Fair Value of Assets and Liabilities

The Company measures, monitors and discloses certain of its assets and liabilities on a fair value basis. These financial assets and financial liabilities are measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the observability of the assumptions used to determine fair value. These levels are:


•	Level 1 — unadjusted quoted prices in active markets for identical assets or liabilities.

•

Level 2 — inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability or inputs that are derived principally from or corroborated by observable market data by correlation or other means.

•

Level 3 — significant unobservable inputs that reflect the Company’s own assumptions that market participants would use in pricing the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

A financial instrument’s categorization within the above valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the assets or liabilities. Following is a description of the valuation methodologies used for the Company’s assets and liabilities measured at fair value on a recurring basis.

Available-for-sale and trading account securities—Fair values for available-for-sale and trading securities are typically based on prices obtained from independent pricing vendors. Securities measured with these valuation techniques are generally classified as Level 2 of the fair value hierarchy. Typically, standard inputs such as benchmark yields, reported trades for similar securities, issuer spreads, benchmark securities, bids, offers and reference data including market research publications are used to fair value a security. When these inputs are not available, broker/dealer quotes may be obtained by the vendor to determine the fair value of the security. We review the vendor’s pricing methodologies to determine if observable market information is being used, versus unobservable inputs. Fair value measurements using significant inputs that are unobservable in the market due to limited activity or a less liquid market are classified as Level 3 in the fair value hierarchy.

The Company’s Investment Operations Department is responsible for the valuation of Level 3 available-for-sale securities. The methodology and variables used as inputs in pricing Level 3 securities are derived from a combination of observable and unobservable inputs. The unobservable inputs are determined through internal assumptions that may vary from period to period due to external factors, such as market movement and credit rating adjustments.

At December 31, 2012, the Company classified $30.8 million of municipal securities as Level 3. These municipal securities are bond issues for various municipal government entities, including park districts, located in the Chicago metropolitan area and southeastern Wisconsin and are privately placed, non-rated bonds without CUSIP numbers. The Company’s methodology for pricing the non-rated bonds focuses on three distinct inputs: equivalent rating, yield and other pricing terms. To determine the rating for a given non-rated municipal bond, the Investment Operations Department references a publicly issued bond by the same issuer if available. A reduction is then applied to the rating obtained from the comparable bond, as the Company believes if liquidated, a non-rated bond would be valued less than a similar bond with a verifiable rating. The reduction applied by the Company is one complete rating grade (i.e. a “AA” rating for a comparable bond would be reduced to “A” for the Company’s valuation). In 2012, all of the ratings derived in the above process by Investment Operations were BBB or better, for both bonds with and without comparable bond proxies. The fair value measurement of municipal bonds is sensitive to the rating input, as a higher rating typically results in an increased valuation. The remaining pricing inputs used in the bond valuation are observable. Based on the rating determined in the above process, Investment Operations obtains a corresponding current market yield curve available to market participants. Other terms including coupon, maturity date, redemption price, number of coupon payments per year, and accrual method are obtained from the individual bond term sheets. Certain municipal bonds held by the Company at December 31, 2012 have a call date that has passed, and are now continuously callable. When valuing these bonds, the fair value is capped at par value as the Company assumes a market participant would not pay more than par for a continuously callable bond.

At December 31, 2012, the Company held $22.2 million of other equity securities classified as Level 3. The securities in Level 3 are primarily comprised of auction rate preferred securities. The Company utilizes an independent pricing vendor to provide a fair market valuation of these securities. The vendor’s valuation methodology includes modeling the contractual cash flows of the underlying preferred securities and applying a discount to these cash flows by a credit spread derived from the market price of the securities underlying debt. At December 31, 2012, the vendor considered five different securities whose implied credit spreads were believed to provide a proxy for the Company’s auction rate preferred securities. The credit spreads ranged from 1.85%-2.43% with an average of 2.09% which was added to three-month LIBOR to be used as the discount rate input to the vendor’s model. Fair value of the securities is sensitive to the discount rate utilized as a higher discount rate results in a decreased fair value measurement.

