UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 0-21923

WINTRUST FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

Illinois		36-3873352
(State of incorporation or organization)		(I.R.S. Employer Identification No.)

727 North Bank Lane
Lake Forest, Illinois 60045

(847) 615-4096

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common Stock — no par value, 24,163,068 shares, as of November 5, 2009

 

 

TABLE OF CONTENTS

				Page
PART I. — FINANCIAL INFORMATION
ITEM 1.		Financial Statements			1-37
ITEM 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			38-78
ITEM 3.		Quantitative and Qualitative Disclosures About Market Risk			79-80
ITEM 4.		Controls and Procedures			81
PART II. — OTHER INFORMATION
ITEM 1.		Legal Proceedings		NA
ITEM 1A.		Risk Factors			82-89
ITEM 2.		Unregistered Sales of Equity Securities and Use of Proceeds			89
ITEM 3.		Defaults Upon Senior Securities		NA
ITEM 4.		Submission of Matters to a Vote of Security Holders		NA
ITEM 5.		Other Information		NA
ITEM 6.		Exhibits			89
		Signatures			90
EX-31.1
EX-31.2
EX-32.1

PART I

ITEM 1. FINANCIAL STATEMENTS

WINTRUST FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION

		(Unaudited)								(Unaudited)
		September 30,				December 31,				September 30,
(In thousands)		2009				2008				2008
Assets
Cash and due from banks		$	128,898			$	219,794			$	158,201
Federal funds sold and securities purchased under resale agreements			22,863				226,110				35,181
Interest bearing deposits with banks			1,168,362				123,009				4,686
Available-for-sale securities, at fair value			1,434,248				784,673				1,469,500
Trading account securities			29,204				4,399				2,243
Brokerage customer receivables			19,441				17,901				19,436
Loans held-for-sale, at fair value			187,505				51,029				63,570
Loans held-for-sale, at lower of cost or market			5,750				10,087				4,828
Loans, net of unearned income			8,275,257				7,621,069				7,322,545
Less: Allowance for loan losses			95,096				69,767				66,327
Net loans			8,180,161				7,551,302				7,256,218
Premises and equipment, net			352,890				349,875				349,388
Accrued interest receivable and other assets			315,806				240,664				209,970
Trade date securities receivable			—				788,565				—
Goodwill			276,525				276,310				276,310
Other intangible assets			14,368				14,608				15,389
Total assets		$	12,136,021			$	10,658,326			$	9,864,920
Liabilities and Shareholders’ Equity
Deposits:
Non-interest bearing		$	841,668			$	757,844			$	717,587
Interest bearing			9,005,495				7,618,906				7,111,940
Total deposits			9,847,163				8,376,750				7,829,527
Notes payable			1,000				1,000				42,025
Federal Home Loan Bank advances			433,983				435,981				438,983
Other borrowings			252,071				336,764				296,391
Subordinated notes			65,000				70,000				75,000
Junior subordinated debentures			249,493				249,515				249,537
Trade date securities payable			—				—				2,000
Accrued interest payable and other liabilities			181,229				121,744				122,126
Total liabilities			11,029,939				9,591,754				9,055,589
Shareholders’ equity:
Preferred stock, no par value; 20,000,000 shares authorized:
Series A — $1,000 liquidation value; 50,000 shares issued and outstanding at September 30, 2009, December 31, 2008 and September 30, 2008			49,379				49,379				49,379
Series B — $1,000 liquidation value; 250,000 shares issued and outstanding at September 30, 2009 and December 31, 2008; no shares issued and outstanding at September 30, 2008			234,682				232,494				—
Common stock, no par value; $1.00 stated value; 60,000,000 shares authorized; 26,965,411, 26,610,714 and 26,547,839 shares issued at September 30, 2009, December 31, 2008 and September 30, 2008, respectively			26,965				26,611				26,548
Surplus			580,988				571,887				551,453
Treasury stock, at cost, 2,862,343 at September 30, 2009 and 2,854,040 shares at December 31, 2008 and September 30, 2008			(122,437	)			(122,290	)			(122,290	)
Retained earnings			342,873				318,793				318,066
Accumulated other comprehensive loss			(6,368	)			(10,302	)			(13,825	)
Total shareholders’ equity			1,106,082				1,066,572				809,331
Total liabilities and shareholders’ equity		$	12,136,021			$	10,658,326			$	9,864,920

