# Wintrust Financial Corp: Form 10-Q for the period ended Mar 31, 2013

- Company: [Wintrust Financial Corp](/companies/wtfc.md) (CIK 1015328)
- Form: 10-Q
- Filed: 2013-05-09
- Accepted by EDGAR: May 9, 2013, 12:10 ET
- Period: 2013-03-31
- Accession: 0001015328-13-000114
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1015328/000101532813000114/wtfc-20130331x10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1015328/000101532813000114/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2013-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2013-01-01 to 2013-03-31 | $188.1m | us-gaap:Revenues |
| Operating income | 3 months, 2013-01-01 to 2013-03-31 | $32.1m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2013-01-01 to 2013-03-31 | $21.6m | us-gaap:InterestExpense |
| Income tax | 3 months, 2013-01-01 to 2013-03-31 | $20.2m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2013-01-01 to 2013-03-31 | $32.1m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2013-01-01 to 2013-03-31 | $0.65 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2013-01-01 to 2013-03-31 | $0.80 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2013-01-01 to 2013-03-31 | 49,439,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2013-01-01 to 2013-03-31 | $99.7m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2013-01-01 to 2013-03-31 | $6.5m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 3 months, 2013-01-01 to 2013-03-31 | $3.6m | us-gaap:PaymentsOfDividends |
| Share repurchases | 3 months, 2013-01-01 to 2013-03-31 | $349.0k | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2013-03-31 | $213.2m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Total assets | at 2013-03-31 | $17.07bn | us-gaap:Assets |
| Total liabilities | at 2013-03-31 | $15.25bn | us-gaap:Liabilities |
| Shareholders' equity | at 2013-03-31 | $1.83bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 184,833 characters.

### MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

### CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of financial condition as of March 31, 2013 compared with December 31, 2012 and March 31, 2012, and the results of operations for the three month periods ended March 31, 2013 and 2012, should be read in conjunction with the unaudited consolidated financial statements and notes contained in this report and the risk factors discussed herein and under Item 1A of the Company’s 2012 Annual Report on Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties and, as such, future results could differ significantly from management’s current expectations. See the last section of this discussion for further information on forward-looking statements.

### Introduction

Wintrust is a financial holding company that provides traditional community banking services, primarily in the Chicago metropolitan area and southeastern Wisconsin, and operates other financing businesses on a national basis and Canada through several non-bank subsidiaries. Additionally, Wintrust offers a full array of wealth management services primarily to customers in the Chicago metropolitan area and southeastern Wisconsin.

### Overview

### First Quarter Highlights

The Company recorded net income of $32.1 million for the first quarter of 2013 compared to $23.2 million in the first quarter of 2012. The results for the first quarter of 2013 demonstrate continued operating strengths as loans outstanding increased, net interest margin remained stable and our deposit funding base mix continued its beneficial shift toward an aggregate lower cost of funds. The Company also continues to take advantage of the opportunities that have resulted from distressed credit markets – specifically, a dislocation of assets, banks and people in the overall market. For more information, see “Overview—Recent Acquisition Transactions.”

The Company increased its loan portfolio, excluding covered loans and loans held for sale, from $10.7 billion at March 31, 2012 and $11.8 billion at December 31, 2012, to $11.9 billion at March 31, 2013. The increase in the current quarter compared to the prior year quarter was primarily a result of the Company’s commercial banking initiative, growth in the premium finance receivables – commercial portfolio as well as acquisition transactions. The Company continues to make new loans, including in the commercial and commercial real-estate sector, where opportunities that meet our underwriting standards exist. For more information regarding changes in the Company’s loan portfolio, see “Financial Condition – Interest Earning Assets” and Note 6 “Loans” of the Financial Statements presented under Item 1 of this report.

Management considers the maintenance of adequate liquidity to be important to the management of risk. Accordingly, during the first quarter of 2013, the Company continued its practice of maintaining appropriate funding capacity to provide the Company with adequate liquidity for its ongoing operations. In this regard, the Company continues to benefit from its strong deposit base, a liquid short-term investment portfolio and its access to funding from a variety of external funding sources. Additionally, in the first quarter of 2013, the Company was able to reduce its excess liquidity through the planned reductions in certain wholesale wealth management deposits and brokered CDs of approximately $250 million. At March 31, 2013, the Company had $898.5 million in overnight liquid funds and interest-bearing deposits with banks.

The Company recorded net interest income of $130.7 million in the first quarter of 2013 compared to $125.9 million in the first quarter of 2012. The higher level of net interest income recorded in the first quarter of 2013 compared to the first quarter of 2012 resulted from an increase in average earning assets and the positive re-pricing of retail interest-bearing deposits along with a more favorable deposit mix. Average earning assets for the first quarter of 2013 increased by $1.3 billion compared to the first quarter of 2012. Average earning asset growth over the past 12 months was primarily a result of the $1.4 billion increase in average loans, excluding covered loans, and an increase of $34 million in the average balance of liquidity management and other assets partially offset by a decrease of $131 million in the average balance of covered loans. The growth in average total loans, excluding covered loans, was comprised of an increase of $398 million in commercial loans, $378 million in commercial real-estate loans, $282 million in U.S.-originated commercial premium finance receivables, $249 million in Canadian-originated commercial premium finance receivables, $48 million in life premium finance receivables and $114 million in mortgages held for sale partially offset by a decrease of $64 million in home equity and other loans. The average earning asset growth of $1.3 billion in the first quarter of 2013 did not fully offset a 44 basis point decline in the yield on earning assets, creating a decrease in total interest income of $4.2 million in the first quarter of 2013 compared to the first quarter of 2012. Funding for the average earning asset growth of $1.3 billion was provided by an increase in total average interest bearing liabilities of $576 million (an increase in interest-bearing deposits of $1.4 billion partially offset by a decrease of $800 million of wholesale funding) and an increase of $732 million in the average balance of net free funds. A 32 basis point decline in the rate paid on total interest-bearing liabilities more than offset the increase in average balance, creating a $9 million reduction in interest expense in the first quarter of 2013 compared to the first quarter of 2012.

Non-interest income totaled $57.4 million in the first quarter of 2013 an increase of $10.4 million, or 22%, compared to the first quarter of 2012. The increase in the first quarter of 2013 compared to the first quarter of 2012 was primarily attributable to higher mortgage banking and wealth management revenues, partially offset by a decrease in fees from covered call options. Mortgage banking revenue increased $11.6 million when compared to the first quarter of 2012. The increase in mortgage banking revenue in the current quarter as compared to the first quarter of 2012 resulted primarily from higher origination volumes as well as general improvement in the overall economy (increased housing starts, home sales and median prices of homes). Loans sold to the secondary market were $974.4 million in the first quarter of 2013 compared to $714.7 million in the first quarter of 2012 (see “Non-Interest Income” section later in this document for further detail).

Non-interest expense totaled $120.1 million in the first quarter of 2013, increasing $2.4 million, or 2%, compared to the first quarter of 2012. The increase compared to the first quarter of 2012 was primarily attributable to a $8.5 million increase in salaries and employee benefits and a $2.6 million increase in equipment, occupancy and data processing expenses due to growth in the Company, partially offset by a $8.8 million decrease in OREO expense. Salaries and employee benefits expense increased primarily as a result of a $4.5 million increase in bonus and commissions primarily attributable to the increase in variable pay based revenue and the Company’s long-term incentive program, a $3.9 million increase in salaries caused by the addition of employees from the various acquisitions and larger staffing as the Company grows and a $111,000 increase from employee benefits. OREO expense decreased primarily as a result of fewer negative valuation adjustments on properties held in OREO and higher gains on sale of properties

### The Current Economic Environment

The Company’s results during the quarter reflect improvement in net charge-offs but a slight increase in non-performing assets as compared to recent quarters. The Company has continued to be disciplined in its approach to growth and has not sacrificed asset quality. However, the Company’s results continue to be impacted by the existing stressed economic environment and real estate valuations that affected both the U.S. economy, generally, and the Company’s local markets, specifically. In response to these conditions, Management continues to carefully monitor the impact on the Company of the financial markets, the depressed values of real property and other assets, loan performance, default rates and other financial and macro-economic indicators in order to navigate the challenging economic environment.

In particular:

- The Company’s provision for credit losses, excluding covered loans, in the first quarter of 2013 totaled $15.4 million, an increase of $213,000 when compared to the first quarter of 2012. Net charge-offs decreased to $11.9 million in the first quarter of 2013 (of which $7.2 million related to commercial and commercial real-estate loans) compared to $14.4 million for the same period in 2012 (of which $11.1 million related to commercial and commercial real-estate loans).
- The Company’s allowance for loan losses, excluding covered loans, totaled $110.3 million at March 31, 2013, reflecting a decrease of $675,000, or 1%, when compared to the same period in 2012 and an increase of $3.0 million, or 3%, when compared to December 31, 2012. At March 31, 2013, approximately $56.4 million, or 51%, of the allowance for loan losses was associated with commercial real-estate loans and another $29.0 million, or 26%, was associated with commercial loans.
- The Company has significant exposure to commercial real-estate. At March 31, 2013, $4.0 billion, or 34%, of our loan portfolio, excluding covered loans, was commercial real-estate, with more than 92% located in the greater Chicago metropolitan and southeastern Wisconsin market areas. As of March 31, 2013, the commercial real-estate loan portfolio was comprised of $333.0 million related to land, residential and commercial construction, $584.7 million related to office buildings, $586.8 million related to retail, $595.5 million related to industrial use, $512.8 million related to multi-family and $1.3 billion related to mixed use and other use types. In analyzing the commercial real-estate market, the Company does not rely upon the assessment of broad market statistical data, in large part because the Company’s market area is diverse and covers many communities, each of which is impacted differently by economic forces affecting the Company’s general market area. As such, the extent of the decline in real estate valuations can vary meaningfully among the different types of commercial and other real estate loans made by the Company. The Company uses its multi-chartered structure and local management knowledge to analyze and manage the local market conditions at each of its banks. As of March 31, 2013, the Company had approximately $61.8 million of non-performing commercial real-estate loans representing approximately 1.6% of the total

commercial real-estate loan portfolio. $22.2 million, or 36%, of the total non-performing commercial real-estate loan portfolio related to the land, residential and commercial construction sector.

- Total non-performing loans (loans on non-accrual status and loans more than 90 days past due and still accruing interest), excluding covered loans, was $128.6 million (of which $61.8 million, or 48%, was related to commercial real-estate) at March 31, 2013, an increase of approximately $15.0 million compared to March 31, 2012.
- The Company’s other real estate owned, excluding covered other real estate owned, decreased by $20.0 million, to $56.2 million during the first quarter of 2013, from $76.2 million at March 31, 2012. The decrease in other real estate owned in the first quarter of 2013 compared to the same period in the prior year is primarily a result of disposals in the past 12 months. The $56.2 million of other real estate owned as of March 31, 2013 was comprised of $10.1 million of residential real-estate development property, $38.8 million of commercial real-estate property and $7.3 million of residential real-estate property.

During the quarter, Management continued its strategic efforts to resolve problem loans through liquidation, rather than retention, of loans or real estate acquired as collateral through the foreclosure process. For more information regarding these efforts, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation—Overview and Strategy” in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012. The level of loans past due 30 days or more and still accruing interest, excluding covered loans, totaled $152.7 million as of March 31, 2013, increasing $696,000 compared to the balance of $152.0 million as of December 31, 2012. Fluctuations from period to period in loans that are past due 30 days or more and still accruing interest are primarily the result of timing of payments for loans with near term delinquencies (i.e. 30-89 days past-due).

The Company enters into residential mortgage loan sale agreements with investors in the normal course of business. These agreements provide recourse to investors through certain representations concerning credit information, loan documentation, collateral and insurability. At March 31, 2013, the Company had a $3.5 million estimated liability on loans expected to be repurchased from loans sold to investors compared to a $4.3 million liability and a $2.7 million liability for similar items as of December 31, 2012 and March 31, 2012, respectively. The Company recognized a reduction in its estimated obligation of $755,000 in the first quarter of 2013 based on analysis of historical claims and payments. For more information regarding requests for indemnification on loans sold, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation—Overview and Strategy” in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012.

In addition, during the first quarter of 2013, the Company restructured certain loans in the amount of $2.3 million by providing economic concessions to borrowers to better align the terms of their loans with their current ability to pay. At March 31, 2013, approximately $116.3 million in loans had terms modified, with $97.1 million of these modified loans in accruing status.

### Trends in Our Three Operating Segments During the First Quarter

#### Community Banking

*Net interest income*. Net interest income for the community banking segment totaled $123.4 million for the first quarter of 2013 compared to $125.9 million for the fourth quarter of 2012 and $121.1 million for the first quarter of 2012. The decrease in net interest income in the first quarter of 2013 compared to the fourth quarter of 2012 is primarily attributable to two fewer days of interest income in the current quarter. The increase in net interest income in the current quarter compared to the first quarter of 2012 can be attributed to growth in earning assets, including those obtained in FDIC-assisted acquisitions as well as the ability to price interest-bearing deposits at more reasonable rates.

*Funding mix and related costs.* Community banking profitability has been bolstered in recent quarters as fixed term certificates of deposit have been renewing at lower rates given the historically low interest rate levels and growth in non-interest bearing deposits as a result of the Company’s commercial banking initiative.

*Level of non-performing loans and other real estate owned.* Given the current economic conditions, problem loan expenses have been at elevated levels in recent years. Non-performing loans increased in the first quarter of 2013 as compared to the fourth quarter of 2012 and first quarter of 2012, however the company does not believe this increase is establishing a trend since the Company is committed to the timely resolution of non-performing loans. Other real estate owned decreased in the current quarter as compared to the fourth quarter of 2012 and first quarter of 2012.

*Mortgage banking revenue.* Mortgage banking revenue decreased $4.6 million when compared to the fourth quarter of 2012 and increased $11.6 million when compared to the first quarter of 2012. The decrease in the current quarter as compared to the fourth quarter of 2012 resulted primarily from a drop in loan volume, associated with a slight increase in mortgage rates in the current quarter and the related tightening of pricing and secondary market gains, partially offset by a reduction in recourse reserves based on analysis of historical claims and payments. The increase in the current quarter compared to the first quarter of 2012 resulted primarily from higher origination volumes as well as general improvement in the overall economy (increased housing starts, home sales and median prices of homes).

For more information regarding our community banking business, please see “Overview and Strategy—Community Banking” under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation” in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012.

#### Specialty Finance

*Financing of Commercial Insurance Premiums.* FIFC originated approximately $1.1 billion of commercial insurance premium finance loans in the U.S. in the first quarter of 2013, relatively unchanged as compared to $1.0 billion of U.S. commercial insurance premium finance loan originated in both the fourth quarter of 2012 and the first quarter of 2012, respectively. The Company acquired a Canadian insurance premium funding company in the second quarter of 2012. In the first quarter of 2013, the Canadian insurance premium funding company originated approximately $126.3 million in commercial insurance premium finance loans as compared to $152.8 million in fourth quarter of 2012. For more information on this acquisition, see “Overview—Recent Acquisition Transactions.”

*Financing of Life Insurance Premiums*. FIFC originated approximately $85.7 million in life insurance premium finance loans in the first quarter of 2013 compared to $123.0 million in the fourth quarter of 2012, and compared to $112.8 million in the first quarter of 2012. The decline in originations in the first quarter of 2013 from the fourth quarter of 2012 is a result of seasonality as the fourth quarter historically produces the largest volume of originations. The decline in originations in the first quarter of 2013 compared to the first quarter of 2012 was a result of fewer loan originations and lower average loan sizes on originations in the current quarter.

For more information regarding our specialty finance business, please see “Overview and Strategy—Specialty Finance” under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation” in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012.

#### Wealth Management Activities

The wealth management segment recorded higher non-interest income in the first quarter of 2013 compared to the first quarter of 2012 primarily as a result of the acquisition of a community bank trust operation as well as continued growth within the existing business. For more information on the trust operation acquisition, see “Overview—Recent Acquisition Transactions.”

For more information regarding our wealth management business, please see “Overview and Strategy—Wealth Management Activities” under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation” in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012.

### Recent Acquisition Transactions

#### FDIC-Assisted Transactions

On September 28, 2012, the Company’s wholly-owned subsidiary Old Plank Trail Bank, acquired certain assets and liabilities and the banking operations of First United Bank in an FDIC-assisted transaction. First United Bank operated four locations in Illinois; one in Crete, two in Frankfort and one in Steger, as well as one location in St. John, Indiana and had approximately $328.4 million in total assets and $316.9 million in total deposits as of the acquisition date. Old Plank Trail Bank acquired substantially all of First United Bank's assets at a discount of approximately 9.3% and assumed all of the non-brokered deposits at a premium of 0.60%. In connection with the acquisition, Old Plank Trail Bank entered into a loss sharing agreement with the FDIC whereby Old Plank Trail Bank will share in losses with the FDIC on certain loans and foreclosed real estate at First United Bank.

On July 20, 2012, the Company’s wholly-owned subsidiary Hinsdale Bank, assumed the deposits and banking operations of Second Federal in an FDIC-assisted transaction. Second Federal operated three locations in Illinois; two in Chicago (Brighton Park and Little Village neighborhoods) and one in Cicero, and had $169.1 million in total deposits as of the acquisition date. Hinsdale Bank assumed substantially all of Second Federal's non-brokered deposits at a premium of $100,000. The Company subsequently divested the deposits and banking operations of Second Federal. See "Divestiture of Previous FDIC-Assisted Acquisition" below for more information.

On February 10, 2012, the Company announced that its wholly-owned subsidiary bank, Barrington Bank, acquired certain assets and liabilities and the banking operations of Charter National in an FDIC-assisted transaction. Charter National operated two locations: one in Hoffman Estates and one in Hanover Park and had approximately $92.4 million in total assets and $90.1 million in total deposits as of the acquisition date. Barrington Bank acquired substantially all of Charter National’s assets at a discount of approximately 4.1% and assumed all of the non-brokered deposits at no premium. In connection with the acquisition, Barrington Bank entered into a loss sharing agreement with the FDIC whereby Barrington Bank will share in losses with the FDIC on certain loans and foreclosed real estate at Charter National.

Loans comprise the majority of the assets acquired in FDIC-assisted transactions and are subject to loss sharing agreements with the FDIC whereby the FDIC has agreed to reimburse the Company for 80% of losses incurred on the purchased loans, OREO, and certain other assets. Additionally, the loss share agreements with the FDIC require the Company to reimburse the FDIC in the event that actual losses on covered assets are lower than the original loss estimates agreed upon with the FDIC with respect of such assets in the loss share agreements. The Company refers to the loans subject to loss-sharing agreements as “covered loans” and use the term “covered assets” to refer to covered loans, covered OREO and certain other covered assets. At their respective acquisition dates in 2012, the Company estimated the fair value of the reimbursable losses, which were approximately $67.2 million and $13.2 million, related to the First United Bank and Charter National acquisitions, respectively. As no loans were acquired by the Company in the acquisition of Second Federal, there is no fair value of reimbursable losses. The agreements with the FDIC require that the Company follow certain servicing procedures or risk losing the FDIC reimbursement of covered asset losses.

The loans covered by the loss sharing agreements are classified and presented as covered loans and the estimated reimbursable losses are recorded as FDIC indemnification assets, both in the Consolidated Statements of Condition. The Company recorded the acquired assets and liabilities at their estimated fair values at the acquisition date. The fair value for loans reflected expected credit losses at the acquisition date, therefore the Company will only recognize a provision for credit losses and charge-offs on the acquired loans for any further credit deterioration. The FDIC-assisted transactions resulted in bargain purchase gains of $6.7 million for First United Bank, $43,000 for Second Federal and $785,000 for Charter National, which are shown as a component of non-interest income on the Company’s Consolidated Statements of Income.

#### Other Completed Transactions

#### Acquisition of HPK Financial Corporation

On December 12, 2012, the Company completed its acquisition of HPK Financial Corporation (“HPK”). HPK was the parent company of Hyde Park Bank & Trust Company, an Illinois state bank, (“Hyde Park Bank”), which operated two banking locations in the Hyde Park neighborhood of Chicago, Illinois. As part of the transaction, Hyde Park Bank merged into the Company's wholly-owned subsidiary bank, Beverly Bank & Trust Company, N.A. (“Beverly Bank”), and the two acquired banking locations are operating as branches of Beverly Bank under the brand name Hyde Park Bank. HPK had approximately $358 million in assets and $243 million in deposits as of the acquisition date, prior to purchase accounting adjustments. The Company recorded goodwill of $12.6 million on the acquisition.

