# Wintrust Financial Corp: Form 10-Q for the period ended Jun 30, 2019

- Company: [Wintrust Financial Corp](/companies/wtfc.md) (CIK 1015328)
- Form: 10-Q
- Filed: 2019-08-09
- Accepted by EDGAR: Aug 9, 2019, 07:29 ET
- Period: 2019-06-30
- Accession: 0001015328-19-000144
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1015328/000101532819000144/wtfc-20190630x10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1015328/000101532819000144/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2019-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2019-04-01 to 2019-06-30 | $40.1m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 6 months, 2019-01-01 to 2019-06-30 | $79.4m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Interest expense | 3 months, 2019-04-01 to 2019-06-30 | $80.6m | us-gaap:InterestExpense |
| Interest expense | 6 months, 2019-01-01 to 2019-06-30 | $152.6m | us-gaap:InterestExpense |
| Income tax | 3 months, 2019-04-01 to 2019-06-30 | $28.7m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2019-01-01 to 2019-06-30 | $58.2m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2019-04-01 to 2019-06-30 | $81.5m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2019-01-01 to 2019-06-30 | $170.6m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2019-04-01 to 2019-06-30 | $1.38 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2019-01-01 to 2019-06-30 | $2.91 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2019-04-01 to 2019-06-30 | $1.40 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2019-01-01 to 2019-06-30 | $2.94 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2019-04-01 to 2019-06-30 | 57,361,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2019-01-01 to 2019-06-30 | 57,296,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2019-01-01 to 2019-06-30 | $22.2m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2019-01-01 to 2019-06-30 | $31.3m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 6 months, 2019-01-01 to 2019-06-30 | $32.4m | us-gaap:PaymentsOfDividends |
| Share repurchases | 6 months, 2019-01-01 to 2019-06-30 | $1.0m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Total assets | at 2019-06-30 | $33.64bn | us-gaap:Assets |
| Total liabilities | at 2019-06-30 | $30.19bn | us-gaap:Liabilities |
| Short-term borrowings | at 2019-06-30 | $10.2m | us-gaap:ShortTermBorrowings |
| Shareholders' equity | at 2019-06-30 | $3.45bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 158,448 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, 2019 compared with December 31, 2018 and June 30, 2018, and the results of operations for the three and six month periods ended June 30, 2019 and June 30, 2018, 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 2018 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, southern Wisconsin and northwest Indiana, and operates other financing businesses on a national basis and in Canada through several non-bank business units. Additionally, Wintrust offers a full array of wealth management services primarily to customers in the Chicago metropolitan area, southern Wisconsin and northwest Indiana.

### Overview

### Second Quarter Highlights

The Company recorded net income of $81.5 million for the second quarter of 2019 compared to $89.6 million in the second quarter of 2018. The results for the second quarter of 2019 demonstrate continued momentum on our operating strengths including steady loan and deposit growth and increased revenue from wealth management services. Combined with the noted continued loan growth, the improvement in net interest margin during the second quarter of 2019 compared to the same period of 2018 resulted in higher net interest income in the current period. Such improvement was offset by recognizing $24.6 million of provision for credit losses and $22.3 million of net charge-offs, of which $15.2 million of provision for credit losses and $18.4 million of net charge-offs related to three credits, as well as higher expenses as the Company continues to grow.

The Company increased its loan portfolio from $22.6 billion at June 30, 2018 and $23.8 billion at December 31, 2018 to $25.3 billion at June 30, 2019. The increase in the current quarter compared to the prior quarters was primarily a result of the Company’s growth in the commercial, commercial real estate, commercial premium finance receivables and life insurance premium finance receivables portfolios. For more information regarding changes in the Company’s loan portfolio, see Financial Condition – Interest Earning Assets and Note 6 - Loans of the Consolidated Financial Statements in Item 1 of this report.

The Company recorded net interest income of $266.2 million in the second quarter of 2019 compared to $238.2 million in the second quarter of 2018. The higher level of net interest income recorded in the second quarter of 2019 compared to the second quarter of 2018 resulted primarily from a $2.3 billion increase in average loans, and a substantial improvement in the yield on earning assets. This was partially offset by an increase in the average balance and cost of interest-bearing liabilities (see "Net Interest Income" for further detail).

Non-interest income totaled $98.2 million in the second quarter of 2019 compared to $95.2 million in the second quarter of 2018. This increase was primarily the result higher operating lease income partially offset by lower mortgage banking revenue (see “Non-Interest Income” for further detail).

Non-interest expense totaled $229.6 million in the second quarter of 2019, increasing $22.8 million, or 11%, compared to the second quarter of 2018. The increase compared to the second quarter of 2018 was primarily attributable to higher salary and employee benefit costs caused by the addition of employees from acquisitions and increased staffing as the Company grows, higher occupancy expenses and increased equipment expense (see “Non-Interest Expense” for further detail).

Management considers the maintenance of adequate liquidity to be important to the management of risk. During the second quarter of 2019, the Company continued its practice of maintaining appropriate funding capacity to provide the Company with adequate liquidity for its ongoing operations. In this regard, the Company benefited from its strong deposit base, a liquid short-term investment portfolio and its access to funding from a variety of external funding sources. At June 30, 2019, the Company had approximately $1.7 billion in overnight liquid funds and interest-bearing deposits with banks.

### RESULTS OF OPERATIONS

### Earnings Summary

The Company’s key operating measures and growth rates for the three and six months ended June 30, 2019, as compared to the same period last year, are shown below:

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

|  | Three months ended June 30, 2019 | June 30, 2018 | Percentage (%) or Basis Point (bp) Change |
| --- | ---: | ---: | ---: |
| Net income | **$81,466** | $89,580 | (9)% |
| Net income per common share—Diluted | **1.38** | 1.53 | (10) |
| Net revenue (1) | **364,360** | 333,403 | 9 |
| Net interest income | **266,202** | 238,170 | 12 |
| Net interest margin | **3.62%** | 3.61% | 1bp |
| Net interest margin - fully taxable-equivalent (non-GAAP) (2) | **3.64** | 3.63 | 1 |
| Net overhead ratio (3) | **1.64** | 1.57 | 7 |
| Return on average assets | **1.02** | 1.26 | (24) |
| Return on average common equity | **9.68** | 11.94 | (226) |
| Return on average tangible common equity (non-GAAP) (2) | **12.28** | 14.72 | (244) |

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

|  | Six months ended June 30, 2019 | June 30, 2018 | Percentage (%) or Basis Point (bp) Change |
| --- | ---: | ---: | ---: |
| Net income | **$170,612** | $171,561 | (1)% |
| Net income per common share—Diluted | **2.91** | 2.93 | (1) |
| Net revenue (1) | **708,003** | 644,164 | 10 |
| Net interest income | **528,188** | 463,252 | 14 |
| Net interest margin | **3.66%** | 3.58% | 8bp |
| Net interest margin - fully taxable equivalent (non-GAAP) (2) | **3.68%** | 3.60% | 8 |
| Net overhead ratio (3) | **1.68%** | 1.58% | 10 |
| Return on average assets | **1.09%** | 1.23% | (14) |
| Return on average common equity | **10.37%** | 11.62% | (125) |
| Return on average tangible common equity (non-GAAP) (2) | **13.19%** | 14.38% | (119) |
| **At end of period** |  |  |  |
| Total assets | **$33,641,769** | $29,464,588 | 14% |
| Total loans, excluding loans held-for-sale | **25,304,659** | 22,610,560 | 12 |
| Total loans, including loans held-for-sale | **25,699,634** | 23,066,272 | 11 |
| Total deposits | **27,518,815** | 24,365,479 | 13 |
| Total shareholders’ equity | **3,446,950** | 3,106,871 | 11 |
| Book value per common share (2) | **58.62** | 52.94 | 11 |
| Tangible common book value per share (2) | **47.48** | 43.50 | 9 |
| Market price per common share | **73.16** | 87.05 | (16) |
| Allowance for credit losses to total loans (4) | **0.64%** | 0.64% | 0bp |
| Non-performing loans to total loans | **0.45** | 0.37 | 8 |

#### (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 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 generally accepted accounting principles (“GAAP”) in the United States and prevailing practices in the banking industry. However, certain non-GAAP performance measures and ratios are used by management to evaluate and measure the Company’s performance. These include taxable-equivalent net interest income (including its individual components), taxable-equivalent net interest margin (including its individual components), the taxable-equivalent efficiency ratio, tangible common equity ratio, tangible book value per common 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 Company's 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 basis. In this non-GAAP presentation, net interest income is adjusted to reflect tax-exempt interest income on an equivalent before-tax basis using tax rates effective as of the end of the period. This measure ensures comparability of net interest income arising from both taxable and tax-exempt sources. Net interest income on a fully taxable-equivalent 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)*

| Reconciliation of Non-GAAP Net Interest Margin and Efficiency Ratio | Three Months Ended June 30, 2019 | June 30, 2018 | Six Months Ended June 30, 2019 | June 30, 2018 |
| --- | ---: | ---: | ---: | ---: |
| **(A) Interest Income (GAAP)** | **$346,814** | $284,047 | **$680,784** | $545,252 |
| Taxable-equivalent adjustment: |  |  |  |  |
| - Loans | **1,031** | 812 | **2,065** | 1,482 |
| - Liquidity Management Assets | **568** | 566 | **1,133** | 1,097 |
| - Other Earning Assets | **1** | 1 | **3** | 4 |
| **(B) Interest Income (non-GAAP)** | **$348,414** | $285,426 | **$683,985** | $547,835 |
| **(C) Interest Expense (GAAP)** | **80,612** | 45,877 | **152,596** | 82,000 |
| **(D) Net Interest Income (GAAP) (A minus C)** | **266,202** | 238,170 | **528,188** | 463,252 |
| **(E) Net Interest Income, fully taxable-equivalent (non-GAAP) (B minus C)** | **267,802** | 239,549 | **531,389** | 465,835 |
| **Net interest margin (GAAP)** | **3.62%** | 3.61% | **3.66%** | 3.58% |
| **Net interest margin, fully taxable-equivalent (non-GAAP)** | **3.64** | 3.63 | **3.68** | 3.60 |
| (F) Non-interest income | **$98,158** | $95,233 | **$179,815** | $180,912 |
| (G) Gains (losses) on investment securities, net | **864** | 12 | **2,228** | (339) |
| (H) Non-interest expense | **229,607** | 206,769 | **443,981** | 401,118 |
| **Efficiency ratio (H/(D+F-G))** | **63.17%** | 62.02% | **62.91%** | 62.24% |
| **Efficiency ratio (non-GAAP) (H/(E+F-G))** | **62.89%** | 61.76% | **62.62%** | 61.99% |
| **Reconciliation of Non-GAAP Tangible Common Equity ratio** |  |  |  |  |
| Total shareholders’ equity | **$3,446,950** | $3,106,871 |  |  |
| Less: Non-convertible preferred stock | **(125,000)** | (125,000) |  |  |
| Less: Intangible assets | **(631,499)** | (531,371) |  |  |
| (I) Total tangible common shareholders’ equity | **$2,690,451** | $2,450,500 |  |  |
| (J) Total assets | **$33,641,769** | $29,464,588 |  |  |
| Less: Intangible assets | **(631,499)** | (531,371) |  |  |
| (K) Total tangible assets | **$33,010,270** | $28,933,217 |  |  |
| **Common equity to assets ratio (GAAP) (L/J)** | **9.9%** | 10.1% |  |  |
| **Tangible common equity ratio (non-GAAP) (I/K)** | **8.2%** | 8.5% |  |  |
| **Reconciliation of tangible book value per share** |  |  |  |  |
| Total shareholders’ equity | **$3,446,950** | $3,106,871 |  |  |
| Less: Preferred stock | **(125,000)** | (125,000) |  |  |
| (L) Total common equity | **$3,321,950** | $2,981,871 |  |  |
| (M) Actual common shares outstanding | **56,668** | 56,329 |  |  |
| **Book value per common share (L/M)** | **$58.62** | $52.94 |  |  |
| **Tangible common book value per share (non-GAAP) (I/M)** | **$47.48** | $43.50 |  |  |

| Reconciliation of non-GAAP return on average tangible common equity |  |  |  |  |
| --- | ---: | ---: | ---: | ---: |
| (N) Net income applicable to common shares | **$79,416** | $87,530 | **166,512** | 167,461 |
| Add: Intangible asset amortization | **2,957** | 997 | **5,899** | 2,001 |
| Less: Tax effect of intangible asset amortization | **(771)** | (263) | **(1,502)** | (506) |
| After-tax intangible asset amortization | **2,186** | 734 | **4,397** | 1,495 |
| (O) Tangible net income applicable to common shares (non-GAAP) | **81,602** | 88,264 | **170,909** | 168,956 |
| Total average shareholders' equity | **3,414,340** | 3,064,154 | **3,362,000** | 3,030,062 |
| Less: Average preferred stock | **(125,000)** | (125,000) | **(125,000)** | (125,000) |
| (P) Total average common shareholders' equity | **3,289,340** | 2,939,154 | **3,237,000** | 2,905,062 |
| Less: Average intangible assets | **(624,794)** | (533,496) | **(623,524)** | (535,077) |
| (Q) Total average tangible common shareholders’ equity (non-GAAP) | **2,664,546** | 2,405,658 | **2,613,476** | 2,369,985 |
| **Return on average common equity, annualized (N/P)** | **9.68%** | 11.94% | **10.37%** | 11.62% |
| **Return on average tangible common equity, annualized (non-GAAP) (O/Q)** | **12.28%** | 14.72% | **13.19%** | 14.38% |

57

### 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 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 56 of the Company’s 2018 Form 10-K.

### Net Income

Net income for the quarter ended June 30, 2019 totaled $81.5 million, a decrease of $8.1 million, or 9%, compared to the quarter ended June 30, 2018. On a per share basis, net income for the second quarter of 2019 totaled $1.38 per diluted common share compared to $1.53 for the second quarter of 2018.

The most significant factors impacting net income for the second quarter of 2019 as compared to the same period in the prior year include an increase in the provision for credit losses and an increase in salaries and employee benefits expense partially offset by an increase in net interest income. See "Net Interest Income", "Non-interest Income", and "Non-interest Expense" for further detail.