See accompanying notes to unaudited consolidated financial statements

WINTRUST FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
(In thousands, except per share data)		2009				2008				2009				2008
Interest income
Interest and fees on loans		$	126,448			$	108,495			$	343,637			$	336,251
Interest bearing deposits with banks			778				27				2,205				215
Federal funds sold and securities purchased under resale agreements			106				197				233				1,303
Securities			14,106				17,599				44,252				50,233
Trading account securities			7				23				86				69
Brokerage customer receivables			132				228				372				834
Total interest income			141,577				126,569				390,785				388,905
Interest expense
Interest on deposits			42,806				53,405				132,261				168,697
Interest on Federal Home Loan Bank advances			4,536				4,583				13,492				13,696
Interest on notes payable and other borrowings			1,779				2,661				5,401				8,331
Interest on subordinated notes			333				786				1,341				2,716
Interest on junior subordinated debentures			4,460				4,454				13,348				13,643
Total interest expense			53,914				65,889				165,843				207,083
Net interest income			87,663				60,680				224,942				181,822
Provision for credit losses			91,193				24,129				129,329				42,985
Net interest income after provision for credit losses			(3,530	)			36,551				95,613				138,837
Non-interest income
Wealth management			7,501				7,044				20,310				22,680
Mortgage banking			13,204				4,488				52,032				18,120
Service charges on deposit accounts			3,447				2,674				9,600				7,612
Gain on sales of premium finance receivables			3,629				456				4,147				2,163
(Losses) gains on available-for-sale securities, net			(412	)			920				(910	)			(553	)
Gain on bargain purchase			113,062				—				113,062				—
Other			10,249				6,548				34,318				30,283
Total non-interest income			150,680				22,130				232,559				80,305
Non-interest expense
Salaries and employee benefits			48,088				35,823				138,923				109,471
Equipment			4,069				4,050				12,022				12,025
Occupancy, net			5,884				5,666				17,682				16,971
Data processing			3,226				2,850				9,578				8,566
Advertising and marketing			1,488				1,343				4,003				3,709
Professional fees			4,089				2,195				9,843				6,490
Amortization of other intangible assets			677				781				2,040				2,348
Other			25,042				10,491				59,679				31,648
Total non-interest expense			92,563				63,199				253,770				191,228
Income (loss) before taxes			54,587				(4,518	)			74,402				27,914
Income tax expense (benefit)			22,592				(2,070	)			29,500				9,381
Net income (loss)			31,995				(2,448	)			44,902				18,533
Preferred stock dividends and discount accretion			4,668				544				14,668				544
Net income (loss) applicable to common shares		$	27,327			$	(2,992	)		$	30,234			$	17,989
Net income (loss) per common share — Basic		$	1.14			$	(0.13	)		$	1.26			$	0.76
Net income (loss) per common share — Diluted		$	1.07			$	(0.13	)		$	1.25			$	0.75
Cash dividends declared per common share		$	0.09			$	0.18			$	0.27			$	0.36
Weighted average common shares outstanding			24,052				23,644				23,958				23,590
Dilutive potential common shares			2,493				—				323				525
Average common shares and dilutive common shares			26,545				23,644				24,281				24,115

See accompanying notes to unaudited consolidated financial statements.

WINTRUST FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)

																						Accumulated
																						Other				Total
		Preferred				Common								Treasury				Retained				Comprehensive				Shareholders’
(In thousands)		Stock				Stock				Surplus				Stock				Earnings				Income (Loss)				Equity
Balance at December 31, 2007		$	—			$	26,281			$	539,586			$	(122,196	)		$	309,556			$	(13,672	)		$	739,555
Comprehensive income:
Net income			—				—				—				—				18,533				—				18,533
Other comprehensive income, net of tax:
Unrealized losses on securities, net of reclassification adjustment			—				—				—				—				—				(212	)			(212	)
Unrealized gains on derivative Instruments			—				—				—				—				—				59				59
Comprehensive income																											18,380
Cash dividends declared on common stock			—				—				—				—				(8,487	)			—				(8,487	)
Dividends on preferred stock			—				—				—				—				(544	)			—				(544	)
Common stock repurchases			—				—				—				(94	)			—				—				(94	)
Stock-based compensation			—				—				7,612				—				—				—				7,612
Cumulative effect of change in accounting for split-dollar life insurance			—				—				—				—				(992	)			—				(992	)
Issuance of preferred stock, net of issuance costs			49,379				—				—				—				—				—				49,379
Common stock issued for:
Exercise of stock options and warrants			—				130				2,959				—				—				—				3,089
Restricted stock awards			—				84				(629	)			—				—				—				(545	)
Employee stock purchase plan			—				23				795				—				—				—				818
Director compensation plan			—				30				1,130				—				—				—				1,160
Balance at September 30, 2008		$	49,379			$	26,548			$	551,453			$	(122,290	)		$	318,066			$	(13,825	)		$	809,331
Balance at December 31, 2008		$	281,873			$	26,611			$	571,887			$	(122,290	)		$	318,793			$	(10,302	)		$	1,066,572
Comprehensive income:
Net income			—				—				—				—				44,902				—				44,902
Other comprehensive income, net of tax:
Unrealized gains on securities, net of reclassification adjustment			—				—				—				—				—				2,154				2,154
Unrealized gains on derivative instruments			—				—				—				—				—				2,089				2,089
Comprehensive income																											49,145
Cash dividends declared on common stock			—				—				—				—				(6,463	)			—				(6,463	)
Dividends on preferred stock			—				—				—				—				(12,480	)			—				(12,480	)
Accretion on preferred stock			2,188				—				—				—				(2,188	)			—				—
Common stock repurchases			—				—				—				(147	)			—				—				(147	)
Stock-based compensation			—				—				5,132				—				—				—				5,132
Cumulative effect of change in accounting for other-than-temporary impairment			—				—				—				—				309				(309	)			—
Common stock issued for:
Exercise of stock options and warrants			—				175				2,482				—				—				—				2,657
Restricted stock awards			—				73				(820	)			—				—				—				(747	)
Employee stock purchase plan			—				56				635				—				—				—				691
Director compensation plan			—				50				1,672				—				—				—				1,722
Balance at September 30, 2009		$	284,061			$	26,965			$	580,988			$	(122,437	)		$	342,873			$	(6,368	)		$	1,106,082

		Nine Months Ended September 30,
		2009				2008
Other Comprehensive Income:
Unrealized gains (losses) on available-for-sale securities arising during the period, net		$	2,435			$	(1,246	)
Unrealized gains on derivative instruments arising during the period, net			3,399				615
Less: Reclassification adjustment for losses included in net income, net			(910	)			(553	)
Less: Income tax expense (benefit)			2,501				(75	)
Other Comprehensive income (loss)		$	4,243			$	(153	)

See accompanying notes to unaudited consolidated financial statements.

