  $ 113,903       100 %   $ 98,277       100 %   $ 69,767       100 %   $ 50,389       100 %   $ 46,055       100 %
 
 
                                                                               
Allowance category as a percent of total allowance:
                                                                               
Commercial
    28 %             29 %             25 %             32 %             33 %        
Commercial real estate
    55               52               57               45               39          
Home equity
    5               9               5               4               4          
Residential real estate
    4               3               2               3               3          
Consumer and other
    1               2               2               3               4          
Premium finance receivables – commercial
    5               3               6               7               10          
Premium finance receivables – life insurance
    1               1               1                                      
Indirect consumer loans
    1               1               2               6               7          
Covered loans
                                                                     
 
Total allowance for loan losses
    100 %             100 %             100 %             100 %             100 %        
 
 
                                                                               
Allowance for losses on lending-related commitments:
                                                                               
Commercial and commercial real estate
  $ 4,134             $ 3,554             $ 1,586             $ 493             $ 457          
 
Total allowance for credit losses
  $ 118,037             $ 101,831             $ 71,353             $ 50,882             $ 46,512          
 
Management has determined that the allowance for loan losses was appropriate at December 31, 2010, 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 the levels of nonperforming loans, the ratio of nonperforming loans to the allowance for credit losses and the 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.

74


Table of Contents

Allowance for Credit Losses
The following tables summarize the activity in our allowance for credit losses during the last five fiscal years.
(Dollars in thousands)
                                         
    2010     2009     2008     2007     2006  
     
Allowance for loan losses at beginning of year
  $ 98,277       69,767       50,389       46,055       40,283  
Provision for credit losses
    124,664       167,932       57,441       14,879       7,057  
Allowance acquired in business combinations
                      362       3,852  
Adjustment for change in accounting for loan securization
    1,943                          
Reclassification from/(to) allowance for lending-related commitments
    (1,301 )     (2,037 )     (1,093 )     (36 )     92  
 
                                       
Charge-offs:
                                       
Commercial
    18,592       35,022       10,066       4,806       3,154  
Commercial real estate
    61,873       89,114       20,403       4,152       1,380  
Home equity
    5,926       4,605       284       289       97  
Residential real estate
    1,143       1,067       1,631       147       81  
Premium finance receivables – commercial
    23,005       8,153       4,073       2,425       2,760  
Premium finance receivables – life insurance
    233                          
Indirect consumer
    967       1,848       1,322       873       584  
Consumer and other
    1,141       644       618       845       421  
     
Total charge-offs
    112,880       140,453       38,397       13,537       8,477  
     
 
                                       
Recoveries:
                                       
Commercial
    1,140       450       299       803       1,273  
Commercial real estate
    914       792       197       929       1,026  
Home equity
    24       815       1       61       31  
Residential real estate
    12                   6       2  
Premium finance receivables – commercial
    781       651       662       514       567  
Premium finance receivables – life insurance
                             
Indirect consumer
    198       179       173       172       191  
Consumer and other
    131       181       95       181       158  
     
Total recoveries
    3,200       3,068       1,427       2,666       3,248  
     
Net charge-offs (excluding covered loans)
    (109,680 )     (137,385 )     (36,970 )     (10,871 )     (5,229 )
Covered loans
                             
     
Net charge-offs
    (109,680 )     (137,385 )     (36,970 )     (10,871 )     (5,229 )
     
Allowance for loan losses at end of year
  $ 113,903       98,277       69,767       50,389       46,055  
Allowance for lending-related commitments at end of year
    4,134       3,554       1,586       493       457  
Allowance for credit losses at end of year
  $ 118,037       101,831       71,353       50,882       46,512  
     
 
                                       
Net charge-offs by category as a percentage of its own respective category’s average:
                                       
