Wintrust Financial Corporation — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012. Wintrust provides community banking, specialty finance and wealth management services, primarily in the Chicago metropolitan area and southeastern Wisconsin, with premium finance operations in the U.S. and Canada. Financial amounts below are in U.S. dollars.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net interest income | $132.6m | $118.4m | $386.7m | $336.7m |
| Net interest margin, FTE | 3.50% | 3.37% | 3.52% | 3.41% |
| Provision for credit losses | $18.8m | $29.3m | $56.9m | $83.8m |
| Non-interest income | $62.9m | $67.2m | $160.9m | $144.8m |
| Non-interest expense | $124.5m | $106.3m | $359.5m | $301.6m |
| Net income | $32.3m | $30.2m | $81.1m | $58.4m |
| Diluted earnings per common share | $0.66 | $0.65 | $1.70 | $1.26 |
- Net revenue (net interest income plus non-interest income) rose 5% to $195.5m in Q3 and 14% to $547.6m year to date. Q3 net income increased 7%; nine-month net income increased 39%.
- Q3 net interest income benefited from loan and earning-asset growth and lower funding costs. The FTE margin improved year over year, but slipped one basis point sequentially from Q2.
- Mortgage banking revenue increased to $31.1m in Q3 from $14.5m, reflecting higher origination volume and better pricing. Loans sold to the secondary market totaled $1.12bn, versus $641.7m.
- Expense growth outpaced quarterly revenue growth: Q3 non-interest expense rose 17%, led by salaries, commissions and bonuses, partly reflecting acquisitions and business growth. The nine-month adjusted efficiency ratio was 62.41%, compared with 63.36%.
Financial position, liquidity and capital
- At September 30, total assets were $17.0bn, up 7% year over year. Total loans were $12.15bn, including $11.49bn excluding covered loans; deposits were $13.85bn, up 13% year over year.
- Cash and cash equivalents were $212.8m, and interest-bearing deposits with banks were $934.4m. Management reported more than $1.1bn in overnight liquid funds and interest-bearing bank deposits, alongside access to external funding.
- Nine-month cash flows: operating activities provided $74.2m, investing activities used $263.8m, and financing activities provided $232.7m. Cash and cash equivalents ended at $212.8m, up $43.1m from year-end 2011. Operating cash flow was substantially below the prior-year $292.1m.
- Total shareholders’ equity was $1.76bn. The tangible common equity ratio was 7.4%; it was 8.4% assuming full conversion of preferred stock. The leverage ratio was 10.2%, Tier 1 capital to risk-weighted assets 12.2%, and total capital to risk-weighted assets 13.3%.
- Borrowings listed as notes payable, FHLB advances, other borrowings, secured securitization borrowings and subordinated notes totaled $808.7m, down from $1.61bn at December 31, 2011. The $600m securitization borrowing was fully paid off in August; the company also repaid $20m of subordinated notes. Junior subordinated debentures remained $249.5m.
Credit quality and material changes
- Non-performing loans excluding covered loans declined to $117.9m, or 1.03% of loans, from $134.0m, or 1.30%, a year earlier. Non-performing assets were $185.3m, or 1.09% of assets, versus $230.9m, or 1.45%.
- Net charge-offs excluding covered loans were $17.9m in Q3, down from $26.9m; nine-month net charge-offs were $49.7m, down from $78.3m. The allowance for loan losses excluding covered loans was $112.3m, or 0.98% of loans; the allowance including lending-related commitments was $124.9m.
- Commercial real estate was $3.70bn, about 30% of total loans excluding covered loans; 91.8% was located in Illinois and Wisconsin. Management cited continued stress in real estate markets. CRE non-performing loans were $58.5m, while non-performing residential real estate and home equity loans increased year over year.
- Restructured loans totaled $147.2m across 181 credits, including $18.8m on non-accrual. The filing reports 24 restructured credits totaling $13.5m in payment default during the first nine months of 2012.
- Deposit mix continued to shift toward lower-cost funding: non-interest-bearing deposits were 16% of average deposits in Q3, versus 13% a year earlier. Time certificates of deposit were 38%, versus 44%.
Outlook, transactions and risks
- The filing provides no specific earnings or financial guidance. Management described continued loan growth, improving credit measures and a beneficial deposit mix, while emphasizing disciplined underwriting and ongoing monitoring of economic and real-estate conditions.
- 2012 transactions included FDIC-assisted acquisitions of Charter National, Second Federal and First United Bank; the Canadian Macquarie Premium Funding business; and Suburban branch and trust operations. These transactions contributed to growth and goodwill. Q3 included a $6.6m bargain-purchase gain; nine-month bargain-purchase gains were $7.4m, compared with $38.0m in 2011.
- Wintrust announced a definitive agreement to acquire HPK Financial Corporation, with completion expected late in Q4 2012, subject to transaction terms and conditions.
- The company issued $126.5m of Series C preferred stock in March. In October, after quarter-end, it amended its credit agreement, increasing the revolving commitment to $100m; no revolving balance was outstanding as of the filing date.
- Other notable items include $22.4m in FHLB advance prepayment fees from first-quarter restructuring, amortized over time, and $1.0m of year-to-date securitization defeasance costs. Mortgage loan repurchase and indemnification exposure was estimated at $3.2m at September 30.
- Key risks include commercial real estate and broader economic deterioration, credit losses and collateral values, interest-rate and liquidity changes, acquisition integration and FDIC loss-share arrangements, premium finance fraud or delinquencies, mortgage repurchase claims, regulatory changes and capital requirements, and derivative counterparty or valuation risk. Management reported disclosure controls were effective and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether lower credit costs and non-performing loan levels persist, particularly in commercial real estate and residential real estate/home equity.
- How much earnings growth is supported by recurring net interest and fee income versus mortgage-cycle strength and acquisition-related bargain-purchase gains.
- Whether expense growth moderates as acquisition-related staffing, incentive compensation and operating costs continue to affect results.
- The performance and integration of recent acquisitions, the expected timing and terms of the announced HPK acquisition, and future FDIC loss-share asset and reimbursement adjustments.
- Liquidity and funding trends after the securitization payoff, the cost and availability of deposits and wholesale funding, and compliance with credit-facility covenants.
- The sensitivity of earnings to interest rates: the company’s model estimated net interest income would rise 5.0% under a +200 basis-point scenario and fall 7.0% under a −200 basis-point scenario at September 30, 2012; actual results may differ.