### 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.

#### Quarter Ended June 30, 2019 compared to the Quarters Ended March 31, 2019 and June 30, 2018

The following table presents a summary of the Company’s average balances, net interest income and related net interest margins, including a calculation on a fully taxable equivalent basis, for the second quarter of 2019 as compared to the first quarter of 2019 (sequential quarters) and second quarter of 2018 (linked quarters):

*(Dollars in thousands)*

|  | Average Balance for three months ended, June 30, 2019 | March 31, 2019 | June 30, 2018 | Interest for three months ended, June 30, 2019 | March 31, 2019 | June 30, 2018 | Yield/Rate for three months ended, June 30, 2019 | March 31, 2019 | June 30, 2018 |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Interest-bearing deposits with banks and cash equivalents(1) | **$893,332** | $897,629 | $759,425 | **$5,206** | $5,300 | $3,244 | **2.34%** | 2.39% | 1.71% |
| Investment securities (2) | **3,653,580** | 3,630,577 | 2,890,828 | **28,290** | 28,521 | 20,454 | **3.11** | 3.19 | 2.84 |
| FHLB and FRB stock | **105,491** | 94,882 | 115,119 | **1,439** | 1,355 | 1,455 | **5.47** | 5.79 | 5.07 |
| Liquidity management assets(3)(8) | **$4,652,403** | $4,623,088 | $3,765,372 | **$34,935** | $35,176 | $25,153 | **3.01%** | 3.09% | 2.68% |
| Other earning assets(3)(4)(8) | **15,719** | 13,591 | 21,244 | **184** | 165 | 172 | **4.68** | 4.91 | 3.24 |
| Mortgage loans held-for-sale | **281,732** | 188,190 | 403,967 | **3,104** | 2,209 | 4,226 | **4.42** | 4.76 | 4.20 |
| Loans, net of unearned income(3)(5)(8) | **24,553,263** | 23,880,916 | 22,283,541 | **310,191** | 298,021 | 255,875 | **5.07** | 5.06 | 4.61 |
| Total earning assets(8) | **$29,503,117** | $28,705,785 | $26,474,124 | **$348,414** | $335,571 | $285,426 | **4.74%** | 4.74% | 4.32% |
| Allowance for loan losses | **(164,231)** | (157,782) | (147,192) |  |  |  |  |  |  |
| Cash and due from banks | **273,679** | 283,019 | 270,240 |  |  |  |  |  |  |
| Other assets | **2,443,204** | 2,385,149 | 1,970,407 |  |  |  |  |  |  |
| Total assets | **$32,055,769** | $31,216,171 | $28,567,579 |  |  |  |  |  |  |
| NOW and interest bearing demand deposits | **$2,878,021** | $2,803,338 | $2,295,268 | **$5,553** | $4,613 | $1,901 | **0.77%** | 0.67% | 0.33% |
| Wealth management deposits | **2,605,690** | 2,614,035 | 2,365,191 | **7,091** | 7,000 | 6,992 | **1.09** | 1.09 | 1.19 |
| Money market accounts | **6,095,285** | 5,915,525 | 4,883,645 | **21,451** | 19,460 | 8,111 | **1.41** | 1.33 | 0.67 |
| Savings accounts | **2,752,828** | 2,715,422 | 2,702,665 | **4,959** | 4,249 | 2,709 | **0.72** | 0.63 | 0.40 |
| Time deposits | **5,322,384** | 5,267,796 | 4,557,187 | **27,970** | 25,654 | 15,580 | **2.11** | 1.98 | 1.37 |
| Interest-bearing deposits | **$19,654,208** | $19,316,116 | $16,803,956 | **$67,024** | $60,976 | $35,293 | **1.37%** | 1.29% | 0.84% |
| Federal Home Loan Bank advances | **869,812** | 594,335 | 1,006,407 | **4,193** | 2,450 | 4,263 | **1.93** | 1.67 | 1.70 |
| Other borrowings | **419,064** | 465,571 | 240,066 | **3,525** | 3,633 | 1,698 | **3.37** | 3.16 | 2.84 |
| Subordinated notes | **220,771** | 139,217 | 139,125 | **2,806** | 1,775 | 1,787 | **5.08** | 5.10 | 5.14 |
| Junior subordinated debentures | **253,566** | 253,566 | 253,566 | **3,064** | 3,150 | 2,836 | **4.78** | 4.97 | 4.42 |
| Total interest-bearing liabilities | **$21,417,421** | $20,768,805 | $18,443,120 | **$80,612** | $71,984 | $45,877 | **1.51%** | 1.40% | 1.00% |
| Non-interest bearing deposits | **6,487,627** | 6,444,378 | 6,539,731 |  |  |  |  |  |  |
| Other liabilities | **736,381** | 693,910 | 520,574 |  |  |  |  |  |  |
| Equity | **3,414,340** | 3,309,078 | 3,064,154 |  |  |  |  |  |  |
| Total liabilities and shareholders’ equity | **$32,055,769** | $31,216,171 | $28,567,579 |  |  |  |  |  |  |
| Interest rate spread(6)(8) |  |  |  |  |  |  | **3.23%** | 3.34% | 3.32% |
| Less: Fully tax-equivalent adjustment |  |  |  | **(1,600)** | (1,601) | (1,379) | **(0.02)** | (0.02) | (0.02) |
| Net free funds/contribution(7) | **$8,085,696** | $7,936,980 | $8,031,004 |  |  |  | **0.41** | 0.38 | 0.31 |
| Net interest income/ margin (GAAP)(8) |  |  |  | **$266,202** | $261,986 | $238,170 | **3.62%** | 3.70% | 3.61% |
| Fully taxable-equivalent adjustment |  |  |  | **1,600** | 1,601 | 1,379 | **0.02** | 0.02 | 0.02 |
| Net interest income/margin, fully taxable-equivalent (non-GAAP)(8) |  |  |  | **$267,802** | $263,587 | $239,549 | **3.64%** | 3.72% | 3.63% |

*(1) Includes interest-bearing deposits with banks, federal funds sold and securities purchased under resale agreements.*

*(2) Investment securities includes investment securities classified as available-for-sale and held-to-maturity, and equity securities with readily determinable fair values. Equity securities without readily determinable fair values are included within other assets.*

*(3) Interest income on tax-advantaged loans, trading securities and investment securities reflects a tax-equivalent adjustment based on the marginal federal corporate tax rate in effect as of the applicable period. The total adjustments for the three months ended June 30, 2019, March 31, 2019 and June 30, 2018 were $1.6 million, $1.6 million and $1.4 million, respectively.*

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

#### (5) Loans, net of unearned income, include non-accrual loans.

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

*(7) 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.*

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

For the second quarter of 2019, net interest income totaled $266.2 million, an an increase of $4.2 million as compared to the first quarter of 2019, and an increase of $28.0 million as compared to the second quarter of 2018. Net interest margin was 3.62% (3.64% on a fully taxable-equivalent basis, non-GAAP) during the second quarter of 2019 compared to 3.70% (3.72% on a fully taxable-equivalent basis, non-GAAP) during the first quarter of 2019, and 3.61% (3.63% on a fully taxable-equivalent basis, non-GAAP) during the second quarter of 2018.

#### Six months ended June 30, 2019 compared to six months ended June 30, 2018

The following table presents a summary of the Company’s net interest income and related net interest margin, including a calculation on a fully taxable equivalent basis, for the six months ended June 30, 2019 compared to the six months ended June 30, 2018:

*(Dollars in thousands)*

|  | Average Balance for six months ended, June 30, 2019 | June 30, 2018 | Interest for six months ended, June 30, 2019 | June 30, 2018 | Yield/Rate for six months ended, June 30, 2019 | June 30, 2018 |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Interest-bearing deposits with banks and cash equivalents(1) | **$895,497** | $754,725 | **$10,506** | $6,040 | **2.37%** | 1.61% |
| Investment securities (2) | **3,642,142** | 2,891,718 | **56,811** | 40,113 | **3.15** | 2.80 |
| FHLB and FRB stock | **100,187** | 110,293 | **2,794** | 2,753 | **5.62** | 5.04 |
| Liquidity management assets(3)(8) | **$4,637,826** | $3,756,736 | **$70,111** | $48,906 | **3.05%** | 2.63% |
| Other earning assets(3)(4)(8) | **14,661** | 24,390 | **349** | 346 | **4.79** | 2.86 |
| Mortgage loans held-for-sale | **235,220** | 342,914 | **5,313** | 7,044 | **4.55** | 4.14 |
| Loans, net of unearned income(3)(5)(8) | **24,218,946** | 21,999,022 | **608,212** | 491,539 | **5.06** | 4.51 |
| Total earning assets(8) | **$29,106,653** | $26,123,062 | **$683,985** | $547,835 | **4.74%** | 4.23% |
| Allowance for loan losses | **(161,024)** | (145,161) |  |  |  |  |
| Cash and due from banks | **278,324** | 262,408 |  |  |  |  |
| Other assets | **2,414,336** | 1,950,374 |  |  |  |  |
| Total assets | **$31,638,289** | $28,190,683 |  |  |  |  |
| NOW and interest bearing demand deposits | **$2,840,886** | $2,275,589 | **$10,166** | $3,286 | **0.72%** | 0.29% |
| Wealth management deposits | **2,609,839** | 2,307,983 | **14,091** | 12,433 | **1.09** | 1.09 |
| Money market accounts | **6,005,902** | 4,703,135 | **40,911** | 12,778 | **1.37** | 0.55 |
| Savings accounts | **2,734,228** | 2,757,911 | **9,208** | 5,440 | **0.68** | 0.40 |
| Time deposits | **5,295,241** | 4,440,299 | **53,624** | 27,905 | **2.04** | 1.27 |
| Interest-bearing deposits | **$19,486,096** | $16,484,917 | **$128,000** | $61,842 | **1.32%** | 0.76% |
| FHLB advances | **732,834** | 939,978 | **6,643** | 7,902 | **1.83** | 1.70 |
| Other borrowings | **442,189** | 251,532 | **7,158** | 3,397 | **3.26** | 2.72 |
| Subordinated notes | **180,219** | 139,110 | **4,581** | 3,560 | **5.08** | 5.12 |
| Junior subordinated notes | **253,566** | 253,566 | **6,214** | 5,299 | **4.88** | 4.16 |
| Total interest-bearing liabilities | **$21,094,904** | $18,069,103 | **$152,596** | $82,000 | **1.46%** | 0.91% |
| Non-interest bearing deposits | **6,466,122** | 6,589,511 |  |  |  |  |
| Other liabilities | **715,263** | 502,007 |  |  |  |  |
| Equity | **3,362,000** | 3,030,062 |  |  |  |  |
| Total liabilities and shareholders’ equity | **$31,638,289** | $28,190,683 |  |  |  |  |
| Interest rate spread(6)(8) |  |  |  |  | **3.28%** | 3.32% |
| Less: Fully tax-equivalent adjustment |  |  | **(3,201)** | (2,583) | **(0.02)** | (0.02) |
| Net free funds/contribution(7) | **$8,011,749** | $8,053,959 |  |  | **0.40** | 0.28 |
| Net interest income/ margin (GAAP)(8) |  |  | **$528,188** | $463,252 | **3.66%** | 3.58% |
| Fully taxable-equivalent adjustment |  |  | **3,201** | 2,583 | **0.02** | 0.02 |
| Net interest income/ margin, fully taxable-equivalent (non-GAAP)(8) |  |  | **$531,389** | $465,835 | **3.68%** | 3.60% |

*(1) Includes interest-bearing deposits with banks, federal funds sold and securities purchased under resale agreements.*

*(2) Investment securities includes investment securities classified as available-for-sale and held-to-maturity, and equity securities with readily determinable fair values. Equity securities without readily determinable fair values are included within other assets.*

*(3) Interest income on tax-advantaged loans, trading securities and investment securities reflects a tax-equivalent adjustment based on the marginal federal corporate tax rate in effect as of the applicable period. The total adjustments for the six months ended June 30, 2019 and June 30, 2018 were $3.2 million and $2.6 million respectively.*

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

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

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

*(7) 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.*

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

For the six months ended June 30, 2019, net interest income totaled $528.2 million, an increase of $64.9 million as compared to the first six months of 2018. Net interest margin was 3.66% (3.68% on a fully taxable-equivalent basis, non-GAAP) for the six months ended June 30, 2019 compared to 3.58% (3.60% on a fully taxable-equivalent basis, non-GAAP) for the same period of 2018 . The increase in net interest margin compared to the first six months of 2018 is primarily the result of an increase in the rate on interest earning assets partially offset by an increase in the rate of interest bearing liabilities.

#### Analysis of Changes in Net Interest Income (GAAP)

The following table presents an analysis of the changes in the Company’s net interest income comparing the three month periods ended June 30, 2019 to March 31, 2019 and June 30, 2018, and six month periods ended June 30, 2019 and 2018. The reconciliations set forth the changes in the GAAP-derived net interest income as a result of changes in volumes, changes in rates and differing number of days in each period:

*(In thousands)*

|  | Second Quarter of 2019 Compared to First Quarter of 2019 | Second Quarter of 2019 Compared to Second Quarter of 2018 | First Six Months of 2019 Compared to First Six Months of 2018 |
| --- | ---: | ---: | ---: |
| Net interest income (GAAP) for comparative period | $261,986 | $238,170 | $463,252 |
| Change due to mix and growth of earning assets and interest-bearing liabilities (volume) | 6,619 | 24,387 | 48,599 |
| Change due to interest rate fluctuations (rate) | (5,282) | 3,645 | 16,337 |
| Change due to number of days in each period | 2,879 | — | — |
| Net interest income (GAAP) for the period ended June 30, 2019 | $266,202 | $266,202 | $528,188 |
| Fully taxable-equivalent adjustment | 1,600 | 1,600 | 3,201 |
| Net interest income, fully taxable-equivalent (non-GAAP) | $267,802 | $267,802 | $531,389 |

61

### Non-interest Income

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

*(Dollars in thousands)*

|  | Three Months Ended June 30, 2019 | June 30, 2018 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Brokerage | **$4,764** | $5,784 | $(1,020) | (18)% |
| Trust and asset management | **19,375** | 16,833 | 2,542 | 15 |
| Total wealth management | **24,139** | 22,617 | 1,522 | 7 |
| Mortgage banking | **37,411** | 39,834 | (2,423) | (6) |
| Service charges on deposit accounts | **9,277** | 9,151 | 126 | 1 |
| Gains on investment securities, net | **864** | 12 | 852 | NM |
| Fees from covered call options | **643** | 669 | (26) | (4) |
| Trading (losses) gains, net | **(44)** | 124 | (168) | NM |
| Operating lease income, net | **11,733** | 8,746 | 2,987 | 34 |
| Other: |  |  |  |  |
| Interest rate swap fees | **3,224** | 3,829 | (605) | (16) |
| BOLI | **1,149** | 1,544 | (395) | NM |
| Administrative services | **1,009** | 1,205 | (196) | (16) |
| Foreign currency remeasurement gains (losses) | **113** | (544) | 657 | NM |
| Early pay-offs of capital leases | **—** | 554 | (554) | (100) |
| Miscellaneous | **8,640** | 7,492 | 1,148 | 15 |
| Total Other | **14,135** | 14,080 | 55 | — |
| **Total Non-interest Income** | **$98,158** | $95,233 | $2,925 | 3% |