Commercial
    0.95 %     2.18 %     0.72 %     0.31 %     0.16 %
Commercial real estate
    1.83       2.59       0.63       0.11       0.01  
Home equity
    0.64       0.41       0.04       0.04       0.01  
Residential real estate
    0.19       0.21       0.49       0.04       0.02  
Premium finance receivables – commercial
    1.74       0.67       0.29       0.15       0.22  
Premium finance receivables – life insurance
    0.02                          
Indirect consumer
    1.09       1.24       0.53       0.28       0.17  
Consumer and other
    0.93       0.35       0.32       0.47       0.19  
     
Total loans, net of unearned income, excluding covered loans
    1.16 %     1.65 %     0.51 %     0.16 %     0.09 %
Covered loans
                             
     
Total loans, net of unearned income
    1.13 %     1.65 %     0.51 %     0.16 %     0.09 %
     
Net charge-offs as a percentage of the provision for credit losses
    87.98 %     81.81 %     64.36 %     73.07 %     74.10 %
 
                                       
Year-end total loans (excluding covered loans)
  $ 9,599,886       8,411,771       7,621,069       6,801,602       6,496,480  
Allowance for loan losses as a percentage of loans at end of year
    1.19 %     1.17 %     0.92 %     0.74 %     0.71 %
Allowance for credit losses as a percentage of loans at end of year
    1.23 %     1.21 %     0.94 %     0.75 %     0.72 %
Year-end total loans (including covered loans)
  $ 9,934,239       8,411,771       7,621,069       6,801,602       6,496,480  
Allowance for loan losses as a percentage of loans at end of year
    1.15 %     1.17 %     0.92 %     0.74 %     0.71 %
Allowance for credit losses as a percentage of loans at end of year
    1.19 %     1.21 %     0.94 %     0.75 %     0.72 %
 

75


Table of Contents

The allowance for credit 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. 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.
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. As part of the Problem Loan Reporting system review, the Company analyzes the loan for purposes of calculating our specific impairment reserves and a general reserve.
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. Any shortfall is recorded as a specific reserve.
General Reserves:
For loans with a credit risk rating of 1 through 7, 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 historical loss experience, 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) categories based on the credit risk rating of the loan, as described above under “Past Due Loans and Non-Performing Assets.” 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.

76


Table of Contents

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 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 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 and Indirect Consumer Loans:
The determination of the appropriate allowance for loan losses for premium finance receivables and indirect consumer loans is based solely on the aging (collection status) of the portfolios. Due to the large number of generally smaller sized and homogenous credits in these portfolios, these loans are not individually assigned a credit risk rating. Loss factors are assigned to each delinquency category in order to calculate an allowance for loan losses. The allowance for loan losses for these categories is entirely a general reserve.
Effects of Economic Recession and Real Estate Market:
The Company’s primary markets, which are mostly in Chicago metropolitan area, have not experienced the same levels of credit deterioration in residential mortgage and home equity loans as certain other major metropolitan markets, such as Miami, Phoenix or Southern California, however the Company’s markets have clearly been under stress. As of December 31, 2010, home equity loans and residential mortgages comprised 9% and 3%, respectively, of the Company’s total loan portfolio. At December 31, 2010 (excluding covered loans), approximately only 2.2% of all of the Company’s residential mortgage loans and approximately only 1.7% of all of the Company’s home equity loans are more than one payment past due. Although there is stress in the Chicago metropolitan and southeastern Wisconsin markets, our portfolios of residential mortgages and home equity loans are performing reasonably well as reflected in the aging of the Company’s loan portfolio table shown earlier in this section.
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 from one of a pre-approved list of independent, third party appraisal firms.
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.