Mortgage loans held-for-sale—Mortgage loans originated by Wintrust Mortgage, a division of Barrington are carried at fair value. The fair value of mortgage loans held-for-sale is determined by reference to investor price sheets for loan products with similar characteristics.

Mortgage servicing rights—Fair value for mortgage servicing rights is determined utilizing a third party valuation model which stratifies the servicing rights into pools based on product type and interest rate. The fair value of each servicing rights pool is calculated based on the present value of estimated future cash flows using a discount rate commensurate with the risk associated with that pool, given current market conditions. At December 31, 2012, the Company classified $6.8 million of mortgage servicing rights as Level 3. The weighted average discount rate used as an input to value the pool of mortgage servicing rights at December 31, 2012 was 10.21% with discount rates applied ranging from 10%-13.5%. The higher the rate utilized to discount estimated future cash flows, the lower the fair value measurement. Additionally, fair value estimates include assumptions about prepayment speeds which ranged from 19%-24% or a weighted average prepayment speed of 20.72% used as an input to value the pool of mortgage servicing rights at December 31, 2012. Prepayment speeds are inversely related to the fair value of mortgage servicing rights as an increase in prepayment speeds results in a decreased valuation.

Derivative instruments—The Company’s derivative instruments include interest rate swaps and caps, commitments to fund mortgages for sale into the secondary market (interest rate locks), forward commitments to end investors for the sale of mortgage loans and foreign currency contracts. Interest rate swaps and caps are valued by a third party, using models that primarily use market observable inputs, such as yield curves, and are validated by comparison with valuations provided by the respective counterparties. The fair value for mortgage derivatives is based on changes in mortgage rates from the date of the commitments. The fair value of foreign currency derivatives is computed based on change in foreign currency rates stated in the contract compared to those prevailing at the measurement date. In conjunction with the FASB’s fair value measurement guidance, the Company made an accounting policy election in the first quarter of 2012 to measure the credit risk of its derivative financial instruments that are subject to master netting agreements on a net basis by counterparty portfolio.

Nonqualified deferred compensation assets—The underlying assets relating to the nonqualified deferred compensation plan are included in a trust and primarily consist of non-exchange traded institutional funds which are priced based by an independent third party service.

The following tables present the balances of assets and liabilities measured at fair value on a recurring basis for the periods presented:



	December 31, 2012
(Dollars in thousands)	Total		Level 1		Level 2		Level 3
Available-for-sale securities
U.S. Treasury	$	219,487	$	—	$	219,487	$	—
U.S. Government agencies	990,039		—		990,039		—
Municipal	110,471		—		79,701		30,770
Corporate notes and other	154,806		—		154,806		—
Mortgage-backed	271,574		—		271,574		—
Equity securities	49,699		—		27,530		22,169
Trading account securities	583		—		583		—
Mortgage loans held-for-sale	385,033		—		385,033		—
Mortgage servicing rights	6,750		—		—		6,750
Nonqualified deferred compensations assets	5,532		—		5,532		—
Derivative assets	53,906		—		53,906		—
Total	$	2,247,880	$	—	$	2,188,191	$	59,689
Derivative liabilities	$	57,751	$	—	$	57,751	$	—

	December 31, 2011
(Dollars in thousands)	Total		Level 1		Level 2		Level 3
Available-for-sale securities
U.S. Treasury	$	16,173	$	—	$	16,173	$	—
U.S. Government agencies	765,916		—		765,916		—
Municipal	60,098		—		35,887		24,211
Corporate notes and other	169,936		—		169,936		—
Mortgage-backed	248,551		—		248,551		—
Equity securities	31,123		—		12,152		18,971
Trading account securities	2,490		—		2,490		—
Mortgage loans held-for-sale	306,838		—		306,838		—
Mortgage servicing rights	6,700		—		—		6,700
Nonqualified deferred compensations assets	4,299		—		4,299		—
Derivative assets	38,607		—		38,607		—
Total	$	1,650,731	$	—	$	1,600,849	$	49,882
Derivative liabilities	$	50,081	$	—	$	50,081	$	—

The aggregate remaining contractual principal balance outstanding as of December 31, 2012 and 2011 for mortgage loans held- for-sale measured at fair value under ASC 825 was $379.5 million and $300.0 million, respectively, while the aggregate fair value of mortgage loans held-for-sale was $385.0 million and $306.8 million, respectively, as shown in the above tables. There were no nonaccrual loans or loans past due greater than 90 days and still accruing in the mortgage loans held-for-sale portfolio measured at fair value as of December 31, 2012 and 2011.

