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2007—Weathering the Perfect Banking Storm
 
What Can Wintrust Do?
Treasury Management
     
  Retail & Wholesale Lockbox
 
   
  On-Line Lockbox (iBusinessPay)
 
   
  On-Line Banking & Reporting (iBusinessBanking)
 
   
  Remote Deposit Capture (iBusinessCapture)
 
   
  Merchant Card Program
 
   
  Payroll Services (CheckMate)
 
   
  ACH & Wire Transfer Services
 
   
  International Banking Services
Commercial Lending
     
  Lending limit of greater than $180 million
 
   
  Commercial & Industrial (Asset Based) Lending
 
   
  Commercial Real Estate, Mortgages & Construction
 
   
  Lines of Credit
 
   
  Letters of Credit
 
   
  Property & Casualty Insurance Premium Financing
 
   
  Life Insurance Financing
Retail Banking
     
  Footprint of 15 chartered banks and 77 facilities
 
   
  Deposit Products
 
   
  Home Equity and Installment Loans
 
   
  Residential Mortgages
Wealth Management
     
  Asset Management (Individual & Institutional)
 
   
  Financial Planning
 
   
  Brokerage
 
   
  Retirement Plans (Business)
 
   
  Trust & Estate Services (Corporate & Personal)
Specialized Financial Services for:
     
  Aircraft Owners
 
   
  Building Management Companies
 
   
  Condominium & Homeowner Associations
 
   
  Insurance Agents & Brokers
 
   
  Municipalities & School Districts
 
   
  Physicians, Dentists and other medical personnel
 
   
  Temporary Staffing & Security Companies
Contents
     
2
  Selected Financial Trends
3
  Selected Financial Highlights
4
  To Our Fellow Shareholders
8
  Overall Financial Performance
  Our Banking and Wealth Management Locations
  Our Other Locations and Our Brands
  Banking Update
  Update on Our Other Companies
  Growth and Earnings Strategies
  Beginning of Financial Review Section
  Management’s Discussion and Analysis
  Consolidated Financial Statements
  Notes to Consolidated Financial Statements
  Reports of Internal Control
  Report of Independent Auditors
  Annual Report on Form 10-K
  Exhibits
  Signatures
  Corporate Locations
  Corporate Information
 Computation of Ratio of Earnings to Fixed Charges
 Subsidiaries
 Consent of Independent Auditors
 Certification of Chief Executive Officer
 Certification of the Chief Financial Officer
 Section 906 Certification
(PHOTO OF BOB KEY)

We have always had a policy of presenting our goals, objectives and financial results in an up front manner to our shareholders. In this annual report, we are confirming our policy of reporting thoroughly the financial results, accounting policies and objectives of Wintrust Financial Corporation and our operating subsidiaries.
 
 

 


Table of Contents

Selected Financial Trends
 
(BAR CHARTS)
Note: M=Million
 
     
2   Wintrust Financial Corporation

 


Table of Contents

Selected Financial Highlights
 
                                         
    Years Ended December 31,  
    2007     2006     2005     2004     2003  
            (dollars in thousands, except per share data)          
Selected Financial Condition Data
(at end of year):
                                       
Total assets
  $ 9,368,859     $ 9,571,852     $ 8,177,042     $ 6,419,048     $ 4,747,398  
Total loans
    6,801,602       6,496,480       5,213,871       4,348,346       3,297,794  
Total deposits
    7,471,441       7,869,240       6,729,434       5,104,734       3,876,621  
Notes payable
    60,700       12,750       1,000       1,000       26,000  
Federal Home Loan Bank advances
    415,183       325,531       349,317       303,501       144,026  
Subordinated notes
    75,000       75,000       50,000       50,000       50,000  
Junior subordinated debentures
    249,662       249,828       230,458       204,489       96,811  
Total shareholders’ equity
    739,555       773,346       627,911       473,912       349,837  
 
                                       
 
Selected Statements of Operations Data:
                                       
Net interest income
  $ 261,550     $ 248,886     $ 216,759     $ 157,824     $ 120,492  
Net revenue (1)
    341,638       340,118       310,316       243,276       193,084  
Net income
    55,653       66,493       67,016       51,334       38,118  
Net income per common share — Basic
    2.31       2.66       2.89       2.49       2.11  
Net income per common share — Diluted
    2.24       2.56       2.75       2.34       1.98  
Cash dividends declared per common share
    0.32       0.28       0.24       0.20       0.16  
 
                                       
 
Selected Financial Ratios and Other Data:
                                       
Performance Ratios:
                                       
Net interest margin
    3.11 %     3.10 %     3.16 %     3.17 %     3.20 %
Core net interest margin(2)
    3.38       3.32       3.37       3.31       3.32  
Non-interest income to average assets
    0.85       1.02       1.23       1.57       1.76  
Non-interest expense to average assets
    2.57       2.56       2.62       2.86       2.98  
Net overhead ratio (3)
    1.72       1.54       1.39       1.30       1.22  
Efficiency ratio (4)
    71.06       66.96       63.97       64.45       63.52  
Return on average assets
    0.59       0.74       0.88       0.94       0.93  
Return on average equity
    7.64       9.47       11.00       13.12       14.36  
         
Average total assets
  $ 9,442,277     $ 8,925,557     $ 7,587,602     $ 5,451,527     $ 4,116,618  
Average total shareholders’ equity
    727,972       701,794       609,167       391,335       265,495  
Ending loan-to-deposit ratio
    91.0 %     82.6 %     77.5 %     85.2 %     85.1 %
Average loans to average deposits ratio
    90.1       82.2       83.4       87.7       86.4  
Average interest earning assets to average interest bearing liabilities
    106.93       107.78       108.83       109.89       109.68  
         
Asset Quality Ratios:
                                       
Non-performing loans to total loans
    1.06 %     0.57 %     0.50 %     0.43 %     0.72 %
Non-performing assets to total assets
    0.81       0.39       0.34       0.29       0.51  
Allowance for credit losses(5) to:
                                       
Total loans
    0.75       0.72       0.78       0.79       0.77  
Non-performing loans
    70.81       126.14       155.69       184.13       107.59  
         
Common Share Data at end of year:
                                       
Market price per common share
  $ 33.13     $ 48.02     $ 54.90     $ 56.96     $ 45.10  
Book value per common share
  $ 31.56     $ 30.38     $ 26.23     $ 21.81     $ 17.43  
Common shares outstanding
    23,430,490       25,457,935       23,940,744       21,728,548       20,066,265  
         
Other Data at end of year:
                                       
Number of:
                                       
Bank subsidiaries
    15       15       13       12       9  
Non-bank subsidiaries
    8       8       10       10       7  
Banking offices
    77       73       62       50       36  
 
 
(1)   Net revenue is net interest income plus non-interest income.
 
(2)   The core net interest margin excludes the effect of the net interest expense associated with the Company’s junior subordinated debentures and the interest expense incurred to fund common stock repurchases.
 
(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 revenues (less securities gains or losses). A lower ratio indicates more efficient revenue generation.
 
(5)   The allowance for credit losses includes both the allowance for loan losses and the allowance for lending-related commitments.
     
 
2007 Annual Report   3

 


Table of Contents

To Our Fellow Shareholders
 
Welcome to Wintrust Financial Corporation’s 2007 annual report. We thank you for being a shareholder.
Market Headwinds
For the first 14 years of Wintrust’s existence, our community bank philosophy and related customer service levels produced a company that enjoyed growth rates substantially above industry standards. We committed the capital and a lot of hard work to take advantage of a banking industry that seemed to be turning its back on providing good old fashioned customer service. However, in 2007, management decided to temporarily suspend historical growth patterns due to a number of environmental factors that limited profitable growth.
As we noted in our 2006 Annual Report, the banking environment was characterized by a disadvantageous inverted yield curve, a loosened lending environment devoid of credit spreads and substantial market liquidity. This resulted in intense price competition. In essence, profitable growth at acceptable risk levels was taken away – a tough occurrence for all banks but especially a growth - oriented bank such as ours. It also seemed apparent that a negative credit cycle was soon to be upon us as we continued to see loan deals get done by many different competitors with what we considered unacceptable underwriting terms.
This seems to be the “perfect storm” that formed throughout the past two years in the banking and financial services industry. The environment has produced strong headwinds for almost everyone in the banking sector.
Our Response and Strategies in Place
Our response to the unfavorable environment was to stay committed to our core loan underwriting standards and not sacrifice our asset quality or pricing standards simply to grow outstanding loan balances and short-term profits. Our sincere belief is that if a bank forsakes credit quality in the short run, it will ultimately give back all of the short-term profits many times over in the form of credit losses down the road. Accordingly, since the marketplace was not allowing for profitable growth within acceptable risk parameters, we made a conscious decision to not commit the Company’s capital to growth that did not produce acceptable returns. Rather, we decided to allocate our capital to growing our younger banks and actually shrinking the larger banks by allowing high cost non-core customer relationships to exit. By slowing the growth, we were able to use excess capital to repurchase common stock – an investment that we think was sound given the alternatives.
Just as it may take sailors slightly longer to get to their destination when facing headwinds, we have not sacrificed our long-term growth for short-term profit strategies. We believe that we are sitting in an advantageous spot due to our strategic measures taken during 2007. We maintained our strict adherence to our high core loan underwriting standards, focused more heavily on deposit pricing discipline, worked to shift our deposit mix to be less dependent on higher cost fixed-rate certificates of deposit (“CDs”), and focused more on expense control.
We say we believe we are in an advantageous spot because we think that those banks that stayed true to their credit underwriting standards over the past few years will not be burdened by troubled loan portfolios going forward. We think we are one of those banks who have kept our “powder dry” to fight the ongoing battle and take advantage of future opportunities.
Wintrust is now positioned to resume its previously successful growth strategies. We believe that 2008 will be a year of opportunities on the lending side of the business as many banks are fighting credit issues. Market liquidity has dried up to a certain extent and there has been much disruption in Chicago banking due to several local bank acquisitions. In fact, at year-end 2007, our loan-to-deposit ratio was north of 90% making us “asset driven” again. Being asset driven allows us to get more aggressive on growing the franchise while also allowing for the sale of excess asset generation to take place thereby augmenting income.
(BANK FACILITIES AND OPERATING SUBSIDIARIES BAR CHART)
Make no mistake, our overall core strategies have remained the same over the years except for this temporary change in tactics. It is our hope that when this credit cycle is over, our investments in the Company’s core strategies
     
 
     
4   Wintrust Financial Corporation

 


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will payoff over the long term with a greater base to generate earnings and increased franchise value to shareholders. We have a resolute interest in growing earnings and our balance sheet for all of our franchises — but only if we can do so in a safe and sound manner.
Credit — Back to Normal
We believe our consistent underwriting standards are geared towards incurring credit losses in the range of 20-30 basis points of average loans which was generally our history from 1991 to 2003. The last few years have been extraordinarily good from a credit loss perspective and our loss ratios have been below the expected range. However, as we have indicated before, we believe the current credit cycle may result in loss ratios closer to pre-2004 levels. In providing you with our best estimates, we are keenly aware that these are uncertain times and no one is larger than the market. The banking business is one where we take measured risks every day through investments in loans and other earning assets. The key is to control the risk and get paid an appropriate amount for taking such risk. We truly believe that we have always maintained consistent underwriting standards that should control risk and limit losses to acceptable levels.
Mortgage Market Turmoil — How We Weathered the Storm
Surely you have all heard or read about the huge problems experienced by the mortgage industry as a whole in 2007. During 2007, our Company originated in excess of $1.9 billion of mortgage loans. We sell the majority of those long-term fixed rate loans to the secondary market in order to reduce interest rate risk. As a condition to selling those loans, we generally retain certain recourse obligations in the event of early payment defaults, misrepresentation of warranties and other matters. As a result of the rapid change in the dynamics of the marketplace, we recorded losses related to those recourse obligations and valuations of mortgages held for sale of approximately $4 million, after-tax. To put this into perspective, this is only about one quarter of one percent of the amount of loans originated. Although we are obviously not pleased with any loss, we do believe it was relatively insignificant compared to the total amount originated during the year. However, we have revised our underwriting standards to limit the exposure to this type of loss in the future. Separately, we are optimistic about the mortgage market in 2008. The lower rate environment that we are currently experiencing should drive more origination volume from customers refinancing their existing mortgages. We continue to add mortgage personnel throughout our banking locations which should help increase mortgage loan production during 2008.
(LINE GRAPH)
Net Interest Margin Challenges
The Company’s net interest margin remained stable in 2007, with an actual uptick of one basis point to 3.11%. Our core net interest margin, which excludes interest expense associated with Wintrust’s junior subordinated debentures and the interest expense incurred to fund common stock repurchases, increased six basis points to 3.38%.
The interest margin challenges faced by all banks in 2007 are well known: loan pricing pressures, rate cuts by the Federal Reserve and a yield curve not quite recovered from its recent inversion. However, the Company took necessary steps to lower its cost of funds with better deposit pricing discipline and rebalancing its deposit mix from higher cost fixed-rate savings vehicles such as CDs to lower rate savings vehicles like money market, savings and NOW accounts. At the same time, industry underwriting and lending terms appear to be returning to the “norm.” The return of credit spreads and sound underwriting standards in the industry should allow us to better compete on a variety of lending opportunities, while still allowing us to be
     
 
     
2007 Annual Report   5

 


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compensated for our time and risk. However, despite some of these encouraging signs, progress made could very well be offset by the margin compression caused by continued rate cuts by the Federal Reserve Bank.
Repurchasing Shares of Common Stock
Beginning in the later half of 2006, the Company began to repurchase its common shares under plans approved by the Board of Directors. Given declining stock price multiples in the banking sector and our decision to slow growth due to unacceptable market conditions, we thought the repurchase of our shares was a sound investment. In total, since the July 2006 Board authorization, we have repurchased approximately 2.8 million shares at an average price under $43 per share. Accordingly, approximately 11% of the common shares of the Company have been repurchased.
In January 2008, the Company authorized the repurchase of up to another one million shares of our common stock. Our decision to continue our share repurchase program demonstrates the Company’s confidence in its long-term growth and commitment towards building shareholder value. Going forward, we will be selective in repurchasing shares while monitoring growth during the year and making sure we maintain sufficient capital to support growth opportunities.
(THE POWER OF WINTRUST ADVERTISEMENT)
Our Newest Addition to the Family
On November 1, 2007, the Company announced the completion of its acquisition of 100% of the ownership interests of Broadway Premium Funding Corporation (“Broadway”). Broadway was founded in 1999 and had approximately $60 million of premium finance receivables outstanding at the date of acquisition. Broadway provides financing for commercial property, casualty and professional insurance premiums, mainly through insurance agents and brokers in the northeastern portion of the United States and California. Broadway, now a subsidiary of the Company’s FIRST Insurance Funding (“FIRST”) premium finance unit, expands the footprint of our commercial premium finance receivables niche and serves a segment of small- to mid-sized businesses not previously covered by FIRST. We welcome the Broadway team to the Wintrust family and are excited about the growth opportunities that exist in their niche of the premium finance market.
The Big Banks and Merger Mania
Over the course of 2007, there were a couple of highly publicized bank mergers that affected the markets where our current banks compete. This creates a beneficial environment for the Company as mergers and acquisitions set money in motion. Suddenly, a client that used to be a big fish in a small pond at one of the acquired institutions sees the pond increase in size comparable to an ocean.
Wintrust is uniquely positioned to capture not only retail customers, but new commercial clients as well. Our philosophy of providing the same or better big bank products, coupled with community bank service we are known for, is ideal for this opportunity. We get back to our bread-and-butter and key differentiator, allowing us to position ourselves as having the best customer service around.
As a result, we have gone on the offensive and begun to use the Wintrust brand for the first time in the commercial banking landscape. This includes advertisements, direct mail and other marketing collateral. We hope you enjoy the many Wintrust
     
 
     
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commercial customers featured in the “Client Profiles” or in the “Clients Having It All’ sections appearing throughout this Annual Report.
Our Key Advantage of Service, Service, Service
As we have continually stated, our key advantage is our people. Our dedicated staff constantly carries forward our mantra of “Service, Service, Service”.
Our decentralized management approach allows senior management at each franchise to manage their company and their employees. These employees are the key to our success. Our clients and customers truly appreciate the unparalleled service that our valued employees provide.
Giving Thanks
As is customary in our letter to shareholders we feel a debt of gratitude and feel some “thank yous” are in order. Let’s start by thanking our leadership teams—our management and directors. Your stewardship and efforts are an important reason for our success. Thank you.
And then let’s thank our employees and welcome those who recently joined our Wintrust team, either from our acquisition of Broadway Premium Funding, or the launch of one of our new bank facilities, or by joining an existing member of our family. As previously mentioned, our dedicated employees provide our clients and customers the best service around. Thank you.
Thanks as well to our shareholders for keeping us focused on what we do best — growing our franchises by delivering products uniquely positioned to meet the financial needs of consumers with the key differentiator of service.
And finally, thank you to our clients and customers — banking, lending, mortgage, wealth management, premium finance, employment agencies — for trusting us to deliver our products and services. Without you, we don’t exist. Thank you.
In Summary
Muhammad Ali coined a phrase that we think is applicable to our current state of mind as a Company. He developed a strategy he called, “Rope-a-Dope,” with the idea to lie on the ropes of a boxing ring, conserve energy and allow the opponent to strike him repeatedly in hopes of making him tire and open up weaknesses to exploit for the inevitable counterattack, which would eventually lead to victory.
We see 2007 as a year of “conserving energy” and are poised to “push off the ropes” with “gloves off” as we hopefully are quick to come out of the current credit cycle and yield environment.
Your continued support of our business is greatly appreciated and we are excited about making 2008 a good year for the Company. Please enjoy the rest of our 2007 Annual Report. We hope to see you at our Annual Meeting, to be held on Thursday, May 22, 2008 at 10:00a.m. It will be held at the Deer Path Inn located at 255 East Illinois Road in Lake Forest, Illinois.
Sincerely,
         
(-s- John S. Lillard)
  (-s- Edward J. Wehmer)   (-s- David A. Dykstra)
John S. Lillard
  Edward J. Wehmer   David A. Dykstra
Chairman
  President &   Senior Executive Vice President &
 
  Chief Executive Officer   Chief Operating Officer
 
       
(PHOTO OF JOHN S. LILLARD)
  (PHOTO OF EDWARD J. WEHMER)   (PHOTO OF DAVID A. DYKSTRA)
     
 
     
2007 Annual Report   7

 


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Overall Financial Performance
 
In 2007, total assets remained relatively unchanged from 2006, and earnings suffered due to a challenging interest rate environment and other market conditions previously discussed. However, the Company did achieve a record level of loans as we surpassed the $6.8 billion mark.
Core Growth
Though growth was not at the level our shareholders have come to expect, our core balance sheet remains strong. Total assets of $9.4 billion were near our 2006 record of $9.6 billion. Furthermore, the Company has doubled in size in a five-year period, which is a substantial achievement, especially in the competitive financial services industry.
Earnings per diluted share decreased to $2.24 in 2007 from $2.56 in 2006. Shareholders’ equity also decreased as a consequence of the repurchase of our common shares. The amount of treasury stock increased substantially from 2006 as the Company continued to repurchase shares, a demonstration of our belief that our stock was undervalued and represented a good investment relative to other investment alternatives. Despite the treasury stock purchases, book value per common share increased by $1.18, or 3.9%, to $31.56.
Net Revenue
Overall net revenue, which includes net interest income and non-interest income, increased 0.4% to $341.6 million. Our net interest margin remained relatively stable at 3.11% in 2007, up one basis point from the prior year, as we continued to face extremely competitive loan and deposit pricing pressures.
Most banking institutions, ours included, have been affected by the inverted yield curve. When long-term interest rates are lower than short-term interest rates, it squeezes the spread between interest earned on our assets and interest paid on liabilities. While the curve has been begun to move toward a “normal” positive-sloping shape, the Federal Reserve Bank’s rate cuts make for a complicated operating environment. Lower interest rates are generally not favorable to community bank organizations because interest spreads get compressed. Rates on lower cost deposits generally can not be lowered as much as the Federal Reserve’s rate cuts. Asset yields, however, are not so constrained. To counteract deposit pricing pressures, the Company has begun to make progress in shifting its mix of retail deposits away from high-rate CDs into lower cost, variable-rate NOW, money market and wealth management deposits.
(TOTAL NET LOANS BAR CHART)
Our other main source of revenue, non-interest income, fell 12.2% in 2007 to $80.1 million. The decrease was primarily attributed to $8.5 million less of trading income recognized on interest rate swaps in 2006 and a decline in mortgage banking revenue of $7.5 million. Offsetting these two large decreases were the BOLI death benefit recorded in the third quarter of 2007, the gain recognized on the Company’s investment in an unaffiliated bank holding company that was acquired by another bank holding company and the gain recognized on the sale of Company owned land.
Asset Quality
At December 31, 2007, non-performing assets were $75.7 million, or 0.81%, of total assets, compared to $37.4 million, or 0.39%, of total assets at December 31, 2006. The increase in non-performing assets is concentrated in three credit relationships. These relationships are being carefully monitored with work-out plans in process.
We believe our consistent underwriting standards are geared towards incurring credit losses in the range of 20-30 basis
Clients Having It All
 
“You have all the parts for our commercial banking needs. By understanding what we are trying to do as a business, you know what needs to get done, and you take care of it quickly for us.”
          — Brian and Greg Panek, Panek Precision
“I switched from my old bank to a Wintrust Community Bank because they provide personal service, they’re always available and — most importantly — they understand the business.”
     — Marc Kresmery, Marc Kresmery Construction LLC
     
 
     
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(NET CHARGE OFFS BAR CHART)
points, which was generally our history from 1991 to 2003. The last few years have been extraordinarily good from a credit loss perspective. As we have indicated before, we believe the current credit cycle may result in loss ratios closer to pre-2004 levels. Both non-performing assets and net charge-offs increased in 2007, but are at levels that are within acceptable operating ranges and are as expected. Sound asset quality has always been a basic operating tenet for us and we are committed to maintaining a good quality loan portfolio. As mentioned earlier, we believe the current credit cycle may result in higher loss ratios in 2008, but hopefully only back to the historical levels we experienced prior to 2004. We believe that the allowance for loan losses is adequate to provide for inherent losses in the portfolio.
Dividend Payouts
In January and July of 2007, our Board of Directors approved semiannual cash dividends of $0.16 per share of outstanding common stock. These dividends were paid in February and August. This annualized cash dividend of $0.32 per share represented a 14% increase over the per share common stock dividends paid during 2006.
And in January 2008, our Board approved a semi-annual cash dividend of $0.18 per share of outstanding common stock. The dividend was paid on February 21, 2008, to shareholders of record as of February 7, 2008. This cash dividend, on an annualized basis, represents a 13% increase over the per share common stock dividends paid during 2007. Following is a historical summary of our increasing dividend distributions:
 
                         
    Diluted   Dividend   Dividend
Year   Earnings   Per Share   Payout Ratio
 
2007
  $ 2.24     $ 0.320       14.3 %
2006
    2.56       0.280       10.9  
2004
    2.75       0.240       8.7  
2003
    2.34       0.200       8.5  
2002
    1.98       0.160       8.1  
2001
    1.60       0.120       7.5  
 
While we have increased our dividend every year since we initiated payment of dividends, we continue to retain the majority of our earnings to fund future growth and to build a strong, long-term franchise. Although the payment of future dividends will be subject to our Board’s periodic review of the financial condition, earnings, and capital requirements of the Company, it is our present intent to continue paying regular semiannual cash dividends.
(TOTAL SHAREHOLDERS' EQUITY BAR CHART)
Clients Having It All
 
“I switched from my old bank because you make banking the way it used to be — I get personal service, even though I am hundreds of miles away. Wintrust is more flexible than the larger banks, with tailored products and services that fit my needs.”
     — John Petrakis, McDonald’s Owner/Operator, Orlando, FL
     
 
     
2007 Annual Report   9

 


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Our Banking and Wealth Management Locations
 
(BANKING AND WEALTH MANAGEMENT LOCATIONS GRAPHIC)
     
 
     
10   Wintrust Financial Corporation

 


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Our Other Locations and Our Brands
 
FIRST Insurance/Broadway Premium Finance, Tricom Funding, and WestAmerica Mortgage Distribution
(OTHER LOCATIONS AND BRANDS GRAPHIC)
Our Bank Brands
(BANK BRANDS GRAPHIC)
Our Other Brands
(OTHER BRANDS GRAPHIC)
     
 
     
2007 Annual Report   11

 


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Banking Update
 
Retail Banking
As we have grown over the years, many wonder how we can stay true to our community banking model. With 15 chartered banks and 77 facilities, it may seem like a challenging task to outsiders. However, our decentralized, multi-chartered approach means that our local leadership teams maintain proper focus on the communities we serve and on our customers.
In 2007, we made a renewed commitment to the customer service experience. We sent mystery shoppers to our retail facilities to gauge how well we are satisfying customer needs and implementing cross-sell initiatives. The shopping results showed that the consistency of the retail experience across our 15 chartered banks is solid, but can always be improved. In a tough interest rate environment where it does not make sense to compete on rates, we believe — more than ever before — that top-notch customer service is our strongest point of differentiation.
Below is a chart of FDIC deposit market share as of June 30, 2007, for each Wintrust main bank zip code.
 