#### Acquisition of Macquarie Premium Funding Inc.

On June 8, 2012, the Company, through its wholly-owned subsidiary Lake Forest Bank and Trust Company (“Lake Forest Bank”), completed its acquisition of Macquarie Premium Funding Inc., the Canadian insurance premium funding unit of Macquarie Group. Through this transaction, Lake Forest Bank acquired approximately $213 million of gross premium finance receivables outstanding. The Company recorded goodwill of approximately $22 million on the acquisition.

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

On April 13, 2012, the Company’s wholly-owned subsidiary bank, Old Plank Trail Bank, completed its acquisition of a branch of Suburban located in Orland Park, Illinois. Through this transaction, Old Plank Trail Bank acquired approximately $52 million of deposits and $3 million of loans. The Company recorded goodwill of $1.5 million on the branch acquisition.

#### Acquisition of the Trust Operations of Suburban Bank & Trust

On March 30, 2012, the Company’s wholly-owned subsidiary, CTC, completed its acquisition of the trust operations of Suburban. Through this transaction, CTC acquired trust accounts having assets under administration of approximately $160 million, in addition to land trust accounts and various other assets. The Company recorded goodwill of $1.8 million on this acquisition.

#### Divestiture of Previous FDIC-Assisted Acquisition

On February 1, 2013, Hinsdale Bank completed its divestiture of the deposits and current banking operations of Second Federal, which were acquired in an FDIC-assisted transaction on July 20, 2012, to Self-Help Federal Credit Union. Through this transaction, the Company divested approximately $149 million of related deposits.

#### Acquisitions Completed After March 31, 2013

On May 1, 2013, the Company completed its previously announced acquisition of First Lansing Bancorp, Inc. ("FLB"). FLB is the parent company of First National Bank of Illinois ("FNBI"), which operates seven banking locations in the south and southwest suburbs of Chicago, Illinois as well as one location in northwest Indiana. Through this transaction, subject to final adjustments, the Company acquired approximately $365 million in assets and assumed approximately $323 million in deposits. The aggregate purchase price was approximately $38.5 million. In the merger, outstanding shares of FLB common stock outstanding were converted into the right to receive merger consideration paid in a combination of approximately 40% cash and approximately 60% shares of Wintrust common stock. Immediately after the acquisition, FNBI was merged into the Company's wholly-owned subsidiary, Old Plank Trail Community Bank, N.A.

#### Stock Offerings

On March 14, 2012, the Company announced the sale of 126,500 shares, or $126,500,000 aggregate liquidation preference, of Series C Preferred Stock. Dividends will be payable on the Series C Preferred Stock when, as, and if, declared by Wintrust’s Board of Directors on a non-cumulative basis quarterly in arrears on January 15, April 15, July 15 and October 15 of each year at a rate of 5.00% per year on the liquidation preference of $1,000 per share.

The holders of the Series C Preferred Stock will have the right at any time to convert each share of Series C Preferred Stock into 24.3132 shares of Wintrust common stock, which represents an initial conversion price of $41.13 per share of Wintrust common stock, plus cash in lieu of fractional shares. The initial conversion price represents a 17.5% conversion premium to the volume-weighted average price of Wintrust common stock on March 13, 2012 of approximately $35.00 per share. The conversion rate, and thus the conversion price, will be subject to adjustment under certain circumstances. On or after April 15, 2017, Wintrust will have the right under certain circumstances to cause the Series C Preferred Stock to be converted into shares of Wintrust common stock, plus cash in lieu of fractional shares.

### RESULTS OF OPERATIONS

### Earnings Summary

The Company’s key operating measures for the three months ended March 31, 2013, as compared to the same period last year, are shown below:

*(Dollars in thousands, except per share data)*

|  | Three months ended March 31, 2013 | Three months ended March 31, 2012 | Percentage (%) or Basis Point (bp)Change |
| --- | ---: | ---: | ---: |
| Net income | **$32,052** | $23,210 | 38% |
| Net income per common share—Diluted | **0.65** | 0.50 | 30 |
| Pre-tax adjusted earnings (2) (6) | **68,263** | 64,067 | 7 |
| Net revenue (1) | **188,092** | 172,918 | 9 |
| Net interest income | **130,713** | 125,895 | 4 |
| Net interest margin (2) | **3.41%** | 3.55% | (14) bp |
| Net overhead ratio (2) (3) | **1.47** | 1.80 | (33) |
| Net overhead ratio, based on pre-tax adjusted earnings (2) (3) | **1.47** | 1.57 | (10) |
| Efficiency ratio (2) (4) | **63.78** | 68.24 | (446) |
| Efficiency ratio, based on pre-tax adjusted earnings (2) (4) | **63.46** | 62.17 | 129 |
| Return on average assets | **0.75** | 0.59 | 16 |
| Return on average common equity | **7.27** | 5.90 | 137 |
| Return on average tangible common equity | **9.35** | 7.55 | 180 |

| At end of period |  |  |  |
| --- | ---: | ---: | ---: |
| Total assets | **$17,074,247** | $16,172,018 | 6% |
| Total loans, excluding loans held-for-sale, excluding covered loans | **11,900,312** | 10,717,384 | 11 |
| Total loans, including loans held-for-sale, excluding covered loans | **12,281,234** | 11,067,712 | 11 |
| Total deposits | **13,962,757** | 12,665,853 | 10 |
| Total shareholders’ equity | **1,825,688** | 1,687,921 | 8 |
| Tangible common equity ratio (TCE) (2) | **7.7%** | 7.5% | 20 bp |
| Tangible common equity ratio, assuming full conversion of preferred stock (2) | **8.8** | 8.6 | 20 |
| Book value per common share (2) | **$38.13** | $35.25 | 8% |
| Tangible common book value per share (2) | **29.74** | 27.57 | 8 |
| Market price per common share | **37.04** | 35.79 | 3 |
| Excluding covered loans: |  |  |  |
| Allowance for credit losses to total loans (5) | **1.06** | 1.16 | (10) bp |
| Non-performing loans to total loans | **1.08** | 1.06 | 2 |

#### (1) Net revenue is net interest income plus non-interest income.

*(2) See following section titled, “Supplementary Financial Measures/Ratios” for additional information on this performance measure/ratio.*

*(3) The net overhead ratio is calculated by netting total non-interest expense and total non-interest income, annualizing this amount, and dividing by that period’s total average assets. A lower ratio indicates a higher degree of efficiency.*

*(4) The efficiency ratio is calculated by dividing total non-interest expense by tax-equivalent net revenues (less securities gains or losses). A lower ratio indicates more efficient revenue generation.*

*(5) The allowance for credit losses includes both the allowance for loan losses and the allowance for lending-related commitments.*

*(6) Pre-tax adjusted earnings excludes the provision for credit losses and certain significant items.*

Certain returns, yields, performance ratios, and quarterly growth rates are “annualized” in this presentation and throughout this report to represent an annual time period. This is done for analytical purposes to better discern for decision-making purposes underlying performance trends when compared to full-year or year-over-year amounts. For example, balance sheet growth rates are most often expressed in terms of an annual rate. As such, 5% growth during a quarter would represent an annualized growth rate of 20%.

### Supplemental Financial Measures/Ratios

The accounting and reporting policies of Wintrust conform to GAAP in the United States and prevailing practices in the banking industry. However, certain non-GAAP performance measures and ratios are used by management to evaluate and measure the Company’s performance. These include taxable-equivalent net interest income (including its individual components), net interest margin (including its individual components), the efficiency ratio, tangible common equity ratio, tangible common book value per share, return on average tangible common equity and pre-tax adjusted earnings. Management believes that these measures and ratios provide users of the Company’s financial information a more meaningful view of the performance of the interest-earning assets and interest-bearing liabilities and of the Company’s operating efficiency. Other financial holding companies may define or calculate these measures and ratios differently.

Management reviews yields on certain asset categories and the net interest margin of the Company and its banking subsidiaries on a fully taxable-equivalent (“FTE”) basis. In this non-GAAP presentation, net interest income is adjusted to reflect tax-exempt interest income on an equivalent before-tax basis. This measure ensures comparability of net interest income arising from both taxable and tax-exempt sources. Net interest income on a FTE basis is also used in the calculation of the Company’s efficiency ratio. The efficiency ratio, which is calculated by dividing non-interest expense by total taxable-equivalent net revenue (less securities gains or losses), measures how much it costs to produce one dollar of revenue. Securities gains or losses are excluded from this calculation to better match revenue from daily operations to operational expenses. Management considers the tangible common equity ratio and tangible book value per common share as useful measurements of the Company’s equity. The Company references the return on average tangible common equity as a measurement of profitability. Pre-tax adjusted earnings is a significant metric in assessing the Company’s operating performance. Pre-tax adjusted earnings is calculated by adjusting income before taxes to exclude the provision for credit losses and certain significant items.

The net overhead ratio and the efficiency ratio are primarily reviewed by the Company based on pre-tax adjusted earnings. The Company believes that these measures provide a more meaningful view of the Company’s operating efficiency and expense management. The net overhead ratio, based on pre-tax adjusted earnings, is calculated by netting total adjusted non-interest expense and total adjusted non-interest income, annualizing this amount, and dividing it by total average assets. Adjusted non-interest expense is calculated by subtracting OREO expenses, covered loan collection expense, defeasance cost, seasonal payroll tax fluctuation and fees to terminate repurchase agreements. Adjusted non-interest income is calculated by adding back the recourse obligation on loans previously sold and subtracting gains or adding back losses on FDIC indemnification asset amortization, foreign currency remeasurement, investment partnerships, bargain purchase, trading and available-for-sale securities activity.

The efficiency ratio, based on pre-tax adjusted earnings, is calculated by dividing adjusted non-interest expense by adjusted taxable-equivalent net revenue. Adjusted taxable-equivalent net revenue is comprised of fully taxable equivalent net interest income and adjusted non-interest income.

A reconciliation of certain non-GAAP performance measures and ratios used by the Company to evaluate and measure the Company’s performance to the most directly comparable GAAP financial measures is shown below:

*(Dollars in thousands)*

| Calculation of Net Interest Margin and Efficiency Ratio | Three months ended March 31, 2013 | 2012 |
| --- | ---: | ---: |
| **(A) Interest Income (GAAP)** | **$152,313** | $156,486 |
| Taxable-equivalent adjustment: |  |  |
| —Loans | **150** | 134 |
| —Liquidity management assets | **343** | 329 |
| —Other earning assets | **1** | 3 |
| Interest Income—FTE | **$152,807** | $156,952 |
| **(B) Interest Expense (GAAP)** | **21,600** | 30,591 |
| Net interest income—FTE | **131,207** | 126,361 |
| **(C) Net Interest Income (GAAP) (A minus B)** | **$130,713** | $125,895 |
| **(D) Net interest margin (GAAP)** | **3.40%** | 3.54% |
| Net interest margin—FTE | **3.41%** | 3.55% |
| **(E) Efficiency ratio (GAAP)** | **63.95%** | 68.42% |
| **Efficiency ratio—FTE** | **63.78%** | 68.24% |
| **Efficiency ratio—Based on pre-tax adjusted earnings** | **63.46%** | 62.17% |
| **(F) Net Overhead ratio (GAAP)** | **1.47%** | 1.80% |
| **Net Overhead ratio—Based on pre-tax adjusted earnings** | **1.47%** | 1.57% |
| **Calculation of Tangible Common Equity ratio (at period end)** |  |  |
| Total shareholders’ equity | **$1,825,688** | $1,687,921 |
| (G) Less: Preferred stock | **(176,441)** | (176,302) |
| Less: Intangible assets | **(363,142)** | (329,396) |
| (H) Total tangible common shareholders’ equity | **$1,286,105** | $1,182,223 |
| Total assets | **$17,074,247** | $16,172,018 |
| Less: Intangible assets | **(363,142)** | (329,396) |
| (I) Total tangible assets | **$16,711,105** | $15,842,622 |
| **Tangible common equity ratio (H/I)** | **7.7%** | 7.5% |
| **Tangible common equity ratio, assuming full conversion of preferred stock ((H-G)/I)** | **8.8%** | 8.6% |
| **Calculation of Pre-Tax Adjusted Earnings** |  |  |
| Income before taxes | **$52,286** | $37,759 |
| Add: Provision for credit losses | **15,687** | 17,400 |
| Add: OREO (income) expense, net | **(1,620)** | 7,178 |
| Add: Recourse obligation on loans previously sold | **(755)** | 36 |
| Add: Covered loan collection expense | **699** | 1,399 |
| Add: Defeasance cost | **—** | 848 |
| Add: Seasonal payroll tax fluctuation | **1,610** | 2,265 |
| Add: FDIC indemnification asset amortization | **1,208** | 379 |
| Add: Loss on foreign currency remeasurement | **22** | — |
| Add: Fees for termination of repurchase agreements | **—** | — |
| Less: Gain from investment partnerships | **(1,058)** | (1,395) |
| Less: Gain on bargain purchases, net | **—** | (840) |
| Less: Trading losses (gains), net | **435** | (146) |
| Less: Gains on available-for-sale securities, net | **(251)** | (816) |
| **Pre-tax adjusted earnings** | **$68,263** | $64,067 |
| **Calculation of book value per share** |  |  |
| Total shareholders’ equity | **$1,825,688** | $1,687,921 |
| Less: Preferred stock | **(176,441)** | (176,302) |
| (J) Total common equity | **$1,649,247** | $1,511,619 |
| Actual common shares outstanding | **37,014** | 36,289 |
| Add: TEU conversion shares | **6,238** | 6,593 |
| (K) Common shares used for book value calculation | **43,252** | 42,882 |
| **Book value per share (J/K)** | **$38.13** | $35.25 |
| **Tangible common book value per share (H/K)** | **$29.74** | $27.57 |
| **Calculation of return on average common equity** |  |  |
| (L) Net income applicable to common shares | **$29,436** | $21,964 |
| Total average shareholders' equity | **1,818,127** | 1,564,662 |
| Less: Average preferred stock | **(176,422)** | (67,852) |
| (M) Total average common shareholders' equity | **1,641,705** | 1,496,810 |
| Less: Average intangible assets | **(365,505)** | (327,195) |
| (N) Total average tangible common shareholders’ equity | **1,276,200** | 1,169,615 |
| **Return on average common equity, annualized (L/M)** | **7.27%** | 5.90% |
| **Return on average tangible common equity, annualized (L/N)** | **9.35%** | 7.55% |

62

### Critical Accounting Policies

The Company’s Consolidated Financial Statements are prepared in accordance with GAAP in the United States and prevailing practices of the banking industry. Application of these principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in the financial statements and accompanying notes. Certain policies and accounting principles inherently have a greater reliance on the use of estimates, assumptions and judgments, and as such have a greater possibility that changes in those estimates and assumptions could produce financial results that are materially different than originally reported. Estimates, assumptions and judgments are necessary when assets and liabilities are required to be recorded at fair value, when a decline in the value of an asset not carried on the financial statements at fair value warrants an impairment write-down or valuation reserve to be established, or when an asset or liability needs to be recorded contingent upon a future event, are based on information available as of the date of the financial statements; accordingly, as information changes, the financial statements could reflect different estimates and assumptions. Management views critical accounting policies to be those which are highly dependent on subjective or complex judgments, estimates and assumptions, and where changes in those estimates and assumptions could have a significant impact on the financial statements. Management currently views critical accounting policies to include the determination of the allowance for loan losses, allowance for covered loan losses and the allowance for losses on lending-related commitments, loans acquired with evidence of credit quality deterioration since origination, estimations of fair value, the valuations required for impairment testing of goodwill, the valuation and accounting for derivative instruments and income taxes as the accounting areas that require the most subjective and complex judgments, and as such could be most subject to revision as new information becomes available. For a more detailed discussion on these critical accounting policies, see “Summary of Critical Accounting Policies” beginning on page 47 of the Company’s 2012 Form 10-K.

### Net Income

Net income for the quarter ended March 31, 2013 totaled $32.1 million, an increase of $8.8 million, or 38%, compared to the first quarter of 2012. On a per share basis, net income for the first quarter of 2013 totaled $0.65 per diluted common share compared to $0.50 in the first quarter of 2012.

The most significant factors impacting net income for the first quarter of 2013 as compared to the same period in the prior year include increased mortgage banking revenues primarily due to higher origination volumes as well as the general improvement in the overall economy (increased housing starts, home sales, and median price of homes), reduced costs on interest-bearing deposits from a more favorable mix of the deposit funding base, improvement in OREO expenses related to lower valuation adjustments on properties held and higher gains on properties sold, higher wealth management revenues partially benefited by an acquisition in March 2012 and growth within the existing business and lower provision for credit losses. These improvements were partially offset by an increase in salary expense caused by the addition of employees from acquisitions, lower interest income due to a decline in the yield on earning assets and a decrease in fees from covered call options.

### Net Interest Income

The primary source of the Company’s revenue is net interest income. Net interest income is the difference between interest income and fees on earnings assets, such as loans and securities, and interest expense on the liabilities to fund those assets, including interest bearing deposits and other borrowings. The amount of net interest income is affected by both changes in the level of interest rates and the amount and composition of earning assets and interest bearing liabilities. Net interest margin represents tax-equivalent net interest income as a percentage of the average earning assets during the period.

#### Quarter Ended March 31, 2013 compared to the Quarter Ended March 31, 2012

The following table presents a summary of the Company’s net interest income and related net interest margin, calculated on a fully taxable equivalent basis, for the first quarter of 2013 as compared to the first quarter of 2012 (linked quarters):

*(Dollars in thousands)*

|  | For the three months ended March 31, 2013 Average | Interest | Rate | For the three months ended March 31, 2012 Average | Interest | Rate |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Liquidity management assets (1) (2) (7) | **$2,797,310** | **$10,363** | **1.50%** | $2,756,833 | $13,040 | 1.90% |
| Other earning assets (2) (3) (7) | **24,205** | **180** | **3.02** | 30,499 | 224 | 2.96 |
| Loans, net of unearned income (2) (4) (7) | **12,252,558** | **131,740** | **4.36** | 10,848,016 | 128,784 | 4.77 |
| Covered loans | **536,284** | **10,524** | **7.96** | 667,242 | 14,904 | 8.98 |
| Total earning assets (7) | **$15,610,357** | **$152,807** | **3.97%** | $14,302,590 | $156,952 | 4.41% |
| Allowance for loan and covered loan losses | **(125,221)** |  |  | (131,769) |  |  |
| Cash and due from banks | **217,345** |  |  | 143,869 |  |  |
| Other assets | **1,554,362** |  |  | 1,520,660 |  |  |
| Total assets | **$17,256,843** |  |  | $15,835,350 |  |  |
| Interest-bearing deposits | **$11,857,400** | **$14,504** | **0.50%** | $10,481,822 | $18,030 | 0.69% |
| Federal Home Loan Bank advances | **414,092** | **2,764** | **2.71** | 470,345 | 3,584 | 3.06 |
| Notes payable and other borrowings | **297,151** | **1,154** | **1.57** | 505,814 | 3,102 | 2.47 |
| Secured borrowings—owed to securitization investors | **—** | **—** | **—** | 514,923 | 2,549 | 1.99 |
| Subordinated notes | **15,000** | **59** | **1.56** | 35,000 | 169 | 1.91 |
| Junior subordinated notes | **249,493** | **3,119** | **5.00** | 249,493 | 3,157 | 5.01 |
| Total interest-bearing liabilities | **$12,833,136** | **$21,600** | **0.68%** | $12,257,397 | $30,591 | 1.00% |
| Non-interest bearing deposits | **2,290,725** |  |  | 1,832,627 |  |  |
| Other liabilities | **314,855** |  |  | 180,664 |  |  |
| Equity | **1,818,127** |  |  | 1,564,662 |  |  |
| Total liabilities and shareholders’ equity | **$17,256,843** |  |  | $15,835,350 |  |  |
| Interest rate spread (5) (7) |  |  | **3.29%** |  |  | 3.41% |
| Net free funds/contribution (6) | **$2,777,221** |  | **0.12%** | $2,045,193 |  | 0.14% |
| Net interest income/Net interest margin(7) |  | **$131,207** | **3.41%** |  | $126,361 | 3.55% |

(1) Liquidity management assets include available-for-sale securities, interest earning deposits with banks, federal funds sold and securities purchased under resale agreements.

