# Wintrust Financial Corp: Form 10-Q for the period ended Jun 30, 2014

- Company: [Wintrust Financial Corp](/companies/wtfc.md) (CIK 1015328)
- Form: 10-Q
- Filed: 2014-08-08
- Accepted by EDGAR: Aug 8, 2014, 16:47 ET
- Period: 2014-06-30
- Accession: 0001015328-14-000171
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1015328/000101532814000171/wtfc-20140630x10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1015328/000101532814000171/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2014-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2014-04-01 to 2014-06-30 | $203.3m | us-gaap:Revenues |
| Revenue | 6 months, 2014-01-01 to 2014-06-30 | $392.8m | us-gaap:Revenues |
| Operating income | 3 months, 2014-04-01 to 2014-06-30 | $38.5m | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2014-01-01 to 2014-06-30 | $73.0m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2014-04-01 to 2014-06-30 | $17.4m | us-gaap:InterestExpense |
| Interest expense | 6 months, 2014-01-01 to 2014-06-30 | $34.7m | us-gaap:InterestExpense |
| Income tax | 3 months, 2014-04-01 to 2014-06-30 | $24.5m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2014-01-01 to 2014-06-30 | $46.3m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2014-04-01 to 2014-06-30 | $38.5m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2014-01-01 to 2014-06-30 | $73.0m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2014-04-01 to 2014-06-30 | $0.76 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2014-01-01 to 2014-06-30 | $1.44 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2014-04-01 to 2014-06-30 | $0.79 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2014-01-01 to 2014-06-30 | $1.51 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2014-04-01 to 2014-06-30 | 50,922,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2014-01-01 to 2014-06-30 | 50,814,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2014-01-01 to 2014-06-30 | $126.8m | us-gaap:NetCashProvidedByUsedInOperatingActivitiesContinuingOperations |
| Capital expenditure | 6 months, 2014-01-01 to 2014-06-30 | $17.4m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 6 months, 2014-01-01 to 2014-06-30 | $12.4m | us-gaap:PaymentsOfDividends |
| Share repurchases | 6 months, 2014-01-01 to 2014-06-30 | $449.0k | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2014-06-30 | $357.0m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Total assets | at 2014-06-30 | $18.90bn | us-gaap:Assets |
| Total liabilities | at 2014-06-30 | $16.90bn | us-gaap:Liabilities |
| Long-term debt | at 2014-06-30 | $764.3m | us-gaap:LongTermDebt |
| Shareholders' equity | at 2014-06-30 | $2.00bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 193,054 characters.

### MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

### CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of financial condition as of June 30, 2014 compared with December 31, 2013 and June 30, 2013, and the results of operations for the three and six month periods ended June 30, 2014 and 2013, 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 2013 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

### Second Quarter Highlights

The Company recorded net income of $38.5 million for the second quarter of 2014 compared to $34.3 million in the second quarter of 2013. The results for the second quarter of 2014 demonstrate continued operating strengths including significant loan and deposit growth, stable net interest margin, steady credit quality metrics, improved mortgage banking revenues, record wealth management revenues and effective expense control. In the second quarter of 2014, the Company acquired a bank branch and two affiliated Canadian insurance premium funding and payment services companies. For more information on acquisition activity, see “Overview—Recent Acquisition Transactions." Additionally, the Company issued subordinated notes generating proceeds of $139.1 million to be used for general corporate purposes.

The Company increased its loan portfolio, excluding covered loans and mortgage loans held for sale, from $12.5 billion at June 30, 2013 and $12.9 billion at December 31, 2013 to $13.7 billion at June 30, 2014. The increase in the current quarter compared to the prior quarters was primarily a result of the Company’s commercial banking initiative and growth in the commercial and life insurance premium finance receivables portfolio. The Company is focused on making new loans, including in the commercial and commercial real-estate sector, where opportunities that meet our underwriting standards exist. For more information regarding changes in the Company’s loan portfolio, see “Financial Condition – Interest Earning Assets” and Note 6 “Loans” of the 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 second quarter of 2014, 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. At June 30, 2014, the Company had approximately $863.8 million in overnight liquid funds and interest-bearing deposits with banks.

The Company recorded net interest income of $149.2 million in the second quarter of 2014 compared to $135.8 million in the second quarter of 2013. The higher level of net interest income recorded in the second quarter of 2014 compared to the second quarter of 2013 resulted primarily from a $1.2 billion increase in the balance of average loans, excluding covered loans and a 12 basis point decline in the rate paid on average interest bearing liabilities as a result of the positive re-pricing of retail interest-bearing deposits along with a more favorable funding mix. These improvements were partially offset by a 1 basis point decline in the yield on earnings assets and a $419.6 million increase in interest bearing liabilities. Combined, an increase in interest income of $9.9 million and a reduction of interest expense of $3.5 million created an increase in total net interest income of $13.4 million in the second quarter of 2014 compared to the second quarter of 2013.

Non-interest income totaled $54.1 million in the second quarter of 2014 a decrease of $9.9 million, or 15%, compared to the second quarter of 2013. The decrease in the second quarter of 2014 compared to the second quarter of 2013 was primarily attributable to a decrease in mortgage banking revenues and trading losses, partially offset by higher wealth management revenues. Mortgage banking revenue decreased $7.9 million when compared to the second quarter of 2013. The decrease in mortgage banking revenue in the current quarter as compared to the second quarter of 2013 resulted primarily from lower originations due to a strong purchase and refinance market in the second quarter of 2013. Loans originated and purchased to be sold to the secondary market were $840.9 million in the second quarter of 2014 compared to $1.1 billion in the second quarter of 2013 (see “-Non-Interest Income” for further detail).

Non-interest expense totaled $133.6 million in the second quarter of 2014, increasing $5.4 million, or 4%, compared to the second quarter of 2013. The increase compared to the second quarter of 2013 was primarily attributable to higher salary and employee benefit costs and increased occupancy, equipment and marketing expenses (see “-Non-Interest Expense” for further detail).

### The Current Economic Environment

The economic environment in the second quarter of 2014 was characterized by continued low interest rates and renewed competition as banks have experienced improvements in their financial condition allowing them to be more active in the lending market. While management believes interest rates will rebound over time, the Company has employed certain strategies to manage net income in the current rate environment, including those discussed below.

#### Net Interest Income

The Company has leveraged its internal loan pipeline and external growth opportunities to grow its earning assets base. The Company has also continued its efforts to shift a greater portion of its deposit base to non-interest bearing. Non-interest bearing deposits as a percentage of total deposits was 20% as of June 30, 2014 as compared to 17% as of June 30, 2013. In the current quarter, the Company was able to increase its net interest margin primarily due to the continued reduction in rate paid on interest-bearing deposits. As a result of the growth in earnings assets, improvement in funding mix and increased net interest margin, the Company increased net interest income by $13.4 million in the second quarter of 2014 compared to the second quarter of 2013.

The Company has continued its practice of writing call options against certain U.S. Treasury and Agency securities to economically hedge the security positions and receive fee income to compensate for net interest margin compression. In the second quarter of 2014, the Company recognized $1.2 million in fees on covered call options. In accordance with accounting guidance, these fees are not recorded as a component of net interest income, however the fee contribution is considered by the Company to be an additional return on the investment portfolio.

The Company utilizes “back to back” interest rate derivative transactions, primarily interest rate swaps, to receive floating rate interest payments related to customer loans. In these arrangements, the Company makes a floating rate loan to a borrower who prefers to pay a fixed rate. To accommodate the risk management strategy of certain qualified borrowers, the Company enters a swap with its borrower to effectively convert the borrower's variable rate loan to a fixed rate. However, in order to minimize the Company's exposure on these transactions and continue to receive a floating rate, the Company simultaneously executes an offsetting mirror-image derivative with a third party.

#### Non-Interest Income

In preparation for a rising rate environment, the Company has purchased interest rate cap contracts to offset the negative impact on the net interest margin in a rising rate environment caused by the repricing of variable rate liabilities and lack of repricing of fixed rate loans and securities. As of June 30, 2014, the Company held six interest rate cap derivatives with a total notional value of $620.0 million which are not designated as accounting hedges but are considered to be an economic hedge for the potential rise in interest rates. Because these are not accounting hedges, fluctuations in the cap values are recorded in earnings. In the second quarter of 2014, the Company recognized $862,000 in trading losses related to the mark to market of these interest rate caps. For more information, see Note 13 "Derivatives" of the Financial Statements presented under Item 1 of this report.

The current interest rate environment impacts the profitability and mix of the Company's mortgage banking business which generated revenues of $23.8 million in the second quarter of 2014 and $31.7 million in the second quarter of 2013, representing 12% and 16%, respectively, of each quarter's total net revenue. Mortgage banking revenue was lower as compared to the prior year quarter due to favorable mortgage banking environment in the second quarter of 2013. Mortgage banking revenue is primarily comprised of gains on originations for new home purchases as well as mortgage refinancing. In the second quarter of 2014, approximately 77% of originations were mortgages associated with new home purchases while 23% of originations were related to refinancing of mortgages. As the housing market improves and interest rates rise, we expect a higher percentage of originations to be attributed to new home purchases.

#### Non-Interest Expense

Management believes expense management is important amid the low interest rate environment and increased competition to enhance profitability. Cost control and an efficient infrastructure should position the Company appropriately as it continues its growth strategy. Management continues to be disciplined in its approach to growth and will leverage the Company's existing expense infrastructure to expand its presence in existing and complimentary markets. Management believes that its recent acquisitions have provided operating capacity for balance sheet growth without a commensurate increase in operating expenses which should provide improvement in its overhead ratio, holding all else equal.

Potentially impacting the cost control strategies discussed above, the Company anticipates increased costs resulting from the changing regulatory environment in which we operate. We have already experienced increases in compliance-related costs and we expect that compliance with the Dodd-Frank Act and its implementing regulations will require us to invest significant additional management attention and resources.

#### Credit Quality

The Company’s credit quality metrics improved in the second quarter of 2014 compared to December 31, 2013 and June 30, 2013. The Company continues to address non-performing assets and remains disciplined in its approach to grow without sacrificing asset quality. Management primarily reviews credit quality excluding covered loans as those loans are obtained through FDIC-assisted acquisitions and therefore potential credit losses are subject to indemnification by the FDIC.

In particular:

- The Company’s provision for credit losses, excluding covered loans, in the second quarter of 2014 totaled $6.8 million, a decrease of $8.3 million when compared to the second quarter of 2013. Net charge-offs decreased to $6.6 million in the second quarter of 2014 (of which $2.0 million related to commercial real-estate loans) compared to $18.4 million for the same period in 2013 (of which $14.4 million related to commercial real-estate loans).
- The Company’s allowance for loan losses, excluding covered loans, totaled $92.3 million at June 30, 2014, reflecting a decrease of $14.6 million, or 14%, when compared to the same period in 2013 and a decrease of $4.7 million, or 5%, when compared to December 31, 2013. At June 30, 2014, approximately $40.7 million, or 44%, of the allowance for loan losses, excluding covered loans, was associated with commercial real-estate loans and another $26.0 million, or 28%, was associated with commercial loans.
- The Company has significant exposure to commercial real-estate. At June 30, 2014, $4.4 billion, or 32%, of our loan portfolio, excluding covered loans, was commercial real-estate, with approximately 93% located in the greater Chicago metropolitan and southeastern Wisconsin market areas. As of June 30, 2014, the commercial real-estate loan portfolio was comprised of $290.9 million related to land, residential and commercial construction, $667.9 million related to office buildings, $697.1 million related to retail, $617.6 million related to industrial use, $636.2 million related to multi-family and $1.4 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 changes 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 June 30, 2014, the Company had approximately $36.6 million of non-performing commercial real-estate loans representing approximately 0.8% of the total commercial real-estate loan portfolio.
- 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 $88.7 million (of which $36.6 million, or 41%, was related to commercial real-estate) at June 30, 2014, a decrease of approximately $14.7 million and $32.8 million compared to December 31, 2013 and June 30, 2013, respectively. Non-performing loans decreased due to the continued reduction in existing non-performing loans through the efforts of our credit workout teams.
- The Company’s other real estate owned, excluding covered other real estate owned, increased to $59.6 million during the second quarter of 2014, compared to $50.5 million at December 31, 2013 and $57.0 million at June 30, 2013 partly due to the transfer into OREO of certain loans acquired in recent bank acquisitions. The $59.6 million of other real estate owned as of June 30, 2014 was comprised of $3.2 million of residential real-estate development property, $47.4 million of commercial real-estate property and $9.0 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. As noted above, the increase in the OREO balance was partly attributable to the transfer to OREO of certain loans acquired in recent bank acquisitions. 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, 2013. The level of loans past due 30 days or more and still accruing interest, excluding covered loans, totaled $145.8 million as of June 30, 2014, increasing $5.1 million compared to the balance of $140.7 million as of December 31, 2013 and increasing $12.1 million compared to the balance of $133.7 million as of June 30, 2013. 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).

In addition, during the second quarter of 2014, the Company modified $2.2 million of loans in troubled debt restructurings, by providing economic concessions to borrowers to better align the terms of their loans with their current ability to pay. At June 30, 2014, approximately $88.1 million in loans had terms modified in TDRs, with $72.2 million of these TDRs in accruing status.

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 June 30, 2014, the Company had a $2.9 million estimated liability on loans expected to be repurchased from loans sold to investors compared to a $3.8 million liability and a $4.5 million liability for similar items as of December 31, 2013 and June 30, 2013, respectively. The lower liability in the current quarter is primarily the result of lower than expected losses on loans previously sold. 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, 2013.

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

#### Community Banking

*Net interest income*. Net interest income for the community banking segment totaled $121.2 million for the second quarter of 2014. Net interest income has increased steadily in recent quarters primarily due to growth in earning assets. The earning asset growth has occurred as a result of the Company's commercial banking initiative as well as franchise expansion through acquisitions.

*Funding mix and related costs.* Community banking profitability has been bolstered in recent quarters as the Company funded strong loan growth with a more desirable funding blend. Additionally, non-interest bearing deposits have grown as a result of the Company’s commercial banking initiative and fixed term certificates of deposit have been running off and renewing at lower rates.

*Level of non-performing loans and other real estate owned.* The Company's credit quality measures have improved in recent quarters. The level of non-performing loans have declined as the Company remains committed to the timely resolution of non-performing loans. The balance in other real estate owned has increased as a result of properties transfered into OREO in the current period, including those obtained in the Company's prior bank acquisitions.

*Mortgage banking revenue.* Mortgage banking revenue rebounded in the current quarter as origination volumes picked up following a general downturn in the mortgage banking business coupled with a prolonged winter season. Origination volumes remain below the levels experienced during the favorable mortgage environment in the prior year. Management expects new home purchase originations to remain strong as the housing market improves.

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, 2013.

#### Specialty Finance

*Financing of Commercial Insurance Premiums.* First Insurance Funding Corporation ("FIFC") and First Insurance Funding of Canada, Inc. ("FIFC Canada") originated approximately $1.4 billion of commercial insurance premium finance loans in the second quarter of 2014, relatively unchanged as compared to the first quarter of 2014 and up from originations of $1.3 billion in the second quarter of 2013.

*Financing of Life Insurance Premiums*. FIFC originated approximately $162.0 million in life insurance premium finance loans in the second quarter of 2014 compared to $113.6 million in the first quarter of 2014, and compared to $136.3 million in the second quarter of 2013. The increase in originations in the current quarter is primarily a result of increased demand for financed life insurance.

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, 2013.

#### Wealth Management Activities

The wealth management segment produced record revenues in the current quarter mostly attributable to continued growth in assets under management due to new customers, as well as market appreciation.