WINTRUST FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

		Nine Months Ended
		September 30,
(In thousands)		2009				2008
Operating Activities:
Net income		$	44,902			$	18,533
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses			129,329				42,985
Depreciation and amortization			15,246				15,350
Stock-based compensation expense			5,132				7,612
Tax (expense) benefit from stock-based compensation arrangements			(140	)			558
Excess tax benefits from stock-based compensation arrangements			(724	)			(684	)
Net amortization (accretion) of premium on securities			129				(1,164	)
Mortgage servicing rights fair value change and amortization, net			2,057				1,053
Originations and purchases of loans held-for-sale			(3,713,883	)			(1,290,805	)
Originations of premium finance receivables held-for-sale			(790,044	)			—
Proceeds from sales and securitizations of premium finance receivables held-for-sale			106,282				—
Proceeds from sales of mortgage loans held-for-sale			3,620,400				1,342,456
Bank owned life insurance income, net of claims			(1,403	)			(1,941	)
Gain on sales of premium finance receivables			(4,147	)			(2,163	)
Increase in trading securities, net			(24,805	)			(672	)
Net (increase) decrease in brokerage customer receivables			(1,540	)			4,770
Gain on mortgage loans sold			(38,656	)			(10,497	)
Losses on available-for-sale securities, net			910				553
Loss on sales of premises and equipment, net			366				84
Bargain purchase gain			(113,062	)			—
(Increase) decrease in accrued interest receivable and other assets, net			(34,073	)			(8,241	)
Increase (decrease) in accrued interest payable and other liabilities, net			25,599				18,963
Net Cash (Used for) Provided by Operating Activities			(772,125	)			136,750
Investing Activities:
Proceeds from maturities of available-for-sale securities			1,146,564				687,323
Proceeds from sales of available-for-sale securities			1,145,137				744,488
Purchases of available-for-sale securities			(2,153,313	)			(1,503,619	)
Proceeds from sales and securitizations of premium finance receivables			600,000				217,834
Net cash paid for acquisition			(685,456	)			—
Net (increase) decrease in interest-bearing deposits with banks			(1,045,353	)			5,724
Net decrease (increase) in loans			122,433				(781,956	)
Purchases of premises and equipment, net			(16,404	)			(23,719	)
Net Cash Used for Investing Activities			(886,392	)			(653,925	)
Financing Activities:
Increase in deposit accounts			1,470,407				358,033
(Decrease) increase in other borrowings, net			(84,693	)			41,957
Decrease in notes payable, net			—				(18,675	)
(Decrease) increase in Federal Home Loan Bank advances, net			(2,000	)			23,802
Repayment of subordinated note			(5,000	)			—
Issuance of preferred stock, net of issuance costs			—				49,379
Excess tax benefits from stock—based compensation arrangements			724				684
Issuance of common shares resulting from exercise of stock options, employee stock purchase plan and conversion of common stock warrants			2,741				2,804
Common stock repurchases			(147	)			(94	)
Dividends paid			(17,658	)			(8,487	)
Net Cash Provided by Financing Activities			1,364,374				449,403
Net Decrease in Cash and Cash Equivalents			(294,143	)			(67,772	)
Cash and Cash Equivalents at Beginning of Period			445,904				261,154
Cash and Cash Equivalents at End of Period		$	151,761			$	193,382

See accompanying notes to unaudited consolidated financial statements.

WINTRUST FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(1) Basis of Presentation

The consolidated financial statements of Wintrust Financial Corporation and Subsidiaries (“Wintrust” or “the Company”) presented herein are unaudited, but in the opinion of management reflect all necessary adjustments of a normal or recurring nature for a fair presentation of results as of the dates and for the periods covered by the consolidated financial statements.

The accompanying consolidated financial statements are unaudited and do not include information or footnotes necessary for a complete presentation of financial condition, results of operations or cash flows in accordance with generally accepted accounting principles. The consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the Company’s Annual Report and Form 10-K for the year ended December 31, 2008. Operating results reported for the three-month and year-to-date periods are not necessarily indicative of the results which may be expected for the entire year. Reclassifications of certain prior period amounts have been made to conform to the current period presentation.

The preparation of the financial statements requires management to make estimates, assumptions and judgments that affect the reported amounts of assets and liabilities. Management believes that the estimates made are reasonable, however, changes in estimates may be required if economic or other conditions develop differently from management’s expectations. In preparing these financial statements, management has evaluated events and transactions for potential recognition and or disclosure through November 9, 2009, the date the financial statements were issued. 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 of producing results that could be materially different than originally reported. Management views critical accounting policies to be those which are highly dependent on subjective or complex judgments, estimates and assumptions, and where changes in those estimates and assumptions could have a significant impact on the financial statements. Management currently views the determination of the allowance for loan losses and the allowance for losses on lending-related commitments, 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 the most subject to revision as new information becomes available. Descriptions of our significant accounting policies are included in Note 1 (Summary of Significant Accounting Policies) of the Company’s 2008 Form 10-K.

