WINTRUST FINANCIAL CORP annual report, FY2018

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Wintrust Financial Corporation — FY2018 Form 10-K

Reporting period: Fiscal year ended December 31, 2018. This annual filing also provides unaudited fourth-quarter results. Wintrust is a financial holding company operating community banking, specialty finance and wealth management businesses, primarily in the Chicago area, southern Wisconsin and northwest Indiana. Amounts below are in U.S. dollars.

Financial performance and position

  • Revenue and earnings: Net revenue was $1.321 billion, up 15% from $1.152 billion in 2017. Net income rose 33% to $343.2 million from $257.7 million; diluted EPS increased to $5.86 from $4.40. Fourth-quarter net income was $79.7 million versus $68.8 million; diluted EPS was $1.35 versus $1.17.
  • Net interest and margins: Net interest income increased 16% to $964.9 million. Net interest margin rose to 3.59% from 3.41% (3.61% versus 3.44% on a fully taxable-equivalent basis), reflecting asset growth and higher rates.
  • Non-interest income and expenses: Non-interest income grew 11% to $356.2 million, led by mortgage banking, wealth management and operating lease income. Non-interest expense rose 13% to $826.1 million, including higher salaries, marketing, lease depreciation and professional fees. The net overhead ratio increased to 1.62% from 1.56%; management’s stated goal is below 1.50%.
  • Margins and returns: Return on average assets was 1.18%, up from 0.98%; return on average common equity was 11.26%, up from 9.26%. The GAAP-derived efficiency ratio improved to 62.40% from 63.55%.
  • Balance sheet and liquidity: Year-end assets were $31.2 billion, up 12%; loans were $23.8 billion, up 10%; and deposits were $26.1 billion, up 13%. Cash and cash equivalents were $392.2 million, with $1.10 billion of interest-bearing bank deposits. Management also reported $1.5 billion of overnight liquid funds and interest-bearing bank deposits combined as a liquidity measure.
  • Cash flows: Net cash provided by operating activities was $377.2 million, down from $401.6 million. Investing activities used $2.76 billion, primarily reflecting loan growth and securities purchases; financing activities provided $2.50 billion, principally from deposit growth. Cash and cash equivalents increased $114.6 million to $392.2 million.
  • Credit quality: Provision for credit losses was $34.8 million versus $29.8 million. Net charge-offs, excluding covered loans, rose to $19.7 million from $15.0 million. Non-performing loans increased to $113.2 million, or 0.48% of loans, from $90.2 million, or 0.42%. The allowance for loan losses was $152.8 million, 0.64% of loans; OREO declined to $24.8 million from $40.6 million.
  • Capital and debt: Company regulatory ratios at year-end were 9.3% Common Equity Tier 1, 9.7% Tier 1, 11.6% total capital and 9.1% leverage; the company and banks were above applicable well-capitalized standards. Shareholders’ equity was $3.27 billion. Debt included $253.6 million of junior subordinated debentures, $139.2 million of subordinated notes and $144.5 million drawn under a new term facility; the $50 million revolving facility was undrawn. The company reported compliance with facility covenants.
  • Segment results: Community banking reported $240.8 million net income, specialty finance $82.1 million and wealth management $20.3 million. Their 2018 net revenues, before intersegment eliminations, were approximately $1.0 billion, $203 million and $109 million, respectively.

Material changes and notable items

  • Loan growth, improving net interest margin and lower income taxes drove earnings growth. The effective tax rate fell to 25.4% from 33.9%, mainly following the federal corporate tax rate reduction to 21%; 2018 also included a $1.2 million additional net tax benefit related to finalizing Tax Act estimates.
  • Funding costs rose: interest expense increased to $205.9 million from $114.4 million, with the average rate on interest-bearing deposits increasing to 0.95% from 0.52%.
  • Mortgage banking revenue increased to $137.0 million from $113.5 million. Mortgage originations were $4.0 billion, and loans serviced for others rose to $6.5 billion from $2.9 billion, partly reflecting the Veterans First acquisition and increased servicing-retained sales.
  • 2018 acquisitions included Chicago Shore Corporation, certain assets and liabilities of American Enterprise Bank, Veterans First Mortgage and CDEC’s parent company. The acquisitions contributed to balance-sheet growth and added goodwill.
  • Accumulated other comprehensive loss widened to $76.9 million from $41.8 million, including lower securities values and foreign-currency translation losses. No other-than-temporary impairment charges were reported on debt securities; the company did record $2.9 million of net investment-security losses, including equity-security valuation effects and impairment of certain investments.
  • Common dividends declared were $0.76 per share for 2018, up from $0.56 in 2017. In January 2019 the board declared a $0.25 quarterly dividend. No common-share repurchases were made in 2018.

Outlook, risks and contingencies

  • Outlook: The filing provides no specific numerical earnings or growth forecast. Management described continued focus on loan and deposit growth, expense discipline, strategic acquisitions and branch expansion, while noting expected compliance and technology costs. Management expects mortgage banking to remain a continuing revenue source, with results sensitive to rates and housing-market conditions.
  • Key risks: The company’s community banking exposure is concentrated in its regional markets; 87% of commercial real estate loans were located in its primary markets. Commercial real estate represented $6.9 billion, or 29%, of loans. Risks include local economic and property-market deterioration, higher deposit costs, interest-rate sensitivity, credit losses, competition, acquisition integration, cybersecurity and third-party operations.
  • Interest-rate and funding sensitivity: The filing’s modeled one-year net-interest-income impact at year-end 2018 ranged from +15.6% under a static +200-basis-point shock to −20.4% under a −200-basis-point shock; ramp scenarios ranged from +7.4% to −8.5%. These are simulations, not forecasts. A significant share of variable-rate loans references LIBOR, whose expected cessation after 2021 creates contract and transition risks.
  • Accounting changes: CECL was expected to become effective for the company in 2020. Management was evaluating its effect; adoption could increase the allowance for credit losses. The company expected to recognize a $150–$190 million right-of-use asset when adopting the new lease standard in 2019.
  • Contingencies: Mortgage repurchase and indemnification reserves were $2.4 million at year-end. A JPMC demand sought approximately $4.6 million; the filing says information was insufficient to assess merits or estimate potential liability. Lehman Holdings litigation continued, with an immaterial reserve for the existing action and no clear estimate for supplemental claims. Other disclosed matters include a California wage-law suit and a Northbrook Bank class action alleging involvement in a Ponzi scheme; management could not estimate potential losses for these matters. Management said the overall eventual outcomes were not expected to materially affect operations or financial condition, while noting an unfavorable resolution could affect a particular period.
  • Audit and controls: Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting.

Important facts for investors to verify

  • Whether loan growth, higher deposit pricing and rising funding costs sustain or erode net interest margin.
  • Developments in non-performing loans, commercial-loan charge-offs, TDRs and allowance adequacy, including the impact of CECL adoption.
  • Commercial real estate and regional-market concentration, and performance of the specialty finance and insurance premium finance portfolios.
  • Acquisition integration, goodwill, expense growth and progress toward management’s below-1.50% net overhead ratio goal.
  • Mortgage servicing asset valuations, mortgage repurchase claims and the status and potential exposure of disclosed litigation.
  • Capital and liquidity levels, dividend capacity, credit-facility covenants, and the LIBOR transition for loans, derivatives and preferred securities.