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, 2013.

### Recent Acquisition Transactions

#### Acquisition of a bank facility and certain related deposits of Urban Partnership Bank

On May 16, 2014, the Company, through its wholly-owned subsidiary Hinsdale Bank, completed its acquisition of the Stone Park branch office and certain related deposits of Urban Partnership Bank.

#### Acquisition of two affiliated Canadian insurance premium funding and payment services companies

On April 28, 2014, the Company completed the acquisition, through its wholly-owned subsidiary, FIFC Canada, of 100% of the shares of each of Policy Billing Services Inc. and Equity Premium Finance Inc., two affiliated Canadian insurance premium funding and payment services companies.

#### Acquisition of a bank facility and certain assets and liabilities of Baytree National Bank &Trust Company

On February 28, 2014, the Company, through its subsidiary Lake Forest Bank and Trust Company ("Lake Forest Bank"), completed an acquisition of a bank branch from Baytree National Bank & Trust Company. In addition to the banking facility, Lake Forest Bank acquired certain assets and approximately $15 million of deposits.

#### Acquisition of Diamond Bancorp, Inc.

On October 18, 2013, the Company completed its acquisition of Diamond. Diamond was the parent company of Diamond Bank, which operated four banking locations in Chicago, Schaumburg, Elmhurst, and Northbrook, Illinois. As part of the transaction, Diamond Bank was merged into the Company's wholly-owned subsidiary bank, Wintrust Bank (formerly known as North Shore Community Bank & Trust Company). Diamond Bank had approximately $169 million in assets and $140 million in deposits as of the acquisition date, prior to purchase accounting adjustments. The Company recorded goodwill of $8.4 million on the acquisition.

#### Acquisition of certain assets and liabilities of Surety Financial Services

On October 1, 2013, the Company announced that its subsidiary, Barrington Bank through its division Wintrust Mortgage, acquired certain assets and assumed certain liabilities of the mortgage banking business of Surety of Sherman Oaks, California. Surety had five offices located in southern California which originated approximately $1.0 billion in the twelve months prior to the acquisition date.

#### Acquisition of First Lansing Bancorp, Inc.

On May 1, 2013, the Company completed its acquisition of FLB. FLB was the parent company of First National Bank of Illinois, which operated seven banking locations in the south and southwest suburbs of Chicago, Illinois as well as one location in northwest Indiana. As part of this transaction, FNBI was merged into Old Plank Trail Bank. FLB had approximately $372 million in assets and $330 million in deposits as of the acquisition date, prior to purchase accounting adjustments. The Company recorded goodwill of $14.0 million on the acquisition.

### Divestiture of Previous FDIC-Assisted Acquisition

On February 1, 2013, Hinsdale Bank completed the sale of the deposits and the current banking operations of Second Federal, which were acquired in an FDIC-assisted transaction on July 20, 2012, to an unaffiliated credit union.

### Acquisitions Completed Subsequent to June 30, 2014 and Announced Acquisitions

#### Acquisition of a bank facility and certain assets and liabilities of THE National Bank

On July 11, 2014, the Company, through its wholly-owned subsidiary Town Bank, completed its acquisition of the Pewaukee, Wisconsin branch of THE National Bank. Through this transaction, subject to purchase accounting adjustments, Town Bank acquired approximately $36 million of deposits, approximately $81 million of performing loans, the bank facility, property and various other assets.

#### Acquisition of certain bank facilities and deposits of Talmer Bank & Trust

On April 8, 2014, the Company announced the signing of a definitive agreement to acquire, through its wholly-owned subsidiary Town Bank, certain branch offices and deposits of Talmer Bank & Trust. Through this transaction, subject to purchase accounting adjustments, Town Bank will acquire 11 branch offices and deposits of approximately $360 million.

### Other Completed Transactions

#### Subordinated Notes Issuance

On June 13, 2014, the Company announced the closing of its public offering of $140,000,000 aggregate principal amount of its 5.000% Subordinated Notes due 2024. The Company received proceeds prior to expenses of approximately $139.1 million from the offering, after deducting underwriting discounts and commissions, which are intended to be used for general corporate purposes.

#### Tangible Equity Units

In December 2010, the Company sold 4.6 million 7.50% tangible equity units at a public offering price of $50.00 per unit. Each tangible equity unit was comprised of a prepaid common stock purchase contract and a junior subordinated amortizing note due December 15, 2013. In December 2013, the Company settled the prepaid common stock purchase contract by delivering approximately 6.1 million shares of the Company’s common stock to the holders of the purchase contract. No separate consideration was paid to the Company for the issuance of the shares of the Company's common stock. The Company also made the final payment on the junior subordinated amortizing note.

#### Conversion of Preferred Stock

On August 26, 2008, the Company sold 50,000 shares of its Series A Preferred Stock. The terms of the Series A Preferred Stock provided that holders of the Series A Preferred Stock could convert their shares into common stock at any time. On July 19, 2013, pursuant to such terms, the holder of the Company's Series A Preferred Stock elected to convert all 50,000 shares of the Series A Preferred Stock issued and outstanding into 1,944,000 shares of the Company's common stock, no par value, at a conversion rate of 38.88 shares of common stock per share of Series A Preferred Stock. No separate consideration was paid to the Company for the issuance of the shares of the Company’s common stock.

### RESULTS OF OPERATIONS

### Earnings Summary

The Company’s key operating measures for the three and six months ended June 30, 2014, as compared to the same period last year, are shown below:

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

|  | Three months ended June 30, 2014 | June 30, 2013 | Percentage (%) or Basis Point (bp) Change |
| --- | ---: | ---: | ---: |
| Net income | **$38,541** | $34,307 | 12% |
| Net income per common share—Diluted | **0.76** | 0.69 | 10 |
| Net revenue (1) | **203,282** | 199,819 | 2 |
| Net interest income | **149,180** | 135,824 | 10 |
| Net interest margin (2) | **3.62%** | 3.50% | 12 bp |
| Net overhead ratio (2) (3) | **1.74** | 1.49 | 25 |
| Efficiency ratio (2) (4) | **65.36** | 63.97 | 139 |
| Return on average assets | **0.84** | 0.80 | 4 |
| Return on average common equity | **8.03** | 7.55 | 48 |
| Return on average tangible common equity | **10.43** | 9.92 | 51 |

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

|  | Six months ended June 30, 2014 | June 30, 2013 | Percentage (%) or Basis Point (bp) Change |
| --- | ---: | ---: | ---: |
| Net income | **$73,041** | $66,359 | 10% |
| Net income per common share—Diluted | **1.44** | 1.34 | 7 |
| Net revenue (1) | **392,817** | 387,911 | 1 |
| Net interest income | **293,186** | 226,537 | 29 |
| Net interest margin (2) | **3.61%** | 3.46% | 15 bp |
| Net overhead ratio (2) (3) | **1.84** | 1.48 | 36 |
| Efficiency ratio (2) (4) | **67.12** | 63.88 | 324 |
| Return on average assets | **0.81** | 0.77 | 4 |
| Return on average common equity | **7.74** | 7.42 | 32 |
| Return on average tangible common equity | **10.08** | 9.75 | 33 |
| **At end of period** |  |  |  |
| Total assets | **$18,895,681** | $17,613,546 | 7% |
| Total loans, excluding loans held-for-sale, excluding covered loans | **13,749,996** | 12,516,892 | 10 |
| Total loans, including loans held-for-sale, excluding covered loans | **14,113,623** | 13,054,883 | 8 |
| Total deposits | **15,556,376** | 14,365,854 | 8 |
| Total shareholders’ equity | **1,998,235** | 1,836,660 | 9 |
| Tangible common equity ratio (TCE) (2) | **8.0%** | 7.4% | 60 bp |
| Tangible common equity ratio, assuming full conversion of preferred stock (2) | **8.7** | 8.5 | 20 |
| Book value per common share (2) | **$40.21** | $37.84 | 6% |
| Tangible common book value per share (2) | **31.64** | 29.25 | 8 |
| Market price per common share | **46.00** | 38.28 | 20 |
| Excluding covered loans: |  |  |  |
| Allowance for credit losses to total loans (5) | **0.68%** | 0.88% | (20) bp |
| Non-performing loans to total loans | **0.64** | 0.97 | (33) bp |

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

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

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

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

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

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

### 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 and return on average tangible common equity. Management believes that these measures and ratios provide users of the Company’s financial information a more meaningful view of the performance of the interest-earning assets and interest-bearing liabilities and of the Company’s operating efficiency. Other financial holding companies may define or calculate these measures and ratios differently.

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

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

*(Dollars and shares in thousands)*

| Calculation of Net Interest Margin and Efficiency Ratio | Three months ended June 30, 2014 | June 30, 2013 | Six months ended June 30, 2014 | June 30, 2013 |
| --- | ---: | ---: | ---: | ---: |
| **(A) Interest Income (GAAP)** | **$166,550** | $156,646 | **$327,876** | $308,959 |
| Taxable-equivalent adjustment: |  |  |  |  |
| —Loans | **281** | 225 | **511** | 375 |
| —Liquidity management assets | **489** | 356 | **944** | 699 |
| —Other earning assets | **2** | 4 | **6** | 5 |
| Interest Income—FTE | **$167,322** | $157,231 | **$329,337** | $310,038 |
| **(B) Interest Expense (GAAP)** | **17,370** | 20,822 | **34,690** | 42,422 |
| Net interest income—FTE | **149,952** | 136,409 | **294,647** | 267,616 |
| **(C) Net Interest Income (GAAP) (A minus B)** | **$149,180** | $135,824 | **$293,186** | $266,537 |
| **(D) Net interest margin (GAAP)** | **3.60%** | 3.49% | **3.59%** | 3.44% |
| Net interest margin—FTE | **3.62%** | 3.50% | **3.61%** | 3.46% |
| **(E) Efficiency ratio (GAAP)** | **65.61%** | 64.15% | **67.37%** | 64.05% |
| Efficiency ratio—FTE | **65.36%** | 63.97% | **67.12%** | 63.88% |
| **(F) Net Overhead ratio (GAAP)** | **1.74%** | 1.49% | **1.84%** | 1.48% |
| **Calculation of Tangible Common Equity ratio (at period end)** |  |  |  |  |
| Total shareholders’ equity | **$1,998,235** | $1,836,660 |  |  |
| (G) Less: Preferred stock | **(126,467)** | (176,476) |  |  |
| Less: Intangible assets | **(398,615)** | (377,008) |  |  |
| (H) Total tangible common shareholders’ equity | **$1,473,153** | $1,283,176 |  |  |
| Total assets | **$18,895,681** | $17,613,546 |  |  |
| Less: Intangible assets | **(398,615)** | (377,008) |  |  |
| (I) Total tangible assets | **$18,497,066** | $17,236,538 |  |  |
| **Tangible common equity ratio (H/I)** | **8.0%** | 7.4% |  |  |
| **Tangible common equity ratio, assuming full conversion of preferred stock ((H-G)/I)** | **8.7%** | 8.5% |  |  |
| **Calculation of book value per share** |  |  |  |  |
| Total shareholders’ equity | **$1,998,235** | $1,836,660 |  |  |
| Less: Preferred stock | **(126,467)** | (176,476) |  |  |
| (J) Total common equity | **$1,871,768** | $1,660,184 |  |  |
| Actual common shares outstanding | **46,553** | 37,725 |  |  |
| Add: TEU conversion shares | **—** | 6,145 |  |  |
| (K) Common shares used for book value calculation | **46,553** | 43,870 |  |  |
| **Book value per share (J/K)** | **$40.21** | $37.84 |  |  |
| **Tangible common book value per share (H/K)** | **$31.64** | $29.25 |  |  |
| **Calculation of return on average common equity** |  |  |  |  |
| (L) Net income applicable to common shares | **$36,960** | $31,690 | **$69,879** | $61,126 |
| Add: After-tax intangible asset amortization | **708** | 710 | **1,418** | 1,395 |
| (M) Tangible net income applicable to common shares | **37,668** | 32,400 | **71,297** | 62,521 |
| Total average shareholders' equity | **1,971,656** | 1,859,265 | **1,947,785** | 1,838,810 |
| Less: Average preferred stock | **(126,473)** | (176,454) | **(126,475)** | (176,438) |
| (N) Total average common shareholders' equity | **1,845,183** | 1,682,811 | **1,821,310** | 1,662,372 |
| Less: Average intangible assets | **(396,425)** | (372,796) | **(394,574)** | (369,171) |
| (O) Total average tangible common shareholders’ equity | **1,448,758** | 1,310,015 | **1,426,736** | 1,293,201 |
| **Return on average common equity, annualized (L/N)** | **8.03%** | 7.55% | **7.74%** | 7.42% |
| **Return on average tangible common equity, annualized (M/O)** | **10.43%** | 9.92% | **10.08%** | 9.75% |

66

### 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 51 of the Company’s 2013 Form 10-K.

### Net Income

Net income for the quarter ended June 30, 2014 totaled $38.5 million, an increase of $4.2 million, or 12%, compared to the second quarter of 2013. On a per share basis, net income for the second quarter of 2014 totaled $0.76 per diluted common share compared to $0.69 in the second quarter of 2013.

The most significant factors impacting net income for the second quarter of 2014 as compared to the same period in the prior year include an increase in net interest income as a result of growth in earning assets as well as reduced costs on interest-bearing deposits from a more favorable mix of the deposit funding base, lower provision for credit losses, and higher wealth management revenues due to an increased customer base and market appreciation. These improvements were partially offset by a reduction in mortgage banking revenue due to lower origination volumes, fewer trading gains related to the valuation of derivatives and an increase in salary expense caused by the addition of employees from the various acquisitions and larger staffing as the Company grows. The return on average common equity for the second quarter 2014 was 8.03%, compared to 7.55% for the prior year second quarter.