*(Dollars in thousands)*

|  | Six Months Ended June 30, 2019 | June 30, 2018 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Brokerage | **$9,280** | $11,815 | $(2,535) | (21)% |
| Trust and asset management | **38,836** | 33,788 | 5,048 | 15 |
| Total wealth management | **48,116** | 45,603 | 2,513 | 6 |
| Mortgage banking | **55,569** | 70,794 | (15,225) | (22) |
| Service charges on deposit accounts | **18,125** | 18,008 | 117 | 1 |
| Gains (losses) on investment securities, net | **2,228** | (339) | 2,567 | NM |
| Fees from covered call options | **2,427** | 2,266 | 161 | 7 |
| Trading (losses) gains, net | **(215)** | 227 | (442) | NM |
| Operating lease income, net | **22,529** | 18,437 | 4,092 | 22 |
| Other: |  |  |  |  |
| Interest rate swap fees | **6,055** | 6,066 | (11) | — |
| BOLI | **2,740** | 2,258 | 482 | 21 |
| Administrative services | **2,039** | 2,266 | (227) | (10) |
| Foreign currency remeasurement gains (losses) | **577** | (872) | 1,449 | NM |
| Early pay-offs of capital leases | **5** | 587 | (582) | (99) |
| Miscellaneous | **19,620** | 15,611 | 4,009 | 26 |
| Total Other | **31,036** | 25,916 | 5,120 | 20 |
| **Total Non-interest Income** | **$179,815** | $180,912 | $(1,097) | (1)% |

#### NM - Not meaningful.

Notable contributions to the change in non-interest income are as follows:

Wealth management revenue during the current period increased as compared to the second quarter of 2018 primarily attributable to higher fees on tax-deferred like-kind exchange services and market appreciation related to managed money accounts with fees based on assets under management. Wealth management revenue is comprised of the trust and asset management revenue of The Chicago Trust Company and Great Lakes Advisors, the brokerage commissions, managed money fees and insurance product commissions at Wintrust Investments and fees from tax-deferred like-kind exchange services provided by CDEC.

Mortgage banking revenue decreased in the second quarter of 2019 as compared to the second quarter of 2018 resulting primarily from negative fair value adjustments recognized on mortgage servicing rights related to changes in valuation assumptions and pay-offs partially offset by higher production margins. Mortgage loans originated for sale totaled $1.2 billion in the second quarter of 2019 as compared to $1.1 billion in the second quarter of 2018. Mortgage banking revenue includes revenue from activities related to originating, selling and servicing residential real estate loans for the secondary market. Mortgage revenue is also impacted by changes in the fair value of mortgage servicing rights ("MSRs"). The Company records MSRs at fair value on a recurring basis.

During the second quarter of 2019, the fair value of the mortgage servicing rights portfolio increased as retained servicing rights led to capitalization of $9.8 million partially offset by negative fair value adjustments of $4.3 million and a reduction in value due to payoffs and paydowns of the existing portfolio. The Company purchased an option at the beginning of the second quarter of 2019 to economically hedge a portion of the potential negative fair value changes recorded in earnings related to its mortgage servicing portfolio. The option was exercised during the second quarter resulting in a net gain of $920,000 which was recorded in mortgage banking revenue.

The table below presents additional selected information regarding mortgage banking revenue for the respective periods.

*(Dollars in thousands)*

| Originations: | Three Months Ended June 30, 2019 | June 30, 2018 | Six Months Ended June 30, 2019 | June 30, 2018 |
| --- | ---: | ---: | ---: | ---: |
| Retail originations | **$669,510** | $769,279 | **$1,035,112** | $1,309,190 |
| Correspondent originations | **182,966** | 122,986 | **331,066** | 249,450 |
| Veterans First originations | **301,324** | 204,108 | **466,086** | 316,585 |
| Total originations for sale (A) | **$1,153,800** | $1,096,373 | **$1,832,264** | $1,875,225 |
| Originations for investment | **106,237** | 68,234 | **199,926** | 111,483 |
| Total originations | **$1,260,037** | $1,164,607 | **$2,032,190** | $1,986,708 |
| Purchases as a percentage of originations for sale | **63%** | 80% | **64%** | 77% |
| Refinances as a percentage of originations for sale | **37** | 20 | **36** | 23 |
| Total | **100%** | 100% | **100%** | 100% |
| **Production Margin:** |  |  |  |  |
| Production revenue (B) (1) | **$29,895** | $27,814 | **$46,501** | $48,340 |
| Production margin (B/A) | **2.59%** | 2.54% | **2.54%** | 2.58% |
| **Mortgage Servicing:** |  |  |  |  |
| Loans serviced for others (C) | **$7,515,186** | $5,228,699 |  |  |
| MSRs, at fair value (D) | **72,850** | 63,194 |  |  |
| Percentage of MSRs to loans serviced for others (D/C) | **0.97%** | 1.21% |  |  |
| **Components of Mortgage Banking Revenue:** |  |  |  |  |
| Production revenue | **$29,895** | $27,814 | **$46,501** | $48,340 |
| MSR current period capitalization | **9,802** | 7,889 | **16,382** | 12,048 |
| MSR collection of expected cash flow - paydowns | **(457)** | (639) | **(962)** | (1,082) |
| MSR collection of expected cash flow - payoffs | **(3,619)** | (725) | **(5,111)** | (1,484) |
| MSR changes in fair value model assumptions | **(4,305)** | 2,097 | **(13,049)** | 6,230 |
| Gain on derivative contract held as an economic hedge, net | **920** | — | **920** | — |
| MSR valuation adjustment, net of gain on derivative contract held as an economic hedge | **(3,385)** | 2,097 | **(12,129)** | 6,230 |
| Servicing income | **5,460** | 3,505 | **10,920** | 6,410 |
| Other | **(285)** | (107) | **(32)** | 332 |
| Total mortgage banking revenue | **$37,411** | $39,834 | **$55,569** | $70,794 |

*(1) Production revenue represents revenue earned from the origination and subsequent sale of mortgages, including gains on loans sold and fees from originations, processing and other related activities, and excludes servicing fees, changes in fair value of servicing rights and changes to the mortgage recourse obligation.*

The Company has typically written call options with terms of less than three months against certain U.S. Treasury and agency securities held in its portfolio for liquidity and other purposes. Management has entered into these transactions with the goal of economically hedging security positions and enhancing its overall return on its investment portfolio by using fees generated from these options to compensate for net interest margin compression. These option transactions are designed to mitigate overall interest rate risk and do not qualify as hedges pursuant to accounting guidance. There were no outstanding call option contracts at June 30, 2019 and June 30, 2018.

Operating lease income increased as compared to the second quarter of 2018 resulting primarily from increases in rental income and net gains on sale of lease assets.

### Non-interest Expense

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, 2019 | June 30, 2018 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Salaries | **$75,360** | $66,976 | $8,384 | 13% |
| Commissions and incentive compensation | **36,486** | 35,907 | 579 | 2 |
| Benefits | **21,886** | 18,792 | 3,094 | 16 |
| Total salaries and employee benefits | **133,732** | 121,675 | 12,057 | 10 |
| Equipment | **12,759** | 10,527 | 2,232 | 21 |
| Operating lease equipment depreciation | **8,768** | 6,940 | 1,828 | 26 |
| Occupancy, net | **15,921** | 13,663 | 2,258 | 17 |
| Data processing | **6,204** | 8,752 | (2,548) | (29) |
| Advertising and marketing | **12,845** | 11,782 | 1,063 | 9 |
| Professional fees | **6,228** | 6,484 | (256) | (4) |
| Amortization of other intangible assets | **2,957** | 997 | 1,960 | NM |
| FDIC insurance | **4,127** | 4,598 | (471) | (10) |
| OREO expense, net | **1,290** | 980 | 310 | 32 |
| Other: |  |  |  |  |
| Commissions—3rd party brokers | **749** | 1,174 | (425) | (36) |
| Postage | **2,606** | 2,567 | 39 | 2 |
| Miscellaneous | **21,421** | 16,630 | 4,791 | 29 |
| Total other | **24,776** | 20,371 | 4,405 | 22 |
| **Total Non-interest Expense** | **$229,607** | $206,769 | $22,838 | 11% |

*(Dollars in thousands)*

| Salaries and employee benefits: | Six months ended June 30, 2019 | June 30, 2018 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Salaries | **$149,397** | $128,962 | $20,435 | 16% |
| Commissions and incentive compensation | **68,085** | 67,856 | 229 | — |
| Benefits | **41,973** | 37,293 | 4,680 | 13 |
| Total salaries and employee benefits | **259,455** | 234,111 | 25,344 | 11 |
| Equipment | **24,529** | 20,599 | 3,930 | 19 |
| Operating lease equipment depreciation | **17,087** | 13,473 | 3,614 | 27 |
| Occupancy, net | **32,166** | 27,430 | 4,736 | 17 |
| Data processing | **13,729** | 17,245 | (3,516) | (20) |
| Advertising and marketing | **22,703** | 20,606 | 2,097 | 10 |
| Professional fees | **11,784** | 13,133 | (1,349) | (10) |
| Amortization of other intangible assets | **5,899** | 2,001 | 3,898 | NM |
| FDIC insurance | **7,703** | 8,960 | (1,257) | (14) |
| OREO expense, net | **1,922** | 3,906 | (1,984) | (51) |
| Other: |  |  |  |  |
| Commissions—3rd party brokers | **1,467** | 2,426 | (959) | (40) |
| Postage | **5,056** | 4,433 | 623 | 14 |
| Miscellaneous | **40,481** | 32,795 | 7,686 | 23 |
| Total other | **47,004** | 39,654 | 7,350 | 19 |
| **Total Non-interest Expense** | **$443,981** | $401,118 | $42,863 | 11% |

#### NM - Not meaningful.

Notable contributions to the change in non-interest expense are as follows:

Salaries and employee benefits expense increased in the second quarter of 2019 compared to the second quarter of 2018 due to increased staffing as the Company grows, including additional salaries from the ROC acquisition as well as a full quarter impact of annual merit increases that were effective in February. Commissions and incentive compensation increased in the current quarter primarily related to the increased volume of mortgage originations for sale. The increase in benefits expense relates primarily to increases in employee insurance expense in the current quarter.

Other miscellaneous expense increased during the second quarter of 2019 compared to the second quarter of 2018 as a result of various other expenses. Miscellaneous expense includes ATM expenses, correspondent bank charges, directors' fees, telephone, travel and entertainment, corporate insurance, dues and subscriptions, problem loan expenses, operating losses and lending origination costs that are not deferred.

Occupancy expense increased in the second quarter of 2019 compared to the second quarter of 2018 primarily as a result of higher costs related to additional locations. Occupancy expense includes depreciation on premises, real estate taxes and insurance, utilities and maintenance of premises, as well as net rent expense for leased premises.

Equipment expense increased in the second quarter of 2019 compared to the second quarter of 2018 as a result of higher software license fees, software and computer depreciation expense, and maintenance and repairs.

Data processing expense decreased in the second quarter of 2019 as compared to the second quarter of 2018 primarily due to the realization of a full quarter impact of favorable contract negotiations on various data processing contracts which were completed in the first quarter of 2019.

### Income Taxes

The Company recorded income tax expense of $28.7 million in the second quarter of 2019 compared to $32.0 million in the second quarter of 2018. The effective tax rates were 26.06% in the second quarter of 2019 compared to 26.33% in the second quarter of 2018. During the first six months of 2019, the Company recorded income tax expense of $58.2 million compared to $58.1 million for the first six months of 2018. The effective tax rates were 25.44% for the first six months of 2019 and 25.30% for the first six months of 2018.

The quarterly and year-to-date effective tax rates were impacted by excess tax benefits related to share-based compensation. These excess tax benefits were $69,000 in the second quarter of 2019 and $1.6 million in the first quarter of 2019 compared to $712,000 in the second quarter of 2018 and $2.6 million in the first quarter of 2018. Excess tax benefits are expected to be higher in the first quarter when the majority of the Company's shared-based awards vest, and will fluctuate throughout the year based on the Company's stock price and timing of employee stock option exercises and vesting of other share-based awards.

### Operating Segment Results

As described in Note 14 to the Consolidated Financial Statements in Item 1, the Company’s operations consist of three primary segments: community banking, specialty finance and wealth management. The Company’s profitability is primarily dependent on the net interest income, provision for credit losses, non-interest income and operating expenses of its community banking segment. For purposes of internal segment profitability, management allocates certain intersegment and parent company balances. Management allocates a portion of revenues to the specialty finance segment related to loans and leases originated by the specialty finance segment and sold or assigned to the community banking segment. Similarly, for purposes of analyzing the contribution from the wealth management segment, management allocates a portion of the net interest income earned by the community banking segment on deposit balances of customers of the wealth management segment to the wealth management segment. Finally, expenses incurred at the Wintrust parent company are allocated to each segment based on each segment's risk-weighted assets.

The community banking segment’s net interest income for the quarter ended June 30, 2019 totaled $214.3 million as compared to $196.8 million for the same period in 2018, an increase of $17.5 million, or 9%. On a year-to-date basis, net interest income for the segment increased by $44.2 million from $381.5 million for the six months ended June 30, 2018 to $425.7 million for the six months ended June 30, 2019. The increase in both three and six month periods is primarily attributable to growth in earning assets and higher net interest margin. The community banking segment’s non-interest income totaled $65.4 million in the second quarter of 2019, a decrease of $335,000, or 1%, when compared to the second quarter of 2018 total of $65.7 million. On a year-to-date basis, non-interest income totaled $113.6 million for the six months ended June 30, 2019, a decrease of $8.6 million, or 7%, compared to $122.3 million in the six months ended June 30, 2018. The decrease in non-interest income on a year-to-date basis is primarily attributable to a decrease in mortgage banking revenue as a result of negative fair value adjustments recognized on mortgage servicing rights related to changes in valuation assumptions and pay-offs and lower production margins. The community banking segment’s net income for the quarter ended June 30, 2019 totaled $53.4 million, a decrease of $11.9 million as compared to net income in the second quarter of 2018 of $65.4 million. On a year-to-date basis, the community banking segment's net income was $113.8 million for the first six months of 2019 as compared to $123.7 million for the first six months of 2018.

