Wintrust Financial Corporation — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015; quarterly figures below identify the fourth quarter. Wintrust is a Rosemont, Illinois-based financial holding company with community banking, specialty finance and wealth management businesses, focused principally on the Chicago metropolitan area and southern Wisconsin. It reported $22.9 billion of assets and operated 15 banks with 152 banking locations at year-end.
Financial results and position
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Net revenue | $913.1 million | $813.8 million | +12% |
| Net interest income | $641.5 million | $598.6 million | +7% |
| Net income | $156.7 million | $151.4 million | +4% |
| Diluted EPS | $2.93 | $2.98 | -2% |
| Net interest margin | 3.36% | 3.53% | -17 bps |
| Efficiency ratio | 68.49% | 66.89% | Higher by 160 bps |
| Return on average assets | 0.75% | 0.81% | -6 bps |
| Operating cash flow | $38.0 million | $205.6 million | Down $167.7 million |
Fourth-quarter net income was $35.5 million and diluted EPS was $0.64, compared with $38.1 million and $0.75 in fourth-quarter 2014. Fourth-quarter net interest income was $167.2 million; provision for credit losses was $9.1 million and non-interest expense was $166.8 million.
- Growth and funding: Year-end assets rose 15% to $22.9 billion, loans excluding covered loans grew 19% to $17.1 billion, and deposits increased 14% to $18.6 billion. Non-interest-bearing deposits reached 26% of deposits, versus 22% a year earlier. Average loans to average deposits, excluding covered loans, were 92.0%.
- Profitability and revenue mix: Non-interest income rose 26% to $271.6 million, led by mortgage banking revenue of $115.0 million, covered-call fees of $15.4 million, and interest-rate swap fees of $9.5 million. Non-interest expense increased 15% to $628.4 million; salaries and benefits rose 14% to $382.1 million.
- Credit: Net charge-offs excluding covered loans fell to $19.2 million from $27.2 million. Non-performing loans increased to $84.1 million from $78.7 million, while the allowance for credit losses excluding covered loans rose to $106.3 million from $92.5 million. The allowance was 0.62% of loans, compared with 0.64%.
- Capital and debt: Shareholders’ equity was $2.35 billion. Regulatory capital ratios were 12.2% total capital, 10.0% Tier 1, 8.4% common equity Tier 1 and 9.1% Tier 1 leverage; the company and banks reported capital above applicable “well-capitalized” levels. Major borrowings included $859.9 million of FHLB advances, $266.0 million of other borrowings, $140.0 million of subordinated notes and $268.6 million of junior subordinated debentures.
- Liquidity and cash flow: Management reported $883.6 million of overnight liquid funds and interest-bearing deposits with banks at year-end, versus $1.2 billion in 2014. Cash and cash equivalents were $275.8 million. Investing activities used $1.64 billion, chiefly reflecting loan growth and securities activity; financing activities provided $1.65 billion, primarily from deposit growth. Operating cash flow fell substantially, including from changes in accrued interest receivable and other assets.
Material changes versus 2014
- Net income rose, but diluted EPS declined, while the net interest margin compressed as loan yields faced pricing pressure and funding costs reflected increased borrowings. Loan growth and a shift toward non-interest-bearing deposits supported higher net interest income.
- Mortgage banking revenue increased 26% to $115.0 million as originations rose to $3.9 billion from $3.2 billion. Covered-call fees nearly doubled to $15.4 million.
- Expense growth outpaced revenue growth, contributing to a higher efficiency ratio. The company cited acquisition and non-operating compensation charges, staffing and incentive compensation, data processing, occupancy and marketing costs.
- Four bank acquisitions were completed in 2015: Delavan, North Bank, Suburban Illinois Bancorp and Community Financial Shares. The company also issued $125 million of Series D preferred stock, receiving approximately $120.8 million net proceeds.
- The company transferred $862.7 million of securities from available-for-sale to held-to-maturity, citing its intent and ability to hold them to maturity. The transfer included $14.4 million of unrealized losses.
Outlook, commentary and risks
The filing provides no specific earnings or revenue guidance. Management described continued strategic growth, expense discipline, efforts to improve funding mix, and a focus on growing lending without relaxing underwriting standards. It anticipated ongoing compliance costs from financial regulation. The company also reported plans to expand its commercial finance leasing niche and, in January 2016, announced an agreement to acquire Foundations Bank’s parent, Generations Bancorp.
- Interest-rate and margin risk remain important: management’s modeled one-year net interest income sensitivity at year-end 2015 ranged from +16.1% under a static +200-basis-point shock to -17.5% under a static -200-basis-point shock; the gradual-rate ramp scenario ranged from +7.3% to -7.7% for the same shocks. These are simulations, not forecasts.
- Credit exposure is concentrated geographically and by collateral: commercial real estate loans were $5.5 billion, or 32% of loans excluding covered loans, and 91% were in Illinois and Wisconsin. Premium finance lending involves third-party agent and broker fraud risk; one insurer represented about 14% of premium finance balances.
- Mortgage repurchase and indemnification liability was $4.0 million at year-end. A Lehman-related demand had an immaterial reserve; a separate demand from RFC Liquidating Trust and a FINRA arbitration involving WHI had no reasonably estimable range of liability. Management said pending matters were not expected to materially affect operations or financial condition, while noting an unfavorable outcome could be material in a particular period.
- Other disclosed risks include local economic and real estate weakness, competition, acquisition integration, regulatory and capital requirements, cybersecurity and vendor disruption, and dependence on subsidiary dividends. The Series D preferred stock carries a 6.50% dividend rate through July 2025, then resets to three-month LIBOR plus 4.06% if declared.
Important facts for investors to verify
- Whether loan and deposit growth can continue to support earnings as margin compression persists and operating expenses rise.
- Trends in non-performing loans, commercial real estate performance, charge-offs, provision expense and allowance adequacy, particularly in the company’s core markets.
- The sustainability and risk profile of mortgage banking and covered-call revenue, including the effect of interest rates on originations and servicing values.
- Liquidity, debt costs and refinancing needs, dividend restrictions, and the impact of the phased-in capital conservation buffer.
- Progress integrating 2015 acquisitions and the outcome of the disclosed mortgage-related demands and WHI arbitration.
The financial statements received an unqualified audit opinion from Ernst & Young LLP; management and the auditor reported effective internal control over financial reporting as of December 31, 2015.