(2) Recent Accounting Developments

Accounting Standards Codification

In June 2009, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles — a replacement of FASB Statement No. 162” (“The Codification”). The Codification reorganized existing U.S. accounting and reporting standards issued by the FASB and other related private sector standard setters into a single source of authoritative accounting principles arranged by topic. The Codification supersedes all existing U.S. accounting standards; all other accounting literature not included in the Codification (other than Securities and Exchange Commission guidance for publicly-traded companies) is considered non-authoritative. The Codification was effective on a prospective basis for interim and annual reporting periods ending after September 15, 2009. The adoption of the Codification changed the Company’s references to U.S. GAAP accounting standards but did not impact the Company’s financial statements.

Accounting for Transfers of Financial Assets and Variable Interest Entities

In June 2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial Assets, an amendment of FASB Statement No. 140” (“SFAS 166”) and SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)” (SFAS 167) which have not yet been adopted into Codification. The amendments will become effective for the Company on January 1, 2010. SFAS 166 amends SFAS 140 by removing the concept of a qualifying special-purpose entity, changes the requirements for derecognizing financial assets and requires additional disclosures about a

transferor’s continuing involvement in transferred financial assets. As described more fully in Note 8 — Loan Securitization, the Company has transferred certain loans to a qualifying special purpose entity (“QSPE”) which is not currently subject to consolidation.

SFAS 167 amends FIN 46(R) “Consolidation of Variable Interest Entities” (“FIN 46R”) by significantly changing the criteria by which an enterprise determines whether it must consolidate a variable interest entity (“VIE”). A VIE is an entity, typically an SPE, which has insufficient equity at risk or which is not controlled through voting rights held by equity investors. FIN 46R currently requires that a VIE be consolidated by the enterprise that will absorb a majority of the expected losses or expected residual returns created by the assets of the VIE. SFAS 167 amends FIN 46R to require that a VIE be consolidated by the enterprise that has both the power to direct the activities that most significantly impact the VIE’s economic performance and the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE. SFAS 167 also requires that an enterprise continually reassess, based on current facts and circumstances, whether it should consolidate the VIEs with which it is involved.

The adoption of the amendments on January 1, 2010 will result in the consolidation of a QSPE that is not currently recorded on the Company’s Consolidated Statement of Condition. The consolidation will result in an increase in net assets, primarily loans and other borrowings, of approximately $600 million. The consolidation will also result in an increase in the provision for credit losses and will require a reversal of a portion of previously recognized securitization gains as a cumulative effect adjustment to retained earnings. See Note 8 — Loan Securitization, for additional information regarding the QSPE.

Subsequent Events

In May 2009, the FASB issued new guidance for the recognition and disclosure of subsequent events not addressed in other applicable generally accepted accounting principles. The new guidance, which is now part of Accounting Standards Codification (“ASC”) 855, “Subsequent Events”, requires entities to disclose the date through which subsequent events have been evaluated and the nature and estimated financial effects of certain subsequent events. This new guidance is effective for interim or annual financial periods ending after June 15, 2009, and will be applied prospectively. The adoption of this new guidance did not have a material impact on the Company’s financial statements. See Note 18 — Subsequent Events, for disclosures relating to subsequent events.

Disclosures about Fair Value of Financial Instruments

In April 2009, the FASB issued new guidance related to the disclosure of the fair value of financial instruments. The new guidance, which is now part of ASC 825, “Financial Instruments”, requires disclosure of the fair value of financial instruments whenever a publicly traded company issues financial information in interim reporting periods in addition to the annual disclosure required at year-end. The provisions of the new guidance were effective for interim periods ending after June 15, 2009. The Company adopted the new guidance in the second quarter of 2009. See Note 5 — Available-for-sale Securities, for the required disclosures in accordance with this guidance.

Other-Than-Temporary Impairments

In April 2009, the FASB issued new guidance for the accounting for other-than temporary impairments. The new guidance, which is now part of ASC 320 “Investments — Debt and Equity Securities” (“ASC 320”), amends the other-than-temporary impairment (“OTTI”) guidance in GAAP for debt securities and the presentation and disclosure requirements of OTTI on debt and equity securities in the financial statements. This new guidance does not amend existing recognition and measurement guidance related to OTTI of equity securities. The new guidance requires separate display of losses related to credit deterioration and losses related to other market factors. When an entity does not intend to sell the security and it is more likely than not that an entity will not have to sell the security before recovery of its cost basis, it must recognize the credit component of OTTI in earnings and the remaining portion in other comprehensive income. The new guidance is effective for interim reporting periods ending after June 15, 2009, with early adoption permitted. The Company adopted the new guidance in the second quarter of 2009. See Note 5 - Available-for-sale Securities, for a further discussion on the adoption of the new guidance.

