Wintrust Financial Corporation — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013. Unaudited consolidated results. Wintrust provides community banking, specialty finance and wealth management services, primarily in the Chicago metropolitan area and southeastern Wisconsin, with specialty finance operations across the U.S. and Canada.
Key financial metrics
| Metric | Q3 2013 / September 30, 2013 | Comparable period |
|---|---|---|
| Total assets | $17.68 billion | $17.02 billion at September 30, 2012 |
| Total loans | $13.00 billion, including $416 million covered loans | $12.15 billion at September 30, 2012 |
| Total deposits | $14.65 billion | $13.85 billion at September 30, 2012 |
| Net interest income | $141.8 million | $132.6 million in Q3 2012 |
| Net interest margin | 3.57% fully taxable-equivalent (FTE) | 3.50% in Q3 2012 |
| Net income | $35.6 million; diluted EPS $0.71 | $32.3 million; diluted EPS $0.66 in Q3 2012 |
| Net income, nine months | $101.9 million; diluted EPS $2.05 | $81.1 million; diluted EPS $1.70 in 2012 |
| Cash flows, nine months | Operating +$220.4 million; investing -$177.5 million; financing -$27.3 million | Net increase in cash and equivalents: $15.6 million |
Q3 net revenue (net interest income plus non-interest income) was $196.4 million, nearly unchanged year over year. Q3 income before taxes was $58.1 million and income tax expense was $22.5 million. For the first nine months, net revenue was $584.4 million. FTE margin for the nine-month period was 3.49%, down from 3.52% in 2012.
At quarter-end, shareholders’ equity was $1.87 billion. The tangible common equity ratio was 7.9% (8.7% assuming full conversion of preferred stock). Regulatory capital ratios included a 10.5% leverage ratio, 12.3% Tier 1 capital to risk-weighted assets and 13.1% total capital to risk-weighted assets. Total liabilities were $15.81 billion. Major non-deposit funding included $388 million of FHLB advances, $247 million of other borrowings and $249 million of junior subordinated debentures. Management reported approximately $1.0 billion in overnight liquid funds and interest-bearing deposits with banks.
Changes versus prior periods
- Q3 net income increased 10% year over year. Net interest income rose 7%, supported by higher average earning assets and lower deposit funding costs; average earning assets grew $723 million year over year.
- Q3 non-interest income fell 13% to $54.7 million, primarily because the prior-year quarter included a $6.6 million bargain purchase gain. Mortgage banking revenue fell $5.4 million, and covered-call option fees declined $1.8 million. Wealth management revenue increased 21%.
- Q3 non-interest expense rose 2% to $127.2 million, including higher salaries, occupancy, data processing and equipment costs, partly offset by lower OREO expense and professional fees.
- Loans excluding covered loans increased 9% year over year to $12.58 billion, reflecting commercial and commercial real-estate growth, premium finance growth and acquisitions. Deposits increased 6%; non-interest-bearing deposits rose to 18% of deposits from 16% a year earlier, while time deposits’ share declined.
- Year-to-date other comprehensive loss was $54.1 million, largely from $49.4 million of after-tax unrealized securities losses and $7.3 million of foreign-currency translation losses. Accumulated other comprehensive loss was $46.4 million at September 30.
- Credit indicators were mixed: non-performing loans excluding covered loans were $123.3 million, up from $117.9 million a year earlier, but the ratio improved to 0.98% from 1.03%. Q3 net charge-offs declined to $11.3 million from $17.9 million.
Outlook, risks and notable items
- Management outlook: No specific full-year earnings or revenue guidance is provided. Management expected any Q4 decline in existing mortgage originations from weaker refinancing activity to be partly offset by the Surety acquisition. Management also cited continued loan growth efforts, a low-rate environment and increased competition.
- Credit concentration: Commercial real estate represented about $4.1 billion, or 33%, of loans excluding covered loans; approximately 93% was located in greater Chicago and southeastern Wisconsin. Management judged the allowance adequate, but acknowledged continuing commercial real-estate market stress. The allowance for loan losses excluding covered loans was $107.2 million, or 0.85% of those loans.
- Problem assets and restructurings: Non-performing assets were $179.0 million, or 1.01% of assets. Troubled debt restructurings totaled $115.0 million across 161 credits; $79.2 million were accruing. Commercial premium finance non-performing loans increased to $21.9 million from $13.0 million a year earlier.
- Interest-rate risk: Simulation estimated net interest income would increase 5.8% with a gradual +200 basis-point rate shift and decline 9.8% with a -200 basis-point shift. These are modeled estimates, not forecasts. Seven non-designated interest-rate caps had $880 million notional; mark-to-market losses contributed to Q3 trading losses of $1.7 million.
- Acquisitions and funding after quarter-end: Wintrust acquired Surety mortgage-banking assets on October 1 and completed the Diamond acquisition on October 18. In November it extended its $100 million revolving facility through November 6, 2014, with no amount outstanding, and repaid its $1 million term loan and $10 million subordinated note.
- Regulation and legal: Management expected Dodd-Frank compliance to require additional attention and resources. Basel III capital rules were scheduled to apply beginning January 1, 2015, with phase-in through 2019; impact was still under evaluation. An FLSA class action involving mortgage loan originator classification was conditionally certified; the company’s reserve was described as immaterial, but the ultimate outcome was uncertain.
- Accounting and estimation: Loan-loss allowances, acquired-credit-impaired loans, fair values, goodwill impairment, derivatives and income taxes rely on significant management estimates. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether commercial real-estate credit performance, non-performing loans and charge-offs continue to improve or deteriorate, particularly in the company’s concentrated local markets.
- Whether loan growth and deposit-mix improvement sustain net interest income as rates and competition change, and how actual results compare with the disclosed rate-sensitivity model.
- Whether mortgage banking revenue stabilizes after refinancing volumes declined, and whether Surety contributes as management expected.
- How the unrealized securities losses, FDIC loss-share asset decline and related clawback obligations evolve.
- The integration and financial contribution of the FNBI, Diamond and Surety transactions, and the effect of acquisition-related costs and goodwill.
- The ultimate outcome and potential exposure from the FLSA litigation, and the effect of new regulatory capital and compliance requirements.