Wintrust Financial Corporation — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; balance-sheet comparisons are primarily with December 31, 2013 and March 31, 2013. Amounts below are in U.S. dollars; financial statement amounts are generally converted from thousands to millions.
Business context and results
Wintrust is a financial holding company with community banking operations concentrated in the Chicago metropolitan area and southeastern Wisconsin, plus national and Canadian specialty finance and regional wealth management businesses. It reported three operating segments: community banking, specialty finance and wealth management.
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Net interest income | $144.0 million | $130.7 million |
| Net interest margin (FTE) | 3.61% | 3.41% |
| Non-interest income | $45.5 million | $57.4 million |
| Non-interest expense | $131.3 million | $120.1 million |
| Net income | $34.5 million | $32.1 million |
| Diluted earnings per common share | $0.68 | $0.65 |
| Common dividend declared per share | $0.10 | $0.09 |
Financial position, liquidity and capital
- Total assets were $18.22 billion, up 7% year over year and 3% from year-end 2013. Loans excluding covered loans and mortgage loans held for sale were $13.13 billion, up 10% year over year; deposits were $15.13 billion, up 8%.
- Shareholders’ equity was $1.94 billion. The tangible common equity ratio was 8.0% (8.7% assuming full conversion of preferred stock). Regulatory capital ratios were 10.4% leverage, 12.0% Tier 1 risk-based and 12.6% total risk-based; each exceeded the filing’s “well-capitalized” thresholds.
- Cash and cash equivalents ended at $342.7 million, up $78.9 million during the quarter. Operating cash flow was $162.3 million, investing cash outflow $487.2 million and financing cash inflow $403.8 million. Management reported approximately $883.7 million of overnight liquid funds and interest-bearing deposits with banks.
- Non-deposit funding balances—including FHLB advances, other borrowings and junior subordinated debentures—totaled $618.8 million. Junior subordinated debentures were $249.5 million; the $100 million revolving credit facility had no balance drawn. The company reported compliance with its credit-facility covenants.
Material changes and asset quality
- Net income rose 8% year over year. Net interest income increased 10%, supported by higher average earning assets, improved asset yields and lower deposit funding costs; FTE net interest margin expanded 20 basis points.
- Non-interest income fell 21%, principally because mortgage banking revenue declined 46% to $16.4 million as mortgage originations fell to $527.3 million from $974.4 million. Wealth management revenue increased 13% to $16.8 million.
- Non-interest expense rose 9%, including higher salaries, occupancy and equipment costs. OREO expense was $4.0 million versus income of $1.6 million a year earlier; the comparison was affected by a $3.4 million gain on a covered OREO sale in Q1 2013. The efficiency ratio increased to 69.02% from 63.78%.
- Credit metrics improved year over year: non-performing loans excluding covered loans were $90.1 million, or 0.69% of loans, versus $128.6 million, or 1.08%, a year earlier. Net charge-offs were $7.8 million versus $11.9 million. The allowance for loan losses excluding covered loans was $92.3 million, or 0.70% of loans, compared with $110.3 million, or 0.93%, a year earlier.
- Commercial real estate represented $4.26 billion, or 32%, of loans excluding covered loans; approximately 94% was in the company’s primary Illinois and Wisconsin markets. OREO excluding covered assets increased to $54.1 million from $50.5 million at year-end.
- Deposits shifted toward lower-cost funding: non-interest-bearing deposits were 18% of total deposits, compared with 16% a year earlier. Brokered deposits were $800.3 million, or 5.3% of deposits, versus $538.1 million, or 3.9%, a year earlier.
Outlook, risks and unusual items
- No specific earnings or financial guidance was provided. Management said it expects interest rates to rebound over time, is pursuing loan and deposit growth, and is emphasizing expense discipline. It expects added compliance costs from Dodd-Frank and related regulation.
- Management cited continued low rates and renewed lending competition. It uses interest-rate caps and other derivatives to manage rate exposure; the filing’s modeled one-year net interest income sensitivity at March 31 was +5.8% for a ramped 200-basis-point increase and -9.1% for a 200-basis-point decrease. These are simulations, not forecasts.
- Risks highlighted include economic weakness, borrower defaults and real-estate values, Chicago-area commercial real estate concentration, interest-rate and market movements, acquisition integration, FDIC loss-share arrangements, premium-finance fraud or credit deterioration, regulatory costs and capital requirements, and mortgage repurchase or indemnification claims.
- Subsequent to quarter-end, Wintrust announced an acquisition of two Canadian insurance premium funding businesses and agreements to acquire specified bank branches and deposits in Illinois and Wisconsin. The announced transactions were subject to completion and/or final adjustments.
- A pending Fair Labor Standards Act class action involving mortgage loan originator classification and compensation had an immaterial reserve. Management said the ultimate outcome could not be predicted and an unfavorable resolution could be material to a particular period.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. The filing stated there were no material changes to the 2013 Form 10-K risk factors.
Key facts for investors to verify
- Whether the improvement in net interest margin and loan growth can persist amid low rates and competitive pricing.
- Whether mortgage banking weakness continues and how it affects non-interest revenue and earnings.
- Commercial real-estate exposure, delinquency trends, OREO balances and adequacy of loan-loss reserves, particularly as charge-offs exceeded the quarterly provision excluding covered loans.
- Deposit mix and brokered-deposit growth, available liquidity, and the company’s ability to maintain capital above regulatory thresholds as Basel III rules phase in.
- Costs, integration progress and returns from announced acquisitions, along with developments in the FLSA litigation and mortgage repurchase exposures.