### 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 June 30, 2014 compared to the Quarter Ended March 31, 2014 and June 30, 2013

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 second quarter of 2014 as compared to the first quarter of 2014 (sequential quarters) and second quarter of 2013 (linked quarters):

*(Dollars in thousands)*

|  | Average Balance for three months ended, June 30, 2014 | March 31, 2014 | June 30, 2013 | Interest for three months ended, June 30, 2014 | March 31, 2014 | June 30, 2013 | Yield/Rate for three months ended, June 30, 2014 | March 31, 2014 | June 30, 2013 |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Liquidity management assets(1)(2)(7) | **$2,607,980** | $2,646,720 | $2,560,118 | **$14,850** | $14,533 | $10,823 | **2.28%** | 2.23% | 1.70% |
| Other earning assets(2)(3)(7) | **27,463** | 28,925 | 25,775 | **207** | 222 | 201 | **3.02** | 3.12 | 3.13 |
| Loans, net of unearned income(2)(4)(7) | **13,710,535** | 13,278,122 | 12,546,676 | **145,169** | 140,320 | 137,139 | **4.25** | 4.29 | 4.38 |
| Covered loans | **292,553** | 325,885 | 491,603 | **7,096** | 6,941 | 9,068 | **9.73** | 8.64 | 7.40 |
| Total earning assets(7) | **$16,638,531** | $16,279,652 | $15,624,172 | **$167,322** | $162,016 | $157,231 | **4.03%** | 4.04% | 4.04% |
| Allowance for loan and covered loan losses | **(98,255)** | (110,304) | (126,455) |  |  |  |  |  |  |
| Cash and due from banks | **232,716** | 223,324 | 225,712 |  |  |  |  |  |  |
| Other assets | **1,529,950** | 1,588,271 | 1,560,556 |  |  |  |  |  |  |
| Total assets | **$18,302,942** | $17,980,943 | $17,283,985 |  |  |  |  |  |  |
| Interest-bearing deposits | **$12,284,444** | $12,121,185 | $11,766,422 | **$11,759** | $11,923 | $13,675 | **0.38%** | 0.40% | 0.47% |
| Federal Home Loan Bank advances | **446,778** | 388,975 | 434,572 | **2,705** | 2,643 | 2,821 | **2.43** | 2.76 | 2.60 |
| Notes payable and other borrowings | **148,135** | 244,950 | 273,255 | **510** | 750 | 1,132 | **1.38** | 1.24 | 1.66 |
| Subordinated notes | **27,692** | — | 13,187 | **354** | — | 52 | **5.06** | — | 1.58 |
| Junior subordinated notes | **249,493** | 249,493 | 249,493 | **2,042** | 2,004 | 3,142 | **3.24** | 3.21 | 4.98 |
| Total interest-bearing liabilities | **$13,156,542** | $13,004,603 | $12,736,929 | **$17,370** | $17,320 | $20,822 | **0.53%** | 0.54% | 0.65% |
| Non-interest bearing deposits | **2,880,501** | 2,726,872 | 2,379,315 |  |  |  |  |  |  |
| Other liabilities | **294,243** | 325,819 | 308,476 |  |  |  |  |  |  |
| Equity | **1,971,656** | 1,923,649 | 1,859,265 |  |  |  |  |  |  |
| Total liabilities and shareholders’ equity | **$18,302,942** | $17,980,943 | $17,283,985 |  |  |  |  |  |  |
| Interest rate spread(5)(7) |  |  |  |  |  |  | **3.50%** | 3.50% | 3.39% |
| Net free funds/contribution(6) | **$3,481,989** | $3,275,049 | $2,887,243 |  |  |  | **0.12%** | 0.11% | 0.11% |
| Net interest income/ margin(7) |  |  |  | **$149,952** | $144,696 | $136,409 | **3.62%** | 3.61% | 3.50% |

*(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 June 30, 2014, March 31, 2014 and June 30, 2013 were $772,000, $690,000 and $585,000, 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 second quarter of 2014 compared to the first quarter of 2014 and second quarter of 2013 increased by one basis point and 12 basis points, respectively. The increase in the second quarter of 2014 compared to the first quarter of 2014 resulted from a one basis point decrease on the rate on total interest bearing liabilities and an increase of one basis point on the contribution of net free funds, partially offset by a one basis point decrease on the yield on total average earning assets. The increase in the second quarter of 2014 compared to the second quarter of 2013 resulted from a 12 basis point decrease on the rate on total interest bearing liabilities and a one basis point increase on the contribution of net free funds, partially offset by a one basis point decrease on the yield on total average earning assets

#### Six Months Ended June 30, 2014 compared to Six Months Ended June 30, 2013

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 six months ended June 30, 2014 compared to the six months ended June 30, 2013:

*(Dollars in thousands)*

|  | Average Balance for six months ended, June 30, 2014 | June 30, 2013 | Interest for six months ended, June 30, 2014 | June 30, 2013 | Yield/Rate for six months ended, June 30, 2014 | June 30, 2013 |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Liquidity management assets(1)(2)(7) | **$2,627,243** | $2,678,059 | **$29,383** | $21,186 | **2.26%** | 1.60% |
| Other earning assets(2)(3)(7) | **28,190** | 24,995 | **429** | 381 | **3.07** | 3.07 |
| Loans, net of unearned income(2)(4)(7) | **13,495,523** | 12,400,429 | **285,489** | 268,879 | **4.27** | 4.37 |
| Covered loans | **309,127** | 513,820 | **14,036** | 19,592 | **9.16** | 7.69 |
| Total earning assets(7) | **$16,460,083** | $15,617,303 | **$329,337** | $310,038 | **4.03%** | 4.00% |
| Allowance for loan and covered loan losses | **(104,247)** | (125,841) |  |  |  |  |
| Cash and due from banks | **228,046** | 221,552 |  |  |  |  |
| Other assets | **1,558,950** | 1,557,475 |  |  |  |  |
| Total assets | **$18,142,832** | $17,270,489 |  |  |  |  |
| Interest-bearing deposits | **$12,203,266** | $11,811,659 | **$23,682** | $28,179 | **0.39%** | 0.48% |
| Federal Home Loan Bank advances | **418,036** | 424,389 | **5,348** | 5,585 | **2.58** | 2.65 |
| Notes payable and other borrowings | **196,274** | 285,137 | **1,260** | 2,286 | **1.29** | 1.62 |
| Subordinated notes | **13,923** | 14,088 | **354** | 111 | **5.06** | 1.57 |
| Junior subordinated notes | **249,493** | 249,493 | **4,046** | 6,261 | **3.23** | 4.99 |
| Total interest-bearing liabilities | **$13,080,992** | $12,784,766 | **$34,690** | $42,422 | **0.53%** | 0.67% |
| Non-interest bearing deposits | **2,804,111** | 2,335,265 |  |  |  |  |
| Other liabilities | **309,944** | 311,648 |  |  |  |  |
| Equity | **1,947,785** | 1,838,810 |  |  |  |  |
| Total liabilities and shareholders’ equity | **$18,142,832** | $17,270,489 |  |  |  |  |
| Interest rate spread(5)(7) |  |  |  |  | **3.50%** | 3.33% |
| Net free funds/contribution(6) | **$3,379,091** | $2,832,537 |  |  | **0.11%** | 0.13% |
| Net interest income/ margin(7) |  |  | **$294,647** | $267,616 | **3.61%** | 3.46% |

*(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 six months ended June 30, 2014, and June 30, 2013 were $1.5 million and $1.1 million, respectively.*

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

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

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

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

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

The net interest margin for the first six months of 2014 was 3.61% compared to 3.46% for the first six months of 2013, an increase of 15 basis points. The increase during the first six months of 2014 compared to the first six months of 2013 resulted from an increase of three basis points on total average earning assets and a decrease of 14 basis points on total interest bearing liabilities, partially offset by a decrease of two basis points on the contribution of net free funds.

#### 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 June 30, 2014 to March 31, 2014 and June 30, 2013, and the six months ended June 30, 2014 and June 30, 2013. 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)*

|  | Second Quarter of 2014 Compared to First Quarter of 2014 | Second Quarter of 2014 Compared to Second Quarter of 2013 | First Six Months of 2014 Compared to First Six Months of 2013 |
| --- | ---: | ---: | ---: |
| Tax-equivalent net interest income for comparative period | $144,696 | $136,409 | $267,616 |
| Change due to mix and growth of earning assets and interest-bearing liabilities (volume) | 3,537 | 8,207 | 14,208 |
| Change due to interest rate fluctuations (rate) | 129 | 5,336 | 12,823 |
| Change due to number of days in each period | 1,590 | — | — |
| Tax-equivalent net interest income for the period ended June 30, 2014 | $149,952 | $149,952 | $294,647 |

70

### Non-interest Income

For the second quarter of 2014, non-interest income totaled $54.1 million, a decrease of $9.9 million, or 15%, compared to the second quarter of 2013. On a year-to-date basis, non-interest income for the first six months of 2014 totaled $99.6 million and decreased $21.7 million compared to the same period in 2013. The decreases in both comparative periods are primarily attributable to lower mortgage banking revenues and trading losses partially offset by higher wealth management revenues.

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

*(Dollars in thousands)*

|  | Three months ended June 30, 2014 | June 30, 2013 | $% Change | Change |
| --- | ---: | ---: | ---: | ---: |
| Brokerage | **$8,270** | $7,426 | $844 | 11% |
| Trust and asset management | **9,952** | 8,466 | 1,486 | 18 |
| Total wealth management | **18,222** | 15,892 | 2,330 | 15 |
| Mortgage banking | **23,804** | 31,734 | (7,930) | (25) |
| Service charges on deposit accounts | **5,688** | 5,035 | 653 | 13 |
| (Losses) gains on available-for-sale securities, net | **(336)** | 2 | (338) | NM |
| Fees from covered call options | **1,244** | 993 | 251 | 25 |
| Trading (losses) gains, net | **(743)** | 3,260 | (4,003) | (123) |
| Other: |  |  |  |  |
| Interest rate swap fees | **1,192** | 1,638 | (446) | (27) |
| Bank Owned Life Insurance | **675** | 902 | (227) | (25) |
| Administrative services | **938** | 832 | 106 | 13 |
| Miscellaneous | **3,418** | 3,707 | (289) | (8) |
| Total Other | **6,223** | 7,079 | (856) | (12) |
| **Total Non-Interest Income** | **$54,102** | $63,995 | $(9,893) | (15)% |

*(Dollars in thousands)*

|  | Six months ended June 30, 2014 | June 30, 2013 | $% Change | Change |
| --- | ---: | ---: | ---: | ---: |
| Brokerage | **$15,361** | $14,692 | $669 | 5% |
| Trust and asset management | **19,674** | 16,028 | 3,646 | 23 |
| Total wealth management | **35,035** | 30,720 | 4,315 | 14 |
| Mortgage banking | **40,232** | 61,879 | (21,647) | (35) |
| Service charges on deposit accounts | **11,034** | 9,828 | 1,206 | 12 |
| (Losses) gains on available-for-sale securities, net | **(369)** | 253 | (622) | NM |
| Fees from covered call options | **2,786** | 2,632 | 154 | 6 |
| Trading (losses) gains, net | **(1,395)** | 2,825 | (4,220) | NM |
| Other: |  |  |  |  |
| Interest rate swap fees | **2,143** | 3,909 | (1,766) | (45) |
| Bank Owned Life Insurance | **1,387** | 1,747 | (360) | (21) |
| Administrative services | **1,796** | 1,569 | 227 | 14 |
| Miscellaneous | **6,982** | 6,012 | 970 | 16 |
| Total Other | **12,308** | 13,237 | (929) | (7) |
| **Total Non-Interest Income** | **$99,631** | $121,374 | $(21,743) | (18)% |

NM-Not Meaningful

The significant changes in non-interest income for the three months and six ended June 30, 2014 compared to the three and six months ended June 30, 2013 are discussed below.

Wealth management revenue totaled $18.2 million in the second quarter of 2014 compared to $15.9 million in the second quarter of 2013, an increase of 15%. On a year-to-date basis, wealth management revenues totaled $35.0 million for the first six months of 2014, compared to $30.7 million for the first six months of 2013. The increases in the current year periods are mostly attributable to growth in assets under management due to new customers, as well as market appreciation. 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 June 30, 2014, mortgage banking revenue totaled $23.8 million, a decrease of $7.9 million, or 25% when compared to the second quarter of 2013. For the six months ended June 30, 2014, mortgage banking revenue totaled $40.2 million compared to $61.9 million for the six months ended June 30, 2013. The decrease in mortgage banking revenue in the three and six months ended June 30, 2014 as compared to the prior year periods resulted primarily from lower loan origination volumes. Originations were higher in the three and six months ended June 30, 2013 in part due to a more active refinance market as compared to the current year periods. Loans originated and purchased to be sold to the secondary market were $840.9 million in the second quarter of 2014 as compared to $1.1 billion in the second quarter of 2013. On a year-to-date basis, mortgage loan originations were $1.4 billion for the six months ended June 30, 2014 compared to $2.0 billion for the same period of the prior year. Mortgage banking revenue includes revenue from activities related to originating, selling, and servicing residential real estate loans for the secondary market.

The below table summarizes the Company's mortgage servicing rights as of the dates presented:

*(Dollars in thousands)*

|  | June 30, 2014 | June 30, 2013 |
| --- | ---: | ---: |
| Mortgage loans serviced for others | **$926,679** | $996,621 |
| Fair value of mortgage servicing rights (MSRs) | **8,227** | 8,636 |
| MSRs as a percentage of loans serviced | **0.89%** | 0.87% |

Service charges on deposit accounts totaled $5.7 million in the second quarter of 2014, an increase of $653,000 compared to the quarter ended June 30, 2013. On a year-to-date basis, service charges on deposit accounts totaled $11.0 million for the six months ended June 30, 2014 as compared to $9.8 million for the same period of the prior year. The increase in current year periods is primarily a result of higher account analysis fees on deposit accounts which have increased as a result of the Company's commercial banking initiative.

The Company recognized $743,000 of trading losses in the second quarter of 2014 compared to trading gains of $3.3 million in the second quarter of 2013. On a year-to-date basis, the Company recognized $1.4 million of trading losses for the six months ended June 30, 2014 compared to $2.8 million of trading gains for the six months ended June 30, 2013. Trading gains and losses recorded by the Company primarily result from fair value adjustments related to interest rate derivatives not designated as hedges, primarily interest rate cap instruments that the Company uses to manage interest rate risk, specifically in the event of future increases in short-term interest rates. The change in value of the cap derivatives reflects the present value of expected cash flows over the remaining life of the caps. These expected cash flows are derived from the expected path for and a measure of volatility for short-term interest rates.

Other non-interest income totaled $6.2 million in the second quarter of 2014 compared to $7.1 million in the second quarter of 2013. On a year-to-date basis, other non-interest income totaled $12.3 million for the first six months of 2014 as compared to $13.2 million in the same period of the prior year. The decreases in current year periods are primarily the result of fewer interest rate swap transactions in 2014 due to a unfavorable change in the rate environment and increased competition.

### Non-interest Expense

Non-interest expense for the second quarter of 2014 totaled $133.6 million and increased approximately $5.4 million, or 4%, compared to the second quarter of 2013. The increase compared to the second quarter of 2013 was primarily attributable to higher salary and employee benefit costs and increased occupancy, equipment and marketing expenses. On a year-to-date basis, non-interest expense for the first six months of 2014 totaled $264.9 million and increased $16.6 million, or 7%, compared to the same period in 2013. The increase compared to the first six months of 2013 was primarily attributable to higher salary and employee benefits and increased occupancy, equipment, marketing and OREO expenses.

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

*(Dollars in thousands)*

| Salaries and employee benefits: | Three months ended June 30, 2014 | June 30, 2013 | $% Change | Change |
| --- | ---: | ---: | ---: | ---: |
| Salaries | **$43,349** | $41,671 | $1,678 | 4% |
| Commissions and incentive compensation | **25,398** | 25,143 | 255 | 1 |
| Benefits | **13,216** | 12,411 | 805 | 6 |
| Total salaries and employee benefits | **81,963** | 79,225 | 2,738 | 3 |
| Equipment | **7,223** | 6,413 | 810 | 13 |
| Occupancy, net | **9,850** | 8,707 | 1,143 | 13 |
| Data processing | **4,543** | 4,358 | 185 | 4 |
| Advertising and marketing | **3,558** | 2,722 | 836 | 31 |
| Professional fees | **4,046** | 4,191 | (145) | (3) |
| Amortization of other intangible assets | **1,156** | 1,164 | (8) | (1) |
| FDIC insurance | **3,196** | 3,003 | 193 | 6 |
| OREO expense, net | **2,490** | 2,284 | 206 | 9 |
| Other: |  |  |  |  |
| Commissions—3rd party brokers | **1,633** | 1,128 | 505 | 45 |
| Postage | **1,465** | 1,464 | 1 | — |
| Stationery and supplies | **894** | 887 | 7 | 1 |
| Miscellaneous | **11,574** | 12,641 | (1,067) | (8) |
| Total other | **15,566** | 16,120 | (554) | (3) |
| **Total Non-Interest Expense** | **$133,591** | $128,187 | $5,404 | 4% |

*(Dollars in thousands)*

| Salaries and employee benefits: | Six months ended June 30, 2014 | June 30, 2013 | $% Change | Change |
| --- | ---: | ---: | ---: | ---: |
| Salaries | **$87,085** | $83,502 | $3,583 | 4% |
| Commissions and incentive compensation | **46,931** | 46,419 | 512 | 1 |
| Benefits | **27,881** | 26,817 | 1,064 | 4 |
| Total salaries and employee benefits | **161,897** | 156,738 | 5,159 | 3 |
| Equipment | **14,626** | 12,597 | 2,029 | 16 |
| Occupancy, net | **20,843** | 17,560 | 3,283 | 19 |
| Data processing | **9,258** | 8,957 | 301 | 3 |
| Advertising and marketing | **6,374** | 4,762 | 1,612 | 34 |
| Professional fees | **7,500** | 7,412 | 88 | 1 |
| Amortization of other intangible assets | **2,319** | 2,284 | 35 | 2 |
| FDIC insurance | **6,147** | 6,447 | (300) | (5) |
| OREO expenses, net | **6,466** | 664 | 5,802 | NM |
| Other: |  |  |  |  |
| Commissions—3rd party brokers | **3,290** | 2,362 | 928 | 39 |
| Postage | **2,894** | 2,713 | 181 | 7 |
| Stationery and supplies | **1,786** | 1,821 | (35) | (2) |
| Miscellaneous | **21,506** | 23,989 | (2,483) | (10) |
| Total other | **29,476** | 30,885 | (1,409) | (5) |
| **Total Non-Interest Expense** | **$264,906** | $248,306 | $16,600 | 7% |

NM - Not Meaningful

The significant changes in non-interest expense for the three and six months ended June 30, 2014 compared to the periods ended June 30, 2013 are discussed below.

