Stock Compensation Plans and Other Employee Benefit Plans

Stock Incentive Plan

In May 2015, the Company’s shareholders approved the 2015 Stock Incentive Plan (“the 2015 Plan”) which provides for the issuance of up to 5,485,000 shares of common stock. The 2015 Plan replaced the 2007 Stock Incentive Plan (“the 2007 Plan”), which replaced the 1997 Stock Incentive Plan (“the 1997 Plan”). The 2015 Plan, the 2007 Plan and the 1997 Plan are collectively referred to as “the Plans.” The 2015 Plan has substantially similar terms to the 2007 Plan and the 1997 Plan. Awards granted under the Plans for which common shares are not issued by reason of cancellation, forfeiture, lapse of such award or settlement of such award in cash, are again available under the 2015 Plan. All grants made after the approval of the 2015 Plan have been made pursuant to the 2015 Plan. As of December 31, 2018, approximately 3.4 million shares were available for future grants (assuming the maximum number of shares are issued for the performance awards outstanding.) 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 Plans permit the grant of incentive stock options, non-qualified stock options, stock appreciation rights, stock awards, restricted share or unit awards, performance awards and other incentive awards valued in whole or in part by reference to the Company’s common stock, all on a stand-alone, combination or tandem basis. The Company historically awarded stock-based compensation in the form of time-vested nonqualified stock options and time-vested restricted share unit awards (“restricted shares”). In general, the grants of options provide for the purchase shares of the Company’s common stock at the fair market value of the stock on the date the options are granted. Options under the 2015 Plan and 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. 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 Plans. 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 performance-based 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 150% of the target award. The awards typically 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 receive, at no cost, the shares earned based on the achievement of the pre-established long-term goals.

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 and issued. Shares that are vested but are not issuable pursuant to deferred compensation arrangements accrue additional shares based on the value of dividends otherwise paid.

Except in limited circumstances, unvested awards granted under the Plans 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 share 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 since the inception of the LTIP in 2011 were primarily granted as LTIP awards. Expected life of the options granted since the inception of the LTIP awards has been 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 year ended December 31, 2016. No options were granted in the years ended December 31, 2018 and 2017.



	2016
Expected dividend yield	0.9	%
Expected volatility	25.2	%
Risk-free rate	1.3	%
Expected option life (in years)	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 $13.5 million, $12.9 million and $9.3 million and the related tax benefits were $3.1 million, $5.1 million and $3.7 million in 2018, 2017 and 2016, respectively.

A summary of the Plans’ stock option activity for the years ended December 31, 2018, 2017 and 2016 is as follows:



Stock Options	Common Shares		Weighted Average Strike Price		Remaining Contractual Term⁽¹⁾	Intrinsic Value⁽²⁾ ($000)
Outstanding at January 1, 2016	1,551,734		$	41.32
Granted	562,166		41.04
Exercised	(313,900	)	37.71
Forfeited or canceled	(101,088	)	48.00
Outstanding at December 31, 2016	1,698,912		$	41.50	4.6	$	52,790
Exercisable at December 31, 2016	703,892		$	39.62	3.4	$	23,195
Outstanding at January 1, 2017	1,698,912		$	41.50
Granted	—		—
Exercised	(593,459	)	40.57
Forfeited or canceled	(20,697	)	42.83
Outstanding at December 31, 2017	1,084,756		$	41.98	4.0	$	43,817
Exercisable at December 31, 2017	562,810		$	41.82	3.3	$	22,820
Outstanding at January 1, 2018	1,084,756		$	41.98
Granted	—		—
Exercised	(282,614	)	41.25
Forfeited or canceled	(7,128	)	39.84
Outstanding at December 31, 2018	795,014		$	42.25	3.1	$	19,268
Exercisable at December 31, 2018	613,932		$	42.54	3.1	$	14,705
Vested or expected to vest at December 31, 2018	787,753		$	42.26	3.1	$	19,085


(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, 2016 was $8.61. The aggregate intrinsic value of options exercised during the years ended December 31, 2018, 2017 and 2016, was $13.3 million, $20.1 million and $5.8 million, respectively. The actual tax benefit realized for the tax deductions from option exercises totaled $3.5 million, $7.8 million and $2.3 million for 2018, 2017 and 2016, respectively. Cash received from option exercises under the Plans for the years ended December 31, 2018, 2017 and 2016 was $11.7 million, $24.1 million and $11.8 million, respectively.