(2) Interest income on tax-advantaged loans, trading securities and securities reflects a tax-equivalent adjustment based on a marginal federal corporate tax rate of 35%. The total adjustments for the three months ended March 31, 2013 and 2012 were $494,000 and $466,000, respectively.

(3) Other earning assets include brokerage customer receivables and trading account securities.

(4) Loans, net of unearned income, include loans held-for-sale and non-accrual loans.

(5) Interest rate spread is the difference between the yield earned on earning assets and the rate paid on interest-bearing liabilities.

(6) Net free funds are the difference between total average earning assets and total average interest-bearing liabilities. The estimated contribution to net interest margin from net free funds is calculated using the rate paid for total interest-bearing liabilities.

(7) See “Supplemental Financial Measures/Ratios” for additional information on this performance ratio.

The net interest margin in the first quarter of 2013 declined by 14 basis points when compared to the first quarter of 2012. This decrease resulted as the yield on total average earning assets declined 44 basis points and the contribution from net free funds declined by two basis points, partially offset by a 32 basis point decrease on the rate on total average interest-bearing liabilities. The decline in the yield on average earning assets includes lower yields on our non-covered loan portfolio which was negatively impacted by competitive and economic pricing pressures. Additionally, the Company experienced lower yields on the covered loan portfolio. However, decreases in the rate on average interest-bearing liabilities primarily attributed to the positive repricing of retail interest-bearing deposits partially offset the lower loan portfolio yields.

#### Quarter Ended March 31, 2013 compared to the Quarter Ended December 31, 2012

The following table presents a summary of the Company’s net interest income and related net interest margin, calculated on a fully taxable equivalent basis, for the first quarter of 2013 as compared to the fourth quarter of 2012 (sequential quarters):

*(Dollars in thousands)*

|  | For the three months ended March 31, 2013 Average | Interest | Rate | For the three months ended December 31, 2012 Average | Interest | Rate |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Liquidity management assets (1) (2) (7) | **$2,797,310** | **$10,363** | **1.50%** | $2,949,034 | $9,844 | 1.33% |
| Other earning assets (2) (3) (7) | **24,205** | **180** | **3.02** | 27,482 | 203 | 2.95 |
| Loans, net of unearned income (2) (4) (7) | **12,252,558** | **131,740** | **4.36** | 12,001,433 | 134,347 | 4.45 |
| Covered loans | **536,284** | **10,524** | **7.96** | 626,449 | 12,758 | 8.10 |
| Total earning assets (7) | **$15,610,357** | **$152,807** | **3.97%** | $15,604,398 | $157,152 | 4.01% |
| Allowance for loan and covered loan losses | **(125,221)** |  |  | (135,156) |  |  |
| Cash and due from banks | **217,345** |  |  | 206,914 |  |  |
| Other assets | **1,554,362** |  |  | 1,572,494 |  |  |
| Total assets | **$17,256,843** |  |  | $17,248,650 |  |  |
| Interest-bearing deposits | **$11,857,400** | **$14,504** | **0.50%** | $11,709,058 | $16,209 | 0.55% |
| Federal Home Loan Bank advances | **414,092** | **2,764** | **2.71** | 414,289 | 2,835 | 2.72 |
| Notes payable and other borrowings | **297,151** | **1,154** | **1.57** | 397,807 | 1,565 | 1.57 |
| Subordinated notes | **15,000** | **59** | **1.56** | 15,000 | 66 | 1.72 |
| Junior subordinated notes | **249,493** | **3,119** | **5.00** | 249,493 | 3,192 | 5.01 |
| Total interest-bearing liabilities | **$12,833,136** | **$21,600** | **0.68%** | $12,785,647 | $23,867 | 0.74% |
| Non-interest bearing deposits | **2,290,725** |  |  | 2,314,935 |  |  |
| Other liabilities | **314,855** |  |  | 361,244 |  |  |
| Equity | **1,818,127** |  |  | 1,786,824 |  |  |
| Total liabilities and shareholders’ equity | **$17,256,843** |  |  | $17,248,650 |  |  |
| Interest rate spread (5) (7) |  |  | **3.29%** |  |  | 3.27% |
| Net free funds/contribution (6) | **$2,777,221** |  | **0.12%** | $2,818,751 |  | 0.13% |
| Net interest income/Net interest margin (7) |  | **$131,207** | **3.41%** |  | $133,285 | 3.40% |

(1) Liquidity management assets include available-for-sale securities, interest earning deposits with banks, federal funds sold and securities purchased under resale agreements.

(2) Interest income on tax-advantaged loans, trading securities and securities reflects a tax-equivalent adjustment based on a marginal federal corporate tax rate of 35%. The total adjustments for the three months ended March 31, 2013 and December 31, 2012 were $494,000 and $509,000, respectively.

(3) Other earning assets include brokerage customer receivables and trading account securities.

(4) Loans, net of unearned income, include loans held-for-sale and non-accrual loans.

(5) Interest rate spread is the difference between the yield earned on earning assets and the rate paid on interest-bearing liabilities.

(6) Net free funds are the difference between total average earning assets and total average interest-bearing liabilities. The estimated contribution to net interest margin from net free funds is calculated using the rate paid for total interest-bearing liabilities.

(7) See “Supplemental Financial Measures/Ratios” for additional information on this performance ratio.

The net interest margin in the first quarter of 2013 increased by one basis point when compared to the fourth quarter of 2012. This increase resulted from a six basis point decrease in the rate on total average interest-bearing liabilities which was partially offset by a four basis point decline in the yield on total average earning assets and a one basis point decline from the contribution of net free funds.

The contribution from re-pricing retail deposits and maturing wholesale funding has diminished when compared to previous quarters. Pressure on the net interest margin will be applied more from the pricing/re-pricing of loan volumes as the low rate environment prohibits further declines in interest-bearing deposits of the same magnitude.

#### Analysis of Changes in Tax-equivalent Net Interest Income

The following table presents an analysis of the changes in the Company’s tax-equivalent net interest income comparing the three month periods ended March 31, 2013 and December 31, 2012 and the three months ended March 31, 2013 and March 31, 2012. The reconciliations set forth the changes in the tax-equivalent net interest income as a result of changes in volumes, changes in rates and differing number of days in each period:

*(Dollars in thousands)*

|  | First Quarter of 2013 Compared to Fourth Quarter of 2012 | First Quarter of 2013 Compared to First Quarter of 2012 |
| --- | ---: | ---: |
| Tax-equivalent net interest income for comparative period | $133,285 | $126,361 |
| Change due to mix and growth of earning assets and interest-bearing liabilities (volume) | 1,152 | 16,919 |
| Change due to interest rate fluctuations (rate) | (268) | (10,669) |
| Change due to number of days in each period | (2,962) | (1,404) |
| Tax-equivalent net interest income for the period ended March 31, 2013 | $131,207 | $131,207 |

66

### Non-interest Income

For the first quarter of 2013, non-interest income totaled $57.4 million, an increase of $10.4 million, or 22%, compared to the first quarter of 2012.

The following table presents non-interest income by category for the periods presented:

*(Dollars in thousands)*

|  | Three months ended March 31, 2013 | 2012 | $% Change | Change |
| --- | ---: | ---: | ---: | ---: |
| Brokerage | **$7,267** | $6,322 | $945 | 15 |
| Trust and asset management | **7,561** | 6,079 | 1,482 | 24 |
| Total wealth management | **14,828** | 12,401 | 2,427 | 20 |
| Mortgage banking | **30,145** | 18,534 | 11,611 | 63 |
| Service charges on deposit accounts | **4,793** | 4,208 | 585 | 14 |
| Gains on available-for-sale securities, net | **251** | 816 | (565) | (69) |
| Fees from covered call options | **1,639** | 3,123 | (1,484) | (48) |
| Gain on bargain purchases, net | **—** | 840 | (840) | (100) |
| Trading (losses) gains, net | **(435)** | 146 | (581) | NM |
| Other: |  |  |  |  |
| Interest rate swap fees | **2,270** | 2,511 | (241) | (10) |
| Bank Owned Life Insurance | **846** | 919 | (73) | (8) |
| Administrative services | **738** | 766 | (28) | (4) |
| Miscellaneous | **2,304** | 2,759 | (455) | (16) |
| Total Other | **6,158** | 6,955 | (797) | (11) |
| **Total Non-Interest Income** | **$57,379** | $47,023 | $10,356 | 22 |

NM—Not Meaningful

The significant changes in non-interest income for the quarter ended March 31, 2013 compared to the quarter ended March 31, 2012 are discussed below.

Wealth management revenue totaled $14.8 million in the first quarter of 2013 compared to $12.4 million in the first quarter of 2012, an increase of 20%. The increase is mostly attributable to additional revenues resulting from the acquisition of a community bank trust operation on March 30, 2012 as well as continued growth within the existing business. Wealth management revenue is comprised of the trust and asset management revenue of The Chicago Trust Company and Great Lakes Advisors and the brokerage commissions, money managed fees and insurance product commissions at Wayne Hummer Investments.

For the quarter ended March 31, 2013, mortgage banking revenue totaled $30.1 million, an increase of $11.6 million when compared to the first quarter of 2012. The increase in mortgage banking revenue in the first quarter of 2013 as compared to the first quarter of 2012 resulted primarily from higher origination volumes due to the continuation of the late 2012 robust refinance market into 2013 as well as the general improvement in the overall economy (increased housing starts, home sales and median price of homes). Mortgage loan originations were $974.4 million in the first quarter of 2013 as compared to $714.7 million in the prior year quarter. In addition to higher origination volume, improved pricing, secondary market gains and a positive adjustment to the recourse reserve contributed to the current period increase in mortgage banking revenue. Mortgage banking revenue includes revenue from activities related to originating, selling and servicing residential real-estate loans for the secondary market.

A summary of the mortgage banking components is shown below:

*(Dollars in thousands)*

|  | Three months ended March 31, 2013 | 2012 |
| --- | ---: | ---: |
| Mortgage loans originated and sold | **$974,432** | $714,655 |
| Mortgage loans serviced for others | **1,016,191** | 963,514 |
| Fair value of mortgage servicing rights (MSRs) | **7,344** | 7,201 |
| MSRs as a percentage of loans serviced | **0.72%** | 0.75% |

Fees from covered call option transactions decreased by $1.5 million in the first quarter of 2013 as compared to the same period in the prior year. Fees from covered call options decreased primarily as a result of fewer option transactions entered in the first quarter of 2013 compared to the first quarter of 2012 resulting in lower premiums received by the Company. The Company has typically written call options with terms of less than three months against certain U.S. Treasury and agency securities held in its portfolio for liquidity and other purposes. Historically, the Company has effectively entered into these transactions with the goal of enhancing its overall return on its investment portfolio by using fees generated from these options to compensate for net interest margin compression. These option transactions are designed to increase the total return associated with holding certain investment securities that do not qualify as hedges pursuant to accounting guidance.

Other non-interest income for the first quarter of 2013 totaled $6.2 million, a decrease of $797,000 compared to the first quarter of 2012. Miscellaneous income decreased in the first quarter of 2013 compared to the prior year quarter primarily as a result of increased FDIC indemnification asset amortization, primarily related to additional clawback expense related to a covered OREO sale during the quarter.

### Non-interest Expense

Non-interest expense for the first quarter of 2013 totaled $120.1 million and increased approximately $2.4 million, or 2%, compared to the first quarter of 2012.

The following table presents non-interest expense by category for the periods presented:

*(Dollars in thousands)*

| Salaries and employee benefits: | Three months ended March 31, 2013 | 2012 | $% Change | Change |
| --- | ---: | ---: | ---: | ---: |
| Salaries | **$41,831** | $37,933 | $3,898 | 10 |
| Commissions and bonus | **21,276** | 16,802 | 4,474 | 27 |
| Benefits | **14,406** | 14,295 | 111 | 1 |
| Total salaries and employee benefits | **77,513** | 69,030 | 8,483 | 12 |
| Equipment | **6,184** | 5,400 | 784 | 15 |
| Occupancy, net | **8,853** | 8,062 | 791 | 10 |
| Data processing | **4,599** | 3,618 | 981 | 27 |
| Advertising and marketing | **2,040** | 2,006 | 34 | 2 |
| Professional fees | **3,221** | 3,604 | (383) | (11) |
| Amortization of other intangible assets | **1,120** | 1,049 | 71 | 7 |
| FDIC insurance | **3,444** | 3,357 | 87 | 3 |
| OREO (income) expense, net | **(1,620)** | 7,178 | (8,798) | NM |
| Other: |  |  |  |  |
| Commissions—3rd party brokers | **1,233** | 1,021 | 212 | 21 |
| Postage | **1,249** | 1,423 | (174) | (12) |
| Stationery and supplies | **934** | 919 | 15 | 2 |
| Miscellaneous | **11,349** | 11,092 | 257 | 2 |
| Total other | **14,765** | 14,455 | 310 | 2 |
| **Total Non-Interest Expense** | **$120,119** | $117,759 | $2,360 | 2 |

NM - Not Meaningful

The significant changes in non-interest expense for the quarter ended March 31, 2013 compared to the quarter ended March 31, 2012 are discussed below.

Salaries and employee benefits expense increased $8.5 million, or 12%, in the first quarter of 2013 compared to the first quarter of 2012 primarily as a result of a $4.5 million increase in bonus and commissions primarily attributable to the increase in variable pay based revenue and the Company's long-term incentive program, a $3.9 million increase in salaries caused by the addition of employees from the various acquisitions and larger staffing as the Company grows and a $111,000 increase in employee benefits.

Equipment expense totaled $6.2 million for the first quarter of 2013, an increase of $784,000 compared to the first quarter of 2012. The increase is primarily related to additional equipment depreciation as a result of acquisitions as well as increased software license fees. Equipment expense includes depreciation on equipment, maintenance and repairs, equipment rental and software license fees.

Occupancy expense for the first quarter of 2013 was $8.9 million, an increase of $791,000, or 10%, compared to the same period in 2012. The increase is primarily the result of depreciation and maintenance and repairs on owned locations which were obtained in the Company's acquisitions. Occupancy expense includes depreciation on premises, real estate taxes, utilities and maintenance of premises, as well as net rent expense for leased premises.

Data processing expenses increased $981,000 in the first quarter of 2013 totaling $4.6 million compared to $3.6 million recorded in the first quarter of 2012. The amount of data processing expenses incurred fluctuates based on the overall growth of loan and deposit accounts as well as additional expenses recorded related to bank acquisition transactions. Data processing expenses increased in the current quarter compared to the previous year quarter primarily due to growth in the Company.

OREO income totaled $1.6 million in the first quarter of 2013 compared to OREO expense of $7.2 million recorded in the first quarter of 2012. The OREO income recorded in the current quarter is primarily related to a $3.4 million gain recognized on a covered OREO property sale as well as fewer negative valuation adjustments on properties held in OREO. OREO costs include all costs related to obtaining, maintaining and selling other real estate owned properties.

Miscellaneous expenses in the first quarter of 2013 increased $257,000, or 2%, compared to the same period in the prior year. Miscellaneous expense includes ATM expenses, correspondent bank charges, directors' fees, telephone, travel and entertainment, corporate insurance, dues and subscriptions, problem loan expenses and lending origination costs that are not deferred.

Two ratios the Company uses to measure expense management are the efficiency ratio and the net overhead ratio. The Company believes that these measures provide a more meaningful view of the Company's operating efficiency and expense management. The efficiency ratio, based on pre-tax adjusted earnings, was 63.46% for the first quarter of 2013, compared to 62.17% in the first quarter of 2012. The net overhead ratio, based on pre-tax adjusted earnings, was 1.47% for the first quarter of 2013, compared to 1.57% in the first quarter of 2012. See "Supplemental Financial Measures/Ratios" section earlier in this document for further detail on these non-GAAP measures/ratios.

### Income Taxes

The Company recorded income tax expense of $20.2 million for the three months ended March 31, 2013, compared to $14.5 million for same period of 2012. The effective tax rates were 38.7% and 38.5% for the first quarters of 2013 and 2012, respectively.

### Operating Segment Results

The Company’s operations consist of three primary segments: community banking, specialty finance and wealth management. The Company’s profitability is primarily dependent on the net interest income, provision for credit losses, non-interest income and operating expenses of its community banking segment. The net interest income of the community banking segment includes interest income and related interest costs from portfolio loans that were purchased from the specialty finance segment. For purposes of internal segment profitability analysis, management reviews the results of its specialty finance segment as if all loans originated and sold to the community banking segment were retained within that segment’s operations.

Similarly, for purposes of analyzing the contribution from the wealth management segment, management allocates a portion of the net interest income earned by the community banking segment on deposit balances of customers of the wealth management segment to the wealth management segment. (See “wealth management deposits” discussion in the Deposits section of this report for more information on these deposits).

The community banking segment’s net interest income for the quarter ended March 31, 2013 totaled $123.4 million as compared to $121.1 million for the same period in 2012, an increase of $2.3 million, or 2%. The increase in the current quarter is primarily attributable to growth in earning assets, including those obtained in acquisitions as well as the ability to gather interest-bearing deposits at more reasonable rates. The community banking segment’s non-interest income totaled $39.9 million in the first quarter of 2013, an increase of $8.1 million, or 25%, when compared to the first quarter of 2012 total of $31.8 million. The increase in the current quarter as compared to the first quarter of 2012 is primarily attributed to higher mortgage banking revenue resulting from higher origination volumes as well as the general improvement in the overall economy (increased housing starts, home sales and median price of homes). The community banking segment’s after-tax profit for the quarter ended March 31, 2013 totaled $33.6 million, an increase of $6.7 million as compared to after-tax profit in the first quarter of 2012 of $27.0 million.

Net interest income for the specialty finance segment totaled $31.1 million for the quarter ended March 31, 2013, compared to $27.6 million for the same period in 2012, an increase of $3.5 million or 13%. The specialty finance segment’s non-interest income for the three month period ending March 31, 2013 totaled $1.7 million compared to the three month period ending March 31, 2012 total of $1.4 million. The increases in both net interest income and non-interest income in the current quarter are primarily attributable to revenues from the Company’s Canadian insurance premium finance subsidiary acquired in the second quarter of 2012. Our commercial premium finance operations, life insurance finance operations and accounts receivable finance operations accounted for 63%, 31% and 6%, respectively, of the total revenues of our specialty finance business for the three month period ending March 31, 2013. The after-tax profit of the specialty finance segment for the quarter ended March 31, 2013 totaled $13.8 million as compared to $12.5 million for the quarter ended March 31, 2012.

The wealth management segment reported net interest income of $1.3 million for the first quarter of 2013 compared to $1.7 million in the same quarter of 2012. Net interest income for this segment is comprised of the net interest earned on brokerage customer receivables at WHI and an allocation of the net interest income earned by the community banking segment on non-interest bearing and interest-bearing wealth management customer account balances on deposit at the banks (“wealth management deposits”). The allocated net interest income included in this segment’s profitability was $1.1 million ($687,000 after tax) for the three month period ended March 31, 2013, compared to $1.6 million ($932,000 after tax) in the prior year quarter. This segment recorded non-interest income of $17.9 million for the first quarter of 2013 compared to $15.2 million for the first quarter of 2012. The increase in the first quarter of 2013 as compared to the first quarter of 2012 is mostly attributable to additional revenues resulting from the acquisition of a community bank trust operation on March 30, 2012 as well as continued growth within the existing business. The wealth management segment’s after-tax profit totaled $2.2 million for the first quarter of 2013 compared to after-tax profit of $1.5 million for the first quarter of 2012.

### Financial Condition

Total assets were $17.1 billion at March 31, 2013, representing an increase of $902.2 million, or 6%, when compared to March 31, 2012 and a decrease of approximately $445.4 million, or 10% on an annualized basis, when compared to December 31, 2012. Total funding, which includes deposits, all notes and advances, including the junior subordinated debentures, was $14.9 billion at March 31, 2013, $14.3 billion at March 31, 2012 and $15.4 billion at December 31, 2012. See Notes 5, 6, 10, 11 and 12 of the Financial Statements presented under Item 1 of this report for additional period-end detail on the Company’s interest-earning assets and funding liabilities.