77


Table of Contents

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 may arrive 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, we may utilize values obtained through 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.
Restructured Loans
The table below presents a summary of restructured loans for the respective periods, presented by loan category and accrual status:
(Dollars in thousands)
                 
    December 31,     December 31,  
    2010     2009  
     
Accruing:
               
Commercial
  $ 14,163       10,946  
Commercial real estate
    65,419       20,573  
Residential real estate
    1,562       234  
     
Total accrual
  $ 81,144       31,753  
     
 
               
Non-accrual: (1)
               
Commercial
  $ 3,865        
Commercial real estate
    15,947       679  
Residential real estate
    234        
     
Total non-accrual
  $ 20,046       679  
     
 
               
Total restructured loans:
               
Commercial
  $ 18,028       10,946  
Commercial real estate
    81,366       21,252  
Residential real estate
    1,796       234  
     
Total restructured loans
  $ 101,190       32,432  
     
 
(1)   Included in total non-performing loans.

78


Table of Contents

At December 31, 2010, the Company had $101.2 million in loans with modified terms. The $101.2 million in modified loans represents 129 credit relationships in which economic concessions were granted to certain borrowers to better align the terms of their loans with their current ability to pay. These actions were taken on a case-by-case basis working with these borrowers to find a concession 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 loan interest rate to a rate considered lower than market and other modification of terms including forgiveness of all or 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.
Subsequent to its restructuring, any restructured loan with a below market rate concession that becomes nonaccrual, will remain classified by the Company as a restructured loan for its duration and will be included in the Company’s nonperforming loans. Each restructured loan was reviewed for collateral impairment at December 31, 2010 and approximately $11.3 million of collateral impairment was present and appropriately reserved for through the Company’s normal reserving methodology in the Company’s allowance for loan losses.
Potential Problem Loans
Management believes that any loan where there are serious doubts as to the ability of such borrowers to comply with the present loan repayment terms should be identified as a non-performing loan and should be included in the disclosure of “Past Due Loans and Non-performing Assets.” Accordingly, at the periods presented in this report, the Company has no potential problem loans as defined by SEC regulations.
Loan Concentrations
Loan concentrations are considered to exist when there are amounts loaned to multiple borrowers engaged in similar activities which would cause them to be similarly impacted by economic or other conditions. The Company had no concentrations of loans exceeding 10% of total loans at December 31, 2010, except for loans included in the specialty finance operating segment, which are diversified throughout the United States.
Other Real Estate Owned
The table below presents a summary of other real estate owned, excluding covered other real estate owned, as of December 31, 2010 and shows the activity for the respective periods and the balance for each property type:
(Dollars in thousands)
                 
    Year Ended  
    December 31,     December 31,  
    2010     2009  
     
Balance at beginning of period
  $ 80,163       32,572  
Disposals/resolved
    (63,562 )     (56,000 )
Transfers in at fair value, less costs to sell
    63,615       112,015  
Fair value adjustments
    (9,002 )     (8,424 )
     
Balance at end of period
  $ 71,214       80,163  
     
                 
    Period End  
    December 31,     December 31,  
    2010     2009  
     
Balance by Property Type:
               
Residential real estate
  $ 5,694       5,889  
Residential real estate development
    17,781       41,992  
Commercial real estate
    47,739       32,282  
     
Balance at end of period
  $ 71,214       80,163  
     

79


Table of Contents

Liquidity and Capital Resources
The Company and the banks are subject to various regulatory capital requirements established by the federal banking agencies that take into account risk attributable to balance sheet and off-balance sheet activities. Failure to meet minimum capital requirements can initiate certain mandatory — and possibly discretionary — actions by regulators, that if undertaken could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the banks must meet specific capital guidelines that involve quantitative measures of the Company’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Federal Reserve’s capital guidelines require bank holding companies to maintain a minimum ratio of qualifying total capital to risk-weighted assets of 8.0%, of which at least 4.0% must be in the form of Tier 1 Capital. The Federal Reserve also requires a minimum leverage ratio of Tier 1 Capital to total assets of 3.0% for strong bank holding companies (those rated a composite “1” under the Federal Reserve’s rating system). For all other bank holding companies, the minimum ratio of Tier 1 Capital to total assets is 4.0%. In addition the Federal Reserve continues to consider the Tier 1 leverage ratio in evaluating proposals for expansion or new activities.
The following table summarizes the capital guidelines for bank holding companies, as well as certain ratios relating to the Company’s equity and assets as of December 31, 2010, 2009 and 2008:
                                         
