Stock Compensation Plans and Other Employee Benefit Plans

Stock Incentive Plan

The 2007 Stock Incentive Plan (“the 2007 Plan”), which was approved by the Company’s shareholders in January 2007, permits the grant of incentive stock options, nonqualified stock options, rights and restricted stock, as well as the conversion of outstanding options of acquired companies to Wintrust options. The 2007 Plan initially provided for the issuance of up to 500,000 shares of common stock. In May 2009 and May 2011, the Company’s shareholders approved an additional 325,000 shares and 2,860,000 shares, respectively, of common stock that may be offered under the 2007 Plan. All grants made after 2006 have been made pursuant to the 2007 Plan, and as of December 31, 2014, 402,394 shares were available for future grants (assuming the maximum number of shares are issued in the performance awards outstanding). The 2007 Plan replaced the Wintrust Financial Corporation 1997 Stock Incentive Plan (“the 1997 Plan”) which had substantially similar terms. The 2007 Plan and the 1997 Plan are collectively referred to as “the Plans.” The Plans cover substantially all employees of Wintrust. The Compensation Committee of the Board of Directors administers all stock-based compensation programs and authorizes all awards granted pursuant to the Plans.

The Company historically awarded stock-based compensation in the form of nonqualified stock options and time-vested restricted share awards (“restricted shares”). In general, the grants of options provide for the purchase shares of Wintrust’s common stock at the fair market value of the stock on the date the options are granted. Options under the 2007 Plan generally vest ratably over periods of three to five years and have a maximum term of seven years from the date of grant. Stock options granted under the 1997 Plan provided for a maximum term of 10 years. Restricted shares entitle the holders to receive, at no cost, shares of the Company’s common stock. Restricted shares generally vest over periods of one to five years from the date of grant.

Beginning in 2011, the Company has awarded annual grants under the Long-Term Incentive Program (“LTIP”), which is administered under the 2007 Plan. The LTIP is designed in part to align the interests of management with interests of shareholders, foster retention, create a long-term focus based on sustainable results and provide participants a target long-term incentive opportunity. It is anticipated that LTIP awards will continue to be granted annually. LTIP grants to date have consisted of time-vested nonqualified stock options and performance-based stock and cash awards. Stock options granted under the LTIP have a term of seven years and will generally vest equally over three years based on continued service. Performance-based stock and cash awards granted under the LTIP are contingent upon the achievement of pre-established long-term performance goals set in advance by the Compensation Committee over a three-year period. These performance awards are granted at a target level, and based on the Company’s achievement of the pre-established long-term goals, the actual payouts can range from 0% to 200% of the target award. The awards vest in the quarter after the end of the performance period upon certification of the payout by the Compensation Committee of the Board of Directors. Holders of performance-based stock awards are entitled to shares of common stock at no cost.

Holders of restricted share awards and performance-based stock awards received under the Plans are not entitled to vote or receive cash dividends (or cash payments equal to the cash dividends) on the underlying common shares until the awards are vested. Except in limited circumstances, these awards are canceled upon termination of employment without any payment of consideration by the Company.

Stock-based compensation is measured as the fair value of an award on the date of grant, and the measured cost is recognized over the period which the recipient is required to provide service in exchange for the award. The fair values of restricted shares and performance-based stock awards are determined based on the average of the high and low trading prices on the grant date, and the fair value of stock options is estimated using a Black-Scholes option-pricing model that utilizes the assumptions outlined in the following table. Option-pricing models require the input of highly subjective assumptions and are sensitive to changes in the option’s expected life and the price volatility of the underlying stock, which can materially affect the fair value estimate. Options granted in 2012, 2013 and 2014, were primarily granted as LTIP awards. The expected life of the options granted pursuant to the LTIP awards is based on the safe harbor rule of the SEC Staff Accounting Bulletin No. 107 “Share-Based Payment” as the Company believes historical exercise data may not provide a reasonable basis to estimate the expected term of these options. Expected stock price volatility is based on historical volatility of the Company’s common stock, which correlates with the expected life of the options, and the risk-free interest rate is based on comparable U.S. Treasury rates. Management reviews and adjusts the assumptions used to calculate the fair value of an option on a periodic basis to better reflect expected trends.