Additional Fair Value Measurement Guidance

In April 2009, the FASB issued new guidance for determining when a transaction is not orderly and for estimating fair value when there has been a significant decrease in the volume and level of activity for an asset or liability. The new guidance, which is now part of ASC 820, “Fair Value Measurements and Disclosures” (ASC 820), requires disclosure of the inputs and valuation techniques used, as well as any changes in valuation techniques and inputs used during the period, to measure fair value in interim and annual periods. In addition, the presentation of the fair value hierarchy is required to be presented by major security type as described in ASC 320. The provisions of the new guidance were effective for interim periods ending after June 15, 2009. The adoption of the new guidance in the second quarter of 2009 did not have a material effect on the Company’s financial statements.

Derivative Instruments and Hedging Activities

In March 2008, the FASB issued new guidance on the disclosure of derivative instruments and hedging activities. The new guidance, which is now a part of ASC 815, “Derivatives and Hedging Activities”, requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of, and gains and losses on, derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. The provisions of the new guidance were effective for financial statements issued for fiscal years beginning after November 15, 2008. See Note 14 — Derivative Financial Instruments, for the required disclosures in accordance with this new guidance.

Noncontrolling Interests in Consolidated Financial Statements

In December 2007, the FASB issued new guidance for the accounting for noncontrolling interests. The new guidance, which is now part of ASC 810, “Consolidation”, establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. The guidance is effective for fiscal years beginning after December 15, 2008. The adoption of the new guidance did not have a material impact on the Company’s financial statements.

Business Combinations

In April 2009, the FASB issued revised guidance for recognizing and measuring pre-acquisition contingencies in a business combination. The revised guidance, which is now part of ASC 805, “Business Combinations”, revises the definition of a business and amends and clarifies prior guidance to address application issues on initial recognition and measurement, subsequent measurement and accounting, and disclosure of assets and liabilities arising from contingencies in a business combination. The revised guidance is effective for assets or liabilities arising from contingencies in business combinations for which the acquisition date is on or after the first annual reporting period beginning on or after December 15, 2008. The adoption of the revised guidance did not have a material impact on the Company’s financial statements.

In December 2007, the FASB issued revised guidance for the accounting for business combinations. The revised guidance, which is now part of ASC 805, “Business Combinations” (ASC 805), requires the acquiring entity in a business combination to recognize the full fair value of the assets acquired and liabilities assumed in a transaction at the acquisition date; the immediate expense recognition of transaction costs; and accounting for restructuring plans separately from the business combination. The application of ASC 805 eliminates separate recognition of the acquired allowance for loan losses on the acquirer’s balance sheet as credit related factors will be incorporated directly into the fair value of the loans recorded at the acquisition date. The application of ASC 805 is effective for business combinations occurring after December 15, 2008. The Company applied ASC 805 to its July 28, 2009 acquisition of a majority of the U.S. life insurance premium finance assets of A.I. Credit Corp. and A.I. Credit Consumer Discount Company, subsidiaries of American International Group, Inc. See Note 3 — Business Combinations, for more information on ASC 805.

(3) Business Combinations

On July 28, 2009 First Insurance Funding Corporation (“FIFC”), a wholly-owned subsidiary of the Company, purchased the majority of the U.S. life insurance premium finance assets of A.I. Credit Corp. and A.I. Credit Consumer Discount Company (“the sellers”), subsidiaries of American International Group, Inc. After giving effect to post-closing adjustments, an aggregate unpaid principal loan balance of $949.3 million was purchased for $685.3 million in cash. At closing, a portion of the portfolio, with an aggregate unpaid principal loan balance of $321.1 million, and a corresponding portion of the purchase price of $232.8 million were placed in escrow, pending the receipt of required third party consents. To the extent any of the required consents are not obtained prior to October 28, 2010, the corresponding portion of the portfolio will be reassumed by the applicable seller, and the corresponding portion of the purchase price will be returned to FIFC. Also, as a part of the purchase, an aggregate of $84.4 million of additional life insurance premium finance assets were available for future purchase by FIFC subject to the satisfaction of certain conditions. The majority of these conditions were satisfied in the fourth quarter of 2009, see Note 18 — Subsequent Events, for more details.

The purchase was accounted for under the acquisition method of accounting in accordance with ASC 805. Accordingly, the impact related to this transaction is included in the Company’s financial statements only since the effective date of acquisition. The purchased assets and assumed liabilities were recorded at their respective acquisition date fair values, and identifiable intangible assets were recorded at fair value. Under ASC 805 a gain is recorded equal to the amount by which the fair value of assets purchased exceeded the fair value of liabilities assumed and consideration paid. As such, the Company recognized a $113.1 million bargain purchase gain in the third quarter of 2009 relating to all of the loans it acquired which have all contingencies removed as of September 30, 2009. This gain is shown as a component of non-interest income on the Company’s Consolidated Statement of Income.

The difference between the fair value of the loans acquired and the outstanding principal balance of these loans represents a discount of $113.3 million and is comprised of two components, an accretable component totaling $74.8 million and a non-accretable component totaling $38.5 million. The accretable component will be recognized into interest income using the effective yield method over its estimated remaining life. The non-accretable portion will be evaluated each quarter and if the loans’ credit related conditions improve, a relative portion will be transferred to the accretable component and accreted over future periods. In the event of a prepayment, accretion of both the accretable and non-accretable component will be accelerated into the quarter in which a specific loan prepays in whole. Currently, the Company has not established an allowance for loan losses relating to the portfolio purchased in this transaction. If credit related conditions deteriorate, an allowance related to these loans will be established as part of the provision for loan losses.