                     
                    Deposit
                    Market
    De Novo   Acquisition   Share
Bank   Opening   Date   Rank
 
  1. Lake Forest Bank
    12/91             1 (out of 10)
  2. Hinsdale Bank
    10/93             2 (out of 14)
  3. North Shore Bank
    9/94             1 (out of 7)
  4. Libertyville Bank
    10/95             1 (out of 9)
  5. Barrington Bank
    12/96             2 (out of 9)
  6. Crystal Lake Bank
    12/97             2 (out of 15)
  7. Northbrook Bank
    11/00             3 (out of 14)
  8. Advantage Bank
            10/03     2 (out of 15)
  9. Village Bank
            12/03     1 (out of 10)
10. Beverly Bank
    4/04             3 (out of 9)
11. Wheaton Bank
            9/04     3 (out of 19)
12. Town Bank
            10/04     1 (out of 5)
13. State Bank
            1/05     1 (out of 8)
14. Old Plank Bank
    3/06             4 (out of 13)
15. St. Charles Bank
            5/06     16 (out of 20)
 
With aggressive marketing, all retail locations are striving increase penetration into their markets and increase market share. The tried-and-true approach is to erode the market share of “big bank” competitors. Bank mergers and acquisitions in the Chicagoland area generally assist us in this task. We are well-positioned as a customer-centric alternative to the big banks in our markets. This positioning is central to our continued retail growth.
Indeed, as the true community banks in our markets, we provide a number of value-added services that the big banks can’t or won’t offer. From community shredding days to credit scoring seminars to events for children via our Junior Savers Club to travel clubs for our senior citizen customers, our banks are clearly more than just a place to make deposits. We are fully invested in the communities we serve, and it doesn’t just stop at the bank level. Our bankers are actively involved in their communities and local organizations, effectively putting community interests first in all they do.
Commercial Banking
In 2006, Wintrust banks enhanced the infrastructure, sales people and products to better enable us to go head–to–head with larger banks. This year proved to be an opportune time for our aggressive rollout and positioning of these services. Big banks were swallowing up the banking leaders in our Chicago bank market. For the first time in our Company’s history we began marketing the Wintrust Financial Corporation name to establish a brand in the commercial banking arena.
Our efforts started with a letter to the top 100 personal banking customers for each individual bank brand that were identified as local businesspersons. The letter introduced Wintrust, but also positioned the bank as locally managed, with local decision making authority. However, we let them in on the fact their local community bank is not just that. Behind their community bank and its superior customer service is a larger financial services company. The response was favorable with many customers surprised and receptive to the news. They know that
Clients Having It All
 
“My Wintrust Bank is easy to do business with, trusting, accommodating and flexible. They have been great to work with and have made business easier by customizing products to fit my company’s specific needs.”
     — Todd Augustine, President, Augustine Custom Homes, Inc., Fox Valley Homebuilders Association
     
 
     
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our community banks develop and foster relationships, both in personal and commercial banking.
Given the favorable response to our initial efforts, the Company followed up with advertising in local and regional business publications. The original advertisements (three of the four can be viewed on page 6) were based upon one of our more historically successful anti-big bank merger advertisements. From July to December, we ran this campaign of four advertisements, followed with direct mail pieces to targeted commercial and small business lists. The response to our commercial banking initiative has been gratifying. We will continue to pursue growth in this area as we truly believe we can competitively offer all the commercial services that our customers need and do so in a more tailored fashion than our large bank competitors.
Wintrust has also developed a few specialty divisions as needs have become apparent within our commercial banking business. Wintrust Commercial Realty Advisors, based out of our Northbrook Bank, provides brokering services to some of our commercial relationships for loans that do no necessarily fit the criteria for our Banks’ loan portfolios. Yet, we maintain the primary relationship and receive fees for this service. Wintrust Government Funds is charged with assisting our Banks in the municipal, school districts and other institutional arenas. Physicians Financial Care, based out of our Barrington and Village Banks, is providing specialized, personal and commercial banking, as well as financial planning needs to doctors in our market areas.
For 2008, Wintrust plans to continue aggressive commercial marketing to further spread our message of community bank service, backed by big bank resources and technology. Our clients “Have It All” and we want prospective clients to know they can too.
(RIDGE PROPERTY TRUST POSTER)
Clients Having It All
 
“At Plastic Bottle Corporation, I’m committed to my customers, employees and vendors. I believe in trust and integrity. I expect that from my bank as well, and that’s what I get from our banking relationship. We mold plastic bottles, you mold relationships. You’ve wanted to understand our business first, and then help with our financial needs. It’s a relationship that works.”
     - Stuart Feen, President, Plastic Bottle Corporation
     
 
     
2007 Annual Report   13

 


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Update on Our Other Companies
 
Wayne Hummer Wealth Management
As one of the oldest and most successful Chicago-based wealth management organizations, Wayne Hummer Wealth Management (“Wayne Hummer”) has more than 170 professionals, over 15,000 clients and approximately $7 billion in client assets under administration. Wayne Hummer marked its fifth year as a Wintrust company in 2007, and it has grown from just two offices to 23 branch locations, mostly in our community banks, in that time.
A provider of comprehensive wealth management services including financial planning, investments, trust services, asset management and insurance, Wayne Hummer has a strong heritage of ethics, integrity, client service and dependability. We offer all the products, technology and capabilities of a national company with the personal service and attention of a boutique wealth management firm.
The strategy of cross-selling Wintrust bank customers our wealth management products and services is working. For 2007, Wayne Hummer’s referral program generated more than 2,400 referrals from over 350 Wintrust bankers. Both clients and our bankers are realizing the benefits of getting a complete array of financial solutions from their hometown bank.
Significant investments have been made in the core business as well. In October 2007, Wayne Hummer moved its headquarters to a new location right above Union Station in downtown Chicago. The move allowed Wayne Hummer to centralize all downtown employees to a single floor, resulting in better servicing of our clients’ needs. We also added 12 net new wealth managers to our stable of professionals.
(WAYNE HUMMER ADVERTISEMENT)
Since the acquisition of the Wayne Hummer Companies in 2002, we have focused on providing smooth integration of all the wealth management units together and into our banking network. We have successfully established one brand image and upgraded the capabilities throughout the wealth management system. The trust arm of the wealth management companies continues to have success in servicing existing customers and attracting new ones. In fact, in 2007, the trust assets under administration surpassed the $1 billion level. Likewise, our brokerage business continues to grow its revenue base after significant investments in state-of-the-art systems and upgraded product offerings. Growth associated with Financial Advisors located in our banking locations is especially promising with most reporting double-digit growth in their brokerage revenue.
The third aspect of the wealth management business is asset management, an area we are targeting for significant future growth. In order to provide for the growth of this important aspect of the business model, it was essential that we supplement our existing talent base to provide the appropriate infrastructure for growth. To that end, in the first quarter of 2008, the ongoing search for additional senior management resulted in the hiring of a new Chief Investment Officer and new Product Head for our asset management division. We are excited about the opportunities that exist in the marketplace and the national recognition and skill set that recent executive hires are bringing to the table. We intend to build a comprehensive array of products to fill out a diversified aggregate portfolio. Our steadfast commitment
     
 
     
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to invest in and grow the asset management business coupled with the rich heritage of the Wayne Hummer franchise should enable us to develop new winning investment strategies for our private clients and institutional investors.
WestAmerica Mortgage Company
In 2007, WestAmerica focused on improving operating efficiencies, boosting service standards and managing every production branch to contribute to overall profitability. This focus was necessary with the mortgage industry in a state of disarray as a result of the widespread issues surrounding sub-prime mortgages. Additionally, warehouse interest spreads were virtually non-existent with the inverted yield curve and, as noted earlier in this report, we had losses associated with certain recourse obligations due primarily to early payment defaults on loans that had been sold into the secondary market.
However, we remain cautiously optimistic that 2008 will bode well for our mortgage operation. The yield curve has improved somewhat in early 2008, which should provide additional margins on loans that we warehouse, pending sale to the secondary market. Also, the overall rate environment has lowered which, if rates stay low, should provide for increased refinancing volumes. Further, recent increases in conventional and government loan limits should help WestAmerica’s business.
We will also continue our ongoing effort to gain further presence in more of our banking facilities. To that end, WestAmerica will boost its presence with lobby signage, point-of-sale displays, and participation in every possible cross-sell opportunity. This should build awareness to over 125,000 Wintrust bank households at a relatively low cost.
(SWEET BABY RAY'S BARBECUE WOOD DALE POSTER)
Clients Having It All
 
“The people at our Wintrust Community Bank raised the comfort level with what we had to do. This was a major project. Everyone made us feel comfortable, from the top down. The bank worked with us and educated us every step of the way. They were knowledgeable, walked us through the process and even did the leg work for us. At the time, no other bank could step up to the plate and deliver. Our bank knew our mission and was very supportive. I would highly recommend it to anyone to pursue a Wintrust Bank for a commercial project like ours. Their communication is excellent, they have superior knowledge of the process, and demonstrate a willingness and passion for getting the job done.”

     — Robert M. Martens, Chief Executive Officer, Family Service & Community Mental Health Center for McHenry County
     
 
     
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(FIRST INSURANCE FUNDING CORP. ADVERTISEMENT)
FIRST Insurance Funding Corp.
The premium finance industry in 2007 faced a second tough year as the volatile interest rate environment and soft insurance market saw premiums drop up to 20% in some markets, reducing loan volume and interest margins. However, unlike many of its competitors who saw a decline in origination volumes due to the soft insurance market, FIRST increased its loan production level slightly to $3.1 billion while it increased its number of loans by almost 10%. The increase in the number of accounts is reflective of the solid reputation that FIRST has in the premium finance arena and the hard work put forth by the team at FIRST. It is important to understand that the expanded customer base positions us well for substantial increases in volumes when the insurance market swings back to higher premium levels.
Like the Wintrust banks, FIRST is also positioning itself as the provider of complete financial solutions. One new product line established by FIRST in 2007 was the financing for life insurance polices tied to high-net-worth estate planning needs.
Additionally, working with our subsidiary bank, Lake Forest Bank, FIRST can provide its independent insurance agency customers with loans for agency perpetuation, acquisitions, equipment, real estate and working capital. Coupled with FIRST’s core premium finance business, its leading edge technology and Lake Forest Bank’s deposit products, FIRST’s customers have access to a full suite of financial tools to help make them more successful in a very competitive market.
The November addition of Broadway Premium Funding Corporation, one of the leaders in premium financing for the small-to middle-market that will continue to run as a separate brand, gives Wintrust access to a segment of smaller and midsized insurance agents not previously covered by FIRST.
As one of the largest premium finance organizations in the country, FIRST and Broadway continue to prove their industry leadership with cutting edge technology and unique products and services.
(TRICOM FUNDING ADVERTISEMENT)
Clients Having It All
 
“The products and services I’ve received from my Wintrust Community Bank really measure up. It is clear that the bank is committed to working with businesses and serving their needs. I get the products available at a large, downtown bank and the personalized service of a small, hometown bank. I’m not just a number here — I’ve become a bigger fish in a smaller pond.”
     — Mark E. Echales, Executive Vice-President & GM, American Building Services
     
 
     
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Tricom Inc. of Milwaukee
The general temporary staffing industry once again saw temperate growth in 2007. This is causing intensified pricing competition among providers of temporary staffing industry financing and back office solutions. Nonetheless, Tricom maintained a net revenue contribution to the Company of approximately $8 million in 2007, and a net income contribution of $1.4 million. Acceptable results considering the significant compression of spreads in the industry.
The strategy of aggressive marketing is working. Juxtaposing Tricom’s strengths against the identified weaknesses of our primary competition is a method being used to generate awareness of the benefits of working with Tricom. In Tricom’s business, the key driver to growth is demonstrating our service levels and capabilities coupled with fair pricing. We think we provide better and more services per dollar of cost than our competitors. As we unbundled the price of combined services and fully disclose our pricing structure, potential customers consistently realize that Tricom really does offer excellent value. We fully intend to build the customer base of this franchise in 2008.
(NSM INSURANCE GROUP POSTER)
Clients Having It All
 
“i-Business Banking, superior customer service and the experienced professionals at my community bank define what’s best to me. I expect a high level commitment from my business partners and that’s what I’m now getting from my bank. You can bet the house on it!”
     — Patrick A. Finn, Custom Homes and Remodeling
“When we partnered with a Wintrust Community Bank, we knew that our decision was as important as choosing the quality products that go into every project we build. We switched from our old bank to a Wintrust Community Bank because they made banking the way it used to be — we get personal service.”
     — Mike & Bob Brenner, Micro Builders
     
 
     
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Growth and Earnings Strategies
 
It is Time For Everyone to Have It All
Almost since our inception, we’ve had the same mantra — “Same or better products as the big banks. Same or better technology as the big banks. Win customers with exceptional service.” Our product offering and technology have always put us on the same playing field as the big-and mega-national banks. What has always differentiated us is service.
Service First
We make fulfilling clients’ needs our top priority, whether in banking, mortgages, wealth management or any of our other businesses. This results in more satisfied customers and higher customer loyalty.
Over the years, we’ve always measured our customers’ level of satisfaction and have been proud of our results. In 2007, we went one step further and began a Mystery Shopping program with our banks. While we confirmed what we always knew, that our banks performed better than our peers, we also learned that there is always room for improvement. This valuable tool now presents us with new opportunities to train our employees and improve our already high level of customer service.
To ensure customer service improvements at our banking facilities, each charter is appointing an Ambassador of Customer Experience, who will make it his or her job to ensure each banking facility is as warm, inviting, attractive, and functional from a customer’s perspective as it possibly can be. In other words, we continue to look for all possible ways to not become complacent with our level of service but rather find ways to always improve upon the most important differentiating aspect of our business.
Proven Recipe for a Strong Franchise
In 2007, we started reminding everyone, customers and non-customers that with Wintrust banks they could in fact “Have It All — Big Bank Resources and Community Bank Service.” This belief has always been at the core of what we do and allowed us to develop a long-term recipe for success:
  1.   Start with a strong base of community banks;
 
  2.   Add a growing commercial banking business;
 
  3.   Fold in expanding wealth management services; and
 
  4.   Top off with asset niches and other income generators.
1. Start with a Strong Base of Community Banks
Wintrust’s 15 bank charters and 77 locations are the backbone of our organization. It is here that we strengthen our relationships, serve our communities and build our business. Nine banks and 56 facilities were de novo launches. The remaining banks and locations have been added via acquisition since 2003. We will continue to add additional branches via de novo launches and perhaps acquisition if the right opportunity presents itself.
Deposit Market Share-Chicago MSA
 
                                 
    At June 30, 2007   At June 30, 2006
    In-market   Deposit   In-market   Deposit
    Deposit   Market   Deposit   Market
Bank Holding Company   Dollars   Share   Dollars   Share
 
1) JP Morgan Chase & Co. *
  $38.9 BB     14.5 %   $40.1 BB     15.3 %
2) ABN AMRO Holding N.V. *
  $34.6 BB     12.9 %   $37.0 BB     14.1 %
3) Bank of Montreal *
  $29.7 BB     11.1 %   $25.6 BB     9.8 %
4) Northern Trust Corporation
  $8.9 BB     3.3 %   $7.3 BB     2.8 %
5) Fifth Third Bancorp *
  $8.4 BB     3.1 %   $8.5 BB     3.2 %
6) Corus Bankshares
  $8.4 BB     3.1 %   $8.2 BB     3.2 %
7) Royal Bank of Scotland Group *
  $7.8 BB     2.9 %   $7.3 BB     2.8 %
8) Citigroup, Inc. *
  $7.6 BB     2.8 %   $7.3 BB     2.6 %
9) Wintrust Financial Corporation
  $7.2 BB     2.7 %   $7.2 BB     2.8 %
 
Source: FDIC website — Summary of Deposits as of June 30, 2007 and June 30, 2006. Market share data is for the Chicago Metropolitan Statistical Area.
* - Corporate Headquarters is out-of-state.
     
 
     
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Since our inception in 1991, we’ve used a proven mix of operating and marketing strategies that allow us to position ourselves differently from the centralized big banks and to better deliver our community bank products and services. Our unique growth strategies include:
Decentralized Management. The management teams at each of our 15 banks ultimately control the fate of their banks. Each has profit responsibilities and the authority to make decisions locally. Our local decision making structure results in more flexibility and customized products to better meet local needs. It also allows better pricing, quicker decisions, more community involvement and customer service more in tune with local customers and businesses. This autonomy lets us attract and retain the best and most entrepreneurial bankers in the area who embrace the responsibility, accountability and the glory.
Local Board and Local Bankers. Each bank is governed by a local board of directors made up of business and community leaders who are influential in the bank’s market. These boards not only bring local oversight, they also supply local contacts and their involvement is required to make our banks real community banks.
We staff our banks with local bankers who are deeply involved and well known in their communities. Their local roots are what make each Wintrust bank a good hometown bank. Though the “Shop Locally” fads often come and go, we know that most people prefer to bank with the professionals and institutions they know. Ultimately, everyone wants to work with local bankers that know them and can better meet their needs.
Local Branding. We not only run our banks locally, we also brand many of our banks and branches after the local communities. The Advantage Bank group is a good example, with its branches also positioned locally as Old Town Bank & Trust of Bloomingdale, Elk Grove Village Bank & Trust and Roselle Bank & Trust.
Aggressive and Creative Marketing. When Wintrust enters a new market, we have a variety of very aggressive introductory marketing programs. These are designed to quickly acquire new customers, expand our customer base and allow us to grow into our overhead and reach profitability quickly.
After our introductory period, our banks continue to be aggressive with marketing to grow household penetration and accounts per household. We do this with targeted direct mail and consistent campaigns that build our distinct community bank positioning. Sometimes, this may take the form of ads that poke fun at the big banks, positioning them as profits-over-service institutions. Other times, it’s simply a matter of defining what community banking is and proving that Wintrust banks live up to that definition.
(FIVESTAR RACECAR BODIES POSTER)
     
 
     
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(ELK GROVE VILLAGE BANK & TRUST ADVERTISEMENT)
2. Add a Growing Commercial Banking Business
Mid-2007 saw a new marketing initiative from Wintrust. For the first time in our history, we started promoting the Wintrust brand to commercial customers. Our “fish” campaign began to promote Wintrust’s complete suite of commercial banking products and superior customer service.
In 2008, we’ll continue this with our “Have It All” campaign. Focusing on customer testimonials, this series of ads and direct mail highlights the complete financial solutions we’ve provided to Wintrust commercial customers, while promoting our key differentiator — service and strong relationships.
As in years past, our key target is middle market commercial and industrial businesses and our primary competition is the larger banks. We have sophisticated treasury management capabilities and technology that are every bit as good as the big banks and the professionals who know how to sell and implement these programs.
The opportunities available to Wintrust in 2008, especially in commercial banking, are almost incalculable. The acquisitions of some competitors and the credit foibles of others have opened up a window that the Wintrust banks can perfectly fit through.
3. Fold in Expanding Wealth Management Services
The wealth management services provided by our three Wayne Hummer companies (Investment, Trust and Asset Management) allow us to be complete financial providers to all Wintrust customers.
We still have an amazing opportunity to grow our investment and trust groups within our community banks. Our Banks are in most of the desirable markets of northeastern Illinois and southern Wisconsin. We will continue to convince our bank customers that we can serve their wealth management needs better than the big-box type, national firms.
Wayne Hummer Asset Management Company is also primed to see real growth in 2008. The appointment of Daniel J. Cardell, CFA, as President and Chief Investment Officer and Todd D. Doersch as Head of Product Management, will enable us to develop new investment strategies for our private clients and institutional investors and be a key step in realizing our vision of becoming the area’s premier money manager.
As in previous years, we will continue increasing the number of Wayne Hummer Wealth Management personnel at our Banks. We are concentrating on opportunities for new wealth management experts that live within our communities, giving them the opportunity, like our bankers, to work in the same communities in which they live.
4. Top Off with Asset Niches and Other Income Generators
One of the things that allows our community banks to be flexible in meeting the needs of customers and not chasing the latest banking fads is Wintrust’s commitment to asset niches and other income generators.
Many community and regional banks have difficulty generating loans from the local consumers and small businesses that exceed 60% of their lending capacity without compromising credit quality. Some overcome this by making questionable loans or following the nationals into questionable sectors.
Clients Having It All
 
“I switched from my old bank to a Wintrust Community Bank because I get personal service from them. They know who I am, and they help me take care of my business.”
     — Vicki Baker, Gifts of Distinction
     
 
     
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Wintrust overcomes this limitation by augmenting our community banks’ loan portfolios with non-traditional earning assets. This improves the profitability of our community banks, gives us additional income to continue to invest in growth, diversifies our loan portfolios and allows the banks to maintain their credit standards. Asset niches allow us to grow the right way, so we never feel compelled to pursue bad credits for the sake of growth.
Wintrust banks and their subsidiaries operate a number of companies that specialize in non-traditional bank lending functions. Non-bank asset niches account for 16.3% of total loans while specialty banking asset niches account for 5.6%.
 
% of Total Loans
         
Non-Bank Asset Niches
       
Premium finance lending (FIRST and Broadway)
    15.9 %
Temporary staffing industry financing (Tricom)
    0.4 %
 
     
 
    16.3 %
 
     
Specialty Banking Asset Niches
       
Indirect consumer (primarily auto lending at Hinsdale Bank)
    3.5 %
Mortgage warehouse lending (Hinsdale Bank)
    0.8 %
Condominium and association lending (Community Advantage- Barrington Bank)
    0.7 %
Small craft aviation lending (NorthAmerican Aviation Finance-Crystal Lake Bank)
    0.6 %
 
     
 
    5.6 %
 
(LOANS PIE CHART)
We also continue to develop fee based services and internal specialties that help Wintrust diversify revenue. This includes not only our wealth management (Wayne Hummer) and residential mortgage (WestAmerica) companies, but also a number of other specialties like commercial mortgage brokerage and municipal services.
Acquisitions
Acquisitions remain an important and viable source of growth for many companies. Since 1999, Wintrust has added a number of banking and other complementary businesses via acquisition. These acquisitions are an important tactic for Wintrust to add key strategic and niche assets, as well as expand into banking locations and markets, creating value for our shareholders.
Banking Acquisitions. Over the past several years, we’ve been contacted by many Midwestern community banks with the goal of merging their community-based bank and branches into the Wintrust family. This year has not been any different. While we entertained several proposals, there were no opportunities that brought the necessary value to Wintrust.
It is our goal to continue to add new banks in attractive markets, either on a de novo basis or by acquisition, always taking into account business sense and shareholder value. Our bank acquisitions have proved successful in the past and have grown deposits, assets, and market share.
Other Acquisitions. We also continue to evaluate non-banking opportunities. These include wealth management and asset or fee income generators. Adding these types of companies will diversify our earning assets and fee-based income businesses to supplement and diversify Wintrust’s revenue stream.
(IMPACT OF ACQUISITIONS ON TOTAL ASSETS BY YEAR)
     
 
     
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(VALLEY FIRE PROTECTIONS SYSTEM POSTER)
     
 
     
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Beginning of Financial Review Section
 
Now that you have read some of the highlights for the Company in the year 2007, take a closer look at the full story of our financial performance in the remaining pages of our Annual Report.
Contents of Financial Review Section
     
Page 24
  Management’s Discussion and Analysis
Page 58
  Consolidated Financial Statements
Page 62
  Notes to Consolidated Financial Statements
Page 95
  Reports of Internal Control
Page 97
  Report of Independent Auditors
Page 98
  Annual Report on Form 10-K
Page 124
  Exhibits
Page 127
  Signatures
Page 128
  Corporate Locations
Page 132
  Corporate Information
     
 
     
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Management’s Discussion and Analysis
 
FORWARD-LOOKING STATEMENTS
This document and the documents incorporated by reference herein contain forward-looking statements within the meaning of federal securities laws. Forward-looking information in this document can be identified through the use of words such as “may,” “will,” “intend,” “plan,” “project,” “expect,” “anticipate,” “should,” “would,” “believe,” “estimate,” “contemplate,” “possible,” and “point.” Forward-looking statements and information are not historical facts, are premised on many factors, 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 115 of this Report. 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 projected growth, anticipated improvements in earnings, earnings per share and other financial performance measures, and management’s long-term performance goals, as well as statements relating to the anticipated effects on financial results of condition from expected developments or events, the Company’s business and growth strategies, including anticipated internal growth, plans to form additional de novo banks and to open new branch offices, and to pursue additional potential development or acquisitions of banks, wealth management entities or specialty finance businesses. Actual results could differ materially from those addressed in the forward-looking statements as a result of numerous factors, including the following:
    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).
 
    Changes in the interest rate environment, which may influence, among other things, the growth of loans and deposits, the quality of the Company’s loan portfolio, the pricing of loans and deposits and interest income.
 
    The extent of defaults and losses on our loan portfolio.
 
    Unexpected difficulties or unanticipated developments related to the Company’s strategy of de novo bank formations and openings. De novo banks typically require 13 to 24 months of operations before becoming profitable, due to the impact of organizational and overhead expenses, the startup phase of generating deposits and the time lag typically involved in redeploying deposits into attractively priced loans and other higher yielding earning assets.
 
    The ability of the Company to obtain liquidity and income from the sale of premium finance receivables in the future and the unique collection and delinquency risks associated with such loans.
 
    Failure to identify and complete acquisitions in the future or unexpected difficulties or unanticipated developments related to the integration of acquired entities with the Company.
 
    Legislative or regulatory changes or actions, or significant litigation involving the Company.
 
    Changes in general economic conditions in the markets in which the Company operates.
 
    The ability of the Company to receive dividends from its subsidiaries.
 
    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.
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. Wintrust does not undertake any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Persons are advised, however, to consult any further disclosures management makes on related subjects in its reports filed with the Securities and Exchange Commission (“SEC”) and in its press releases.
The Company undertakes no obligation to release revisions to these forward-looking statements or reflect events or circumstances after the date of this Annual Report.
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, 2007. 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 report.
 
         
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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
    2007   2006   2005   2006 to 2007   2005 to 2006
     
Net income
  $ 55,653     $ 66,493     $ 67,016       (16)%       (1)%  
Net income per common share — Diluted
  $ 2.24     $ 2.56     $ 2.75       (13)%       (7)%  
Net revenue (1)
  $ 341,638     $ 340,118     $ 310,316       – %       10%  
Net interest income
  $ 261,550     $ 248,886     $ 216,759       5 %       15%  
Net interest margin (5)
    3.11 %     3.10 %     3.16 %     1 bp     (6)bp
Core net interest margin(2)(5)
    3.38 %     3.32 %     3.37 %     6 bp     (5)bp
Net overhead ratio (3)
    1.72 %     1.54 %     1.39 %   18 bp    15 bp
Efficiency ratio(4)(5)
    71.06 %     66.96 %     63.97 %        410 bp        299 bp
Return on average assets
    0.59 %     0.74 %     0.88 %         (15)bp         (14)bp
Return on average equity
    7.64 %     9.47 %     11.00 %       (183)bp       (153)bp
 
                                       
At end of period:
                                       
Total assets
  $ 9,368,859     $ 9,571,852     $ 8,177,042       (2)%       17%  
Total loans
  $ 6,801,602     $ 6,496,480     $ 5,213,871       5%       25%  
Total deposits
  $ 7,471,441     $ 7,869,240     $ 6,729,434       (5)%     17%  
Total equity
  $ 739,555     $ 773,346     $ 627,911       (4)%       23%  
Book value per common share
  $ 31.56     $ 30.38     $ 26.23       4%       16%  
Market price per common share
  $ 33.13     $ 48.02     $ 54.90       (31)%       (13)%  
Common shares outstanding
    23,430,490       25,457,935       23,940,744       (8)%       6%  
 
(1)   Net revenue is net interest income plus non-interest income.
 
(2)   Core net interest margin excludes the effect of the net interest expense associated with Wintrust’s junior subordinated debentures and the interest expense incurred to fund common stock repurchases.
 
(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.
 
(5)   See “Non-GAAP Financial Measures/Ratios” for additional information on this performance measure/ratio.
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.
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), core net interest margin 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.
 
 
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Management also evaluates the net interest margin excluding the interest expense associated with the Company’s junior subordinated debentures and the interest expense incurred to fund common stock repurchases (“Core Net Interest Margin”). Because junior subordinated debentures are utilized by the Company primarily as capital instruments and the cost incurred to fund common stock repurchases is capital utilization related, management finds it useful to view the net interest margin excluding these expenses and deems it to be a more meaningful view of the operational net interest margin of the Company.
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 years ended December 31, 2007, 2006 and 2005 (dollars in thousands):
                         
 
    Years Ended
    December 31,
    2007   2006   2005
     
(A) Interest income (GAAP)
  $ 611,557     $ 557,945     $ 407,036  
Taxable-equivalent adjustment
                       
- Loans
    826       409       531  
- Liquidity management assets
    2,388       1,195       777  
- Other earning assets
    13       17       19  
     
Interest income — FTE
  $ 614,784     $ 559,566     $ 408,363  
(B) Interest expense (GAAP)
    350,007       309,059       190,277  
     
Net interest income — FTE
  $ 264,777     $ 250,507     $ 218,086  
     
(C) Net interest income (GAAP) (A minus B)
  $ 261,550     $ 248,886     $ 216,759  
Net interest income — FTE
  $ 264,777     $ 250,507     $ 218,086  
Add: Interest expense on junior subordinated debentures and interest cost incurred for common stock repurchases(1)
    23,170       17,838       14,672  
     
Core net interest income — FTE(2)
  $ 287,947     $ 268,345     $ 232,758  
     
(D) Net interest margin (GAAP)
    3.07%       3.07%       3.14%  
Net interest margin — FTE
    3.11%       3.10%       3.16%  
Core net interest margin — FTE(2)
    3.38%       3.32%       3.37%  
(E) Efficiency ratio (GAAP)
    71.74%       67.28%       64.25%  
Efficiency ratio — FTE
    71.06%       66.96%       63.97%  
 
(1)   Interest expense from the junior subordinated debentures is net of the interest income on the Common Securities owned by the Trusts and included in interest income. Interest cost incurred for common stock repurchases is estimated using current period average rates on certain debt obligations.
 
(2)   Core net interest income and core net interest margin are by definition a non-GAAP measure/ratio. The GAAP equivalents are the net interest income and net interest margin determined in accordance with GAAP (lines C and D in the table).
OVERVIEW AND STRATEGY
Wintrust is a financial holding company, providing traditional community banking services as well as a full array of wealth management services. The Company has grown rapidly since its inception and its Banks have been among the fastest growing community-oriented de novo banking operations in Illinois and the country. As of December 31, 2007, the Company operated 15 community-oriented bank subsidiaries (the “Banks”) with 77 banking locations. During 2007, the Company acquired a premium finance company and opened five new bank branches. During 2006, the Company acquired one bank with five locations, opened its ninth de novo bank and opened five new branches. However, the Company temporarily curtailed balance sheet growth trends in 2007 given the interest rate and credit environments. Additionally, the historical financial performance of the Company has been affected by costs associated with growing market share in deposits and loans, establishing new banks and opening new branch facilities, and building an experienced management team. The Company’s experience has been that it generally takes 13-24 months for new banking offices to first achieve operational profitability.
Management’s ongoing focus is to balance further asset growth with earnings growth by seeking to fully leverage the existing capacity within each of the Banks and non-bank subsidiaries. One aspect of this strategy is to continue to pursue specialized lending or earning asset niches in order to maintain the mix of earning assets in higher-yielding loans as well as diversify the loan portfolio. Another aspect of this strategy is a continued focus on less aggressive deposit pricing at the Banks with significant market share and more established customer bases.
Wintrust also provides a full range of wealth management services through its trust, asset management and broker-dealer subsidiaries.
 