Salaries and employee benefits expense increased $2.7 million, or 3%, in the second quarter of 2014 compared to the second quarter of 2013 primarily as a result of a $1.7 million increase in salaries caused by the addition of employees from the various acquisitions and larger staffing as the Company grows. On a year-to-date basis, salaries and employee benefits expense increased $5.2 million, or 3%, in the first six months of 2014 compared to the first six months of 2013 primarily as a result of $4.6 million increase in expense related to the Company's long-term incentive program, a $3.6 million increase in salaries caused by the addition of new employees from the various acquisitions and larger staffing as the company grows and a $1.1 million increase from employee benefits (primarily health care plan and payroll taxes related), partially offset by a $4.3 million decrease in commissions.

Equipment expense totaled $7.2 million for the second quarter of 2014, an increase of $810,000 compared to the second quarter of 2013. On a year-to-date basis, equipment expense totaled $14.6 million for the first six months of 2014 as compared to $12.6 million for the first six months of 2013. The increase in the current year periods 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 fees.

Occupancy expense for the second quarter of 2014 was $9.9 million, an increase of $1.1 million, or 13%, compared to the same period in 2013. The increase in the second quarter of 2014 compared to the second quarter in 2013 is primarily due to expenses incurred related to properties acquired last year. On a year-to-date basis, occupancy expense totaled $20.8 million for the first six months of 2014, as compared to $17.6 million for the first six months of 2013. The increase in the first six months of 2014 as compared to the same period in 2013 is primarily the result of elevated snow removal expenses in the first quarter of 2014 and utility expenses on owned locations including those 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 $185,000 in the second quarter of 2014 totaling $4.5 million compared to $4.4 million recorded in the second quarter of 2013. On a year-to-date basis, data processing expenses totaled $9.3 million for the first six months of 2014, as compared to $9.0 million for the first six months of 2013. 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 acquired banks.

Advertising and marketing expenses for the second quarter of 2014 were $3.6 million, as compared to $2.7 million for the second quarter of 2013. The increase in the second quarter of 2014 compared to the second quarter of 2013 relates primarily to expenses for community ads and sponsorships. On a year-to-date basis, advertising and marketing expenses totaled $6.4 million for the first six months of 2014, as compared to $4.8 million for the first six months of 2013. The increase in the first six months on 2014 as compared the same period in 2013 relates primarily to expenses for mass media, direct mail printing and community ads and sponsorships.

Professional fees for the second quarter of 2014 were $4.0 million, as compared to $4.2 million for the second quarter of 2013, a decrease of $145,000, or 3%. The decrease in the second quarter of 2014 compared to the second quarter of 2013 is primarily the result of decreased legal fees during the current period. On a year-to-date basis, professional fees remained relatively unchanged for the first six months of 2014 as compared to the first six months of 2013. Professional fees include legal, audit and tax fees, external loan review costs and normal regulatory exam assessments.

OREO expense totaled $2.5 million in the second quarter of 2014 compared to $2.3 million recorded in the second quarter of 2013. On a year-to-date basis, OREO expenses totaled $6.5 million for the first six months of 2014, an increase of $5.8 million, as compared to $664,000 in the first six months of 2013. OREO expense increased in the first six months of 2014 primarily due to a $3.4 million gain recognized during the prior year period on a covered OREO property sale and higher valuation write-downs in the current period. OREO costs include all costs related to obtaining, maintaining and selling other real estate owned properties.

Miscellaneous other expenses in the second quarter of 2014 decreased $554,000, or 3%, compared to the quarter ended June 30, 2013. On a year-to-date basis, miscellaneous expense decreased by $1.4 million to $29.5 million for the first six months of 2014, as compared to $30.9 million in the prior period. 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.

### Income Taxes

The Company recorded income tax expense of $24.5 million for the three months ended June 30, 2014, compared to $21.9 million for same period of 2013. Income tax expense was $46.3 million and $42.2 million for the six months ended June 30, 2014 and 2013, respectively. The effective tax rates were 38.9% and 39.0% for the second quarters of 2014 and 2013, respectively, and 38.8% and 38.9% for the 2014 and 2013 year-to-date periods, 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. For purposes of internal segment profitability, management allocates certain intersegment and parent company balances. Management allocates a portion of revenues to the specialty finance segment related to loans originated by the specialty finance segment and sold to the community banking segment. Similarly, for purposes of analyzing the contribution from the wealth management segment, management allocates a portion of the net interest income earned by the community banking segment on deposit balances of customers of the wealth management segment to the wealth management segment. Finally, expenses incurred at the Wintrust parent company are allocated to each segment based on each segment's risk-weighted assets.

The community banking segment’s net interest income for the quarter ended June 30, 2014 totaled $121.2 million as compared to $111.4 million for the same period in 2013, an increase of $9.9 million, or 9%. On a year-to-date basis, net interest income for the segment increased by $20.4 million from $217.6 million for the first six months of 2013 to $238.0 million for the first six months of 2014. The increase in both the three and six month periods is primarily attributable to growth in earning assets as well as the ability to gather interest-bearing deposits at more favorable rates. The community banking segment’s non-interest income totaled $33.3 million in the second quarter of 2014, a decrease of $12.0 million, or 27%, when compared to the second quarter of 2013 total of $45.4 million. On a year-to-date basis, non-interest income totaled $60.7 million for the six months ended June 30, 2014, a decrease of $25.3 million, or 29%, compared to $86.0 million recorded in the six months ended June 30, 2013. The decrease in non-interest income in the quarter and year-to-date periods was primarily attributable to lower mortgage banking revenues as a result of lower originations in 2014. The community banking segment’s after-tax profit for the quarter ended June 30, 2014 totaled $24.6 million, an increase of $2.6 million as compared to after-tax profit in the second quarter of 2013 of $22.0 million. On a year-to-date basis, the community banking segment’s after-tax profit was $47.2 million for the first six months of 2014 as compared to $43.0 million for the first six months of 2013. The increase in after-tax profit recorded for both of the current year periods was a result of lower provision for loan losses recorded in 2014.

Net interest income for the specialty finance segment totaled $19.8 million for the quarter ended June 30, 2014, compared to $17.4 million for the same period in 2013, an increase of $2.4 million, or 14%. The specialty finance segment’s non-interest income for the three month period ending June 30, 2014 totaled $8.5 million compared to the three month period ending June 30, 2013 total of $8.2 million. On a year-to-date basis, net interest income and non-interest income increased by $4.1 million and $839,000, respectively, in the first six months of 2014 as compared to the first six months of 2013. The increases in both net interest income and non-interest income in the current year periods are primarily attributable to both higher premium finance receivable originations and increased loan balances. Our commercial premium finance operations, life insurance finance operations and accounts receivable finance operations accounted for 60%, 32% and 8%, respectively, of the total revenues of our specialty finance business for the six month period ending June 30, 2014. The after-tax profit of the specialty finance segment for the quarter ended June 30, 2014 totaled $10.3 million as compared to $9.7 million for the quarter ended June 30, 2013. On a year-to-date basis, the after-tax profit of the specialty finance segment for the six months ended June 30, 2014 totaled $19.3 million as compared to $18.3 million for the six months ended June 30, 2013.

The wealth management segment reported net interest income of $4.0 million for the second quarter of 2014 compared to $3.3 million in the same quarter of 2013. On a year-to-date basis, net interest income totaled $8.1 million for the first six months of 2014 as compared to $6.7 million for the first six months of 2013. Net interest income for this segment is primarily comprised of an allocation of the net interest income earned by the community banking segment on non-interest bearing and interest-bearing wealth management customer account balances on deposit at the banks (“wealth management deposits”). The allocated net interest income included in this segment’s profitability was $3.9 million and $7.8 million for the three and six month periods ended June 30, 2014, respectively, compared to $3.0 million and $6.4 million in the three and six month periods ended June 30, 2013, respectively. This segment recorded non-interest income of $19.2 million for the second quarter of 2014 compared to $16.7 million for the second quarter of 2013. On a year-to-date basis, the wealth management segment non-interest income totaled $36.2 million in the first six months of 2014 as compared to $32.1 million in the first six months of 2013. The increase in non-interest income in the current year periods is primarily attributable to growth in assets under management due to new customers, as well as market appreciation. The wealth management segment’s after-tax profit totaled $3.6 million for the second quarter of 2014 compared to after-tax profit of $2.6 million for the second quarter of 2013. On a year-to-date basis, the after-tax profit of the wealth management segment for the six months ended June 30, 2014 totaled $6.5 million as compared to $5.1 million for the six months ended June 30, 2013.

### Financial Condition

Total assets were $18.9 billion at June 30, 2014, representing an increase of $1.3 billion, or 7%, when compared to June 30, 2013 and an increase of approximately $674.5 million, or 15% on an annualized basis, when compared to March 31, 2014. Total funding, which includes deposits, all notes and advances, including the junior subordinated debentures, was $16.6 billion at June 30, 2014, $16.0 billion at March 31, 2014, and $15.5 billion at June 30, 2013. See Notes 5, 6, 9, 10 and 11 of the Consolidated Financial Statements presented under Item 1 of this report for additional period-end detail on the Company’s interest-earning assets and funding liabilities.

### 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 June 30, 2014 Balance | Percent | March 31, 2014 Balance | Percent | June 30, 2013 Balance | Percent |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Commercial | **$3,525,503** | **21%** | $3,307,025 | 21% | $2,937,443 | 19% |
| Commercial real-estate | **4,315,297** | **26** | 4,256,012 | 26 | 4,061,849 | 26 |
| Home equity | **709,741** | **4** | 712,604 | 4 | 762,772 | 5 |
| Residential real-estate (1) | **704,249** | **4** | 661,253 | 4 | 756,703 | 5 |
| Premium finance receivables | **4,285,940** | **26** | 4,167,530 | 26 | 3,844,482 | 25 |
| Other loans | **169,805** | **1** | 173,698 | 1 | 183,427 | 1 |
| Total loans, net of unearned income excluding covered loans (2) | **$13,710,535** | **82%** | $13,278,122 | 82% | $12,546,676 | 81% |
| Covered loans | **292,553** | **2** | 325,885 | 2 | 491,603 | 3 |
| Total average loans (2) | **$14,003,088** | **84%** | $13,604,007 | 84% | $13,038,279 | 84% |
| Liquidity management assets (3) | **$2,607,980** | **16%** | $2,646,720 | 16% | 2,560,118 | 16% |
| Other earning assets (4) | **27,463** | **—** | 28,925 | — | 25,775 | — |
| Total average earning assets | **$16,638,531** | **100%** | $16,279,652 | 100% | $15,624,172 | 100% |
| Total average assets | **$18,302,942** |  | $17,980,943 |  | $17,283,985 |  |
| Total average earning assets to total average assets |  | **91%** |  | 91% |  | 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 second quarter of 2014 increased $1.0 billion, or 6%, to $16.6 billion, compared to the second quarter of 2013, and increased $358.9 million, or 9% on an annualized basis, compared to the first quarter of 2014. Average earning assets comprised 91% of average total assets at June 30, 2014 and March 31, 2014 compared to 90% of average total assets at June 30, 2013.

Average total loans, net of unearned income, totaled $14.0 billion in the second quarter of 2014, increasing $964.8 million, or 7%, from the second quarter of 2013 and $399.1 million, or 12% on an annualized basis, from the first quarter of 2014. Average commercial loans totaled $3.5 billion in the second quarter of 2014, and increased $588.1 million, or 20%, over the average balance in the same period of 2013, while average commercial real-estate loans totaled $4.3 billion in the second quarter of 2014, increasing $253.4 million, or 6%, compared to the second quarter of 2013. Combined, these categories comprised 56% and 54% of the average loan portfolio in the second quarters of 2014 and 2013, respectively. The growth realized in these categories for the second quarter of 2014 as compared to the prior year period is primarily attributable to increased business development efforts and various bank acquisitions. Average balances increased compared to the quarter ended March 31, 2014, with average commercial loans increasing by $218.5 million, or 26% annualized, and average commercial real-estate loans increasing by $59.3 million, or 6% annualized.

Home equity loans averaged $709.7 million in the second quarter of 2014, and decreased $53.0 million, or 7%, when compared to the average balance in the same period of 2013 and decreased $2.9 million, or 2% annualized, when compared to quarter ended March 31, 2014. 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 variability in the overall residential real estate market. The number of home equity line of credit commitments originated by us has decreased due to a decline in homeowners' desire to use their remaining equity as collateral.

Residential real-estate loans averaged $704.2 million in the second quarter of 2014, and decreased $52.5 million, or 7% from the average balance of $756.7 million in same period of 2013. Additionally, compared to the quarter ended March 31, 2014, the average balance increased $43.0 million, or 26% 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 decreased since the same period of 2013 as a result of lower origination volumes during the current period due to the impact of higher rates on refinancing activity as well as competitive pricing pressure. Additionally, compared to the quarter ended March 31, 2014, mortgage loans held-for-sale increased as as result of higher origination volumes due to an improved mortgage banking environment.

Average premium finance receivables totaled $4.3 billion in the second quarter of 2014, and accounted for 31% 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 second quarter of 2014 and 2013. In the second quarter of 2014, average premium finance receivables increased $441.5 million, or 11%, from the average balance of $3.8 billion at the same period of 2013. Additionally, the average balance increased $118.4 million, or 11% on an annualized basis, from the average balance of $4.2 billion in the quarter ended March 31, 2014. The increase during 2014 compared to both periods was the result of continued originations within the portfolio due to the effective marketing and customer servicing. Approximately $1.6 billion of premium finance receivables were originated in the second quarter of 2014 compared to $1.5 billion during the same period of 2013.

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

Covered loans averaged $292.6 million in the second quarter of 2014, and decreased $199.1 million, or 40%, when compared to the average balance in the same period of 2013 and decreased $33.3 million, or 41% annualized, when compared to quarter ended March 31, 2014. 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 Consolidated Financial Statements presented under Item 1 of this report for a discussion of these acquisitions, including the aggregation of these loans by risk characteristics when determining the initial and subsequent fair value.