The following table summarizes the net fair value of assets acquired and the resulting bargain purchase gain at the date of acquisition:

(Dollars in thousands)
Assets:
Loans		$	835,952
Customer list intangible			1,800
Other assets			150
Total assets			837,902
Cash paid			685,456
Total bargain purchase gain		$	152,446
Bargain purchase gain recorded in third quarter 2009			113,062
Bargain purchase gain deferred pending third party consents		$	39,384

(4) Cash and Cash Equivalents

For purposes of the Consolidated Statements of Cash Flows, the Company considers cash and cash equivalents to include cash on hand, cash items in the process of collection, non-interest bearing amounts due from correspondent banks, federal funds sold and securities purchased under resale agreements with original maturities of three months or less.

(5) Available-for-sale Securities

The following tables are a summary of the available-for-sale securities portfolio as of the dates shown:

		September 30, 2009
						Gross				Gross
		Amortized				Unrealized				Unrealized				Fair
(Dollars in thousands)		Cost				Gains				Losses				Value
U.S. Treasury		$	121,597			$	—			$	(8,701	)		$	112,896
U.S. Government agencies			655,161				1,403				(1,540	)			655,024
Municipal			64,790				2,400				(290	)			66,900
Corporate notes and other:
Financial issuers (1)		42,948				1,170				(3,173		)		40,945
Retained subordinated securities		47,647				357				—				48,004
Other		11,205				622				(270		)		11,557
Mortgage-backed: (2)
Agency		214,683				11,277				(8		)		225,952
Non-agency CMOs		106,285				5,053				(705		)		110,633
Non-agency CMOs — Alt A		54,840				900				(1,655		)		54,085
Federal Reserve and FHLB stock			71,889				—				—				71,889
Other equity securities			36,415				90				(142	)			36,363
Total available-for-sale securities		$	1,427,460			$	23,272			$	(16,484	)		$	1,434,248

		December 31, 2008
						Gross				Gross
		Amortized				Unrealized				Unrealized				Fair
(Dollars in thousands)		Cost				Gains				Losses				Value
U.S. Treasury		$	—			$	—			$	—			$	—
U.S. Government agencies			297,191				1,539				(1	)			298,729
Municipal			59,471				563				(739	)			59,295
Corporate notes and other debt			36,157				223				(8,339	)			28,041
Mortgage-backed			272,492				12,859				(44	)			285,307
Federal Reserve/FHLB stock and other equity securities			115,414				—				(2,113	)			113,301
Total available-for-sale securities		$	780,725			$	15,184			$	(11,236	)		$	784,673

recognition of other than temporary impairment for debt securities resulted in the recognition of a cumulative-effect adjustment to retained earnings with a corresponding charge to accumulated other comprehensive income of $309,000. No impairment charges were recorded in the second quarter of 2009. In the third quarter of 2009, the Company recognized a $472,000 impairment charge on a corporate note of a financial issuer.

The following tables present the portion of the Company’s available-for-sale securities portfolio which has gross unrealized losses, reflecting the length of time that individual securities have been in a continuous unrealized loss position at September 30, 2009:

		Continuous unrealized								Continuous unrealized
		losses existing for								losses existing for
		less than 12 months								greater than 12 months								Total
		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
(Dollars in thousands)		Value				Losses				Value				Losses				Value				Losses
U.S. Treasury		$	112,896				(8,701	)			—				—				112,896				(8,701	)
U.S. Government agencies			132,423				(1,540	)			—				—				132,423				(1,540	)
Municipal			13,992				(196	)			2,105				(94	)			16,097				(290	)
Corporate notes and other:
Financial issuers		11,096				(698		)		3,462				(2,475		)		14,558				(3,173		)
Retained subordinated securities		—				—				—				—				—				—
Other		—				—				7,477				(270		)		7,477				(270		)
Mortgage-backed:
Agency		390				(8		)		—				—				390				(8		)
Non-agency CMOs		37,641				(699		)		157				(6		)		37,798				(705		)
Non-agency CMOs — Alt A		34,107				(1,655		)		—				—				34,107				(1,655		)
Federal Reserve and FHLB stock			—				—				—				—				—				—
Other equity securities		—					—			2,230					(142	)		2,230					(142	)
Total		$	342,545				(13,497	)		15,431					(2,987	)		357,976					(16,484	)

The Company does not consider these unrealized losses to be other-than-temporary at September 30, 2009. The Company does not intend to sell these investments and it is not more likely than not that the Company will be required to sell these investments before recovery of the amortized cost bases, which may be the maturity dates of the securities. The unrealized losses within each category have occurred as a result of changes in interest rates and market spreads subsequent to purchase. A substantial portion of the securities that have unrealized losses are either U.S. Treasury securities or corporate notes of financial issuers. The corporate notes of financial issuers with continuous losses existing for greater than 12 months represent three trust-preferred securities with unrealized losses totaling $2.5 million. These three securities represent financial issuers with high investment grade credit ratings. Most of these obligations were purchased in 1999, have interest rates significantly below the rates at which these types of obligations are currently issued, and have maturity dates in 2027. Although they are currently callable by the issuers, it is unlikely that they will be called in the near future as the interest rates are very attractive to the issuers. A review of the issuers indicated that they have recently raised equity capital and/or have strong capital ratios. The Company does not own any pooled trust-preferred securities.