         
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De Novo Bank Formations, Branch Openings and Acquisitions
The Company developed its community banking franchise through the formation of nine de novo banks, the opening of branch offices of the Banks and acquisitions. Following is a summary of the expansion of the Company’s banking franchise through newly chartered banks, new branching locations and acquisitions over the last three years.
2007 Banking Expansion Activity
Opened the following branch locations
  Hoffman Estates, Illinois, a branch of Barrington Bank
 
  Hartland, Wisconsin, a branch of Town Bank
 
  Bloomingdale, Illinois, a branch of Advantage Bank
 
  Island Lake, Illinois, a branch of Libertyville Bank
 
  North Chicago, Illinois, a branch of Lake Forest Bank
Closed the following branch location
  Glen Ellyn Bank, temporary facility opened in 2005, a branch of Wheaton Bank
2006 Banking Expansion Activity
Opened the Company’s ninth de novo bank
  Old Plank Trail Bank in Frankfort, Illinois
Opened the following branch locations
  St. Charles, Illinois, a branch of St. Charles Bank
 
  Algonquin Bank & Trust, a branch of Crystal Lake Bank
 
  Mokena, Illinois, a branch of Old Plank Trail Bank
 
  Elm Grove, Wisconsin, a branch of Town Bank
 
  New Lenox, Illinois, a branch of Old Plank Trail Bank
Acquired the following banks
  Hinsbrook Bank with locations in Willowbrook, Downers Grove, Glen Ellyn, Darien and Geneva
2005 Banking Expansion Activity
Opened the following branch locations
  Wales, Wisconsin, a branch of Town Bank
 
  Glen Ellyn Bank, a branch of Wheaton Bank
 
  West Northbrook, a branch of Northbrook Bank
 
  Lake Bluff — drive through facility added to existing banking office; a branch of Lake Forest Bank
 
  Northwest Highway in Barrington, a branch of Barrington Bank
 
  Palatine Bank & Trust, a branch of Barrington Bank Acquired the following banks
 
  State Bank of The Lakes with locations in Antioch, Lindenhurst, Grayslake, Spring Grove and McHenry
 
  First Northwest Bank with two locations in Arlington Heights
Closed the following branch location
  Wayne Hummer Bank, a branch of North Shore Bank
Earning Asset, Wealth Management
and Other Business Niches
As previously mentioned, the Company continues to pursue specialized earning asset and business niches in order to maximize the Company’s revenue stream as well as diversify its loan portfolio. A summary of the Company’s more significant earning asset niches and non-bank operating subsidiaries follows.
Wayne Hummer Investments LLC (“WHI”), a registered broker-dealer, provides a full-range of investment products and services tailored to meet the specific needs of individual and institutional investors throughout the country, primarily in the Midwest. In addition, WHI provides a full range of investment services to clients through a network of relationships with community-based financial institutions located primarily in Illinois. Although headquartered in Chicago, WHI also operates an office in Appleton, Wisconsin that opened in 1936 and serves the greater Appleton area. As of December 31, 2007, WHI had branch locations in offices in a majority of the Company’s fifteen banks. WHI had approximately $5.6 billion in client assets at December 31, 2007.
Wayne Hummer Asset Management (“WHAMC”), a registered investment advisor, is the investment advisory affiliate of WHI. WHAMC provides money management, financial planning and investment advisory services to individuals and institutional, municipal and tax-exempt organizations. WHAMC also provides portfolio management and financial supervision for a wide-range of pension and profit sharing plans. At December 31, 2007, assets under management totaled approximately $541 million.
Wayne Hummer Trust Company (“WHTC”) was formed to offer trust and investment management services to all communities served by the Banks. In addition to offering trust services to existing bank customers at each of the Banks, the Company believes WHTC can successfully compete for trust business by targeting small to mid-size businesses and affluent individuals whose needs command the personalized attention offered by WHTC’s experienced trust professionals. Services offered by WHTC typically include traditional trust products and services, as well as investment management services. Assets under administration by WHTC as of December 31, 2007 were approximately $1.0 billion.
 
 
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First Insurance Funding Corp. (“FIFC”) is the Company’s most significant specialized earning asset niche, originating approximately $3.1 billion in loan (premium finance receivables) volume during 2007. 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 may be more susceptible to third party fraud, however no material third party fraud has occurred since the third quarter of 2000. The majority of these loans are purchased by the Banks in order to more fully utilize their lending capacity, and these loans generally provide the Banks with higher yields than alternative investments. However, excess FIFC originations over the capacity to retain such loans within the Banks’ loan portfolios may be sold to an unrelated third party with servicing retained.
Additionally, in 2007, FIFC began to make loans to irrevocable life insurance trusts to purchase life insurance policies for high net-worth individuals. The loans are originated through independent insurance agents or financial advisors and legal counsel. The life insurance policy is the primary collateral on the loan and, in most cases, the loans are also secured by a letter of credit.
On November 1, 2007, the Company acquired Broadway Premium Funding Corporation (“Broadway”). Broadway is a commercial finance company that specializes in financing insurance premiums for corporate entities. Its products are marketed through insurance agents and brokers to their small to mid-size corporate clients. Broadway is headquartered in New York City and services clients primarily in the northeastern United States and California. Broadway is a subsidiary of FIFC.
SGB Corporation d/b/a WestAmerica Mortgage Company (“WestAmerica”) engages primarily in the origination and purchase of residential mortgages for sale into the secondary market. WestAmerica’s affiliate Guardian Real Estate Services, Inc. (“Guardian”) provides the document preparation and other loan closing services to West America and its network of mortgage brokers. West America sells its loans with servicing released and does not currently engage in servicing loans for others. WestAmerica maintains principal origination offices in nine states, including Illinois, and originates loans in other states through wholesale and correspondent offices. WestAmerica provides the Banks with the ability to use an enhanced loan origination and documentation system which allows WestAmerica and each Bank to better utilize existing operational capacity and expand the mortgage products offered to the Banks’ customers. WestAmerica’s production of adjustable rate mortgage loans may be retained by the Banks in their loan portfolios, resulting in additional earning assets to the combined organization, thus adding further desired diversification to the Company’s earning asset base.
Tricom, Inc (“Tricom”) is a company that has been in business since 1989 and specializes in providing high-yielding, short-term accounts receivable financing and value-added out-sourced administrative services, such as data processing of payrolls, billing and cash management services to clients in the temporary staffing industry. Tricom’s clients, located throughout the United States, provide staffing services to businesses in diversified industries. These receivables may involve greater credit risks than generally associated with the loan portfolios of more traditional community banks depending on the marketability of the collateral. The principal sources of repayments on the receivables are payments received by the borrowers from their customers who are located throughout the United States. Tricom mitigates this risk by employing lockboxes and other cash management techniques to protect its interests. Tricom’s revenue principally consists of interest income from financing activities and fee-based revenues from administrative services. Tricom processed payrolls with associated client billings of approximately $467 million in 2007 and $531 million in 2006.
In addition to the earning asset niches provided by the Company’s non-bank subsidiaries, several earning asset niches operate within the Banks, including indirect auto lending which is conducted through Hinsdale Bank, and Barrington Bank’s Community Advantage program that provides lending, deposit and cash management services to condominium, homeowner and community associations. In addition, Hinsdale Bank operates a mortgage warehouse lending program that provides loan and deposit services to mortgage brokerage companies located predominantly in the Chicago metropolitan area, and Crystal Lake Bank has a specialty in small aircraft lending. The Company continues to pursue the development or acquisition of other specialty lending businesses that generate assets suitable for bank investment and/or secondary market sales.
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. These estimates, assumptions and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements could reflect different estimates, assumptions, and judgments. Certain policies and accounting principles inher-
 

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ently have a greater reliance on the use of estimates, assumptions and judgments and as such have a greater possibility of producing results that could be materially different than originally reported. 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. Carrying assets and liabilities at fair value inherently results in more financial statement volatility. The fair values and the information used to record valuation adjustments for certain assets and liabilities are based either on quoted market prices or are provided by other third-party sources, when available. When third party information is not available, valuation adjustments are estimated in good faith by management primarily through the use of internal cash flow modeling techniques.
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 the determination of the allowance for loan losses and the allowance for losses on lending-related commitments, the valuation of the retained interest in the premium finance receivables sold, the valuations required for impairment testing of goodwill, the valuation and accounting for derivative instruments and income taxes as the accounting areas that require the most subjective and complex judgments, and as such could be the most subject to revision as new information becomes available.
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. Management has established credit committees at each of the Banks that evaluate the credit quality of the loan portfolio and the level of the adequacy of the allowance for loan losses and the allowance for lending-related commitments. 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.
Sales of Premium Finance Receivables
The gains on the sale of premium finance receivables are determined based on management’s estimates of the underlying future cash flows of the loans sold. Cash flow projections are used to allocate the Company’s initial investment in a loan between the loan, the servicing asset and the Company’s retained interest, including its guarantee obligation, based on their relative fair values. Gains or losses are recognized for the difference between the proceeds received and the cost basis allocated to the loan. The Company’s retained interest includes a servicing asset, an interest only strip and a guarantee obligation pursuant to the terms of the sale agreement. The estimates of future cash flows from the underlying loans incorporate assumptions for prepayments, late payments and other factors. The Company’s guarantee obligation is estimated based on the historical loss experience and credit risk factors of the loans. If actual cash flows from the underlying loans are less than originally anticipated, the Company’s retained interest may be impaired, and such impairment would be recorded as a charge to earnings. Because the terms of the loans sold are less than ten months, the estimation of the cash flows is inherently easier to monitor than if the assets had longer durations, such as mortgage loans. See Note 1 to the Consolidated Financial Statements and the section titled “Non-interest Income” later in this report for further analysis of the gains on sale of premium finance receivables.
Impairment Testing of Goodwill
As required by Statement of Financial Accounting Standards (“SFAS”) 142, “Goodwill and Other Intangible Assets,” 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 primarily through the use of publicly available valuations of comparable entities for the Company’s bank subsidiaries and internal cash flow models using financial projections in the reporting unit’s business plan, if public valuations are not available for the Company’s non-bank entities.
 

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Valuation and Accounting for 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.
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.
On January 1, 2007, the Company adopted FASB Interpretation No. 48 (“FIN 48”) which clarifies the accounting for income taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on dere-cognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. The adoption of FIN 48 did not have a material impact on the Company.
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 77 offices at the end of 2007. FIFC has matured from its limited operations in 1991 to a company that generated, on a national basis, $3.1 billion in premium finance receivables in 2007. 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 our existing Banks become more profitable, the start-up costs associated with future bank and branch openings and other new financial services ventures will not have as significant an impact on earnings. Additionally, the Company’s more mature Banks have several operating ratios that are either comparable to or better than peer group data, suggesting that as the Banks become more established, the overall earnings level will continue to increase.
Earnings Summary
Net income for the year ended December 31, 2007, totaled $55.7 million, or $2.24 per diluted common share, compared to $66.5 million, or $2.56 per diluted common share, in 2006, and $67.0 million, or $2.75 per diluted common share, in 2005. During 2007, net income declined by 16% while earnings per diluted common share declined by 13%, and during 2006, net income remained essentially the same, decreasing 1%, while earnings per diluted common share decreased 7%. Financial results in 2007 were negatively impacted by a continued compression of interest rate spreads, an increase in provision for credit losses, lower levels of mortgage banking revenue and a reduced level of trading income. Financial results in 2006 were negatively impacted by the adoption of SFAS 123R (stock option expense), compressed interest spreads, a decrease in fees from covered call options, lower levels of mortgage banking revenue and lower sales of premium finance receivables, and was positively impacted by the fair value adjustments related to certain derivatives.
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 earn-
 

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ing 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 2007 totaled $264.8 million, up from $250.5 million in 2006 and $218.1 million in 2005, representing increases of $14.3 million, or 6%, in 2007 and $32.4 million, or 15%, in 2006. These improved levels of net interest income were primarily attributable to increases in average earning assets. 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 2007 and 2006. Average earning assets increased $426.5 million, or 5%, in 2007 and $1.2 billion, or 17%, in 2006. 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 increased $811.5 million, or 14%, in 2007 and $875.4 million, or 17%, in 2006. Total average loans as a percentage of total average earning assets were 80%, 74% and 75% in 2007, 2006, and 2005, respectively. The average yield on loans was 7.71% in 2007, 7.60% in 2006 and 6.54% in 2005, reflecting an increase of 11 basis points in 2007 and an increase of 106 basis points in 2006. The higher loan yield in 2007 compared to 2006 is a result of the higher average rate environment in the first three quarters of 2007. The higher loan yield in 2006 compared to 2005 is reflective of the interest rate increases effected by the Federal Reserve Bank offset by continued competitive loan pricing pressures. Similarly, the average rate paid on interest bearing deposits, the largest component of the Company’s interest bearing liabilities, was 4.26% in 2007, 3.97% in 2006 and 2.80% in 2005, representing an increase of 29 basis points in 2007 and an increase of 117 basis points in 2006. The interest bearing deposits yield increased in 2007 due to higher costs of retail deposits as rates have generally risen in 2007, continued competitive pricing pressures on fixed-maturity time deposits in most markets and promotional pricing activities associated with opening additional de novo branches.
Net interest margin, which reflects net interest income as a per-cent of average earning assets, remained relatively flat at 3.11% in 2007 compared to 3.10% in 2006. During 2007, the Company’s focus on retail deposit pricing and changing the mix of deposits has helped offset the competitive pricing of retail certificates of deposit. The Company has made progress in shifting its mix of retail deposits away from certificates of deposit into lower cost, more variable rate NOW, money market and wealth management deposits. Net interest margin in 2005 was 3.16%.
The core net interest margin was 3.38% in 2007, 3.32% in 2006 and 3.37% in 2005. Management evaluates the core net interest margin excluding the net interest expense associated with the Company’s junior subordinated debentures and the interest expense incurred to fund common stock repurchases. Because junior subordinated debentures are utilized by the Company primarily as capital instruments and the cost incurred to fund common stock repurchases is capital utilization related, management finds it useful to view the net interest margin excluding these expenses and deems them to be a more accurate view of the operational net interest margin of the Company. See Non-GAAP Financial Measures/Ratios section of this report.
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 purchase 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. See Note 7 of the Consolidated Financial Statements for further discussion of the Company’s business combinations.
 

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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, 2007, 2006 and 2005. 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 and do not have a material effect on the average yield. 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,
    2007   2006   2005
                    Average                   Average                   Average
    Average           Yield/   Average           Yield/   Average           Yield/
    Balance(1)   Interest   Rate   Balance(1)   Interest   Rate   Balance(1)   Interest   Rate
     
Assets
                                                                       
Interest bearing deposits with banks
  $ 14,036     $ 841       5.99 %   $ 13,361     $ 651       4.87 %   $ 9,003     $ 278       3.10 %
Securities
    1,588,542       81,790       5.15       1,930,662       94,593       4.90       1,627,523       67,333       4.14  
Federal funds sold and securities purchased under resale agreements
    72,141       3,774       5.23       110,775       5,393       4.87       102,199       3,485       3.41  
     
Total liquidity management assets(2) (8)
    1,674,719       86,405       5.16       2,054,798       100,637       4.90       1,738,725       71,096       4.09  
     
Other earning assets(2) (3)
    24,721       1,943       7.86       29,675       2,136       7.20       23,644       1,345       5.69  
Loans, net of unearned income(2) (4) (8)
    6,824,880       526,436       7.71       6,013,344       456,793       7.60       5,137,912       335,922       6.54  
     
Total earning assets(8)
    8,524,320       614,784       7.21       8,097,817       559,566       6.91       6,900,281       408,363       5.92  
     
Allowance for loan losses
    (48,605 )                     (44,648 )                     (40,566 )                
Cash and due from banks
    131,271                       125,253                       138,253                  
Other assets
    835,291                       747,135                       589,634                  
     
Total assets
  $ 9,442,277                     $ 8,925,557                     $ 7,587,602                  
 
 
                                                                       
Liabilities and Shareholders’ Equity
                                                                       
Deposits — interest bearing:
                                                                       
NOW accounts
  $ 938,960     $ 25,033       2.67 %   $ 774,481     $ 19,548       2.52 %   $ 699,323     $ 11,973       1.71 %
Wealth management deposits
    547,408       24,871       4.54       464,438       20,456       4.40       407,816       10,181       2.50  
Money market accounts
    696,760       22,427       3.22       639,590       17,497       2.74       657,788       11,071       1.68  
Savings accounts
    302,339       4,504       1.49       307,142       4,275       1.39       298,468       2,629       0.88  
Time deposits
    4,442,469       218,079       4.91       4,509,488       203,953       4.52       3,507,771       120,398       3.43  
     
Total interest bearing deposits
    6,927,936       294,914       4.26       6,695,139       265,729       3.97       5,571,166       156,252       2.80  
     
 
                                                                       
Federal Home Loan Bank advances
    400,552       17,558       4.38       364,149       14,675       4.03       333,108       11,912       3.58  
Notes payable and other borrowings
    318,540       13,794       4.33       149,764       5,638       3.76       167,930       4,178       2.49  
Subordinated notes
    75,000       5,181       6.81       66,742       4,695       6.94       50,000       2,829       5.66  
Junior subordinated debentures
    249,739       18,560       7.33       237,249       18,322       7.62       217,983       15,106       6.93  
     
Total interest bearing liabilities
    7,971,767       350,007       4.39       7,513,043       309,059       4.11       6,340,187       190,277       3.00  
     
 
                                                                       
Non-interest bearing deposits
    647,715                       623,542                       592,879                  
Other liabilities
    94,823                       87,178                       45,369                  
Equity
    727,972                       701,794                       609,167                  
     
Total liabilities and shareholders’ equity
  $ 9,442,277                     $ 8,925,557                     $ 7,587,602                  
 
Interest rate spread(5) (8)
                    2.82 %                     2.80 %                     2.92 %
Net free funds/contribution (6)
  $ 552,553               0.29 %   $ 584,774               0.30 %   $ 560,094               0.24 %
Net interest income/Net interest margin (8)
          $ 264,777       3.11 %           $ 250,507       3.10 %           $ 218,086       3.16 %
Core net interest margin(7) (8)
                    3.38 %                     3.32 %                     3.37 %
 
(1)   Average balances were generally computed using daily balances.
 
(2)   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 reflected in the above table are $3.2 million, $1.6 million and $1.3 million in 2007, 2006 and 2005 respectively.
 
(3)   Other earning assets include brokerage customer receivables and trading account securities.
 
(4)   Loans, net of unearned income, include mortgages held-for-sale and non-accrual loans.
 
(5)   Interest rate spread is the difference between the yield earned on earning assets and the rate paid on interest-bearing liabilities.
 
(6)   Net free funds are the difference between total average earning assets and total average interest-bearing liabilities. The estimated contribution to net interest margin from net free funds is calculated using the rate paid for total interest-bearing liabilities.
 
(7)   The core net interest margin excludes the effect of the net interest expense associated with Wintrust’s junior subordinated debentures and the interest expense incurred to fund common stock repurchases.
 
(8)   See “Non-GAAP Financial Measures/Ratios” for additional information on this performance measure/ratio.
 

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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,
    2007 Compared to 2006   2006 Compared to 2005
    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
  $ 156       34       190     $ 202       171       373  
Securities
    4,633       (17,436 )     (12,803 )     13,536       13,724       27,260  
Federal funds sold and securities purchased under resale agreement
    375       (1,994 )     (1,619 )     1,595       313       1,908  
     
Total liquidity management assets
    5,164       (19,396 )     (14,232 )     15,333       14,208       29,541  
     
Other earning assets
    185       (378 )     (193 )     404       387       791  
Loans
    6,749       62,894       69,643       58,934       61,937       120,871  
     
Total interest income
    12,098       43,120       55,218       74,671       76,532       151,203  
     
Interest expense:
                                               
Deposits — interest bearing:
                                               
NOW accounts
    1,199       4,286       5,485       5,437       2,138       7,575  
Wealth management deposits
    667       3,748       4,415       8,690       1,585       10,275  
Money market accounts
    3,266       1,664       4,930       6,742       (316 )     6,426  
Savings accounts
    296       (67 )     229       1,567       79       1,646  
Time deposits
    17,220       (3,094 )     14,126       51,354       32,201       83,555  
     
Total interest expense — deposits
    22,648       6,537       29,185       73,790       35,687       109,477  
     
Federal Home Loan Bank advances
    1,340       1,543       2,883       1,587       1,176       2,763  
Notes payable and other borrowings
    966       7,190       8,156       2,849       (1,389 )     1,460  
Subordinated notes
    (86 )     572       486       786       1,080       1,866  
Junior subordinated debentures
    (699 )     937       238       1,822       1,394       3,216  
     
Total interest expense
    24,169       16,779       40,948       80,834       37,948       118,782  
     
Net interest income
  $ (12,071 )     26,341       14,270     $ (6,163 )     38,584       32,421  
 
The changes in net interest income are created by changes in both interest rates and volumes. The change in the Company’s net interest income for the periods under review was predominantly impacted by the growth in the volume of the overall interest-earning assets (specifically loans) and interest-bearing deposit liabilities. 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.
Provision for Credit Losses
The provision for credit losses totaled $14.9 million in 2007, $7.1 million in 2006, and $6.7 million in 2005. Net charge-offs totaled $10.9 million in 2007, $5.2 million in 2006 and $4.9 million in 2005. The allowance for loan losses as a percentage of loans at December 31, 2007, 2006 and 2005 was 0.74%, 0.71% and 0.77%, respectively. Non-performing loans were $71.9 million and $36.9 million at December 31, 2007 and 2006, respectively. The increase in non-performing loans in 2007 as compared to 2006 was primarily the result of $32.3 million related to three credit relationships. See the “Credit Risk and Asset Quality” section of this report for more detail on non-performing loans. In 2007, the Company reclassified $36,000 from its allowance for loan losses to a separate liability account which represents the portion of the allowance for loan losses that was associated with lending-related commitments, specifically unfunded loan commitments and letters of credit. In 2006, the Company reclassified $92,000 from the allowance for lending-relating commitments to its allowance for loan losses. In future periods, the provision for credit losses may contain both a component related to funded loans (provision for loan losses) and a component related to lending-related commitments (provision for unfunded loan commitments and letters of credit). Management believes the allowance for loan losses is adequate to provide for inherent losses in the port-
 
 
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folio. There can be no assurances however, that future losses will not exceed the amounts provided for, thereby affecting future results of operations. The amount of future additions to the allowance for loan losses and the allowance for lending-related commitments will be dependent upon management’s assessment of the adequacy of the allowance based on its evaluation of economic conditions, changes in real estate values, interest rates, the regulatory environment, the level of past-due and non-performing loans, and other factors. Please refer to the “Credit Risk and Asset Quality” section of this report for further discussion of the Company’s loan loss experience and non-performing assets.
Non-interest Income
Non-interest income totaled $80.1 million in 2007, $91.2 million in 2006 and $93.6 million in 2005, reflecting a decrease of 12% in 2007 compared to 2006, and a decrease of 3% in 2006 compared to 2005. Non-interest income as a percentage of net revenue declined to 23% in 2007 compared to 27% in 2006 and 30% in 2005. The decline in non-interest income in 2007 compared to 2006 is attributable to lower levels of trading income recognized on interest rate swaps and mortgage banking valuation and recourse obligation adjustments in 2007 and the $2.4 million gain on the sale of the Wayne Hummer Growth Fund in 2006 offset by higher levels of gains on available-for-sale securities and higher wealth managment fees. The following table presents non-interest income by category for 2007, 2006 and 2005 (in thousands):
                                                         
 
    Years ended December 31,   2007 compared to 2006   2006 compared to 2005
    2007   2006   2005   $ Change   % Change   $ Change   % Change
     
Brokerage
  $ 20,346       19,615       20,154     $ 731       4 %   $ (539 )     (3 )%
Trust and asset management
    10,995       12,105       9,854       (1,110 )     (9 )     2,251       23  
     
Total wealth management fees
    31,341       31,720       30,008       (379 )     (1 )     1,712       6  
Mortgage banking
    14,888       22,341       25,913       (7,453 )     (33 )     (3,572 )     (14 )
Service charges on deposit accounts
    8,386       7,146       5,983       1,240       17       1,163       19  
Gain on sales of premium finance receivables
    2,040       2,883       6,499       (843 )     (29 )     (3,616 )     (56 )
Administrative services
    4,006       4,598       4,539       (592 )     (13 )     59       1  
Gains on available-for-sale securities, net
    2,997       17       1,063       2,980     NM     (1,046 )     (98 )
Other:
                                                       
Fees from covered call options
    2,628       3,157       11,434       (529 )     (17 )     (8,277 )     (72 )
Trading income — net cash settlement of swaps
          1,237       440       (1,237 )   NM     797       181  
Trading income (loss) — change in fair market value
    265       7,514       (1,339 )     (7,249 )     (97 )     8,853       661  
Bank Owned Life Insurance
    4,909       2,948       2,431       1,961       67       517       21  
Miscellaneous
    8,628       7,671       6,586       957       13       1,085       17  
     
Total other
    16,430       22,527       19,552       (6,097 )     (27 )     2,975       15  
     
Total non-interest income
  $ 80,088       91,232       93,557     $ (11,144 )     (12 )%   $ (2,325 )     (3 )%
 
NM   — Not Meaningful
Wealth management is comprised of the trust and asset management revenue of WHTC and the asset management fees, brokerage commissions, trading commissions and insurance product commissions generated by the Wayne Hummer Companies. Trust and asset management fees represent WHTC’s trust fees which include fees earned on assets under management, custody fees and other trust related fees and WHAMC’s fees for advisory services to individuals and institutions, municipal and tax-exempt organizations, including the management of the Wayne Hummer proprietary mutual funds. The brokerage income is generated by WHI, the Company’s broker-dealer subsidiary.
Brokerage revenue is directly impacted by trading volumes. In 2007, brokerage revenue totaled $20.3 million, reflecting an increase of $731,000, or 4%, compared to 2006. The Company anticipates continued recognition of revenue enhancement capabilities and continued growth of the wealth management platform throughout its banking locations. In 2006, brokerage revenue totaled $19.6 million reflecting a decrease of $539,000, or 3%, compared to 2005.
Trust and asset management revenue totaled $11.0 million in 2007, a decrease of $1.1 million, or 9%, compared to 2006. The Wayne Hummer Growth Fund, which was managed by WHAMC and had total assets of $162 million at December 31, 2005, was sold during the first quarter of 2006 for a gain of $2.4 million which is included in this category. In 2006, trust and asset management fees totaled $12.1 million and increased $2.3 million, or 23%, compared to 2005. This increase is attributable to the $2.4 million gain
 
         
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recorded in 2006 on the sale of the Wayne Hummer Growth Fund. Trust and asset management fees are based primarily on the market value of the assets under management or administration. Trust assets and assets under management totaled $1.6 billion at December 31, 2007, $1.4 billion at December 31, 2006 and $1.6 billion at December 31, 2005.
Mortgage banking includes revenue from activities related to originating, selling and servicing residential real estate loans for the secondary market. Mortgage banking revenue totaled $14.9 million in 2007, $22.3 million in 2006, and $25.9 million in 2005, reflecting a decrease of $7.4 million, or 33%, in 2007, and $3.6 million, or 14%, in 2006. In 2007, the Company recorded $4.2 million in losses related to recourse obligations on residential mortgage loans sold to investors. These losses primarily related to mortgages originated through wholesale channels which experienced early payment defaults. Also, in 2007 compared to 2006, the Company recorded an additional $1.8 million in lower of cost or market adjustments for residential mortgage loans held-for-sale. The remainder of the decrease in mortgage banking is a result of lower origination volumes in 2007 compared to 2006. Future growth of mortgage banking is impacted by the interest rate environment and will continue to be dependent upon the relative level of long-term interest rates. A continuation of the existing depressed residential real estate environment may continue to hamper mortgage banking production growth. Effective January 1, 2006, the Company adopted the provisions of SFAS 156 and elected the fair value measurement method for mortgage servicing rights (“MSRs”). Prior to January 1, 2006, MSRs were accounted for at the lower of their initial carrying value, net of accumulated amortization, or fair value. Included in the 2007 mortgage banking revenue decrease is $125,000 of MSR valuation adjustment (additional expense) compared to 2006. Included in the 2006 mortgage banking revenue decrease is $514,000 of MSR valuation adjustment compared to 2005 amortization expense.
Service charges on deposit accounts totaled $8.4 million in 2007, $7.1 million in 2006 and $6.0 million in 2005. These increases of 17% in 2007 and 19% in 2006, were due primarily to the overall larger household account base. The majority of deposit service charges relates to customary fees on overdrawn accounts and returned items. The level of service charges received is substantially below peer group levels, as management believes in the philosophy of providing high quality service without encumbering that service with numerous activity charges.
Gain on sales of premium finance receivables results from the Company’s sales of premium finance receivables to unrelated third parties. However, from the third quarter of 2006 to the third quarter of 2007, all of the receivables originated by FIFC were purchased by the Banks to more fully utilize their lending capacity. In the fourth quarter of 2007, due to the Company’s average loan-to-average deposit ratio being consistently above the target of 85% to 90%, the Company reinstated its program of selling premium finance receivables, with servicing retained, to unrelated third parties. Having a program in place to sell premium finance receivables to third parties allows the Company to execute its strategy to be asset-driven while providing the benefits of additional sources of liquidity and revenue. The level of premium finance receivables sold to unrelated third parties depends in large part on the capacity of the Banks to retain such loans in their portfolio and therefore, it is possible that sales of these receivables may occur in the future.
Loans sold to unrelated third parties totaled $230 million in 2007, $303 million in 2006 and $562 million in 2005, representing 8%, 10% and 21% of FIFC’s total originations in 2007, 2006 and 2005, respectively. The Company recognized net gains totaling $2.0 million in 2007, $2.9 million in 2006 and $6.5 million in 2005 related to this activity.
As FIFC continues to service the loans sold, it recognizes a retained interest in the loans sold which consists of a servicing asset, interest only strip and a recourse obligation, upon each sale. Recognized gains, recorded in accordance with SFAS 140, as well as the Company’s retained interests in these loans are based on the Company’s projection of cash flows that will be generated from the loans. The cash flow model incorporates the amounts FIFC is contractually entitled to receive from the customer, including an estimate of late fees, the amounts due to the purchaser of the loans, fees paid to insurance agents as well as estimates of the term of the loans and credit losses. Significant differences in actual cash flows and the projected cash flows can cause impairment to the servicing asset and interest only strip as well as the recourse obligation. The Company monitors the performance of these loans on a “static pool” basis and adjusts the assumptions in its cash flow model when warranted. These loans have relatively short maturities (less than 12 months) and prepayments are not highly correlated to movements in interest rates. Due to the short-term nature of these loans, the Company believes that the book value of the servicing asset approximates fair value.
The Company capitalized $2.0 million and amortized $590,000 in servicing assets related to the sale of these loans in 2007, and capitalized $2.8 million and amortized $4.7 million in servicing assets related to sale of these loans in 2006. As of December 31, 2007, the Company’s retained interest in the loans sold included a servicing asset of $1.9 million, an interest only strip of $2.6 million and a liability for its recourse obligation of $179,000.
Gains are significantly dependent on the spread between the net yield on the loans sold and the rate passed on to the purchasers. The net yield on the loans sold and the rates passed on to the purchasers typically do not react in a parallel fashion, therefore causing the spreads to vary from period to period. This spread was 3.70% in 2007, compared to 2.62% to 3.24% in 2006 and 2.71% to 3.74% in 2005.
 
