Wintrust Financial Corp. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Unaudited consolidated results. Wintrust provides community banking primarily in the Chicago region, specialty finance nationally and in Canada, and wealth management services.
Financial results and position
- Q2 earnings: Net income was $81.5 million, down 9% from $89.6 million a year earlier. Diluted EPS was $1.38, versus $1.53. Net revenue rose 9% to $364.4 million.
- Six-month earnings: Net income was $170.6 million, down 1%; diluted EPS was $2.91, versus $2.93. Net revenue increased 10% to $708.0 million.
- Net interest: Q2 net interest income rose 12% to $266.2 million; net interest margin was 3.62%, up 1 basis point year over year but down from 3.70% in Q1 2019. For six months, net interest income increased 14% to $528.2 million and margin rose 8 basis points to 3.66%. Higher earning-asset yields and loan growth supported results, while funding costs increased.
- Other revenue and expenses: Q2 non-interest income increased 3% to $98.2 million, including operating lease income growth, partly offset by mortgage banking revenue down 6% to $37.4 million. Non-interest expense rose 11% to $229.6 million, led by salaries, benefits, occupancy and equipment. The Q2 efficiency ratio was 62.89% on a fully taxable-equivalent basis, compared with 61.76% a year earlier.
- Credit costs: Q2 provision for credit losses was $24.6 million, versus $5.0 million; net charge-offs were $22.3 million, versus $1.1 million. Management attributed $15.2 million of provision and $18.4 million of net charge-offs to three credits. The allowance for credit losses was $161.9 million, or 0.64% of loans. Non-performing loans were $113.4 million, 0.45% of loans, compared with 0.37% a year earlier.
- Balance sheet and liquidity: Total assets were $33.6 billion, up 14% year over year. Loans were $25.3 billion, up 12%, and deposits were $27.5 billion, up 13%. The company reported approximately $1.7 billion in overnight liquid funds and interest-bearing bank deposits. Six-month operating cash flow was $22.2 million, versus $102.2 million; investing used $1.81 billion and financing provided $1.70 billion. Cash and cash equivalents declined $91.2 million to $301.0 million.
- Debt and capital: Subordinated notes totaled $436.0 million, up from $139.2 million at year-end, after a $300 million issuance in Q2 at 4.85%, due 2029. Total shareholders’ equity was $3.45 billion. At June 30, the Tier 1 leverage, Tier 1 risk-based, CET1 and total capital ratios were 9.1%, 9.6%, 9.2% and 12.4%, respectively; management reported compliance with applicable credit-facility covenants.
Changes, transactions and unusual items
- Loan growth and higher net interest income were offset in Q2 by elevated credit costs and operating expenses, reducing net income despite higher revenue.
- Mortgage banking revenue fell 22% for the first six months to $55.6 million. Management cited negative MSR valuation changes and payoffs, as well as lower production margins. Q2 included a $920,000 gain from an option used to economically hedge MSR value changes.
- Wintrust completed its acquisition of Rush-Oak Corporation/Oak Bank on May 24, adding approximately $223.8 million of assets and $161.2 million of deposits; it recorded $10.7 million of goodwill. After quarter-end, the company announced agreements to acquire STC Bancshares and SBC, Incorporated; completion was not reported in this filing.
- Adoption of the new lease standard on January 1, 2019 resulted in recognition of lease liabilities of approximately $199.4 million and right-of-use assets of $170.6 million. At June 30, those balances were $195.1 million and $163.1 million, respectively.
- The company issued no quantified earnings or growth guidance. Management described continued loan and deposit growth and operating momentum, while noting the pressure from credit costs and expenses. CECL was scheduled to become effective in 2020; implementation work was ongoing and its financial impact was not clearly quantified.
Risks, contingencies and management commentary
- Key stated risks include credit deterioration, commercial real estate and local economic conditions, interest-rate and funding-cost changes, competition, acquisition integration, cybersecurity and technology failures, regulatory changes, and uncertainty surrounding LIBOR.
- Management said the allowance was appropriate and the loan portfolio diversified and well secured, but allowance estimates rely on judgments about borrower performance, collateral values and economic conditions.
- Litigation includes Lehman-related mortgage indemnification claims and other matters. The company reserved an immaterial amount for the Lehman action but said potential outcomes remain uncertain; management did not expect the described proceedings to have a material adverse effect overall, while acknowledging an unfavorable resolution could materially affect a particular period. A separate JPMorgan/Bear Stearns dispute was settled for an immaterial amount.
- Management stated that liquidity was adequate and that capital ratios exceeded regulatory “well-capitalized” thresholds. These are management assessments, not guarantees of future performance.
Important facts for investors to verify
- Whether the three large credit exposures drive further provisions, charge-offs or deterioration in non-performing loans.
- Whether loan growth and net interest income can offset deposit repricing, higher funding costs and expense growth; monitor sequential net interest margin.
- Whether mortgage banking and MSR valuation recover, and how much future earnings depend on production, servicing assumptions and hedging.
- The terms, funding, integration costs and expected returns of the announced STC and SBC acquisitions, and completion of those transactions.
- The effect of CECL adoption on the allowance, retained earnings and capital, once the company provides a quantified estimate.
- Debt servicing and liquidity, including the recently issued subordinated notes and the maturity extension of the Canadian secured borrowing to December 2020.
- Developments in the Lehman and other legal matters, and whether any liability could exceed recorded reserves.