### Interest-Earning Assets

The following table sets forth, by category, the composition of average earning asset balances and the relative percentage of total average earning assets for the periods presented:

*(Dollars in thousands)*

| Loans: | Three Months Ended March 31, 2013 Balance | Percent | December 31, 2012 Balance | Percent | March 31, 2012 Balance | Percent |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Commercial | **$2,841,360** | **18%** | $2,768,603 | 18% | $2,443,595 | 17% |
| Commercial real-estate | **3,916,871** | **25** | 3,731,790 | 24 | 3,538,735 | 25 |
| Home equity | **774,772** | **5** | 800,616 | 5 | 851,495 | 6 |
| Residential real-estate (1) | **751,473** | **5** | 825,698 | 5 | 626,623 | 4 |
| Premium finance receivables | **3,777,563** | **24** | 3,677,591 | 24 | 3,199,028 | 22 |
| Indirect consumer loans | **73,238** | **1** | 78,155 | 1 | 65,587 | 1 |
| Other loans | **117,281** | **1** | 118,980 | 1 | 122,953 | 1 |
| Total loans, net of unearned income excluding covered loans (2) | **$12,252,558** | **79%** | $12,001,433 | 78% | $10,848,016 | 76% |
| Covered loans | **536,284** | **3** | 626,449 | 4 | 667,242 | 5 |
| Total average loans (2) | **$12,788,842** | **82%** | $12,627,882 | 82% | $11,515,258 | 81% |
| Liquidity management assets (3) | **$2,797,310** | **18%** | $2,949,034 | 18% | 2,756,833 | 19% |
| Other earning assets (4) | **24,205** | **—** | 27,482 | — | 30,499 | — |
| Total average earning assets | **$15,610,357** | **100%** | $15,604,398 | 100% | $14,302,590 | 100% |
| Total average assets | **$17,256,843** |  | $17,248,650 |  | $15,835,350 |  |
| Total average earning assets to total average assets |  | **90%** |  | 90% |  | 90% |

(1) *Includes mortgage loans held-for-sale*

(2) *Includes loans held-for-sale and non-accrual loans*

(3) *Liquidity management assets include available-for-sale securities, other securities, interest earning deposits with banks, federal funds sold and securities purchased under resale agreements*

(4) *Other earning assets include brokerage customer receivables and trading account securities*

Total average earning assets for the first quarter of 2013 increased $1.3 billion, or 9%, to $15.6 billion, compared to the first quarter of 2012, and increased $6.0 million, or less than 1% on an annualized basis, compared to the fourth quarter of 2012. Average earning assets comprised 90% of average total assets at March 31, 2013, December 31, 2012 and March 31, 2012.

Average total loans, net of unearned income, totaled $12.8 billion in the first quarter of 2013, increasing $1.3 billion, or 11%, from the first quarter of 2012 and $161.0 million, or 5% on an annualized basis, from the fourth quarter of 2012. Average commercial loans totaled $2.8 billion in the first quarter of 2013, and increased $397.8 million, or 16%, over the average balance in the same period of 2012, while average commercial real-estate loans totaled $3.9 billion in the first quarter of 2013, increasing $378.1 million, or 11%, compared to the first quarter of 2012. Combined, these categories comprised 53% and 52% of the average loan portfolio in the first quarters of 2013 and 2012, respectively. The growth realized in these categories for the first quarter of 2013 as compared to the prior year period is primarily attributable to increased business development efforts and the acquisition of Hyde Park Bank at the end of the fourth quarter of 2012. Average balances increased compared to the quarter ended December 31, 2012, with average commercial loans increasing by $72.8 million, or 11% annualized, and average commercial real-estate loans increasing by $185.1 million, or 20% annualized.

Home equity loans averaged $774.8 million in the first quarter of 2013, and decreased $76.7 million, or 9%, when compared to the average balance in the same period of 2012 and $25.8 million, or 13% annualized, when compared to quarter ended December 31, 2012. As a result of economic conditions, the Company has been actively managing its home equity portfolio to ensure that diligent pricing, appraisal and other underwriting activities continue to exist. The Company has not sacrificed asset quality or pricing standards when originating new home equity loans. Our home equity loan portfolio has performed well in light of the deterioration in the overall residential real-estate market. The number of home equity line of credit commitments originated by us has decreased due to declines in housing valuations that have decreased the amount of equity against which homeowners may borrow, and a decline in homeowners' desire to use their remaining equity as collateral.

Residential real-estate loans averaged $751.5 million in the first quarter of 2013, and increased $124.9 million, or 20% from the average balance of $626.6 million in same period of 2012. Additionally, compared to the quarter ended December 31, 2012, the average balance decreased $74.2 million, or 36% on an annualized basis. 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. Mortgage loans held-for-sale increased since the same period of 2012 as a result of higher origination volumes due to the continuation of the late 2012 refinance market into 2013.

Average premium finance receivables totaled $3.8 billion in the first quarter of 2013, and accounted for 30% of the Company’s average total loans. Premium finance receivables consist of a commercial portfolio and a life portfolio, comprising approximately 54% and 46%, respectively, of the average total balance of premium finance receivables for the first quarter of 2013, compared to 47% and 53%, respectively, for the same period in 2012. In the first quarter of 2013, average premium finance receivables increased $578.5 million, or 18%, from the average balance of $3.2 billion at the same period of 2012. Additionally, the average balance increased $100.0 million, or 11% on an annualized basis, from the average balance of $3.7 billion in the quarter ended December 31, 2012. The increase during 2013 compared to both periods was the result of continued originations within the portfolio due to the effective marketing and customer servicing. Additionally, the increase during 2013 compared to 2012 was the result of the acquisition of Macquarie Premium Funding Inc. Approximately $1.3 billion of premium finance receivables were originated in the first quarter of 2013 compared to $1.1 billion during the same period of 2012.

Indirect consumer loans are comprised primarily of automobile loans originated at Hinsdale Bank. These loans were financed from networks of unaffiliated automobile dealers located throughout the Chicago metropolitan area with which the Company has established relationships. The risks associated with the Company’s portfolios are diversified among many individual borrowers. Like other consumer loans, the indirect consumer loans are subject to the Banks’ established credit standards. Management regards substantially all of these loans as prime quality loans. In the fourth quarter of 2012, the Company ceased the origination of indirect automobile loans through Hinsdale Bank as a result of competitive pricing pressures. During the first quarter of 2013 and 2012, average indirect consumer loans totaled $73.2 million and $65.6 million, respectively.

Other loans represent a wide variety of personal and consumer loans to individuals as well as high-yielding short-term accounts receivable financing to clients in the temporary staffing industry located throughout the United States. Consumer loans generally have shorter terms and higher interest rates than mortgage loans but generally involve more credit risk due to the type and nature of the collateral. Additionally, short-term accounts receivable financing may also involve greater credit risks than generally associated with the loan portfolios of more traditional community banks depending on the marketability of the collateral.

Covered loans averaged $536.3 million in the first quarter of 2013, and decreased $131.0 million, or 20%, when compared to the average balance in the same period of 2012 and decreased $90.2 million, or 58% annualized, when compared to quarter ended December 31, 2012. Covered loans represent loans acquired in FDIC-assisted transactions. These loans are subject to loss sharing agreements with the FDIC. The FDIC has agreed to reimburse the Company for 80% of losses incurred on the purchased loans, foreclosed real estate, and certain other assets. See Note 3 of the Financial Statements presented under Item 1 of this report for a discussion of these acquisitions, including the aggregation of these loans by risk characteristics when determining the initial and subsequent fair value.

Liquidity management assets include available-for-sale securities, other securities, interest earning deposits with banks, federal funds sold and securities purchased under resale agreements. The balances of these assets can fluctuate based on management’s ongoing effort to manage liquidity and for asset liability management purposes. Average liquidity management assets accounted for 18% of total average earning assets in the first quarter of 2013 and fourth quarter of 2012, and 19% in the first quarter of 2012. Average liquidity management assets increased $40.5 million in the first quarter of 2013 compared to the same period 2012, and increased $151.7 million compared to the fourth quarter of 2012. The balances of liquidity management assets can fluctuate based on management’s ongoing effort to manage liquidity and for asset liability management purposes.

Other earning assets include brokerage customer receivables and trading account securities. In the normal course of business, Wayne Hummer Investments, LLC (“WHI”) activities involve the execution, settlement, and financing of various securities transactions. WHI’s customer securities activities are transacted on either a cash or margin basis. In margin transactions, WHI, under an agreement with an out-sourced securities firm, extends credit to its customers, subject to various regulatory and internal margin requirements, collateralized by cash and securities in customer’s accounts. In connection with these activities, WHI executes and the out-sourced firm clears customer transactions relating to the sale of securities not yet purchased, substantially all of which are transacted on a margin basis subject to individual exchange regulations. Such transactions may expose WHI to off-balance-sheet risk, particularly in volatile trading markets, in the event margin requirements are not sufficient to fully cover losses that customers may incur. In the event a customer fails to satisfy its obligations, WHI under the agreement with the outsourced securities firm, may be required to purchase or sell financial instruments at prevailing market prices to fulfill the customer’s obligations. WHI seeks to control the risks associated with its customers’ activities by requiring customers to maintain margin collateral in compliance with various regulatory and internal guidelines. WHI monitors required margin levels daily and, pursuant to such guidelines, requires customers to deposit additional collateral or to reduce positions when necessary.

### Deposits

Total deposits at March 31, 2013 were $14.0 billion an increase of $1.3 billion, or 10%, compared to total deposits at March 31, 2012. See Note 10 to the financial statements presented under Item 1 of this report for a summary of period end deposit balances.

The following table sets forth, by category, the maturity of time certificates of deposit as of March 31, 2013:

| Time Certificates of Deposit Maturity/Re-pricing Analysis As of March 31, 2013 (Dollars in thousands) | CDARs & Brokered Certificates of Deposit (1) | MaxSafe Certificates of Deposit (1) | Variable Rate Certificates of Deposit (2) | Other Fixed Rate Certificates of Deposit (1) | Total Time Certificates of Deposits | Weighted-Average Rate of Maturing Time Certificates of Deposit (3) |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| 1-3 months | $146,322 | $61,916 | $161,566 | $817,366 | **$1,187,170** | **0.58%** |
| 4-6 months | 125,277 | 45,658 | — | 667,345 | **838,280** | **0.79%** |
| 7-9 months | 4,465 | 51,234 | — | 533,132 | **588,831** | **0.72%** |
| 10-12 months | 40,012 | 46,938 | — | 584,053 | **671,003** | **0.82%** |
| 13-18 months | 18,370 | 35,645 | — | 491,918 | **545,933** | **1.02%** |
| 19-24 months | 95,661 | 13,554 | — | 211,650 | **320,865** | **1.77%** |
| 24+ months | — | 23,790 | — | 493,781 | **517,571** | **1.66%** |
| Total | $430,107 | $278,735 | $161,566 | $3,799,245 | **$4,669,653** | **0.92%** |

*(1) This category of certificates of deposit is shown by contractual maturity date.*

*(2) This category includes variable rate certificates of deposit and savings certificates with the majority repricing on at least a monthly basis.*

*(3) Weighted-average rate excludes the impact of purchase accounting fair value adjustments.*

The following table sets forth, by category, the composition of average deposit balances and the relative percentage of total average deposits for the periods presented:

*(Dollars in thousands)*

|  | Three Months Ended March 31, 2013 Balance | Percent | December 31, 2012 Balance | Percent | March 31, 2012 Balance | Percent |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Non-interest bearing | **$2,290,725** | **16%** | $2,314,935 | 17% | $1,832,627 | 15% |
| NOW | **2,005,668** | **14** | 1,879,620 | 13 | 1,710,407 | 14 |
| Wealth management deposits | **966,219** | **7** | 990,621 | 7 | 780,851 | 6 |
| Money market | **2,804,256** | **20** | 2,571,065 | 18 | 2,275,178 | 19 |
| Savings | **1,251,759** | **9** | 1,209,452 | 9 | 914,399 | 7 |
| Time certificates of deposit | **4,829,498** | **34** | 5,058,300 | 36 | 4,800,987 | 39 |
| Total average deposits | **$14,148,125** | **100%** | $14,023,993 | 100% | $12,314,449 | 100% |

Total average deposits for the first quarter of 2013 were $14.1 billion, an increase of $1.8 billion, or 15%, from the first quarter of 2012. The increase in average deposits is primarily attributable to the Company’s acquisition activity in 2012, as well as deposits added which are associated with the increased commercial lending. The Company continues to see a beneficial shift in its deposit mix as average non-interest bearing deposits increased $458.1 million, or 25%, in the first quarter of 2013 compared to the first quarter of 2012.

Wealth management deposits are funds from the brokerage customers of WHI, the trust and asset management customers of CTC and brokerage customers from unaffiliated companies which have been placed into deposit accounts of the banks (“wealth management deposits” in the table above). Wealth Management deposits consist primarily of money market accounts. Consistent with reasonable interest rate risk parameters, these funds have generally been invested in loan production of the banks as well as other investments suitable for banks.

#### Brokered Deposits

While the Company obtains a portion of its total deposits through brokered deposits, the Company does so primarily as an asset-liability management tool to assist in the management of interest rate risk. The Company does not consider brokered deposits to be a vital component of its current liquidity resources. Historically, brokered deposits have represented a small component of the Company’s total deposits outstanding, as set forth in the table below:

*(Dollars in thousands)*

|  | March 31, 2013 | 2012 | December 31, 2012 | 2011 | 2010 |
| --- | ---: | ---: | ---: | ---: | ---: |
| Total deposits | **$13,962,757** | $12,665,853 | $14,428,544 | $12,307,267 | $10,803,673 |
| Brokered deposits | **538,128** | 884,523 | 787,812 | 674,013 | 639,687 |
| Brokered deposits as a percentage of total deposits | **3.9%** | 7.0% | 5.5% | 5.5% | 5.9% |

Brokered deposits include certificates of deposit obtained through deposit brokers, deposits received through the Certificate of Deposit Account Registry Program (“CDARS”), and wealth management deposits of brokerage customers from unaffiliated companies which have been placed into deposit accounts of the banks.

### Other Funding Sources

Although deposits are the Company’s primary source of funding its interest-earning assets, the Company’s ability to manage the types and terms of deposits is somewhat limited by customer preferences and market competition. As a result, in addition to deposits and the issuance of equity securities and the retention of earnings, the Company uses several other funding sources to support its growth. These sources include short-term borrowings, notes payable, Federal Home Loan Bank advances, subordinated debt, secured borrowings and junior subordinated debentures. The Company evaluates the terms and unique characteristics of each source, as well as its asset-liability management position, in determining the use of such funding sources.

The following table sets forth, by category, the composition of the average balances of other funding sources for the quarterly periods presented:

*(Dollars in thousands)*

|  | Three Months Ended March 31, 2013 | December 31, 2012 | March 31, 2012 |
| --- | ---: | ---: | ---: |
| Notes payable | **$3,424** | $2,273 | $52,820 |
| Federal Home Loan Bank advances | **414,092** | 414,289 | 470,345 |
| Other borrowings: |  |  |  |
| Federal funds purchased | **108** | 161 | 8,413 |
| Securities sold under repurchase agreements | **258,360** | 356,207 | 414,771 |
| Other | **35,259** | 39,166 | 29,810 |
| Total other borrowings | **$293,727** | $395,534 | $452,994 |
| Secured borrowings—owed to securitization investors | **—** | — | 514,923 |
| Subordinated notes | **15,000** | 15,000 | 35,000 |
| Junior subordinated debentures | **249,493** | 249,493 | 249,493 |
| Total other borrowings | **$975,736** | $1,076,589 | $1,775,575 |

Notes payable balances represent the balances on a loan agreement with unaffiliated banks and an unsecured promissory note as a result of the Great Lakes Advisors acquisition. The loan agreement is a $100.0 million revolving credit facility and a $1.0 million term loan available for corporate purposes such as to provide capital to fund continued growth at existing bank subsidiaries, possible future acquisitions and for other general corporate matters. At March 31, 2013, the Company had $31.9 million of notes payable outstanding compared to $2.1 million at December 31, 2012 and $52.6 million at March 31, 2012.

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 $414.0 million at March 31, 2013, compared to $414.1 million at December 31, 2012 and $466.4 million at March 31, 2012.

Other borrowings include securities sold under repurchase agreements, federal funds purchased, debt issued by the Company in conjunction with its tangible equity unit offering in December 2010 and a fixed-rate promissory note entered into in August 2012 related to an office building complex owned by the Company. These borrowings totaled $256.2 million, $274.4 million and $411.0 million at March 31, 2013, December 31, 2012 and March 31, 2012, respectively. Securities sold under repurchase agreements represent sweep accounts for certain customers in connection with master repurchase agreements at the banks as well as short-term borrowings from banks and brokers. This funding category fluctuates based on customer preferences and daily liquidity needs of the banks, their customers and the banks’ operating subsidiaries.

The average balance of secured borrowings represents the consolidation of a QSPE. In connection with the securitization, premium finance receivables—commercial were transferred to FIFC Premium Funding, LLC, a QSPE. Instruments issued by the QSPE included $600 million Class A notes that had an annual interest rate of LIBOR plus 1.45%. At the time of issuance, the Notes were eligible collateral under the Federal Reserve Bank of New York’s Term Asset-Backed Securities Loan Facility (“TALF”). During the first and second quarters of 2012, the Company repurchased $172.0 million and $67.2 million, respectively, of the Notes in the open market effectively defeasing a portion of the Notes. During the third quarter of 2012, the QSPE completely paid-off the remaining portion of the these Notes resulting in no balance remaining at March 31, 2013 and December 31, 2012, compared to $428.0 million at March 31, 2012.

The Company borrowed $75.0 million under three separate $25.0 million subordinated note agreements. Each subordinated note requires annual principal payments of $5.0 million beginning in the sixth year of the note and has a term of ten years with final maturity dates in 2012, 2013, and 2015. During the second quarter of 2012, two subordinated notes issued in October 2002 and April 2003 with remaining balances of $5.0 million and $10.0 million, respectively, were paid off prior to maturity. Subject to certain limitations, the remaining note qualifies as Tier 2 regulatory capital. Subordinated notes totaled $15.0 million at March 31, 2013 and December 31, 2012, and $35.0 million at March 31, 2012.

The Company had $249.5 million of junior subordinated debentures outstanding as of March 31, 2013, December 31, 2012 and March 31, 2012. 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. 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.

See Notes 8, 11 and 12 of the Financial Statements presented under Item 1 of this report for details of period end balances and other information for these various funding sources. There were no material changes outside the ordinary course of business in the Company’s contractual obligations during the first quarter of 2013 as compared to December 31, 2012.

### Shareholders’ Equity

Total shareholders’ equity was $1.8 billion at March 31, 2013, reflecting an increase of $137.8 million since March 31, 2012 and $21.0 million since December 31, 2012. The increase from December 31, 2012 was the result of net income of $32.1 million less common stock dividends of $3.3 million and preferred stock dividends of $2.6 million, $2.4 million credited to surplus for stock-based compensation costs, $1.6 million from the issuance of shares of the Company’s common stock (and related tax benefit) pursuant to various stock compensation plans and $888,000 net unrealized gains from cash flow hedges, net of tax, offset by $4.9 million of foreign currency translation adjustments, net of tax, $4.8 million in net unrealized losses from available-for-sale securities, net of tax, and $349,000 of common stock repurchases by the Company.

The following tables reflect various consolidated measures of capital as of the dates presented and the capital guidelines established by the Federal Reserve Bank for a bank holding company:

|  | March 31, 2013 | December 31, 2012 | March 31, 2012 |
| --- | ---: | ---: | ---: |
| Leverage ratio | **10.2%** | 10.0% | 10.5% |
| Tier 1 capital to risk-weighted assets | **12.4** | 12.1 | 12.7 |
| Total capital to risk-weighted assets | **13.5** | 13.1 | 13.9 |
| Total average equity-to-total average assets(1) | **10.5** | 10.4 | 9.9 |

#### (1) Based on quarterly average balances.

|  | Minimum Capital Requirements | Well Capitalized |
| --- | ---: | ---: |
| Leverage ratio | 4.0% | 5.0% |
| Tier 1 capital to risk-weighted assets | 4.0 | 6.0 |
| Total capital to risk-weighted assets | 8.0 | 10.0 |

76

The Company’s principal sources of funds at the holding company level are dividends from its subsidiaries, borrowings under its loan agreement with unaffiliated banks and proceeds from the issuances of subordinated debt and additional common or preferred equity. Refer to Notes 11, 12 and 17 of the Financial Statements presented under Item 1 of this report for further information on these various funding sources. The issuances of subordinated debt, preferred stock and additional common stock are the primary forms of regulatory capital that are considered as the Company evaluates increasing its capital position. Management is committed to maintaining the Company’s capital levels above the “Well Capitalized” levels established by the Federal Reserve for bank holding companies.