 
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The Company typically makes a clean up call by repurchasing the remaining loans in the pools sold after approximately ten months from the sale date. Upon repurchase, the loans are recorded in the Company’s premium finance receivables portfolio and any remaining balance of the Company’s retained interest is recorded as an adjustment to the gain on sale of premium finance receivables. Clean-up calls resulted in increased gains of $444,000, $761,000, and $248,000 in 2007, 2006 and 2005, respectively. The Company continuously monitors the performance of the loan pools to the projections and adjusts the assumptions in its cash flow model when warranted. Credit losses on loans sold were estimated at 0.20% of the estimated average balances in 2007, at 0.15% for 2006 and at a range of 0.15% to 0.25% for 2005. The gains are also influenced by the number of months these loans are estimated to be outstanding. The estimated average terms of the loans were nine months in 2007 and in 2006, and eight to nine months in 2005. The applicable discount rate used in determining gains related to this activity was the same in 2007, 2006 and 2005.
At December 31, 2007 and 2006, premium finance loans sold and serviced for others for which the Company retains a recourse obligation related to credit losses totaled approximately $219.9 million and $58.3 million, respectively. The remaining estimated recourse obligation carried in other liabilities was approximately $179,000 and $129,000, at December 31, 2007 and 2006, respectively. Credit losses incurred on loans sold are applied against the recourse obligation liability that is established at the date of sale. Credit losses, net of recoveries, for premium finance receivables sold and serviced for others totaled $129,000 in 2007, $191,000 in 2006 and $269,000 in 2005. At December 31, 2007, non-performing loans related to this sold portfolio were approximately $180,000, or less than 1% of the sold loans, compared to $3.5 million, or 6%, of the sold loans at December 31, 2006. The premium finance portfolio owned by the Company had a ratio of non-performing loans to total loans of 1.80% at December 31, 2007 and 1.07% at December 31, 2006. Ultimate losses on premium finance loans are substantially less than non-performing loans for the reasons noted in the “Non-performing Premium Finance Receivables” portion of the “Credit Risk and Asset Quality” section of this report.
Administrative services revenue generated by Tricom was $4.0 million in 2007, $4.6 million in 2006 and $4.5 million in 2005. 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. The decrease in revenue in 2007 compared to 2006 is a result of slower growth in new customer relationships and a decrease in revenue from existing clients. In 2006 compared to 2005, Tricom increased sales volumes with its current client base, however experienced competitive rate pressures.
Gains on available-for-sale securities totaled $3.0 million in 2007, $17,000 in 2006 and $1.1 million in 2005. Included in gains in 2007 was a $2.5 million gain recognized in the fourth quarter of 2007 on the Company’s investment in an unaffiliated bank holding company that was acquired by another bank holding company.
Premium income from covered call option transactions totaled $2.6 million in 2007, $3.2 million in 2006 and $11.4 million in 2005. The higher fees from covered call options in 2005 was due to the mix in the types of underlying securities and the volatility in the marketplace that resulted in higher premiums for the options.
During 2007, call option contracts were written against $1.1 billion of underlying securities, compared to $1.6 billion in 2006 and $3.3 billion in 2005. The same security may be included in this total more than once to the extent that multiple call option contracts were written against it if the initial call option contracts were not exercised. The Company routinely writes call options with terms of less than three months against certain U.S. Treasury and agency securities held in its portfolio for liquidity and other purposes. Management enters into these transactions with the goal of enhancing its overall return on its investment portfolio by using the 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 SFAS 133. There were no outstanding call option contracts at December 31, 2007 or December 31, 2006.
The Company recognized trading income related to interest rate swaps not designated in hedge relationships and the trading account assets of its broker-dealer. Trading income recognized for the net cash settlement of swaps is income that would have been recognized regardless of whether the swaps were designated in hedging relationships. However, in the absence of hedge accounting, the net cash settlement of the swaps is included in trading income rather than net interest income. Trading income totaled $265,000 in 2007 and $8.8 million in 2006, compared to a loss of $0.9 million in 2005. At June 30, 2006, the Company had $231.1 million of interest rate swaps that were initially documented at their inception dates as being in hedging relationships with the Company’s variable rate junior subordinated debentures and subordinated notes, but subsequently, management determined that the hedge documentation did not meet the standards of SFAS 133. In July 2006, the Company settled its position in these interest rate swap contracts by selling them
 
         
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to third parties. The Company realized approximately $5.8 million from the settlement of these swaps and eliminated any further earnings volatility due to the changes in fair values.
Bank Owned Life Insurance (“BOLI”) generated non-interest income of $4.9 million in 2007, $2.9 million in 2006 and $2.4 million in 2005. This income typically represents adjustments to the cash surrender value of BOLI policies; however in the third quarter of 2007, the Company recorded a non-taxable $1.4 million death benefit gain. 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 purchased additional BOLI since then, including $8.9 million of BOLI that was owned by State Bank of the Lakes and $8.4 million owned by Hinsbrook Bank when Wintrust acquired these banks. BOLI totaled $84.7 million at December 31, 2007 and $82.1 million at December 31, 2006, and is included in other assets.
Miscellaneous other non-interest income includes loan servicing fees, service charges, rental income from equipment leases and miscellaneous other income. In 2007, the Company recognized a $2.6 million gain from the sale of property held by the Company, which was partially offset by $1.4 million of losses recognized on various limited partnership investments. Approximately $1.0 million of these partnership losses relate to a low income housing tax credit investment which generates tax credits that are recorded directly to income tax expense. The increase in 2006 compared to 2005 is as a result of growth in the Company’s balance sheet.
Non-interest Expense
Non-interest expense totaled $242.9 million in 2007, and increased $14.1 million, or 6%, compared to 2006. In 2006, non-interest expense totaled $228.8 million, and increased $30.1 million, or 15%, compared to 2005. The non-interest expense categories increased as a result of acquisitions in 2005, 2006 and 2007, the new branch locations opened and the new de novo bank opened at the end of the first quarter of 2006. In 2007, Wintrust added five locations that added to all categories of non-interest expense.
The following table presents non-interest expense by category for 2007, 2006 and 2005 (in thousands):
                                                         
 
    Years ended December 31,   2007 compared to 2006   2006 compared to 2005
    2007   2006   2005   $ Change   % Change   $ Change   % Change
     
Salaries and employee benefits
  $ 141,816       137,008       118,071     $ 4,808       4 %   $ 18,937       16 %
Equipment
    15,363       13,529       11,779       1,834       14       1,750       15  
Occupancy, net
    21,987       19,807       16,176       2,180       11       3,631       22  
Data processing
    10,420       8,493       7,129       1,927       23       1,364       19  
Advertising and marketing
    5,318       5,074       4,970       244       5       104       2  
Professional fees
    7,090       6,172       5,609       918       15       563       10  
Amortization of other intangible assets
    3,861       3,938       3,394       (77 )     (2 )     544       16  
Other:
                                                       
Commissions — 3rd party brokers
    3,854       3,842       3,823       12             19       1  
Postage
    3,841       3,940       3,665       (99 )     (3 )     275       8  
Stationery and supplies
    3,159       3,233       3,262       (74 )     (2 )     (29 )     (1 )
FDIC Insurance
    3,713       911       926       2,802       308       (15 )     (2 )
Miscellaneous
    22,513       22,873       19,886       (360 )     (2 )     2,987       15  
     
Total other
    37,080       34,799       31,562       2,281       7       3,237       10  
     
Total non-interest expense
  $ 242,935       228,820       198,690     $ 14,115       6 %   $ 30,130       15 %
 
Wintrust’s net overhead ratio, which is non-interest expense less non-interest income as a percent of total average assets, was 1.72% in 2007, 1.54% in 2006 and 1.39% in 2005. This ratio has steadily increased the past few years as the Company has increased staff levels to accommodate new facilities and growth at existing facilities, while non-interest income from mortgage banking and fees generated from covered call options have slowed over the past few years.
Salaries and employee benefits is the largest component of non-interest expense, accounting for 58% of the total in 2007, 60% of the total in 2006 and 59% in 2005. For the year ended December 31, 2007, salaries and employee benefits totaled $141.8 million and increased $4.8 million, or 4% compared to 2006. Base pay components and the impact of the Hinsbrook and Broadway acquisitions contributed to the majority of the increase in 2007 compared to 2006. The increase in 2006 compared to 2005 is comprised of fixed and variable compensation components increasing $10.9 million, the adoption of SFAS 123(R) increasing costs by $5.6 million and
 
 
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total benefits increasing $2.4 million. See Note 18 of the Consolidated Financial Statements for further information on SFAS 123(R). For the year ended December 31, 2006, salaries and employee benefits totaled $137.0 million, and increased $18.9 million, or 16%, compared to 2005.
Equipment expense, which includes furniture, equipment and computer software depreciation and repairs and maintenance costs, totaled $15.4 million in 2007, $13.5 million in 2006 and $11.8 million in 2005, reflecting increases of 14% in 2007 and 15% in 2006. These increases were caused by higher levels of expense related to the furniture, equipment and computer software required at new facilities and at existing facilities due to increased staffing.
Occupancy expense for the years 2007, 2006 and 2005 was $22.0 million, $19.8 million and $16.2 million, respectively, reflecting increases of 11% in 2007 and 22% in 2006. Occupancy expense includes depreciation on premises, real estate taxes, utilities and maintenance of premises, as well as net rent expense for leased premises. Increases in 2007 and 2006 reflect the increases in the number of facilities operated as well as market increases in operating costs of such facilities.
Data processing expenses totaled $10.4 million in 2007, $8.5 million in 2006 and $7.1 million in 2005, representing increases of 23% in 2007 and 19% in 2006. The increases are primarily due to the additional costs of acquired banks, new branch facilities at existing banks and the overall growth of loan accounts.
Advertising and marketing expenses totaled $5.3 million for 2007, $5.1 million for 2006 and $5.0 million for 2005. Marketing costs are necessary to attract loans and deposits at the newly chartered banks, to announce new branch openings as well as the expansion of the wealth management business, to continue to promote community-based products at the more established locations and, in 2007, to promote the Company’s commercial banking capabilities. 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 targeted marketing programs in the more mature market areas.
Professional fees include legal, audit and tax fees, external loan review costs and normal regulatory exam assessments. These fees totaled $7.1 million in 2007, $6.2 million in 2006 and $5.6 million in 2005. The increase for 2007 is primarily related to increased legal costs related to non-performing loans. The increase for 2006 is attributable to the general growth in the Company’s total assets, the expansion of the banking franchise and the acquisition of Hinsbrook Bank.
Amortization of other intangibles assets relates to the amortization of core deposit premiums and customer list intangibles established in connection with the application of SFAS 142 to business combinations. See Note 8 of the Consolidated Financial Statements for further information on these intangible assets.
Commissions paid to 3rd party brokers primarily represent the commissions paid on revenue generated by WHI through its network of unaffiliated banks.
FDIC insurance totaled $3.7 million in 2007 and $0.9 million in both 2006 and 2005. The significant increase in 2007 is a result of a higher rate structure imposed on all financial institutions beginning in 2007.
Miscellaneous non-interest expense includes ATM expenses, correspondent banking charges, directors’ fees, telephone, travel and entertainment, corporate insurance and dues and subscriptions. These expenses represent a large collection of controllable daily operating expenses. This category decreased $0.4 million, or 2%, in 2007 and increased $3.0 million, or 15%, in 2006. The decrease in 2007 compared to 2006 reflects management’s continued efforts to control daily operating expenses. The increase in 2006 compared to 2005 is in line with increases in the other non-interest expense categories for that period and reflects the growth in the Company’s balance sheet.
Income Taxes
The Company recorded income tax expense of $28.2 million in 2007, $37.7 million in 2006 and $37.9 million in 2005. The effective tax rates were 33.6%, 36.2% and 36.1% in 2007, 2006 and 2005, respectively. Please refer to Note 17 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.
Operating Segment Results
As described in Note 24 to the Consolidated Financial Statements, the Company’s operations consist of four primary segments: banking, premium finance, Tricom 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 banking segment. The net interest income of the banking segment includes income and related interest costs from portfolio loans that were purchased from the premium finance segment. For purposes of internal segment profitability analysis, management reviews the results of its premium finance segment as if all loans originated and sold to the banking segment were retained within that segment’s operations. Similarly, for purposes of analyzing the contribution from the wealth management segment, management allocates the net interest income earned by the banking segment on deposit balances of customers of the wealth management segment to the wealth management segment.
 
         
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The banking segment’s net interest income for the year ended December 31, 2007 totaled $259.0 million as compared to $235.2 million for the same period in 2006, an increase of $23.8 million, or 10%. The increase in net interest income for 2006 when compared to the total of $211.7 million in 2005 was $23.5 million, or 11%. The increase in 2007 compared to 2006 is primarily a result of an increase in net interest margin which was attributable to a higher loan-to-deposit ratio and the shift in deposits away from higher cost retail certificates of deposit in 2007. The increase in 2006 compared to 2005 was primarily the result of continued growth in the loan portfolio partially offset by the effect of a decrease in net interest margin. Total loans increased 8% in 2007 and 22% in 2006. Provision for credit losses increased to $14.3 million in 2007 compared to $6.3 million in 2006 and $6.5 million in 2005. The banking segment’s non-interest income totaled $36.3 million in 2007, a decrease of $4.3 million, or 11%, when compared to the 2006 total of $40.6 million. The decrease in non-interest income in 2007 is primarily a result of lower mortgage banking revenues which were impacted by mortgage banking valuation and recourse obligation adjustments totaling $6.0 million. In 2006, non-interest income for the banking segment decreased $10.4 million, or 20% when compared to the 2005 total of $51.0 million. The decrease in 2006 compared to 2005 is primarily a result of a lower level of fees from covered call options and lower mortgage banking revenues. The banking segment’s net income for the year ended December 31, 2007 totaled $62.3 million, an increase of $1.2 million, or 2%, as compared to the 2006 total of $61.1 million. Net income for the year ended December 31, 2006 decreased $8.3 million, or 12%, as compared to the 2005 total of $69.4 million.
The premium finance segment’s net interest income totaled $60.5 million for the year ended December 31, 2007 and increased $18.1 million, or 43%, over the $42.4 million in 2006. This increase was primarily the result of $275 million of higher average levels of premium finance receivables compared to 2006. In November 2007, the Company completed the acquisition of Broadway Premium Funding Corporation which is now included in the premium finance segment results since the date of acquisition. Wintrust did not sell any premium finance receivables to an unrelated third party financial institution in the third and fourth quarters of 2006 or the first three quarters of 2007. The premium finance segment’s non-interest income totaled $2.0 million, $2.9 million and $6.5 million for the years ended December 31, 2007, 2006 and 2005, respectively. Non-interest income for this segment reflects the gains from the sale of premium finance receivables to an unrelated third party, as more fully discussed in the Consolidated Results of Operations section. Net after-tax profit of the premium finance segment totaled $29.8 million, $19.6 million and $21.7 million for the years ended December 31, 2007, 2006 and 2005, respectively. New receivable originations totaled $3.1 billion in 2007, $3.0 billion in 2006 and $2.7 billion in 2005. The increases in new volumes each year is indicative of this segment’s ability to increase market penetration in existing markets and establish a presence in new markets.
The Tricom segment data reflects the business associated with short-term accounts receivable financing and value-added out-sourced administrative services, such as data processing of payrolls, billing and cash management services that Tricom provides to its clients in the temporary staffing industry. The segment’s net interest income was $3.9 million in 2007 and 2006, and $4.1 million in 2005. Non-interest income for 2007 was $4.0 million, decreasing $592,000 or 13%, from the $4.6 million reported in 2006. Revenue trends at Tricom reflect the general staffing trends of the economy and the entrance of new competitors in most market places served by Tricom. The segment’s net income was $1.4 million in 2007, $1.8 million in 2006 and $1.8 million 2005. The decrease in net income in 2007 compared to 2006 and 2005 is a result of growth in new customer relationships offset by a decrease in revenue from existing clients.
The wealth management segment reported net interest income of $12.9 million for 2007 compared to $6.3 million for 2006 and $1.4 million for 2005. Net interest income is comprised of the net interest earned on brokerage customer receivables at WHI and an allocation of the net interest income earned by the 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 $11.7 million ($7.2 million after tax) in 2007 and $5.2 million ($3.2 million after tax) in 2006. During the third quarter of 2006, the Company changed the measurement methodology for the net interest income component of the wealth management segment. In conjunction with the change in the executive management team for this segment in the third quarter of 2006, the contribution attributable to the wealth management deposits was redefined to measure the full net interest income contribution. In previous periods, the contribution from these deposits was limited to the value as an alternative source of funding for each bank. As such, the contribution in previous periods did not capture the total net interest income contribution of this funding source. Current executive management of this segment uses this measured contribution to determine overall profitability. Wealth management customer account balances on deposit at the Banks averaged $538.7 million, $465.4 million and $407.8 million in 2007, 2006 and 2005, respectively. This segment recorded non-interest income of $39.3 million for 2007 as compared to $38.0 million for 2006 and $36.6 million in 2005. In 2006, this segment’s non-interest income included a $2.4 million gain on the sale of the Wayne Hummer Growth Fund. Distribution of wealth management services through each bank subsidiary continues to be a focus of the Company as the number of brokers in its Banks continues to increase. Wealth management revenue growth generated in the banking locations is significantly outpacing the growth derived from the
 
 
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traditional Wayne Hummer Investment downtown Chicago sources. Wintrust is committed to growing the wealth management segment in order to better service its customers and create a more diversified revenue stream and continues to focus on reducing the fixed cost structure of this segment to a variable cost structure. This segment reported net income of $7.7 million for 2007 compared to $3.3 million for 2006 and a net loss of $589,000 for 2005.
ANALYSIS OF FINANCIAL CONDITION
The Company’s total assets were $9.4 billion at December 31, 2007, a decrease of $203.0 million, or 2%, when compared to the $9.6 billion at December 31, 2006. Total assets increased $1.4 billion, or 17%, in 2006 over the $8.2 billion at December 31, 2005. In 2007, available-for-sale securities decreased $535.9 million, while loans increased $305.1 million. In 2006, loans increased $1.3 billion, representing the most significant component of the total asset growth in 2006.
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,    
     
    2007 2006 2005
    Average   Percent   Average   Percent   Average   Percent
    Balance   of Total   Balance   of Total   Balance   of Total
     
Loans:
                                               
Commercial and commercial real estate
  $ 4,182,205       49 %   $ 3,647,982       45 %   $ 2,931,230       42 %
Home equity
    652,034       8       641,494       8       621,160       9  
Residential real estate (1)
    335,894       4       365,159       5       401,473       6  
Premium finance receivables
    1,264,941       15       989,689       12       847,970       12  
Indirect consumer loans
    248,203       3       229,757       3       195,697       3  
Tricom finance receivables
    33,552             41,703       1       36,599       1  
Consumer and other loans
    108,051       1       97,560       1       103,783       2  
     
Total loans, net of unearned income (2)
    6,824,880       80       6,013,344       75       5,137,912       75  
Liquidity management assets (3)
    1,674,719       20       2,054,798       25       1,738,725       25  
Other earnings assets (4)
    24,721             29,675             23,644        
     
Total average earning assets
  $ 8,524,320       100 %   $ 8,097,817       100 %   $ 6,900,281       100 %
     
Total average assets
  $ 9,442,277             $ 8,925,557             $ 7,587,602          
     
Total average earning assets to total average assets
            90 %             91 %             91 %
 
(1)   Includes mortgage loans held-for-sale
 
(2)   Includes non-accrual loans
 
(3)   Includes available-for-sale securities, interest earning deposits with banks and federal funds sold and securities purchased under resale agreements
 
(4)   Includes brokerage customer receivables and trading account securities
Average earning assets increased $426.5 million, or 5%, in 2007 and $1.2 billion, or 17%, in 2006. The ratio of average earning assets as a percent of total average assets in 2007 declined slightly to 90% from 91% in 2006 and 2005.
Total average loans increased $811.5 million, or 14%, in 2007, and $875.4 million, or 17%, in 2006. The increase in average loans was primarily funded by proceeds from maturing liquidity management assets and higher levels of average deposits. The average loans to average deposits ratio increased to 90.1% in 2007 from 82.2% in 2006 and 83.4% in 2005. Due to the increase of the average loan-to-deposit ratio in 2007 to the high-end of management’s target range of 85% — 90%, the Company reinstated its program of selling premium finance receivables to unrelated third parties by selling $230.0 million of outstanding balances in the fourth quarter of 2007. The sale of premium finance receivables is discussed below in more detail.
Loans. Total loans at December 31, 2007 were $6.8 billion, increasing $305.1 million, or 5%, over the December 31, 2006 total of $6.5 billion. Average total loans, net of unearned income, totaled $6.8 billion in 2007, $6.0 billion in 2006 and $5.1 billion in 2005.
 
         
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Average commercial and commercial real estate loans, the largest loan category, totaled $4.2 billion in 2007, and increased $534.2 million, or 15%, over the average balance in 2006. The average balance in 2006 increased $716.8 million, or 24%, over the average balance in 2005. This category comprised 61% of the average loan portfolio in 2007 and 2006. The growth realized in this category is attributable to increased business development efforts, acquisitions, and to a lesser extent the reclassification of $78.6 million of loans in the fourth quarter of 2006 from the residential real estate category to commercial and commercial real estate.
In order to minimize the time lag typically experienced by de novo banks in redeploying deposits into higher yielding earning assets, the Company has developed lending programs focused on specialized earning asset niches that generally have large volumes of homogeneous assets that can be acquired for the Banks’ portfolios and possibly sold in the secondary market to generate fee income. These specialty niches also diversify the Banks’ loan portfolios and add higher yielding earning assets that help to improve the net interest margin. However, these loans may involve greater credit risk than generally associated with loan portfolios of more traditional community banks due to marketability of the collateral, or because of the indirect relationship the Company has with the underlying borrowers. Specialty loan programs include premium finance, indirect auto, Tricom finance receivables, mortgage broker warehouse lending through Hinsdale Bank, the Community Advantage program at Barrington Bank, which provides lending, deposit and cash management services to condominium, homeowner and community associations and the small aircraft lending program at Crystal Lake Bank. Other than the premium finance receivables, Tricom finance receivables and indirect auto, all of the loans generated by these specialty loan programs are included in commercial and commercial real estate loans in the preceding table. Management continues to evaluate other specialized types of earning assets to assist with the deployment of deposit funds and to diversify the earning asset portfolio.
Home equity loans averaged $652.0 million in 2007, and increased $10.5 million, or 2%, when compared to the average balance in 2006. Home equity loans averaged $641.5 million in 2006, and increased $20.3 million, or 3%, when compared to the average balance in 2005. Unused commitments on home equity lines of credit totaled $878.1 million at December 31, 2007 and $846.8 million at December 31, 2006.
Residential real estate loans averaged $335.9 million in 2007, and decreased $29.3 million, or 8%, from the average balance in 2006. 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 remaining loans in this category are maintained within the Banks’ loan portfolios and represent mostly adjustable rate mortgage loans and shorter-term fixed rate mortgage loans. The Company does not think it has a significant exposure related to subprime mortgages. WestAmerica, which originated certain subprime mortgages for sale into the secondary market, substantially modified its product offerings in the second quarter of 2007 in an effort to reduce the risk associated with subprime mortgages. The lower average residential real estate loans in 2007 have resulted from the Company’s reclassification of $78.6 million of loans in the fourth quarter of 2006, which are now included in commercial and commercial real estate.
Premium finance receivables are originated through FIFC and to a lesser extent Broadway. These receivables represent loans to businesses to finance the insurance premiums they pay on their commercial insurance policies. All premium finance receivables originated by FIFC are subject to the Company’s credit standards, and substantially all such loans are made to commercial customers. The Company rarely finances consumer insurance premiums.
Average premium finance receivables totaled $1.3 billion in 2007, and accounted for 19% of the Company’s average total loans. Average premium finance receivables increased $275.3 million, or 28%, from the average balance of $989.7 million in 2006. The increase in the average balance of premium finance receivables is a result of the Company’s decision to suspend the sale of premium finance receivables to an unrelated third party beginning in the third quarter of 2006 and to a lesser extent from loans acquired through the Broadway acquisition in the fourth quarter of 2007. Also, in the fourth quarter of 2007, due to the Company’s average loan-to-average deposit ratio being consistently above the target range of 85% to 90%, the Company reinstated its program of selling premium finance receivables, with servicing retained, to unrelated third parties. The majority of the receivables originated by FIFC are sold to the Banks and retained in their loan portfolios. Having a program in place to sell premium finance receivables to third parties allows the Company to execute its strategy to be asset-driven while providing the benefits of additional sources of liquidity and revenue. The level of premium finance receivables sold to unrelated third parties depends in large part on the capacity of the Banks to retain such loans in their portfolio and therefore, it is possible that sales of these receivables may occur in the future. See Consolidated Results of Operations for further information on these loan sales. Total premium finance loan originations were $3.1 billion, $3.0 billion and $2.7 billion in 2007, 2006 and 2005, respectively.
 
         
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Indirect consumer loans are comprised primarily of automobile loans (94% of the indirect portfolio) and boat loans at State Bank of The Lakes. These loans are financed from networks of unaffiliated automobile and boat dealers located throughout the Chicago and southern Wisconsin metropolitan areas with which the Company has established relationships. Indirect auto loans are secured by new and used automobiles and generally have an original maturity of 36 to 72 months with the average actual maturity estimated to be approximately 40 to 45 months. 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. Management continually monitors the dealer relationships to ensure the Banks are not dependent on any one dealer as a source of such loans. During 2007, 2006 and 2005 average indirect consumer loans totaled $248.2 million, $229.8 million and $195.7 million, respectively.
Tricom finance receivables represent high-yielding short-term accounts receivable financing to Tricom’s clients in the temporary staffing industry located throughout the United States. These receivables may involve greater credit risks than generally associated with the loan portfolios of more traditional community banks depending on the marketability of the collateral. The principal sources of repayments on the receivables are payments due to the borrowers from their customers who are located throughout the United States. The Company mitigates this risk by employing lockboxes and other cash management techniques to protect their interests. Typically, Tricom also provides value-added out-sourced administrative services to many of these clients, such as data processing of payrolls, billing and cash management services, which generate additional fee income. Average Tricom finance receivables were $33.6 million in 2007, $41.7 million in 2006 and $36.6 million in 2005. Lower activity from existing clients and slower growth in new customer relationships has lead to the decrease in Tricom finance receivables in 2007 compared with 2006. Higher sales volumes with Tri-com’s existing client base coupled with new client business lead to the higher level of Tricom finance receivables in 2006 compared with 2005.
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 20% of total average earning assets in 2007 and 25% in 2006 and 2005. Average liquidity management assets decreased $380.1 million in 2007 compared to 2006, and increased $316.1 million in 2006 compared to 2005. The decrease in average liquidity management assets in 2007 is the result of the maturity of various available-for-sale securities, primarily in the first half of 2007. As a result of the current interest rate environment, loan growth and the Company’s balance sheet strategy, not all maturities were replaced with new purchases. The Company has put in place a deposit pricing strategy which has resulted in a gradual shift away from dependence upon retail certificates of deposits and resulted in an increase in the average loan-to-average-deposit ratio. The increase in average liquidity management assets in 2006 compared to 2005 was a result of increases in average deposits and other funding sources exceeding increases in average loans in 2006.
Other earning assets. Average other earning assets include trading account securities and brokerage customer receivables 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.
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, 2007, were $7.5 billion, decreasing $398 million, or 5%, compared to the $7.9 billion at December 31, 2006. Average deposit balances in 2007 were $7.6 billion, reflecting an increase of $257 million, or 4%, compared to the average balances in 2006. During 2006, average deposits increased $1.2 billion, or 19%, compared to the prior year.
 
