Wintrust Financial Corporation — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. Unaudited consolidated results; amounts below are in U.S. dollars. Wintrust provides community banking primarily in the Chicago area and southern Wisconsin, alongside specialty finance and wealth management businesses.
Financial performance and condition
| Metric | Q2 2016 | Q2 2015 | First half 2016 | First half 2015 |
|---|---|---|---|---|
| Net interest income | $175.3 million | $156.9 million | $346.8 million | $308.8 million |
| Non-interest income | $84.8 million | $77.0 million | $153.6 million | $141.6 million |
| Net income | $50.0 million | $43.8 million | $99.2 million | $82.9 million |
| Diluted EPS | $0.90 | $0.85 | $1.80 | $1.61 |
- Revenue and margins: Net revenue (net interest income plus non-interest income) rose 11% year over year in both Q2, to $260.1 million, and the first half, to $500.3 million. GAAP net interest margin was 3.24% in Q2 versus 3.39% a year earlier; fully tax-equivalent margin was 3.27% versus 3.41%. The FTE efficiency ratio was 65.73% versus 65.64% in Q2 and improved to 64.88% from 66.72% for the first half.
- Expenses and credit costs: Q2 non-interest expense increased 11% to $171.0 million; first-half expense increased 8% to $324.7 million. Provision for credit losses was $9.1 million in Q2 and $17.2 million for the first half. First-half net charge-offs were $8.4 million, compared with $6.9 million a year earlier.
- Balance sheet at June 30: Assets were $24.42 billion, up 17% year over year. Total loans, excluding covered loans and mortgage loans held for sale, were $18.17 billion, up 17%; deposits were $20.04 billion, up 17%. Shareholders’ equity was $2.62 billion.
- Asset quality: Non-performing loans were 0.48% of loans excluding covered loans, versus 0.49% a year earlier; non-performing assets were 0.52% of assets versus 0.57%. Non-performing loan dollars increased to $88.1 million from $76.6 million. The allowance for credit losses was $115.4 million, or 0.64% of loans, versus 0.65% a year earlier. Troubled debt restructurings totaled $49.6 million, down from $62.8 million.
- Liquidity, funding and debt: Management reported approximately $964.8 million of overnight liquid funds and interest-bearing bank deposits. Total deposits were $20.04 billion. FHLB advances, other borrowings and subordinated notes totaled $979.6 million; junior subordinated debentures were $253.6 million. The $75 million revolving credit facility was undrawn, and the company reported compliance with its credit agreement covenants at June 30.
- Capital: Consolidated regulatory ratios included a 9.2% leverage ratio, 10.1% Tier 1 risk-based capital ratio, 8.9% common equity Tier 1 ratio and 12.4% total risk-based capital ratio. Tangible common equity was 7.8% of tangible assets. A June common-stock offering of 3.0 million shares generated $152.8 million net proceeds. The quarterly common dividend was $0.12 per share.
- Cash flows, first half: Operating cash flow was negative $92.7 million, investing cash flow negative $1.06 billion and financing cash flow positive $1.15 billion. Cash and cash equivalents ended at $271.6 million, down $4.2 million from year-end. Financing included $1.30 billion of deposit growth and the common-stock issuance; investing included $943.0 million of net loan growth.
Material changes versus comparable periods
- Net income rose 14% in Q2 and 20% for the first half. Management attributed growth primarily to loan and deposit expansion and higher net interest income.
- Average loans excluding covered loans increased $2.6 billion year over year in Q2. Growth reflected commercial and commercial real estate lending, life insurance premium finance receivables and acquisitions. Average non-interest-bearing deposits rose 40% year over year in Q2.
- Non-interest income growth was supported by service charges, securities gains and operating lease income in Q2. First-half mortgage banking revenue fell 8% to $58.5 million, primarily reflecting lower origination volume; production margin declined to 2.68% from 2.99%.
- Expenses rose with acquisition-related staffing, higher employee costs, equipment and data processing. First-half results also included a $4.3 million gain from the early extinguishment of junior subordinated debt.
- Available-for-sale securities declined to $637.7 million from $1.72 billion at year-end 2015, while held-to-maturity securities increased to $992.2 million. The filing notes a $862.7 million transfer from available-for-sale to held-to-maturity occurred in Q4 2015; no such transfer occurred in the first half of 2016.
Outlook, risks and unusual items
- Outlook: No specific earnings or financial guidance was provided. Management said it would continue pursuing loan growth where opportunities meet underwriting standards and described wealth management and business development as growth priorities. The filing cautions that interim results are not necessarily indicative of full-year results.
- Acquisitions: Wintrust acquired Generations Bancorp on March 31, 2016, adding approximately $131 million of assets and $100 million of deposits and recording $11.4 million of goodwill. After quarter-end, it announced agreements to acquire First Community Financial Corporation and approximately $581 million of performing franchise loans from an affiliate of GE Capital; completion and integration risks remain.
- Regulatory capital matter: The company identified issues with the eligibility of certain subsidiary-bank subordinated notes as Tier 2 capital. It replaced or reclassified affected instruments and infused Tier 1 capital at four banks; management said the affected banks remained well capitalized. Revised calculations showed Beverly Bank technically below the well-capitalized threshold at December 2015 and March 2016; the company deemed the matter immaterial and obtained lender waivers for any technical covenant default.
- Interest-rate risk: At June 30, the static model projected net interest income rising 8.9% for a 100-basis-point rate increase and falling 8.9% for a 100-basis-point decrease; the gradual ramp scenario projected +3.5% and -3.7%, respectively. These are modeled estimates, not forecasts, and depend on assumptions and management actions.
- Credit and operating risks: Management cited regional economic and commercial real estate exposure, competition, interest-rate and liquidity changes, acquisition execution, premium-finance credit and fraud risks, mortgage repurchase claims, cybersecurity and vendor dependencies, and regulatory requirements. Management considered the allowance appropriate, but its estimation depends on judgment and economic assumptions.
- Legal matters: The filing describes mortgage-related claims by Lehman Holdings and RFC Liquidating Trust and a FINRA arbitration involving BMO Harris Financial Advisors and Wintrust’s brokerage subsidiary. Some potential losses were not reasonably estimable; the Lehman reserve was described as immaterial. 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.
Most important facts for investors to verify
- Whether strong loan and deposit growth can continue without further margin compression or weakening credit quality.
- Trends in non-performing loans, delinquencies, charge-offs and the adequacy of loan-loss reserves, especially in commercial and commercial real estate portfolios.
- Mortgage banking volume and margins, and any reserve or loss developments involving loan repurchase and indemnification claims.
- Completion, purchase accounting and integration of the announced acquisitions, including the GE Capital-affiliate loan purchase.
- Resolution and ongoing effects of the subsidiary-bank capital classification issue, including regulatory status and lender covenant compliance.
- Liquidity and funding mix, interest-rate sensitivity assumptions, and the impact of the increased share count from the June offering.