A summary of the Plans’ restricted share activity for the years ended December 31, 2018, 2017 and 2016 is as follows:



	2018				2017				2016
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	127,787		$	53.33	133,425		$	49.94	137,593		$	49.63
Granted	35,654		84.36		16,552		73.16		18,022		46.01
Vested and issued	(18,324	)	54.31		(19,639	)	47.13		(20,007	)	44.91
Forfeited	(1,854	)	63.50		(2,551	)	52.26		(2,183	)	44.18
Outstanding at end of year	143,263		$	60.80	127,787		$	53.33	133,425		$	49.94
Vested, but not issuable at end of year	90,520		$	51.94	89,723		$	51.64	89,050		$	51.47

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, 2018, 2017 and 2016 is as follows:



	2018				2017				2016
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	359,196		$	54.37	298,180		$	43.64	276,533		$	43.01
Granted	134,380		88.27		145,853		72.60		118,084		41.02
Vested and issued	(82,307	)	44.39		(68,712	)	46.85		(78,410	)	37.90
Expired, canceled or forfeited	(14,414	)	60.05		(16,125	)	52.98		(18,027	)	41.83
Outstanding at end of year	396,855		$	67.71	359,196		$	54.37	298,180		$	43.64
Vested, but deferred at year end	21,530		$	43.54	108,143		$	44.16	6,672		$	37.98

At December 31, 2018, the maximum number of performance-based shares that could be issued on outstanding awards if performance is attained at the maximum amount was approximately 585,518 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 issue 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 2018, 2017 and 2016 was $994,000, $975,000 and $241,000, respectively, more than the expected tax benefit for those shares. These differences in actual and expected tax benefits were recorded to tax expense in 2018 and 2017 and directly to shareholders’ equity in 2016.

As of December 31, 2018, there was $15.4 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, 2018, 2017 and 2016 was $8.0 million, $8.9 million and $8.4 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 had no expense related to the CIRP in 2018, 2017 and 2016, and no awards were paid in those years. There were no outstanding awards under this plan at December 31, 2018.

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 $10.4 million in 2018, $8.9 million in 2017, and $6.6 million in 2016.

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, beginning January 1, 2015, the purchase price of the shares of common stock is equal to 95% of the closing price of the Company’s common stock on the last day of the offering period. During 2018, 2017 and 2016, 33,977, 35,022 and 50,920, respectively, shares of common stock were purchased by participants and no compensation expense was recorded. The Company plans to continue to offer common stock through this ESPP on an ongoing basis, and in 2018, increased the shares authorized under the ESPP by 200,000 shares. At December 31, 2018, the Company had an obligation to issue 10,807 shares of common stock to participants and had 216,063 shares available for future grants under the ESPP.

As a result of the Company's acquisition of HPK Financial Corporation (“HPK”) in December 2012, the Company assumed the obligations of a noncontributory pension plan, (“the HPK Plan”). 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, 2018, the projected benefit obligation was $4.9 million and the fair value of the plan's assets was $4.7 million. Similarly, in connection with the Company's acquisition of Diamond in October 2013, the Company assumed the obligation of Diamond's pension plan. 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, 2018, the projected benefit obligation was $2.7 million and the fair value of the plan's assets was $1.6 million. The Company has accrued liabilities for the unfunded portions of these plans. The Company recorded (income) expense of $(38,000), $1.2 million and $526,000 in 2018, 2017 and 2016, respectively, related to 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 2018, 2017 and 2016, a total of 18,856 shares, 27,508 shares and 25,362 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, 2018, the Company has an obligation to issue 281,910 shares of common stock to directors and has 74,206 shares available for future grants under the DDFS Plan.