Funds that are not utilized for loan originations are used to purchase investment securities and short term money market investments, to sell as federal funds and to maintain in interest bearing deposits with banks. Average liquidity management assets accounted for 16% of total average earning assets in the second quarter of 2014, first quarter of 2014 and the second quarter of 2013. Average liquidity management assets decreased $47.9 million in the second quarter of 2014 compared to the same period in 2013, and decreased $38.7 million compared to the first quarter of 2014. The balances of these assets can fluctuate based on management’s ongoing effort to manage liquidity and for asset liability management purposes.

Other earning assets 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.

*(Dollars in thousands)*

| Loans: | Average Balances for the Six Months Ended June 30, 2014 Balance | Percent | June 30, 2013 Balance | Percent |
| --- | ---: | ---: | ---: | ---: |
| Commercial | **$3,416,867** | **21%** | $2,889,667 | 19% |
| Commercial real-estate | **4,285,818** | **26** | 3,989,761 | 26 |
| Home equity | **711,165** | **4** | 768,739 | 5 |
| Residential real-estate (1) | **682,870** | **4** | 754,102 | 5 |
| Premium finance receivables | **4,227,062** | **26** | 3,811,207 | 24 |
| Other loans | **171,741** | **1** | 186,953 | 1 |
| Total loans, net of unearned income excluding covered loans (2) | **$13,495,523** | **82%** | $12,400,429 | 80% |
| Covered loans | **309,127** | **2** | 513,820 | 3 |
| Total average loans (2) | **$13,804,650** | **84%** | $12,914,249 | 83% |
| Liquidity management assets (3) | **$2,627,243** | **16%** | $2,678,059 | 17% |
| Other earning assets (4) | **28,190** | **—** | 24,995 | — |
| Total average earning assets | **$16,460,083** | **100%** | $15,617,303 | 100% |
| Total average assets | **$18,142,832** |  | $17,270,489 |  |
| Total average earning assets to total average assets |  | **91%** |  | 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 loans for the first six months of 2014 increased $890.4 million or 7%, over the previous year period. Similar to the quarterly discussion above, approximately $527.2 million of this increase relates to the commercial portfolio, $415.9 million of this increase relates to the premium finance receivables portfolio and $296.1 million of this increase relates to the commercial real estate portfolio. The increase is partially offset by a decrease of $204.7 million in covered loans.

### Deposits

Total deposits at June 30, 2014 were $15.6 billion, an increase of $1.2 billion, or 8%, compared to total deposits at June 30, 2013. See Note 9 to the Consolidated 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 June 30, 2014:

| Time Certificates of Deposit Maturity/Re-pricing Analysis As of June 30, 2014 (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 | $23,246 | $92,928 | $154,609 | $607,886 | **$878,669** | **0.49%** |
| 4-6 months | 75,000 | 58,689 | — | 531,492 | **665,181** | **0.54%** |
| 7-9 months | 95,661 | 35,954 | — | 435,204 | **566,819** | **0.97%** |
| 10-12 months | 69,394 | 27,046 | — | 479,141 | **575,581** | **0.77%** |
| 13-18 months | 38,477 | 35,573 | — | 523,652 | **597,702** | **0.99%** |
| 19-24 months | 36,300 | 6,735 | — | 201,292 | **244,327** | **0.94%** |
| 24+ months | 204,713 | 18,559 | — | 490,663 | **713,935** | **1.16%** |
| Total | $542,791 | $275,484 | $154,609 | $3,269,330 | **$4,242,214** | **0.81%** |

*(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 June 30, 2014 Balance | Percent | March 31, 2014 Balance | Percent | June 30, 2013 Balance | Percent |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Non-interest bearing | **$2,880,501** | **20%** | $2,726,872 | 18% | $2,379,315 | 17% |
| NOW | **1,989,919** | **13** | 1,934,403 | 13 | 2,115,414 | 15 |
| Wealth management deposits | **1,244,757** | **8** | 1,214,576 | 8 | 874,101 | 6 |
| Money market | **3,500,186** | **23** | 3,396,773 | 23 | 2,923,602 | 21 |
| Savings | **1,438,264** | **9** | 1,415,653 | 10 | 1,284,411 | 9 |
| Time certificates of deposit | **4,111,318** | **27** | 4,159,780 | 28 | 4,568,894 | 32 |
| Total average deposits | **$15,164,945** | **100%** | $14,848,057 | 100% | $14,145,737 | 100% |

Total average deposits for the second quarter of 2014 were $15.2 billion, an increase of 1.0 billion, or 7%, from the second quarter of 2013. The increase in average deposits is primarily attributable to additional deposits associated with the Company's increased commercial lending relationships. The Company continues to see a beneficial shift in its deposit mix as average non-interest bearing deposits increased $501.2 million, or 21%, in the second quarter of 2014 compared to the second quarter of 2013.

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)*

|  | June 30, 2014 | 2013 | December 31, 2013 | 2012 | 2011 |
| --- | ---: | ---: | ---: | ---: | ---: |
| Total deposits | **$15,556,376** | $14,365,854 | $14,668,789 | $14,428,544 | $12,307,267 |
| Brokered deposits | **876,201** | 623,955 | 476,139 | 787,812 | 674,013 |
| Brokered deposits as a percentage of total deposits | **5.6%** | 4.3% | 3.2% | 5.5% | 5.5% |

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 June 30, 2014 | March 31, 2014 | June 30, 2013 |
| --- | ---: | ---: | ---: |
| Notes payable | **$180** | $362 | $18,104 |
| Federal Home Loan Bank advances | **446,778** | 388,975 | 434,572 |
| Other borrowings: |  |  |  |
| Federal funds purchased | **2,795** | 797 | 997 |
| Securities sold under repurchase agreements | **125,995** | 224,480 | 222,851 |
| Other | **19,165** | 19,311 | 31,303 |
| Total other borrowings | **$147,955** | $244,588 | $255,151 |
| Subordinated notes | **27,692** | — | 13,187 |
| Junior subordinated debentures | **249,493** | 249,493 | 249,493 |
| Total other funding sources | **$872,098** | $883,418 | $970,507 |

Notes payable balances represent the balances on an unsecured promissory note as a result of the Great Lakes Advisors acquisition and a loan agreement with unaffiliated banks. The Company had no outstanding balance on the unsecured promissory note at June 30, 2014 after the remaining balance was paid-off in the second quarter of 2014. At March 31, 2014 and June 30, 2013, the outstanding balance of the unsecured promissory note was $182,000 and $729,000, respectively. The loan agreement with unaffiliated banks is a $100.0 million revolving credit facility 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. In the fourth quarter of 2013, the Company amended the terms of the $100.0 million revolving credit facility, and repaid and terminated a related $1.0 million term loan. At June 30, 2014 and March 31, 2014, the Company had no outstanding balance on the loan agreement with unaffiliated banks as compared to $1.0 million outstanding at June 30, 2013.

FHLB advances provide the banks with access to fixed rate funds which are useful in mitigating interest rate risk and achieving an acceptable interest rate spread on fixed rate loans or securities. Additionally, the banks have the ability to borrow shorter-term, overnight funding from the FHLB for other general purposes. These FHLB advances to the banks totaled $580.6 million at June 30, 2014, compared to $387.7 million at March 31, 2014 and $585.9 million at June 30, 2013.

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 $43.7 million, $230.9 million and $252.8 million at June 30, 2014, March 31, 2014 and June 30, 2013, 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. These borrowings totaled $24.6 million, $211.7 million, and $224.9 million at June 30, 2014, March 31, 2014, and June 30, 2013, respectively. The large decrease in the second quarter of 2014 is primarily attributable to the Company paying off a $180.0 million short term borrowings from brokers. This funding category typically fluctuates based on customer preferences and daily liquidity needs of the banks, their customers and the banks’ operating subsidiaries. In December 2013, the debt issued by the Company, in conjunction with its tangible equity unit offering was paid-off at maturity. At March 31, 2014, the fixed-rate promissory note related to an office building complex had an outstanding balance of $19.1 million.

At June 30, 2014, subordinated notes totaled $140.0 million compared to no balance at March 31, 2014 and a balance of $10.0 million at June 30, 2013. In the second quarter of 2014, the Company issued $140.0 million of subordinated notes receiving $139.1 million in net proceeds. The notes have a stated interest rate of 5.00% and mature in June 2024. Previously, the Company borrowed $75.0 million under three separate $25.0 million subordinated note agreements. Each subordinated note required annual principal payments of $5.0 million beginning in the sixth year of the note and had a term of ten years. During 2012, two subordinated notes with total remaining balances of $15.0 million were paid off prior to maturity. During 2013, the remaining subordinated note with a balance of $10.0 million was paid off prior to maturity.

The Company had $249.5 million of junior subordinated debentures outstanding as of June 30, 2014, March 31, 2014 and June 30, 2013. 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 10 and 11 of the Consolidated Financial Statements presented under Item 1 of this report for details of period end balances and other information for these various funding sources. There were no material changes outside the ordinary course of business in the Company’s contractual obligations during the first six months of 2014 as compared to December 31, 2013 or the first six months of 2013.

### Shareholders’ Equity

Total shareholders’ equity was $2.0 billion at June 30, 2014, reflecting an increase of $161.6 million since June 30, 2013 and $97.6 million since December 31, 2013. The increase from December 31, 2013 was the result of net income of $73.0 million less common stock dividends of $9.3 million and preferred stock dividends of $3.2 million, $3.8 million credited to surplus for stock-based compensation costs, $5.2 million from the issuance of shares of the Company’s common stock (and related tax benefit) pursuant to various stock compensation plans, $29.7 million in net unrealized gains from available-for-sale securities, net of tax, partially offset by $693,000 of foreign currency translation adjustments, net of tax, $449,000 of common stock repurchases by the Company and $436,000 net unrealized losses from cash flow hedges, net of tax.

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:

|  | June 30, 2014 | March 31, 2014 | June 30, 2013 |
| --- | ---: | ---: | ---: |
| Leverage ratio | **10.5%** | 10.4% | 10.4% |
| Tier 1 capital to risk-weighted assets | **11.7** | 12.0 | 12.0 |
| Total capital to risk-weighted assets | **13.2** | 12.6 | 12.9 |
| Total average equity-to-total average assets(1) | **10.8** | 10.7 | 10.8 |

#### (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 |

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 10, 11 and 16 of the Consolidated 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 5.00% non-cumulative perpetual convertible preferred stock, Series C, the terms of the Company’s Trust Preferred Securities offerings and under certain financial covenants in the Company’s credit agreement. In each of January, April and July of 2014, the Company declared a quarterly cash dividend of $0.10 per common share. In each of January and July of 2013, the Company declared a semi-annual cash dividend of $0.09 per common share.

See Note 16 of the Consolidated Financial Statements presented under Item 1 of this report for details on the Company’s issuance of Series C preferred stock in March 2012, tangible equity units in December 2010 and Series A preferred stock in August 2008, and the conversion of Series A preferred stock and the settlement of the tangible equity units into the Company's common stock in July 2013 and December 2013, respectively.

#### Basel III Capital Rules

In July 2013, the Federal Reserve Bank, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation (the “Agencies”) published final Basel III Capital rules for U.S. banking organizations. The Company had estimated that it would have been “well-capitalized" if the fully-phased in capital requirements of the original proposal were adopted.

The Company will become subject to the new rules on January 1, 2015 and certain provisions of the new rules will be phased in from 2015 through 2019. A summary of the new rules is as follows:

- Revises regulatory capital definitions and minimum ratios
- Redefines Tier 1 Capital as two components
- Common Equity Tier 1 Capital
- Additional Tier 1 Capital
- Creates a new capital ratio - Common Equity Tier 1 Risk-based Capital Ratio
- Implements a capital conservation buffer
- Revises prompt corrective action (“PCA”) thresholds and adds the new ratio to the PCA framework
- Changes risk weights for certain assets and off-balance sheet exposures

The Company is continuing to evaluate the final rules and their expected impact on the Company.

### 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)*

|  | June 30, 2014 Amount | % of Total | December 31, 2013 Amount | % of Total | June 30, 2013 Amount | % of Total |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Commercial | **$3,640,430** | **26%** | $3,253,687 | 25% | $3,119,931 | 24% |
| Commercial real-estate | **4,353,472** | **31** | 4,230,035 | 32 | 4,094,628 | 31 |
| Home equity | **713,642** | **5** | 719,137 | 5 | 758,260 | 6 |
| Residential real-estate | **451,905** | **3** | 434,992 | 3 | 384,961 | 3 |
| Premium finance receivables—commercial | **2,378,529** | **17** | 2,167,565 | 16 | 2,165,734 | 16 |
| Premium finance receivables—life insurance | **2,051,645** | **15** | 1,923,698 | 15 | 1,821,147 | 14 |
| Consumer and other | **160,373** | **1** | 167,488 | 1 | 172,231 | 2 |
| Total loans, net of unearned income, excluding covered loans | **$13,749,996** | **98%** | $12,896,602 | 97% | $12,516,892 | 96% |
| Covered loans | **275,154** | **2** | 346,431 | 3 | 454,602 | 4 |
| Total loans | **$14,025,150** | **100%** | $13,243,033 | 100% | $12,971,494 | 100% |

82

*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 June 30, 2014 and 2013:

*(Dollars in thousands)*

| As of June 30, 2014 Commercial: | Balance | % of Total Balance | Nonaccrual | \> 90 Days Past Due and Still Accruing | Allowance For Loan Losses Allocation |
| --- | ---: | ---: | ---: | ---: | ---: |
| Commercial and industrial | $2,012,480 | 25.2% | $6,216 | $— | $16,237 |
| Franchise | 223,456 | 2.8 | — | — | 1,888 |
| Mortgage warehouse lines of credit | 148,211 | 1.9 | — | — | 1,229 |
| Community Advantage—homeowner associations | 94,009 | 1.2 | — | — | — |
| Aircraft | 7,847 | 0.1 | — | — | 10 |
| Asset-based lending | 778,344 | 9.7 | 295 | — | 5,562 |
| Tax exempt | 208,913 | 2.6 | — | — | 1,017 |
| Leases | 144,435 | 1.8 | — | — | 6 |
| Other | 9,792 | 0.1 | — | — | 78 |
| PCI - commercial loans (1) | 12,943 | 0.2 | — | 1,452 | 11 |
| **Total commercial** | **$3,640,430** | **45.6%** | **$6,511** | **$1,452** | **$26,038** |
| **Commercial Real-Estate:** |  |  |  |  |  |
| Residential construction | $29,959 | 0.4% | $— | $— | $500 |
| Commercial construction | 155,059 | 1.9 | 839 | — | 2,184 |
| Land | 105,927 | 1.3 | 2,367 | — | 3,084 |
| Office | 667,917 | 8.4 | 10,950 | — | 7,442 |
| Industrial | 617,640 | 7.7 | 5,097 | — | 4,577 |
| Retail | 697,095 | 8.7 | 6,909 | — | 6,467 |
| Multi-family | 636,169 | 8.0 | 689 | — | 4,302 |
| Mixed use and other | 1,378,439 | 17.2 | 9,470 | 309 | 12,146 |
| PCI - commercial real-estate (1) | 65,267 | 0.8 | — | 15,682 | — |
| **Total commercial real-estate** | **$4,353,472** | **54.4%** | **$36,321** | **$15,991** | **$40,702** |
| **Total commercial and commercial real-estate** | **$7,993,902** | **100.0%** | **$42,832** | **$17,443** | **$66,740** |
| Commercial real-estate—collateral location by state: |  |  |  |  |  |
| Illinois | $3,661,706 | 84.1% |  |  |  |
| Wisconsin | 374,486 | 8.6 |  |  |  |
| **Total primary markets** | **$4,036,192** | **92.7%** |  |  |  |
| Florida | 64,473 | 1.5 |  |  |  |
| Arizona | 15,330 | 0.4 |  |  |  |
| Indiana | 93,708 | 2.2 |  |  |  |
| Other (no individual state greater than 0.5%) | 143,769 | 3.2 |  |  |  |
| **Total** | **$4,353,472** | **100.0%** |  |  |  |