         
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The decrease in year end deposits in 2007 over 2006 reflects the Company’s initiatives in 2007 to reduce the level of higher rate certificates of deposit. During 2007, the Company’s retail deposit pricing strategies focused on shifting the mix of deposits away from certificates of deposit into lower rate and more variable rate NOW and money market accounts.
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,
    2007   2006   2005
    Average   Percent   Average   Percent   Average   Percent
    Balance   of Total   Balance   of Total   Balance   of Total
     
Non-interest bearing deposits
  $ 647,715       9 %   $ 623,542       9 %   $ 592,879       9 %
NOW accounts
    938,960       12       774,481       10       699,323       11  
Wealth management deposits
    547,408       7       464,438       6       407,816       7  
Money market accounts
    696,760       9       639,590       9       657,788       11  
Savings accounts
    302,339       4       307,142       4       298,468       5  
Time certificates of deposit
    4,442,469       59       4,509,488       62       3,507,771       57  
     
Total deposits
  $ 7,575,651       100 %   $ 7,318,681       100 %   $ 6,164,045       100 %
 
Wealth management deposits are funds from the brokerage customers of WHI and the trust and asset management customers managed by Wayne Hummer Trust Company which have been placed into deposit accounts of the Banks (“Wealth management deposits” in table above). 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.
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,
    2007   2006   2005
    Average   Percent   Average   Percent   Average   Percent
    Balance   of Total   Balance   of Total   Balance   of Total
     
Lake Forest Bank
  $ 1,060,954       14 %   $ 1,048,493       14 %   $ 947,014       15 %
Hinsdale Bank(3)
    1,037,514       14       888,430       12       740,092       12  
North Shore Bank
    781,699       10       819,010       11       767,464       12  
Libertyville Bank
    798,522       11       741,231       10       662,330       11  
Barrington Bank
    700,728       9       707,620       10       653,509       11  
Crystal Lake Bank
    470,586       6       457,486       6       410,168       7  
Northbrook Bank
    613,943       8       632,337       9       554,717       9  
Advantage Bank
    241,117       3       219,689       3       209,136       3  
Village Bank(1)
    491,307       6       504,021       7       359,224       6  
Beverly Bank
    141,186       2       138,800       2       83,285       1  
Wheaton Bank(3)
    244,158       3       157,440       2       94,194       2  
Town Bank
    399,857       6       358,295       5       283,548       5  
State Bank of The Lakes
    428,653       6       418,805       6       399,364       6  
Old Plank Trail Bank(2)
    108,887       1       44,569       1              
St. Charles Bank(3)
    56,540       1       182,455       2              
     
Total deposits
  $ 7,575,651       100 %   $ 7,318,681       100 %   $ 6,164,045       100 %
     
Percentage increase from prior year
            4 %             19 %             40 %
 
(1)   For 2005, represents effect on consolidated average deposits from effective acquisition date of March 31, 2005 for First Northwest Bank, which was merged with Village Bank. At December 31, 2005, Village Bank had total deposits of $498.0 million.
 
(2)   For 2006, represents effect on consolidated average deposits from effective organization date of March 23, 2006 for Old Plank Trail Bank. At December 31, 2006, Old Plank Trail Bank had total deposits of $92.0 million.
 
(3)   For 2006, represents effect on consolidated average deposits from effective acquisition date of May 31, 2006 for Hinsbrook Bank. Branches (and related deposits) from Hinsbrook Bank were sold to Hinsdale Bank and Wheaton Bank in the fourth quarter of 2006. Hinsbrook’s Geneva branch was renamed St. Charles Bank.
 
 
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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 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 2007, 2006 and 2005 is presented in the following table (dollars in thousands):
                                                 
 
    Years Ended December 31,
    2007   2006   2005
    Average   Percent   Average   Percent   Average   Percent
    Balance   of Total   Balance   of Total   Balance   of Total
     
Notes payable
  $ 51,979       5 %   $ 6,913       1 %   $ 12,100       2 %
Federal Home Loan Bank advances
    400,552       38       364,149       45       333,108       43  
Subordinated notes
    75,000       7       66,742       8       50,000       7  
Short-term borrowings
    264,743       25       140,968       17       152,575       20  
Junior subordinated debentures
    249,739       25       237,249       29       217,983       28  
Other
    1,818             1,883             3,255        
     
Total other funding sources
  $ 1,043,831       100 %   $ 817,904       100 %   $ 769,021       100 %
 
Notes payable balances represent the balances on a credit agreement with an unaffiliated bank. This 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, 2007 and 2006, the Company had $60.7 million and $12.8 million, respectively, of notes payable outstanding. See Note 11 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 $415.2 million at December 31, 2007, and $325.5 million at December 31, 2006. See Note 12 to the Consolidated Financial Statements for further discussion of the terms of these advances.
The Company borrowed $75.0 million under three separate $25 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. See Note 13 to the Consolidated Financial Statements for further discussion of the terms of the notes.
Short-term borrowings include securities sold under repurchase agreements and federal funds purchased. These borrowings totaled $252.6 million and $159.9 million at December 31, 2007 and 2006, respectively. Securities sold under repurchase agreements primarily represent sweep accounts for certain customers in connection with master repurchase agreements at the Banks. This funding category fluctuates based on customer preferences and daily liquidity needs of the Banks, their customers and the Banks’ operating subsidiaries.
The Company has $249.7 million of junior subordinated debentures outstanding as of December 31, 2007. 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. On September 1, 2006, the Company issued $51.5 million of 6.84% fixed rate junior subordinated debentures in connection with a private placement of the related Trust Preferred Securities and on September 5, 2006, the Company used the proceeds from this issuance to redeem at par $32.0 million of 9.0% fixed rate junior subordinated debentures originally issued in 1998. See Note 15 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.
 
         
44       Wintrust Financial Corporation

 


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Shareholders’ Equity. Total shareholders’ equity was $739.6 million at December 31, 2007 reflecting a decrease of $33.7 million from the December 31, 2006 total of $773.3 million. In 2006, shareholders’ equity increased $145.4 million over the December 31, 2005 balance. During 2007, shareholders’ equity increased $47.8 million as a result of earnings retention ($55.7 million of net income less dividends of $7.8 million), $10.8 million due to stock-based compensation costs, $8.9 million from the issuance of shares (including related tax benefits) pursuant to various stock-based compensation plans and $4.1 million from other comprehensive income, net of tax. Shareholders’ equity decreased $105.9 million in 2007 as a result of the purchase of 2,506,717 shares of treasury stock, at an average price of $42.23 per share.
The $145.4 million increase in shareholders’ equity in 2006 was primarily due to the retention of $59.5 million of earnings
($66.5 million of net income less dividends of $7.0 million), $57.1 million due to stock issued in business combinations, $11.6 million from the issuance of 200,000 new shares in final settlement of a forward sale agreement of the company’s common stock, $17.3 million due to stock-based compensation costs pursuant to the adoption of SFAS 123R, $14.2 million from the issuance of shares (including related tax benefits) pursuant to various stock-based compensation plans and $1.1 million from the cumulative effect adjustment of a change in accounting for MSRs pursuant to the adoption of SFAS 156. Shareholders’ equity decreased $16.3 million in 2006 as a result of the purchase of 344,089 shares of treasury stock, at an average price of $47.50 per share.
 
 
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CREDIT RISK AND ASSET QUALITY
Allowance for Credit Losses
The following table summarizes the activity in the allowance for credit losses during the last five years (dollars in thousands):
                                         
 
    2007     2006     2005     2004     2003  
     
Allowance for loan losses at beginning of year
  $ 46,055       40,283       34,227       25,541       18,390  
Provision for credit losses
    14,879       7,057       6,676       6,298       10,999  
Allowance acquired in business combinations
    362       3,852       4,792       5,110       1,602  
Reclassification from/(to) allowance for lending-related commitments
    (36 )     92       (491 )            
 
                                       
Charge-offs:
                                       
Commercial and commercial real estate loans
    8,958       4,534       3,252       2,356       2,382  
Home equity loans
    289       97       88             358  
Residential real estate loans
    147       81       198              
Consumer and other loans
    593       371       363       204       222  
Premium finance receivables
    2,425       2,760       2,067       1,852       2,558  
Indirect consumer loans
    873       584       555       425       937  
Tricom finance receivables
    252       50             33        
     
Total charge-offs
    13,537       8,477       6,523       4,870       6,457  
     
 
                                       
Recoveries:
                                       
Commercial and commercial real estate loans
    1,732       2,299       527       1,148       339  
Home equity loans
    61       31             6       39  
Residential real estate loans
    6       2                   13  
Consumer and other loans
    178       148       243       104       40  
Premium finance receivables
    514       567       677       738       399  
Indirect consumer loans
    172       191       155       152       173  
Tricom finance receivables
    3       10                   4  
     
Total recoveries
    2,666       3,248       1,602       2,148       1,007  
     
Net charge-offs
    (10,871 )     (5,229 )     (4,921 )     (2,722 )     (5,450 )
     
Allowance for loan losses at end of year
  $ 50,389       46,055       40,283       34,227       25,541  
     
Allowance for lending-related commitments at end of year
    493       457       491              
     
Allowance for credit losses at end of year
  $ 50,882       46,512       40,774       34,227       25,541  
     
 
                                       
Net charge-offs (recoveries) by category as a percentage of its own respective category’s average:
                                       
Commercial and commercial real estate loans
    0.17 %     0.06 %     0.09 %     0.06 %     0.14 %
Home equity loans
    0.04       0.01       0.01       (0.00 )     0.08  
Residential real estate loans
    0.04       0.02       0.05             (0.01 )
Consumer and other loans
    0.38       0.23       0.12       0.13       0.34  
Premium finance receivables
    0.15       0.22       0.16       0.14       0.34  
Indirect consumer loans
    0.28       0.17       0.20       0.15       0.45  
Tricom finance receivables
    0.74       0.10             0.12       (0.02 )
     
Total loans, net of unearned income
    0.16 %     0.09 %     0.10 %     0.07 %     0.18 %
     
 
                                       
Net charge-offs as a percentage of the provision for credit losses
    73.07 %     74.10 %     73.71 %     43.22 %     49.55 %
 
                                       
Year-end total loans
  $ 6,801,602       6,496,480       5,213,871       4,348,346       3,297,794  
Allowance for loan losses as a percentage of loans at end of year
    0.74 %     0.71 %     0.77 %     0.79 %     0.77 %
Allowance for credit losses as a percentage of loans at end of year
    0.75 %     0.72 %     0.78 %     0.79 %     0.77 %
 
 
         
46       Wintrust Financial Corporation

 


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Risk Elements in the Loan Portfolio
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 (dollars in thousands):
                                                                                 
 
    2007   2006   2005   2004   2003
            % 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 and commercial real estate
  $ 38,995       65 %   $ 32,943       63 %   $ 28,288       61 %   $ 20,016       57 %   $ 7,421       50 %
Home equity
    2,057       10       1,985       10       1,835       12       1,404       13       467       14  
Residential real estate
    1,290       3       1,381       3       1,372       5       993       5       417       5  
Consumer and other
    1,442       2       1,757       1       1,516       1       1,585       2       418       2  
Premium finance receivables
    3,672       16       4,838       18       4,586       16       7,708       18       5,495       23  
Indirect consumer loans
    2,900       4       3,019       4       2,538       4       2,149       4       915       5  
Tricom finance receivables
    33             132       1       148       1       372       1       143       1  
Unallocated
                                                    10,265        
 
 
                                                                               
Total allowance for loan losses
  $ 50,389       100 %   $ 46,055       100 %   $ 40,283       100 %   $ 34,227       100 %   $ 25,541       100 %
 
 
                                                                               
Allowance category as a percent of total allowance:
                                                                               
Commercial and commercial real estate
    77 %             72 %             70 %             58 %             29 %        
Home equity
    4               4               5               4               2          
Residential real estate
    3               3               4               3               1          
Consumer and other
    3               4               4               5               2          
Premium finance receivables
    7               10               11               23               22          
Indirect consumer loans
    6               7               6               6               3          
Tricom finance receivables
                                              1               1          
Unallocated
                                                            40          
 
 
                                                                               
Total allowance for loan losses
    100 %             100 %             100 %             100 %             100 %        
 
 
                                                                               
Allowance for losses on lending-related commitments:
                                                                               
Commercial and commercial real estate
  $ 493             $ 457             $ 491             $             $          
 
 
                                                                               
Total allowance for credit losses
  $ 50,882             $ 46,512             $ 40,774             $ 34,227             $ 25,541          
 
Management has determined that the allowance for loan losses and the allowance for losses on lending-related commitments were adequate at December 31, 2007. The Company’s loan rating process is an integral component of the methodology utilized in determining the adequacy of the allowance for loan losses. The Company utilizes a loan rating system to assign risk to loans and utilizes that risk rating system to assist in developing the Problem Loan Report as a means of reporting non-performing and potential problem loans. At each scheduled meeting of the Boards of Directors of the Banks and the Wintrust Risk Management Committee, a Problem Loan Report is presented, showing loans that are non-performing and loans that may warrant additional monitoring. Accordingly, in addition to those loans disclosed under “Past Due Loans and Non-performing Assets,” there are certain loans in the portfolio which management has identified, through its Problem Loan Report, which exhibit a higher than normal credit risk. These Problem Loan Report credits are reviewed individually by management to determine whether any specific reserve amount should be allocated for each respective credit. However, these loans are still performing and, accordingly, are not included in non-performing loans. Management’s philosophy is to be proactive and conservative in assigning risk ratings to loans and identifying loans to be included on the Problem Loan Report. The principal amount of loans on the Company’s Problem Loan Report (exclusive of those loans reported as non-performing) as of December 31, 2007 and December 31, 2006, was approximately $142.1 million and $84.7 million, respectively. The increase in 2007 is primarily a result of Problem Loan Report credits in the commercial and commercial real estate category. We believe these loans are performing and, accordingly, do not cause management to have serious doubts as to the ability of such borrowers to comply with the present loan repayment terms.
 
 
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In 2004, the Company refined its methodology for determining certain elements of the allowance for loan losses. This refinement resulted in allocation of the allowance to specific loan portfolio groupings. The Company maintains its allowance for loan losses at a level believed adequate by management to absorb probable losses inherent in the loan portfolio and is based on the size and current risk characteristics of the loan portfolio, an assessment of Problem Loan Report loans and actual loss experience, changes in the composition of the loan portfolio, historical loss experience, changes in lending policies and procedures, including underwriting standards and collections, charge-off and recovery practices, changes in the experience, ability and depth of lending management and staff, changes in national and local economic and business conditions and developments, including the condition of various market segments and changes in the volume and severity of past due and classified loans and trends in the volume of non-accrual loans, troubled debt restructurings and other loan modifications. The allowance for loan losses also includes an element for estimated probable but undetected losses and for imprecision in the credit risk models used to calculate the allowance. The methodology used since 2004 refined the process so that this element was calculated for each loan portfolio grouping. In prior years, this element of the allowance was associated with the loan portfolio as a whole rather than with a specific loan portfolio grouping. In 2007, the increase in the amount of allowance for loan losses can be primarily attributed to the potential losses for loans on the Company’s Problem Loan Report, specifically commercial and commercial real estate. 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. Loan losses are charged off against the allowance, while recoveries are credited to the allowance. A provision for credit losses is charged to operations based on management’s periodic evaluation of the factors previously mentioned, as well as other pertinent factors. Evaluations are conducted at least quarterly and more frequently if deemed necessary.
The Company also maintains an allowance for lending-related commitments, specifically unfunded loan commitments and letters of credit, to provide for the risk of loss inherent in these arrangements. The allowance for lending-related commitments relates to certain amounts that the Company is 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. This allowance is included in other liabilities on the Consolidated Statement of Condition while the corresponding provision for these losses is recorded as a component of the provision for credit losses.
An analysis of commercial and commercial real estate loans actual loss experience is conducted to assess reserves established for credits with similar risk characteristics. An allowance is established for loans on the Problem Loan Report and for pools of loans based on the loan types and the risk ratings assigned. The Company separately measures the fair value of impaired commercial and commercial real estate loans using either the present value of expected future cash flows discounted at the loan’s effective interest rate, the observable market price of the loan, or the fair value of the collateral if the loan is collateral dependent. Problem Loan Report loans, which include nonperforming loans, are subject to impairment valuation. Commercial and commercial real estate loans continue to represent a larger percentage of the Company’s total loans outstanding. The credit risk of commercial and commercial real estate loans is largely influenced by the impact on borrowers of general economic conditions, which can be challenging and uncertain. Historically low net charge-offs of commercial and commercial real-estate loans may not be indicative of future charge-off levels. The home equity, residential real estate, consumer and other loan allocations are based on analysis of historical delinquency and charge-off statistics and trends and the current economic environment. Allocations for niche loans such as premium finance receivables, indirect consumer and Tricom finance receivables are based on an analysis of historical delinquency and charge-off statistics, historical growth trends and historical economic trends.
The allowance for loan losses as of December 31, 2007, increased $4.3 million to $50.4 million from December 31, 2006. The allowance for loan losses as a percentage of total loans at December 31, 2007 and 2006 was 0.74% and 0.71%, respectively. As a percent of average total loans, total net charge-offs for 2007 and 2006 were 0.16% and 0.09%, respectively. While management believes that the allowance for loan losses is adequate to provide for losses inherent in the portfolio, there can be no assurances that future losses will not exceed the amounts provided for, thereby affecting future earnings. In 2007, the Company reclassified $36,000 from its allowance for loan losses to its allowance for lending-related commitments, specifically unfunded loan commitments and letters of credit. In 2006, the Company reclassified $92,000 from the allowance for lending-related commitments to its allowance for loan losses. The allowance for credit losses is comprised of the allowance for loan losses and the allowance for lending-related commitments. In future periods, the provision for credit losses may contain both a component related to funded loans (provision for loan losses) and a component related to lending-related commitments (provision for unfunded loan commitments and letters of credit).
Commercial and commercial real estate loans represent the largest loan category in the Company’s loan portfolio, accounting for 65% of total loans at December 31, 2007. Net charge-offs in this category totaled $7.2 million, or 0.17% of average loans in this category in 2007, and $2.2 million, or 0.06% of average loans in this category in 2006.
 
 
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Premium finance receivable loans represent the second largest loan category in the Company’s portfolio, accounting for 16% of total loans at December 31, 2007. Net charge-offs totaled $1.9 million in 2007 as compared to $2.2 million in 2006. Net charge-offs were 0.15% of average premium finance receivables in 2007 versus 0.22% in 2006. As noted in the next section of this report, non-performing premium finance receivables as a percent of total premium finance receivables were 1.80% at December 31, 2007 and 1.07% at December 31, 2006.
Past Due Loans and Non-performing Assets
The following table classifies the Company’s non-performing assets as of December 31 for each of last five years. The information in the table should be read in conjunction with the detailed discussion following the table (dollars in thousands):
                                         
 
    2007     2006     2005     2004     2003  
     
Loans past due greater than 90 days and still accruing:
                                       
Residential real estate and home equity(1)
  $ 51       308       159              
Commercial, consumer and other
    14,742       8,454       1,898       715       1,024  
Premium finance receivables
    8,703       4,306       5,211       3,869       3,439  
Indirect consumer loans
    517       297       228       280       313  
Tricom finance receivables
                             
     
Total loans past due greater than 90 days and still accruing
    24,013       13,365       7,496       4,864       4,776  
     
Non-accrual loans:
                                       
Residential real estate and home equity(1)
    3,215       1,738       457       2,660       3,217  
Commercial, consumer and other
    33,267       12,959       11,712       3,550       9,646  
Premium finance receivables
    10,725       8,112       6,189       7,396       5,994  
Indirect consumer loans
    560       376       335       118       107  
Tricom finance receivables
    74       324                    
     
Total non-accrual
    47,841       23,509       18,693       13,724       18,964  
     
Total non-performing loans:
                                       
Residential real estate and home equity(1)
    3,266       2,046       616       2,660       3,217  
Commercial, consumer and other
    48,009       21,413       13,610       4,265       10,670  
Premium finance receivables
    19,428       12,418       11,400       11,265       9,433  
Indirect consumer loans
    1,077       673       563       398       420  
Tricom finance receivables
    74       324                    
     
Total non-performing loans
    71,854       36,874       26,189       18,588       23,740  
     
Other real estate owned
    3,858       572       1,400             368  
     
Total non-performing assets
  $ 75,712       37,446       27,589       18,588       24,108  
     
Total non-performing loans by category as a percent of its own respective category’s year end balance:
                                       
Residential real estate and home equity(1)
    0.36 %     0.23 %     0.07 %     0.32 %     0.48 %
Commercial, consumer and other
    1.06       0.51       0.42       0.17       0.63  
Premium finance receivables
    1.80       1.07       1.40       1.46       1.26  
Indirect consumer loans
    0.45       0.27       0.28       0.23       0.24  
Tricom finance receivables
    0.27       0.74                    
     
Total non-performing loans
    1.06 %     0.57 %     0.50 %     0.43 %     0.72 %
     
Total non-performing assets as a percentage of total assets
    0.81 %     0.39 %     0.34 %     0.29 %     0.51 %
     
Allowance for loan losses as a percentage of non-performing loans
    70.13 %     124.90 %     153.82 %     184.13 %     107.59 %
 
(1)   Residential real estate and home equity loans that are non-accrual and past due greater than 90 days and still accruing do not include non-performing mortgage loans held-for-sale. These loans totaled $2.0 million as of December 31, 2007. Mortgage loans held-for-sale are carried at the lower of cost or market applied on an aggregate basis by loan type. Charges related to adjustments to record the loans at fair value are recognized in mortgage banking revenue.
 
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Non-performing Residential Real Estate and Home Equity
The non-performing residential real estate and home equity loans totaled $3.3 million at December 31, 2007. The balance increased $1.2 million from December 31, 2006. This category of non-performing loans consists of 14 individual credits representing eight home equity loans and six residential real estate loans. The average balance of loans in this category is approximately $233,000. On average, this is less than one residential real estate loan or home equity loan per chartered bank within the Company and the control and collection of these loans is very manageable. Each non-performing credit is well secured and in the process of collection. Management does not expect any material losses from the resolution of any of the credits in this category.
Non-performing Commercial, Consumer and Other
The commercial, consumer and other non-performing loan category totaled $48.0 million as of December 31, 2007. The balance in this category increased $26.6 million from December 31, 2006. The increase in the non-performing loans since December 31, 2006 was primarily the result of $32.3 million related to three credit relationships.
One of the relationships, totaling approximately $15.8 million, relates to two residential real estate developments in the southwestern suburbs of Chicago that are partially developed and were acquired as a result of the Hinsbrook Bank acquisition. Current market conditions have substantially slowed the sale of single family home lots. The Company believes the projects have reasonable long term viability; however, given the current state of the residential real estate market, the ultimate resolution of these problem loans could span a lengthy period of time until market conditions stabilize. The Company is working on various scenarios to minimize the holding periods and future losses, if any.
Another addition to this non-performing loan category relates to a credit that approximates $10.4 million secured by a low rise apartment complex that is being converted to condominiums. The project is located in one of the Company’s primary market areas. Sales have slowed on the project to levels less than originally projected. This loan was initially structured with significant equity and mezzanine debt subordinate to our position resulting in a conservative loan-to-value position at the inception of the loan. The Company believes that the current market conditions may have impacted the valuation of the property, but not to a level where our principal is at substantial risk. We believe our first lien position relative to the value of the collateral to be favorable. Management of the Company believes that there is reasonable interest in this property from investors and anticipates a relatively quick resolution to this situation.
The other significant addition to this category of non-performing loans is a $6.1 million loan relationship made to a long-time commercial customer of the Company who is involved in several small residential developments in the northern suburbs of Chicago. The slowdown in the residential real estate market has impacted the borrower’s ability to service the debt; however, sales do continue at a slower than projected pace. The loan relates to a variety of properties and these properties are not concentrated in any one development. Based on the Company’s evaluation of the collateral, we believe our loan is adequately secured at this time and anticipate that this loan will be resolved during 2008 as a result of collateral liquidations.
Non-performing Premium Finance Receivables
The table below presents the level of non-performing premium finance receivables as of December 31, 2007 and 2006, and the amount of net charge-offs for the years then ended (dollars in thousands):
                 
 
    2007     2006  
     
Non-performing premium finance receivables
  $ 19,428     $ 12,418  
- as a percent of premium finance receivables outstanding
    1.80 %     1.07 %
                 
Net charge-offs of premium finance receivables
  $ 1,911     $ 2,193  
- annualized as a percent of average premium finance receivables
    0.15 %     0.22 %
 
As noted below, fluctuations in this category may occur due to timing and nature of account collections from insurance carriers. Management is comfortable with administering the collections at this level of non-performing premium finance receivables and expects that such ratios will remain at relatively low levels.
The ratio of non-performing 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 premium finance receivables, it customarily takes 60-150 days to convert the collateral into cash collections. Accordingly, the level of non-performing 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. Interest continues to accrue until maturity as the unearned premium is usually sufficient to pay-off the outstanding balance and contractual interest due.
 
 
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Non-performing Indirect Consumer Loans
Total non-performing indirect consumer loans were $1.1 million at December 31, 2007, compared to $673,000 at December 31, 2006. The ratio of these non-performing loans to total indirect consumer loans was 0.45% at December 31, 2007 compared to 0.27% at December 31, 2006. As noted in the Allowance for Credit Losses table, net charge-offs as a percent of total indirect consumer loans were 0.28% for the year ended December 31, 2007 compared to 0.17% in the same period in 2006. The level of nonperforming and net charge-offs of indirect consumer loans continues to be below standard industry ratios for this type of lending.
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, 2007, except for loans included in the premium finance operating segment, which are diversified throughout the United States.
EFFECTS OF INFLATION
A banking organization’s assets and liabilities are primarily monetary. Changes in the rate of inflation do not have as great an impact on the financial condition of a bank as do changes in interest rates. Moreover, interest rates do not necessarily change at the same percentage as does inflation. Accordingly, changes in inflation are not expected to have a material impact on the Company. An analysis of the Company’s asset and liability structure provides the best indication of how the organization is positioned to respond to changing interest rates.
 
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Asset-Liability Management
As an ongoing part of its financial strategy, the Company attempts to manage the impact of fluctuations in market interest rates on net interest income. This effort entails providing a reasonable balance between interest rate risk, credit risk, liquidity risk and maintenance of yield. Asset-liability management policies are established and monitored by management in conjunction with the boards of directors of the Banks, subject to general oversight by the Risk Management Committee of the Company’s Board of Directors. The policies establish guidelines for acceptable limits on the sensitivity of the market value of assets and liabilities to changes in interest rates.
Interest rate risk arises when the maturity or repricing periods and interest rate indices of the interest earning assets, interest bearing liabilities, and derivative financial instruments are different. It is the risk that changes in the level of market interest rates will result in disproportionate changes in the value of, and the net earnings generated from, the Company’s interest earning assets, interest bearing liabilities and derivative financial instruments. The Company continuously monitors not only the organization’s current net interest margin, but also the historical trends of these margins. In addition, management attempts to identify potential adverse changes in net interest income in future years as a result of interest rate fluctuations by performing simulation analysis of various interest rate environments. If a potential adverse change in net interest margin and/or net income is identified, management would take appropriate actions with its asset-liability structure to mitigate these potentially adverse situations. Please refer to earlier sections of this discussion and analysis for further discussion of the net interest margin.
Since the Company’s primary source of interest bearing liabilities is customer deposits, the Company’s ability to manage the types and terms of such deposits may be somewhat limited by customer preferences and local competition in the market areas in which the Banks operate. The rates, terms and interest rate indices of the Company’s interest earning assets result primarily from the Company’s strategy of investing in loans and securities that permit the Company to limit its exposure to interest rate risk, together with credit risk, while at the same time achieving an acceptable interest rate spread.
One method utilized by financial institutions to manage interest rate risk is to enter into derivative financial instruments. A derivative financial instrument includes interest rate swaps, interest rate caps and floors, futures, forwards, option contracts and other financial instruments with similar characteristics. See Note 21 of the Consolidated Financial Statements for information on the Company’s derivative financial instruments.
During 2007 and 2006, the Company also entered into certain covered call option transactions related to certain securities held by the Company. The Company uses these option transactions (rather than entering into other derivative interest rate contracts, such as interest rate floors) to increase the total return associated with the related securities. Although the revenue received from these options is recorded as non-interest income rather than interest income, the increased return attributable to the related securities from these options contributes to the Company’s overall profitability. The Company’s exposure to interest rate risk may be affected by these transactions. To mitigate this risk, the Company may acquire fixed-rate term debt or use financial derivative instruments. There were no covered call options outstanding as of December 31, 2007 or December 31, 2006.
The Company’s exposure to interest rate risk is reviewed on a regular basis by management and the Risk Management Committees of the Boards of Directors of the Banks and the Company. The objective is to measure the effect on net income and to adjust balance sheet and derivative financial instruments to minimize the inherent risk while at the same time maximize net interest income. Tools used by management include a standard gap analysis and a rate simulation model whereby changes in net interest income are measured in the event of various changes in interest rate indices. An institution with more assets than liabilities re-pricing over a given time frame is considered asset sensitive and will generally benefit from rising rates, and conversely, a higher level of re-pricing liabilities versus assets would generally be beneficial in a declining rate environment.
 