The changes in Level 3 assets measured at fair value on a recurring basis during the year ended December 31, 2012 are summarized as follows:



				Equity securities		Mortgage servicing rights
(Dollars in thousands)	Municipal			Equity securities		Mortgage servicing rights
Balance at January 1, 2012	$	24,211		$	18,971	$	6,700
Total net gains (losses) included in:
Net income ⁽¹⁾	—			—		50
Other comprehensive income	27			3,198		—
Purchases	20,967			—		—
Issuances	—			—		—
Sales	—			—		—
Settlements	(12,033		)	—		—
Net transfers out of Level 3 ⁽²⁾	(2,402		)	—		—
Balance at December 31, 2012	$	30,770		$	22,169	$	6,750


(1)	Changes in the balance of mortgage servicing rights are recorded as a component of mortgage banking revenue in non-interest income.


(2)	During the first quarter of 2012, one municipal security was transferred out of Level 3 into Level 2 as observable market information was available that market participants would use in pricing these securities. Transfers out of Level 3 are recognized at the end of the reporting period.

The changes in Level 3 assets measured at fair value on a recurring basis during the year ended December 31, 2011 are summarized as follows:



(Dollars in thousands)	Municipal			Corporate notes and other debt			Mortgage- backed			Equity securities			Trading Account Securities			Mortgage servicing rights
Balance at January 1, 2011	$	16,416		$	9,841		$	2,460		$	28,672		$	4,372		$	8,762
Total net gains (losses) included in:
Net income ⁽¹⁾	—			(274		)	(53		)	—			—			(2,062		)
Other comprehensive income	77			—			—			(6,101		)	—			—
Purchases	26,425			7,246			1,126			1,800			—			—
Issuances	—			—			—			—			—			—
Sales	(19,469		)	—			—			—			(4,372		)	—
Settlements	(1,230		)	(333		)	(116		)	—			—			—
Net transfers into (out of) Level 3 ⁽²⁾	1,992			(16,480		)	(3,417		)	(5,400		)	—			—
Balance at December 31, 2011	$	24,211		$	—		$	—		$	18,971		$	—		$	6,700


(1)	Income for Corporate notes and other debt and mortgage-backed are recognized as a component of interest income on securities. Additionally, changes in the balance of mortgage servicing rights are recorded as a component of mortgage banking revenue in non-interest income.

(2)

The transfer of available for sale securities into Level 3 is the result of the use of significant inputs that are unobservable in the market due to limited activity or a less liquid market. Transfers out of Level 3 result from the availability and use of observable market information that market participants would use in pricing these securities. Transfers into/out of Level 3 are recognized at the end of the reporting period.

Also, the Company may be required, from time to time, to measure certain other financial assets at fair value on a nonrecurring basis in accordance with GAAP. These adjustments to fair value usually result from application of lower of cost or market accounting or impairment charges of individual assets. For assets measured at fair value on a nonrecurring basis that were still held in the balance sheet at the end of the period, the following table provides the carrying value of the related individual assets or portfolios at December 31, 2012.



	December 31, 2012								Twelve Months Ended December 31, 2012 Fair Value Losses (Gains) Recognized
(Dollars in thousands)	Total		Level 1		Level 2		Level 3
Impaired loans	$	98,426	$	—	$	—	$	98,426	$	30,143
Other real estate owned	62,891		—		—		62,891		24,573
Mortgage loans held-for-sale, at lower of cost or market	27,167		—		27,167		—		—
Total	$	188,484	$	—	$	27,167	$	161,317	$	54,716

Impaired loans—A loan is considered to be impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due pursuant to the contractual terms of the loan agreement. A loan restructured in a troubled debt restructuring is an impaired loan according to applicable accounting guidance. Impairment is measured by estimating the fair value of the loan based on the present value of expected cash flows, the market price of the loan, or the fair value of the underlying collateral. Impaired loans are considered a fair value measurement where an allowance is established based on the fair value of collateral. Appraised values, which may require adjustments to market-based valuation inputs, are generally used on real estate collateral-dependent impaired loans.