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

*(Dollars in thousands)*

| As of June 30, 2013 Commercial: | Balance | % of Total Balance | Nonaccrual | \> 90 Days Past Due and Still Accruing | Allowance For Loan Losses Allocation |
| --- | ---: | ---: | ---: | ---: | ---: |
| Commercial and industrial | $1,696,236 | 23.5% | $15,432 | $— | $17,892 |
| Franchise | 202,240 | 2.8 | — | — | 1,647 |
| Mortgage warehouse lines of credit | 174,422 | 2.4 | — | — | 1,571 |
| Community Advantage—homeowner associations | 83,003 | 1.2 | — | — | 208 |
| Aircraft | 13,174 | 0.2 | — | — | 33 |
| Asset-based lending | 685,701 | 9.5 | 1,816 | 100 | 5,891 |
| Tax exempt | 151,492 | 2.1 | — | — | 1,233 |
| Leases | 102,409 | 1.4 | — | — | 255 |
| Other | 98 | — | — | — | 1 |
| PCI - commercial loans (1) | 11,156 | 0.2 | — | 190 | — |
| **Total commercial** | **$3,119,931** | **43.3%** | **$17,248** | **$290** | **$28,731** |
| **Commercial Real-Estate:** |  |  |  |  |  |
| Residential construction | $39,299 | 0.5% | $2,659 | $3,263 | $1,220 |
| Commercial construction | 138,043 | 1.9 | 7,857 | — | 2,053 |
| Land | 116,853 | 1.6 | 5,742 | — | 3,525 |
| Office | 597,757 | 8.3 | 6,324 | — | 6,030 |
| Industrial | 615,501 | 8.5 | 5,773 | — | 6,064 |
| Retail | 607,391 | 8.4 | 7,471 | — | 5,418 |
| Multi-family | 533,568 | 7.4 | 3,337 | — | 11,738 |
| Mixed use and other | 1,378,805 | 19.2 | 15,662 | — | 15,707 |
| PCI - commercial real-estate (1) | 67,411 | 0.9 | — | 6,466 | 201 |
| **Total commercial real-estate** | **$4,094,628** | **56.7%** | **$54,825** | **$9,729** | **$51,956** |
| **Total commercial and commercial real-estate** | **$7,214,559** | **100.0%** | **$72,073** | **$10,019** | **$80,687** |
| Commercial real-estate—collateral location by state: |  |  |  |  |  |
| Illinois | $3,461,043 | 84.5% |  |  |  |
| Wisconsin | 346,230 | 8.5 |  |  |  |
| **Total primary markets** | **$3,807,273** | **93.0%** |  |  |  |
| Florida | 65,928 | 1.6 |  |  |  |
| Arizona | 17,927 | 0.4 |  |  |  |
| Indiana | 78,871 | 1.9 |  |  |  |
| Other (no individual state greater than 0.5%) | 124,629 | 3.1 |  |  |  |
| **Total** | **$4,094,628** | **100.0%** |  |  |  |

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

We make commercial loans for many purposes, including working capital lines, which are generally renewable annually and supported by business assets, personal guarantees and additional collateral; loans to condominium and homeowner associations originated through Barrington Bank’s Community Advantage program; 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 recent improvements in credit quality within the overall commercial portfolio, our allowance for loan losses in our commercial loan portfolio is $26.0 million as of June 30, 2014 compared to $28.7 million as of June 30, 2013.

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, 92.7% of our commercial real-estate loan portfolio is located in this region. Commercial real-estate market conditions continued to be under stress in the second quarter of 2014, however we have been able to effectively manage and reduce our total non-performing commercial real-estate loans. As of June 30, 2014, our allowance for loan losses related to this portfolio is $40.7 million compared to $52.0 million as of June 30, 2013.

The Company also participates in mortgage warehouse lending by providing interim funding to unaffiliated mortgage bankers to finance residential mortgages originated by such bankers for sale into the secondary market. The Company’s loans to the mortgage bankers are secured by the business assets of the mortgage companies as well as the specific mortgage loans funded by the Company, after they have been pre-approved for purchase by third party end lenders. The Company may also provide interim financing for packages of mortgage loans on a bulk basis in circumstances where the mortgage bankers desire to competitively bid on a number of mortgages for sale as a package in the secondary market. Amounts advanced with respect to any particular mortgage loan are usually required to be repaid within 21 days. In the current period, mortgage warehouse lines decreased to $148.2 million as of June 30, 2014 from $174.4 million as of June 30, 2013 as a result of lower origination volumes during the current period as refinance activity declined as well as competitive pricing pressure.

*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 June 30, 2014, our residential loan portfolio totaled $451.9 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 due to the fact that such loans generally provide for periodic and lifetime limits on the interest rate adjustments among other features. Additionally, adjustable rate mortgages may pose a higher risk of delinquency and default because they require borrowers to make larger payments when interest rates rise. To date, we have not seen a significant elevation in delinquencies and foreclosures in our residential loan portfolio. As of June 30, 2014, $15.3 million of our residential real-estate mortgages, or 3.4% of our residential real-estate loan portfolio, excluding PCI loans, were classified as nonaccrual, $3.5 million were 30 to 89 days past due (0.7%) and $430.4 million were current (95.9%). 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

June 30, 2014 and 2013 was $926.7 million and $996.6 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 June 30, 2014, approximately $13.8 million of our mortgage loans consist of interest-only loans.

*Premium finance receivables – commercial.* FIFC and FIFC Canada originated approximately $1.4 billion in commercial insurance premium finance receivables during the second quarter of 2014 compared to $1.3 billion in the same period of 2013. During the six months ending June 30, 2014 and 2013, FIFC and FIFC Canada originated approximately $2.8 billion and $2.5 billion, respectively, in commercial insurance premium finance receivables. FIFC and FIFC Canada make loans to businesses to finance the insurance premiums they pay on their commercial insurance policies. The loans are originated by working through independent medium and large insurance agents and brokers located throughout the United States and Canada. The insurance premiums financed are primarily for commercial customers’ purchases of liability, property and casualty and other commercial insurance.

This lending involves relatively rapid turnover of the loan portfolio and high volume of loan originations. The majority of these loans are purchased by our banks in order to more fully utilize their lending capacity as these loans generally provide the banks with higher yields than alternative investments. 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.

*Premium finance receivables—life insurance.* FIFC originated approximately $162.0 million in life insurance premium finance receivables in the second quarter of 2014 as compared to $136.3 million of originations in the second quarter of 2013. For the six months ending June 30, 2014 and 2013, FIFC originated $275.6 million and $222.0 million, respectively, in life insurance premium finance receivables. The Company has experienced increased competition and pricing pressure within the current market in 2014. These loans are originated directly with the borrowers with assistance from life insurance carriers, independent insurance agents, financial advisors and legal counsel. The life insurance policy is the primary form of collateral. In addition, these loans often are secured with a letter of credit, marketable securities or certificates of deposit. In some cases, FIFC may make a loan that has a partially unsecured position.

*Consumer and other.* Included in the consumer and other loan category is a wide variety of personal and consumer loans to individuals as well as indirect automobile and consumer loans and high yielding short-term accounts receivable financing to clients in the temporary staffing industry located throughout the United States. 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.

#### Maturities and Sensitivities of Loans to Changes in Interest Rates

The following table classifies the commercial and commercial real-estate loan portfolio at June 30, 2014 by date at which the loans reprice or mature, and the type of rate exposure:

*(Dollars in thousands)*

| As of June 30, 2014 Commercial | One year or less | From one to five years Total | Over five years |  |
| --- | ---: | ---: | ---: | ---: |
| Fixed rate | **$76,347** | **$410,608** | **$168,513** | **$655,468** |
| Variable rate |  |  |  |  |
| With floor feature | **578,093** | **454** | **—** | **578,547** |
| Without floor feature | **2,387,219** | **6,511** | **12,685** | **2,406,415** |
| Total commercial | **3,041,659** | **417,573** | **181,198** | **3,640,430** |
| Commercial real-estate |  |  |  |  |
| Fixed rate | **$357,089** | **$1,360,879** | **$169,198** | **$1,887,166** |
| Variable rate |  |  |  |  |
| With floor feature | **395,367** | **15,611** | **—** | **410,978** |
| Without floor feature | **2,016,026** | **37,995** | **1,307** | **2,055,328** |
| Total commercial real-estate | **2,768,482** | **1,414,485** | **170,505** | **4,353,472** |

86

### 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 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 and TDRs performing under the contractual terms of the loan agreement, excluding covered assets and PCI loans, as of the dates shown:

*(Dollars in thousands)*

| Loans past due greater than 90 days and still accruing (1): | June 30, 2014 | March 31, 2014 | December 31, 2013 | June 30, 2013 |
| --- | ---: | ---: | ---: | ---: |
| Commercial | **$—** | $387 | $— | $100 |
| Commercial real-estate | **309** | — | 230 | 3,263 |
| Home equity | **—** | — | — | 25 |
| Residential real-estate | **—** | — | — | — |
| Premium finance receivables—commercial | **10,275** | 6,808 | 8,842 | 6,671 |
| Premium finance receivables—life insurance | **649** | — | — | 1,212 |
| Consumer and other | **73** | 57 | 105 | 217 |
| Total loans past due greater than 90 days and still accruing | **11,306** | 7,252 | 9,177 | 11,488 |
| **Non-accrual loans (2):** |  |  |  |  |
| Commercial | **6,511** | 11,782 | 10,780 | 17,248 |
| Commercial real-estate | **36,321** | 33,733 | 46,658 | 54,825 |
| Home equity | **5,804** | 7,311 | 10,071 | 12,322 |
| Residential real-estate | **15,294** | 14,385 | 14,974 | 10,213 |
| Premium finance receivables—commercial | **12,298** | 14,517 | 10,537 | 13,605 |
| Premium finance receivables—life insurance | **—** | — | — | 16 |
| Consumer and other | **1,116** | 1,144 | 1,137 | 1,768 |
| Total non-accrual loans | **77,344** | 82,872 | 94,157 | 109,997 |
| **Total non-performing loans:** |  |  |  |  |
| Commercial | **6,511** | 12,169 | 10,780 | 17,348 |
| Commercial real-estate | **36,630** | 33,733 | 46,888 | 58,088 |
| Home equity | **5,804** | 7,311 | 10,071 | 12,347 |
| Residential real-estate | **15,294** | 14,385 | 14,974 | 10,213 |
| Premium finance receivables—commercial | **22,573** | 21,325 | 19,379 | 20,276 |
| Premium finance receivables—life insurance | **649** | — | — | 1,228 |
| Consumer and other | **1,189** | 1,201 | 1,242 | 1,985 |
| Total non-performing loans | **$88,650** | $90,124 | $103,334 | $121,485 |
| Other real estate owned | **51,673** | 47,656 | 43,398 | 44,623 |
| Other real estate owned—from acquisitions | **7,915** | 6,475 | 7,056 | 12,402 |
| Other repossessed assets | **311** | 426 | 542 | 1,032 |
| Total non-performing assets | **$148,549** | $144,681 | $154,330 | $179,542 |
| TDRs performing under the contractual terms of the loan agreement | **72,199** | 74,622 | 78,610 | 93,810 |
| **Total non-performing loans by category as a percent of its own respective category’s period-end balance:** |  |  |  |  |
| Commercial | **0.18%** | 0.35% | 0.33% | 0.56% |
| Commercial real-estate | **0.84** | 0.79 | 1.11 | 1.42 |
| Home equity | **0.81** | 1.03 | 1.40 | 1.63 |
| Residential real-estate | **3.38** | 3.37 | 3.44 | 2.65 |
| Premium finance receivables—commercial | **0.95** | 0.97 | 0.89 | 0.94 |
| Premium finance receivables—life insurance | **0.03** | — | — | 0.07 |
| Consumer and other | **0.74** | 0.75 | 0.74 | 1.15 |
| Total non-performing loans | **0.64%** | 0.69% | 0.80% | 0.97% |
| **Total non-performing assets, as a percentage of total assets** | **0.79%** | 0.79% | 0.85% | 1.02% |
| **Allowance for loan losses as a percentage of total non-performing loans** | **104.06%** | 102.39% | 93.80% | 87.95% |

*(1) As of the dates shown, no TDRs were past due greater than 90 days and still accruing interest.*

*(2) Non-accrual loans included TDRs totaling $15.9 million, $17.9 million, $28.5 million and $32.4 million as of June 30, 2014, March 31, 2014, December 31, 2013 and June 30, 2013, respectively.*

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

Commercial non-performing loans totaled $6.5 million as of June 30, 2014 compared to $10.8 million as of December 31, 2013 and $17.3 million as of June 30, 2013. Commercial real-estate non-performing loans totaled $36.6 million as of June 30, 2014 compared to $46.9 million as of December 31, 2013 and $58.1 million as of June 30, 2013. 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 $21.1 million as of June 30, 2014. The balance decreased $3.9 million from December 31, 2013 and decreased $1.5 million from June 30, 2013. The June 30, 2014 non-performing balance is comprised of $15.3 million of residential real-estate (79 individual credits) and $5.8 million of home equity loans (39 individual credits). On average, this is approximately eight 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 June 30, 2014 and 2013, and the amount of net charge-offs for the quarters then ended.