         
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Standard gap analysis reflects contractual re-pricing information for assets, liabilities and derivative financial instruments. While the gap position and related ratios illustrated in the following table are useful tools that management can use to assess the general positioning of the Company’s and its subsidiaries’ balance sheets, it is only as of a point in time and static in nature. The following table illustrates the Company’s estimated interest rate sensitivity and periodic and cumulative gap positions based on contractual re-pricing and maturities as of December 31, 2007:
                                         
 
    Time to Maturity or Repricing
    0-90   91-365   1-5   Over 5    
(Dollars in thousands)   Days   Days   Years   Years   Total
 
Assets:
                                       
Federal funds sold and securities purchased under resale agreements
  $ 90,964                         90,964  
Interest-bearing deposits with banks
    10,410                         10,410  
Available-for-sale securities
    382,162       131,865       276,996       512,814       1,303,837  
     
Total liquidity management assets
    483,536       131,865       276,996       512,814       1,405,211  
Loans, net of unearned income (1)
    3,727,333       1,517,815       1,487,716       178,290       6,911,154  
Other earning assets
    25,777                         25,777  
     
Total earning assets
    4,236,646       1,649,680       1,764,712       691,104       8,342,142  
Other non-earning assets
                      1,026,717       1,026,717  
     
Total assets (RSA)
  $ 4,236,646       1,649,680       1,764,712       1,717,821       9,368,859  
     
 
                                       
Liabilities and Shareholders’ Equity:
                                       
Interest-bearing deposits (2)
  $ 4,162,455       1,949,766       694,525       431       6,807,177  
Federal Home Loan Bank advances
    10,701       4,996       179,486       220,000       415,183  
Notes payable and other borrowings
    254,434       60,700                   315,134  
Subordinated notes
    75,000                         75,000  
Junior subordinated debentures
    191,887       6,228       51,547             249,662  
     
Total interest-bearing liabilities
    4,694,477       2,021,690       925,558       220,431       7,862,156  
Demand deposits
                      664,264       664,264  
Other liabilities
                      102,884       102,884  
Shareholders’ equity
                      739,555       739,555  
 
                                       
Effect of derivative financial instruments (3):
                                       
Interest rate swaps (Company pays fixed, receives floating)
    (175,000 )           85,000       90,000        
     
 
                                       
Total liabilities and shareholders’ equity including effect of derivative financial instruments (RSL)
  $ 4,519,477       2,021,690       1,010,558       1,817,134       9,368,859  
     
 
                                       
Repricing gap (RSA — RSL)
  $ (282,831 )     (372,010 )     754,154       (99,313 )        
Cumulative repricing gap
  $ (282,831 )     (654,841 )     99,313                
 
                                       
Cumulative RSA/Cumulative RSL
    94 %     90 %     101 %                
Cumulative RSA/Total assets
    45 %     63 %     82 %                
Cumulative RSL/Total assets
    48 %     70 %     81 %                
 
                                       
Cumulative GAP/Total assets
    (3 )%     (7 )%     1 %                
Cumulative GAP/Cumulative RSA
    (7 )%     (11 )%     1 %                
 
(1)   Loans, net of unearned income, include mortgage loans held-for-sale and nonaccrual loans.
 
(2)   Non-contractual interest-bearing deposits are subject to immediate withdrawal and, therefore, are included in 0-90 days.
 
(3)   Excludes interest rate swaps to qualified commercial customers as they are offset with interest rate swaps entered into with third parties and have no effect on the Company’s interest rate sensitivity. See Note 21 of the Consolidated Financial Statements for further discussion of these interest rate swaps.
As seen in the table, the Company’s gap analysis as of December 31, 2007, reflects that the Company is in a negative gap position, which generally indicates the Company would benefit from a declining rate environment. However, the shape of the yield curve, an institution’s funding sources and deposit mix, and the inability to have negative interest rates can create undue margin compression even for liability sensitive institutions operating in a low interest rate environment.
 
 
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As a result of the static position and inherent limitations of gap analysis, management uses an additional measurement tool to evaluate its asset-liability sensitivity that determines exposure to changes in interest rates by measuring the percentage change in net interest income due to changes in interest rates over a two-year time horizon. Management measures its exposure to changes in interest rates using many different interest rate scenarios. One interest rate scenario utilized is to measure the percentage change in net interest income assuming an instantaneous permanent parallel shift in the yield curve of 100 and 200 basis points, both upward and downward. Utilizing this measurement concept, the interest rate risk of the Company, expressed as a percentage change in net interest income over a two-year time horizon due to changes in interest rates, at December 31, 2007 and December 31, 2006, is as follows:
                                 
 
    + 200   + 100   - 100   - 200
    Basis   Basis   Basis   Basis
    Points   Points   Points   Points
     
Percentage change in net interest income due to an immediate 200 basis point shift in the yield curve:
                               
December 31, 2007
    9.5 %     6.4 %     (1.4 )%     (9.9 )%
December 31, 2006
    4.6 %     1.7 %     (2.0 )%     (7.2 )%
 
These results are based solely on an instantaneous permanent parallel shift in the yield curve and do not reflect the net interest income sensitivity that may arise from other factors, such as changes in the shape of the yield curve or changes in the spread between key market rates. The above results are conservative estimates due to the fact that no management actions to mitigate potential changes in net interest income are included in this simulation process. These management actions could include, but would not be limited to, delaying a change in deposit rates, extending the maturities of liabilities, the use of derivative financial instruments, changing the pricing characteristics of loans or modifying the growth rate of certain types of assets or liabilities.
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 the Company’s capital ratios as of December 31, 2007, 2006 and 2005:
                                         
 
                    Wintrust’s   Wintrust’s   Wintrust’s
            Well   Ratios at   Ratios at   Ratios at
    Minimum   Capitalized   Year-end   Year-end   Year-end
    Ratios   Ratios   2007   2006   2005
     
Tier 1 Leverage Ratio
    4.0 %     5.0 %     7.7 %     8.2 %     8.3 %
Tier 1 Capital to Risk-Weighted Assets
    4.0 %     6.0 %     8.7 %     9.8 %     10.3 %
Total Capital to Risk-Weighted Assets
    8.0 %     10.0 %     10.2 %     11.3 %     11.9 %
Total average equity to total average assets
    N/A       N/A       7.7 %     7.9 %     8.0 %
 
As reflected in the table, each of the Company’s capital ratios at December 31, 2007, exceeded the well-capitalized ratios established by the Federal Reserve. Refer to Note 19 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 an unaffiliated bank and proceeds from the issuances of subordinated debt, junior subordinated debentures and additional equity. Refer to Notes 11, 13, 15 and 23 of the Consolidated Financial Statements for further information on the Company’s notes payable, subordinated note, 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.
On March 30, 2005, Wintrust consummated the partial settlement of the forward sale agreement the Company entered into on December 14, 2004 with Royal Bank of Canada, an affiliate of RBC Capital Markets Corporation, relating to the forward sale by Wintrust of 1.2 million shares of Wintrust’s common stock. Pursuant to and in partial settlement of the forward sale agreement, Wintrust issued 1.0 million shares of its common stock, and received net proceeds of $55.8 million from Royal Bank of Canada. Additionally, on December 14, 2005, Wintrust amended certain terms of the forward sale agreement for the purpose of extending the maturity date for the remaining 200,000 shares from December 17, 2005 to December 17,
 
         
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2006. In conjunction with the completion of the acquisition of HBI in May 2006, the forward sale agreement was fully settled with Wintrust issuing 200,000 shares of its common stock and receiving net proceeds of $11.6 million. The Company issued 1,120,033 shares of common stock in May 2006 in connection with the acquisition of HBI.
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. In addition, the payment of dividends may be restricted under certain financial covenants in the Company’s revolving credit line agreement. At January 1, 2008, subject to minimum capital requirements at the Banks, approximately $28.5 million was available as dividends from the Banks without prior regulatory approval. However, since the Banks are required to maintain their capital at the well-capitalized level (due to the Company being approved as 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. At January 1, 2008, approximately $17.0 million was available as dividends from the Banks without compromising the Banks’ well-capitalized positions. During 2007, 2006 and 2005 the subsidiaries paid dividends to Wintrust totaling $105.9 million, $183.6 million and $45.1 million, respectively.
The Company declared its first semi-annual cash dividend on its common stock in 2000 and has increased the dividend each year thereafter. The dividend payout ratio was 14.3% in 2007, 10.9% in 2006 and 8.7% in 2005. The Company continues to target an earnings retention ratio of approximately 85% to 90% to support continued growth. The $0.32 cash dividend per share paid in 2007 represented a 14% increase over the $0.28 cash dividend per share paid in 2006. Along those same lines, the semi-annual dividend of $0.18 per share in January 2008 represents (on an annualized basis) $0.36 per share, or a 13% increase over 2007.
In July 2006, the Company’s Board of Directors authorized the repurchase of up to 2.0 million shares of the Company’s outstanding common stock over 18 months. Through April 2007, the Company repurchased a total of approximately 1.8 million shares at an average price of $45.74 per share under the July 2006 share repurchase plan. In April 2007, the Company’s Board of Directors terminated the July 2006 authorization and authorized the repurchase of up to an additional 1.0 million shares of the Company’s outstanding common stock over 12 months. The Company began to repurchase shares under the this authorization in July 2007 and repurchased all 1.0 million shares at an average price of $37.57 per share during the third and fourth quarters of 2007. In January 2008, the Company’s Board of Directors authorized the repurchase of up to an additional 1.0 million shares of the Company’s outstanding common stock over the next 12 months.
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. Approximately 55% of the Company’s total assets were funded by core deposits at the end of 2007 and 2006. The remaining assets were funded by other funding sources such as time deposits with balances in excess of $100,000, borrowed funds and equity capital. 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.
Liquid assets refer to money market assets such as Federal funds sold and interest bearing deposits with banks, as well as available-for-sale debt securities. Net liquid assets represent the sum of the liquid asset categories less the amount of assets pledged to secure public funds. At December 31, 2007, net liquid assets totaled approximately $191.4 million, compared to approximately $346.7 million at December 31, 2006.
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, 2007 and 2006, the Banks had approximately $780.8 million and $910.1 million, respectively, of securities collateralizing such public deposits and other short-term borrowings. Deposits requiring pledged assets are not considered to be core deposits, and the assets that are pledged as collateral for these deposits are not deemed to be liquid assets.
The Company is not aware of any known trends, commitments, events, regulatory recommendations or uncertainties that would have any adverse effect on the Company’s capital resources, operations or liquidity.
 
 
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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, 2007, 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
     
    (in thousands)
Deposits(1)
    10     $ 6,743,086       519,731       208,424       296       7,471,537  
Notes payable
    11       59,700                   1,000       60,700  
FHLB advances(1) (2)
    12       15,698       20,500       159,000       220,000       415,198  
Subordinated notes
    13       5,000       20,000       30,000       20,000       75,000  
Other borrowings
    14       200,057       21,877       32,500             254,434  
Junior subordinated debentures(1)
    15                         249,493       249,493  
Operating leases
    16       3,059       6,768       4,991       16,777       31,595  
Purchase obligations(3)
            20,425       19,921       753       496       41,595  
 
Total
          $ 7,047,025       608,797       435,668       508,062       8,599,552  
 
(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 liabilities recorded on the balance sheet at December 31, 2007 do not represent the amounts that may ultimately be paid under these contracts, these 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, 2007. Further information on these commitments is included in Note 20 of the Consolidated Financial Statements.
                                         
 
    One Year   1 - 3   3 - 5   Over    
    or Less   Years   Years   5 Years   Total
     
    (in thousands)
Commitment type:
                                       
Commercial, commercial real estate and construction
  $ 1,201,230       334,497       171,812       144,699       1,852,238  
Residential real estate
    113,640                         113,640  
Revolving home equity lines of credit
    878,102                         878,102  
Letters of credit
    104,103       65,434       3,643       39       173,219  
Commitments to sell mortgage loans
    218,913                         218,913  
 
 
         
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Contingent Liabilities. In connection with the sale of premium finance receivables, the Company continues to service the receivables and maintains a recourse obligation to the purchasers should the underlying borrowers default on their obligations. The estimated recourse obligation is taken into account in recording the sale, effectively reducing the gain recognized. As of December 31, 2007, outstanding premium finance receivables sold to and serviced for third parties for which the Company has a recourse obligation were $219.9 million and the estimated recourse obligation was $179,000 and included in other liabilities on the balance sheet. Please refer to the Consolidated Results of Operations section of this report for further discussion of these loan sales.
The Company enters into residential mortgage loan sale agreements with investors in the normal course of business. These agreements usually require certain representations concerning credit information, loan documentation, collateral and insurability. On occasion, investors have requested the Company to indemnify them against losses on certain loans or to repurchase loans which the investors believe do not comply with applicable representations. Upon completion of its own investigation, the Company generally repurchases or provides indemnification on certain loans. Indemnification requests are generally received within two years subsequent to sale. Management maintains a liability for estimated losses on loans expected to be repurchased or on which indemnification is expected to be provided and regularly evaluates the adequacy of this recourse liability based on trends in repurchase and indemnification requests, actual loss experience, known and inherent risks in the loans, and current economic conditions. At December 31, 2007 the liability for estimated losses on repurchase and indemnification was $1.9 million and was included in other liabilities on the balance sheet.
 
 
2007 Annual Report   57

 


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Consolidated Financial Statements
 
WINTRUST FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION

(In thousands, except share data)
                 
 
    December 31,
    2007   2006
     
Assets
               
Cash and due from banks
  $ 170,190       169,071  
Federal funds sold and securities purchased under resale agreements
    90,964       136,221  
Interest bearing deposits with banks
    10,410       19,259  
Available-for-sale securities, at fair value
    1,303,837       1,839,716  
Trading account securities
    1,571       2,324  
Brokerage customer receivables
    24,206       24,040  
Mortgage loans held-for-sale
    109,552       148,331  
Loans, net of unearned income
    6,801,602       6,496,480  
Less: Allowance for loan losses
    50,389       46,055  
 
Net loans
    6,751,213       6,450,425  
 
               
Premises and equipment, net
    339,297       311,041  
Accrued interest receivable and other assets
    273,678       180,889  
Goodwill
    276,204       268,936  
Other intangible assets
    17,737       21,599  
 
 
               
Total assets
  $ 9,368,859       9,571,852  
 
 
               
Liabilities and Shareholders’ Equity
               
Deposits:
               
Non-interest bearing
  $ 664,264       699,203  
Interest bearing
    6,807,177       7,170,037  
 
Total deposits
    7,471,441       7,869,240  
 
               
Notes payable
    60,700       12,750  
Federal Home Loan Bank advances
    415,183       325,531  
Other borrowings
    254,434       162,072  
Subordinated notes
    75,000       75,000  
Junior subordinated debentures
    249,662       249,828  
Accrued interest payable and other liabilities
    102,884       104,085  
 
 
               
Total liabilities
    8,629,304       8,798,506  
 
 
               
Shareholders’ equity:
               
Preferred stock, no par value; 20,000,000 shares authorized, no shares issued and outstanding
           
Common stock, no par value; $1.00 stated value; 60,000,000 shares authorized; 26,281,296 and 25,802,024 shares issued at December 31, 2007 and 2006, respectively
    26,281       25,802  
Surplus
    539,127       519,233  
Treasury stock, at cost, 2,850,806 and 344,089 shares at December 31, 2007 and 2006, respectively
    (122,196 )     (16,343 )
Common stock warrants
    459       681  
Retained earnings
    309,556       261,734  
Accumulated other comprehensive loss
    (13,672 )     (17,761 )
 
 
               
Total shareholders’ equity
    739,555       773,346  
 
 
               
Total liabilities and shareholders’ equity
  $ 9,368,859       9,571,852  
 
See accompanying Notes to Consolidated Financial Statements
 
         
58       Wintrust Financial Corporation

 


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WINTRUST FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
                         
 
    Years Ended December 31,
    2007   2006   2005
     
Interest income
                       
Interest and fees on loans
  $ 525,610       456,384       335,391  
Interest bearing deposits with banks
    841       651       279  
Federal funds sold and securities purchased under resale agreements
    3,774       5,393       3,485  
Securities
    79,402       93,398       66,555  
Trading account securities
    55       51       68  
Brokerage customer receivables
    1,875       2,068       1,258  
 
Total interest income
    611,557       557,945       407,036  
 
Interest expense
                       
Interest on deposits
    294,914       265,729       156,252  
Interest on Federal Home Loan Bank advances
    17,558       14,675       11,912  
Interest on notes payable and other borrowings
    13,794       5,638       4,178  
Interest on subordinated notes
    5,181       4,695       2,829  
Interest on junior subordinated debentures
    18,560       18,322       15,106  
 
Total interest expense
    350,007       309,059       190,277  
 
Net interest income
    261,550       248,886       216,759  
Provision for credit losses
    14,879       7,057       6,676  
 
Net interest income after provision for credit losses
    246,671       241,829       210,083  
 
Non-interest income
                       
Wealth management
    31,341       31,720       30,008  
Mortgage banking
    14,888       22,341       25,913  
Service charges on deposit accounts
    8,386       7,146       5,983  
Gain on sales of premium finance receivables
    2,040       2,883       6,499  
Administrative services
    4,006       4,598       4,539  
Fees from covered call options
    2,628       3,157       11,434  
Gains on available-for-sale securities, net
    2,997       17       1,063  
Other
    13,802       19,370       8,118  
 
Total non-interest income
    80,088       91,232       93,557  
 
Non-interest expense
                       
Salaries and employee benefits
    141,816       137,008       118,071  
Equipment
    15,363       13,529       11,779  
Occupancy, net
    21,987       19,807       16,176  
Data processing
    10,420       8,493       7,129  
Advertising and marketing
    5,318       5,074       4,970  
Professional fees
    7,090       6,172       5,609  
Amortization of other intangible assets
    3,861       3,938       3,394  
Other
    37,080       34,799       31,562  
 
Total non-interest expense
    242,935       228,820       198,690  
 
Income before income taxes
    83,824       104,241       104,950  
Income tax expense
    28,171       37,748       37,934  
 
Net income
  $ 55,653       66,493       67,016  
 
Net income per common share — Basic
  $ 2.31       2.66       2.89  
 
Net income per common share — Diluted
  $ 2.24       2.56       2.75  
 
See accompanying Notes to Consolidated Financial Statements
 
 
2007 Annual Report   59

 


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WINTRUST FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(In thousands, except share data)
 
                                                                 
    Compre-                                             Accumulated        
    hensive                             Common             other     Total  
    income     Common             Treasury     stock     Retained     comprehensive     shareholders’  
    (loss)     stock     Surplus     stock     warrants     earnings     income (loss)     equity  
 
Balance at December 31, 2004
          $ 21,729       319,147             828       139,566       (7,358 )     473,912  
Comprehensive income:
                                                               
Net income
  $ 67,016                               67,016             67,016  
Other comprehensive loss, net of tax:
                                                               
Unrealized losses on securities, net of reclassification adjustment
    (11,081 )                                   (11,081 )     (11,081 )
Unrealized gains on derivative instruments
    106                                     106       106  
 
                                                             
Comprehensive Income
    56,041                                                          
 
                                                               
Cash dividends declared on common stock
                                    (5,449 )           (5,449 )
 
                                                               
Common stock issued for:
                                                               
New issuance, net of costs
            1,000       54,845                               55,845  
Business combinations
            601       29,986                               30,587  
Exercise of stock options
            461       12,692                               13,153  
Restricted stock awards
            19       832                               851  
Employee stock purchase plan
            35       1,679                               1,714  
Exercise of common stock warrants
            89       935             (84 )                 940  
Director compensation plan
            7       310                               317  
 
Balance at December 31, 2005
          $ 23,941       420,426             744       201,133       (18,333 )     627,911  
 
                                                               
Comprehensive income:
                                                               
Net income
    66,493                               66,493             66,493  
Other comprehensive income, net of tax:
                                                               
Unrealized gains on securities, net of reclassification adjustment
    2,051                                     2,051       2,051  
Unrealized losses on derivative instruments
    (1,479 )                                   (1,479 )     (1,479 )
 
                                                             
Comprehensive Income
    67,065                                                          
 
                                                               
Cash dividends declared on common stock
                                    (6,961 )           (6,961 )
 
                                                               
Common stock repurchases
                        (16,343 )                       (16,343 )
Cumulative effect of change in accounting for mortgage servicing rights
                                    1,069             1,069  
Stock-based compensation
                  17,282                               17,282  
Common stock issued for:
                                                               
New issuance, net of costs
            200       11,384                               11,584  
Business combinations
            1,123       55,965                               57,088  
Exercise of stock options
            401       11,317                               11,718  
Restricted stock awards
            73       (135 )                             (62 )
Employee stock purchase plan
            37       1,949                               1,986  
Exercise of common stock warrants
            14       476             (63 )                 427  
Director compensation plan
            13       569                               582  
 
Balance at December 31, 2006
          $ 25,802       519,233       (16,343 )     681       261,734       (17,761 )     773,346  
 
                                                               
Comprehensive income:
                                                               
Net income
    55,653                               55,653             55,653  
Other comprehensive income, net of tax:
                                                               
Unrealized gains on securities, net of reclassification adjustment
    8,185                                     8,185       8,185  
Unrealized losses on derivative instruments
    (4,096 )                                   (4,096 )     (4,096 )
 
                                                             
Comprehensive Income
  $ 59,742                                                          
 
                                                               
Cash dividends declared on common stock
                                    (7,831 )           (7,831 )
 
                                                               
Common stock repurchases
                        (105,853 )                       (105,853 )
Stock-based compensation
                  10,846                               10,846  
Common stock issued for:
                                                               
Exercise of stock options
            298       6,518                               6,816  
Restricted stock awards
            112       (472 )                             (360 )
Employee stock purchase plan
            39       1,652                               1,691  
Exercise of common stock warrants
            14       634             (222 )                 426  
Director compensation plan
            16       716                               732  
 
Balance at December 31, 2007
          $ 26,281       539,127       (122,196 )     459       309,556       (13,672 )     739,555  
 
See accompanying Notes to Consolidated Financial Statements.
 
         
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WINTRUST FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
                         
 
    Years Ended December 31,  
    2007     2006     2005  
Operating Activities:
                       
Net income
  $ 55,653       66,493       67,016  
Adjustments to reconcile net income to net cash provided by operating activities:
                       
Provision for credit losses
    14,879       7,057       6,676  
Depreciation and amortization
    20,010       17,622       14,113  
Deferred income tax (benefit) expense
    (4,837 )     (1,207 )     345  
Stock-based compensation
    10,845       12,159       4,450  
Tax benefit from stock-based compensation arrangements
    2,024       5,281       7,038  
Excess tax benefits from stock-based compensation arrangements
    (2,623 )     (4,565 )      
Net amortization (accretion) of premium on securities
    618       (1,136 )     2,638  
Fair market value change of interest rate swaps
          (1,809 )     1,809  
Mortgage servicing rights fair value change and amortization, net
    1,030       905       1,423  
Originations and purchases of mortgage loans held-for-sale
    (1,949,742 )     (1,971,894 )     (2,196,638 )
Proceeds from sales of mortgage loans held-for-sale
    1,997,445       1,922,284       2,227,636  
Bank owned life insurance, net of claims
    (3,521 )     (2,948 )     (2,431 )
Gain on sales of premium finance receivables
    (2,040 )     (2,883 )     (6,499 )
Decrease (increase) in trading securities, net
    753       (714 )     1,989  
Net (increase) decrease in brokerage customer receivables
    (166 )     3,860       3,947  
Gain on mortgage loans sold
    (12,341 )     (12,736 )     (10,054 )
Gain on available-for-sale securities, net
    (2,997 )     (17 )     (1,063 )
(Gain) loss on sales of premises and equipment, net
    (2,529 )     (14 )     40  
Increase in accrued interest receivable and other assets, net
    (1,589 )     (7,867 )     (5,140 )
(Decrease) increase in accrued interest payable and other liabilities, net
    (5,496 )     13,521       (389 )
 
Net Cash Provided by Operating Activities
    115,376       41,392       116,906  
 
 
Investing Activities:
                       
Proceeds from maturities of available-for-sale securities
    801,547       857,199       384,840  
Proceeds from sales of available-for-sale securities
    252,706       372,613       1,068,470  
Purchases of available-for-sale securities
    (586,817 )     (1,069,596 )     (1,827,642 )
Proceeds from sales of premium finance receivables
    229,994       302,882       561,802  
Net cash paid for acquisitions
    (11,594 )     (51,070 )     (79,222 )
Net decrease (increase) in interest bearing deposits with banks
    8,849       (6,819 )     (7,191 )
Net increase in loans
    (487,676 )     (1,211,300 )     (1,007,090 )
Redemptions of Bank Owned Life Insurance
    1,306              
Purchases of premises and equipment, net
    (42,829 )     (64,824 )     (47,006 )
 
Net Cash Provided by (Used for) Investing Activities
    165,486       (870,915 )     (953,039 )
 
 
Financing Activities:
                       
(Decrease) increase in deposit accounts
    (397,938 )     717,044       1,038,247  
Increase (decrease) in other borrowings, net
    39,801       63,476       (133,755 )
Increase (decrease) in notes payable, net
    47,950       11,750       (5,000 )
Increase (decrease) in Federal Home Loan Bank advances, net
    89,698       (36,080 )     22,815  
Net proceeds from issuance of junior subordinated debentures
          50,000       40,000  
Redemption of junior subordinated debentures, net
          (31,050 )     (20,000 )
Proceeds from issuance of subordinated note
          25,000        
Repayment of subordinated note
          (8,000 )      
Excess tax benefits from stock-based compensation arrangements
    2,623       4,565        
Issuance of common stock, net of issuance costs
          11,584       55,845  
Issuance of common stock resulting from exercise of stock options, employee stock purchase plan and conversion of common stock warrants
    6,550       8,465       8,769  
Treasury stock purchases
    (105,853 )     (16,343 )      
Dividends paid
    (7,831 )     (6,961 )     (5,449 )
 
Net Cash (Used for) Provided by Financing Activities
    (325,000 )     793,450       1,001,472  
 
Net (Decrease) Increase in Cash and Cash Equivalents
    (44,138 )     (36,073 )     165,339  
Cash and Cash Equivalents at Beginning of Year
    305,292       341,365       176,026  
 
Cash and Cash Equivalents at End of Year
  $ 261,154       305,292       341,365  
 
 
Supplemental Disclosures of Cash Flow Information:
                       
Cash paid during the year for:
                       
Interest
  $ 351,795       304,088       183,804  
Income taxes, net
    30,992       33,281       28,618  
Acquisitions:
                       
Fair value of assets acquired, including cash and cash equivalents
    59,683       483,723       707,406  
Value ascribed to goodwill and other intangible assets
    7,221       79,832       92,597  
Fair value of liabilities assumed
    53,095       448,409       660,452  
Non-cash activities
                       
Common stock issued for acquisitions
          57,088       30,587  
Transfer to other real estate owned from loans
    5,427       2,439       1,456  
Loans transferred from held-for-sale to portfolio
    3,419              
 
See accompanying Notes to Consolidated Financial Statements.
 