                    Wintrust’s   Wintrust’s   Wintrust’s
            Well   Ratios at   Ratios at   Ratios at
    Minimum   Capitalized   Year-end   Year-end   Year-end
    Ratios   Ratios   2010   2009   2008
 
Tier 1 Leverage Ratio
    4.0 %     5.0 %     10.1 %     9.3 %     10.6 %
Tier 1 Capital to Risk-Weighted Assets
    4.0 %     6.0 %     12.5 %     11.0 %     11.6 %
Total Capital to Risk-Weighted Assets
    8.0 %     10.0 %     13.8 %     12.4 %     13.1 %
Total average equity to total average assets
    N/A       N/A       10.0 %     9.5 %     8.0 %
Dividend payout ratio
    N/A       N/A       17.6 %     12.4 %     47.4 %
 
As reflected in the table, each of the Company’s capital ratios at December 31, 2010, exceeded the well-capitalized ratios established by the Federal Reserve. Refer to Note 20 of the Consolidated Financial Statements for further information on the capital positions of the banks.
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, junior subordinated debentures and additional equity. Refer to Notes 12, 14, 16 and 24 of the Consolidated Financial Statements for further information on the Company’s notes payable, subordinated notes, junior subordinated debentures and shareholders’ equity, respectively. Management is committed to maintaining the Company’s capital levels above the “Well Capitalized” levels established by the Federal Reserve for bank holding companies.
In March 2010, the Company issued through a public offering a total of 6.67 million shares of its common stock at $33.25 per share. Net proceeds to the Company totaled $210.3 million after deducting underwriting discounts and commissions and estimated offering expenses. Additionally, in December 2010, the Company sold 3.66 million shares of common stock at $30.00 per share and 4.6 million 7.50% tangible equity units (“TEU”) at a public offering price of $50.00 per unit. The Company received net proceeds of $104.8 million and $222.7 million from the common stock and TEU, respectively, after deducting underwriting discounts and commissions and estimated offering expenses. Each tangible equity unit is a unit composed of a prepaid stock purchase contract and a junior subordinated amortizing note due December 15, 2013. For additional discussion of these offerings and the terms of the TEUs, see Note 24 — Shareholders’ Equity and Note 15 — Other Borrowings.