The specialty finance segment's net interest income totaled $39.4 million for the quarter ended June 30, 2019, compared to $32.2 million for the same period in 2018, an increase of $7.2 million, or 22%. On a year-to-date basis, net interest income increased by $13.4 million in the first six months of 2019 as compared to the first six months of 2018. The increase is primarily attributable to growth in earning assets and higher yields on the premium finance receivables portfolios. The specialty finance segment’s non-interest income totaled $19.6 million and $16.3 million for the three month periods ended June 30, 2019 and 2018, respectively. On a year-to-date basis, non-interest income increased by $7.1 million in the first six months of 2019 as compared to the first six months of 2018. The increase in non-interest income in the current year periods are primarily the result of higher originations and increased balances related to the commercial premium finance portfolio and growth in business from the Company's leasing division. Our commercial premium finance operations, life insurance finance operations, lease financing operations and accounts receivable finance operations accounted for 40%, 35%, 21% and 4%, respectively, of the total revenues of our specialty finance business for the six month period ended June 30, 2019. The net income of the specialty finance segment for the quarter ended June 30, 2019 totaled $21.1 million as compared to $19.5 million for the quarter ended June 30, 2018. On a year-to-date basis, the net income of the specialty finance segment for the six months ended June 30, 2019 totaled $43.0 million as compared to $38.5 million for the six months ended June 30, 2018.

The wealth management segment reported net interest income of $6.9 million for the second quarter of 2019 compared to $4.2 million in the same quarter of 2018. On a year-to-date basis, net interest income totaled $14.4 million for the first six months of 2019 as compared to $8.7 million for the first six months of 2018. Net interest income for this segment is primarily comprised of an allocation of the net interest income earned by the community banking segment on non-interest bearing and interest-bearing wealth management customer account balances on deposit at the banks. Wealth management customer account balances on deposit at the banks averaged $1.6 billion and $899.4 million in the first six months of 2019 and 2018, respectively. This segment recorded non-interest income of $25.0 million for the second quarter of 2019 compared to $23.3 million for the second quarter of 2018. On a year-to-date basis, the wealth management segment's non-interest income totaled $50.0 million during the first six months of 2019 as compared to $46.3 million in the first six months of 2018. Distribution of wealth management services through each bank continues to be a focus of the Company. The Company is committed to growing the wealth management segment in order to better service its customers and create a more diversified revenue stream. The wealth management segment’s net income totaled $6.9 million for the second quarter of 2019 compared to $4.7 million for the second quarter of 2018. On a year-to-date basis, the wealth management segment's net income totaled $13.9 million and $9.4 million for the six month periods ended June 30, 2019 and 2018, respectively.

### Financial Condition

Total assets were $33.6 billion at June 30, 2019, representing an increase of $4.2 billion, or 14%, when compared to June 30, 2018 and an increase of approximately $1.3 billion, or 16% on an annualized basis, when compared to March 31, 2019. Total funding, which includes deposits, all notes and advances, including secured borrowings and the junior subordinated debentures, was $29.2 billion at June 30, 2019, $28.1 billion at March 31, 2019, and $25.7 billion at June 30, 2018. See Notes 5, 6, 10, 11 and 12 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)*

|  | Three Months Ended June 30, 2019 Balance | Percent | March 31, 2019 Balance | Percent | June 30, 2018 Balance | Percent |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Mortgage loans held-for-sale | **$281,732** | **1%** | $188,190 | 1% | $403,967 | 2% |
| Loans, net of unearned income |  |  |  |  |  |  |
| Commercial | **$8,110,690** | **27** | $7,854,451 | 27 | $7,167,150 | 27 |
| Commercial real estate | **7,120,936** | **24** | 6,963,852 | 24 | 6,624,140 | 25 |
| Home equity | **527,784** | **2** | 540,121 | 2 | 609,455 | 2 |
| Residential real estate | **995,417** | **3** | 938,364 | 3 | 834,633 | 3 |
| Premium finance receivables | **7,696,745** | **26** | 7,468,706 | 26 | 6,912,264 | 26 |
| Other loans | **101,691** | **1** | 115,422 | 1 | 135,899 | 1 |
| Total average loans (1) | **$24,553,263** | **83%** | $23,880,916 | 83% | $22,283,541 | 84% |
| Liquidity management assets (2) | **$4,652,403** | **16%** | $4,623,088 | 16% | $3,765,372 | 14% |
| Other earning assets (3) | **15,719** | **—** | 13,591 | — | 21,244 | — |
| Total average earning assets | **$29,503,117** | **100%** | $28,705,785 | 100% | $26,474,124 | 100% |
| Total average assets | **$32,055,769** |  | $31,216,171 |  | $28,567,579 |  |
| Total average earning assets to total average assets |  | **92%** |  | 92% |  | 93% |

#### (1) Includes non-accrual loans

*(2) Liquidity management assets include investment securities, other securities, interest earning deposits with banks, federal funds sold and securities purchased under resale agreements*

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

*Mortgage loans held-for-sale.* Average mortgage loans held-for-sale totaled $281.7 million in the second quarter of 2019, compared to $188.2 million in the first quarter of 2019 and $404.0 million in the second quarter of 2018. 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.

*Loans, net of unearned income.* Average total loans, net of unearned income, totaled $24.6 billion in the second quarter of 2019, increasing $2.3 billion, or 10%, from the second quarter of 2018 and $672.3 million, or 11% on an annualized basis, from the first quarter of 2019. Combined, the commercial and commercial real estate loan categories comprised 62% of the average loan portfolio in both of the second quarter of 2019 and 2018. Growth realized in these categories for the second quarter of 2019 as compared to the sequential and prior year periods is primarily attributable to increased business development efforts and the acquisition of ROC. Additionally, growth realized in the second quarter of 2019 as compared to the second quarter of 2018 was partially attributable to the acquisitions of AEB and CSC.

Home equity loan portfolio averaged $527.8 million in the second quarter of 2019, and decreased $81.7 million, or 13% from the average balance of $609.5 million in same period of 2018. The Company has been actively managing its home equity portfolio to ensure that diligent pricing, appraisal and other underwriting activities continue to exist.

Residential real estate loans averaged $995.4 million in the second quarter of 2019, and increased $160.8 million, or 19% from the average balance of $834.6 million in same period of 2018. Additionally, compared to the quarter ended March 31, 2019, the average balance increased $57.1 million, or 24% on an annualized basis. The Company's residential real estate portfolio predominantly includes one- to four-family adjustable rate mortgage loans that have repricing terms generally from one to three years, construction loans to individuals and bridge financing loans for qualifying customers.

Average premium finance receivables totaled $7.7 billion in the second quarter of 2019, and accounted for 31% of the Company’s average total loans. The increase during the second quarter of 2019 compared to both the first quarter of 2019 and the second quarter of 2018 was the result of continued originations within the portfolio due to the effective marketing and customer servicing. Approximately $2.4 billion of premium finance receivables were originated in the second quarter of 2019 compared to $2.1 billion during the same period of 2018. Premium finance receivables consist of a commercial portfolio and a life portfolio comprising approximately 41% and 59%, respectively, of the average total balance of premium finance receivables for the second quarter of 2019, and 39% and 61%, respectively, for the second quarter of 2018.

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

*Liquidity management assets.* Funds that are not utilized for loan originations are used to purchase investment securities and short term money market investments, to sell as federal funds and to maintain in interest bearing deposits with banks. The balances of these assets can fluctuate based on management’s ongoing effort to manage liquidity and for asset liability management purposes.

*Other earning assets.* Other earning assets include brokerage customer receivables and trading account securities. In the normal course of business, Wintrust Investments activities involve the execution, settlement, and financing of various securities transactions. Wintrust Investments customer securities activities are transacted on either a cash or margin basis. In margin transactions, Wintrust Investments, 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, Wintrust Investments 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 Wintrust Investments 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, Wintrust Investments 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. Wintrust Investments 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. Wintrust Investments monitors required margin levels daily and, pursuant to such guidelines, requires customers to deposit additional collateral or to reduce positions when necessary.

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)*

|  | Six Months Ended June 30, 2019 Balance | Percent | June 30, 2018 Balance | Percent |
| --- | ---: | ---: | ---: | ---: |
| Mortgage loans held-for-sale | **$235,220** | **1%** | $342,914 | 1% |
| Loans: |  |  |  |  |
| Commercial | **$7,983,279** | **27%** | $7,003,037 | 27% |
| Commercial real estate | **7,042,828** | **24** | 6,607,235 | 26 |
| Home equity | **533,918** | **2** | 629,032 | 2 |
| Residential real estate (1) | **967,048** | **3** | 832,146 | 3 |
| Premium finance receivables | **7,583,355** | **26** | 6,796,823 | 26 |
| Other loans | **108,518** | **1** | 130,749 | 1 |
| Total average loans (2) | **$24,218,946** | **83%** | $21,999,022 | 85% |
| Liquidity management assets (3) | **$4,637,826** | **16%** | $3,756,736 | 14% |
| Other earning assets (4) | **14,661** | **—** | 24,390 | — |
| Total average earning assets | **$29,106,653** | **100%** | $26,123,062 | 100% |
| Total average assets | **$31,638,289** |  | $28,190,683 |  |
| Total average earning assets to total average assets |  | **92%** |  | 93% |

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

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

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

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

Total average loans for the first six months of 2019 increased $2.2 billion or 10% over the previous year period. Similar to the quarterly discussion above, approximately $980.2 million of this increase relates to the commercial portfolio, $435.6 million of this increase relates to the commercial real estate portfolio and $786.5 million of this increase relates to the premium finance receivables portfolio.

### LOAN PORTFOLIO AND ASSET QUALITY

### Loan Portfolio

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

*(In thousands)*

|  | June 30, 2019 Amount | % of Total | December 31, 2018 Amount | % of Total | June 30, 2018 Amount | % of Total |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Commercial | **$8,270,774** | **33%** | $7,828,538 | 33% | $7,289,060 | 32% |
| Commercial real estate | **7,276,244** | **29** | 6,933,252 | 29 | 6,575,084 | 29 |
| Home equity | **527,370** | **2** | 552,343 | 2 | 593,500 | 3 |
| Residential real estate | **1,118,178** | **4** | 1,002,464 | 4 | 895,470 | 4 |
| Premium finance receivables—commercial | **3,368,423** | **13** | 2,841,659 | 12 | 2,833,452 | 12 |
| Premium finance receivables—life insurance | **4,634,478** | **18** | 4,541,794 | 19 | 4,302,288 | 19 |
| Consumer and other | **109,192** | **1** | 120,641 | 1 | 121,706 | 1 |
| Total loans, net of unearned income | **$25,304,659** | **100%** | $23,820,691 | 100% | $22,610,560 | 100% |

69

*Commercial and commercial real estate loans.* Our commercial and commercial real estate loan portfolios are comprised primarily of commercial real estate loans and lines of credit for working capital purposes. The table below sets forth information regarding the types and amounts of our loans within these portfolios as of June 30, 2019 and 2018:

*(Dollars in thousands)*

| Commercial: | As of June 30, 2019 Balance | % of Total Balance | Allowance For Loan Losses Allocation | As of June 30, 2018 Balance | % of Total Balance | Allowance For Loan Losses Allocation |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Commercial, industrial and other | **$5,295,775** | **34.0%** | **$52,756** | $4,621,789 | 33.2% | $39,704 |
| Franchise | **926,521** | **6.0** | **8,314** | 957,339 | 6.9 | 8,743 |
| Mortgage warehouse lines of credit | **275,170** | **1.8** | **2,195** | 200,060 | 1.4 | 1,598 |
| Asset-based lending | **1,068,226** | **6.9** | **9,335** | 1,042,755 | 7.5 | 8,958 |
| Leases | **680,757** | **4.4** | **1,879** | 458,614 | 3.3 | 1,237 |
| PCI - commercial loans (1) | **24,325** | **0.2** | **414** | 8,503 | 0.1 | 487 |
| **Total commercial** | **$8,270,774** | **53.3%** | **$74,893** | $7,289,060 | 52.4% | $60,727 |
| **Commercial Real Estate:** |  |  |  |  |  |  |
| Construction | **$838,499** | **5.3%** | **$9,343** | $807,235 | 5.8% | $9,337 |
| Land | **145,639** | **0.9** | **4,193** | 115,357 | 0.8 | 3,716 |
| Office | **957,218** | **6.2** | **9,778** | 894,349 | 6.5 | 5,971 |
| Industrial | **956,530** | **6.2** | **6,591** | 882,525 | 6.4 | 5,902 |
| Retail | **976,201** | **6.3** | **6,515** | 867,639 | 6.3 | 8,085 |
| Multi-family | **1,240,067** | **8.0** | **11,983** | 952,048 | 6.9 | 9,688 |
| Mixed use and other | **2,035,099** | **13.0** | **14,813** | 1,949,242 | 14.1 | 14,859 |
| PCI - commercial real estate (1) | **126,991** | **0.8** | **54** | 106,689 | 0.8 | 102 |
| **Total commercial real estate** | **$7,276,244** | **46.7%** | **$63,270** | $6,575,084 | 47.6% | $57,660 |
| **Total commercial and commercial real estate** | **$15,547,018** | **100.0%** | **$138,163** | $13,864,144 | 100.0% | $118,387 |
| Commercial real estate - collateral location by state: |  |  |  |  |  |  |
| Illinois | **$5,505,290** | **75.7%** |  | $5,100,132 | 77.6% |  |
| Wisconsin | **740,288** | **10.2** |  | 726,874 | 11.1 |  |
| **Total primary markets** | **$6,245,578** | **85.9%** |  | $5,827,006 | 88.7% |  |
| Indiana | **179,977** | **2.5** |  | 153,807 | 2.3 |  |
| Florida | **60,343** | **0.8** |  | 51,143 | 0.8 |  |
| Arizona | **62,607** | **0.9** |  | 55,171 | 0.8 |  |
| Michigan | **37,271** | **0.5** |  | 45,670 | 0.7 |  |
| California | **68,497** | **0.9** |  | 68,459 | 1.0 |  |
| Other | **621,971** | **8.5** |  | 373,828 | 5.7 |  |
| **Total commercial real estate** | **$7,276,244** | **100.0%** |  | $6,575,084 | 100.0% |  |

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

We make commercial loans for many purposes, including working capital lines, which are generally renewable annually and supported by business assets, personal guarantees and additional collateral. Commercial business lending is generally considered to involve a slightly higher degree of risk than traditional consumer bank lending. Primarily as a result of growth in the commercial portfolio and higher specific reserves on impaired loans within the portfolio, our allowance for loan losses in our commercial loan portfolio is $74.9 million as of June 30, 2019 compared to $60.7 million as of June 30, 2018.

