Business context and reporting period
Wintrust Financial Corporation is a financial holding company focused on community banking in the Chicago metropolitan area and southern Wisconsin, with specialty finance businesses operating nationally and in Canada and wealth management services. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2017; comparisons below are primarily with the same 2016 periods.
Financial performance and condition
| Metric | Third quarter 2017 | Prior-year comparison |
|---|---|---|
| Net interest income | $216.0 million | Up 17% from $184.6 million |
| Net interest margin | 3.43% GAAP; 3.46% fully taxable-equivalent | Up 22 basis points on both measures |
| Non-interest income | $79.7 million | Down 8% from $86.6 million |
| Non-interest expense | $183.6 million | Up 4% from $176.6 million |
| Provision for credit losses | $7.9 million | Down from $9.6 million |
| Net income | $65.6 million; diluted EPS $1.12 | Net income up 24%; diluted EPS was $0.92 |
| Efficiency ratio | 62.09% | Improved from 65.92% |
For the first nine months, net income was $188.9 million, up 24%; diluted EPS was $3.23 versus $2.72. Net interest income rose 15% to $613.0 million, while non-interest income declined 1% to $238.5 million and non-interest expense increased 7% to $535.2 million. Net interest margin was 3.40%, up 15 basis points year over year. The nine-month effective tax rate was 35.8%, including $5.0 million of excess tax benefits from share-based compensation accounting adoption.
At September 30, 2017, total assets were $27.36 billion, up 8% year over year. Loans excluding covered loans and mortgage loans held for sale were $20.91 billion, up 9%; deposits were $22.90 billion, up 8%. Non-interest-bearing deposits were 28% of deposits, compared with 27% a year earlier. Shareholders’ equity was $2.91 billion; tangible common equity ratio was 8.4% and book value per common share was $49.86.
Loan quality indicators were generally favorable year over year: non-performing loans were 0.37% of loans, versus 0.44%, and the allowance for credit losses was 0.64% of loans, versus 0.62%. Non-performing loans increased sequentially from 0.33% at June 30. The allowance for loan losses was $133.1 million; nine-month net charge-offs were $11.3 million, compared with $14.1 million in 2016. Total impaired loans were $78.6 million and troubled debt restructurings were $33.2 million.
Cash and cash equivalents were $252.0 million at quarter end, and management reported approximately $1.5 billion of overnight liquid funds and interest-bearing bank deposits. For the first nine months, operating cash flow was $148.4 million, compared with cash used of $82.6 million in 2016; investing cash outflow was $1.69 billion and financing cash inflow was $1.52 billion. Deposits were the principal funding source. FHLB advances were $469.0 million; other borrowings $251.7 million; subordinated notes $139.1 million; and junior subordinated debentures $253.6 million. Regulatory capital ratios included a 9.5% common equity Tier 1 ratio and 12.2% total capital ratio; the company reported ratios above bank-holding-company “well capitalized” thresholds.
Material changes and management commentary
- Management attributed higher net interest income to loan growth and improved margins. Average loans excluding covered loans increased $2.1 billion year over year in the quarter; growth was concentrated in commercial, commercial real estate and premium finance lending.
- Mortgage banking revenue fell 19% in the quarter to $28.2 million, primarily due to lower origination volume; originations were $956.0 million versus $1.26 billion. Management also cited a $2.2 million negative mortgage servicing rights fair-value adjustment.
- Operating lease income rose to $8.5 million from $4.5 million, reflecting leasing-business growth. Higher staffing, lease-equipment depreciation, marketing and professional fees contributed to higher expenses.
- The company’s Series C preferred stock was mandatorily converted into common stock in April 2017, eliminating that preferred balance and increasing common shares. The quarterly common dividend was $0.14 per share.
- On October 16, 2017, after quarter end, Wintrust terminated its remaining FDIC loss-share agreements, paying the FDIC a net $15.2 million. The company expected to record a fourth-quarter pre-tax gain of approximately $0.4 million and will bear future gains, losses and expenses on the formerly covered assets without FDIC sharing.
Outlook, risks and contingencies
The filing provides no specific numerical earnings or growth guidance. Management described continued focus on loan growth where opportunities meet underwriting standards, deposit funding, and expansion of wealth management. It stated that liquidity was adequate and reserves appropriate, while noting that quarterly results are not necessarily indicative of full-year results.
Key risks include deterioration in borrower credit quality or collateral values, commercial real estate conditions in the company’s primary markets, interest-rate and liquidity changes, competitive pressure on loan and deposit pricing, mortgage repurchase or indemnification claims, fraud in premium finance lending, acquisition integration, regulatory and capital requirements, cybersecurity and vendor disruptions, and fair-value estimation uncertainty. Interest-rate simulations showed estimated one-year net interest income sensitivity of +9.8% for an immediate +100-basis-point shock and -12.9% for a -100-basis-point shock; gradual-rate ramp scenarios estimated +4.6% and -5.3%, respectively. Actual outcomes may differ.
Wintrust reported an immaterial reserve for the pending Lehman Brothers loan-indemnity litigation; the outcome and any loss beyond reserves could not be predicted. A separate RFC Liquidating Trust claim was settled for an immaterial amount on October 30, 2017. Management did not expect the described legal matters to have a material adverse effect overall, but acknowledged an unfavorable resolution could materially affect a particular period. No material risk-factor changes from the 2016 Form 10-K were reported.
Important facts for investors to verify
- Whether the improvement in net interest margin and loan growth persists as deposit and borrowing costs rise.
- Mortgage production, servicing-rights valuations and the sustainability of non-interest income, including lease and wealth-management contributions.
- Credit trends, especially the sequential increase in non-performing loans, commercial real estate exposures, and allowance adequacy.
- The financial and credit consequences of ending FDIC loss sharing, including realized losses on formerly covered assets and the fourth-quarter accounting gain.
- Liquidity and funding mix, including brokered deposits (5.6% of deposits), FHLB advances and the maturity/refinancing of secured borrowings.
- Actual legal outcomes, the effect of the preferred-stock conversion on per-share comparisons, and the company’s capital ratios and dividend capacity.