The following table presents the weighted average assumptions used to determine the fair value of options granted in the years ending December 31, 2014, 2013 and 2012:



	2014		2013		2012
Expected dividend yield	0.5	%	0.5	%	0.6	%
Expected volatility	29.8	%	59.0	%	62.6	%
Risk-free rate	0.8	%	1.0	%	0.7	%
Expected option life (in years)	4.5		4.5		4.5

Stock based compensation is recognized based on the number of awards that are ultimately expected to vest. Forfeitures are estimated based on historical forfeiture experience. For performance-based stock awards, an estimate is made of the number of shares expected to vest as a result of actual performance against the performance criteria to determine the amount of compensation expense to be recognized. The estimate is reevaluated quarterly and total compensation expense is adjusted for any change in the current period.

Stock-based compensation expense recognized in the Consolidated Statements of Income was $10.1 million, $6.7 million and $9.1 million and the related tax benefits were $4.0 million, $2.5 million and $3.3 million in 2014, 2013 and 2012, respectively. The 2014 stock-based compensation expense includes a $2.1 million charge for a modification to the performance measurement criteria related to the 2011 LTIP performance-based stock grants that were vested and paid out in the first quarter of 2014. The cost of the modification was determined based on the stock price on the date of remeasurement and paid to the holders of the performance-based stock awards in cash.

A summary of the Plans’ stock option activity for the years ended December 31, 2014, 2013 and 2012 is as follows:



Stock Options	Common Shares		Weighted Average Strike Price		Remaining Contractual Term⁽¹⁾	Intrinsic Value⁽²⁾ ($000)
Outstanding at January 1, 2012	2,064,534		$	38.83
Granted	250,997		31.16
Exercised	(484,709	)	21.43
Forfeited or canceled	(85,395	)	43.70
Outstanding at December 31, 2012	1,745,427		$	42.31	3.1	$	3,836
Exercisable at December 31, 2012	1,346,287		$	45.57	2.3	$	1,677
Outstanding at January 1, 2013	1,745,427		$	42.31
Granted	236,120		38.01
Exercised	(371,826	)	40.46
Forfeited or canceled	(85,049	)	44.12
Outstanding at December 31, 2013	1,524,672		$	42.00	2.6	$	11,021
Exercisable at December 31, 2013	1,097,836		$	44.82	1.5	$	6,165
Outstanding at January 1, 2014	1,524,672		$	42.00
Granted	447,153		46.38
Exercised	(176,009	)	33.32
Forfeited or canceled	(177,390	)	52.55
Outstanding at December 31, 2014	1,618,426		$	43.00	3.5	$	9,303
Exercisable at December 31, 2014	941,741		$	43.35	2.0	$	6,392
Vested or expected to vest at December 31, 2014	1,607,305		$	42.99


(1)	Represents the weighted average contractual remaining life in years.

(2)

Aggregate intrinsic value represents the total pretax intrinsic value (i.e., the difference between the Company’s stock price at year end and the option exercise price, multiplied by the number of shares) that would have been received by the option holders if they had exercised their options on the last day of the year. Options with exercise prices above the year end stock price are excluded from the calculation of intrinsic value. The intrinsic value will change based on the fair market value of the Company’s stock.

The weighted average per share grant date fair value of options granted during the years ended December 31, 2014, 2013 and 2012 was $11.52, $17.49 and $15.00, respectively. The aggregate intrinsic value of options exercised during the years ended December 31, 2014, 2013 and 2012, was $2.3 million, $1.2 million and $5.4 million, respectively. The actual tax benefit realized for the tax deductions from option exercises totaled $900,000, $485,000 and $2.1 million for 2014, 2013 and 2012, respectively. Cash received from option exercises under the Plans for the years ended December 31, 2014, 2013 and 2012 was $5.9 million, $15.0 million and $10.4 million, respectively.