Our commercial real estate loans are generally secured by a first mortgage lien and assignment of rents on the property. Since most of our bank branches are located in the Chicago metropolitan area and southern Wisconsin, 85.9% of our commercial real estate loan portfolio is located in this region as of June 30, 2019. We have been able to effectively manage our total non-performing commercial real estate loans. As of June 30, 2019, our allowance for loan losses related to this portfolio is $63.3 million compared to $57.7 million as of June 30, 2018.

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. Mortgage warehouse lines portfolio totaled $275.2 million as of June 30, 2019 compared to $200.1 million as of June 30, 2018.

*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.

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

Our home equity loan portfolio has performed well in light of the ongoing volatility in the overall residential real estate market.

*Residential real estate.* 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, 2019, our residential loan portfolio totaled $1.1 billion, or 4% of our total outstanding loans.

Our adjustable rate mortgages relate to properties located principally in the Chicago metropolitan area and southern Wisconsin or vacation homes owned by local residents. These adjustable rate mortgages are often non-agency conforming. Adjustable rate mortgage loans decrease the interest rate risk we face on our mortgage portfolio. However, this risk is not eliminated due to the fact that such loans generally provide for periodic and lifetime limits on the interest rate adjustments among other features. Additionally, adjustable rate mortgages may pose a higher risk of delinquency and default because they require borrowers to make larger payments when interest rates rise. As of June 30, 2019, $14.2 million of our residential real estate mortgages, or 1.3% of our residential real estate loan portfolio were classified as nonaccrual, $1.9 million were 90 or more days past due and still accruing (0.2%), $3.1 million were 30 to 89 days past due (0.3%) and $1.1 billion were current (98.2%). We believe that since our loan portfolio consists primarily of locally originated loans, and since the majority of our borrowers are longer-term customers with lower LTV ratios, we face a relatively low risk of borrower default and delinquency.

While we generally do not originate loans for our own portfolio with long-term fixed rates due to interest rate risk considerations, we can accommodate customer requests for fixed rate loans by originating such loans and then selling them into the secondary market, for which we receive fee income. We may also selectively retain certain of these loans within the banks’ own portfolios where they are non-agency conforming, or where the terms of the loans make them favorable to retain. A portion of the loans we sold into the secondary market were sold with the servicing of those loans retained. The amount of loans serviced for others as of June 30, 2019 and 2018 was $7.5 billion and $5.2 billion, respectively. All other mortgage loans sold into the secondary market were sold without the retention of servicing rights.

The Government National Mortgage Association ("GNMA") optional repurchase programs allow financial institutions acting as servicers to buy back individual delinquent mortgage loans that meet certain criteria from the securitized loan pool for which the institution was the original transferor of such loans. At the option of the servicer and without prior authorization from GNMA, the servicer may repurchase such delinquent loans for an amount equal to the remaining principal balance of the loan. Under FASB ASC Topic 860, “Transfers and Servicing,” this buy-back option is considered a conditional option until the delinquency criteria are met, at which time the option becomes unconditional. When the Company is deemed to have regained effective control over these loans under the unconditional repurchase option and the expected benefit of the potential repurchase is more than trivial, the loans can no longer be reported as sold and must be brought back onto the balance sheet as loans, regardless of whether the Company intends to exercise the buy-back option. These loans are reported as loans held-for-investment, part of the residential real estate portfolio, with the offsetting liability being reported in accrued interest payable and other liabilities. Rebooked GNMA loans held-for-investment amounted to $95.6 million at June 30, 2019, compared to $53.4 million balance at June 30, 2018.

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, 2019, approximately $1.3 million of our mortgage loans consist of interest-only loans.

*Premium finance receivables – commercial.* FIRST Insurance Funding and FIFC Canada originated approximately $2.2 billion in commercial insurance premium finance receivables in the second quarter of 2019 as compared to $1.8 billion of originations in the second quarter of 2018. During the six months ended June 30, 2019 and 2018, FIRST Insurance Funding and FIFC Canada originated approximately $4.1 billion and $3.4 billion, respectively, in commercial insurance premium finance receivables.

FIRST Insurance Funding and FIFC Canada make loans to businesses to finance the insurance premiums they pay on their commercial insurance policies. The loans are originated by working through independent medium and large insurance agents and brokers located throughout the United States and Canada. The insurance premiums financed are primarily for commercial customers’ purchases of liability, property and casualty and other commercial insurance.

This lending involves relatively rapid turnover of the loan portfolio and high volume of loan originations. Because of the indirect nature of this lending through third party agents and brokers and because the borrowers are located nationwide and in Canada, this segment is more susceptible to third party fraud than relationship lending. The Company performs ongoing credit and other reviews of the agents and brokers, and performs various internal audit steps to mitigate against the risk of any fraud. The majority of these loans are purchased by the banks in order to more fully utilize their lending capacity as these loans generally provide the banks with higher yields than alternative investments.

*Premium finance receivables—life insurance.* Wintrust Life Finance originated approximately $230.9 million in life insurance premium finance receivables in the second quarter of 2019 as compared to $230.1 million of originations in the second quarter of 2018. During the six months ended June 30, 2019 and 2018, Wintrust Life Finance originated approximately $474.9 million and $454.6 million, respectively, in life insurance premium finance receivables.

The Company continues to experience increased competition and pricing pressure within the current market. These loans are originated directly with the borrowers with assistance from life insurance carriers, independent insurance agents, financial advisors and legal counsel. The life insurance policy is the primary form of collateral. In addition, these loans often are secured with a letter of credit, marketable securities or certificates of deposit. In some cases, Wintrust Life Finance may make a loan that has a partially unsecured position.

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

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

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

The following table classifies the loan portfolio at June 30, 2019 by date at which the loans reprice or mature, and the type of rate exposure:

*(In thousands)*

| As of June 30, 2019 Commercial | One year or less | From one to five years Total | Over five years |  |
| --- | ---: | ---: | ---: | ---: |
| Fixed rate | **174,882** | **1,151,480** | **795,619** | **2,121,981** |
| Variable rate | **6,142,234** | **6,418** | **141** | **6,148,793** |
| Total commercial | **$6,317,116** | **$1,157,898** | **$795,760** | **$8,270,774** |
| Commercial real estate |  |  |  |  |
| Fixed rate | **436,317** | **2,047,111** | **327,794** | **2,811,222** |
| Variable rate | **4,435,060** | **29,954** | **8** | **4,465,022** |
| Total commercial real estate | **$4,871,377** | **$2,077,065** | **$327,802** | **$7,276,244** |
| Home equity |  |  |  |  |
| Fixed rate | **21,140** | **8,325** | **9,019** | **38,484** |
| Variable rate | **488,886** | **—** | **—** | **488,886** |
| Total home equity | **$510,026** | **$8,325** | **$9,019** | **$527,370** |
| Residential real estate |  |  |  |  |
| Fixed rate | **28,796** | **20,535** | **238,940** | **288,271** |
| Variable rate | **50,646** | **336,681** | **442,580** | **829,907** |
| Total residential real estate | **$79,442** | **$357,216** | **$681,520** | **$1,118,178** |
| Premium finance receivables - commercial |  |  |  |  |
| Fixed rate | **3,302,806** | **65,617** | **—** | **3,368,423** |
| Variable rate | **—** | **—** | **—** | **—** |
| Total premium finance receivables - commercial | **$3,302,806** | **$65,617** | **$—** | **$3,368,423** |
| Premium finance receivables - life insurance |  |  |  |  |
| Fixed rate | **12,537** | **116,560** | **10,389** | **139,486** |
| Variable rate | **4,494,992** | **—** | **—** | **4,494,992** |
| Total premium finance receivables - life insurance | **$4,507,529** | **$116,560** | **$10,389** | **$4,634,478** |
| Consumer and other |  |  |  |  |
| Fixed rate | **71,568** | **10,562** | **1,988** | **84,118** |
| Variable rate | **25,074** | **—** | **—** | **25,074** |
| Total consumer and other | **$96,642** | **$10,562** | **$1,988** | **$109,192** |
| Total per category |  |  |  |  |
| Fixed rate | **4,048,046** | **3,420,190** | **1,383,749** | **8,851,985** |
| Variable rate | **15,636,892** | **373,053** | **442,729** | **16,452,674** |
| Total loans, net of unearned income | **$19,684,938** | **$3,793,243** | **$1,826,478** | **$25,304,659** |
| **Variable Rate Loan Pricing by Index:** |  |  |  |  |
| Prime |  |  |  | **$2,308,201** |
| One- month LIBOR |  |  |  | **8,507,875** |
| Three- month LIBOR |  |  |  | **417,452** |
| Twelve- month LIBOR |  |  |  | **4,988,875** |
| Other |  |  |  | **230,271** |
| Total variable rate |  |  |  | **$16,452,674** |

73

### 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, the Company operates a credit risk rating system under which our credit management personnel assign a credit risk rating to each loan at the time of origination and review loans on a regular basis to determine each loan’s credit risk rating on a scale of 1 through 10 with higher scores indicating higher risk. The credit risk rating structure used is shown below:

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

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

The Company’s approach to workout plans and restructuring loans is built on the credit-risk rating process. A modification of a loan with an existing credit risk rating of 6 or worse or a modification of any other credit, which will result in a restructured credit risk rating of 6 or worse must be reviewed for TDR classification. In that event, our Managed Assets Division conducts an overall credit and collateral review. A modification of a loan is considered to be a TDR if both (1) the borrower is experiencing financial difficulty and (2) for economic or legal reasons, the bank grants a concession to a borrower that it would not otherwise consider. The modification of a loan where the credit risk rating is 5 or better both before and after such modification is not considered to be a TDR. Based on the Company’s credit risk rating system, it considers that borrowers whose credit risk rating is 5 or better are not experiencing financial difficulties and therefore, are not considered TDRs.

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

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

#### Non-performing Assets

The following table sets forth Wintrust’s non-performing assets and TDRs performing under the contractual terms of the loan agreement, excluding PCI loans, as of the dates shown:

*(Dollars in thousands)*

| Loans past due greater than 90 days and still accruing (1): | June 30, 2019 | March 31, 2019 | December 31, 2018 | June 30, 2018 |
| --- | ---: | ---: | ---: | ---: |
| Commercial | **$488** | $— | $— | $— |
| Commercial real estate | **—** | — | — | — |
| Home equity | **—** | — | — | — |
| Residential real estate | **—** | 30 | — | — |
| Premium finance receivables—commercial | **6,940** | 6,558 | 7,799 | 5,159 |
| Premium finance receivables—life insurance | **—** | 168 | — | — |
| Consumer and other | **172** | 218 | 109 | 224 |
| Total loans past due greater than 90 days and still accruing | **7,600** | 6,974 | 7,908 | 5,383 |
| **Non-accrual loans (2):** |  |  |  |  |
| Commercial | **47,604** | 55,792 | 50,984 | 18,388 |
| Commercial real estate | **20,875** | 15,933 | 19,129 | 19,195 |
| Home equity | **8,489** | 7,885 | 7,147 | 9,096 |
| Residential real estate | **14,236** | 15,879 | 16,383 | 15,825 |
| Premium finance receivables—commercial | **13,833** | 14,797 | 11,335 | 14,832 |
| Premium finance receivables—life insurance | **590** | — | — | — |
| Consumer and other | **220** | 326 | 348 | 563 |
| Total non-accrual loans | **105,847** | 110,612 | 105,326 | 77,899 |
| **Total non-performing loans:** |  |  |  |  |
| Commercial | **48,092** | 55,792 | 50,984 | 18,388 |
| Commercial real estate | **20,875** | 15,933 | 19,129 | 19,195 |
| Home equity | **8,489** | 7,885 | 7,147 | 9,096 |
| Residential real estate | **14,236** | 15,909 | 16,383 | 15,825 |
| Premium finance receivables—commercial | **20,773** | 21,355 | 19,134 | 19,991 |
| Premium finance receivables—life insurance | **590** | 168 | — | — |
| Consumer and other | **392** | 544 | 457 | 787 |
| Total non-performing loans | **$113,447** | $117,586 | $113,234 | $83,282 |
| Other real estate owned | **9,920** | 9,154 | 11,968 | 18,925 |
| Other real estate owned—from acquisitions | **9,917** | 12,366 | 12,852 | 16,406 |
| Other repossessed assets | **263** | 270 | 280 | 305 |
| Total non-performing assets | **$133,547** | $139,376 | $138,334 | $118,918 |
| TDRs performing under the contractual terms of the loan agreement | **45,862** | 48,305 | 33,281 | 57,249 |
| **Total non-performing loans by category as a percent of its own respective category’s period-end balance:** |  |  |  |  |
| Commercial | **0.58%** | 0.70% | 0.65% | 0.25% |
| Commercial real estate | **0.29** | 0.23 | 0.28 | 0.29 |
| Home equity | **1.61** | 1.49 | 1.29 | 1.53 |
| Residential real estate | **1.27** | 1.51 | 1.63 | 1.77 |
| Premium finance receivables—commercial | **0.62** | 0.71 | 0.67 | 0.71 |
| Premium finance receivables—life insurance | **0.01** | — | — | — |
| Consumer and other | **0.36** | 0.45 | 0.38 | 0.65 |
| Total non-performing loans | **0.45%** | 0.49% | 0.48% | 0.37% |
| **Total non-performing assets, as a percentage of total assets** | **0.40%** | 0.43% | 0.44% | 0.40% |
| **Allowance for loan losses as a percentage of total non-performing loans** | **141.41%** | 134.55% | 134.92% | 172.19% |

*(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 $30.1 million, $40.1 million, $32.8 million and $8.1 million as of June 30, 2019, March 31, 2019, December 31, 2018 and June 30, 2018, respectively.*

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

#### Loan Portfolio Aging

The tables below show the aging of the Company’s loan portfolio at June 30, 2019 and March 31, 2019:

*(Dollars in thousands)*

| As of June 30, 2019 Loan Balances: Commercial | Nonaccrual | 90+ days and still accruing | 60-89 days past due | 30-59 days past due | Current | Total Loans |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Commercial, industrial and other | **$35,902** | **$488** | **$3,711** | **$10,271** | **$5,245,403** | **$5,295,775** |
| Franchise | **11,076** | **—** | **—** | **—** | **915,445** | **926,521** |
| Mortgage warehouse lines of credit | **—** | **—** | **—** | **—** | **275,170** | **275,170** |
| Asset-based lending | **568** | **—** | **972** | **4,275** | **1,062,411** | **1,068,226** |
| Leases | **58** | **—** | **—** | **808** | **679,891** | **680,757** |
| PCI - commercial (1) | **—** | **1,451** | **600** | **748** | **21,526** | **24,325** |
| Total commercial | **47,604** | **1,939** | **5,283** | **16,102** | **8,199,846** | **8,270,774** |
| Commercial real estate |  |  |  |  |  |  |
| Construction | **1,030** | **—** | **—** | **23,702** | **813,767** | **838,499** |
| Land | **1,226** | **—** | **—** | **2,227** | **142,186** | **145,639** |
| Office | **8,981** | **—** | **892** | **14,596** | **932,749** | **957,218** |
| Industrial | **368** | **—** | **552** | **874** | **954,736** | **956,530** |
| Retail | **6,867** | **—** | **1,232** | **9,022** | **959,080** | **976,201** |
| Multi-family | **296** | **—** | **—** | **3,957** | **1,235,814** | **1,240,067** |
| Mixed use and other | **2,107** | **—** | **5,520** | **12,555** | **2,014,917** | **2,035,099** |
| PCI - commercial real estate (1) | **—** | **5,124** | **3,003** | **6,054** | **112,810** | **126,991** |
| Total commercial real estate | **20,875** | **5,124** | **11,199** | **72,987** | **7,166,059** | **7,276,244** |
| Home equity | **8,489** | **—** | **321** | **2,155** | **516,405** | **527,370** |
| Residential real estate, including PCI | **14,236** | **1,867** | **1,306** | **1,832** | **1,098,937** | **1,118,178** |
| Premium finance receivables |  |  |  |  |  |  |
| Commercial insurance loans | **13,833** | **6,940** | **17,977** | **16,138** | **3,313,535** | **3,368,423** |
| Life insurance loans | **590** | **—** | **18,580** | **19,673** | **4,449,078** | **4,487,921** |
| PCI - life insurance loans (1) | **—** | **—** | **—** | **—** | **146,557** | **146,557** |
| Consumer and other, including PCI | **220** | **235** | **242** | **227** | **108,268** | **109,192** |
| Total loans, net of unearned income | **$105,847** | **$16,105** | **$54,908** | **$129,114** | **$24,998,685** | **$25,304,659** |

| Aging as a % of Loan Balance: As of June 30, 2019 Commercial | Nonaccrual | 90+ days and still accruing | 60-89 days past due | 30-59 days past due | Current | Total Loans |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Commercial, industrial and other | **0.7%** | **—%** | **0.1%** | **0.2%** | **99.0%** | **100.0%** |
| Franchise | **1.2** | **—** | **—** | **—** | **98.8** | **100.0** |
| Mortgage warehouse lines of credit | **—** | **—** | **—** | **—** | **100.0** | **100.0** |
| Asset-based lending | **0.1** | **—** | **0.1** | **0.4** | **99.4** | **100.0** |
| Leases | **—** | **—** | **—** | **0.1** | **99.9** | **100.0** |
| PCI - commercial (1) | **—** | **6.0** | **2.5** | **3.1** | **88.4** | **100.0** |
| Total commercial | **0.6** | **—** | **0.1** | **0.2** | **99.1** | **100.0** |
| Commercial real estate |  |  |  |  |  |  |
| Construction | **0.1** | **—** | **—** | **2.8** | **97.1** | **100.0** |
| Land | **0.8** | **—** | **—** | **1.5** | **97.7** | **100.0** |
| Office | **0.9** | **—** | **0.1** | **1.5** | **97.5** | **100.0** |
| Industrial | **—** | **—** | **0.1** | **0.1** | **99.8** | **100.0** |
| Retail | **0.7** | **—** | **0.1** | **0.9** | **98.3** | **100.0** |
| Multi-family | **—** | **—** | **—** | **0.3** | **99.7** | **100.0** |
| Mixed use and other | **0.1** | **—** | **0.3** | **0.6** | **99.0** | **100.0** |
| PCI - commercial real estate (1) | **—** | **4.0** | **2.4** | **4.8** | **88.8** | **100.0** |
| Total commercial real estate | **0.3** | **0.1** | **0.2** | **1.0** | **98.4** | **100.0** |
| Home equity | **1.6** | **—** | **0.1** | **0.4** | **97.9** | **100.0** |
| Residential real estate, including PCI | **1.3** | **0.2** | **0.1** | **0.2** | **98.2** | **100.0** |
| Premium finance receivables |  |  |  |  |  |  |
| Commercial insurance loans | **0.4** | **0.2** | **0.5** | **0.5** | **98.4** | **100.0** |
| Life insurance loans | **—** | **—** | **0.4** | **0.4** | **99.2** | **100.0** |
| PCI - life insurance loans (1) | **—** | **—** | **—** | **—** | **100.0** | **100.0** |
| Consumer and other, including PCI | **0.2** | **0.2** | **0.2** | **0.2** | **99.2** | **100.0** |
| Total loans, net of unearned income | **0.4%** | **0.1%** | **0.2%** | **0.5%** | **98.8%** | **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.*

*(Dollars in thousands)*

| As of March 31, 2019 Loan Balances: Commercial | Nonaccrual | 90+ days and still accruing | 60-89 days past due | 30-59 days past due | Current | Total Loans |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Commercial, industrial and other | $38,858 | — | $1,787 | $38,094 | $5,172,214 | $5,250,953 |
| Franchise | 15,799 | — | — | 534 | 863,573 | 879,906 |
| Mortgage warehouse lines of credit | — | — | — | — | 174,284 | 174,284 |
| Asset-based lending | 1,135 | — | — | 7,821 | 1,031,878 | 1,040,834 |
| Leases | — | — | — | 2,796 | 620,088 | 622,884 |
| PCI - commercial (1) | — | 2,499 | — | 455 | 22,376 | 25,330 |
| Total commercial | 55,792 | 2,499 | 1,787 | 49,700 | 7,884,413 | 7,994,191 |
| Commercial real estate |  |  |  |  |  |  |
| Construction | 1,030 | — | 496 | 3,877 | 798,266 | 803,669 |
| Land | 54 | — | — | 3,888 | 143,759 | 147,701 |
| Office | 4,482 | — | — | 3,364 | 918,529 | 926,375 |
| Industrial | 267 | — | 1,039 | 10,643 | 953,011 | 964,960 |
| Retail | 7,645 | — | — | 8,149 | 879,473 | 895,267 |
| Multi-family | 303 | — | 187 | 675 | 1,116,220 | 1,117,385 |
| Mixed use and other | 2,152 | — | 1,084 | 17,243 | 1,987,008 | 2,007,487 |
| PCI - commercial real estate (1) | — | 4,265 | 2,806 | 7,033 | 96,557 | 110,661 |
| Total commercial real estate | 15,933 | 4,265 | 5,612 | 54,872 | 6,892,823 | 6,973,505 |
| Home equity | 7,885 | — | 810 | 4,315 | 515,438 | 528,448 |
| Residential real estate, including PCI | 15,879 | 1,481 | 509 | 11,112 | 1,024,543 | 1,053,524 |
| Premium finance receivables |  |  |  |  |  |  |
| Commercial insurance loans | 14,797 | 6,558 | 5,628 | 20,767 | 2,941,038 | 2,988,788 |
| Life insurance loans | — | 168 | 4,788 | 35,046 | 4,349,597 | 4,389,599 |
| PCI - life insurance loans (1) | — | — | — | — | 165,770 | 165,770 |
| Consumer and other, including PCI | 326 | 280 | 47 | 350 | 119,801 | 120,804 |
| Total loans, net of unearned income | $110,612 | $15,251 | $19,181 | $176,162 | $23,893,423 | $24,214,629 |

| Aging as a % of Loan Balance: As of March 31, 2019 Commercial | Nonaccrual | 90+ days and still accruing | 60-89 days past due | 30-59 days past due | Current | Total Loans |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Commercial, industrial and other | 0.7% | —% | —% | 0.7% | 98.6% | 100.0% |
| Franchise | 1.8 | — | — | 0.1 | 98.1 | 100.0 |
| Mortgage warehouse lines of credit | — | — | — | — | 100.0 | 100.0 |
| Asset-based lending | 0.1 | — | — | 0.8 | 99.1 | 100.0 |
| Leases | — | — | — | 0.4 | 99.6 | 100.0 |
| PCI - commercial (1) | — | 9.9 | — | 1.8 | 88.3 | 100.0 |
| Total commercial | 0.7 | — | — | 0.6 | 98.7 | 100.0 |
| Commercial real estate |  |  |  |  |  |  |
| Construction | 0.1 | — | 0.1 | 0.5 | 99.3 | 100.0 |
| Land | — | — | — | 2.6 | 97.4 | 100.0 |
| Office | 0.5 | — | — | 0.4 | 99.1 | 100.0 |
| Industrial | — | — | 0.1 | 1.1 | 98.8 | 100.0 |
| Retail | 0.9 | — | — | 0.9 | 98.2 | 100.0 |
| Multi-family | — | — | — | 0.1 | 99.9 | 100.0 |
| Mixed use and other | 0.1 | — | 0.1 | 0.9 | 98.9 | 100.0 |
| PCI - commercial real estate (1) | — | 3.9 | 2.5 | 6.4 | 87.2 | 100.0 |
| Total commercial real estate | 0.2 | 0.1 | 0.1 | 0.8 | 98.8 | 100.0 |
| Home equity | 1.5 | — | 0.2 | 0.8 | 97.5 | 100.0 |
| Residential real estate, including PCI | 1.5 | 0.1 | — | 1.1 | 97.3 | 100.0 |
| Premium finance receivables |  |  |  |  |  |  |
| Commercial insurance loans | 0.5 | 0.2 | 0.2 | 0.7 | 98.4 | 100.0 |
| Life insurance loans | — | — | 0.1 | 0.8 | 99.1 | 100.0 |
| PCI - life insurance loans (1) | — | — | — | — | 100.0 | 100.0 |
| Consumer and other, including PCI | 0.3 | 0.2 | — | 0.3 | 99.2 | 100.0 |
| Total loans, net of unearned income | 0.5% | 0.1% | 0.1% | 0.7% | 98.6% | 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, 2019, $54.9 million of all loans or 0.2%, were 60 to 89 days past due and $129.1 million of all loans or 0.5%, were 30 to 59 days (or one payment) past due. As of March 31, 2019, $19.2 million of all loans or 0.1%, were 60 to 89 days past due and $176.2 million, or 0.7%, were 30 to 59 days (or one payment) past due. Many of the commercial and commercial real estate loans shown as 60 to 89 days and 30 to 59 days past due are included on the Company’s internal problem loan reporting system. Loans on this system are closely monitored by management on a monthly basis.

The Company's home equity and residential loan portfolios continue to exhibit low delinquency ratios. Home equity loans at June 30, 2019 that were current with regard to the contractual terms of the loan agreement represent 97.9% of the total home equity portfolio. Residential real estate loans at June 30, 2019 that were current with regards to the contractual terms of the loan agreements comprise 98.2% of total residential real estate loans outstanding.

#### Non-performing Loans Rollforward

The table below presents a summary of non-performing loans, excluding PCI loans, for the periods presented:

*(In thousands)*

|  | Three Months Ended June 30, 2019 | June 30, 2018 | Six Months Ended June 30, 2019 | June 30, 2018 |
| --- | ---: | ---: | ---: | ---: |
| Balance at beginning of period | **$117,586** | $89,690 | **$113,234** | $90,162 |
| Additions, net | **20,567** | 10,403 | **44,597** | 17,011 |
| Return to performing status | **(47)** | (759) | **(14,124)** | (4,512) |
| Payments received | **(5,438)** | (4,589) | **(9,462)** | (7,158) |
| Transfer to OREO and other repossessed assets | **(1,486)** | (3,528) | **(1,568)** | (5,509) |
| Charge-offs | **(16,817)** | (1,968) | **(20,809)** | (5,523) |
| Net change for niche loans (1) | **(918)** | (5,967) | **1,579** | (1,189) |
| **Balance at end of period** | **$113,447** | $83,282 | **$113,447** | $83,282 |

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

PCI loans are excluded from non-performing loans as they continue to earn interest income from the related accretable yield, independent of performance with contractual terms of the loan. See Note 7 of the Consolidated Financial Statements in Item 1 for further discussion of non-performing loans and the loan aging during the respective periods.

### Allowance for Loan Losses

The allowance for loan losses represents management’s estimate of the probable and reasonably estimable loan losses that are inherent in the loan portfolio. The allowance for loan losses is determined quarterly using a methodology that incorporates important risk characteristics of each loan, as described below under “How We Determine the Allowance for Credit Losses” in this Item 2. This process is subject to review at each of our bank subsidiaries by the applicable regulatory authority, including the FRB of Chicago, the OCC, the State of Illinois and the State of Wisconsin.

Management determined that the allowance for loan losses was appropriate at June 30, 2019, and that the loan portfolio is well diversified and well secured, without undue concentration in any specific risk area. While this process involves a high degree of management judgment, the allowance for credit losses is based on a comprehensive, well documented, and consistently applied analysis of the Company’s loan portfolio. This analysis takes into consideration all available information existing as of the financial statement date, including environmental factors such as economic, industry, geographical and political factors. The relative level of allowance for credit losses is reviewed and compared to industry peers. This review encompasses levels of total non-performing 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

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

*(Dollars in thousands)*

|  | Three Months Ended June 30, 2019 | June 30, 2018 | Six Months Ended June 30, 2019 | June 30, 2018 |
| --- | ---: | ---: | ---: | ---: |
| **Allowance for loan losses at beginning of period** | **$158,212** | $139,503 | **$152,770** | $137,905 |
| **Provision for credit losses** | **24,580** | 5,043 | **35,204** | 13,389 |
| **Other adjustments** | **(11)** | (44) | **(38)** | (84) |
| **Reclassification to allowance for unfunded lending-related commitments** | **(70)** | — | **(86)** | 26 |
| **Charge-offs:** |  |  |  |  |
| Commercial | **17,380** | 2,210 | **17,883** | 4,897 |
| Commercial real estate | **326** | 155 | **4,060** | 968 |
| Home equity | **690** | 612 | **778** | 969 |
| Residential real estate | **287** | 180 | **290** | 751 |
| Premium finance receivables—commercial | **5,009** | 3,254 | **7,219** | 7,975 |
| Premium finance receivables—life insurance | **—** | — | **—** | — |
| Consumer and other | **136** | 459 | **238** | 588 |
| Total charge-offs | **23,828** | 6,870 | **30,468** | 16,148 |
| **Recoveries:** |  |  |  |  |
| Commercial | **289** | 666 | **607** | 928 |
| Commercial real estate | **247** | 2,387 | **727** | 4,074 |
| Home equity | **68** | 171 | **130** | 294 |
| Residential real estate | **140** | 1,522 | **169** | 1,562 |
| Premium finance receivables—commercial | **734** | 975 | **1,290** | 1,360 |
| Premium finance receivables—life insurance | **—** | — | **—** | — |
| Consumer and other | **60** | 49 | **116** | 96 |
| Total recoveries | **1,538** | 5,770 | **3,039** | 8,314 |
| **Net charge-offs** | **(22,290)** | (1,100) | **(27,429)** | (7,834) |
| **Allowance for loan losses at period end** | **$160,421** | $143,402 | **$160,421** | $143,402 |
| **Allowance for unfunded lending-related commitments at period end** | **1,480** | 1,243 | **1,480** | 1,243 |
| **Allowance for credit losses at period end** | **$161,901** | $144,645 | **$161,901** | $144,645 |
| **Annualized net charge-offs by category as a percentage of its own respective category’s average:** |  |  |  |  |
| Commercial | **0.85%** | 0.09% | **0.44%** | 0.11% |
| Commercial real estate | **0.00** | (0.14) | **0.10** | (0.09) |
| Home equity | **0.47** | 0.29 | **0.25** | 0.22 |
| Residential real estate | **0.06** | (0.64) | **0.03** | (0.20) |
| Premium finance receivables—commercial | **0.55** | 0.34 | **0.40** | 0.51 |
| Premium finance receivables—life insurance | **0.00** | 0.00 | **0.00** | 0.00 |
| Consumer and other | **0.30** | 1.21 | **0.23** | 0.76 |
| Total loans, net of unearned income | **0.36%** | 0.02% | **0.23%** | 0.07% |
| **Net charge-offs as a percentage of the provision for credit losses** | **90.68%** | 21.80% | **77.92%** | 58.51% |
| **Loans at period-end** | **$25,304,659** | $22,610,560 |  |  |
| **Allowance for loan losses as a percentage of loans at period end** | **0.63%** | 0.63% |  |  |
| **Allowance for credit losses as a percentage of loans at period end** | **0.64%** | 0.64% |  |  |

The allowance for credit losses, is comprised of an allowance for loan losses, which is determined with respect to loans that we have originated, and an allowance for lending-related commitments. Our allowance for lending-related commitments is determined with respect to funds that we have committed to lend but for which funds have not yet been disbursed and is computed using a methodology similar to that used to determine the allowance for loan losses. The allowance for unfunded lending-related commitments totaled $1.5 million and $1.2 million as of June 30, 2019 and June 30, 2018, respectively.