80


Table of Contents

On December 22, 2010, the Company repurchased all 250,000 shares of its Series B Preferred Stock, which it issued to the Treasury in December 2008 under the TARP CPP. The Series B Preferred Stock and the accompanying warrant to purchase Wintrust common stock were the only securities sold by the Company to the federal government.
The Company’s Board of Directors approved the first semiannual dividend on the Company’s common stock in January 2000 and has continued to approve semi-annual dividends since that time. The payment of dividends is also subject to statutory restrictions and restrictions arising under the terms of our 8.00% non-cumulative perpetual convertible preferred stock, Series A, the Company’s Trust Preferred Securities offerings, the Company’s 7.5% tangible equity units and under certain financial covenants in the Company’s credit agreement. Under the terms of the Company’s revolving credit facility entered into on October 30, 2009 (and amended on October 29, 2010), the Company is prohibited from paying dividends on any equity interests, including its common stock and preferred stock, if such payments would cause the Company to be in default under its credit facility. Prior to the repurchase of the Series B Preferred Stock, noted above, declarations of dividends were also limited by the terms of Series B Preferred Stock. In January and July 2010, Wintrust declared semi-annual cash dividends of $0.09 per common share, and in January and July 2009, Wintrust declared semi-annual cash dividends of $0.18 and $0.09 per common share, respectively. Taking into account the limitations on the payment of dividends, the final determination of timing, amount and payment of dividends is at the discretion of the Company’s Board of Directors and will depend on the Company’s earnings, financial condition, capital requirements and other relevant factors.
Banking laws impose restrictions upon the amount of dividends that can be paid to the holding company by the banks. Based on these laws, the banks could, subject to minimum capital requirements, declare dividends to the Company without obtaining regulatory approval in an amount not exceeding (a) undivided profits, and (b) the amount of net income reduced by dividends paid for the current and prior two years.
At January 1, 2011, subject to minimum capital requirements at the banks, approximately $69.4 million was available as dividends from the banks without prior regulatory approval and without compromising the banks’ well-capitalized positions.
Since the banks are required to maintain their capital at the well-capitalized level (due to the Company being a financial holding company), funds otherwise available as dividends from the banks are limited to the amount that would not reduce any of the banks’ capital ratios below the well-capitalized level. During 2010, 2009 and 2008 the subsidiaries paid dividends to Win-trust totaling $11.5 million, $100.0 million and $73.2 million, respectively.
Liquidity management at the banks involves planning to meet anticipated funding needs at a reasonable cost. Liquidity management is guided by policies, formulated and monitored by the Company’s senior management and each Bank’s asset/liability committee, which take into account the marketability of assets, the sources and stability of funding and the level of unfunded commitments. The banks’ principal sources of funds are deposits, short-term borrowings and capital contributions from the holding company. In addition, the banks are eligible to borrow under Federal Home Loan Bank advances and certain banks are eligible to borrow at the Federal Reserve Bank Discount Window, another source of liquidity.
Core deposits are the most stable source of liquidity for community banks due to the nature of long-term relationships generally established with depositors and the security of deposit insurance provided by the FDIC. Core deposits are generally defined in the industry as total deposits less time deposits with balances greater than $100,000. Due to the affluent nature of many of the communities that the Company serves, management believes that many of its time deposits with balances in excess of $100,000 are also a stable source of funds. Standard deposit insurance coverage is $250,000 per depositor per insured bank, for each account ownership category. In addition, each of our subsidiary banks elected to participate in the Transaction Account Guarantee Program (TAGP), which provides unlimited FDIC insurance coverage for the entire account balance in exchange for an additional insurance premium to be paid by the depository institution for accounts with balances in excess of the permanent FDIC insurance limit of $250,000. This additional insurance coverage expired on December 31, 2010. Effective on that same date, the Dodd-Frank Act provided unlimited deposit insurance coverage for noninterest-bearing deposits through December 31, 2012. This unlimited insurance coverage is separate from, and in addition to, the insurance coverage provided to a depositor’s other accounts at a bank.

81


Table of Contents

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, and the Company does not consider brokered deposits to be a vital component of its current liquidity resources. For example, as of December 31, 2010, Wintrust had approximately $1.0 billion of cash, overnight funds and interest-bearing deposits with other banks (primarily the Federal Reserve) on its books, but only maintained $639.7 million of brokered deposits. Historically, brokered deposits have represented a small component of the Company’s total deposits outstanding, as set forth in the table below:
(Dollars in thousands)
                                         
    December 31,
    2010   2009   2008   2007   2006
     
Total Deposits
  $ 10,803,673       9,917,074       8,376,750       7,471,441       7,869,240  
Brokered Deposits (1)
    639,687       927,722       800,042       505,069       591,579  
Brokered Deposits as a percentage of Total Deposits (1)
    5.9 %     9.4 %     9.6 %     6.8 %     7.5 %
 