The Company’s Board of Directors approves dividends from time to time, however, the ability to declare a dividend is limited by the Company's financial condition, the terms of the Company's 8.00% non-cumulative perpetual convertible preferred stock, Series A, the terms of the Company's 5.00% non-cumulative perpetual convertible preferred stock, Series C, the terms of the Company’s Trust Preferred Securities offerings, the Company’s 7.5% tangible equity units and under certain financial covenants in the Company’s credit agreement. In January of 2013, Wintrust declared a semi-annual cash dividend of $0.09 per common share. In each of January and July of 2012, Wintrust declared a semi-annual cash dividend of $0.09 per common share.

See Note 17 of the Financial Statements presented under Item 1 of this report for details on the Company’s issuance of Series C preferred stock in March 2012, tangible equity units in December 2010, and Series A preferred stock in August 2008.

### LOAN PORTFOLIO AND ASSET QUALITY

### Loan Portfolio

The following table shows the Company’s loan portfolio by category as of the dates shown:

*(Dollars in thousands)*

|  | March 31, 2013 Amount | % of Total | December 31, 2012 Amount | % of Total | March 31, 2012 Amount | % of Total |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Commercial | **$2,872,695** | **23%** | $2,914,798 | 24% | $2,544,456 | 22% |
| Commercial real-estate | **3,990,465** | **32** | 3,864,118 | 31 | 3,585,760 | 32 |
| Home equity | **759,218** | **6** | 788,474 | 6 | 840,364 | 7 |
| Residential real-estate | **360,652** | **3** | 367,213 | 3 | 361,327 | 3 |
| Premium finance receivables—commercial | **1,997,160** | **16** | 1,987,856 | 16 | 1,512,630 | 13 |
| Premium finance receivables—life insurance | **1,753,512** | **14** | 1,725,166 | 14 | 1,693,763 | 15 |
| Indirect consumer | **69,245** | **1** | 77,333 | 1 | 67,445 | 1 |
| Other loans | **97,365** | **1** | 103,985 | 1 | 111,639 | 1 |
| Total loans, net of unearned income, excluding covered loans | **$11,900,312** | **96%** | $11,828,943 | 96% | $10,717,384 | 94% |
| Covered loans | **518,661** | **4** | 560,087 | 4 | 691,220 | 6 |
| Total loans | **$12,418,973** | **100%** | $12,389,030 | 100% | $11,408,604 | 100% |

77

*Commercial and commercial real-estate loans.* Our commercial and commercial real-estate loan portfolios are comprised primarily of commercial real-estate loans and lines of credit for working capital purposes. The table below sets forth information regarding the types, amounts and performance of our loans within these portfolios (excluding covered loans) as of March 31, 2013 and 2012:

*(Dollars in thousands)*

| As of March 31, 2013 Commercial: | Balance | % of Total Balance | Nonaccrual | \> 90 Days Past Due and Still Accruing | Allowance For Loan Losses Allocation |
| --- | ---: | ---: | ---: | ---: | ---: |
| Commercial and industrial | $1,569,576 | 22.9% | $17,717 | $— | $18,279 |
| Franchise | 194,511 | 2.8 | 125 | — | 1,655 |
| Mortgage warehouse lines of credit | 131,970 | 1.9 | — | — | 1,288 |
| Community Advantage—homeowner associations | 82,763 | 1.2 | — | — | 207 |
| Aircraft | 14,112 | 0.2 | — | — | 74 |
| Asset-based lending | 687,255 | 10.0 | 531 | — | 6,307 |
| Municipal | 89,508 | 1.3 | — | — | 880 |
| Leases | 98,030 | 1.4 | — | — | 261 |
| Other | 127 | — | — | — | 1 |
| Purchased non-covered commercial loans (1) | 4,843 | — | — | 449 | — |
| **Total commercial** | **$2,872,695** | **41.7%** | **$18,373** | **$449** | **$28,952** |
| **Commercial Real-Estate:** |  |  |  |  |  |
| Residential construction | $37,083 | 0.5% | $3,094 | $— | $1,200 |
| Commercial construction | 162,358 | 2.4 | 1,086 | — | 2,749 |
| Land | 133,578 | 2.0 | 17,976 | — | 5,198 |
| Office | 584,684 | 8.5 | 3,564 | — | 5,634 |
| Industrial | 595,525 | 8.7 | 7,137 | — | 6,602 |
| Retail | 586,801 | 8.6 | 7,915 | — | 5,592 |
| Multi-family | 512,785 | 7.5 | 2,088 | — | 12,778 |
| Mixed use and other | 1,322,834 | 19.3 | 18,947 | — | 16,458 |
| Purchased non-covered commercial real-estate (1) | 54,817 | 0.8 | — | 1,866 | 197 |
| **Total commercial real-estate** | **$3,990,465** | **58.3%** | **$61,807** | **$1,866** | **$56,408** |
| **Total commercial and commercial real-estate** | **$6,863,160** | **100.0%** | **$80,180** | **$2,315** | **$85,360** |
| Commercial real-estate—collateral location by state: |  |  |  |  |  |
| Illinois | $3,359,815 | 84.2% |  |  |  |
| Wisconsin | 334,333 | 8.4 |  |  |  |
| **Total primary markets** | **$3,694,148** | **92.6%** |  |  |  |
| Florida | 64,999 | 1.6 |  |  |  |
| Arizona | 39,442 | 1.0 |  |  |  |
| Indiana | 53,401 | 1.3 |  |  |  |
| Other (no individual state greater than 0.5%) | 138,475 | 3.5 |  |  |  |
| **Total** | **$3,990,465** | **100.0%** |  |  |  |

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

*(Dollars in thousands)*

| As of March 31, 2012 Commercial: | Balance | % of Total Balance | Nonaccrual | \> 90 Days Past Due and Still Accruing | Allowance For Loan Losses Allocation |
| --- | ---: | ---: | ---: | ---: | ---: |
| Commercial and industrial | $1,506,019 | 24.6% | $17,392 | $— | $20,849 |
| Franchise | 169,277 | 2.8 | 1,792 | — | 1,876 |
| Mortgage warehouse lines of credit | 136,438 | 2.2 | — | — | 1,146 |
| Community Advantage—homeowner associations | 75,786 | 1.2 | — | — | 190 |
| Aircraft | 19,891 | 0.3 | 260 | — | 103 |
| Asset-based lending | 474,811 | 7.7 | 391 | — | 7,704 |
| Municipal | 76,885 | 1.3 | — | — | 1,031 |
| Leases | 77,671 | 1.3 | — | — | 306 |
| Other | 1,733 | — | — | — | 14 |
| Purchased non-covered commercial loans (1) | 5,945 | 0.1 | — | 424 | — |
| **Total commercial** | **$2,544,456** | **41.5%** | **$19,835** | **$424** | **$33,219** |
| **Commercial Real-Estate:** |  |  |  |  |  |
| Residential construction | $56,111 | 0.9% | $1,807 | $— | $1,744 |
| Commercial construction | 164,719 | 2.7 | 2,389 | — | 4,167 |
| Land | 184,042 | 3.0 | 25,306 | — | 10,606 |
| Office | 560,708 | 9.1 | 8,534 | — | 6,418 |
| Industrial | 590,903 | 9.6 | 1,864 | — | 5,475 |
| Retail | 528,077 | 8.6 | 7,323 | 73 | 4,561 |
| Multi-family | 324,938 | 5.3 | 3,708 | — | 8,400 |
| Mixed use and other | 1,123,940 | 18.4 | 11,773 | — | 12,581 |
| Purchased non-covered commercial real-estate (1) | 52,322 | 0.9 | — | 2,959 | — |
| **Total commercial real-estate** | **$3,585,760** | **58.5%** | **$62,704** | **$3,032** | **$53,952** |
| **Total commercial and commercial real-estate** | **$6,130,216** | **100.0%** | **$82,539** | **$3,456** | **$87,171** |
| Commercial real-estate—collateral location by state: |  |  |  |  |  |
| Illinois | $2,990,714 | 83.4% |  |  |  |
| Wisconsin | 331,901 | 9.3 |  |  |  |
| **Total primary markets** | **$3,322,615** | **92.7%** |  |  |  |
| Florida | 56,969 | 1.6 |  |  |  |
| Arizona | 39,329 | 1.1 |  |  |  |
| Indiana | 41,222 | 1.1 |  |  |  |
| Other (no individual state greater than 0.5%) | 125,625 | 3.5 |  |  |  |
| **Total** | **$3,585,760** | **100.0%** |  |  |  |

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

We make commercial loans for many purposes, including: working capital lines, which are generally renewable annually and supported by business assets, personal guarantees and additional collateral; loans to condominium and homeowner associations originated through Barrington Bank’s Community Advantage program; small aircraft financing, an earning asset niche developed at Crystal Lake Bank; and franchise lending at Lake Forest Bank. Commercial business lending is generally considered to involve a higher degree of risk than traditional consumer bank lending. However, as a result of improvement in credit quality within the overall commercial portfolio, our allowance for loan losses in our commercial loan portfolio is $29.0 million as of March 31, 2013 compared to $33.2 million as of March 31, 2012.

Our commercial real-estate loans are generally secured by a first mortgage lien and assignment of rents on the property. Since most of our bank branches are located in the Chicago metropolitan area and southeastern Wisconsin, 92.6% of our commercial real-estate loan portfolio is located in this region. Commercial real-estate market conditions continued to be under stress in the first quarter of 2013, however we have been able to effectively manage and reduce our total non-performing commercial real-estate loans from March 31, 2012 to March 31, 2013. As of March 31, 2013, our allowance for loan losses related to this portfolio is $56.4 million compared to $54.0 million as of March 31, 2012.

The Company also participates in mortgage warehouse lending by providing interim funding to unaffiliated mortgage bankers to finance residential mortgages originated by such bankers for sale into the secondary market. The Company’s loans to the mortgage bankers are secured by the business assets of the mortgage companies as well as the specific mortgage loans funded by the Company, after they have been pre-approved for purchase by third party end lenders. The Company may also provide interim financing for packages of mortgage loans on a bulk basis in circumstances where the mortgage bankers desire to competitively bid on a number of mortgages for sale as a package in the secondary market. Amounts advanced with respect to any particular mortgage loan are usually required to be repaid within 21 days. Despite difficult conditions in the U.S. residential real-estate market experienced since 2008, our mortgage warehouse lending business expanded due to the high demand for mortgage re-financings given the historically low interest rate environment at that time and the fact that many of our competitors exited the market in late 2008 and early 2009. However, increased competition in the first quarter of 2013 resulted in mortgage warehouse lines decreasing to $132.0 million as of March 31, 2013 from $136.4 million as of March 31, 2012. Our allowance for loan losses with respect to these loans is $1.3 million as of March 31, 2013.

*Home equity loans.* Our home equity loans and lines of credit are originated by each of our banks in their local markets where we have a strong understanding of the underlying real estate value. Our banks monitor and manage these loans, and we conduct an automated review of all home equity loans and lines of credit at least twice per year. This review collects current credit performance for each home equity borrower and identifies situations where the credit strength of the borrower is declining, or where there are events that may influence repayment, such as tax liens or judgments. Our banks use this information to manage loans that may be higher risk and to determine whether to obtain additional credit information or updated property valuations. As a result of this work and general market conditions, we have modified our home equity offerings and changed our policies regarding home equity renewals and requests for subordination. In a limited number of situations, the unused availability on home equity lines of credit was frozen.

The rates we offer on new home equity lending are based on several factors, including appraisals and valuation due diligence, in order to reflect inherent risk, and we place additional scrutiny on larger home equity requests. In a limited number of cases, we issue home equity credit together with first mortgage financing, and requests for such financing are evaluated on a combined basis. It is not our practice to advance more than 85% of the appraised value of the underlying asset, which ratio we refer to as the loan-to-value ratio, or LTV ratio, and a majority of the credit we previously extended, when issued, had an LTV ratio of less than 80%.

Our home equity loan portfolio has performed well in light of the deterioration in the overall residential real-estate market. The number of new home equity line of credit commitments originated by us has decreased due to declines in housing valuations that have decreased the amount of equity against which homeowners may borrow, and a decline in homeowners’ desire to use their remaining equity as collateral.

*Residential real-estate mortgages.* Our residential real-estate portfolio predominantly includes one to four-family adjustable rate mortgages that have repricing terms generally from one to three years, construction loans to individuals and bridge financing loans for qualifying customers. As of March 31, 2013, our residential loan portfolio totaled $360.7 million, or 3% of our total outstanding loans.

Our adjustable rate mortgages relate to properties located principally in the Chicago metropolitan area and southeastern Wisconsin or vacation homes owned by local residents, and may have terms based on differing indexes. These adjustable rate mortgages are often non-agency conforming because the outstanding balance of these loans exceeds the maximum balance that can be sold into the secondary market. Adjustable rate mortgage loans decrease the interest rate risk we face on our mortgage portfolio. However, this risk is not eliminated because, among other things, such loans generally provide for periodic and lifetime limits on the interest rate adjustments. Additionally, adjustable rate mortgages may pose a higher risk of delinquency and default because they require borrowers to make larger payments when interest rates rise. To date, we have not seen a significant elevation in delinquencies and foreclosures in our residential loan portfolio. As of March 31, 2013, $9.6 million of our residential real-estate mortgages, or 2.7% of our residential real-estate loan portfolio, excluding loans acquired with evidence of credit quality deterioration since origination, were classified as nonaccrual, $9.5 million were 30 to 89 days past due (2.6%) and $340.8 million were current (94.7%). We believe that since our loan portfolio consists primarily of locally originated loans, and since the majority of our borrowers are longer-term customers with lower LTV ratios, we face a relatively low risk of borrower default and delinquency.

While we generally do not originate loans for our own portfolio with long-term fixed rates due to interest rate risk considerations, we can accommodate customer requests for fixed rate loans by originating such loans and then selling them into the secondary market, for which we receive fee income, or by selectively retaining certain of these loans within the banks’ own portfolios where they are non-agency conforming, or where the terms of the loans make them favorable to retain. A portion of the loans we sold into the secondary market were sold with the servicing of those loans retained. The amount of loans serviced for others as of March 31, 2013 and 2012 was $1.0 billion and $963.5 million, respectively. All other mortgage loans sold into the secondary market were sold without the retention of servicing rights.

It is not our current practice to underwrite, and we have no plans to underwrite, subprime, Alt A, no or little documentation loans, or option ARM loans. As of March 31, 2013, approximately $15.8 million of our mortgage loans consist of interest-only loans.

*Premium finance receivables – commercial.* FIFC and FIFC Canada originated approximately $1.2 billion in commercial insurance premium finance receivables during the first quarter of 2013 compared to $1.0 billion in the same period of 2012. FIFC and FIFC Canada makes loans to businesses to finance the insurance premiums they pay on their commercial insurance policies. The loans are originated by working through independent medium and large insurance agents and brokers located throughout the United States and Canada. The insurance premiums financed are primarily for commercial customers’ purchases of liability, property and casualty and other commercial insurance.

During the second quarter of 2012, the Company completed its acquisition of Macquarie Premium Funding Inc. Through this transaction, the Company acquired approximately $213 million of gross premium finance receivables outstanding. See Note 3 of the Consolidated Financial Statements presented under Item 8 of this report for a discussion of this acquisition.

This lending involves relatively rapid turnover of the loan portfolio and high volume of loan originations. Because of the indirect nature of this lending through third party agents and brokers and because the borrowers are located nationwide and in Canada, this segment is more susceptible to third party fraud than relationship lending. The Company performs ongoing credit and other reviews of the agents and brokers, and performs various internal audit steps to mitigate against the risk of any fraud.

The majority of these loans are purchased by the banks in order to more fully utilize their lending capacity as these loans generally provide the banks with higher yields than alternative investments. However, during the third quarter of 2009, FIFC initially sold $695 million in commercial premium finance receivables to our indirect subsidiary, FIFC Premium Funding I, LLC, which in turn sold $600 million in aggregate principal amount of notes backed by such premium finance receivables in a securitization transaction sponsored by FIFC. During the first and second quarter of 2012, the Company completely paid-off these notes. See Note 8 of the Consolidated Financial Statements presented under Item 8 of this report for a discussion of this securitization transaction.

*Premium finance receivables—life insurance.* In 2007, FIFC began financing life insurance policy premiums generally for high net-worth individuals. In 2009, FIFC expanded this niche lending business segment when it purchased a portfolio of domestic life insurance premium finance loans for a total aggregate purchase price of $745.9 million.

FIFC originated approximately $85.7 million in life insurance premium finance receivables in the first quarter of 2013 as compared to $112.8 million of originations in the first quarter of 2012. The decrease in originations from period to period was the result of increased competition and pricing pressure within the current market. These loans are originated directly with the borrowers with assistance from life insurance carriers, independent insurance agents, financial advisors and legal counsel. The life insurance policy is the primary form of collateral. In addition, these loans often are secured with a letter of credit, marketable securities or certificates of deposit. In some cases, FIFC may make a loan that has a partially unsecured position.

*Indirect consumer loans.* As part of its strategy to pursue specialized earning asset niches to augment loan generation within the Banks’ target markets, the Company established fixed-rate automobile loan financing at Hinsdale Bank funded indirectly through unaffiliated automobile dealers. The risks associated with the Company’s portfolios are diversified among many individual borrowers. Like other consumer loans, the indirect consumer loans are subject to the Banks’ established credit standards. Management regards substantially all of these loans as prime quality loans. In the fourth quarter of 2012, the Company ceased the origination of indirect automobile loans through Hinsdale Bank as a result of competitive pricing pressures.

*Other Loans.* Included in the other loan category is a wide variety of personal and consumer loans to individuals as well as high yielding short-term accounts receivable financing to clients in the temporary staffing industry located throughout the United States. The Banks originate consumer loans in order to provide a wider range of financial services to their customers.

Consumer loans generally have shorter terms and higher interest rates than mortgage loans but generally involve more credit risk than mortgage loans due to the type and nature of the collateral. Additionally, short-term accounts receivable financing may also involve greater credit risks than generally associated with the loan portfolios of more traditional community banks depending on the marketability of the collateral.