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

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

The allowance for loan losses includes an element for estimated probable but undetected losses and for imprecision in the credit risk models used to calculate the allowance. If the loan is impaired, the Company analyzes the loan for purposes of calculating our specific impairment reserves as part of the Problem Loan Reporting system review. A general reserve is separately determined for loans not considered impaired. See Note 7 of the Consolidated Financial Statements presented under Item 1 of this report for further discussion of the specific impairment reserve and general reserve as it relates to the allowance for credit losses for each loan category and the total loan portfolio.

#### 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 received, discounted at the loan’s original rate, or for collateral dependent loans, to the fair value of the collateral less the estimated cost to sell. Any shortfall is recorded as a specific impairment reserve.

At June 30, 2019, the Company had $137.3 million of impaired loans with $60.1 million of this balance requiring $15.2 million of specific impairment reserves. At March 31, 2019, the Company had $144.1 million of impaired loans with $72.5 million of this balance requiring $13.6 million of specific impairment reserves. The most significant fluctuations in the recorded investment of impaired loans with specific impairment from March 31, 2019 to June 30, 2019 occurred within the franchise portfolio. The recorded investment and specific reserve in this portfolio decreased $15.6 million and $4.5 million, respectively, which was a result of an impaired relationship being charged off during the second quarter of 2019. See Note 7 of the Consolidated Financial Statements presented under Item 1 of this report for further discussion of impaired loans and the related specific impairment reserve.

#### General Reserves:

For loans with a credit risk rating of 1 through 7 that are not considered impaired loans, reserves are established based on the type of loan collateral, if any, and the assigned credit risk rating. Determination of the allowance is inherently subjective as it requires significant estimates, including the amounts and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans based on the average historical loss experience over a six-year period, and consideration of current environmental factors and economic trends, all of which may be susceptible to significant change.

We determine this component of the allowance for loan losses by classifying each loan into (i) categories based on the type of collateral that secures the loan (if any), and (ii) one of ten categories based on the credit risk rating of the loan, as described above under “Past Due Loans and Non-Performing Assets” in this Item 2. Each combination of collateral and credit risk rating is then assigned a specific loss factor that incorporates the following factors:

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

In 2018, the Company modified its historical loss experience analysis by incorporating eight-year average loss rate assumptions for its historical loss experience to capture an extended credit cycle. The current eight-year average loss rate assumption analysis is computed for each of the Company’s collateral codes. The historical loss experience is combined with the specific loss factor for each combination of collateral and credit risk rating which is then applied to each individual loan balance to determine an appropriate general reserve. The historical loss rates are updated on a quarterly basis and are driven by the performance of the portfolio and any changes to the specific loss factors are driven by management judgment and analysis of the factors described above. The Company also analyzes the three-, four-, five-, six- and seven-year average historical loss rates on a quarterly basis as a comparison.

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

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

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

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

#### Premium Finance Receivables:

The determination of the appropriate allowance for loan losses for premium finance receivables is based on the assigned credit risk rating of loans in the portfolio. Loss factors are assigned to each risk rating in order to calculate an allowance for credit losses. The allowance for loan losses for these categories is entirely a general reserve.

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

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

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

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

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

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

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

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

#### TDRs

At June 30, 2019, the Company had $76.0 million in loans modified in TDRs. The $76.0 million in TDRs represents 182 credits in which economic concessions were granted to certain borrowers to better align the terms of their loans with their current ability to pay. The balance increased from $88.4 million representing 163 credits at March 31, 2019 and increased from $65.3 million representing 94 credits at June 30, 2018.

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

Subsequent to its restructuring, any TDR that becomes nonaccrual or more than 90 days past-due and still accruing interest will be included in the Company’s non-performing loans. Each TDR was reviewed for impairment at June 30, 2019 and approximately $3.8 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, 2019, the Company was committed to lend an additional $42,000 of funds to borrowers 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:

*(In thousands)*

| Accruing TDRs: | June 30, 2019 | March 31, 2019 | June 30, 2018 |
| --- | ---: | ---: | ---: |
| Commercial | **$15,923** | $19,650 | $37,560 |
| Commercial real estate | **12,646** | 14,123 | 15,086 |
| Residential real estate and other | **17,293** | 14,532 | 4,603 |
| Total accruing TDRs | **$45,862** | $48,305 | $57,249 |
| **Non-accrual TDRs: (1)** |  |  |  |
| Commercial | **$21,850** | $34,390 | $1,671 |
| Commercial real estate | **2,854** | 1,517 | 1,362 |
| Residential real estate and other | **5,435** | 4,150 | 5,028 |
| Total non-accrual TDRs | **$30,139** | $40,057 | $8,061 |
| **Total TDRs:** |  |  |  |
| Commercial | **$37,773** | $54,040 | $39,231 |
| Commercial real estate | **15,500** | 15,640 | 16,448 |
| Residential real estate and other | **22,728** | 18,682 | 9,631 |
| Total TDRs | **$76,001** | $88,362 | $65,310 |

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

#### TDR Rollforward

The tables below present a summary of TDRs as of June 30, 2019 and June 30, 2018, and shows the changes in the balance during those periods:

| Three Months Ended June 30, 2019 (In thousands) | Commercial | Commercial Real Estate | Residential Real Estate and Other | Total |
| --- | ---: | ---: | ---: | ---: |
| Balance at beginning of period | **$54,040** | **$15,640** | **$18,682** | **$88,362** |
| Additions during the period | **2,454** | **1,274** | **5,762** | **9,490** |
| Reductions: |  |  |  |  |
| Charge-offs | **(15,607)** | **(127)** | **128** | **(15,606)** |
| Payments received | **(3,114)** | **(1,287)** | **(1,844)** | **(6,245)** |
| **Balance at period end** | **$37,773** | **$15,500** | **$22,728** | **$76,001** |

| Three Months Ended June 30, 2018 (In thousands) | Commercial | Commercial Real Estate | Residential Real Estate and Other | Total |
| --- | ---: | ---: | ---: | ---: |
| Balance at beginning of period | $21,544 | $17,391 | $8,741 | $47,676 |
| Additions during the period | 18,188 | 85 | 1,332 | 19,605 |
| Reductions: |  |  |  |  |
| Charge-offs | — | — | (15) | (15) |
| Removal of TDR loan status (1) | — | (170) | — | (170) |
| Payments received | (501) | (858) | (427) | (1,786) |
| **Balance at period end** | $39,231 | $16,448 | $9,631 | $65,310 |

*(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, 2019 (In thousands) | Commercial | Commercial Real Estate | Residential Real Estate and Other | Total |
| --- | ---: | ---: | ---: | ---: |
| Balance at beginning of period | **$36,319** | **$15,447** | **$14,336** | **$66,102** |
| Additions during the period | **21,384** | **1,576** | **10,248** | **33,208** |
| Reductions: |  |  |  | **—** |
| Charge-offs | **(15,607)** | **(127)** | **128** | **(15,606)** |
| Payments received | **(4,323)** | **(1,396)** | **(1,984)** | **(7,703)** |
| **Balance at period end** | **$37,773** | **$15,500** | **$22,728** | **$76,001** |

| Six Months Ended June 30, 2018 (In thousands) | Commercial | Commercial Real Estate | Residential Real Estate and Other | Total |
| --- | ---: | ---: | ---: | ---: |
| Balance at beginning of period | $23,917 | $17,500 | $8,369 | $49,786 |
| Additions during the period | 18,284 | 144 | 2,167 | 20,595 |
| Reductions: |  |  |  |  |
| Charge-offs | (2,208) | — | (370) | (2,578) |
| Removal of TDR loan status (1) | — | (170) | — | (170) |
| Payments received | (762) | (1,026) | (535) | (2,323) |
| **Balance at period end** | $39,231 | $16,448 | $9,631 | $65,310 |

*(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 ("OREO")

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

*(In thousands)*

|  | Three Months Ended June 30, 2019 | June 30, 2018 | Six Months Ended June 30, 2019 | June 30, 2018 |
| --- | ---: | ---: | ---: | ---: |
| Balance at beginning of period | **$21,520** | $36,598 | **$24,820** | $40,646 |
| Disposal/resolved | **(2,397)** | (4,557) | **(5,155)** | (8,236) |
| Transfers in at fair value, less costs to sell | **1,746** | 4,801 | **1,778** | 6,590 |
| Additions from acquisition | **—** | — | **—** | — |
| Fair value adjustments | **(1,032)** | (1,511) | **(1,606)** | (3,669) |
| Balance at end of period | **$19,837** | $35,331 | **$19,837** | $35,331 |

*(In thousands)*

|  | Period End June 30, 2019 | March 31, 2019 | June 30, 2018 |
| --- | ---: | ---: | ---: |
| Residential real estate | **$1,312** | $3,037 | $5,155 |
| Residential real estate development | **1,282** | 1,139 | 2,205 |
| Commercial real estate | **17,243** | 17,344 | 27,971 |
| Total | **$19,837** | $21,520 | $35,331 |

### Deposits

Total deposits at June 30, 2019 were $27.5 billion, an increase of $3.2 billion, or 13%, compared to total deposits at June 30, 2018. See Note 10 to the Consolidated Financial Statements in Item 1 of this report for a summary of period end deposit balances.

The following table sets forth, by category, the maturity of time certificates of deposit as of June 30, 2019:

| Time Certificates of Deposit Maturity/Re-pricing Analysis As of June 30, 2019 (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 | $75,122 | $32,378 | $103,079 | $745,645 | **$956,224** | **1.68%** |
| 4-6 months | — | 22,108 | — | 653,009 | **675,117** | **1.78** |
| 7-9 months | — | 22,094 | — | 778,564 | **800,658** | **2.04** |
| 10-12 months | — | 10,439 | — | 1,072,876 | **1,083,315** | **2.19** |
| 13-18 months | — | 15,064 | — | 520,874 | **535,938** | **2.17** |
| 19-24 months | — | 9,844 | — | 850,748 | **860,592** | **2.71** |
| 24+ months | 1,000 | 9,301 | — | 583,478 | **593,779** | **2.60** |
| Total | $76,122 | $121,228 | $103,079 | $5,205,194 | **$5,505,623** | **2.15%** |

*(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, 2019 Balance | Percent | March 31, 2019 Balance | Percent | June 30, 2018 Balance | Percent |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Non-interest bearing | **$6,487,627** | **25%** | $6,444,378 | 25% | $6,539,731 | 27% |
| NOW and interest bearing demand deposits | **2,878,021** | **11** | 2,803,338 | 11 | 2,295,268 | 10 |
| Wealth management deposits | **2,605,690** | **10** | 2,614,035 | 10 | 2,365,191 | 10 |
| Money market | **6,095,285** | **23** | 5,915,525 | 23 | 4,883,645 | 21 |
| Savings | **2,752,828** | **11** | 2,715,422 | 11 | 2,702,665 | 12 |
| Time certificates of deposit | **5,322,384** | **20** | 5,267,796 | 20 | 4,557,187 | 20 |
| Total average deposits | **$26,141,835** | **100%** | $25,760,494 | 100% | $23,343,687 | 100% |

Total average deposits for the second quarter of 2019 were $26.1 billion, an increase of $2.8 billion, or 12%, from the second quarter of 2018. The increase in average deposits is primarily attributable to the various acquisitions and branch openings along with additional deposits associated with relationships from marketing efforts.

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

#### Brokered Deposits

While the Company obtains a portion of its total deposits through brokered deposits, the Company does so primarily as an asset-liability management tool to assist in the management of interest rate risk, and 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, 2019 | 2018 | December 31, 2018 | 2017 | 2016 |
| --- | ---: | ---: | ---: | ---: | ---: |
| Total deposits | **$27,518,815** | $24,365,479 | $26,094,678 | $23,183,347 | $21,658,632 |
| Brokered deposits | **1,764,261** | 1,766,168 | 1,071,562 | 1,445,306 | 1,159,475 |
| Brokered deposits as a percentage of total deposits | **6.4%** | 7.2% | 4.1% | 6.2% | 5.4% |

86

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, FHLB advances, subordinated debt, secured borrowings and junior subordinated debentures. The Company evaluates the terms and unique characteristics of each source, as well as its asset-liability management position, in determining the use of such funding sources.

