Wintrust Financial Corporation — Q1 2011 Form 10-Q
Business context and reporting period
Unaudited results for the three months ended March 31, 2011; balance-sheet comparisons are primarily with December 31, 2010 and March 31, 2010. Wintrust provides community banking, specialty finance, and wealth management services, mainly in the Chicago area and southeastern Wisconsin, with certain specialty finance operations nationwide.
Key financial results
| Metric | Q1 2011 / March 31, 2011 | Comparable period / prior date |
|---|---|---|
| Net interest income | $109.6 million | $95.9 million, Q1 2010 |
| Net interest margin, fully taxable-equivalent | 3.48% | 3.38%, Q1 2010; 3.46%, Q4 2010 |
| Net revenue | $150.5 million | $138.5 million, Q1 2010 |
| Net income | $16.4 million; diluted EPS $0.36 | $16.0 million; diluted EPS $0.41, Q1 2010 |
| Non-interest income / expense | $40.9 million / $98.1 million | $42.6 million / $83.9 million, Q1 2010 |
| Operating cash flow | $351.1 million | $161.1 million, Q1 2010 |
| Total assets / shareholders’ equity | $14.1 billion / $1.45 billion | $12.84 billion / $1.36 billion, March 31, 2010 |
| Loans, excluding covered loans / deposits | $9.56 billion / $10.92 billion | $9.07 billion / $9.72 billion, March 31, 2010 |
Q1 cash flows also included $234.3 million used in investing activities and $114.9 million used in financing activities; cash and cash equivalents increased $1.9 million to $174.5 million. Management reported more than $1.1 billion in overnight liquid funds and interest-bearing bank deposits; some balances were restricted for securitization investors.
At March 31, 2011, disclosed borrowings included $423.5 million of Federal Home Loan Bank advances, $250.0 million of other borrowings, $600.0 million of securitization borrowings, $50.0 million of subordinated notes, and $249.5 million of junior subordinated debentures. The company reported regulatory capital ratios of 10.3% leverage, 12.7% Tier 1 risk-based capital, and 14.1% total risk-based capital. Tangible common equity ratio was 8.0%, versus 6.3% a year earlier.
Material changes versus prior comparable period
- Net interest income increased 14%, supported by higher average loan balances and lower deposit funding costs. The average yield on loans declined, but lower costs of interest-bearing deposits more than offset that pressure on margin.
- Net income rose 2%, but diluted EPS fell from $0.41 to $0.36 as average common and dilutive shares increased substantially. Basic EPS was $0.44 versus $0.43.
- Non-interest income declined 4%: lower trading results and bargain-purchase gains more than offset growth in mortgage banking and wealth management. Non-interest expense rose 17%, including higher staff costs and OREO expense.
- Loans excluding covered loans grew 5% year over year; total deposits grew 12%. Non-interest-bearing deposits increased to 11.7% of average deposits from 8.9%.
- Credit provision fell to $25.3 million from $29.0 million, and net charge-offs declined to $25.3 million from $26.8 million. However, non-performing loans excluding covered loans rose to $155.4 million from $141.0 million, and the allowance for loan losses increased to $115.0 million from $102.4 million.
Management commentary, outlook, risks and unusual items
- Management cited continued core loan and demand-deposit growth, an improved deposit mix, and opportunities to acquire assets and institutions from distressed markets. No specific earnings or financial guidance was provided; management cautioned that quarterly results are not necessarily indicative of full-year results.
- Commercial real estate was $3.36 billion, about 35% of loans excluding covered loans; 91.7% was in Illinois and Wisconsin. Non-performing commercial real estate loans were $96.0 million. Management noted continuing pressure on real-estate values and expected difficult market conditions to persist.
- Other real estate owned was $85.3 million. Non-interest expense included $5.8 million of net OREO costs, up $4.5 million year over year, primarily due to higher valuation adjustments and legal costs.
- The company had a $9.4 million estimated liability for loans potentially subject to investor repurchase or indemnification claims. It reported $96.6 million of restructured loans, including $69.4 million in accruing status.
- Five FDIC-assisted bank acquisitions had been completed since April 2010. Q1 2011 acquisitions of Community First Bank-Chicago and The Bank of Commerce generated $9.8 million in bargain-purchase gains; covered assets generally carry an FDIC agreement reimbursing 80% of specified losses. Certain purchase-price allocations remained preliminary.
- Mortgage originations fell 18% year over year amid an industry-wide slowdown. A River City Mortgage acquisition was announced in April 2011; a Great Lakes Advisors acquisition was announced in May, subject to regulatory approval and closing conditions.
- Interest-rate sensitivity modeling estimated net interest income would change by +4.3% or +1.5% under ramped rate increases of 200 or 100 basis points, and by -3.9% or -8.3% under decreases of 100 or 200 basis points. These are modeled estimates, not forecasts.
- Other notable items: the company recognized a one-time $0.3 million deferred-tax charge related to an Illinois tax-rate change; it declared a $0.09-per-share semiannual common dividend. A new general-ledger system was implemented during the quarter; management said additional monitoring steps were used and disclosure controls were effective.
Important facts for investors to verify
- Whether rising non-performing loans, delinquencies, CRE exposure, OREO valuations, and charge-offs lead to further reserve increases or losses.
- How much earnings depend on acquisition-related bargain gains, purchased-loan accretion, and covered-asset recoveries versus recurring operations.
- Whether margin improvement and loan growth can continue as asset yields, deposit costs, and mortgage activity change.
- The adequacy of the $9.4 million mortgage repurchase liability and the status of restructured loans and investor claims.
- FDIC loss-share compliance, acquisition integration, and the terms and completion conditions of announced transactions.
- Capital, liquidity, and covenant capacity, including the effects of interest-rate changes and the securitization facility.