A summary of the Plans’ restricted share activity for the years ended December 31, 2014, 2013 and 2012 is as follows:



	2014				2013				2012
Restricted Shares	Common Shares		Weighted Average Grant-Date Fair Value		Common Shares		Weighted Average Grant-Date Fair Value		Common Shares		Weighted Average Grant-Date Fair Value
Outstanding at January 1	181,522		$	43.39	314,226		$	37.99	336,709		$	38.29
Granted	31,463		45.00		16,932		42.14		111,207		32.37
Vested and issued	(60,121	)	34.98		(144,860	)	31.83		(132,337	)	34.12
Forfeited	(6,752	)	37.95		(4,776	)	33.93		(1,353	)	30.99
Outstanding at end of year	146,112		$	47.45	181,522		$	43.39	314,226		$	37.99
Vested, but not issuable at end of year	85,000		$	51.88	85,000		$	51.88	85,000		$	51.88

A summary of the 2007 Plan’s performance-based stock award activity, based on the target level of the awards, for the years ended December 31, 2014, 2013, and 2012 is as follows:



	2014				2013				2012
Performance Shares	Common Shares		Weighted Average Grant-Date Fair Value		Common Shares		Weighted Average Grant-Date Fair Value		Common Shares		Weighted Average Grant-Date Fair Value
Outstanding at January 1	307,512		$	34.01	214,565		$	32.08	100,220		$	33.25
Granted	93,535		46.86		106,268		37.90		119,476		31.10
Expired, canceled or forfeited	(89,424	)	33.78		(13,321	)	34.00		(5,131	)	32.16
Vested and issued	(15,944	)	33.25		—		—		—		—
Outstanding at end of year	295,679		$	38.18	307,512		$	34.01	214,565		$	32.08

Based on the achievement of the pre-established performance goals over a three-year period, the actual performance-based award payouts can be adjusted downward to 0% or upward to a maximum of 200% of the target award. The awards vest in the quarter after the end of the performance period. In the first quarter of 2014, the 2011 grants vested and were paid. As previously discussed, the Compensation Committee of the Board of Directors of the Company modified the 2011 awards such that 17% of the awards were paid in shares and the remainder in cash. As a result, the remaining shares granted in connection with the 2011 awards were canceled and remain available for future use under the Plan. The Company issues new shares to satisfy its obligation to issue shares granted pursuant to the Plans.

At December 31, 2014, the maximum number of performance-based shares that could be issued if performance is attained at 200% of target based on the grants made to date was approximately 591,000 shares.

The actual tax benefit realized upon the vesting of restricted shares and performance-based stock is based on the fair value of the shares on the vesting date and the estimated tax benefit of the awards is based on fair value of the awards on the grant date. The actual tax benefit realized upon the vesting of restricted shares and performance-based stock in 2014, 2013 and 2012 was $254,000, $329,000 and $15,000, respectively, more than the estimated tax benefit for those shares. These differences in actual and estimated tax benefits were recorded directly to shareholders’ equity.

As of December 31, 2014, there was $10.1 million of total unrecognized compensation cost related to non-vested share based arrangements under the Plans. That cost is expected to be recognized over a weighted average period of approximately two years. The total fair value of shares vested during the years ended December 31, 2014, 2013 and 2012 was $7.8 million, $7.4 million and $6.4 million, respectively.

The Company issues new shares to satisfy its obligation to issue shares granted pursuant to the Plans.

Cash Incentive and Retention Plan

The Cash Incentive and Retention Plan (“CIRP”) allows the Company to provide cash compensation to the Company’s and its subsidiaries’ officers and employees. The CIRP is administered by the Compensation Committee of the Board of Directors. The CIRP generally provides for the grants of cash awards, which may be earned pursuant to the achievement of performance criteria established by the Compensation Committee and/or continued employment. The performance criteria, if any, established by the Compensation Committee must relate to one or more of the criteria specified in the CIRP, which includes: earnings, earnings growth, revenues, stock price, return on assets, return on equity, improvement of financial ratings, achievement of balance sheet or income statement objectives and expenses. These criteria may relate to the Company, a particular line of business or a specific subsidiary of the Company. The Company’s expense related to the CIRP was approximately $20,000, $115,000 and $357,000 in 2014, 2013 and 2012, respectively. In January 2014, the Company paid $473,000 for awards with performance periods ending in December 2013. No awards were paid in 2013 and $1.2 million was paid in 2012.

