Business context and reporting period
Wintrust Financial Corporation is a financial holding company focused on community banking in the Chicago area, southern Wisconsin and northwest Indiana, with specialty finance businesses operating nationally and in Canada, and wealth management operations. This unaudited Form 10-Q covers the quarter ended March 31, 2018; comparisons below are year over year unless stated otherwise. Dollar amounts are in millions unless noted.
Financial performance and condition
| Metric | Q1 2018 | Q1 2017 or comparison |
|---|---|---|
| Net interest income | $225.1 | $192.6; up 17% |
| Net interest margin | 3.54% | 3.36%; up 18 basis points |
| Non-interest income | $85.7 | $68.8; up 25% |
| Non-interest expense | $194.3 | $168.1; up 16% |
| Provision for credit losses | $8.3 | $5.2 |
| Net income | $82.0 | $58.4; up 40% |
| Diluted EPS | $1.40 | $1.00 |
| Cash dividends declared per common share | $0.19 | $0.14 |
| Operating cash flow | $22.4 | $130.8 |
Net interest margin on a fully taxable-equivalent basis was 3.56%, versus 3.39%. The efficiency ratio improved to 62.47% from 64.31%. Return on average assets was 1.20% (0.94%); return on average common equity was 11.29% (8.93%). The effective tax rate fell to 24.1% from 33.7%, primarily reflecting the lower federal corporate tax rate under the Tax Act.
At March 31, 2018, total assets were $28.46 billion, loans excluding covered loans were $22.06 billion, and deposits were $23.28 billion. Year-over-year, assets grew 10%, loans 11%, and deposits 7%. Shareholders’ equity was $3.03 billion. The allowance for credit losses was 0.64% of loans, unchanged year over year; non-performing loans were 0.41% of loans, compared with 0.40%.
Cash and cash equivalents ended at $231.5 million, down $46.1 million during the quarter. Investing activities used $499.0 million, mainly reflecting $394.4 million of net loan growth; financing activities provided $430.5 million, including a $355.0 million net increase in FHLB advances. Management cited approximately $1.2 billion of overnight liquid funds and interest-bearing deposits with banks and said it believed funding and liquidity were sufficient.
FHLB advances were $915.0 million, up from $559.7 million at year-end 2017. Other borrowings were $247.1 million; subordinated notes were $139.1 million; junior subordinated debentures were $253.6 million. Total deposits were the primary funding source. Regulatory capital ratios included a 9.3% leverage ratio, 9.5% common equity Tier 1 ratio and 12.0% total capital ratio; the company reported compliance with applicable holding-company credit facility covenants.
Material changes versus prior periods
- Growth in average loans and improved yields on earning assets lifted net interest income; management attributed the year-over-year increase to $2.1 billion of average loan growth and higher earning-asset yields.
- Mortgage banking revenue rose 41% to $31.0 million, supported by originations and a $4.1 million positive MSR fair-value adjustment. Servicing for others increased to $4.80 billion from $1.97 billion.
- Expense growth of 16% reflected acquisition-related and growth-related staffing, higher employee costs, lease-equipment depreciation, marketing, professional fees and OREO expense.
- Net charge-offs increased to $6.7 million from $1.6 million; charge-offs were $9.3 million versus $3.4 million, partly offset by higher recoveries. The allowance remained 0.64% of loans.
- Other comprehensive loss was $26.4 million, versus income of $5.5 million, mainly reflecting unrealized losses on available-for-sale securities. Consequently, comprehensive income was $55.6 million versus $63.9 million despite higher net income.
- Common equity Tier 1 capital ratio increased to 9.5% from 8.9% a year earlier. Series C preferred shares had been mandatorily converted to common stock in April 2017.
Outlook, commentary, risks and unusual items
No quantified earnings or growth guidance is provided. Management described continued loan growth, higher net interest margin, mortgage banking growth and stable credit-quality measures as operating strengths, and said it would pursue loans meeting underwriting standards. It also identified continued growth in wealth management as a priority. On May 2, 2018, after quarter-end, Wintrust announced an agreement to acquire Chicago Shore Corporation; the filing gives Delaware Place Bank’s March 31 assets of approximately $245 million, loans of $165 million and deposits of $215 million.
- Veterans First was acquired January 4, 2018; the acquisition added mortgage servicing rights on approximately 10,000 loans with estimated unpaid principal of $1.6 billion and $10.2 million of goodwill.
- The company terminated its FDIC loss-share agreements in October 2017 and is now responsible for future losses and recoveries on previously covered assets.
- Interest-rate sensitivity models estimate net interest income changes over one year of +18.8% under a static +200-basis-point shock and +9.0% under a gradual +200-basis-point ramp; a -100-basis-point scenario estimates -11.6% and -4.8%, respectively. These are simulations, not forecasts.
- Management cited risks including economic and real-estate market weakness, borrower defaults and credit losses, interest-rate and funding changes, competitive pressure, acquisition integration, cybersecurity and technology issues, regulatory changes, and potential mortgage repurchase or indemnification costs.
- The company recorded $537,000 of impairment on equity securities without readily determinable fair values. Available-for-sale securities had $69.6 million of gross unrealized losses at quarter-end, attributed principally to interest rates, spreads and market conditions; management did not consider the securities other-than-temporarily impaired and stated it did not expect to need to sell them before recovery.
- The company was evaluating the future lease-accounting and expected-credit-loss standards. It expected to complete its accounting for Tax Act impacts in Q4 2018; no adjustment to its 2017 provisional amounts was made in Q1.
- A Lehman Brothers-related mortgage litigation matter remained pending; the company described its reserve as immaterial and said the outcome could not be predicted. Management did not expect pending matters to have a material adverse effect overall, while noting an unfavorable resolution could be material in a particular period.
Important facts for investors to verify
- Whether loan and deposit growth, net interest margin and funding costs remain favorable as rates and competition change.
- Whether higher charge-offs—particularly in commercial insurance premium finance—are isolated or signal a broader deterioration, and whether allowance levels remain adequate.
- The sustainability of mortgage banking results and MSR valuations, which depend on origination volumes, prepayments and other valuation assumptions.
- The liquidity and capital effects of increased FHLB borrowing, the planned Chicago Shore acquisition and integration of Veterans First.
- The effect of securities valuation losses, the Tax Act, and adoption of CECL and lease accounting on future reported results and capital.
- Developments in the Lehman litigation and other contingencies, and any material change in the company’s disclosed risk factors.