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

*(In thousands)*

|  | Three Months Ended June 30, 2019 | March 31, 2019 | June 30, 2018 |
| --- | ---: | ---: | ---: |
| FHLB advances | **$869,812** | $594,335 | $1,006,407 |
| Other borrowings: |  |  |  |
| Notes payable | **142,571** | 144,284 | 33,645 |
| Short-term borrowings | **42,214** | 111,413 | 14,985 |
| Secured borrowings | **187,100** | 162,367 | 142,948 |
| Other | **47,179** | 47,507 | 48,488 |
| Total other borrowings | **$419,064** | $465,571 | $240,066 |
| Subordinated notes | **220,771** | 139,217 | 139,125 |
| Junior subordinated debentures | **253,566** | 253,566 | 253,566 |
| Total other funding sources | **$1,763,213** | $1,452,689 | $1,639,164 |

FHLB advances provide the banks with access to fixed rate funds which are useful in mitigating interest rate risk and achieving an acceptable interest rate spread on fixed rate loans or securities. Additionally, the banks have the ability to borrow shorter-term, overnight funding from the FHLB for other general purposes. FHLB advances to the banks totaled $574.8 million at June 30, 2019, compared to $576.4 million at March 31, 2019 and $667.0 million at June 30, 2018.

Notes payable balances as of June 30, 2019 and December 31, 2018 represent the balances on a $200.0 million loan agreement with unaffiliated banks consisting of a $50.0 million revolving credit facility and a $150.0 million term facility. Both loan facilities are available for corporate purposes such as to provide capital to fund continued growth at existing bank subsidiaries, possible future acquisitions and for other general corporate matters. At June 30, 2019 and December 31, 2018, the Company had a balance under the term facility of $133.8 million and $144.5 million, respectively. The Company was contractually required to borrow the entire amount of the term facility on September 18, 2018 and all such borrowings must be repaid by September 18, 2023. During the second quarter of 2019, the Company borrowed $35.0 million on the Revolving Credit Facility and paid off such amount prior to June 30, 2019. As such, at June 30, 2019 as well as December 31, 2018 the Company had no outstanding balance on the $50.0 million revolving credit facility.

In connection with the establishment of the $200.0 million loan agreement, all outstanding notes payable balances under a $150.0 million loan agreement with unaffiliated banks consisting of a $75.0 million revolving credit facility and a $75.0 million term facility were paid in full. This $150.0 million loan agreement was also available for corporate purposes such as to provide capital to fund continued growth at existing bank subsidiaries, possible future acquisitions and for other general corporate matters. At June 30, 2018, the Company had a balance under the term facility of $30.0 million. At June 30, 2018, the Company had no outstanding balance on the $75.0 million revolving credit facility.

Short-term borrowings include securities sold under repurchase agreements and federal funds purchased. These borrowings totaled $10.2 million at June 30, 2019 compared to $50.6 million at March 31, 2019 and $21.4 million at June 30, 2018. Securities sold under repurchase agreements represent sweep accounts for certain customers in connection with master repurchase agreements at the banks. This funding category typically fluctuates based on customer preferences and daily liquidity needs of the banks, their customers and the banks’ operating subsidiaries.

The average balance of secured borrowings primarily represents a third party Canadian transaction ("Canadian Secured Borrowing"). Under the Canadian Secured Borrowing, in December 2014, the Company, through its subsidiary, FIFC Canada, sold an undivided co-ownership interest in all receivables owed to FIFC Canada to an unrelated third party in exchange for a cash payment of approximately C$150 million pursuant to a receivables purchase agreement (“Receivables Purchase Agreement”). The Receivables Purchase Agreement was amended in December 2015, effectively extending the maturity date from December 15, 2015 to December 15, 2017. Additionally, at that time, the unrelated third party paid an additional C$10 million, which increased the total payments to C$160 million. The Receivables Purchase Agreement was again amended in December 2017, effectively extending the maturity date from December 15, 2017 to December 16, 2019. Additionally, in December 2017, the unrelated third party paid an additional C$10 million, which increased the total payments to C$170 million. In June 2018, the unrelated third party paid an additional C$20 million, which increased the total payments to C$190 million. The Receivables Purchase Agreement was again amended in February 2019, effectively extending the maturity date from December 16, 2019 to December 15, 2020. Additionally, in February 2019, the unrelated third party paid an additional C$20 million, which increased the total payments to C$210 million. These transactions were not considered sales of receivables and, as such, related proceeds received are reflected on the Company’s Consolidated Statements of Condition as a secured borrowing owed to the unrelated third party and translated to the Company’s reporting currency as of the respective date. The translated balance of the Canadian Secured Borrowing under the Receivables Purchase Agreement totaled $213.7 million at June 30, 2019 compared to $157.2 million at March 31, 2019 and $144.6 million at June 30, 2018. At June 30, 2019, the interest rate of the Canadian Secured Borrowing was 2.7093%. The remaining balance within secured borrowings at June 30, 2019 represents other sold interests in certain loans by the Company that were not considered sales and, as such, related proceeds received are reflected on the Company’s Consolidated Statements of Condition as a secured borrowing owed to the various unrelated third parties.

Other borrowings at June 30, 2019 include a fixed-rate promissory note issued by the Company in June 2017 ("Fixed-Rate Promissory Note") related to and secured by two office buildings owned by the Company. At June 30, 2019, the Fixed-Rate Promissory Note had a balance of $47.1 million compared to $47.4 million at March 31, 2019 and $48.4 million at June 30, 2018. Under the Fixed-Rate Promissory Note, the Company makes monthly principal payments and pay interest at a fixed rate of 3.36% until maturity on June 30, 2022.

At June 30, 2019, the Company had outstanding subordinated notes totaling $436.0 million compared to $139.2 million and $139.1 million outstanding at March 31, 2019 and June 30, 2018, respectively. During the second quarter of 2019, the Company issued $300.0 million of subordinated notes, receiving $296.7 million in net proceeds. The notes have a stated interest rate of 4.85% and mature in June 2029. Additionally, at June 30, 2019, the Company had $139.3 million outstanding on previously issued subordinated debt. These notes have a stated interest rate of 5.00% and mature in June 2024. Subordinated notes are stated at par adjusted for unamortized costs paid related to the different issuances of such debt.

The Company had $253.6 million of junior subordinated debentures outstanding as of June 30, 2019, March 31, 2019 and June 30, 2018. The amounts reflected on the balance sheet represent the junior subordinated debentures issued to eleven trusts by the Company and equal the amount of the preferred and common securities issued by the trusts. At June 30, 2019, the Company included $245.5 million of the junior subordinated debentures, net of common securities, in Tier 2 regulatory capital.

See Notes 11 and 12 of the Consolidated Financial Statements presented under Item 1 of this report for details of period end balances and other information for these various funding sources.

### Shareholders’ Equity

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

|  | June 30, 2019 | March 31, 2019 | June 30, 2018 |
| --- | ---: | ---: | ---: |
| Tier 1 leverage ratio | **9.1%** | 9.1% | 9.4% |
| Risk-based capital ratios: |  |  |  |
| Tier 1 capital ratio | **9.6** | 9.8 | 10.0 |
| Common equity tier 1 capital ratio | **9.2** | 9.3 | 9.6 |
| Total capital ratio | **12.4** | 11.7 | 12.1 |
| Other ratio: |  |  |  |
| Total average equity-to-total average assets(1) | **10.7** | 10.6 | 10.7 |

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

|  | Minimum Capital Requirements | Well Capitalized |
| --- | ---: | ---: |
| Leverage ratio | 4.0% | 5.0% |
| Tier 1 capital to risk-weighted assets | 6.0 | 8.0 |
| Common equity Tier 1 capital to risk-weighted assets | 4.5 | 6.5 |
| Total capital to risk-weighted assets | 8.0 | 10.0 |

The Company’s principal sources of funds at the holding company level are dividends from its subsidiaries, borrowings under its loan agreement with unaffiliated banks and proceeds from the issuances of subordinated debt and additional equity. Refer to Notes 11, 12 and 18 of the Consolidated Financial Statements in Item 1 for further information on these various funding sources. Management is committed to maintaining the Company’s capital levels above the “Well Capitalized” levels established by the FRB 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 Series D preferred stock, the terms of the Company’s Trust Preferred Securities offerings and under certain financial covenants in the Company’s revolving and term facilities. In January and April of 2019 the Company declared a quarterly cash dividend of $0.25 per common share. In January, April, July and October of 2018, the Company declared a quarterly cash dividend of $0.19 per common share.

See Note 18 of the Consolidated Financial Statements presented under Item 1 of this report for details on the Company’s issuance of Series D preferred stock in June 2015. The Company hereby incorporates by reference Note 18 of the Consolidated Financial Statements presented under Item 1 of this report in its entirety.

### Announced Acquisitions

On July 25, 2019, the Company announced the signing of a definitive agreement to acquire SBC, Incorporated (“SBC”). SBC is the parent company of Countryside Bank, an Illinois state-chartered bank, which operates six banking offices located in the communities of Countryside, Burbank, Darien, Homer Glen, Oak Brook and Chicago, Illinois. As of March 31, 2019, Countryside Bank had approximately $594 million in assets, approximately $411 million in loans and approximately $509 million in deposits.

On June 5, 2019, the Company announced the signing of a definitive agreement to acquire STC Bancshares Corporation ("STC"). STC is the parent company of STC Capital Bank, an Illinois state charted bank, which operates five banking offices located in the communities of St. Charles, Geneva and South Elgin, Illinois. As of March 31, 2019, STC Capital Bank had approximately $277 million in assets, including approximately $204 million in loans, and approximately $246 million in deposits.

### 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 and equity securities with readily determinable fair values 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 Risk” section of this report for additional information.

### FORWARD-LOOKING STATEMENTS

This document contains forward-looking statements within the meaning of federal securities laws. Forward-looking information can be identified through the use of words such as “intend,” “plan,” “project,” “expect,” “anticipate,” “believe,” “estimate,” “contemplate,” “possible,” “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 2018 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:

- economic conditions that affect the economy, housing prices, the job market and other factors that may adversely affect the Company’s liquidity and the performance of its loan portfolios, particularly in the markets in which it operates;
- negative effects suffered by us or our customers resulting from changes in U.S. trade policies;
- 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;
- commercial real estate market conditions in the Chicago metropolitan area and southern Wisconsin;
- 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), which may result in loss of market share and reduced income from deposits, loans, advisory fees and income from other products;
- 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;
- harm to the Company’s reputation;
- any negative perception of the Company’s financial strength;
- ability of the Company 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 of the Company to use technology to provide products and services that will satisfy customer demands and create efficiencies in operations and to manage risks associated therewith;
- failure or breaches of our security systems or infrastructure, or those of third parties;
- security breaches, including denial of service attacks, hacking, social engineering attacks, malware intrusion or data corruption attempts and identity theft;
- adverse effects on our information technology systems resulting from failures, human error or cyberattacks;
- 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 to which the Company is subject, including any effect on our reputation;
- losses incurred in connection with repurchases and indemnification payments related to mortgages and increases in reserves associated therewith;
- 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, and any unanticipated impact of the Tax Act;
- changes in accounting standards, rules and interpretations such as the new CECL standard, and the impact on the Company’s financial statements;
- the ability of the Company to receive dividends from its subsidiaries;
- uncertainty about the future of LIBOR;
- a decrease in the Company’s capital ratios, including as a result of 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;
- a lowering of our credit rating;
- changes in U.S. monetary policy and changes to the Federal Reserve’s balance sheet as a result of the end of its program of quantitative easing or otherwise;
- 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 regulatory environment;
- 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. Any such statement speaks only as of the date the statement was made or as of such date that may be referenced within the statement. The Company undertakes no obligation to update any forward-looking statement to reflect the impact of circumstances or events that arise after the date of this report. 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, 6,029 characters.

### QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

Interest rate risk arises when the maturity or re-pricing periods and interest rate indices of the interest earning assets, interest bearing liabilities, and derivative financial instruments are different. It is the risk that changes in the level of market interest rates will result in disproportionate changes in the value of, and the net earnings generated from, the Company’s interest earning assets, interest bearing liabilities and derivative financial instruments. The Company continuously monitors not only the organization’s current net interest margin, but also the historical trends of these margins. In addition, management attempts to identify potential adverse changes in net interest income in future years as a result of interest rate fluctuations by performing simulation analysis of various interest rate environments. If a potential adverse change in net interest margin and/or net income is identified, management would take appropriate actions with its asset-liability structure to mitigate these potentially adverse situations.

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

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

The following interest rate scenarios display the percentage change in net interest income over a one-year time horizon assuming increases of 100 and 200 basis points and decreases of 100 basis points. The Static Shock Scenario results incorporate actual cash flows and repricing characteristics for balance sheet instruments following an instantaneous, parallel change in market rates based upon a static (i.e. no growth or constant) balance sheet. Conversely, the Ramp Scenario results incorporate management’s projections of future volume and pricing of each of the product lines following a gradual, parallel change in market rates over twelve months. Actual results may differ from these simulated results due to timing, magnitude, and frequency of interest rate changes as well as changes in market conditions and management strategies. The interest rate sensitivity for both the Static Shock and Ramp Scenarios at June 30, 2019, March 31, 2019 and June 30, 2018 is as follows:

| Static Shock Scenarios | +200 Basis Points | +100 Basis Points | -100 Basis Points |
| --- | ---: | ---: | ---: |
| **June 30, 2019** | **17.3%** | **8.9%** | **(10.2)%** |
| March 31, 2019 | 14.9 | 7.8 | (8.5) |
| June 30, 2018 | 19.3 | 9.7 | (10.7) |

| Ramp Scenarios | +200 Basis Points | +100 Basis Points | -100 Basis Points |
| --- | ---: | ---: | ---: |
| **June 30, 2019** | **8.3%** | **4.3%** | **(4.6)%** |
| March 31, 2019 | 6.7 | 3.5 | (3.3) |
| June 30, 2018 | 8.7 | 4.5 | (4.4) |

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, floors and collars, 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 15 of the Consolidated Financial Statements in Item 1 of this report for further information on the Company’s derivative financial instruments.

During the first six months of 2019 and 2018, the Company entered into certain covered call option transactions related to certain securities held by the Company. The Company uses these option transactions (rather than entering into other derivative interest rate contracts, such as interest rate floors) to economically hedge positions and compensate for net interest margin compression by increasing the total return associated with the related securities through fees generated from these options. Although the revenue received from these options is recorded as non-interest income rather than interest income, the increased return attributable to the related securities from these options contributes to the Company’s overall profitability. The Company’s exposure to interest rate risk may be impacted by these transactions. To mitigate this risk, the Company may acquire fixed rate term debt or use financial derivative instruments. There were no covered call options outstanding as of June 30, 2019 and 2018.

## 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, 176 characters.

There have been 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, 2018.

Filed Aug 9, 2019.
Source: SEC EDGAR, the filing index for accession 0001015328-19-000144. Last ingested by Listed: Nov 5, 2026, 14:04 ET. No prices; not investment advice.