The Company’s Managed Assets Division is primarily responsible for the valuation of Level 3 measurements of impaired loans. For more information on the Managed Assets Division review of impaired loans refer to Note 5 – Allowance for Loan Losses, Allowance for Losses on Lending-Related Commitments and Impaired Loans. At December 31, 2012, the Company had $204.5 million of impaired loans classified as Level 3. Of the $204.5 million of impaired loans, $98.4 million were measured at fair value based on the underlying collateral of the loan as shown in the table above. The remaining $106.1 million were valued based on discounted cash flows in accordance with ASC 310.

Other real estate owned—Other real estate owned is comprised of real estate acquired in partial or full satisfaction of loans and is included in other assets. Other real estate owned is recorded at its estimated fair value less estimated selling costs at the date of transfer, with any excess of the related loan balance over the fair value less expected selling costs charged to the allowance for loan losses. Subsequent changes in value are reported as adjustments to the carrying amount and are recorded in other non-interest expense. Gains and losses upon sale, if any, are also charged to other non-interest expense. Fair value is generally based on third party appraisals and internal estimates and is therefore considered a Level 3 valuation.

Similar to impaired loans, the Company’s Managed Assets Division is primarily responsible for the valuation of Level 3 measurements for other real estate owned. At December 31, 2012, the Company had $62.9 million of other real estate owned classified as Level 3. The unobservable input applied to other real estate owned relates to the valuation adjustment determined by the Company’s appraisals. The impairment adjustments applied to other real estate owned range from 0%-49% of the carrying value prior to impairment adjustments at December 31, 2012, with a weighted average input of 6.58%. An increased impairment adjustment applied to the carrying value results in a decreased valuation.

Mortgage loans held-for-sale, at lower of cost or market—Fair value is based on either quoted prices for the same or similar loans, or values obtained from third parties, or is estimated for portfolios of loans with similar financial characteristics and is therefore considered a Level 2 valuation.

The valuation techniques and significant unobservable inputs used to measure both recurring and non-recurring Level 3 fair value measurements at December 31, 2012 were as follows:

(Dollars in thousands)

Fair Value

Valuation Methodology

Significant Unobservable Input

Range

of Inputs

Weighted

Average

of Inputs

Impact to valuation

from an increased or

higher input value

Measured at fair value on a recurring basis:

Municipal Securities

30,770

Bond pricing

Equivalent rating

BBB-AAA

N/A

Increase

Other Equity Securities

22,169

Discounted cash flows

Discount rate

1.85%-2.43%

2.09%

Decrease

Mortgage Servicing Rights

6,750

Discounted cash flows

Discount rate

10%-13.5%

10.21%

Decrease

Constant prepayment rate (CPR)

19%-24%

20.72%

Decrease

Measured at fair value on a non-recurring basis:

Impaired loans—collateral based

98,426

Appraisal value

N/A

Other real estate owned

62,891

Appraisal value

Property specific impairment adjustment

0%-49%

6.58%

Decrease

The Company is required under applicable accounting guidance to report the fair value of all financial instruments on the consolidated statements of condition, including those financial instruments carried at cost. The carrying amounts and estimated fair values of the Company’s financial instruments as of the dates shown:



	December 31, 2012				December 31, 2011
(Dollars in thousands)	Carrying Value		Fair Value		Carrying Value		Fair Value
Financial Assets:
Cash and cash equivalents	$	315,028	$	315,028	$	169,704	$	169,704
Interest bearing deposits with banks	1,035,743		1,035,743		749,287		749,287
Available-for-sale securities	1,796,076		1,796,076		1,291,797		1,291,797
Trading account securities	583		583		2,490		2,490
Brokerage customer receivables	24,864		24,864		27,925		27,925
Federal Home Loan Bank and Federal Reserve Bank stock, at cost	79,564		79,564		100,434		100,434
Mortgage loans held-for-sale, at fair value	385,033		385,033		306,838		306,838
Mortgage loans held-for-sale, at lower of cost or market	27,167		27,568		13,686		13,897
Total loans	12,389,030		13,053,101		11,172,745		11,590,729
Mortgage servicing rights	6,750		6,750		6,700		6,700
Nonqualified deferred compensation assets	5,532		5,532		4,299		4,299
Derivative assets	53,906		53,906		38,607		38,607
FDIC indemnification asset	208,160		208,160		344,251		344,251
Accrued interest receivable and other	157,157		157,157		147,207		147,207
Total financial assets	$	16,484,593	$	17,149,065	$	14,375,970	$	14,794,165
Financial Liabilities
Non-maturity deposits	$	9,447,633	9,447,633		$	7,424,367	$	7,424,367
Deposits with stated maturities	4,980,911		5,013,757		4,882,900		4,917,740
Notes payable	2,093		2,093		52,822		52,822
Federal Home Loan Bank advances	414,122		425,431		474,481		507,368
Subordinated notes	15,000		15,000		35,000		35,000
Other borrowings	274,411		274,411		443,753		443,753
Secured borrowings owed to securitization investors	—		—		600,000		603,294
Junior subordinated debentures	249,493		250,428		249,493		185,199
Derivative liabilities	57,751		57,751		50,081		50,081
Accrued interest payable and other	11,589		11,589		12,952		12,952
Total financial liabilities	$	15,453,003	$	15,498,093	$	14,225,849	$	14,232,576

Not all the financial instruments listed in the table above are subject to the disclosure provisions of ASC Topic 820, as certain assets and liabilities result in their carrying value approximating fair value. These include cash and cash equivalents, interest bearing deposits with banks, brokerage customer receivables, FHLB and FRB stock, FDIC indemnification asset, accrued interest receivable and accrued interest payable, non-maturity deposits, notes payable, subordinated notes and other borrowings.

The following methods and assumptions were used by the Company in estimating fair values of financial instruments that were not previously disclosed.

Loans. Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are analyzed by type such as commercial, residential real estate, etc. Each category is further segmented by interest rate type (fixed and variable) and term. For variable-rate loans that reprice frequently, estimated fair values are based on carrying values. The fair value of residential loans is based on secondary market sources for securities backed by similar loans, adjusted for differences in loan characteristics. The fair value for other fixed rate loans is estimated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect credit and interest rate risks inherent in the loan. The primary impact of credit risk on the present value of the loan portfolio, however, was accommodated through the use of the allowance for loan losses, which is believed to represent the current fair value of probable incurred losses for purposes of the fair value calculation. In accordance with ASC 820, the Company has categorized loans as a Level 3 fair value measurement.

Deposits with stated maturities. The fair value of certificates of deposit is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently in effect for deposits of similar remaining maturities. In accordance with ASC 820, the Company has categorized deposits with stated maturities as a Level 3 fair value measurement.

Federal Home Loan Bank advances. The fair value of Federal Home Loan Bank advances is obtained from the Federal Home Loan Bank which uses a discounted cash flow analysis based on current market rates of similar maturity debt securities to discount cash flows. In accordance with ASC 820, the Company has categorized Federal Home Loan Bank advances as a Level 3 fair value measurement.

Secured borrowings – owed to securitization investors. The fair value of secured borrowings – owed to securitization investors is based on the discounted value of expected cash flows. In accordance with ASC 820, the Company has categorized secured borrowings – owed to securitization investors as a Level 3 fair value measurement. There were no secured borrowings - owed to securitization investors outstanding at December 31, 2012.

Junior subordinated debentures. The fair value of the junior subordinated debentures is based on the discounted value of contractual cash flows. In accordance with ASC 820, the Company has categorized junior subordinated debentures as a Level 3 fair value measurement.