#### Variable Rate Loan Repricing and Rate Floors

The following table classifies the commercial and commercial real-estate loan portfolio at March 31, 2013 by date at which the loans reprice and the type of rate:

*(Dollars in thousands)*

| As of March 31, 2013 Commercial | One year or less | From one to five years Total | Over five years |  |
| --- | ---: | ---: | ---: | ---: |
| Fixed rate | **$75,818** | **$329,020** | **$120,103** | **$524,941** |
| Variable rate |  |  |  |  |
| With floor feature | **703,600** | **5,880** | **—** | **709,480** |
| Without floor feature | **1,633,973** | **4,301** | **—** | **1,638,274** |
| Total commercial | **2,413,391** | **339,201** | **120,103** | **2,872,695** |
| Commercial real-estate |  |  |  |  |
| Fixed rate | **431,971** | **1,114,255** | **98,417** | **1,644,643** |
| Variable rate |  |  |  |  |
| With floor feature | **751,938** | **7,889** | **473** | **760,300** |
| Without floor feature | **1,556,047** | **28,375** | **1,100** | **1,585,522** |
| Total commercial real-estate | **2,739,956** | **1,150,519** | **99,990** | **3,990,465** |

### Past Due Loans and Non-Performing Assets

Our ability to manage credit risk depends in large part on our ability to properly identify and manage problem loans. To do so, we operate a credit risk rating system under which our credit management personnel assign a credit risk rating to each loan at the time of origination and review loans on a regular basis to determine each loan’s credit risk rating on a scale of 1 through 10 with higher scores indicating higher risk. The credit risk rating structure used is shown below:

|  |  |
| --- | --- |
| 1 Rating — | Minimal Risk (Loss Potential – none or extremely low) (Superior asset quality, excellent liquidity, minimal leverage) |
| 2 Rating — | Modest Risk (Loss Potential demonstrably low) (Very good asset quality and liquidity, strong leverage capacity) |
| 3 Rating — | Average Risk (Loss Potential low but no longer refutable) (Mostly satisfactory asset quality and liquidity, good leverage capacity) |
| 4 Rating — | Above Average Risk (Loss Potential variable, but some potential for deterioration) (Acceptable asset quality, little excess liquidity, modest leverage capacity) |
| 5 Rating — | Management Attention Risk (Loss Potential moderate if corrective action not taken) (Generally acceptable asset quality, somewhat strained liquidity, minimal leverage capacity) |
| 6 Rating — | Special Mention (Loss Potential moderate if corrective action not taken) (Assets in this category are currently protected, potentially weak, but not to the point of substandard classification) |
| 7 Rating — | Substandard Accrual (Loss Potential distinct possibility that the bank may sustain some loss, but no discernable impairment) (Must have well defined weaknesses that jeopardize the liquidation of the debt) |
| 8 Rating — | Substandard Non-accrual (Loss Potential well documented probability of loss, including potential impairment) (Must have well defined weaknesses that jeopardize the liquidation of the debt) |
| 9 Rating — | Doubtful (Loss Potential extremely high) (These assets have all the weaknesses in those classified “substandard” with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of current existing facts, conditions, and values, highly improbable) |
| 10 Rating — | Loss (fully charged-off) (Loans in this category are considered fully uncollectible.) |

Each loan officer is responsible for monitoring his or her loan portfolio, recommending a credit risk rating for each loan in his or her portfolio and ensuring the credit risk ratings are appropriate. These credit risk ratings are then ratified by the bank’s chief credit officer and/or concurrence credit officer. Credit risk ratings are determined by evaluating a number of factors, including: a borrower’s financial strength, cash flow coverage, collateral protection and guarantees. A third party loan review firm independently reviews a significant portion of the loan portfolio at each of the Company’s subsidiary banks to evaluate the appropriateness of the management-assigned credit risk ratings. These ratings are subject to further review at each of our bank subsidiaries by the applicable regulatory authority, including the Federal Reserve Bank of Chicago, the Office of the Comptroller of the Currency, the State of Illinois and the State of Wisconsin and are also reviewed by our internal audit staff.

The Company’s problem loan reporting system automatically includes all loans with credit risk ratings of 6 through 9. This system is designed to provide an on-going detailed tracking mechanism for each problem loan. Once management determines that a loan has deteriorated to a point where it has a credit risk rating of 6 or worse, the Company’s Managed Asset Division performs an overall credit and collateral review. As part of this review, all underlying collateral is identified and the valuation methodology is analyzed and tracked. As a result of this initial review by the Company’s Managed Asset Division, the credit risk rating is reviewed and a portion of the outstanding loan balance may be deemed uncollectible or an impairment reserve may be established. The Company’s impairment analysis utilizes an independent re-appraisal of the collateral (unless such a third-party evaluation is not possible due to the unique nature of the collateral, such as a closely-held business or thinly traded securities). In the case of commercial real-estate collateral, an independent third party appraisal is ordered by the Company’s Real Estate Services Group to determine if there has been any change in the underlying collateral value. These independent appraisals are reviewed by the Real Estate Services Group and sometimes by independent third party valuation experts and may be adjusted depending upon market conditions. An appraisal is ordered at least once a year for these loans, or more often if market conditions dictate. In the event that the underlying value of the collateral cannot be easily determined, a detailed valuation methodology is prepared by the Managed Asset Division. A summary of this analysis is provided to the directors’ loan committee of the bank which originated the credit for approval of a charge-off, if necessary.

Through the credit risk rating process, loans are reviewed to determine if they are performing in accordance with the original contractual terms. If the borrower has failed to comply with the original contractual terms, further action may be required by the Company, including a downgrade in the credit risk rating, movement to non-accrual status, a charge-off or the establishment of a specific impairment reserve. In the event a collateral shortfall is identified during the credit review process, the Company will work with the borrower for a principal reduction and/or a pledge of additional collateral and/or additional guarantees. In the event that these options are not available, the loan may be subject to a downgrade of the credit risk rating. If we determine that a loan amount or portion thereof, is uncollectible the loan’s credit risk rating is immediately downgraded to an 8 or 9 and the uncollectible amount is charged-off. Any loan that has a partial charge-off continues to be assigned a credit risk rating of an 8 or 9 for the duration of time that a balance remains outstanding. The Managed Asset Division undertakes a thorough and ongoing analysis to determine if additional impairment and/or charge-offs are appropriate and to begin a workout plan for the credit to minimize actual losses.

The Company’s approach to workout plans and restructuring loans is built on the credit-risk rating process. A modification of a loan with an existing credit risk rating of six or worse or a modification of any other credit, which will result in a restructured credit risk rating of six or worse must be reviewed for troubled debt restructuring (“TDR”) classification. In that event, our Managed Assets Division conducts an overall credit and collateral review. A modification of a loan is considered to be a TDR if both (1) the borrower is experiencing financial difficulty and (2) for economic or legal reasons, the bank grants a concession to a borrower that it would not otherwise consider. The modification of a loan where the credit risk rating is five or better both before and after such modification is not considered to be a TDR. Based on the Company’s credit risk rating system, it considers that borrowers whose credit risk rating is five or better are not experiencing financial difficulties and therefore, are not considered TDRs.

TDRs, which are by definition considered impaired loans, are reviewed at the time of modification and on a quarterly basis to determine if a specific reserve is needed. The carrying amount of the loan is compared to the expected payments to be received, discounted at the loan’s original rate, or for collateral dependent loans, to the fair value of the collateral. Any shortfall is recorded as a specific reserve.

For non-TDR loans, if based on current information and events, it is probable that the Company will be unable to collect all amounts due to it according to the contractual terms of the loan agreement, a loan is considered impaired, and a specific impairment reserve analysis is performed and if necessary, a specific reserve is established. In determining the appropriate reserve for collateral-dependent loans, the Company considers the results of appraisals for the associated collateral.

#### Non-performing Assets, excluding covered assets

The following table sets forth Wintrust’s non-performing assets, excluding covered assets, and loans acquired with credit quality deterioration since origination, as of the dates shown:

*(Dollars in thousands)*

| Loans past due greater than 90 days and still accruing: | March 31, 2013 | December 31, 2012 | March 31, 2012 |
| --- | ---: | ---: | ---: |
| Commercial | **$—** | $— | $— |
| Commercial real-estate | **—** | — | 73 |
| Home equity | **—** | 100 | — |
| Residential real-estate | **—** | — | — |
| Premium finance receivables—commercial | **7,677** | 10,008 | 4,619 |
| Premium finance receivables—life insurance | **2,256** | — | — |
| Indirect consumer | **145** | 189 | 257 |
| Consumer and other | **—** | 32 | — |
| Total loans past due greater than 90 days and still accruing | **10,078** | 10,329 | 4,949 |
| **Non-accrual loans:** |  |  |  |
| Commercial | **18,373** | 21,737 | 19,835 |
| Commercial real-estate | **61,807** | 49,973 | 62,704 |
| Home equity | **14,891** | 13,423 | 12,881 |
| Residential real-estate | **9,606** | 11,728 | 5,329 |
| Premium finance receivables—commercial | **12,068** | 9,302 | 7,650 |
| Premium finance receivables—life insurance | **20** | 25 | — |
| Indirect consumer | **95** | 55 | 152 |
| Consumer and other | **1,695** | 1,511 | 121 |
| Total non-accrual loans | **118,555** | 107,754 | 108,672 |
| **Total non-performing loans:** |  |  |  |
| Commercial | **18,373** | 21,737 | 19,835 |
| Commercial real-estate | **61,807** | 49,973 | 62,777 |
| Home equity | **14,891** | 13,523 | 12,881 |
| Residential real-estate | **9,606** | 11,728 | 5,329 |
| Premium finance receivables—commercial | **19,745** | 19,310 | 12,269 |
| Premium finance receivables—life insurance | **2,276** | 25 | — |
| Indirect consumer | **240** | 244 | 409 |
| Consumer and other | **1,695** | 1,543 | 121 |
| Total non-performing loans | **$128,633** | $118,083 | $113,621 |
| Other real estate owned | **50,593** | 56,174 | 69,575 |
| Other real estate owned—obtained in acquisition | **5,584** | 6,717 | 6,661 |
| Other repossessed assets | **4,315** | — | — |
| Total non-performing assets | **$189,125** | $180,974 | $189,857 |
| **Total non-performing loans by category as a percent of its own respective category’s period-end balance:** |  |  |  |
| Commercial | **0.64%** | 0.75% | 0.78% |
| Commercial real-estate | **1.55** | 1.29 | 1.75 |
| Home equity | **1.96** | 1.72 | 1.53 |
| Residential real-estate | **2.66** | 3.19 | 1.47 |
| Premium finance receivables—commercial | **0.99** | 0.97 | 0.81 |
| Premium finance receivables—life insurance | **0.13** | — | — |
| Indirect consumer | **0.35** | 0.32 | 0.61 |
| Consumer and other | **1.74** | 1.48 | 0.11 |
| Total non-performing loans | **1.08%** | 1.00% | 1.06% |
| **Total non-performing assets, as a percentage of total assets** | **1.11%** | 1.03% | 1.17% |
| **Allowance for loan losses as a percentage of total non-performing loans** | **85.79%** | 90.91% | 97.71% |

84

#### Non-performing Commercial and Commercial Real-Estate

Commercial non-performing loans totaled $18.4 million as of March 31, 2013 compared to $21.7 million as of December 31, 2012 and $19.8 million as of March 31, 2012. Commercial real-estate non-performing loans totaled $61.8 million as of March 31, 2013 compared to $50.0 million as of December 31, 2012 and $62.8 million as of March 31, 2012.

Management is pursuing the resolution of all credits in this category. At this time, management believes reserves are adequate to absorb inherent losses that may occur upon the ultimate resolution of these credits.

#### Non-performing Residential Real-Estate and Home Equity

Non-performing residential real-estate and home equity loans totaled $24.5 million as of March 31, 2013. The balance decreased $754,000 from December 31, 2012 and increased $6.3 million from March 31, 2012. The March 31, 2013 non-performing balance is comprised of $9.6 million of residential real-estate (50 individual credits) and $14.9 million of home equity loans (53 individual credits). On average, this is approximately seven non-performing residential real-estate loans and home equity loans per chartered bank within the Company. The Company believes control and collection of these loans is very manageable. At this time, management believes reserves are adequate to absorb inherent losses that may occur upon the ultimate resolution of these credits.

#### Non-performing Commercial Premium Finance Receivables

The table below presents the level of non-performing property and casualty premium finance receivables as of March 31, 2013 and 2012, and the amount of net charge-offs for the quarters then ended.

*(Dollars in thousands)*

|  | March 31, 2013 | March 31, 2012 |
| --- | ---: | ---: |
| Non-performing premium finance receivables—commercial | **$19,745** | $12,269 |
| - as a percent of premium finance receivables—commercial outstanding | **0.99%** | 0.81% |
| Net charge-offs of premium finance receivables—commercial | **$783** | $560 |
| - annualized as a percent of average premium finance receivables—commercial | **0.16%** | 0.15% |

Fluctuations in this category may occur due to timing and nature of account collections from insurance carriers. The Company’s underwriting standards, regardless of the condition of the economy, have remained consistent. We anticipate that net charge-offs and non-performing asset levels in the near term will continue to be at levels that are within acceptable operating ranges for this category of loans. Management is comfortable with administering the collections at this level of non-performing property and casualty premium finance receivables and believes reserves are adequate to absorb inherent losses that may occur upon the ultimate resolution of these credits.

Due to the nature of collateral for commercial premium finance receivables, it customarily takes 60-150 days to convert the collateral into cash. Accordingly, the level of non-performing commercial premium finance receivables is not necessarily indicative of the loss inherent in the portfolio. In the event of default, Wintrust has the power to cancel the insurance policy and collect the unearned portion of the premium from the insurance carrier. In the event of cancellation, the cash returned in payment of the unearned premium by the insurer should generally be sufficient to cover the receivable balance, the interest and other charges due. Due to notification requirements and processing time by most insurance carriers, many receivables will become delinquent beyond 90 days while the insurer is processing the return of the unearned premium. Management continues to accrue interest until maturity as the unearned premium is ordinarily sufficient to pay-off the outstanding balance and contractual interest due.

#### Loan Portfolio Aging

The following table shows, as of March 31, 2013, only 1.1% of the entire portfolio, excluding covered loans, is non-accrual or greater than 90 days past due and still accruing interest with only 1.2%, either one or two payments past due. In total, 97.7% of the Company’s total loan portfolio, excluding covered loans, as of March 31, 2013 is current according to the original contractual terms of the loan agreements.

The tables below show the aging of the Company’s loan portfolio at March 31, 2013 and December 31, 2012:

*(Dollars in thousands)*

| As of March 31, 2013 Loan Balances: Commercial | Nonaccrual | 90+ days and still accruing | 60-89 days past due | 30-59 days past due | Current | Total Loans |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Commercial and industrial | **$17,717** | **$—** | **$1,150** | **$16,710** | **$1,533,999** | **$1,569,576** |
| Franchise | **125** | **—** | **—** | **76** | **194,310** | **194,511** |
| Mortgage warehouse lines of credit | **—** | **—** | **—** | **—** | **131,970** | **131,970** |
| Community Advantage—homeowners association | **—** | **—** | **—** | **—** | **82,763** | **82,763** |
| Aircraft | **—** | **—** | **—** | **—** | **14,112** | **14,112** |
| Asset-based lending | **531** | **—** | **483** | **5,518** | **680,723** | **687,255** |
| Municipal | **—** | **—** | **—** | **—** | **89,508** | **89,508** |
| Leases | **—** | **—** | **—** | **844** | **97,186** | **98,030** |
| Other | **—** | **—** | **—** | **—** | **127** | **127** |
| Purchased non-covered commercial (1) | **—** | **449** | **—** | **—** | **4,394** | **4,843** |
| Total commercial | **18,373** | **449** | **1,633** | **23,148** | **2,829,092** | **2,872,695** |
| Commercial real-estate |  |  |  |  |  |  |
| Residential construction | **3,094** | **—** | **945** | **—** | **33,044** | **37,083** |
| Commercial construction | **1,086** | **—** | **9,521** | **—** | **151,751** | **162,358** |
| Land | **17,976** | **—** | **—** | **11,563** | **104,039** | **133,578** |
| Office | **3,564** | **—** | **8,990** | **4,797** | **567,333** | **584,684** |
| Industrial | **7,137** | **—** | **—** | **986** | **587,402** | **595,525** |
| Retail | **7,915** | **—** | **6,970** | **5,953** | **565,963** | **586,801** |
| Multi-family | **2,088** | **—** | **1,036** | **4,315** | **505,346** | **512,785** |
| Mixed use and other | **18,947** | **—** | **1,573** | **13,560** | **1,288,754** | **1,322,834** |
| Purchased non-covered commercial real-estate (1) | **—** | **1,866** | **251** | **3,333** | **49,367** | **54,817** |
| Total commercial real-estate | **61,807** | **1,866** | **29,286** | **44,507** | **3,852,999** | **3,990,465** |
| Home equity | **14,891** | **—** | **1,370** | **4,324** | **738,633** | **759,218** |
| Residential real-estate | **9,606** | **—** | **782** | **8,680** | **340,751** | **359,819** |
| Purchased non-covered residential real-estate (1) | **—** | **—** | **198** | **—** | **635** | **833** |
| Premium finance receivables |  |  |  |  |  |  |
| Commercial insurance loans | **12,068** | **7,677** | **4,647** | **19,323** | **1,953,445** | **1,997,160** |
| Life insurance loans | **20** | **2,256** | **—** | **1,340** | **1,250,165** | **1,253,781** |
| Purchased life insurance loans (1) | **—** | **—** | **—** | **—** | **499,731** | **499,731** |
| Indirect consumer | **95** | **145** | **127** | **221** | **68,657** | **69,245** |
| Consumer and other | **1,695** | **—** | **160** | **493** | **92,379** | **94,727** |
| Purchased non-covered consumer and other (1) | **—** | **—** | **—** | **20** | **2,618** | **2,638** |
| Total loans, net of unearned income, excluding covered loans | **$118,555** | **$12,393** | **$38,203** | **$102,056** | **$11,629,105** | **$11,900,312** |
| Covered loans | **1,820** | **115,482** | **1,454** | **12,268** | **387,637** | **518,661** |
| Total loans, net of unearned income | **$120,375** | **$127,875** | **$39,657** | **$114,324** | **$12,016,742** | **$12,418,973** |

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

| Aging as a % of Loan Balance: As of March 31, 2013 Commercial | Nonaccrual | 90+ days and still accruing | 60-89 days past due | 30-59 days past due | Current | Total Loans |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Commercial and industrial | **1.1%** | **—** | **0.1%** | **1.1%** | **97.7%** | **100.0%** |
| Franchise | **0.1** | **—** | **—** | **—** | **99.9** | **100.0** |
| Mortgage warehouse lines of credit | **—** | **—** | **—** | **—** | **100.0** | **100.0** |
| Community Advantage—homeowners association | **—** | **—** | **—** | **—** | **100.0** | **100.0** |
| Aircraft | **—** | **—** | **—** | **—** | **100.0** | **100.0** |
| Asset-based lending | **0.1** | **—** | **0.1** | **0.8** | **99.0** | **100.0** |
| Municipal | **—** | **—** | **—** | **—** | **100.0** | **100.0** |
| Leases | **—** | **—** | **—** | **0.9** | **99.1** | **100.0** |
| Other | **—** | **—** | **—** | **—** | **100.0** | **100.0** |
| Purchased non-covered commercial (1) | **—** | **9.3** | **—** | **—** | **90.7** | **100.0** |
| Total commercial | **0.6** | **—** | **0.1** | **0.8** | **98.5** | **100.0** |
| Commercial real-estate |  |  |  |  |  |  |
| Residential construction | **8.3** | **—** | **2.6** | **—** | **89.1** | **100.0** |
| Commercial construction | **0.7** | **—** | **5.9** | **—** | **93.4** | **100.0** |
| Land | **13.5** | **—** | **—** | **8.7** | **77.8** | **100.0** |
| Office | **0.6** | **—** | **1.5** | **0.8** | **97.1** | **100.0** |
| Industrial | **1.2** | **—** | **—** | **0.2** | **98.6** | **100.0** |
| Retail | **1.4** | **—** | **1.2** | **1.0** | **96.4** | **100.0** |
| Multi-family | **0.4** | **—** | **0.2** | **0.8** | **98.6** | **100.0** |
| Mixed use and other | **1.4** | **—** | **0.1** | **1.0** | **97.5** | **100.0** |
| Purchased non-covered commercial real-estate (1) | **—** | **3.4** | **0.5** | **6.1** | **90.0** | **100.0** |
| Total commercial real-estate | **1.6** | **0.1** | **0.7** | **1.1** | **96.5** | **100.0** |
| Home equity | **2.0** | **—** | **0.2** | **0.6** | **97.2** | **100.0** |
| Residential real-estate | **2.7** | **—** | **0.2** | **2.4** | **94.7** | **100.0** |
| Purchased non-covered residential real-estate (1) | **—** | **—** | **23.8** | **—** | **76.2** | **100.0** |
| Premium finance receivables |  |  |  |  |  |  |
| Commercial insurance loans | **0.6** | **0.4** | **0.2** | **1.0** | **97.8** | **100.0** |
| Life insurance loans | **—** | **0.2** | **—** | **0.1** | **99.7** | **100.0** |
| Purchased life insurance loans (1) | **—** | **—** | **—** | **—** | **100.0** | **100.0** |
| Indirect consumer | **0.1** | **0.2** | **0.2** | **0.3** | **99.2** | **100.0** |
| Consumer and other | **1.8** | **—** | **0.2** | **0.5** | **97.5** | **100.0** |
| Purchased non-covered consumer and other (1) | **—** | **—** | **—** | **0.8** | **99.2** | **100.0** |
| Total loans, net of unearned income, excluding covered loans | **1.0%** | **0.1%** | **0.3%** | **0.9%** | **97.7%** | **100.0%** |
| Covered loans | **0.4** | **22.3** | **0.3** | **2.4** | **74.6** | **100.0** |
| Total loans, net of unearned income | **1.0%** | **1.0%** | **0.3%** | **0.9%** | **96.8%** | **100.0%** |

