Wintrust Financial Corporation — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. Wintrust is a financial holding company focused on community banking in the Chicago area and southeastern Wisconsin, with specialty finance and wealth management businesses. Unaudited results should be read with the company’s 2012 Form 10-K; management cautions that interim results are not necessarily indicative of full-year performance. Dollar amounts below are in millions unless noted.
Financial performance and position
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net interest income | $135.8 | $128.3 | $266.5 | $254.2 |
| Non-interest income | $64.0 | $50.9 | $121.4 | $98.0 |
| Non-interest expense | $128.2 | $117.2 | $248.3 | $234.9 |
| Net income | $34.3 | $25.6 | $66.4 | $48.8 |
| Diluted earnings per common share | $0.69 | $0.52 | $1.34 | $1.02 |
- Q2 net revenue (net interest income plus non-interest income) rose 12% to $199.8 million; net income increased 34%. Six-month net income rose 36%.
- Q2 net interest margin was 3.50% on a fully taxable-equivalent basis, down 1 basis point year over year but up 9 basis points sequentially. Six-month margin was 3.46%, down 7 basis points year over year.
- Mortgage banking revenue increased 24% in Q2 to $31.7 million; wealth management revenue rose 19% to $15.9 million. Trading gains were $3.3 million, principally from interest-rate-cap valuation changes. These gains and mortgage-related revenue contributed to stronger non-interest income.
- Q2 provision for credit losses was $15.4 million, compared with $20.7 million; net charge-offs excluding covered loans were $18.4 million, up from $17.4 million. Six-month provision was $31.1 million versus $38.1 million.
- Six-month operating cash flow was $5.7 million, versus cash used of $328.8 million in the prior-year period. Investing activities provided $13.4 million; financing activities used $100.8 million. Cash and cash equivalents ended the period at $233.3 million.
- At June 30, total assets were $17.6 billion, loans $13.0 billion, deposits $14.4 billion and shareholders’ equity $1.84 billion. Cash, federal funds and interest-bearing bank deposits together were about $674 million. Total borrowings and debt included $585.9 million of FHLB advances, $252.8 million of other borrowings, $249.5 million of junior subordinated debentures and smaller notes and subordinated debt; secured securitization borrowings were zero.
- Regulatory capital ratios were 10.4% leverage, 12.0% Tier 1 risk-based and 12.9% total risk-based. Tangible common equity ratio was 7.4% (8.5% assuming full preferred conversion). Q2 return on average assets was 0.80% and return on average common equity 7.55%.
- Other comprehensive loss was $48.1 million in Q2, largely due to unrealized securities losses and foreign-currency translation. Accumulated other comprehensive loss was $49.2 million at quarter-end.
Material changes and business developments
- Loans excluding covered loans grew 12% year over year to $12.5 billion; deposits grew 10% to $14.4 billion. Management attributed loan growth to commercial lending, premium finance receivables and acquisitions, while liquidity was deployed to fund lending.
- Funding mix improved: non-interest-bearing deposits were 17% of deposits at quarter-end, while time certificates declined to 30% of deposits from 38% a year earlier. Average interest-bearing deposit costs fell, supporting net interest income despite lower earning-asset yields.
- Wintrust acquired First Lansing Bancorp on May 1, adding approximately $373 million of fair-value assets and $331 million of deposits and recording $14.0 million of goodwill. It divested Second Federal’s deposits and operations in February, reducing deposits by approximately $149 million.
- After quarter-end, the Series A preferred holder elected to convert all 50,000 shares into 1.944 million common shares. Wintrust also announced an agreement to acquire Diamond Bancorp, expected to add approximately $165 million of assets and $135 million of deposits, subject to final adjustments.
Management commentary, outlook and risks
- Management cited continued low interest rates and renewed bank competition as constraints on margin expansion. It expects loan pricing and repricing to become a greater source of margin pressure as further deposit-cost reductions diminish.
- Management described credit metrics as improved overall: non-performing loans excluding covered loans were $121.5 million, or 0.97% of loans, and non-performing assets were 1.02% of assets. However, non-performing commercial real-estate loans increased from year-end to $58.1 million. Commercial real estate represented 33% of loans excluding covered loans, with 93% of that portfolio in the Chicago area and southeastern Wisconsin.
- The allowance for loan losses excluding covered loans was $106.8 million, or 0.85% of those loans. TDRs totaled $126.2 million across 167 credits; $93.8 million were accruing and $32.4 million non-accruing. The filing reports $4.0 million of impairment on TDRs, reserved under the normal allowance methodology.
- Management considers liquidity sufficient, supported by deposits, liquid investments and external funding sources. It expects mortgage purchase activity to support originations if rates rise, partly offsetting lower refinancing, and continues cost-control efforts. It also expects additional compliance costs from Dodd-Frank regulation. No specific earnings or revenue guidance is provided.
- Interest-rate simulation indicated net interest income could rise 5.8% under a gradual +200 basis-point shock or fall 8.1% under a gradual -200 basis-point shock over one year. Results depend on assumptions and actual outcomes may differ. The company held $880 million notional of non-designated interest-rate caps as economic protection against rising rates; fair-value changes affect earnings.
- Other notable exposures include FDIC loss-sharing arrangements and a declining FDIC indemnification asset ($137.7 million at quarter-end), mortgage loan repurchase and indemnification obligations (estimated liability $4.5 million), and the company’s concentrated commercial real-estate lending. The filing identifies economic conditions, credit losses, interest rates, competition, acquisition integration, regulation, capital access and mortgage repurchases among key risks. Management said there were no material changes to the risk factors in its 2012 Form 10-K.
Investor verification points
- Reconcile six-month net interest income: the financial statements and segment disclosures report $266.5 million, but one MD&A summary table prints $226.5 million. The filing text does not explain this apparent inconsistency.
- Assess whether loan growth and the shift toward commercial and commercial real-estate lending can be sustained without weakening underwriting or increasing credit costs; track CRE delinquencies, charge-offs, non-performing loans and reserve adequacy.
- Separate recurring earnings from mortgage banking and wealth-management activity, interest-rate-cap mark-to-market gains, and other variable or investment-related income.
- Monitor the portfolio’s sensitivity to rate changes, securities-related unrealized losses, deposit pricing and mix, and the effectiveness and accounting volatility of derivatives.
- Verify the costs, funding, integration and capital effects of the First Lansing acquisition and proposed Diamond transaction, and the effect of the Series A conversion on share count and per-share results.