Other Employee Benefits

Wintrust and its subsidiaries also provide 401(k) Retirement Savings Plans (“401(k) Plans”). The 401(k) Plans cover all employees meeting certain eligibility requirements. Contributions by employees are made through salary deferrals at their direction, subject to certain Plan and statutory limitations. Employer contributions to the 401(k) Plans are made at the employer’s discretion. Generally, participants completing 501 hours of service are eligible to share in an allocation of employer contributions. The Company’s expense for the employer contributions to the 401(k) Plans was approximately $5.0 million in 2014, $4.9 million in 2013, and $4.3 million in 2012.

The Wintrust Financial Corporation Employee Stock Purchase Plan (“ESPP”) is designed to encourage greater stock ownership among employees, thereby enhancing employee commitment to the Company. The ESPP gives eligible employees the right to accumulate funds over an offering period to purchase shares of common stock. All shares offered under the ESPP will be either newly issued shares of the Company or shares issued from treasury, if any. In accordance with the ESPP, the purchase price of the shares of common stock may not be lower than the lesser of 85% of the fair market value per share of the common stock on the first day of the offering period or 85% of the fair market value per share of the common stock on the last date for the offering period. The Company’s Board of Directors authorized a purchase price calculation at 90% of fair market value for each of the offering periods. During 2014, 2013 and 2012, a total of 66,521 shares, 62,096 shares and 66,237 shares, respectively, were earned by participants and approximately $377,000, $355,000 and $421,000, respectively, was recognized as compensation expense. Beginning with the January 1, 2015 through March 31, 2015 offering period, the purchase price of the shares of common stock will be equal to 95% of the fair market value per share on the last day of the offering period. The Company plans to continue to periodically offer common stock through this ESPP subsequent to March 31, 2015. In May 2012, the Company's shareholders authorized an additional 300,000 shares of common stock that may be offered under the ESPP. At December 31, 2014, the Company had an obligation to issue 15,008 shares of common stock to participants and has 192,499 shares available for future grants under the ESPP.

As a result of the Company's acquisition of HPK in December 2012, the Company assumed the obligations of a noncontributory pension plan, (“the HPK Plan”), that covers approximately 100 participants with benefits based on years of service and compensation prior to retirement. The HPK Plan was “frozen” as of December 31, 2006, with no additional years of credit earned for service or compensation paid. As of December 31, 2014, the projected benefit obligation was $6.4 million and the fair value of the plan's assets was $5.6 million. Similarly, in connection with the Company's acquisition of Diamond in October 2013, the Company assumed the obligation of Diamond's pension plan, which covers approximately 35 participants. The Diamond Plan was frozen as of December 31, 2004, and only service and compensation prior to this date is considered in determining benefits. As of December 31, 2014, the projected benefit obligation was $3.2 million and the fair value of the plan's assets was $2.7 million. The Company has accrued liabilities for these plans.

The Company does not currently offer other postretirement benefits such as health care or other pension plans.

Directors Deferred Fee and Stock Plan

The Wintrust Financial Corporation Directors Deferred Fee and Stock Plan (“DDFS Plan”) allows directors of the Company and its subsidiaries to choose to receive payment of directors’ fees in either cash or common stock of the Company and to defer the receipt of the fees. The DDFS Plan is designed to encourage stock ownership by directors. All shares offered under the DDFS Plan will be either newly issued shares of the Company or shares issued from treasury. The number of shares issued is determined on a quarterly basis based on the fees earned during the quarter and the fair market value per share of the common stock on the last trading day of the preceding quarter. The shares are issued annually and the directors are entitled to dividends and voting rights upon the issuance of the shares. During 2014, 2013 and 2012, a total of 19,488 shares, 30,547 shares and 22,220 shares, respectively, were issued to directors. For those directors that elect to defer the receipt of the common stock, the Company maintains records of stock units representing an obligation to issue shares of common stock. The number of stock units equals the number of shares that would have been issued had the director not elected to defer receipt of the shares. Additional stock units are credited at the time dividends are paid, however no voting rights are associated with the stock units. The shares of common stock represented by the stock units are issued in the year specified by the directors in their participation agreements. At December 31, 2014, the Company has an obligation to issue 266,264 shares of common stock to directors and has 32,053 shares available for future grants under the DDFS Plan.