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

| As of December 31, 2012 (Dollars in thousands) Loan Balances: Commercial | Nonaccrual | 90+ days and still accruing | 60-89 days past due | 30-59 days past due | Current | Total Loans |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Commercial and industrial | $19,409 | $— | $5,520 | $15,410 | $1,587,864 | $1,628,203 |
| Franchise | 1,792 | — | — | — | 194,603 | 196,395 |
| Mortgage warehouse lines of credit | — | — | — | — | 215,076 | 215,076 |
| Community Advantage—homeowners association | — | — | — | — | 81,496 | 81,496 |
| Aircraft | — | — | 148 | — | 17,216 | 17,364 |
| Asset-based lending | 536 | — | 1,126 | 6,622 | 564,154 | 572,438 |
| Municipal | — | — | — | — | 91,824 | 91,824 |
| Leases | — | — | — | 896 | 89,547 | 90,443 |
| Other | — | — | — | — | 16,549 | 16,549 |
| Purchased non-covered commercial (1) | — | 496 | 432 | 7 | 4,075 | 5,010 |
| Total commercial | 21,737 | 496 | 7,226 | 22,935 | 2,862,404 | 2,914,798 |
| Commercial real-estate |  |  |  |  |  |  |
| Residential construction | 3,110 | — | 4 | 41 | 37,246 | 40,401 |
| Commercial construction | 2,159 | — | 885 | 386 | 167,525 | 170,955 |
| Land | 11,299 | — | 632 | 9,014 | 113,252 | 134,197 |
| Office | 4,196 | — | 1,889 | 3,280 | 560,346 | 569,711 |
| Industrial | 2,089 | — | 6,042 | 4,512 | 565,294 | 577,937 |
| Retail | 7,792 | — | 1,372 | 998 | 558,734 | 568,896 |
| Multi-family | 2,586 | — | 3,949 | 1,040 | 389,116 | 396,691 |
| Mixed use and other | 16,742 | — | 6,660 | 13,349 | 1,312,503 | 1,349,254 |
| Purchased non-covered commercial real-estate (1) | — | 749 | 2,663 | 2,508 | 50,156 | 56,076 |
| Total commercial real-estate | 49,973 | 749 | 24,096 | 35,128 | 3,754,172 | 3,864,118 |
| Home equity | 13,423 | 100 | 1,592 | 5,043 | 768,316 | 788,474 |
| Residential real-estate | 11,728 | — | 2,763 | 8,250 | 343,616 | 366,357 |
| Purchased non-covered residential real-estate (1) | — | — | 200 | — | 656 | 856 |
| Premium finance receivables |  |  |  |  |  |  |
| Commercial insurance loans | 9,302 | 10,008 | 6,729 | 19,597 | 1,942,220 | 1,987,856 |
| Life insurance loans | 25 | — | — | 5,531 | 1,205,151 | 1,210,707 |
| Purchased life insurance loans (1) | — | — | — | — | 514,459 | 514,459 |
| Indirect consumer | 55 | 189 | 51 | 442 | 76,596 | 77,333 |
| Consumer and other | 1,511 | 32 | 167 | 433 | 99,010 | 101,153 |
| Purchased non-covered consumer and other (1) | — | 66 | 32 | 101 | 2,633 | 2,832 |
| Total loans, net of unearned income, excluding covered loans | $107,754 | $11,640 | $42,856 | $97,460 | $11,569,233 | $11,828,943 |
| Covered loans | 1,988 | 122,350 | 16,108 | 7,999 | 411,642 | 560,087 |
| Total loans, net of unearned income | $109,742 | $133,990 | $58,964 | $105,459 | $11,980,875 | $12,389,030 |

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

| Aging as a % of Loan Balance: As of December 31, 2012 Commercial | Nonaccrual | 90+ days and still accruing | 60-89 days past due | 30-59 days past due | Current | Total Loans |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Commercial and industrial | 1.2% | —% | 0.3% | 1.0% | 97.5% | 100.0% |
| Franchise | 0.9 | — | — | — | 99.1 | 100.0 |
| Mortgage warehouse lines of credit | — | — | — | — | 100.0 | 100.0 |
| Community Advantage—homeowners association | — | — | — | — | 100.0 | 100.0 |
| Aircraft | — | — | 0.9 | — | 99.1 | 100.0 |
| Asset-based lending | 0.1 | — | 0.2 | 1.2 | 98.5 | 100.0 |
| Municipal | — | — | — | — | 100.0 | 100.0 |
| Leases | — | — | — | 1.0 | 99.0 | 100.0 |
| Other | — | — | — | — | 100.0 | 100.0 |
| Purchased non-covered commercial (1) | — | 9.9 | 8.6 | 0.1 | 81.4 | 100.0 |
| Total commercial | 0.8 | — | 0.3 | 0.8 | 98.1 | 100.0 |
| Commercial real-estate |  |  |  |  |  |  |
| Residential construction | 7.7 | — | — | 0.1 | 92.2 | 100.0 |
| Commercial construction | 1.3 | — | 0.5 | 0.2 | 98.0 | 100.0 |
| Land | 8.4 | — | 0.5 | 6.7 | 84.4 | 100.0 |
| Office | 0.7 | — | 0.3 | 0.6 | 98.4 | 100.0 |
| Industrial | 0.4 | — | 1.1 | 0.8 | 97.7 | 100.0 |
| Retail | 1.4 | — | 0.2 | 0.2 | 98.2 | 100.0 |
| Multi-family | 0.7 | — | 1.0 | 0.3 | 98.0 | 100.0 |
| Mixed use and other | 1.2 | — | 0.5 | 1.0 | 97.3 | 100.0 |
| Purchased non-covered commercial real-estate (1) | — | 1.3 | 4.8 | 4.5 | 89.4 | 100.0 |
| Total commercial real-estate | 1.3 | — | 0.6 | 0.9 | 97.2 | 100.0 |
| Home equity | 1.7 | — | 0.2 | 0.6 | 97.5 | 100.0 |
| Residential real-estate | 3.2 | — | 0.8 | 2.3 | 93.7 | 100.0 |
| Purchased non-covered residential real-estate (1) | — | — | 23.4 | — | 76.6 | 100.0 |
| Premium finance receivables |  |  |  |  |  |  |
| Commercial insurance loans | 0.5 | 0.5 | 0.3 | 1.0 | 97.7 | 100.0 |
| Life insurance loans | — | — | — | 0.5 | 99.5 | 100.0 |
| Purchased life insurance loans (1) | — | — | — | — | 100.0 | 100.0 |
| Indirect consumer | 0.1 | 0.2 | 0.1 | 0.6 | 99.0 | 100.0 |
| Consumer and other | 1.5 | — | 0.2 | 0.4 | 97.9 | 100.0 |
| Purchased non-covered consumer and other (1) | — | 2.3 | 1.1 | 3.6 | 93.0 | 100.0 |
| Total loans, net of unearned income, excluding covered loans | 0.9% | 0.1% | 0.4% | 0.8% | 97.8% | 100.0% |
| Covered loans | 0.4 | 21.8 | 2.9 | 1.4 | 73.5 | 100.0 |
| Total loans, net of unearned income | 0.9% | 1.1% | 0.5% | 0.9% | 96.6% | 100.0% |

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

As of March 31, 2013, only $38.2 million of all loans, excluding covered loans, or 0.3%, were 60 to 89 days past due and $102.1 million or 0.9%, were 30 to 59 days (or one payment) past due. As of December 31, 2012, $42.9 million of all loans, excluding covered loans, or 0.4%, were 60 to 89 days past due and $97.5 million, or 0.8%, were 30 to 59 days (or one payment) past due.

The majority of the commercial and commercial real-estate loans shown as 60 to 89 days and 30 to 59 days past due are included on the Company’s internal problem loan reporting system. Loans on this system are closely monitored by management on a monthly basis. Commercial and commercial real estate loans with delinquencies from 30 to 89 days past-due increased $9.2 million since December 31, 2012.

The Company's home equity and residential loan portfolios continue to exhibit low delinquency ratios. Home equity loans at March 31, 2013 that are current with regard to the contractual terms of the loan agreement represent 97.2% of the total home equity portfolio. Residential real-estate loans, excluding loans acquired with evidence of credit quality deterioration since origination, at March 31, 2013 that are current with regards to the contractual terms of the loan agreements comprise 94.7% of total residential real-estate loans outstanding.

#### Nonperforming Loans Rollforward

The table below presents a summary of non-performing loans, excluding covered loans, and loans acquired with credit quality deterioration since origination, for the periods presented:

*(Dollars in thousands)*

|  | Three Months Ended March 31, 2013 | March 31, 2012 |
| --- | ---: | ---: |
| Balance at beginning of period | **$118,083** | $120,084 |
| Additions, net | **28,030** | 17,867 |
| Return to performing status | **—** | (922) |
| Payments received | **(4,121)** | (4,640) |
| Transfer to OREO | **(6,890)** | (6,601) |
| Charge-offs | **(9,148)** | (11,307) |
| Net change for niche loans (1) | **2,679** | (860) |
| **Balance at end of period** | **$128,633** | $113,621 |

*(1) This includes activity for premium finance receivables and indirect consumer loans.*

See Note 7 of the Financial Statements presented under Item 1 of this report for further discussion of non-performing loans and the loan aging during the respective periods.

### Allowance for Loan Losses

The allowance for loan losses represents management’s estimate of the probable and reasonably estimable loan losses that our loan portfolio is expected to incur. The allowance for loan losses is determined quarterly using a methodology that incorporates important risk characteristics of each loan, as described below under “*How We Determine the Allowance for Credit Losses.”* This process is subject to review at each of our bank subsidiaries by the applicable regulatory authority, including the Federal Reserve Bank of Chicago, the Office of the Comptroller of the Currency, the State of Illinois and the State of Wisconsin.

Management determined that the allowance for loan losses was appropriate at March 31, 2013, and that the loan portfolio is well diversified and well secured, without undue concentration in any specific risk area. This process involves a high degree of management judgment, however the allowance for credit losses is based on a comprehensive, well documented, and consistently applied analysis of the Company’s loan portfolio. This analysis takes into consideration all available information existing as of the financial statement date, including environmental factors such as economic, industry, geographical and political factors. The relative level of allowance for credit losses is reviewed and compared to industry peers. This review encompasses levels of total nonperforming loans, portfolio mix, portfolio concentrations, current geographic risks and overall levels of net charge-offs. Historical trending of both the Company’s results and the industry peers is also reviewed to analyze comparative significance.

#### Allowance for Credit Losses, excluding covered loans

The following table summarizes the activity in our allowance for credit losses during the periods indicated.

*(Dollars in thousands)*

|  | Three months ended March 31, 2013 | 2012 |
| --- | ---: | ---: |
| **Allowance for loan losses at beginning of period** | **$107,351** | $110,381 |
| **Provision for credit losses** | **15,367** | 15,154 |
| **Other adjustments** | **(229)** | (238) |
| **Reclassification (to)/from allowance for unfunded lending-related commitments** | **(213)** | 152 |
| **Charge-offs:** |  |  |
| Commercial | **4,540** | 3,262 |
| Commercial real-estate | **3,299** | 8,229 |
| Home equity | **2,397** | 2,590 |
| Residential real-estate | **1,728** | 175 |
| Premium finance receivables—commercial | **1,068** | 837 |
| Premium finance receivables—life insurance | **—** | 13 |
| Indirect consumer | **32** | 51 |
| Consumer and other | **97** | 310 |
| Total charge-offs | **13,161** | 15,467 |
| **Recoveries:** |  |  |
| Commercial | **295** | 257 |
| Commercial real-estate | **368** | 131 |
| Home equity | **162** | 162 |
| Residential real-estate | **5** | 2 |
| Premium finance receivables—commercial | **285** | 277 |
| Premium finance receivables—life insurance | **9** | 21 |
| Indirect consumer | **15** | 30 |
| Consumer and other | **94** | 161 |
| Total recoveries | **1,233** | 1,041 |
| **Net charge-offs** | **(11,928)** | (14,426) |
| **Allowance for loan losses at period end** | **$110,348** | $111,023 |
| **Allowance for unfunded lending-related commitments at period end** | **15,287** | 13,078 |
| **Allowance for credit losses at period end** | **$125,635** | $124,101 |
| **Annualized net charge-offs by category as a percentage of its own respective category’s average:** |  |  |
| Commercial | **0.61%** | 0.49% |
| Commercial real-estate | **0.30** | 0.92 |
| Home equity | **1.17** | 1.15 |
| Residential real-estate | **0.93** | 0.11 |
| Premium finance receivables—commercial | **0.16** | 0.15 |
| Premium finance receivables—life insurance | **—** | — |
| Indirect consumer | **0.09** | 0.13 |
| Consumer and other | **0.01** | 0.49 |
| Total loans, net of unearned income, excluding covered loans | **0.39%** | 0.53% |
| **Net charge-offs as a percentage of the provision for credit losses** | **77.62%** | 95.20% |
| **Loans at period-end, excluding covered loans** | **$11,900,312** | $10,717,384 |
| **Allowance for loan losses as a percentage of loans at period end** | **0.93%** | 1.04% |
| **Allowance for credit losses as a percentage of loans at period end** | **1.06%** | 1.16% |

The allowance for credit losses, excluding the allowance for covered loan losses, is comprised of an allowance for loan losses, which is determined with respect to loans that we have originated, and an allowance for lending-related commitments. Our allowance for lending-related commitments is determined with respect to funds that we have committed to lend but for which funds have not yet been disbursed and is computed using a methodology similar to that used to determine the allowance for loan losses. Additions to the allowance for loan losses are charged to earnings through the provision for credit losses. Charge-offs represent the amount of loans that have been determined to be uncollectible during a given period, and are deducted from the allowance for loan losses, and recoveries represent the amount of collections received from loans that had previously been charged off, and are credited to the allowance for loan losses. See Note 7 of the Financial Statements presented under Item 1 of this report for further discussion of activity within the allowance for loan losses during the period and the relationship with respective loan balances for each loan category and the total loan portfolio, excluding covered loans.

#### How We Determine the Allowance for Credit Losses

The allowance for loan losses includes an element for estimated probable but undetected losses and for imprecision in the credit risk models used to calculate the allowance. As part of the Problem Loan Reporting system review, the Company analyzes the loan for purposes of calculating our specific impairment reserves and a general reserve. See Note 7 of the Financial Statements presented under Item 1 of this report for further discussion of the specific impairment reserve and general reserve as it relates to the allowance for credit losses for each loan category and the total loan portfolio, excluding covered loans.

#### Specific Impairment Reserves:

Loans with a credit risk rating of a 6 through 9 are reviewed on a monthly basis to determine if (a) an amount is deemed uncollectible (a charge-off) or (b) it is probable that the Company will be unable to collect amounts due in accordance with the original contractual terms of the loan (impaired loan). If a loan is impaired, the carrying amount of the loan is compared to the expected payments to be reserved, discounted at the loan’s original rate, or for collateral dependent loans, to the fair value of the collateral. Any shortfall is recorded as a specific impairment reserve.

At March 31, 2013, the Company had $203.6 million of impaired loans with $101.6 million of this balance requiring $14.6 million of specific impairment reserves. At December 31, 2012, the Company had $204.5 million of impaired loans with $90.0 million of this balance requiring $13.6 million of specific impairment reserves. The most significant fluctuations in impaired loans with specific impairment from December 31, 2012 to March 31, 2013 occurred within the commercial construction and land portfolios. The recorded investment of the commercial construction and land portfolios increased $6.8 million and $5.7 million, respectively, which was primarily the result of the addition of two credits previously not requiring a specific impairment. See Note 7 of the Financial Statements presented under Item 1 of this report for further discussion of impaired loans and the related specific impairment reserve.

#### General Reserves:

For loans with a credit risk rating of 1 through 7, reserves are established based on the type of loan collateral, if any, and the assigned credit risk rating. Determination of the allowance is inherently subjective as it requires significant estimates, including the amounts and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans based on the average historical loss experience over a five-year period, and consideration of current environmental factors and economic trends, all of which may be susceptible to significant change.

We determine this component of the allowance for loan losses by classifying each loan into (i) categories based on the type of collateral that secures the loan (if any), and (ii) one of ten categories based on the credit risk rating of the loan, as described above under “*Past Due Loans and Non-Performing Assets.”* Each combination of collateral and credit risk rating is then assigned a specific loss factor that incorporates the following factors:

- historical underwriting loss factor;
- changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off, and recovery practices not considered elsewhere in estimating credit losses;
- changes in national, regional, and local economic and business conditions and developments that affect the collectibility of the portfolio;
- changes in the nature and volume of the portfolio and in the terms of the loans;
- changes in the experience, ability, and depth of lending management and other relevant staff;
- changes in the volume and severity of past due loans, the volume of non-accrual loans, and the volume and severity of adversely classified or graded loans;
- changes in the quality of the bank’s loan review system;
- changes in the underlying collateral for collateral dependent loans;
- the existence and effect of any concentrations of credit, and changes in the level of such concentrations; and
- the effect of other external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in the bank’s existing portfolio.

In the second quarter of 2012, the Company modified its historical loss experience analysis to incorporate three-year average loss rate assumptions. Prior to this, the Company employed a five-year average loss rate assumption analysis. The three-year average loss rate assumption analysis is computed for each of the Company’s collateral codes. The historical loss experience is combined with the specific loss factor for each combination of collateral and credit risk rating which is then applied to each individual loan balance to determine an appropriate general reserve. The historical loss rates are updated on a quarterly basis and are driven by the performance of the portfolio and any changes to the specific loss factors are driven by management judgment and analysis of the factors described above.

The reasons for the migration to a three-year average historical loss rate from the previous five-year average historical loss rate analysis are:

- The three-year average is more relevant to the inherent losses in the core bank loan portfolio as the charge-off rates from earlier periods are no longer as relevant in comparison to the more recent periods. Earlier periods had historically low credit losses which then built up to a peak in credit losses as a result of the stressed economic environment and depressed real estate valuations that affected both the U.S. economy, generally, and the Company’s local markets, specifically during that time. Since the end of 2009 there has been no evidence in the Company’s loan portfolio of a return to the level of charge-offs experienced at the height of the credit crisis.
- Migrating to a three-year historical average loss rate reduces the need for management judgment factors related to national, regional, and local economic and business conditions and developments that affect the collectability of the portfolio as the three year average is now more closely aligned with the credit risk in our portfolio today.

The Company also analyzes the four- and five-year average historical loss rates on a quarterly basis as a comparison.

#### Home Equity and Residential Real-Estate Loans:

The determination of the appropriate allowance for loan losses for residential real-estate and home equity loans differs slightly from the process used for commercial and commercial real-estate loans. The same credit risk rating system, Problem Loan Reporting system, collateral coding methodology and loss factor assignment are used. The only significant difference is in how the credit risk ratings are assigned to these loans.

The home equity loan portfolio is reviewed on a loan by loan basis by analyzing current FICO scores of the borrowers, line availability, recent line usage and the aging status of the loan. Certain of these factors, or combination of these factors, may cause a portion of the credit risk ratings of home equity loans across all banks to be downgraded. Similar to commercial and commercial real-estate loans, once a home equity loan’s credit risk rating is downgraded to a 6 through 9, the Company’s Managed Asset Division reviews and advises the subsidiary banks as to collateral valuations and as to the ultimate resolution of the credits that deteriorate to a non-accrual status to minimize losses.

Residential real-estate loans that are downgraded to a credit risk rating of 6 through 9 also enter the Problem Loan Reporting system and have the underlying collateral evaluated by the Managed Assets Division.

#### Premium Finance Receivables and Indirect Consumer Loans:

The determination of the appropriate allowance for loan losses for premium finance receivables and indirect consumer loans is based solely on the aging (collection status) of the portfolios. Due to the large number of generally smaller sized and homogenous credits in these portfolios, these loans are not individually assigned a credit risk rating. Loss factors are assigned to each delinquency category in order to calculate an allowance for credit losses. The allowance for loan losses for these categories is entirely a general reserve.