*(Dollars in thousands)*

|  | June 30, 2014 | June 30, 2013 |
| --- | ---: | ---: |
| Non-performing premium finance receivables—commercial | **$22,573** | $20,276 |
| - as a percent of premium finance receivables—commercial outstanding | **0.95%** | 0.94% |
| Net charge-offs of premium finance receivables—commercial | **$1,180** | $1,027 |
| - annualized as a percent of average premium finance receivables—commercial | **0.20%** | 0.20% |

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 June 30, 2014, only 0.8% of the entire portfolio, excluding covered loans, is non-accrual or greater than 90 days past due and still accruing interest with only 0.8% either one or two payments past due. In total, 98.4% of the Company’s total loan portfolio, excluding covered loans, as of June 30, 2014 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 June 30, 2014 and March 31, 2014:

*(Dollars in thousands)*

| As of June 30, 2014 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 | **$6,216** | **$—** | **$4,165** | **$21,610** | **$1,980,489** | **$2,012,480** |
| Franchise | **—** | **—** | **—** | **549** | **222,907** | **223,456** |
| Mortgage warehouse lines of credit | **—** | **—** | **—** | **1,680** | **146,531** | **148,211** |
| Community Advantage—homeowners association | **—** | **—** | **—** | **—** | **94,009** | **94,009** |
| Aircraft | **—** | **—** | **—** | **—** | **7,847** | **7,847** |
| Asset-based lending | **295** | **—** | **—** | **6,047** | **772,002** | **778,344** |
| Tax exempt | **—** | **—** | **—** | **—** | **208,913** | **208,913** |
| Leases | **—** | **—** | **—** | **36** | **144,399** | **144,435** |
| Other | **—** | **—** | **—** | **—** | **9,792** | **9,792** |
| PCI - commercial (1) | **—** | **1,452** | **—** | **224** | **11,267** | **12,943** |
| Total commercial | **6,511** | **1,452** | **4,165** | **30,146** | **3,598,156** | **3,640,430** |
| Commercial real-estate |  |  |  |  |  |  |
| Residential construction | **—** | **—** | **—** | **18** | **29,941** | **29,959** |
| Commercial construction | **839** | **—** | **—** | **—** | **154,220** | **155,059** |
| Land | **2,367** | **—** | **614** | **4,502** | **98,444** | **105,927** |
| Office | **10,950** | **—** | **999** | **3,911** | **652,057** | **667,917** |
| Industrial | **5,097** | **—** | **899** | **690** | **610,954** | **617,640** |
| Retail | **6,909** | **—** | **1,334** | **2,560** | **686,292** | **697,095** |
| Multi-family | **689** | **—** | **244** | **4,717** | **630,519** | **636,169** |
| Mixed use and other | **9,470** | **309** | **5,384** | **12,300** | **1,350,976** | **1,378,439** |
| PCI - commercial real-estate (1) | **—** | **15,682** | **155** | **1,595** | **47,835** | **65,267** |
| Total commercial real-estate | **36,321** | **15,991** | **9,629** | **30,293** | **4,261,238** | **4,353,472** |
| Home equity | **5,804** | **—** | **1,392** | **3,324** | **703,122** | **713,642** |
| Residential real-estate | **15,294** | **—** | **1,487** | **1,978** | **430,364** | **449,123** |
| PCI - residential real-estate (1) | **—** | **988** | **111** | **—** | **1,683** | **2,782** |
| Premium finance receivables |  |  |  |  |  |  |
| Commercial insurance loans | **12,298** | **10,275** | **12,335** | **14,672** | **2,328,949** | **2,378,529** |
| Life insurance loans | **—** | **649** | **896** | **4,783** | **1,635,557** | **1,641,885** |
| PCI - life insurance loans (1) | **—** | **—** | **—** | **—** | **409,760** | **409,760** |
| Consumer and other | **1,116** | **73** | **558** | **600** | **157,828** | **160,175** |
| PCI - consumer and other (1) | **—** | **—** | **4** | **—** | **194** | **198** |
| Total loans, net of unearned income, excluding covered loans | **$77,344** | **$29,428** | **$30,577** | **$85,796** | **$13,526,851** | **$13,749,996** |
| Covered loans | **6,690** | **34,486** | **4,003** | **1,482** | **228,493** | **275,154** |
| Total loans, net of unearned income | **$84,034** | **$63,914** | **$34,580** | **$87,278** | **$13,755,344** | **$14,025,150** |

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

| Aging as a % of Loan Balance: As of June 30, 2014 Commercial | Nonaccrual | 90+ days and still accruing | 60-89 days past due | 30-59 days past due | Current | Total Loans |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Commercial and industrial | **0.3%** | **—%** | **0.2%** | **1.1%** | **98.4%** | **100.0%** |
| Franchise | **—** | **—** | **—** | **0.2** | **99.8** | **100.0** |
| Mortgage warehouse lines of credit | **—** | **—** | **—** | **1.1** | **98.9** | **100.0** |
| Community Advantage—homeowners association | **—** | **—** | **—** | **—** | **100.0** | **100.0** |
| Aircraft | **—** | **—** | **—** | **—** | **100.0** | **100.0** |
| Asset-based lending | **—** | **—** | **—** | **0.8** | **99.2** | **100.0** |
| Tax exempt | **—** | **—** | **—** | **—** | **100.0** | **100.0** |
| Leases | **—** | **—** | **—** | **—** | **100.0** | **100.0** |
| Other | **—** | **—** | **—** | **—** | **100.0** | **100.0** |
| PCI - commercial (1) | **—** | **11.2** | **—** | **1.7** | **87.1** | **100.0** |
| Total commercial | **0.2** | **—** | **0.1** | **0.8** | **98.9** | **100.0** |
| Commercial real-estate |  |  |  |  |  |  |
| Residential construction | **—** | **—** | **—** | **0.1** | **99.9** | **100.0** |
| Commercial construction | **0.5** | **—** | **—** | **—** | **99.5** | **100.0** |
| Land | **2.2** | **—** | **0.6** | **4.3** | **92.9** | **100.0** |
| Office | **1.6** | **—** | **0.1** | **0.6** | **97.7** | **100.0** |
| Industrial | **0.8** | **—** | **0.1** | **0.1** | **99.0** | **100.0** |
| Retail | **1.0** | **—** | **0.2** | **0.4** | **98.4** | **100.0** |
| Multi-family | **0.1** | **—** | **—** | **0.7** | **99.2** | **100.0** |
| Mixed use and other | **0.7** | **—** | **0.4** | **0.9** | **98.0** | **100.0** |
| PCI - commercial real-estate (1) | **—** | **24.0** | **0.2** | **2.4** | **73.4** | **100.0** |
| Total commercial real-estate | **0.8** | **0.4** | **0.2** | **0.7** | **97.9** | **100.0** |
| Home equity | **0.8** | **—** | **0.2** | **0.5** | **98.5** | **100.0** |
| Residential real-estate | **3.4** | **—** | **0.3** | **0.4** | **95.9** | **100.0** |
| PCI - residential real-estate (1) | **—** | **35.5** | **4.0** | **—** | **60.5** | **100.0** |
| Premium finance receivables |  |  |  |  |  |  |
| Commercial insurance loans | **0.5** | **0.4** | **0.5** | **0.6** | **98.0** | **100.0** |
| Life insurance loans | **—** | **—** | **0.1** | **0.3** | **99.6** | **100.0** |
| PCI - life insurance loans (1) | **—** | **—** | **—** | **—** | **100.0** | **100.0** |
| Consumer and other | **0.7** | **—** | **0.3** | **0.4** | **98.6** | **100.0** |
| PCI - consumer and other (1) | **—** | **—** | **2.0** | **—** | **98.0** | **100.0** |
| Total loans, net of unearned income, excluding covered loans | **0.6%** | **0.2%** | **0.2%** | **0.6%** | **98.4%** | **100.0%** |
| Covered loans | **2.4** | **12.5** | **1.5** | **0.5** | **83.1** | **100.0** |
| Total loans, net of unearned income | **0.6%** | **0.5%** | **0.2%** | **0.6%** | **98.1%** | **100.0%** |

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

*(Dollars in thousands)*

| As of March 31, 2014 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 | $11,112 | $387 | $2,235 | $16,150 | $1,965,425 | $1,995,309 |
| Franchise | — | — | — | 75 | 221,026 | 221,101 |
| Mortgage warehouse lines of credit | — | — | — | — | 60,809 | 60,809 |
| Community Advantage - homeowners association | — | — | — | — | 91,414 | 91,414 |
| Aircraft | — | — | — | — | 8,840 | 8,840 |
| Asset-based lending | 670 | — | — | 10,573 | 729,425 | 740,668 |
| Municipal | — | — | — | — | 177,973 | 177,973 |
| Leases | — | — | — | — | 121,986 | 121,986 |
| Other | — | — | — | — | 10,261 | 10,261 |
| Purchased non-covered commercial (1) | — | 1,079 | — | 865 | 8,892 | 10,836 |
| Total commercial | 11,782 | 1,466 | 2,235 | 27,663 | 3,396,051 | 3,439,197 |
| Commercial real-estate |  |  |  |  |  |  |
| Residential construction | — | — | 680 | 27 | 35,690 | 36,397 |
| Commercial construction | 844 | — | — | — | 150,786 | 151,630 |
| Land | 2,405 | — | 2,682 | 3,438 | 99,445 | 107,970 |
| Office | 6,970 | — | 1,672 | 8,868 | 633,655 | 651,165 |
| Industrial | 6,101 | — | 1,114 | 2,706 | 615,139 | 625,060 |
| Retail | 9,540 | — | 217 | 3,089 | 664,584 | 677,430 |
| Multi-family | 1,327 | — | — | 3,820 | 570,616 | 575,763 |
| Mixed use and other | 6,546 | — | 6,626 | 10,744 | 1,337,320 | 1,361,236 |
| Purchased non-covered commercial real-estate (1) | — | 21,073 | 2,791 | 6,169 | 45,571 | 75,604 |
| Total commercial real-estate | 33,733 | 21,073 | 15,782 | 38,861 | 4,152,806 | 4,262,255 |
| Home equity | 7,311 | — | 1,650 | 4,972 | 693,815 | 707,748 |
| Residential real estate | 14,385 | — | 946 | 4,889 | 403,474 | 423,694 |
| Purchased non-covered residential real estate (1) | — | 1,414 | — | 248 | 1,413 | 3,075 |
| Premium finance receivables |  |  |  |  |  |  |
| Commercial insurance loans | 14,517 | 6,808 | 5,600 | 20,777 | 2,160,659 | 2,208,361 |
| Life insurance loans | — | — | — | 4,312 | 1,511,820 | 1,516,132 |
| Purchased life insurance loans (1) | — | — | — | — | 413,202 | 413,202 |
| Consumer and other | 1,144 | 57 | 213 | 550 | 157,290 | 159,254 |
| Purchased non-covered consumer and other (1) | — | 48 | — | 20 | 174 | 242 |
| Total loans, net of unearned income, excluding covered loans | $82,872 | $30,866 | $26,426 | $102,292 | $12,890,704 | $13,133,160 |
| Covered loans | 9,136 | 35,831 | 6,682 | 7,042 | 253,787 | 312,478 |
| Total loans, net of unearned income | $92,008 | $66,697 | $33,108 | $109,334 | $13,144,491 | $13,445,638 |

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

| Aging as a % of Loan Balance: Commercial | Nonaccrual | 90+ days and still accruing | 60-89 days past due | 30-59 days past due | Current | Total Loans |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Commercial and industrial | 0.6% | —% | 0.1% | 0.8% | 98.5% | 100.0% |
| Franchise | — | — | — | — | 100.0 | 100.0 |
| Mortgage warehouse lines of credit | — | — | — | — | 100.0 | 100.0 |
| Community Advantage - homeowners association | — | — | — | — | 100.0 | 100.0 |
| Aircraft | — | — | — | — | 100.0 | 100.0 |
| Asset-based lending | 0.1 | — | — | 1.4 | 98.5 | 100.0 |
| Municipal | — | — | — | — | 100.0 | 100.0 |
| Leases | — | — | — | — | 100.0 | 100.0 |
| Other | — | — | — | — | 100.0 | 100.0 |
| Purchased non-covered commercial(1) | — | 10.0 | — | 8.0 | 82.0 | 100.0 |
| Total commercial | 0.3 | — | 0.1 | 0.8 | 98.8 | 100.0 |
| Commercial real-estate |  |  |  |  |  |  |
| Residential construction | — | — | 1.9 | 0.1 | 98.0 | 100.0 |
| Commercial construction | 0.6 | — | — | — | 99.4 | 100.0 |
| Land | 2.2 | — | 2.5 | 3.2 | 92.1 | 100.0 |
| Office | 1.1 | — | 0.3 | 1.4 | 97.2 | 100.0 |
| Industrial | 1.0 | — | 0.2 | 0.4 | 98.4 | 100.0 |
| Retail | 1.4 | — | — | 0.5 | 98.1 | 100.0 |
| Multi-family | 0.2 | — | — | 0.7 | 99.1 | 100.0 |
| Mixed use and other | 0.5 | — | 0.5 | 0.8 | 98.2 | 100.0 |
| Purchased non-covered commercial real-estate (1) | — | 27.9 | 3.7 | 8.2 | 60.2 | 100.0 |
| Total commercial real-estate | 0.8 | 0.5 | 0.4 | 0.9 | 97.4 | 100.0 |
| Home equity | 1.0 | — | 0.2 | 0.7 | 98.1 | 100.0 |
| Residential real estate | 3.4 | — | 0.2 | 1.2 | 95.2 | 100.0 |
| Purchased non-covered residential real estate(1) | — | 46.0 | — | 8.1 | 45.9 | 100.0 |
| Premium finance receivables |  |  |  |  |  |  |
| Commercial insurance loans | 0.7 | 0.3 | 0.3 | 0.9 | 97.8 | 100.0 |
| Life insurance loans | — | — | — | 0.3 | 99.7 | 100.0 |
| Purchased life insurance loans (1) | — | — | — | — | 100.0 | 100.0 |
| Consumer and other | 0.7 | — | 0.1 | 0.3 | 98.9 | 100.0 |
| Purchased non-covered consumer and other(1) | — | 19.8 | — | 8.3 | 71.9 | 100.0 |
| Total loans, net of unearned income, excluding covered loans | 0.6% | 0.2% | 0.2% | 0.8% | 98.2% | 100.0% |
| Covered loans | 2.9 | 11.5 | 2.1 | 2.3 | 81.2 | 100.0 |
| Total loans, net of unearned income | 0.7% | 0.5% | 0.2% | 0.8% | 97.8% | 100.0% |

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

As of June 30, 2014, only $30.6 million of all loans, excluding covered loans, or 0.2%, were 60 to 89 days past due and $85.8 million or 0.6%, were 30 to 59 days (or one payment) past due. As of March 31, 2014, $26.4 million of all loans, excluding covered loans, or 0.2%, were 60 to 89 days past due and $102.3 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 decreased $10.3 million since March 31, 2014.

The Company's home equity and residential loan portfolios continue to exhibit low delinquency ratios. Home equity loans at June 30, 2014 that are current with regard to the contractual terms of the loan agreement represent 98.5% of the total home equity portfolio. Residential real-estate loans, excluding PCI loans, at June 30, 2014 that are current with regards to the contractual terms of the loan agreements comprise 95.9% 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 June 30, 2014 | June 30, 2013 | Six Months Ended June 30, 2014 | June 30, 2013 |
| --- | ---: | ---: | ---: | ---: |
| Balance at beginning of period | **$90,124** | $128,633 | **$103,334** | $118,083 |
| Additions, net | **15,143** | 21,348 | **20,798** | 49,378 |
| Return to performing status | **(1,094)** | (817) | **(3,067)** | (817) |
| Payments received | **(3,083)** | (10,552) | **(6,813)** | (14,673) |
| Transfer to OREO and other repossessed assets | **(9,741)** | (5,271) | **(19,754)** | (12,161) |
| Charge-offs | **(4,602)** | (11,325) | **(9,376)** | (20,473) |
| Net change for niche loans (1) | **1,903** | (531) | **3,528** | 2,148 |
| **Balance at end of period** | **$88,650** | $121,485 | **$88,650** | $121,485 |