The Company conducts a regular assessment of its investment securities to determine whether securities are other-than-temporarily impaired considering, among other factors, the nature of the securities, credit ratings or financial condition of the issuer, the extent and duration of the unrealized loss, expected cash flows, market conditions and the Company’s ability to hold the securities through the anticipated recovery period.

During the first quarter of 2009, the Company recorded $2.1 million of other than temporary impairment on certain corporate debt securities. Effective April 1, 2009, the Company adopted new guidance for the measurement and recognition of other than temporary impairment for debt securities, which is now part of ASC 320. If an entity does not intend to sell, and it is more likely than not that the entity will not be required to sell a debt security before recovery of its cost basis, impairment should be separated into (a) the amount representing credit loss and (b) the amount related to all other factors. The amount of impairment related to credit loss is recognized in earnings and the impairment related to other factors is recognized in other comprehensive income (loss). To determine the amount related to credit loss, the Company applied a method similar to that described by ASC 310, “Receivables”, using a single best estimate of expected cash flows. The Company’s adoption of new guidance for the measurement and

Changes in the amount of credit losses recognized in net income on these corporate debt securities are summarized as follows:

		Three Months Ended				Nine Months Ended
(Dollars in thousands)		September 30, 2009				September 30, 2009
Balance at March 31, 2009		$	(4,195	)		$	(6,181	)
Credit losses not previously recognized			(472	)			(472	)
Reductions for securities sold during the period			3,043				5,029
Balance at end of period		$	(1,624	)		$	(1,624	)

The amortized cost and fair value of securities as of September 30, 2009, by contractual maturity, are shown in the following table. Contractual maturities may differ from actual maturities as borrowers may have the right to call or repay obligations with or without call or prepayment penalties. Mortgage-backed securities are not included in the maturity categories in the following maturity summary as actual maturities may differ from contractual maturities because the underlying mortgages may be called or prepaid without penalty:

		September 30, 2009
		Amortized				Fair
(Dollars in thousands)		Cost				Value
Due in one year or less		$	102,362				102,801
Due in one to five years			325,697				336,407
Due in five to ten years			371,902				354,812
Due after ten years			143,387				141,306
Mortgage-backed			375,808				390,670
Federal Reserve and FHLB stock			71,889				71,889
Other equity securities			36,415				36,363
Total available-for-sale securities		$	1,427,460				1,434,248

The following table provides information as to the amount of gross gains and losses realized through the sales of available-for-sale investment securities:

		Three Months				Nine Months
		Ended				Ended
		September 30,				September 30,
(Dollars in thousands)		2009				2009
Realized gains		$	1,601			$	3,417
Realized losses			(1,541	)			(1,719	)
Net realized gains (losses)		$	60			$	(1,698	)

(6) Loans

The following table shows the Company’s loan portfolio by category as of September 30, 2009, as of December 31, 2008 and September 30, 2008:

		September 30,				December 31,				September 30,
(Dollars in thousands)		2009				2008				2008
Balance:
Commercial and commercial real estate		$	5,035,859			$	4,778,664			$	4,673,682
Home equity			928,548				896,438				837,127
Residential real estate			281,151				262,908				247,203
Premium finance receivables — commercial			752,032				1,243,858				1,164,256
Premium finance receivables — life insurance			1,045,653				102,728				41,120
Indirect consumer loans			115,528				175,955				199,845
Other loans			116,486				160,518				159,312
Total loans, net of unearned income		$	8,275,257			$	7,621,069			$	7,322,545
Mix:
Commercial and commercial real estate			61	%			63	%			64	%
Home equity			11				12				11
Residential real estate			4				3				4
Premium finance receivables — commercial			9				16				16
Premium finance receivables — life insurance			13				2				1
Indirect consumer loans			1				2				3
Other loans			1				2				1
Total loans, net of unearned income			100	%			100	%			100	%

Certain premium finance receivables are recorded net of unearned income. The unearned income portions of such premium finance receivables were $30.1 million at September 30, 2009, $27.1 million at December 31, 2008 and $23.4 million at September 30, 2008. Life insurance premium finance receivables are also recorded net of credit discounts attributable to the life insurance premium finance loan acquisition in the third quarter of 2009. The accretable component of the credit discount was $67.4 million and the non-accretable component of the credit discount was $36.2 million at September 30, 2009. The accretable component will be recognized into interest income using the effective yield method over its estimated remaining life. The non-accretable portion will be evaluated each quarter and if the loans’ credit related conditions improve, a relative portion will be transferred to the accretable component and accreted over future periods. In the event of a prepayment, accretion of both the accretable and non-accretable component will be accelerated into the quarter in which a specific loan prepays in whole.

Indirect consumer loans include auto, boat and other indirect consumer loans. Total loans include net deferred loan fees and costs and fair value purchase accounting adjustments totaling $10.4 million at September 30, 2009, $9.4 million at December 31, 2008 and $9.3 million at September 30, 2008.