#### Effects of Economic Recession and Real Estate Market:

The Company’s primary markets, which are mostly in suburban Chicago, have not experienced the same levels of credit deterioration in residential mortgage and home equity loans as certain other major metropolitan markets, such as Miami, Phoenix or Southern California, however the Company’s markets have clearly been under stress. As of March 31, 2013, home equity loans and residential mortgages comprised 6% and 3%, respectively, of the Company’s total loan portfolio. At March 31, 2013, approximately 2.9% of all of the Company’s residential mortgage loans, excluding covered loans and loans acquired with evidence of credit quality deterioration since origination, and approximately 2.2% of all of the Company’s home equity loans, are on nonaccrual status or more than one payment past due. Current delinquency statistics of these two portfolios, demonstrate that although there is stress in the Chicago metropolitan and southeastern Wisconsin markets, our portfolios of residential mortgages and home equity loans are performing reasonably well as reflected in the aging of the Company’s loan portfolio table shown earlier in this section.

#### Methodology in Assessing Impairment and Charge-off Amounts

In determining the amount of impairment or charge-offs associated with collateral dependent loans, the Company values the loan generally by starting with a valuation obtained from an appraisal of the underlying collateral and then deducting estimated selling costs to arrive at a net appraised value. We obtain the appraisals of the underlying collateral typically on an annual basis from one of a pre-approved list of independent, third party appraisal firms. Types of appraisal valuations include “as-is”, “as-complete”, “as-stabilized”, bulk, fair market, liquidation and “retail sell-out” values.

In many cases, the Company simultaneously values the underlying collateral by marketing the property to market participants interested in purchasing properties of the same type. If the Company receives offers or indications of interest, we will analyze the price and review market conditions to assess whether in light of such information the appraised value overstates the likely price and that a lower price would be a better assessment of the market value of the property and would enable us to liquidate the collateral. Additionally, the Company takes into account the strength of any guarantees and the ability of the borrower to provide value related to those guarantees in determining the ultimate charge-off or reserve associated with any impaired loans. Accordingly, the Company may charge-off a loan to a value below the net appraised value if it believes that an expeditious liquidation is desirable in the circumstance and it has legitimate offers or other indications of interest to support a value that is less than the net appraised value. Alternatively, the Company may carry a loan at a value that is in excess of the appraised value if the Company has a guarantee from a borrower that the Company believes has realizable value. In evaluating the strength of any guarantee, the Company evaluates the financial wherewithal of the guarantor, the guarantor’s reputation, and the guarantor’s willingness and desire to work with the Company. The Company then conducts a review of the strength of a guarantee on a frequency established as the circumstances and conditions of the borrower warrant.

In circumstances where the Company has received an appraisal but has no third party offers or indications of interest, the Company may enlist the input of realtors in the local market as to the highest valuation that the realtor believes would result in a liquidation of the property given a reasonable marketing period of approximately 90 days. To the extent that the realtors’ indication of market clearing price under such scenario is less than the net appraised valuation, the Company may take a charge-off on the loan to a valuation that is less than the net appraised valuation.

The Company may also charge-off a loan below the net appraised valuation if the Company holds a junior mortgage position in a piece of collateral whereby the risk to acquiring control of the property through the purchase of the senior mortgage position is deemed to potentially increase the risk of loss upon liquidation due to the amount of time to ultimately market the property and the volatile market conditions. In such cases, the Company may abandon its junior mortgage and charge-off the loan balance in full.

In other cases, the Company may allow the borrower to conduct a “short sale,” which is a sale where the Company allows the borrower to sell the property at a value less than the amount of the loan. Many times, it is possible for the current owner to receive a better price than if the property is marketed by a financial institution which the market place perceives to have a greater desire to liquidate the property at a lower price. To the extent that we allow a short sale at a price below the value indicated by an appraisal, we may take a charge-off beyond the value that an appraisal would have indicated.

Other market conditions may require a reserve to bring the carrying value of the loan below the net appraised valuation such as litigation surrounding the borrower and/or property securing our loan or other market conditions impacting the value of the collateral.

Having determined the net value based on the factors such as those noted above and compared that value to the book value of the loan, the Company arrives at a charge-off amount or a specific reserve included in the allowance for loan losses. In summary, for collateral dependent loans, appraisals are used as the fair value starting point in the estimate of net value. Estimated costs to sell are deducted from the appraised value to arrive at the net appraised value. Although an external appraisal is the primary source of valuation utilized for charge-offs on collateral dependent loans, alternative sources of valuation may become available between appraisal dates. As a result, we may utilize values obtained through these alternating sources, which include purchase and sale agreements, legitimate indications of interest, negotiated short sales, realtor price opinions, sale of the note or support from guarantors, as the basis for charge-offs. These alternative sources of value are used only if deemed to be more representative of value based on updated information regarding collateral resolution. In addition, if an appraisal is not deemed current, a discount to appraised value may be utilized. Any adjustments from appraised value to net value are detailed and justified in an impairment analysis, which is reviewed and approved by the Company’s Managed Assets Division.

#### Restructured Loans

At March 31, 2013, the Company had $116.3 million in loans with modified terms representing 167 credits in which economic concessions were granted to certain borrowers to better align the terms of their loans with their current ability to pay. The balance decreased from $126.5 million representing 165 credits at December 31, 2012 and $165.0 million representing 182 credits at March 31, 2012.

These actions were taken on a case-by-case basis working with these borrowers to find a concession that would assist them in retaining their businesses or their homes and attempt to keep these loans in an accruing status for the Company. Typical concessions include reduction of the loan interest rate to a rate considered lower than market and other modification of terms including forgiveness of all or a portion of the loan balance, extension of the maturity date, and/or modifications from principal and interest payments to interest-only payments for a certain period. See Note 7 of the Financial Statements presented under Item 1 of this report for further discussion regarding the effectiveness of these modifications in keeping the modified loans current based upon contractual terms.

Subsequent to its restructuring, any restructured loan with a below market rate concession that becomes nonaccrual, will remain classified by the Company as a restructured loan for its duration and will be included in the Company’s nonperforming loans. Each restructured loan was reviewed for impairment at March 31, 2013 and approximately $2.6 million of impairment was present and appropriately reserved for through the Company’s normal reserving methodology in the Company’s allowance for loan losses.

The table below presents a summary of restructured loans for the respective periods, presented by loan category and accrual status:

*(Dollars in thousands)*

| Accruing: | March 31, 2013 | December 31, 2012 | March 31, 2012 |
| --- | ---: | ---: | ---: |
| Commercial | **$9,073** | $11,871 | $9,324 |
| Commercial real-estate | **83,396** | 89,906 | 134,516 |
| Residential real-estate and other | **4,653** | 4,342 | 7,176 |
| Total accrual | **$97,122** | $106,119 | $151,016 |
| **Non-accrual: (1)** |  |  |  |
| Commercial | **$2,764** | $6,124 | $1,465 |
| Commercial real-estate | **14,907** | 12,509 | 11,805 |
| Residential real-estate and other | **1,552** | 1,721 | 760 |
| Total non-accrual | **$19,223** | $20,354 | $14,030 |
| **Total restructured loans:** |  |  |  |
| Commercial | **$11,837** | $17,995 | $10,789 |
| Commercial real-estate | **98,303** | 102,415 | 146,321 |
| Residential real-estate and other | **6,205** | 6,063 | 7,936 |
| Total restructured loans | **$116,345** | $126,473 | $165,046 |
| **Weighted-average contractual interest rate of restructured loans** | **4.14%** | 4.11% | 4.12% |

#### (1) Included in total non-performing loans.

#### Restructured Loans Rollforward

The table below presents a summary of restructured loans as of March 31, 2013 and 2012, and shows the changes in the balance during those periods:

| Three Months Ended March 31, 2013 (Dollars in thousands) | Commercial | Commercial Real-estate | Residential Real-estate and Other | Total |
| --- | ---: | ---: | ---: | ---: |
| Balance at beginning of period | **$17,995** | **$102,415** | **$6,063** | **$126,473** |
| Additions during the period | **708** | **1,192** | **377** | **2,277** |
| Reductions: |  |  |  |  |
| Charge-offs | **(2,142)** | **(1,372)** | **(17)** | **(3,531)** |
| Transferred to OREO and other repossessed assets | **(3,800)** | **(167)** | **(103)** | **(4,070)** |
| Removal of restructured loan status (1) | **(609)** | **—** | **—** | **(609)** |
| Payments received | **(315)** | **(3,765)** | **(115)** | **(4,195)** |
| **Balance at period end** | **$11,837** | **$98,303** | **$6,205** | **$116,345** |

| Three Months Ended March 31, 2012 (Dollars in thousands) | Commercial | Commercial Real-estate | Residential Real-estate and Other | Total |
| --- | ---: | ---: | ---: | ---: |
| Balance at beginning of period | $10,834 | $112,796 | $6,888 | $130,518 |
| Additions during the period | 118 | 38,519 | 1,060 | 39,697 |
| Reductions: |  |  |  |  |
| Charge-offs | — | (1,342) | — | (1,342) |
| Transferred to OREO and other repossessed assets | — | (2,129) | — | (2,129) |
| Removal of restructured loan status (1) | — | (463) | — | (463) |
| Payments received | (163) | (1,060) | (12) | (1,235) |
| **Balance at period end** | $10,789 | $146,321 | $7,936 | $165,046 |

*(1) Loan was previously classified as a troubled debt restructuring and subsequently performed in compliance with the loan's modified terms for a period of six months (including over a calendar year-end) at a modified interest rate which represented a market rate at the time of restructuring. Per our TDR policy, the TDR classification is removed.*

#### Other Real Estate Owned

In certain circumstances, the Company is required to take action against the real estate collateral of specific loans. The Company uses foreclosure only as a last resort for dealing with borrowers experiencing financial hardships. The Company employs extensive contact and restructuring procedures to attempt to find other solutions for our borrowers. The table below presents a summary of other real estate owned, excluding covered other real estate owned, and shows the activity for the respective periods and the balance for each property type:

*(Dollars in thousands)*

|  | Three Months Ended March 31, 2013 | December 31, 2012 | March 31, 2012 |
| --- | ---: | ---: | ---: |
| Balance at beginning of period | **$62,891** | $67,377 | $86,523 |
| Disposal/resolved | **(7,498)** | (12,516) | (11,681) |
| Transfers in at fair value, less costs to sell | **2,128** | 8,030 | 6,876 |
| Additions from acquisition | **—** | 2,923 | — |
| Fair value adjustments | **(1,344)** | (2,923) | (5,482) |
| Balance at end of period | **$56,177** | $62,891 | $76,236 |

*(Dollars in thousands)*

|  | Period End March 31, 2013 | December 31, 2012 | March 31, 2012 |
| --- | ---: | ---: | ---: |
| Residential real-estate | **$7,312** | $9,077 | $6,647 |
| Residential real-estate development | **10,133** | 12,144 | 14,764 |
| Commercial real-estate | **38,732** | 41,670 | 54,825 |
| Total | **$56,177** | $62,891 | $76,236 |

#### Other Repossessed Assets

At March 31, 2013, the Company had $4.3 million of other repossessed assets. This balance consists primarily of an airplane, which was repossessed during the first quarter of 2013 at a fair value of $3.8 million. Repossessed assets also includes miscellaneous other assets.

### LIQUIDITY

Wintrust manages the liquidity position of its banking operations to ensure that sufficient funds are available to meet customers’ needs for loans and deposit withdrawals. The liquidity to meet these demands is provided by maturing assets, liquid assets that can be converted to cash and the ability to attract funds from external sources. Liquid assets refer to money market assets such as Federal funds sold and interest bearing deposits with banks, as well as available-for-sale debt securities which are not pledged to secure public funds.

The Company believes that it has sufficient funds and access to funds to meet its working capital and other needs. Please refer to the Interest-Earning Assets, Deposits, Other Funding Sources and Shareholders’ Equity discussions of this report for additional information regarding the Company’s liquidity position.

### INFLATION

A banking organization’s assets and liabilities are primarily monetary. Changes in the rate of inflation do not have as great an impact on the financial condition of a bank as do changes in interest rates. Moreover, interest rates do not necessarily change at the same percentage as inflation. Accordingly, changes in inflation are not expected to have a material impact on the Company. An analysis of the Company’s asset and liability structure provides the best indication of how the organization is positioned to respond to changing interest rates. See “Quantitative and Qualitative Disclosures About Market Risks” section of this report for additional information.

### FORWARD-LOOKING STATEMENTS

This document contains, and the documents into which it may be incorporated by reference may contain, forward-looking statements within the meaning of federal securities laws. Forward-looking information can be identified through the use of words such as “intend,” “plan,” “project,” “expect,” “anticipate,” “believe,” “estimate,” “contemplate,” “possible,” “point,” “will,” “may,” “should,” “would” and “could.” Forward-looking statements and information are not historical facts, are premised on many factors and assumptions, and represent only management’s expectations, estimates and projections regarding future events. Similarly, these statements are not guarantees of future performance and involve certain risks and uncertainties that are difficult to predict, which may include, but are not limited to, those listed below and the Risk Factors discussed under Item 1A of the Company’s 2012 Annual Report on Form 10-K and in any of the Company’s subsequent SEC filings. The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and is including this statement for purposes of invoking these safe harbor provisions. Such forward-looking statements may be deemed to include, among other things, statements relating to the Company’s future financial performance, the performance of its loan portfolio, the expected amount of future credit reserves and charge-offs, delinquency trends, growth plans, regulatory developments, securities that the Company may offer from time to time, and management’s long-term performance goals, as well as statements relating to the anticipated effects on financial condition and results of operations from expected developments or events, the Company’s business and growth strategies, including future acquisitions of banks, specialty finance or wealth management businesses, internal growth and plans to form additional *de novo* banks or branch offices. Actual results could differ materially from those addressed in the forward-looking statements as a result of numerous factors, including the following:

- negative economic conditions that adversely affect the economy, housing prices, the job market and other factors that may affect the Company’s liquidity and the performance of its loan portfolios, particularly in the markets in which it operates;
- the extent of defaults and losses on the Company’s loan portfolio, which may require further increases in its allowance for credit losses;
- estimates of fair value of certain of the Company’s assets and liabilities, which could change in value significantly from period to period;
- the financial success and economic viability of the borrowers of our commercial loans;
- market conditions in the commercial real-estate market in the Chicago metropolitan area;
- the extent of commercial and consumer delinquencies and declines in real estate values, which may require further increases in the Company’s allowance for loan and lease losses;
- changes in the level and volatility of interest rates, the capital markets and other market indices that may affect, among other things, the Company’s liquidity and the value of its assets and liabilities;
- 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);
- failure to identify and complete favorable acquisitions in the future or unexpected difficulties or developments related to the integration of the Company’s recent or future acquisitions;
- unexpected difficulties and losses related to FDIC-assisted acquisitions, including those resulting from our loss- sharing arrangements with the FDIC;
- any negative perception of the Company’s reputation or financial strength;
- ability to raise additional capital on acceptable terms when needed;
- disruption in capital markets, which may lower fair values for the Company’s investment portfolio;
- ability to use technology to provide products and services that will satisfy customer demands and create efficiencies in operations;
- adverse effects on our information technology systems resulting from failures, human error or tampering;
- accuracy and completeness of information the Company receives about customers and counterparties to make credit decisions;
- ability of the Company to attract and retain senior management experienced in the banking and financial services industries;
- environmental liability risk associated with lending activities;
- the impact of any claims or legal actions, including any effect on our reputation;
- losses incurred in connection with repurchases and indemnification payments related to mortgages;
- the loss of customers as a result of technological changes allowing consumers to complete their financial transactions without the use of a bank;
- the soundness of other financial institutions;
- the possibility that certain European Union member states will default on their debt obligations, which may affect the Company’s liquidity, financial conditions and results of operations;
- examinations and challenges by tax authorities;
- changes in accounting standards, rules and interpretations and the impact on the Company’s financial statements;
- the ability of the Company to receive dividends from its subsidiaries;
- a decrease in the Company’s regulatory capital ratios, including as a result of further declines in the value of its loan portfolios, or otherwise;
- legislative or regulatory changes, particularly changes in regulation of financial services companies and/or the products and services offered by financial services companies, including those resulting from the Dodd-Frank Act;
- restrictions upon our ability to market our products to consumers and limitations on our ability to profitably operate our mortgage business resulting from the Dodd-Frank Act;
- increased costs of compliance, heightened regulatory capital requirements and other risks associated with changes in regulation and the current regulatory environment, including the Dodd-Frank Act;
- changes in capital requirements;
- increases in the Company’s FDIC insurance premiums, or the collection of special assessments by the FDIC;
- delinquencies or fraud with respect to the Company’s premium finance business;
- credit downgrades among commercial and life insurance providers that could negatively affect the value of collateral securing the Company’s premium finance loans;
- the Company’s ability to comply with covenants under its credit facility; and
- fluctuations in the stock market, which may have an adverse impact on the Company’s wealth management business and brokerage operation.

Therefore, there can be no assurances that future actual results will correspond to these forward-looking statements. The reader is cautioned not to place undue reliance on any forward-looking statement made by the Company. Forward-looking statements speak only as of the date they are made, and the Company undertakes no obligation to update any forward-looking statement to reflect the impact of circumstances or events that arise after the date the forward-looking statement was made. Persons are advised, however, to consult further disclosures management makes on related subjects in its reports filed with the Securities and Exchange Commission and in its press releases.

## Market risk

As filed, 5,985 characters.

### QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

As an ongoing part of its financial strategy, the Company attempts to manage the impact of fluctuations in market interest rates on net interest income. This effort entails providing a reasonable balance between interest rate risk, credit risk, liquidity risk and maintenance of yield. Asset-liability management policies are established and monitored by management in conjunction with the boards of directors of the banks, subject to general oversight by the Risk Management Committee of the Company’s Board of Directors. The policies establish guidelines for acceptable limits on the sensitivity of the market value of assets and liabilities to changes in interest rates.

Interest rate risk arises when the maturity or 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 Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for further discussion of the net interest margin.

Since the Company’s primary source of interest bearing liabilities is from customer deposits, the Company’s ability to manage the types and terms of such deposits 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.

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.

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 a ramped increase and decrease of 100 and 200 basis points that occurs in equal steps over a twelve-month time horizon. Utilizing this measurement concept, the interest rate risk of the Company, expressed as a percentage change in net interest income over a one-year time horizon due to changes in interest rates, at March 31, 2013, December 31, 2012 and March 31, 2012 is as follows:

| Percentage change in net interest income due to a ramped 100 and 200 basis point shift in the yield curve: | +200 Basis Points | +100 Basis Points | -100 Basis Points | -200 Basis Points |
| --- | ---: | ---: | ---: | ---: |
| **March 31, 2013** | **4.3%** | **2.1%** | **(3.5)%** | **(7.7)%** |
| December 31, 2012 | 5.1% | 2.4% | (3.5)% | (7.6)% |
| March 31, 2012 | 6.5% | 3.1% | (3.9)% | (8.6)% |

This simulation analysis is based upon actual cash flows and repricing characteristics for balance sheet instruments and incorporates management’s projections of the future volume and pricing of each of the product lines offered by the Company as well as other pertinent assumptions. Actual results may differ from these simulated results due to timing, magnitude, and frequency of interest rate changes as well as changes in market conditions and management strategies.

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. Additionally, the Company enters into commitments to fund certain mortgage loans (interest rate locks) to be sold into the secondary market and forward commitments for the future delivery of mortgage loans to third party investors. See Note 14 of the Financial Statements presented under Item 1 of this report for further information on the Company’s derivative financial instruments.

During the first quarter of 2013, the Company entered into 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 impacted by these transactions. To mitigate this risk, the Company may acquire fixed rate term debt or use financial derivative instruments. There were no covered call options outstanding as of March 31, 2013.

## Controls and procedures

As filed, 1,139 characters.

### CONTROLS AND PROCEDURES

As of the end of the period covered by this report, the Company’s Chief Executive Officer and Chief Financial Officer carried out an evaluation under their supervision, with the participation of other members of management as they deemed appropriate, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as contemplated by Exchange Act Rule 13a-15. Based upon, and as of the date of that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective, in all material respects, in timely alerting them to material information relating to the Company (and its consolidated subsidiaries) required to be included in the periodic reports the Company is required to file and submit to the SEC under the Exchange Act.

There were no changes in the Company’s internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)) during the period that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

## Risk factors

As filed, 171 characters.

There were no material changes from the risk factors set forth under Part I, Item 1A “Risk Factors” in the Company’s Form 10-K for the fiscal year ended December 31, 2012.

Filed May 9, 2013.
Source: SEC EDGAR, the filing index for accession 0001015328-13-000114. Last ingested by Listed: Nov 5, 2026, 14:04 ET. No prices; not investment advice.