 
(1)   Brokered Deposits include certificates of deposit obtained through deposit brokers, deposits received through the Certificate of Deposit Account Registry Program (“CDARS”), as well as wealth management deposits of brokerage customers from unaffiliated companies which have been placed into deposit accounts of the banks.
The banks routinely accept deposits from a variety of municipal entities. Typically, these municipal entities require that banks pledge marketable securities to collateralize these public deposits. At December 31, 2010 and 2009, the banks had approximately $875.7 million and $865.2 million, respectively, of securities collateralizing public deposits and other short-term borrowings. Public deposits requiring pledged assets are not considered to be core deposits, however they provide the Company with a more reliable, lower cost, short-term funding source than what is available through other wholesale alternatives.
As discussed in Note 6 of the Consolidated Financial Statements, in September 2009, the Company’s subsidiary, FIFC, sponsored a qualifying special-purpose entity (“QSPE”) that issued $600 million in aggregate principal amount of its Notes. The QSPE’s obligations under the Notes are secured by loans made to buyers of property and casualty insurance policies to finance the related premiums payable by the buyers to the insurance companies for the policies. At the time of issuance, the Notes were eligible collateral under TALF and certain investors therefore received non-recourse funding from the New York Fed in order to purchase the Notes. As a result, FIFC believes it received greater proceeds at lower interest rates from the securitization than it otherwise would have received in a non-TALF-eligible transaction.
Other than as discussed in this section, the Company is not aware of any known trends, commitments, events, regulatory recommendations or uncertainties that would have any material adverse effect on the Company’s capital resources, operations or liquidity.

82


Table of Contents

CONTRACTUAL OBLIGATIONS, COMMITMENTS, CONTINGENT LIABILITIES AND OFF-BALANCE SHEET ARRANGEMENTS
The Company has various financial obligations, including contractual obligations and commitments, that may require future cash payments.
Contractual Obligations. The following table presents, as of December 31, 2010, significant fixed and determinable contractual obligations to third parties by payment date. Further discussion of the nature of each obligation is included in the referenced note to the Consolidated Financial Statements:
                                                 
            Payments Due In
    Note     One Year     1-3     3-5     Over        
    Reference     or Less     Years     Years     5 Years     Total  
     
    (dollars in thousands)
Deposits (1)
    11     $ 8,999,553       1,446,484       353,692       3,944       10,803,673  
Notes payable
    12                   1,000             1,000  
FHLB advances (1) (2)
    13             233,500       60,000       130,000       423,500  
Subordinated notes
    14       15,000       25,000       10,000             50,000  
Other borrowings
    15       90,513       770,107                   860,620  
Junior subordinated debentures
    16                         249,493       249,493  
Operating leases
    17       4,066       7,374       5,278       9,850       26,568  
Purchase obligations (3)
            16,509       3,509       121       139       20,278  
 
Total
          $ 9,125,641       2,485,974       430,091       393,426       12,435,132  
 
 
(1)   Excludes basis adjustment for purchase accounting valuations.
 
(2)   Certain advances provide the FHLB with call dates which are not reflected in the above table.
 
(3)   Purchase obligations presented above primarily relate to certain contractual obligations for services related to the construction of facilities, data processing and the outsourcing of certain operational activities.
The Company also enters into derivative contracts under which the Company is required to either receive cash from or pay cash to counterparties depending on changes in interest rates. Derivative contracts are carried at fair value representing the net present value of expected future cash receipts or payments based on market rates as of the balance sheet date. Because the derivative assets and liabilities recorded on the balance sheet at December 31, 2010 do not represent the amounts that may ultimately be paid under these contracts, these assets and liabilities are not included in the table of contractual obligations presented above.
Commitments. The following table presents a summary of the amounts and expected maturities of significant commitments as of December 31, 2010. Further information on these commitments is included in Note 21 of the Consolidated Financial Statements.
                                         
    One Year     1-3     3-5     Over        
    or Less     Years     Years     5 Years     Total  
     
    (dollars in thousands)
Commitment type:
                                       
Commercial, commercial real estate and construction
  $ 1,278,570       480,440       128,032       40,372       1,927,414  
Residential real estate
    303,132                         303,132  
Revolving home equity lines of credit
    829,919                         829,919  
Letters of credit
  &