 
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Notes to Consolidated Financial Statements
 
Description of the Business
Wintrust Financial Corporation (“Wintrust” or “the Company”) is a financial holding company currently engaged in the business of providing traditional community banking services to cus-tomers in the Chicago metropolitan area and southern Wisconsin. Additionally, the Company operates various non-bank subsidiaries.
Wintrust has 15 wholly-owned bank subsidiaries (collectively, “the Banks”), nine of which the Company started as de novo institutions, including Lake Forest Bank & Trust Company (“Lake Forest Bank”), Hinsdale Bank & Trust Company (“Hinsdale Bank”), North Shore Community Bank & Trust Company (“North Shore Bank”), Libertyville Bank & Trust Company (“Libertyville Bank”), Barrington Bank & Trust Company, N.A. (“Barrington Bank”), Crystal Lake Bank & Trust Company, N.A. (“Crystal Lake Bank”), Northbrook Bank & Trust Company (“Northbrook Bank”), Beverly Bank & Trust Company, N.A. (“Beverly Bank”) and Old Plank Trail Community Bank, N.A. (“Old Plank Trail Bank”). The Company acquired Advantage National Bank (“Advantage Bank”) in October 2003, Village Bank & Trust (“Village Bank”) in December 2003, Northview Bank & Trust (“Northview Bank”) in September 2004, Town Bank in October 2004, State Bank of The Lakes in January 2005, First Northwest Bank in March 2005 and Hinsbrook Bank and Trust (“Hinsbrook Bank”) in May 2006. In December 2004, Northview Bank’s Wheaton branch became its main office, it was renamed Wheaton Bank & Trust (“Wheaton Bank”) and its two Northfield locations became branches of Northbrook Bank and its Mundelein location became a branch of Libertyville Bank. In May 2005, First Northwest Bank was merged into Village Bank. In November 2006, Hinsbrook Bank’s Geneva branch was renamed St. Charles Bank & Trust (“St. Charles Bank”), its Willowbrook, Downers Grove and Darien locations became branches of Hinsdale Bank and its Glen Ellyn location became a branch of Wheaton Bank.
The Company provides, on a national basis, loans to businesses to finance insurance premiums on their commercial insurance policies (“premium finance receivables”) through First Insurance Funding Corporation (“FIFC”). FIFC is a wholly-owned sub-sidiary of Crabtree Capital Corporation (“Crabtree”) which is a wholly-owned subsidiary of Lake Forest Bank.
In November 2007, the Company acquired Broadway Premium Funding Corporation (“Broadway”). Broadway also provides loans to businesses to finance insurance premiums, mainly through insurance agents and brokers in the northeastern portion of the United States and California. Broadway is a wholly-owned subsidiary of FIFC.
Wintrust, through Tricom, Inc. of Milwaukee (“Tricom”), provides high-yielding short-term accounts receivable financing (“Tricom finance receivables”) and value-added out-sourced administrative services, such as data processing of payrolls, billing and cash management services, to the temporary staffing industry, with clients located throughout the United States. Tricom is a wholly-owned subsidiary of Hinsdale Bank.
The Company provides a full range of wealth management services through its trust, asset management and broker-dealer subsidiaries. Trust and investment services are provided at the Banks through the Company’s wholly-owned subsidiary, Wayne Hummer Trust Company, N.A. (“WHTC”), a de novo company started in 1998. Wayne Hummer Investments, LLC (“WHI”) is a broker-dealer providing a full range of private client and securities brokerage services to clients located primarily in the Midwest. WHI has office locations staffed by one or more registered financial advisors in a majority of the Company’s Banks. WHI also provides a full range of investment services to individuals through a network of relationships with community-based financial institutions primarily in Illinois. WHI is a wholly-owned subsidiary of North Shore Bank. Focused Investments LLC was a wholly-owned subsidiary of WHI and was merged into WHI in December 2006. Wayne Hummer Asset Management Company (“WHAMC”) provides money management services and advisory services to individuals, institutions and municipal and tax-exempt organizations, in addition to portfolio management and financial supervision for a wide range of pension and profit-sharing plans. WHAMC is a wholly-owned subsidiary of Wintrust. WHI, WHAMC and Focused were acquired in 2002, and are collectively referred to as the “Wayne Hummer Companies”. In February 2003, the Company acquired Lake Forest Capital Management (“LFCM”), a registered investment advisor, which was merged into WHAMC.
In May 2004, the Company acquired SGB Corporation d/b/a WestAmerica Mortgage Company (“WestAmerica”) and its affiliate, Guardian Real Estate Services, Inc. (“Guardian”). WestAmerica engages primarily in the origination and purchase of residential mortgages for sale into the secondary market, and Guardian provides document preparation and other loan closing services to WestAmerica and a network of mortgage brokers. WestAmerica maintains principal origination offices in nine states, including Illinois, and originates loans in other states through wholesale and correspondent offices. WestAmerica and Guardian are wholly-owned subsidiaries of Barrington Bank.
Wintrust Information Technology Services Company (“WITS”) provides information technology support, item capture, imaging and statement preparation services to the Wintrust subsidiaries and is a wholly-owned subsidiary of Wintrust.
 
         
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(1) Summary of Significant Accounting Policies
The accounting and reporting policies of Wintrust and its subsidiaries conform to generally accepted accounting principles (“GAAP”) in the United States and prevailing practices of the banking industry. In the preparation of the consolidated financial statements, management is required to make certain estimates and assumptions that affect the reported amounts contained in the consolidated financial statements. Management believes that the estimates made are reasonable; however, changes in estimates may be required if economic or other conditions change beyond management’s expectations. Reclassifications of certain prior year amounts have been made to conform to the current year presentation. The following is a summary of the Company’s more significant accounting policies.
Principles of Consolidation
The consolidated financial statements of Wintrust include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in the consolidated financial statements.
Earnings per Share
Basic earnings per share is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that would occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company.
Business Combinations
Business combinations are accounted for by the purchase method of accounting. Under the purchase method, assets and liabilities of the business acquired are recorded at their estimated fair values as of the date of acquisition with any excess of the cost of the acquisition over the fair value of the net tangible and intangible assets acquired recorded as goodwill. Results of operations of the acquired business are included in the income statement from the effective date of acquisition.
Cash Equivalents
For purposes of the consolidated statements of cash flows, Win-trust considers cash on hand, cash items in the process of collection, non-interest bearing amounts due from correspondent banks, federal funds sold and securities purchased under resale agreements with original maturities of three months or less, to be cash equivalents.
Securities
The Company classifies securities upon purchase in one of three categories: trading, held-to-maturity, or available-for-sale. Trading securities are bought principally for the purpose of selling them in the near term. Held-to-maturity securities are those debt securities in which the Company has the ability and positive intent to hold until maturity. All other securities are currently classified as available-for-sale as they may be sold prior to maturity.
Held-to-maturity securities are stated at amortized cost, which represents actual cost adjusted for premium amortization and discount accretion using methods that approximate the effective interest method. Available-for-sale securities are stated at fair value. Unrealized gains and losses on available-for-sale securities, net of related taxes, are included as accumulated other comprehensive income and reported as a separate component of shareholders’ equity.
Trading account securities are stated at fair value. Realized and unrealized gains and losses from sales and fair value adjustments are included in other non-interest income.
A decline in the market value of any available-for-sale or held-to-maturity security below cost that is deemed other than temporary is charged to earnings, resulting in the establishment of a new cost basis for the security. Interest and dividends, including amortization of premiums and accretion of discounts, are recognized as interest income when earned. Realized gains and losses for securities classified as available-for-sale are included in non-interest income and are derived using the specific identification method for determining the cost of securities sold.
Securities Purchased Under Resale Agreements and Securities Sold Under Repurchase Agreements
Securities purchased under resale agreements and securities sold under repurchase agreements are generally treated as collateralized financing transactions and are recorded at the amount at which the securities were acquired or sold plus accrued interest. Securities, generally U.S. government and Federal agency securities, pledged as collateral under these financing arrangements cannot be sold by the secured party. The fair value of collateral either received from or provided to a third party is monitored and additional collateral is obtained or requested to be returned as deemed appropriate.
Brokerage Customer Receivables
The Company, under an agreement with an out-sourced securities clearing firm, extends credit to its brokerage customers to finance their purchases of securities on margin. The Company receives income from interest charged on such extensions of credit. Brokerage customer receivables represent amounts due on margin balances. Securities owned by customers are held as collateral for these receivables.
 
 
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Mortgage Loans Held-for-Sale
Mortgage loans are classified as held-for-sale when originated or acquired with the intent to sell the loan into the secondary market. Market conditions or other developments may change management’s intent with respect to the disposition of these loans and loans previously classified as mortgage loans held-for-sale may be reclassified to the loan portfolio. Loans that are transferred between mortgage loans held-for-sale and the loan portfolio are recorded at the lower of cost or market at the date of transfer.
Mortgage loans held-for-sale are carried at the lower of cost or market applied on an aggregate basis by loan type. Fair value is based on either quoted prices for the same or similar loans or values obtained from third parties. Charges related to adjustments to record the loans at fair value are recognized in mortgage banking revenue. When these loans are sold, the loans are removed from the balance sheet and a gain or loss is recognized in mortgage banking revenue.
Loans, Allowance for Loan Losses and Allowance for Losses on Lending-Related Commitments
Loans, which include premium finance receivables, Tricom finance receivables and lease financing, are generally reported at the principal amount outstanding, net of unearned income. Interest income is recognized when earned. Loan origination fees and certain direct origination costs are deferred and amortized over the expected life of the loan as an adjustment to the yield using methods that approximate the effective interest method. Finance charges on premium finance receivables are earned over the term of the loan based on actual funds outstanding, beginning with the funding date, using a method which approximates the effective yield method.
Interest income is not accrued on loans where management has determined that the borrowers may be unable to meet contractual principal and/or interest obligations, or where interest or principal is 90 days or more past due, unless the loans are adequately secured and in the process of collection. Cash receipts on non-accrual loans are generally applied to the principal balance until the remaining balance is considered collectible, at which time interest income may be recognized when received.
The Company allocates the allowance for loan losses to specific loan portfolio groups and maintains its allowance for loan losses at a level believed adequate by management to absorb probable losses inherent in the loan portfolio. The allowance for loan losses is based on the size and current risk characteristics of the loan portfolio, an assessment of Problem Loan Report loans and actual loss experience, changes in the composition of the loan portfolio, historical loss experience, changes in lending policies and procedures, including underwriting standards and collections, charge-off and recovery practices, changes in the experience, ability and depth of lending management and staff, changes in national and local economic and business conditions and developments, including the condition of various market segments and changes in the volume and severity of past due and classified loans and trends in the volume of non-accrual loans, troubled debt restructurings and other loan modifications. The allowance for loan losses also includes an element for estimated probable but undetected losses and for imprecision in the credit risk models used to calculate the allowance. The Company reviews Problem Loan Report loans on a case-by-case basis to allocate a specific dollar amount of allowance, whereas all other loans are reserved for based on assigned allowance percentages evaluated by loan groupings. The loan groupings utilized by the Company are commercial and commercial real estate, residential real estate, home equity, premium finance receivables, indirect consumer, Tricom finance receivables and consumer. 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. Loan losses are charged off against the allowance, while recoveries are credited to the allowance. A provision for credit losses is charged to operations based on management’s periodic evaluation of the factors previously mentioned, as well as other pertinent factors. Evaluations are conducted at least quarterly and more frequently if deemed necessary.
In accordance with the American Institute of Certified Public Accountants Statement of Position (“SOP”) 03-3, “Accounting for Certain Loans or Debt Securities Acquired in a Transfer,” loans acquired after January 1, 2005, including debt securities, are recorded at the amount of the Company’s initial investment and no valuation allowance is carried over from the seller for individually-evaluated loans that have evidence of deterioration in credit quality since origination, and for which it is probable all contractual cash flows on the loan will be unable to be collected. Also, the excess of all undiscounted cash flows expected to be collected at acquisition over the purchaser’s initial investment are recognized as interest income on a level-yield basis over the life of the loan. Subsequent increases in cash flows expected to be collected are recognized prospectively through an adjustment of the loan’s yield over its remaining life, while subsequent decreases are recognized as impairment. Loans carried at fair value, mortgage loans held-for-sale, and loans to borrowers in good standing under revolving credit agreements are excluded from the scope of SOP 03-3.
In estimating expected losses, the Company evaluates loans for impairment in accordance with Statement of Financial Accounting Standard (“SFAS”) 114, “Accounting by Creditors for Impairment of a Loan.” A loan is considered impaired when, based on current information and events, it is probable that a
 
         
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creditor will be unable to collect all amounts due pursuant to the contractual terms of the loan. Impaired loans are generally considered by the Company to be commercial and commercial real estate loans that are non-accrual loans, restructured loans or loans with principal and/or interest at risk, even if the loan is current with all payments of principal and interest. Impairment is measured by estimating the fair value of the loan based on the present value of expected cash flows, the market price of the loan, or the fair value of the underlying collateral less costs to sell. If the estimated fair value of the loan is less than the recorded book value, a valuation allowance is established as a component of the allowance for loan losses.
The Company also maintains an allowance for lending-related commitments, specifically unfunded loan commitments and letters of credit, to provide for the risk of loss inherent in these arrangements. The allowance is computed using a methodology similar to that used to determine the allowance for loan losses. This allowance is included in other liabilities on the statement of condition while the corresponding provision for these losses is recorded as a component of the provision for credit losses.
Mortgage Servicing Rights
The Company originates mortgage loans for sale to the secondary market, the majority of which are sold without retaining servicing rights. There are certain loans, however, that are originated and sold to governmental agencies, with servicing rights retained. Mortgage servicing rights (MSR) associated with loans originated and sold, where servicing is retained, are capitalized at the time of sale at fair value based on the future net cash flows expected to be realized for performing the servicing activities, and included in other assets in the consolidated statements of condition. The change in MSR fair value is recorded as a component of mortgage banking revenue in non-interest income in the consolidated statements of income. For purposes of measuring fair value, a third party valuation is obtained. This valuation stratifies the servicing rights into pools based on product type and interest rate. The fair value of each servicing rights pool is calculated based on the present value of estimated future cash flows using a discount rate commensurate with the risk associated with that pool, given current market conditions. Estimates of fair value include assumptions about prepayment speeds, interest rates and other factors which are subject to change over time. Changes in these underlying assumptions could cause the fair value of mortgage servicing rights to change significantly in the future. Prior to the adoption of SFAS 156, “Accounting for the Servicing of Financial Assets — An Amendment of FASB Statement No. 140” (“SFAS 156”) on January 1, 2006, the capitalized value of mortgage servicing rights was carried at the lower of the initial carrying value, adjusted for amortization, or estimated fair value.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the related assets. Useful lives range from two to ten years for furniture, fixtures and equipment, two to five years for software and computer-related equipment and seven to 39 years for buildings and improvements. Land improvements are amortized over a period of 15 years and leasehold improvements are amortized over the shorter of the useful life of the improvement or the term of the respective lease. Land and antique furnishings and artwork are not subject to depreciation. Expenditures for major additions and improvements are capitalized, and maintenance and repairs are charged to expense as incurred. Internal costs related to the configuration and installation of new software and the modification of existing software that provides additional functionality are capitalized.
Long-lived depreciable assets are evaluated periodically for impairment when events or changes in circumstances indicate the carrying amount may not be recoverable. Impairment exists when the expected undiscounted future cash flows of a long-lived asset are less than its carrying value. In that event, a loss is recognized for the difference between the carrying value and the estimated fair value of the asset based on a quoted market price, if applicable, or a discounted cash flow analysis. Impairment losses are recognized in other non-interest expense.
Other Real Estate Owned
Other real estate owned is comprised of real estate acquired in partial or full satisfaction of loans and is included in other assets. Other real estate owned is recorded at its estimated fair value less estimated selling costs at the date of transfer, with any excess of the related loan balance over the fair value less expected selling costs charged to the allowance for loan losses. Subsequent changes in value are reported as adjustments to the carrying amount and are recorded in other non-interest expense. Gains and losses upon sale, if any, are also charged to other non-interest income or expense, as appropriate. At December 31, 2007 and 2006, other real estate owned totaled $3.9 million and $572,000, respectively.
Goodwill and Other Intangible Assets
Goodwill represents the excess of the cost of an acquisition over the fair value of net assets acquired. Other intangible assets represent purchased assets that also lack physical substance but can be distinguished from goodwill because of contractual or other legal rights or because the asset is capable of being sold or exchanged either on its own or in combination with a related contract, asset or liability. In accordance with SFAS 142,
 
 
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“Goodwill and Other Intangible Assets,” goodwill is not amortized, but rather is tested for impairment on an annual basis or more frequently when events warrant. Intangible assets which have finite lives are amortized over their estimated useful lives and also are subject to impairment testing. All of the Company’s other intangible assets have finite lives and are amortized over varying periods not exceeding ten years.
Bank-Owned Life Insurance
The Company owns bank-owned life insurance (“BOLI”) on certain executives. BOLI balances are recorded at their cash surrender values and are included in other assets. Changes in the cash surrender values are included in non-interest income. At December 31, 2007 and 2006, BOLI totaled $84.7 million and $82.1 million, respectively.
Derivative Instruments
The Company enters into derivative transactions principally to protect against the risk of adverse price or interest rate movements on the future cash flows or the value of certain assets and liabilities. The Company is also required to recognize certain contracts and commitments, including certain commitments to fund mortgage loans held-for-sale, as derivatives when the characteristics of those contracts and commitments meet the definition of a derivative. The Company accounts for derivatives in accordance with SFAS 133, “Accounting for Derivative Instruments and Hedging Activities,” which requires that all derivative instruments be recorded in the statement of condition at fair value. The accounting for changes in the fair value of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and further, on the type of hedging relationship.
Derivative instruments designated in a hedge relationship to mitigate exposure to changes in the fair value of an asset or liability attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivative instruments designated in a hedge relationship to mitigate exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Formal documentation of the relationship between a derivative instrument and a hedged asset or liability, as well as the risk-management objective and strategy for undertaking each hedge transaction and an assessment of effectiveness is required at inception to apply hedge accounting. In addition, formal documentation of ongoing effectiveness testing is required to maintain hedge accounting.
Fair value hedges are accounted for by recording the fair value of the derivative instrument and the fair value related to the risk being hedged of the hedged asset or liability on the statement of condition with corresponding offsets recorded in the income statement. The adjustment to the hedged asset or liability is included in the basis of the hedged item, while the fair value of the derivative is recorded as a freestanding asset or liability. Actual cash receipts or payments and related amounts accrued during the period on derivatives included in a fair value hedge relationship are recorded as adjustments to the interest income or expense recorded on the hedged asset or liability.
Cash flow hedges are accounted for by recording the fair value of the derivative instrument on the statement of condition as either a freestanding asset or liability, with a corresponding offset recorded in other comprehensive income within shareholders’ equity, net of deferred taxes. Amounts are reclassified from other comprehensive income to interest expense in the period or periods the hedged forecasted transaction affects earnings.
Under both the fair value and cash flow hedge scenarios, changes in the fair value of derivatives not considered to be highly effective in hedging the change in fair value or the expected cash flows of the hedged item are recognized in earnings as non-interest income during the period of the change.
Derivative instruments that do not qualify as hedges pursuant to SFAS 133 are reported on the statement of condition at fair value and the changes in fair value are recognized in earnings as non-interest income during the period of the change.
Commitments to fund mortgage loans (interest rate locks) to be sold into the secondary market and forward commitments for the future delivery of these mortgage loans are accounted for as derivatives not qualifying for hedge accounting. Fair values of these mortgage derivatives are estimated based on changes in mortgage rates from the date of the commitments. Changes in the fair values of these derivatives are included in mortgage banking revenue.
Periodically, the Company sells options to an unrelated bank or dealer for the right to purchase certain securities held within the Banks’ investment portfolios. These option transactions are designed primarily to increase the total return associated with holding these securities as earning assets. These transactions do not qualify as hedges pursuant to SFAS 133 and, accordingly, changes in fair values of these contracts, are reported in other non-interest income. There were no covered call option contracts outstanding as of December 31, 2007 or 2006.
Junior Subordinated Debentures Offering Costs
In connection with the Company’s currently outstanding junior subordinated debentures, approximately $726,000 of offering costs were incurred, including underwriting fees, legal and professional fees, and other costs. These costs are included in other assets and are being amortized as an adjustment to interest expense using a method that approximates the effective interest method. As of December 31, 2007, the unamortized balance of these costs was approximately $384,000. See Note 15 for further information about the junior subordinated debentures.
 
         
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Trust Assets, Assets Under Management and Brokerage Assets
Assets held in fiduciary or agency capacity for customers are not included in the consolidated financial statements as they are not assets of Wintrust or its subsidiaries. Fee income is recognized on an accrual basis and is included as a component of non-interest income.
Administrative Services Revenue
Administrative services revenue is recognized as services are performed, in accordance with the accrual method of accounting. These services include providing data processing of payrolls, billing and cash management services to Tricom’s clients in the temporary staffing services industry.
Income Taxes
Wintrust and its subsidiaries file a consolidated Federal income tax return. Income tax expense is based upon income in the consolidated financial statements rather than amounts reported on the income tax return. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using currently enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized as an income tax benefit or income tax expense in the period that includes the enactment date.
Positions taken in the Company’s tax returns may be subject to challenge by the taxing authorities upon examination. In accordance with FIN 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109, Accounting for Income Taxes,” which the Company adopted effective January 1, 2007, uncertain tax positions are initially recognized in the financial statements when it is more likely than not the positions will be sustained upon examination by the tax authorities. Such tax positions are both initially and subsequently measured as the largest amount of tax benefit that is greater than 50% likely being realized upon settlement with the tax authority, assuming full knowledge of the position and all relevant facts. Interest and penalties on income tax uncertainties are classified within income tax expense in the income statement.
Stock-Based Compensation Plans
On January 1, 2006, the Company adopted provisions of FASB Statement No. 123(R), “Share-Based Payment” (“SFAS 123R”), using the modified prospective transition method. Under this transition method, compensation cost is recognized in the financial statements beginning January 1, 2006, based on the requirements of SFAS 123R for all share-based payments granted after that date and based on the grant date fair value estimated in accordance with the original provisions of SFAS 123, “Accounting for Stock-Based Compensation” for all share-based payments granted prior to, but not yet vested as of December 31, 2005. Results for prior periods have not been restated.
Prior to 2006, the Company accounted for stock-based compensation using the intrinsic value method set forth in APB 25, as permitted by SFAS 123. The intrinsic value method provides that compensation expense for employee stock options is generally not recognized if the exercise price of the option equals or exceeds the fair value of the stock on the date of grant. As a result, for periods prior to 2006, compensation expense was generally not recognized in the Consolidated Statements of Income for stock options. Compensation expense has always been recognized for restricted share awards. On January 1, 2006, the Company reclassified $5.2 million of liabilities related to previously recognized compensation cost for restricted share awards that had not been vested as of that date to surplus as these awards represented equity awards as defined in SFAS 123R.
Compensation cost is measured as the fair value of the awards on their date of grant. A Black-Scholes model is utilized to estimate the fair value of stock options and the market price of the Company’s stock at the date of grant is used to estimate the fair value of restricted stock awards. Compensation cost is recognized over the required service period, generally defined as the vesting period. For awards with graded vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award.
SFAS 123R requires the recognition of stock based compensation for the number of awards that are ultimately expected to vest. As a result, recognized stock compensation expense is reduced for estimated forfeitures prior to vesting primarily based on historical forfeiture data. Estimated forfeitures are reassessed in subsequent periods and may change based on new facts and circumstances. Prior to January 1, 2006, actual forfeitures were accounted for as they occurred for purposes of required pro forma stock compensation disclosures.
 
 
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The Company issues new shares to satisfy option exercises and vesting of restricted shares.
The following table reflects the Company’s pro forma net income and earnings per share as if compensation expense for the Company’s stock options, determined based on the fair value at the date of grant consistent with the method of SFAS 123, had been included in the determination of the Company’s net income for the year ended December 31, 2005 (in thousands, except per share data):
         
 
    Year Ended  
    December 31,  
    2005  
Net income:
       
As reported
  $ 67,016  
Compensation cost of stock options based on fair value, net of related tax effect
    (3,313 )
 
     
Pro forma
  $ 63,703  
 
     
Earnings per share — Basic:
       
As reported
  $ 2.89  
Compensation cost of stock options based on fair value, net of related tax effect
    (0.14 )
 
     
Pro forma
  $ 2.75  
 
     
Earnings per share — Diluted:
       
As reported
  $ 2.75  
Compensation cost of stock options based on fair value, net of related tax effect
    (0.13 )
 
     
Pro forma
  $ 2.62  
 
Advertising Costs
Advertising costs are expensed in the period in which they are incurred.
Start-up Costs
Start-up and organizational costs are expensed in the period in which they are incurred.
Comprehensive Income
Comprehensive income consists of net income and other comprehensive income. Other comprehensive income includes unrealized gains and losses on securities available-for-sale, net of deferred taxes, and adjustments related to cash flow hedges, net of deferred taxes.
Stock Repurchases
The Company periodically repurchases shares of its outstanding common stock through open market purchases or other methods. Repurchased shares are recorded as treasury shares on the trade date using the treasury stock method, and the cash paid is recorded as treasury stock.
Sales of Premium Finance Receivables
Sales of premium finance receivables to an unrelated third party are recognized in accordance with SFAS 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities.” The Company recognizes as a gain or loss the difference between the proceeds received and the allocated cost basis of the loans. The allocated cost basis of the loans is determined by allocating the Company’s initial investment in the loan between the loan and the Company’s retained interests, based on their relative fair values. The retained interests include assets for the servicing rights and interest only strip and a liability for the Company’s guarantee obligation pursuant to the terms of the sale agreement. The servicing assets and interest only strips are included in other assets and the liability for the guarantee obligation is included in other liabilities. If actual cash flows are less than estimated, the servicing assets and interest only strips would be impaired and charged to earnings. Loans sold in these transactions have terms of less than twelve months, resulting in minimal prepayment risk. The Company typically makes a clean-up call by repurchasing the remaining loans in the pools sold after approximately 10 months from the sale date. Upon repurchase, the loans are recorded in the Company’s premium finance receivables portfolio and any remaining balance of the Company’s retained interest is recorded as an adjustment to the gain on sale of premium finance receivables.
Variable Interest Entities
In accordance with Financial Accounting Standards Board (“FASB”) Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”), which addresses the consolidation rules to be applied to entities defined in FIN 46 as “variable interest entities,” the Company does not consolidate its interests in subsidiary trusts formed for purposes of issuing trust preferred securities. Management believes that FIN 46 is not applicable to its various other investments or interests.
 
         
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(2) Recent Accounting Pronouncements
Accounting for Uncertainty in Income Taxes
In June 2006, the FASB issued Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109, Accounting for Income Taxes,” effective for the Company beginning on January 1, 2007. FIN 48 clarifies the accounting for income taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on derecognition, measurement, classification of interest and penalties, accounting in interim periods, disclosure and transition. The adoption of FIN 48 did not have a material impact on the Company.
Accounting for Split-Dollar Life Insurance Arrangements
In September 2006, the FASB ratified the Emerging Issues Task Force (“EITF”) consensus on EITF Issue 06-4, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements” (“EITF 06-4”). The EITF is limited to the recognition of a liability and related compensation costs for endorsement split-dollar insurance arrangements that provide a benefit to an employee that extends to postretirement periods. Therefore, the provisions of EITF 06-4 would not apply to a split-dollar insurance arrangement that provides a specified benefit to an employee that is limited to the employee’s active service period with an employer. EITF is effective for fiscal years beginning after December 15, 2007. The effect of initially applying the guidance would be accounted for as a cumulative-effect adjustment to beginning retained earnings with the option of retrospective application. The adoption of EITF 06-4 did not materially impact the consolidated financial statements.
Fair Value Measurements
In September 2006, the FASB issued Statement of Financial Accounting Standards 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 establishes a framework for measuring fair value and requires expanded disclosure about the information used to measure fair value. The statement applies whenever other statements require, or permit, assets or liabilities to be measured at fair value. The statement does not expand the use of fair value in any new circumstances and is effective January 1, 2008. The adoption of SFAS 157 did not materially impact the consolidated financial statements.
Fair Value Option for Financial Assets and Financial Liabilities
In February 2007, the FASB issued Statement of Financial Accounting Standards 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115” (“SFAS 159”). SFAS No. 159 provides entities with an option to report selected financial assets and liabilities at fair value. SFAS No. 159 is effective January 1, 2008. The adoption of SFAS 159 did not materially impact the consolidated financial statements.
Business Combinations
In December 2007, the FASB issued Statement of Financial Accounting Standards 141(R), “Business Combinations” (SFAS 141R”). SFAS 141R requires the acquiring entity in a business combination to recognize the full fair value of the assets acquired and liabilities assumed in a transaction at the acquisition date; the immediate expense recognition of transaction costs; and accounting for restructuring plans separately from the business combination. SFAS 141R is effective for financial statements issued for fiscal years beginning after December 15, 2008. Early adoption is prohibited.
Accounting for Written Loan Commitments at Fair Value Through Earnings
In November 2007, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. 109 (“SAB 109”), “Written Loan Commitments Recorded at Fair Value through Earnings.” SAB 109 states that the expected cash flows related to servicing the loan should be included in the measurement of all written loan commitments that are accounted for at fair value. Prior to SAB 109, this component of value was not incorporated into the fair value of the loan commitment. SAB 109 is effective for financial statements issued for fiscal years December 15, 2007. The Company does not expect SAB 109 to have a material impact to its financial statements.
 