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

As of September 30, 2009

														> 90 Days				Allowance
						% of								Past Due				For Loan
						Total				Non-				and Still				Losses
(Dollars in thousands)		Balance				Loans				accrual				Accruing				Allocation
Commercial:
Commercial and Industrial		$	1,345,111				16.3	%		$	16,689			$	605			$	21,799
Franchise			107,447				1.3				—				—				1,619
Mortgage warehouse lines of credit			73,816				0.9				—				—				985
Community Advantage — homeowner associations			60,146				0.7				—				—				145
Aircraft			41,606				0.5				—				153				164
Other			15,595				0.2				2,346				—				424
Total Commercial		$	1,643,721				19.9	%		$	19,035			$	758			$	25,136
Commercial Real Estate:
Land and development		$	1,041,641				12.6	%		$	103,573			$	10,090			$	22,102
Office			544,772				6.6				10,029				—				7,079
Industrial			466,725				5.6				8,476				355				7,012
Retail			570,589				6.9				10,698				12,161				7,846
Mixed use and other			768,411				9.3				14,915				13				10,686
Total Commercial Real Estate Loans		$	3,392,138				41.0	%		$	147,691			$	22,619			$	54,725
Total Commercial and Commercial Real Estate		$	5,035,859				60.9	%		$	166,726			$	23,377			$	79,861
Commercial Real Estate—collateral location by state:
Illinois		$	2,729,454				80.5	%
Wisconsin			375,911				11.1
Total primary markets		$	3,105,365				91.6	%
Indiana			48,300				1.4
Florida			43,164				1.3
Arizona			42,226				1.2
Other (no individual state greater than 0.6%)			153,083				4.5
Total		$	3,392,138				100.0	%

Our commercial real estate loan portfolio predominantly relates to owner-occupied real estate, and our 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, Illinois metropolitan area and southeastern Wisconsin, 91.6% of our commercial real estate loan portfolio is located in this region. Commercial real estate market conditions continued to be under stress in the third quarter of 2009, and we expect this trend to continue. These conditions have negatively affected our commercial real estate loan portfolio, and as of September 30, 2009, our allowance for loan losses related to this portfolio is $54.7 million.

We make commercial loans for many purposes, including: working capital lines, which are generally renewable annually and supported by business assets, personal guarantees and additional collateral; loans to condominium and homeowner associations originated through Barrington Bank’s Community Advantage program; small aircraft financing, an earning asset niche developed at Crystal Lake Bank; and franchise lending at Lake Forest Bank. Commercial business lending is generally considered to involve a higher degree of risk than traditional consumer bank lending, and as a result of the economic recession, allowance for loan losses in our commercial loan portfolio is $25.1 million as of September 30, 2009.

Our allowance for loan losses for commercial and commercial real estate loans in the aggregate has increased to $79.9 million as of September 30, 2009 from $57.0 million as of December 31, 2008 and $54.4 million as of September 30, 2008.

The Company also participates in mortgage warehouse lending by providing interim funding to unaffiliated mortgage bankers to finance residential mortgages originated by such bankers for sale into the secondary market. The Company’s loans to the mortgage bankers are secured by the business assets of the mortgage companies as well as the specific mortgage loans funded by the Company, after they have been pre-approved for purchase by third party end lenders. End lender re-payments are sent directly to the Company upon end-lenders’ acceptance of final loan documentation. The Company may also provide interim financing for packages of mortgage loans on a bulk basis in circumstances where the mortgage bankers desire to competitively bid on a number of mortgages for sale as a package in the secondary market. Typically, the Company will serve as sole funding source for its mortgage warehouse lending customers under short-term revolving credit agreements. Amounts advanced with respect to any particular mortgage loan are usually required to be repaid within 21 days.

Despite poor economic conditions generally, and the particularly difficult conditions in the U.S. residential real estate market experienced since 2008, our mortgage warehouse lending business has expanded during 2009 due to the high demand for mortgage re-financings given the historically low interest rate environment and the fact that many of our competitors exited the market in late 2008 and early 2009. The expansion of this business has caused our mortgage warehouse lines to increase to $73.8 million as of September 30, 2009 from $55.3 million as of December 31, 2008 and $44.4 million as of September 30, 2008. Additionally, our allowance for loan losses with respect to these loans is $985,000 as of September 30, 2009. Since the inception of this business, the Company has not suffered any related loan losses on these loans.

(7) Allowance for Loan Losses, Allowance for Losses on Lending-Related Commitments and Impaired Loans

The following table presents a summary of the activity in the allowance for credit losses for the periods presented:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
(Dollars in thousands)		2009				2008				2009				2008
Allowance for loan losses at beginning of period		$	85,113			$	57,633			$	69,767			$	50,389
Provision for credit losses			91,193				24,129				129,329				42,985
Reclassification (to)/from allowance for losses on lending-related commitments			(1,543	)			—				(1,543	)			—
Charge-offs			(80,072	)			(15,816	)			(103,602	)			(28,067	)
Recoveries			405				381				1,145				1,020
Allowance for loan losses at period end		$	95,096			$	66,327			$	95,096			$	66,327
Allowance for losses on lending-related commitments at period end		$	3,129			$	493			$	3,129			$	493
Allowance for credit losses at period end		$	98,225			$	66,820			$	98,225			$	66,820