Wintrust Financial Corporation — FY2017 Form 10-K
Reporting period: Year ended December 31, 2017; comparisons are principally with FY2016. This is an annual filing, not a standalone fourth-quarter report. Wintrust is a financial holding company operating community banking, specialty finance and wealth management businesses, primarily in the Chicago area and southern Wisconsin, with premium finance operations across the U.S. and Canada. Total assets were $27.9 billion.
Financial performance and condition
| Metric | FY2017 | FY2016 | Change |
|---|---|---|---|
| Net interest income | $832.1 million | $722.2 million | +15% |
| Net revenue | $1,151.6 million | $1,047.6 million | +10% |
| Net income | $257.7 million | $206.9 million | +25% |
| Diluted earnings per common share | $4.40 | $3.66 | +20% |
| Net interest margin | 3.41% | 3.24% | +17 basis points |
| Non-interest income | $319.5 million | $325.4 million | -2% |
| Non-interest expense | $731.8 million | $681.7 million | +7% |
| Total assets | $27.9 billion | $25.7 billion | +9% |
| Loans, excluding covered loans and loans held for sale | $21.6 billion | $19.7 billion | +10% |
| Deposits | $23.2 billion | $21.7 billion | +7% |
- Profitability: Return on average assets was 0.98%, versus 0.85%; return on average common equity was 9.26%, versus 8.37%. The efficiency ratio was 63.55%, improved from 65.55%. Management’s stated goal was to keep the net overhead ratio below 1.50%; it was 1.56% in 2017.
- Cash flow: Net cash from operating activities was $401.0 million; investing activities used $2.304 billion and financing activities provided $1.910 billion. Cash and cash equivalents increased $7.5 million to $277.6 million. Separately, the Company reported $1.3 billion of overnight liquid funds and interest-bearing bank deposits.
- Credit quality: Provision for credit losses was $29.8 million, compared with $34.1 million. Net charge-offs, excluding covered loans, were $15.0 million, down from $16.9 million. Non-performing loans, excluding covered loans, were $90.2 million, or 0.42% of loans, versus $87.5 million, or 0.44%. The allowance for loan losses was $137.9 million, or 0.64% of loans.
- Capital and debt: Shareholders’ equity was $3.0 billion. Company regulatory ratios were 9.4% Common Equity Tier 1, 9.9% Tier 1, 12.0% total capital and 9.3% Tier 1 leverage; the Company and its banks were reported above applicable well-capitalized requirements. Year-end borrowings included $559.7 million of FHLB advances, $139.1 million of subordinated notes and $253.6 million of junior subordinated debentures. The $75 million revolving facility was undrawn; $41.2 million remained on the term facility.
Material changes versus FY2016
- Earnings growth was driven mainly by loan and earning-asset growth and a higher net interest margin. Average earning assets increased 9%; average loans excluding covered loans rose 12%. Rising rates lifted average loan yield to 4.19% from 3.96%, while the average rate paid on interest-bearing deposits rose to 0.52% from 0.40%.
- Non-interest income declined as mortgage banking revenue fell $15.3 million to $113.5 million, covered-call fees fell $7.1 million to $4.4 million, and securities gains fell to $45,000 from $7.6 million. Operating lease income increased $13.2 million to $29.6 million, supporting specialty finance growth.
- Expenses increased $50.1 million, led by $24.9 million in salaries and benefits, $10.8 million in operating-lease equipment depreciation and $7.4 million in professional fees.
- Non-interest-bearing deposits grew to 29% of period-end deposits from 27%. Shareholders’ equity increased 10%; the Series C preferred stock was mandatorily converted into common shares in April 2017.
Outlook, management commentary, risks and unusual items
- Management described continued loan and deposit growth, rising interest rates and intense competition. It emphasized disciplined underwriting, expense control and leveraging existing infrastructure. The filing does not provide quantified earnings or growth guidance.
- The 2017 effective tax rate was 33.9%, down from 37.7%. The Tax Cuts and Jobs Act generated a provisional net tax benefit of $7.6 million, including deferred-tax remeasurement partly offset by a one-time tax on deemed repatriation of Canadian earnings; management said its accounting would be completed during 2018.
- In October 2017, Wintrust terminated all FDIC loss-share agreements, paying the FDIC a net $15.2 million. It recorded a pretax gain of approximately $0.4 million. Wintrust thereafter bears future losses and recoveries on the formerly covered assets without FDIC sharing.
- Key exposures include concentrated community-bank lending in the Chicago and southern Wisconsin markets, commercial and commercial real estate credit, interest-rate and funding costs, competition, mortgage origination and repurchase claims, premium-finance agent and broker fraud, insurer concentration, cybersecurity and regulatory costs. Approximately 89% of commercial real estate loans were in the primary Illinois and Wisconsin markets. One insurer represented about 14% of premium finance balances; two others represented about 6% and 5%.
- Liquidity is supported by deposits and access to external funding, but holding-company dividends depend substantially on subsidiary distributions and are subject to regulatory and covenant restrictions. The Company reported $317.7 million of bank dividends available without prior regulatory approval as of January 1, 2018, subject to capital requirements.
- Mortgage repurchase and indemnification liability was $3.0 million, down from $4.2 million. The Lehman loan-indemnity action remained pending, with an immaterial reserve; an RFC Liquidating Trust claim was settled for an immaterial amount in October 2017. Management did not expect the described matters to materially affect operations or financial condition, while noting an unfavorable resolution could affect a particular period.
- The auditor issued an unqualified opinion on the financial statements and internal controls. Management also concluded disclosure controls and internal control over financial reporting were effective.
Important facts for investors to verify
- Whether loan growth and the improved net interest margin persist as deposit costs reprice and competition continues.
- Credit performance and reserve adequacy, especially in commercial, commercial real estate and premium finance portfolios; also monitor non-performing loans, charge-offs and TDRs.
- The final tax effects of the Tax Act and the quality of earnings excluding its provisional benefit and share-based compensation tax benefits.
- The effect of ending FDIC loss sharing on future credit costs and recoveries, and the status of the Lehman litigation and mortgage repurchase exposure.
- Liquidity, capital and dividend capacity under rising funding needs, regulatory requirements and debt covenants; assess the company’s interest-rate and LIBOR exposures.