Wintrust Financial Corporation — FY 2013 Form 10-K
Business and period. This annual report covers the fiscal year ended December 31, 2013; it is not a standalone fourth-quarter filing. Wintrust is an Illinois-based financial holding company with approximately $18.1 billion in assets. Its businesses are community banking, specialty finance, and wealth management, with banking concentrated in the Chicago area and southeastern Wisconsin and specialty finance operating nationally and in Canada.
Financial performance and condition
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Net revenue | $773.0 million | $745.6 million | Up 4% |
| Net interest income | $550.6 million | $519.5 million | Up 6% |
| Net income | $137.2 million | $111.2 million | Up 23% |
| Diluted earnings per common share | $2.75 | $2.31 | Up 19% |
| Net interest margin (FTE) | 3.50% | 3.49% | Up 1 bp |
| Efficiency ratio | 64.57% | 65.85% | Improved 128 bps |
| Return on average assets | 0.79% | 0.67% | Improved |
- Fourth-quarter snapshot: net income was $35.3 million and diluted EPS was $0.70, versus $30.1 million and $0.61 in Q4 2012. Net interest income was $142.3 million; provision for credit losses was $3.9 million.
- Cash flow: cash provided by operating activities was $321.8 million; investing activities used $240.8 million and financing activities used $132.2 million. Cash and cash equivalents decreased $51.2 million to $263.9 million. Management reported $759.4 million of overnight liquid funds and interest-bearing deposits with banks at year-end, down from $1.4 billion, principally as liquidity funded loan growth.
- Balance sheet and funding: total assets were $18.10 billion, up 3%; loans excluding covered loans were $12.90 billion, up 9%; deposits were $14.67 billion, up 2%. Non-interest-bearing deposits increased to 19% of deposits from 17%.
- Debt and capital: year-end funding included $417.8 million of FHLB advances, $254.7 million of other borrowings, and $249.5 million of junior subordinated debentures; subordinated notes were repaid in 2013. Regulatory capital ratios were 12.9% total risk-based, 12.2% Tier 1 risk-based, and 10.5% Tier 1 leverage. All banks were reported well capitalized.
- Credit quality: net charge-offs excluding covered loans declined to $56.1 million from $74.8 million; non-performing loans fell to $103.3 million from $118.1 million; and OREO declined to $50.5 million from $62.9 million. The allowance for loan losses excluding covered loans was $96.9 million, or 0.75% of those loans, versus 0.91% a year earlier.
Material changes and business drivers
- Net interest income increased mainly because average loans excluding covered loans grew $1.2 billion and interest expense declined as deposit costs fell. Average loan yield decreased to 4.34% from 4.60%, while the average rate paid on interest-bearing deposits fell to 0.45% from 0.62%.
- Provision for credit losses declined to $46.0 million from $76.4 million. Non-interest expense rose 3% to $502.6 million, including a $20.2 million increase in salaries and benefits; OREO expense fell by $16.3 million.
- Non-interest income decreased 2% to $222.4 million. Higher wealth-management revenue ($63.0 million, up 20%) and deposit service charges were offset by lower mortgage banking revenue ($106.9 million, down 3%), fewer covered-call fees, no bargain-purchase gains, and a $3.0 million net loss on available-for-sale securities.
- Community banking generated $599 million in segment net revenue and $88 million in segment net income; specialty finance generated $105 million and $38 million; wealth management generated $80 million and $11 million, respectively. Segment figures exclude intersegment eliminations.
- Acquisitions expanded the franchise: Wintrust acquired First Lansing Bancorp and Diamond Bancorp and certain Surety Financial Services mortgage assets and liabilities. The company added banking locations and reported $31.8 million of goodwill acquired in 2013 across the relevant businesses.
Outlook, risks, contingencies, and unusual items
- Management provided no specific numerical earnings or revenue guidance. It described a strategy of measured growth, cost control, improving funding mix, and using the loan pipeline and acquisitions to expand earning assets. Management expected interest rates to rebound over time, while emphasizing continued low-rate conditions and stronger competition.
- Major risks include concentration in the Chicago-area economy and commercial real estate, interest-rate and margin sensitivity, credit losses, acquisition integration, and dependence on deposit funding. Commercial real estate was $4.23 billion, 32% of loans; 92.3% was located in Illinois and Wisconsin. A 200-basis-point rate decline was modeled to reduce one-year net interest income by 10.0% at year-end 2013; a 200-basis-point increase was modeled to raise it by 5.0%. These are simulations, not forecasts.
- New Basel III capital rules were scheduled to begin applying in 2015, with phased implementation. Management believed the company would exceed estimated well-capitalized requirements on a fully phased-in basis. Dodd-Frank and mortgage rules were expected to increase compliance demands and costs.
- The Volcker Rule led to a $3.3 million fourth-quarter 2013 impairment on a money-market preferred security expected to require divestiture. Available-for-sale securities also had $100.6 million of gross unrealized losses at year-end; management said it did not consider the securities other-than-temporarily impaired, apart from the noted security.
- Mortgage repurchase and indemnification liability was $3.8 million, down from $4.3 million. A Fair Labor Standards Act class action involving mortgage loan originators had an immaterial reserve; management said the ultimate outcome could not yet be predicted, while stating pending or threatened matters were not expected to materially affect operations or financial condition.
- The audited financial statements received an unqualified opinion, and the auditor also reported effective internal control over financial reporting.
Most important facts for investors to verify
- Whether improving credit metrics persist as commercial and commercial-real-estate lending grows, and whether the lower allowance remains adequate.
- Loan and deposit growth, deposit mix and costs, net interest margin, and sensitivity to changing rates.
- Execution and returns from 2013 acquisitions, including integration costs and the performance of acquired assets.
- Mortgage banking volumes, profitability, and the adequacy of reserves for repurchase and indemnification claims.
- Capital and liquidity headroom under Basel III and stress scenarios, including the effect of dividends and further growth.
- The significance of unrealized securities losses and any further Volcker Rule-related divestitures or charges.