Wintrust Financial Corporation — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. Financial statements are unaudited. Unless stated otherwise, amounts below are in U.S. dollars.
Business context
Wintrust provides community banking mainly in the Chicago metropolitan area and southern Wisconsin, alongside national and Canadian specialty finance businesses and wealth management. Growth reflects lending activity and acquisitions, including the January 2015 acquisition of Delavan Bancshares.
Key financial results
| Metric | Q2 2015 | Comparable period |
|---|---|---|
| Net revenue | $233.9 million, up 15% | $203.3 million in Q2 2014 |
| Net interest income | $156.9 million, up 5% | $149.2 million in Q2 2014 |
| Net income | $43.8 million, up 14% | $38.5 million in Q2 2014 |
| Diluted earnings per common share | $0.85 | $0.76 in Q2 2014 |
| Net interest margin, fully taxable-equivalent | 3.41%, down 21 basis points | 3.62% in Q2 2014 |
| Non-interest income | $77.0 million, up 42% | $54.1 million in Q2 2014 |
| Non-interest expense | $154.3 million, up 15% | $133.6 million in Q2 2014 |
For the six months, net revenue was $450.3 million, net income was $82.9 million and diluted EPS was $1.61, compared with $392.8 million, $73.0 million and $1.44, respectively, in the first half of 2014. Six-month FTE net interest margin was 3.42%, versus 3.61%.
Mortgage banking revenue rose to $36.0 million in Q2 from $23.8 million, with mortgage originations for sale of $1.2 billion versus $840.9 million. Covered-call option fees increased to $4.6 million from $1.2 million. Other income included a $1.5 million BOLI death benefit. Higher compensation, marketing, occupancy, data-processing and professional costs partly offset revenue growth; lower OREO expense provided a partial offset.
Financial position, liquidity and capital
- Total assets were $20.8 billion, up 10% year over year. Total loans excluding covered loans and loans held for sale were $15.5 billion, up 13%; deposits were $17.1 billion, up 10%.
- Non-interest-bearing deposits were 23% of deposits, versus 20% a year earlier. Management reported $843.9 million in overnight liquid funds and interest-bearing bank deposits at quarter-end.
- Six-month cash flows were $54.5 million used in operations, $429.2 million used in investing and $505.2 million provided by financing. Cash and cash equivalents ended at $252.2 million, compared with $357.0 million a year earlier. Operating cash flow was affected in part by the volume and timing of mortgage loan originations and sales.
- At June 30, total shareholders’ equity was $2.26 billion. Regulatory ratios were 9.8% leverage, 10.7% Tier 1 capital, 9.0% Common Equity Tier 1 and 13.1% total capital to risk-weighted assets; management said the company remained well-capitalized. Tangible common equity ratio was 7.7%.
- The company issued $125 million of Series D preferred stock in June, receiving approximately $121.2 million after underwriting discounts and commissions, before expenses. The preferred stock carries a 6.50% fixed dividend through July 2025, then a floating rate of three-month LIBOR plus 4.06%, if dividends are declared.
- Federal Home Loan Bank advances were $444.0 million; other borrowings were $261.9 million; subordinated notes were $140.0 million; and junior subordinated debentures were $249.5 million. A $75 million term-facility borrowing was drawn in June. The company reported compliance with credit-facility covenants.
Changes, asset quality and unusual items
- Loan growth was led by commercial lending, commercial real estate and life-insurance premium finance, as well as acquisitions. The company’s $4.9 billion commercial real estate portfolio represented 31% of loans excluding covered loans; 91.7% was in Illinois and Wisconsin.
- Non-performing loans excluding covered loans were $76.6 million, or 0.49% of loans, down from $88.7 million and 0.64% a year earlier. Non-performing assets were $118.9 million, or 0.57% of assets, versus $148.5 million and 0.79%. The allowance for loan losses excluding covered loans was $100.2 million; Q2 net charge-offs were $3.9 million.
- Management described credit metrics as relatively stable sequentially and improved year over year. It increased the historical loss-rate period used in its allowance methodology from three to five years in Q2 2015. The allowance involves significant management estimates and judgment.
- Accumulated other comprehensive loss increased to $61.9 million from $37.3 million at year-end, largely reflecting unrealized securities losses. Management did not consider securities with unrealized losses to be other-than-temporarily impaired and said it did not intend, and was not more likely than not required, to sell them before recovery.
- Acquisitions after quarter-end: North Bank on July 1; Suburban Illinois Bancorp on July 17; and Community Financial Shares on July 24. Reported pre-purchase-accounting assets were approximately $112 million, $480 million and $327 million, respectively.
- A Fair Labor Standards Act case was settled for an immaterial amount and approved by the court in June. A Lehman Brothers Holdings indemnification demand remained outstanding; the company said its reserve was immaterial. Management said pending or threatened legal matters were not expected to have a material adverse effect overall, while noting an unfavorable resolution could materially affect a particular period.
Outlook, commentary and risks
No specific earnings or financial guidance was provided. Management emphasized continued loan growth where underwriting standards are met, a shift toward non-interest-bearing deposits, and disciplined expense management. It expected new-home-purchase originations to remain strong if housing conditions improve, and said a higher share of mortgage originations could come from purchases if rates rise. Management also anticipated increased compliance costs, including from Dodd-Frank requirements.
Key sensitivities include the low-rate, competitive banking environment and margin compression; commercial real estate concentration in the company’s local markets; credit losses and allowance estimates; mortgage-market activity and repurchase or indemnification claims; acquisition integration; and regulatory and compliance costs. The mortgage loan repurchase and indemnification liability was $4.0 million, up from $3.1 million at December 31, 2014. Interest-rate simulations estimated that a 100-basis-point decline would reduce one-year net interest income by 10.5% under the static shock scenario and 4.0% under the gradual ramp scenario; actual results may differ.
Important facts for investors to verify
- Whether loan growth and mortgage-related income can continue to offset margin compression and rising operating expenses.
- Credit performance, allowance adequacy and commercial real estate exposure as the loan book expands.
- Liquidity and capital effects of the three post-quarter acquisitions, including integration costs and funding needs.
- The durability of non-interest income contributions from covered-call fees and the one-time BOLI death benefit.
- Changes in mortgage repurchase claims, legal contingencies and the company’s interest-rate sensitivity.