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

PCI loans are excluded from non-performing loans as they continue to earn interest income from the related accretable yield, independent of performance with contractual terms of the loan. See Note 7 of the Consolidated Financial Statements 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 June 30, 2014, 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 June 30, 2014 | June 30, 2013 | Six months ended June 30, 2014 | June 30, 2013 |
| --- | ---: | ---: | ---: | ---: |
| **Allowance for loan losses at beginning of period** | **$92,275** | $110,348 | **$96,922** | $107,351 |
| **Provision for credit losses** | **6,813** | 15,133 | **10,117** | 30,500 |
| **Other adjustments** | **(105)** | (309) | **(253)** | (538) |
| **Reclassification from (to) allowance for unfunded lending-related commitments** | **(146)** | 65 | **(164)** | (148) |
| **Charge-offs:** |  |  |  |  |
| Commercial | **2,384** | 1,093 | **3,032** | 5,633 |
| Commercial real-estate | **2,351** | 14,947 | **6,844** | 18,246 |
| Home equity | **730** | 1,785 | **2,997** | 4,182 |
| Residential real-estate | **689** | 517 | **915** | 2,245 |
| Premium finance receivables—commercial | **1,492** | 1,306 | **2,702** | 2,374 |
| Premium finance receivables—life insurance | **—** | — | **—** | — |
| Consumer and other | **213** | 128 | **386** | 257 |
| Total charge-offs | **7,859** | 19,776 | **16,876** | 32,937 |
| **Recoveries:** |  |  |  |  |
| Commercial | **270** | 268 | **587** | 563 |
| Commercial real-estate | **342** | 584 | **487** | 952 |
| Home equity | **122** | 171 | **379** | 333 |
| Residential real-estate | **74** | 18 | **205** | 23 |
| Premium finance receivables—commercial | **312** | 279 | **631** | 564 |
| Premium finance receivables—life insurance | **2** | — | **4** | 9 |
| Consumer and other | **153** | 61 | **214** | 170 |
| Total recoveries | **1,275** | 1,381 | **2,507** | 2,614 |
| **Net charge-offs** | **(6,584)** | (18,395) | **(14,369)** | (30,323) |
| **Allowance for loan losses at period end** | **$92,253** | $106,842 | **$92,253** | $106,842 |
| **Allowance for unfunded lending-related commitments at period end** | **884** | 3,563 | **884** | 3,563 |
| **Allowance for credit losses at period end** | **$93,137** | $110,405 | **$93,137** | $110,405 |
| **Annualized net charge-offs by category as a percentage of its own respective category’s average:** |  |  |  |  |
| Commercial | **0.24%** | 0.11% | **0.14%** | 0.35% |
| Commercial real-estate | **0.19** | 1.42 | **0.30** | 0.87 |
| Home equity | **0.34** | 0.85 | **0.74** | 1.01 |
| Residential real-estate | **0.35** | 0.26 | **0.21** | 0.59 |
| Premium finance receivables—commercial | **0.20** | 0.20 | **0.18** | 0.18 |
| Premium finance receivables—life insurance | **—** | — | **—** | — |
| Consumer and other | **0.14** | 0.15 | **0.20** | 0.09 |
| Total loans, net of unearned income, excluding covered loans | **0.19%** | 0.59% | **0.21%** | 0.49% |
| **Net charge-offs as a percentage of the provision for credit losses** | **96.62%** | 121.57% | **142.02%** | 99.42% |
| **Loans at period-end, excluding covered loans** | **$13,749,996** | $12,516,892 |  |  |
| **Allowance for loan losses as a percentage of loans at period end** | **0.67%** | 0.85% |  |  |
| **Allowance for credit losses as a percentage of loans at period end** | **0.68%** | 0.88% |  |  |

The allowance for credit losses, excluding the allowance for covered loan losses, is comprised of an allowance for loan losses, which is determined with respect to loans that we have originated, and an allowance for lending-related commitments. Our allowance for lending-related commitments is determined with respect to funds that we have committed to lend but for which funds have not yet been disbursed and is computed using a methodology similar to that used to determine the allowance for loan losses. The allowance for unfunded lending-related commitments totaled $884,000 as of June 30, 2014 compared to $3.6 million as of June 30, 2013. The decrease since the prior period was primarily attributable to the funding of one letter of credit in the third quarter of 2013 and the expiration of one letter of credit in the fourth quarter of 2013.

Additions to the allowance for loan losses are charged to earnings through the provision for credit losses. Charge-offs represent the amount of loans that have been determined to be uncollectible during a given period, and are deducted from the allowance for loan losses, and recoveries represent the amount of collections received from loans that had previously been charged off, and are credited to the allowance for loan losses. See Note 7 of the Consolidated Financial Statements presented under Item 1 of this report for further discussion of activity within the allowance for loan losses during the period and the relationship with respective loan balances for each loan category and the total loan portfolio, excluding covered loans.

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

The allowance for loan losses includes an element for estimated probable but undetected losses and for imprecision in the credit risk models used to calculate the allowance. 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 Consolidated Financial Statements presented under Item 1 of this report for further discussion of the specific impairment reserve and general reserve as it relates to the allowance for credit losses for each loan category and the total loan portfolio, excluding covered loans.

#### Specific Impairment Reserves:

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

At June 30, 2014, the Company had $137.2 million of impaired loans with $91.5 million of this balance requiring $10.3 million of specific impairment reserves. At March 31, 2014, the Company had $143.0 million of impaired loans with $86.4 million of this balance requiring $8.2 million of specific impairment reserves. The most significant fluctuations in impaired loans with specific impairment from March 31, 2014 to June 30, 2014 occurred within the office portfolio. The recorded investment in the office portfolio increased $5.7 million, which was primarily the result of two credit relationship with a recorded investment of $5.1 million becoming impaired and requiring a specific impairment reserve at June 30, 2014. See Note 7 of the Consolidated Financial Statements presented under Item 1 of this report for further discussion of impaired loans and the related specific impairment reserve.

#### General Reserves:

For loans with a credit risk rating of 1 through 7, 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 loss experience;
- changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off, and recovery practices not considered elsewhere in estimating credit losses;
- changes in national, regional, and local economic and business conditions and developments that affect the collectibility of the portfolio;
- changes in the nature and volume of the portfolio and in the terms of the loans;
- changes in the experience, ability, and depth of lending management and other relevant staff;
- changes in the volume and severity of past due loans, the volume of non-accrual loans, and the volume and severity of adversely classified or graded loans;
- changes in the quality of the bank’s loan review system;
- changes in the underlying collateral for collateral dependent loans;
- the existence and effect of any concentrations of credit, and changes in the level of such concentrations; and
- the effect of other external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in the bank’s existing portfolio.

In the second quarter of 2012, the Company modified its historical loss experience analysis 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:

The determination of the appropriate allowance for loan losses for premium finance receivables is based solely on the aging (collection status) of the portfolio. Due to the large number of generally smaller sized and homogenous credits in this portfolio, 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, however the Company’s markets have clearly been under stress. As of June 30, 2014, home equity loans and residential mortgages comprised 5% and 3%, respectively, of the Company’s total loan portfolio. At June 30, 2014, approximately 3.7% of all of the Company’s residential mortgage loans, excluding covered loans and PCI loans, and approximately 1.0% 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.

#### TDRs

At June 30, 2014, the Company had $88.1 million in loans modified in TDRs. The $88.1 million in TDRs represents 143 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 $92.5 million representing 143 credits at March 31, 2014 and decreased from $126.2 million representing 167 credits at June 30, 2013.

Concessions were granted on a case-by-case basis working with these borrowers to find modified terms that would assist them in retaining their businesses or their homes and attempt to keep these loans in an accruing status for the Company. Typical concessions include reduction of the interest rate on the loan to a rate considered lower than market and other modification of terms including forgiveness of a portion of the loan balance, extension of the maturity date, and/or modifications from principal and interest payments to interest-only payments for a certain period. See Note 7 of the Consolidated Financial Statements 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 TDR with a below market rate concession that becomes nonaccrual will remain classified by the Company as a TDR for its duration and will be included in the Company’s nonperforming loans. Each TDR was reviewed for impairment at June 30, 2014 and approximately $4.9 million of impairment was present and appropriately reserved for through the Company’s normal reserving methodology in the Company’s allowance for loan losses. Additionally, at June 30, 2014, the Company was committed to lend additional funds to borrowers totaling $786,000 under the contractual terms of TDRs.

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

*(Dollars in thousands)*

| Accruing TDRs: | June 30, 2014 | March 31, 2014 | June 30, 2013 |
| --- | ---: | ---: | ---: |
| Commercial | **$5,225** | $5,844 | $7,316 |
| Commercial real-estate | **63,178** | 64,726 | 82,072 |
| Residential real-estate and other | **3,796** | 4,052 | 4,422 |
| Total accruing TDRs | **$72,199** | $74,622 | $93,810 |
| **Non-accrual TDRs: (1)** |  |  |  |
| Commercial | **$1,192** | $1,434 | $1,904 |
| Commercial real-estate | **12,656** | 14,774 | 28,552 |
| Residential real-estate and other | **2,060** | 1,687 | 1,930 |
| Total non-accrual TDRs | **$15,908** | $17,895 | $32,386 |
| **Total TDRs:** |  |  |  |
| Commercial | **$6,417** | $7,278 | $9,220 |
| Commercial real-estate | **75,834** | 79,500 | 110,624 |
| Residential real-estate and other | **5,856** | 5,739 | 6,352 |
| Total TDRs | **$88,107** | $92,517 | $126,196 |
| **Weighted-average contractual interest rate of TDRs** | **4.04%** | 4.02% | 4.06% |

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

#### TDR Rollforward

The table below presents a summary of TDRs as of June 30, 2014 and June 30, 2013, and shows the changes in the balance during those periods:

| Three Months Ended June 30, 2014 (Dollars in thousands) | Commercial | Commercial Real-estate | Residential Real-estate and Other | Total |
| --- | ---: | ---: | ---: | ---: |
| Balance at beginning of period | **$7,278** | **$79,500** | **$5,739** | **$92,517** |
| Additions during the period | **—** | **2,020** | **220** | **2,240** |
| Reductions: |  |  |  |  |
| Charge-offs | **(17)** | **(19)** | **(73)** | **(109)** |
| Transferred to OREO and other repossessed assets | **(252)** | **(3,780)** | **—** | **(4,032)** |
| Removal of TDR loan status (1) | **(383)** | **—** | **—** | **(383)** |
| Payments received | **(209)** | **(1,887)** | **(30)** | **(2,126)** |
| **Balance at period end** | **$6,417** | **$75,834** | **$5,856** | **$88,107** |

| Three Months Ended June 30, 2013 (Dollars in thousands) | Commercial | Commercial Real-estate | Residential Real-estate and Other | Total |
| --- | ---: | ---: | ---: | ---: |
| Balance at beginning of period | $11,837 | $98,303 | $6,205 | $116,345 |
| Additions during the period | — | 14,067 | 401 | 14,468 |
| Reductions: |  |  |  |  |
| Charge-offs | (27) | (371) | (240) | (638) |
| Transferred to OREO and other repossessed assets | — | (670) | — | (670) |
| Removal of TDR loan status (1) | (2,231) | — | — | (2,231) |
| Payments received | (359) | (705) | (14) | (1,078) |
| **Balance at period end** | $9,220 | $110,624 | $6,352 | $126,196 |

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

| Six Months Ended June 30, 2014 (Dollars in thousands) | Commercial | Commercial Real estate | Residential Real estate and Other | Total |
| --- | ---: | ---: | ---: | ---: |
| Balance at beginning of period | **$7,388** | **$93,535** | **$6,180** | **$107,103** |
| Additions during the period | **88** | **7,177** | **220** | **7,485** |
| Reductions: |  |  |  |  |
| Charge-offs | **(23)** | **(3,732)** | **(479)** | **(4,234)** |
| Transferred to OREO | **(252)** | **(16,057)** | **—** | **(16,309)** |
| Removal of restructured loan status (1) | **(383)** | **—** | **—** | **(383)** |
| Payments received | **(401)** | **(5,089)** | **(65)** | **(5,555)** |
| **Balance at period end** | **$6,417** | **$75,834** | **$5,856** | **$88,107** |

| Six Months Ended June 30, 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 | 15,259 | 778 | 16,745 |
| Reductions: |  |  |  |  |
| Charge-offs | (2,169) | (1,743) | (257) | (4,169) |
| Transferred to OREO | (3,800) | (837) | (103) | (4,740) |
| Removal of restructured loan status (1) | (2,840) | — | — | (2,840) |
| Payments received | (674) | (4,470) | (129) | (5,273) |
| **Balance at period end** | $9,220 | $110,624 | $6,352 | $126,196 |

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

#### 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 tables 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 June 30, 2014 | June 30, 2013 | Six Months Ended June 30, 2014 | June 30, 2013 |
| --- | ---: | ---: | ---: | ---: |
| Balance at beginning of period | **$54,131** | $56,177 | **$50,454** | $62,891 |
| Disposal/resolved | **(6,155)** | (9,488) | **(14,360)** | (16,986) |
| Transfers in at fair value, less costs to sell | **12,801** | 7,262 | **27,371** | 9,390 |
| Additions from acquisition | **—** | 6,818 | **—** | 6,818 |
| Fair value adjustments | **(1,189)** | (3,744) | **(3,877)** | (5,088) |
| Balance at end of period | **$59,588** | $57,025 | **$59,588** | $57,025 |

*(Dollars in thousands)*

|  | Period End June 30, 2014 | March 31, 2014 | June 30, 2013 |
| --- | ---: | ---: | ---: |
| Residential real-estate | **$9,007** | $6,452 | $7,327 |
| Residential real-estate development | **3,216** | 3,500 | 6,950 |
| Commercial real-estate | **47,365** | 44,179 | 42,748 |
| Total | **$59,588** | $54,131 | $57,025 |

102

### LIQUIDITY

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

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

### INFLATION

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

### FORWARD-LOOKING STATEMENTS

This document contains, 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 2013 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;
- inaccurate assumptions in our analytical and forecasting models used to manage our loan portfolio;
- 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;
- adverse effects of failures by our vendors to provide agreed upon services in the manner and at the cost agreed, particularly our information technology vendors;
- increased costs as a result of protecting our customers from the impact of stolen debit card information;
- 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 expenses and delayed returns inherent in opening new branches and de novo banks;
- 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;
- a lowering of our credit rating;
- 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;
- the impact of heightened 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, 6,077 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 re-pricing periods and interest rate indices of the interest earning assets, interest bearing liabilities, and derivative financial instruments are different. Interest rate risk is the risk that changes in the level of market interest rates will result in disproportionate changes in the value of, and the net earnings generated from, the Company’s interest earning assets, interest bearing liabilities and derivative financial instruments. The Company continuously monitors not only the organization’s current net interest margin, but also the historical trends of these margins. In addition, management attempts to identify potential adverse changes in net interest income in future years as a result of interest rate fluctuations by performing simulation analysis of various interest rate environments. If a potential adverse change in net interest margin and/or net income is identified, management would take appropriate actions with its asset-liability structure to mitigate these potentially adverse situations. Please refer to Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for further discussion of the net interest margin.

Since the Company’s primary source of interest bearing liabilities is from customer deposits, the Company’s ability to manage the types and terms of such deposits is somewhat limited by customer preferences and local competition in the market areas in which the banks operate. The rates, terms and interest rate indices of the Company’s interest earning assets result primarily from the Company’s strategy of investing in loans and securities that permit the Company to limit its exposure to interest rate risk, together with credit risk, while at the same time achieving an acceptable interest rate spread.

The Company’s exposure to interest rate risk is reviewed on a regular basis by management and the Risk Management Committees of the boards of directors of the banks and the Company. The objective of the review is to measure the effect on net income and to adjust balance sheet and derivative financial instruments to minimize the inherent risk while at the same time maximize net interest income.

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 June 30, 2014, December 31, 2013 and June 30, 2013 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 |
| --- | ---: | ---: | ---: | ---: |
| **June 30, 2014** | **5.0%** | **2.4%** | **(4.0)%** | **(8.0)%** |
| December 31, 2013 | 5.0% | 2.4% | (5.0)% | (10.0)% |
| June 30, 2013 | 5.8% | 2.4% | (3.8)% | (8.1)% |

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, including the Company, to manage interest rate risk is to enter into derivative financial instruments. Derivative financial instruments include interest rate swaps, interest rate caps and floors, futures, forwards, option contracts and other financial instruments with similar characteristics. Additionally, the Company enters into commitments to fund certain mortgage loans (interest rate locks) to be sold into the secondary market and forward commitments for the future delivery of mortgage loans to third party investors. See Note 13 of the Consolidated Financial Statements presented under Item 1 of this report for further information on the Company’s derivative financial instruments.

During the second quarter of 2014, 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 economically hedge positions and 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 June 30, 2014.

## 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, 2013.

Filed Aug 8, 2014.
Source: SEC EDGAR, the filing index for accession 0001015328-14-000171. Last ingested by Listed: Nov 5, 2026, 14:04 ET. No prices; not investment advice.