 
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(3) Available-for-Sale Securities
A summary of the available-for-sale securities portfolio presenting carrying amounts and gross unrealized gains and losses as of December 31, 2007 and 2006 is as follows (in thousands):
                                                                 
 
    December 31, 2007     December 31, 2006
            Gross     Gross                     Gross     Gross        
    Amortized     unrealized     unrealized     Fair     Amortized     unrealized     unrealized     Fair  
    cost     gains     losses     Value     cost     gains     losses     Value  
     
U.S. Treasury
  $ 33,161       73       (125 )     33,109       35,990       8       (1,926 )     34,072  
U.S. Government agencies
    321,548       783       (288 )     322,043       696,946       396       (6,768 )     690,574  
Municipal
    49,376       246       (495 )     49,127       49,602       206       (599 )     49,209  
Corporate notes and other debt
    45,920       12       (3,130 )     42,802       61,246       391       (1,557 )     60,080  
Mortgage-backed
    699,166       282       (10,602 )     688,846       884,130       405       (18,247 )     866,288  
Federal Reserve/FHLB stock and other equity securities
    167,591       319             167,910       138,283       1,210             139,493  
     
Total available-for-sale securities
  $ 1,316,762       1,715       (14,640 )     1,303,837       1,866,197       2,616       (29,097 )     1,839,716  
 
The decrease in U.S. Government agencies as of December 31, 2007 compared to December 31, 2006 is primarily related to the maturity of Federal Home Loan Bank (“FHLB”) bonds partially offset by new purchases.
The following table presents the portion of the Company’s available-for-sale securities portfolio which has gross unrealized losses, reflecting the length of time that individual securities have been in a continuous unrealized loss position at December 31, 2007 (in thousands):
                                                 
 
    Continuous unrealized     Continuous unrealized        
    losses existing for     losses existing for        
    less than 12 months     greater than 12 months     Total  
    Fair     Unrealized     Fair     Unrealized     Fair     Unrealized  
    value     losses     value     losses     value     losses  
     
U.S. Treasury
  $             10,076       (125 )     10,076       (125 )
U.S. Government agencies
    86,993       (99 )     36,099       (189 )     123,092       (288 )
Municipal
    9,601       (224 )     16,617       (271 )     26,218       (495 )
Corporate notes and other debt
    18,943       (1,515 )     19,234       (1,615 )     38,177       (3,130 )
Mortgage-backed
    1,371       (1 )     667,570       (10,601 )     668,941       (10,602 )
     
Total
  $ 116,908       (1,839 )     749,596       (12,801 )     866,504       (14,640 )
 
Management does not believe any individual unrealized loss as of December 31, 2007 represents an other-than-temporary impairment. All mortgage-backed securities are of investment grade quality and issued by government-backed agencies. The fair value of available-for-sale securities includes investments totaling approximately $749.6 million with unrealized losses of $12.8 million, which have been in an unrealized loss position for greater than 12 months. U.S. Treasury, U.S. Government agencies and Mortgage-backed securities totaling $713.7 million with unrealized losses of $10.9 million are primarily fixed-rate investments with temporary impairment resulting from increases in interest rates since the purchase of the investments. The Company has the intent and ability to hold these investments until such time as the values recover or until maturity.
 
         
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The amortized cost and fair value of securities as of December 31, 2007 and 2006, by contractual maturity, are shown in the following table. Contractual maturities may differ from actual maturities as borrowers may have the right to call or repay obligations with or without call or prepayment penalties. Mortgage-backed securities are not included in the maturity categories in the following maturity summary as actual maturities may differ from contractual maturities because the underlying mortgages may be called or prepaid without penalties (in thousands):
                                 
 
    December 31, 2007     December 31, 2006  
    Amortized     Fair     Amortized     Fair  
    Cost     Value     Cost     Value  
     
Due in one year or less
  $ 184,645       184,739       459,736       458,858  
Due in one to five years
    48,381       47,392       58,404       57,814  
Due in five to ten years
    92,708       90,998       295,613       287,258  
Due after ten years
    124,271       123,952       30,031       30,005  
Mortgage-backed
    699,166       688,846       884,130       866,288  
Federal Reserve/FHLB Stock and other equity
    167,591       167,910       138,283       139,493  
     
Total available-for-sale securities
  $ 1,316,762       1,303,837       1,866,197       1,839,716  
 
In 2007, 2006 and 2005, the Company had gross realized gains on sales of available-for-sale securities of $3.6 million, $510,000 and $1.1 million, respectively. During 2007, 2006 and 2005, gross realized losses on sales of available-for-sale securities totaled $628,000, $493,000 and $40,000, respectively. Proceeds from sales of available-for-sale securities during 2007, 2006 and 2005, were $253 million, $373 million and $1.1 billion, respectively. At December 31, 2007 and 2006, securities having a carrying value of $780.8 million and $910.1 million, respectively, were pledged as collateral for public deposits, trust deposits, FHLB advances and securities sold under repurchase agreements. At December 31, 2007, there were no securities of a single issuer, other than U.S. Government-sponsored agency securities, which exceeded 10% of shareholders’ equity.
(4) Loans
A summary of the loan portfolio at December 31, 2007 and 2006 is as follows (in thousands):
                 
 
    2007     2006  
     
Commercial and commercial real estate
  $ 4,408,661       4,068,437  
Home equity
    678,298       666,471  
Residential real estate
    226,686       207,059  
Premium finance receivables
    1,078,185       1,165,846  
Indirect consumer loans
    241,393       249,534  
Tricom finance receivables
    27,719       43,975  
Consumer and other loans
    140,660       95,158  
     
Total loans
  $ 6,801,602       6,496,480  
 
At December 31, 2007 and 2006, premium finance receivables were recorded net of unearned income of $23.3 million and $27.9 million, respectively. Total loans include net deferred loan fees and costs and fair value purchase accounting adjustments totaling $6.6 million at December 31, 2007 and $2.0 million at December 31, 2006.
Certain real estate loans, including mortgage loans held-for-sale, and home equity loans with balances totaling approximately $663.9 million and $607.1 million, at December 31, 2007 and 2006, respectively, were pledged as collateral to secure the availability of borrowings from certain Federal agency banks. At December 31, 2007, approximately $461.9 million of these pledged loans are included in a blanket pledge of qualifying loans to the Federal Home Loan Bank (“FHLB”). The remaining $202.0 million of pledged loans was used to secure potential borrowings at the Federal Reserve Bank discount window. At December 31, 2007 and 2006, the Banks borrowed $415.2 million and $325.5 million, respectively, from the FHLB in connection with these collateral arrangements. See Note 12 for a summary of these borrowings.
The Company’s loan portfolio is generally comprised of loans to consumers and small to medium-sized businesses located within the geographic market areas that the Banks serve. The premium finance receivables and Tricom finance receivables portfolios are made to customers on a national basis and the majority of the indirect consumer loans are generated through a network of local automobile dealers. As a result, the Company strives to maintain a loan portfolio that is diverse in terms of loan type, industry, borrower and geographic concentrations. Such diversification reduces the exposure to economic downturns that may occur in different segments of the economy or in different industries.
It is the policy of the Company to review each prospective credit in order to determine the appropriateness and, when required, the adequacy of security or collateral necessary to obtain when making a loan. The type of collateral, when required, will vary from liquid assets to real estate. The Company seeks to assure access to collateral, in the event of default, through adherence to state lending laws and the Company’s credit monitoring procedures.
 
 
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(5) Allowance for Loan Losses and Allowance for Losses on Lending-Related Commitments
A summary of the activity in the allowance for loan losses for the years ended December 31, 2007, 2006, and 2005 is as follows (in thousands):
                         
 
    Years Ended December 31,
    2007   2006   2005
     
Allowance at beginning of year
  $ 46,055       40,283       34,227  
Provision for credit losses
    14,879       7,057       6,676  
Allowance acquired in business combinations
    362       3,852       4,792  
Reclassification from/(to) allowance for losses on lending-related commitments
    (36 )     92       (491 )
Charge-offs
    (13,537 )     (8,477 )     (6,523 )
Recoveries
    2,666       3,248       1,602  
     
Allowance at end of year
  $ 50,389       46,055       40,283  
 
The Company also maintains an allowance for lending-related commitments, specifically unfunded loan commitments and letters of credit. The balance of the allowance for lending-related commitments was $493,000 and $457,000 at December 31, 2007 and 2006, respectively.
A summary of non-accrual and impaired loans and their impact on interest income as well as loans past due greater than 90 days and still accruing interest are as follows (in thousands):
                         
 
    Years Ended December 31,
    2007   2006   2005
     
Total non-accrual loans (as of year-end)
  $ 47,841       23,509       18,693  
Reduction of interest income from non-accrual loans
    1,790       1,126       1,258  
Average balance of impaired loans
    15,359       10,230       9,331  
Interest income recognized on impaired loans
    361       140       581  
Loans past due greater than 90 days and still accruing
    24,013       13,365       7,496  
 
Management evaluates the value of the impaired loans primarily by using the fair value of the collateral. A summary of impaired loan information at December 31, 2007 and 2006 is as follows (in thousands):
                 
 
    2007   2006
     
Impaired loans
  $ 28,759       11,191  
Impaired loans that had allocated specific allowance for loan losses
    22,515       6,165  
Allocated allowance for loan losses
    2,308       1,400  
 
(6) Mortgage Servicing Rights
Effective January 1, 2006, the Company adopted the provisions of SFAS 156 and elected the fair value measurement method for mortgage servicing rights (“MSRs”). Upon adoption, the carrying value of the MSRs was increased to fair value by recognizing a cumulative effect adjustment of $1.7 million pre-tax, or $1.1 million after tax. Following is a summary of the changes in the carrying value of MSRs, accounted for at fair value, for the years ending December 31, 2007 and 2006 (in thousands):
                 
 
    2007   2006
     
Balance at beginning of year
  $ 5,031       3,630  
Cumulative effect of change in accounting
          1,727  
Additions from loans sold with servicing retained
    729       579  
Changes in fair value due to:
               
Payoffs and paydowns
    (773 )     (802 )
Changes in valuation inputs or assumptions
    (257 )     (103 )
     
Fair value at end of year
  $ 4,730       5,031  
     
Unpaid principal balance of mortgage loans serviced for others
  $ 487,660       494,695  
 
Prior to January 1, 2006, MSRs were accounted for at the lower of their initial carrying value, net of accumulated amortization, or fair value. MSRs were periodically evaluated for impairment and a valuation allowance was established through a charge to income when the carrying value exceeded the fair value and was believed to be temporary. Changes in the carrying value of MSRs, accounted for using the amortization method, for the year ended December 31, 2005 follow (in thousands):
         
 
    2005
Balance at beginning of year
  $ 2,179  
Balance acquired in business combinations
    2,064  
Additions from loans sold with servicing retained
    810  
Amortization
    (1,423 )
 
   
Balance at end of year
    3,630  
     
Fair value at end of year
  $ 5,357  
     
Unpaid principal balance of mortgage loans serviced for others
  $ 521,520  
 
There was no valuation allowance at December 31, 2005.
The Company recognizes MSR assets on residential real estate loans sold upon the sale of the loans when it retains the obligation to service the loans and the servicing fee is more than adequate compensation. The recognition of MSR assets and subsequent change in fair value are recognized in mortgage banking revenue. MSRs are subject to decline in value from actual and expected prepayment of the underlying loans. The Company does not specifically hedge the value of its MSRs.
 

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Fair values are provided by a third party which uses a discounted cash flow model that incorporates the objective characteristics of the portfolio as well as subjective valuation parameters that purchasers of servicing would apply to such portfolios sold into the secondary market. The subjective factors include loan prepayment speeds, interest rates, servicing costs and other economic factors.
(7) Business Combinations
The Company completed one business combination in 2007. The acquisition was accounted for under the purchase method of accounting; thus, the results of operations prior to the effective date of acquisition were not included in the accompanying consolidated financial statements. Goodwill and other purchase accounting adjustments were recorded upon the completion of the acquisition, which did not have a material impact on the consolidated financial statements.
On November 1, 2007, the Company completed the acquisition of 100% of the ownership interests of Broadway Premium Funding Corporation (“Broadway”). Broadway was founded in 1999 and had approximately $60 million of premium finance receivables outstanding at the date of acquisition. Broadway provides financing for commercial property and casualty insurance premiums, mainly through insurance agents and brokers in the northeastern portion of the United States and California. Broadway is a subsidiary of FIFC.
(8) Goodwill and Other Intangible Assets
A summary of goodwill by business segment is as follows (in thousands):
                                 
 
    Jan 1,     Goodwill     Impairment     Dec 31,  
    2007     Acquired     Losses     2007  
     
Banking
  $ 245,805       (109 )           245,696  
Premium Finance
          7,221             7,221  
Tricom
    8,958                   8,958  
Wealth management
    14,173       156             14,329  
     
Total
  $ 268,936       7,268             276,204  
 
Approximately $24.9 million of the December 31, 2007 book balance of goodwill is deductible for tax purposes.
The decrease in the Banking segment’s goodwill primarily relates to adjustments of prior estimates of fair values associated with the acquisition of Hinsbrook Bank partially offset by additional contingent consideration earned by former owners of Guardian as a result of attaining certain performance measures. Wintrust could pay additional consideration pursuant to the West America and Guardian transaction through June 2009. Any payments would be reflected in the Banking segment’s goodwill.
The increase in goodwill in the wealth management segment represents additional contingent consideration earned by the former owners of LFCM as a result of attaining certain performance measures pursuant to the terms of the LFCM purchase agreement. Wintrust is no longer required to pay additional consideration pursuant to this transaction. LFCM was merged into WHAMC in February 2003.
A summary of finite-lived intangible assets as of December 31, 2007 and 2006 and the expected amortization as of December 31, 2007 is follows (in thousands):
                 
 
    December 31,
    2007   2006
     
Wealth management segment:
               
Customer list intangibles
Gross carrying amount
  $ 3,252       3,252  
Accumulated amortization
    (2,800 )     (2,463 )
     
Net carrying amount
    452       789  
     
 
               
Banking segment:
               
Core deposit intangibles
Gross carrying amount
    27,918       27,918  
Accumulated amortization
    (10,633 )     (7,108 )
     
Net carrying amount
    17,285       20,810  
     
 
               
Total intangible assets, net
  $ 17,737       21,599  
     
                 
Estimated amortization        
 
2008
  $ 3,862          
2009
    2,717          
2010
    2,381          
2011
    2,253          
2012
    2,251          
 
The customer list intangibles recognized in connection with the acquisitions of LFCM in 2003 and WHAMC in 2002, are being amortized over seven-year periods on an accelerated basis. The core deposit intangibles recognized in connection with the Company’s seven bank acquisitions in the last five years are being amortized over ten-year periods on an accelerated basis. Total amortization expense associated with finite-lived intangibles in 2007, 2006 and 2005 was $3.9 million, $3.9 million and $3.4 million, respectively.
 

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(9) Premises and Equipment, Net
A summary of premises and equipment at December 31, 2007 and 2006 is as follows (in thousands):
                 
 
    2007     2006  
     
Land
  $ 77,868       81,458  
Buildings and leasehold improvements
    253,000       204,249  
Furniture, equipment and computer software
    82,705       71,616  
Construction in progress
    8,003       21,545  
     
 
    421,576       378,868  
Less: Accumulated depreciation and amortization
    82,279       67,827  
     
Total premises and equipment, net
  $ 339,297       311,041  
 
Depreciation and amortization expense related to premises and equipment, totaled $17.1 million in 2007, $13.5 million in 2006 and $12.1 million in 2005.
(10) Deposits
The following is a summary of deposits at December 31, 2007 and 2006 (in thousands):
                 
 
    2007     2006  
     
Non-interest bearing accounts
  $ 664,264       699,203  
NOW accounts
    1,014,780       844,875  
Wealth Management deposits
    599,426       529,730  
Money market accounts
    701,972       690,938  
Savings accounts
    297,586       304,362  
Time certificates of deposit
    4,193,413       4,800,132  
     
Total deposits
  $ 7,471,441       7,869,240  
 
The scheduled maturities of time certificates of deposit at December 31, 2007 and 2006 are as follows (in thousands):
                 
 
    2007     2006  
     
Due in one year
  $ 3,464,962       3,704,507  
Due in one to two years
    386,937       643,252  
Due in two to three years
    132,794       185,803  
Due in three to four years
    141,148       106,111  
Due in four to five years
    67,276       157,783  
Due after five years
    296       2,676  
     
Total time certificates of deposit
  $ 4,193,413       4,800,132  
 
The following table sets forth the scheduled maturities of time deposits in denominations of $100,000 or more at December 31 (in thousands):
                     
 
    2007   2006
     
Maturing within 3 months
  $ 708,559       613,214  
After 3 but within 6 months
    493,223       560,578  
After 6 but within 12 months
    645,061       794,749  
After 12 months
    482,818       669,957  
     
Total
  $ 2,329,661       2,638,498  
     
(11) Notes Payable
The notes payable balance was $60.7 million and $12.8 million at December 31, 2007 and 2006, respectively. These balances represent the outstanding balances on a $101.0 million loan agreement (“Agreement”) with an unaffiliated bank. The Agreement consists of a $100.0 million revolving note, which matures on June 1, 2008 and a $1.0 million note that matures on June 1, 2015. At December 31, 2007, the notes payable balance includes the $1.0 million note and a $59.7 million outstanding balance on the $100.0 million revolving note. Effective January 1, 2007, interest is calculated, at the Company’s option, at a floating rate equal to either: (1) LIBOR plus 115 basis points or (2) the greater of the lender’s prime rate or the Federal Funds Rate plus 50 basis points. At December 31, 2007 and 2006, the interest rates were 6.27% and 6.77%, respectively.
The Agreement is secured by the stock of some of the Banks and contains several restrictive covenants, including the maintenance of various capital adequacy levels, asset quality and profitability ratios, and certain restrictions on dividends and other indebtedness. At December 31, 2007, the Company is in compliance with all debt covenants. The Agreement may be utilized, as needed, to provide capital to fund continued growth at the Company’s Banks and to serve as an interim source of funds for acquisitions, common stock repurchases or other general corporate purposes.
 

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(12) Federal Home Loan Bank Advances
A summary of the outstanding FHLB advances at December 31, 2007 and 2006, is as follows (in thousands):
                 
 
    2007   2006
     
2.77% advance due February 2007
  $       25,000  
4.89% advance due November 2007
          3,034  
Variable-rate advance due January 2008
    3,698        
5.37% advance due February 2008
    2,502       2,518  
3.32% advance due March 2008
    2,501       2,505  
4.36% advance due March 2008
    2,000       2,000  
2.72% advance due May 2008
    1,996       1,986  
4.78% advance due October 2008
    3,000       3,000  
4.40% advance due July 2009
    2,026       2,044  
4.85% advance due November 2009
    3,000       3,000  
4.58% advance due March 2010
    5,018       5,026  
4.61% advance due March 2010
    2,500       2,500  
4.50% advance due September 2010
    4,942       4,918  
4.88% advance due November 2010
    3,000       3,000  
4.60% advance due July 2011
    30,000       30,000  
3.30% advance due November 2011
    25,000       25,000  
4.61% advance due January 2012
    53,000        
4.68% advance due January 2012
    16,000        
4.44% advance due April 2012
    5,000        
4.78% advance due June 2012
    25,000        
4.79% advance due June 2012
          25,000  
3.99% advance due September 2012
    5,000        
3.78% advance due February 2015
    25,000       25,000  
4.12% advance due February 2015
    25,000       25,000  
3.70% advance due June 2015
    40,000       40,000  
4.55% advance due February 2016
    45,000       45,000  
4.83% advance due May 2016
    50,000       50,000  
3.47% advance due November 2017
    10,000        
4.18% advance due February 2022
    25,000        
     
Federal Home Loan Bank advances
  $ 415,183       325,531  
 
At December 31, 2007 all but one of the FHLB advances were fixed-rate term obligations. The Company entered into a $3.7 million, 30-day variable-rate advance in December 2007. The rate on the variable advance adjusts daily and was 3.77% at December 31, 2007. All of the advances due after 2011 have varying call dates ranging from January 2008 to February 2011. FHLB advances are stated at par value of the debt adjusted for unamortized fair value adjustments recorded in connection with advances acquired through acquisitions.
At December 31, 2007, the weighted average contractual interest rate on FHLB advances was 4.31%, which is also the same as the weighted average effective interest rate, which reflects amortization of fair value adjustments associated with FHLB advances acquired through acquisitions.
FHLB advances are collateralized by qualifying residential real estate loans and certain securities. The Banks have arrangements with the FHLB whereby, based on available collateral, they could have borrowed an additional $85.2 million at December 31, 2007.
(13) Subordinated Notes
A summary of the subordinated notes at December 31, 2007 and 2006 is as follows (in thousands):
                 
 
    2007   2006
     
Subordinated note, due October 29, 2012
  $ 25,000       25,000  
Subordinated note, due May 1, 2013
    25,000       25,000  
Subordinated note, due May 29, 2015
    25,000       25,000  
     
Total subordinated notes
  $ 75,000       75,000  
 
The subordinated notes were issued in 2002, 2003 and 2005. Each subordinated note has a term of ten years and may be redeemed by the Company at any time prior to maturity. The subordinated note issued in 2005 was signed by the Company on October 25, 2005, but was not funded until May 2006. The proceeds from the issuance were used to fund the acquisition of Hinsbrook Bank. Each note requires annual principal payments of $5.0 million beginning in the sixth year of the note. The interest rate on each subordinated note is calculated at a rate equal to LIBOR plus 1.30%. In 2006, the interest rate on each subordinated note was calculated at a rate equal to LIBOR plus 1.60%. At December 31, 2007 and 2006, the weighted average contractual interest rate on the subordinated notes was 6.38% and 6.97%, respectively. In connection with the issuances of the subordinated notes in 2002 and 2003, the Company incurred costs totaling $1.0 million. These costs are included in other assets and are being amortized to interest expense using a method that approximates the effective interest method. At December 31, 2007 and 2006, the unamortized balance of these costs were $380,000 and $508,000, respectively. No issuance costs were incurred in connection with the subordinated note issued in 2005. The subordinated notes qualify as Tier II capital under the regulatory capital requirements.
(14) Other Borrowings
The following is a summary of other borrowings at December 31, 2007 and 2006 (in thousands):
                 
 
    2007   2006
     
Federal funds purchased
  $ 4,223        
Securities sold under repurchase agreements
    248,334       159,883  
Other
    1,877       2,189  
     
Total other borrowings
  $ 254,434       162,072  
 
At December 31, 2007 securities sold under repurchase agreements represent $165.5 million of customer sweep accounts in connection with master repurchase agreements at the Banks as well as $82.8 million of short-term borrowings from banks and brokers. Securities
 
 
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pledged for these borrowings are maintained under the Company’s control and consist of U.S. Government agency, mortgage-backed and corporate securities. These securities are included in the available-for-sale securities portfolio as reflected on the Company’s Consolidated Statements of Condition.
Other includes a 6.17% fixed-rate mortgage (which matures May 1, 2010) related to the Company’s Northfield banking office.
(15) Junior Subordinated Debentures
As of December 31, 2007 the Company owned 100% of the Common Securities of nine trusts, Wintrust Capital Trust III, Wintrust Statutory Trust IV, Wintrust Statutory Trust V, Wintrust Capital Trust VII, Wintrust Capital Trust VIII, Wintrust Capital Trust IX, Northview Capital Trust I, Town Bankshares Capital Trust I and First Northwest Capital Trust I (the “Trusts”) set up to provide long-term financing. The Northview, Town and First Northwest capital trusts were acquired as part of the acquisitions of Northview Financial Corporation, Town Bank-shares, Ltd. and First Northwest Bancorp, Inc., respectively. The Trusts were formed for purposes of issuing Trust Preferred Securities to third-party investors and investing the proceeds from the issuances of the Trust Preferred Securities and the Common Securities solely in Junior Subordinated Debentures (“Debentures”) issued by the Company, with the same maturities and interest rates as the Trust Preferred Securities. The Debentures are the sole assets of the Trusts. In each Trust the Common Securities represent approximately 3% of the Debentures and the Trust Preferred Securities represent approximately 97% of the Debentures.
The Trusts are reported in the Company’s financial statements as unconsolidated subsidiaries; the Debentures are reflected as “Junior subordinated debentures” and the Common Securities are included in Available-for-sale Securities.
A summary of the Company’s junior subordinated debentures, which represents the par value of the obligations and basis adjustments for the unamortized fair value adjustments recognized at the acquisition dates for the Northview, Town and First Northwest obligations at December 31, 2007 and 2006, is as follows (in thousands):
                 
 
    2007   2006
     
Variable rate (LIBOR + 3.25%) Debentures owed to Wintrust Capital Trust III, due April 7, 2033
  $ 25,774       25,774  
Variable rate (LIBOR + 2.80%) Debentures owed to Wintrust Statutory Trust IV, due December 8, 2033
    20,619       20,619  
Variable rate (LIBOR + 2.60%) Debentures owed to Wintrust Statutory Trust V, due May 11, 2034
    41,238       41,238  
Variable rate (LIBOR + 1.95%) Debentures owed to Wintrust Capital Trust VII, due March 15, 2035
    51,550       51,550  
Variable rate (LIBOR + 1.45%) Debentures owed to Wintrust Capital Trust VIII due September 30, 2035
    41,238       41,238  
Fixed rate (6.84%) Debentures owed to Wintrust Capital Trust IX, due September 15, 2036
    51,547       51,547  
Fixed rate (6.35%) Debentures owed to Northview Capital Trust I, due November 8, 2033
    6,228       6,279  
Variable rate (LIBOR + 3.00%) Debentures owed to Town Bankshares Capital Trust I, due November 8, 2033
    6,239       6,301  
Variable rate (LIBOR + 3.00%) Debentures owed to First Northwest Capital Trust I, due May 31, 2034
    5,229       5,282  
     
Total junior subordinated debentures
  $ 249,662       249,828  
 
The interest rates associated with the variable rate Debentures are based on the three-month LIBOR rate and were 8.49%, 7.63%, 7.43%, 6.94%, 6.28%, 7.91%, and 7.83%, for Wintrust Capital Trust III, Wintrust Statutory Trust IV, Wintrust Statutory Trust V, Wintrust Capital Trust VII, Wintrust Capital Trust VIII, Town Bankshares Capital Trust I and First Northwest Capital Trust I, respectively, at December 31, 2007. The interest rate on the Debentures of Wintrust Capital Trust IX, currently fixed at 6.84%, changes to a variable rate equal to three-month LIBOR plus 1.63% effective September 15, 2011, and the interest rate on
 
         
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the Debentures of Northview Capital Trust I, fixed at 6.35% at December 31, 2007, changed to a variable rate equal to three-month LIBOR plus 3.00% effective February 8, 2008. At December 31, 2007, the weighted average contractual interest rate on the Debentures was 7.14%. In August 2006, the Company entered into $175 million of interest rate swaps, which are designated in hedge relationships, to hedge the variable cash flows of certain Debentures. On a hedge-adjusted basis, the weighted average interest rate on the Debentures was 7.38% at December 31, 2007. Distributions on the common and preferred securities issued by the Trusts are payable quarterly at a rate per annum equal to the interest rate being earned by the Trusts on the Debentures held by the Trusts. Interest expense on the Debentures is deductible for income tax purposes.
On September 1, 2006, the Company issued $51.5 million of Debentures to Wintrust Capital Trust IX with an initial fixed rate of 6.84%, and on September 5, 2006, the Company used proceeds from this issuance to redeem, at par value, $32.0 million of the Debentures of Wintrust Capital Trust I with a fixed interest rate of 9.00%. In connection with the redemption of the Debentures of Wintrust Capital Trust I, the Company expensed $304,000 of unamortized issuance costs.
The Company has guaranteed the payment of distributions and payments upon liquidation or redemption of the trust preferred securities in each case to the extent of funds held by the Trusts. The Company and the Trusts believe that, taken together, the obligations of the Company under the guarantees, the Debentures, and other related agreements provide, in the aggregate, a full, irrevocable and unconditional guarantee, on a subordinated basis, of all of the obligations of the Trusts under the trust preferred securities. Subject to certain limitations, the Company has the right to defer payment of interest on the Debentures at any time, or from time to time, for a period not to exceed 20 consecutive quarters. The trust preferred securities are subject to mandatory redemption, in whole or in part, upon repayment of the Debentures at maturity or their earlier redemption. The Debentures are redeemable in whole or in part prior to maturity, at the discretion of the Company if certain conditions are met, and only after the Company has obtained Federal Reserve approval, if then required under applicable guidelines or regulations. The Debentures held by the Trusts are first redeemable, in whole or in part, by the Company as follows:
     
 
Wintrust Capital Trust III
  April 7, 2008
Wintrust Statutory Trust IV
  December 31, 2008
Wintrust Statutory Trust V
  June 30, 2009
Wintrust Capital Trust VII
  March 15, 2010
Wintrust Capital Trust VIII
  September 30, 2010
Wintrust Capital Trust IX
  September 15, 2011
Northview Capital Trust I
  August 8, 2008
Town Bankshares Capital Trust I
  August 8, 2008
First Northwest Capital Trust I
  May 31, 2009
 
The junior subordinated debentures, subject to certain limitations, qualify as Tier 1 capital of the Company for regulatory purposes. On February 28, 2005, the Federal Reserve issued a final rule that retains Tier I capital treatment for these instruments but with stricter limits. Under the rule, which is effective March 31, 2009, and has a transition period until then, the aggregate amount of junior subordinated debentures and certain other capital elements is limited to 25% of Tier I capital elements (including junior subordinated debentures), net of goodwill less any associated deferred tax liability. The amount of junior subordinated debentures and certain other capital elements in excess of the limit could be included in Tier 2 capital, subject to restrictions. Applying the final rule at December 31, 2007, the Company would still be considered well-capitalized under regulatory capital guidelines.
(16) M