Wintrust Financial Corporation — 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. This is an annual report; fourth-quarter figures are identified separately where provided. Wintrust is an Illinois-based financial holding company operating community banking, specialty finance, and wealth management businesses, principally in metropolitan Chicago and southeastern Wisconsin.
Financial performance and condition
- Full-year earnings: Net income was $111.2 million, up 43% from $77.6 million in 2011. Diluted earnings per share rose to $2.31 from $1.67. Fourth-quarter net income was $30.1 million and diluted EPS was $0.61, compared with $19.2 million and $0.41 in fourth-quarter 2011.
- Revenue and margins: Net revenue was $745.6 million, up 15%. Net interest income increased 13% to $519.5 million; net interest margin was 3.49%, versus 3.42%. Non-interest income rose 19% to $226.1 million, led by mortgage banking. Non-interest expense increased 16% to $489.0 million, including a 21% rise in salaries and benefits. The efficiency ratio increased to 65.85% from 64.58%; management’s adjusted measure improved to 62.50% from 63.75%.
- Profitability: Return on average assets was 0.67%, up from 0.52%; return on average common equity was 6.60%, up from 5.11%. Pre-tax adjusted earnings, a non-GAAP measure, increased 24% to $273.5 million.
- Balance sheet and funding: Assets grew 10% to $17.52 billion. Loans excluding covered loans rose 12% to $11.83 billion; deposits increased 17% to $14.43 billion. Non-interest-bearing deposits grew to $2.40 billion from $1.79 billion. Year-end cash and cash equivalents were $315.0 million, with a further $1.04 billion in interest-bearing deposits at banks. Management reported $1.4 billion in overnight liquid funds and interest-bearing bank deposits.
- Debt and capital: The $600 million securitization borrowing was fully repaid in 2012. Year-end funding included $414.1 million of FHLB advances, $274.4 million of other borrowings, $249.5 million of junior subordinated debentures, $15.0 million of subordinated notes, and $2.1 million of notes payable. Regulatory capital ratios were 13.1% total capital, 12.1% Tier 1 risk-based capital, and 10.0% leverage; the Company and its banks reported meeting applicable well-capitalized thresholds.
- Cash flow: Operating activities provided $268.7 million; investing activities used $495.9 million; financing activities provided $372.5 million. Cash and cash equivalents increased $145.3 million to $315.0 million.
- Credit quality: Non-performing loans excluding covered loans declined to $118.1 million from $120.1 million; the ratio to loans improved to 1.00% from 1.14%. Net charge-offs excluding covered loans fell to $74.8 million from $103.3 million. The allowance for loan losses excluding covered loans was $107.4 million, or 0.91% of those loans, down from 1.05%. OREO excluding covered assets fell to $62.9 million from $86.5 million.
Material changes versus 2011
- Loan and deposit growth, acquisitions, and lower funding costs contributed to higher net interest income; average loan yields nevertheless declined to 4.60% from 5.03%.
- Mortgage banking revenue rose 93% to $110.0 million as originations and sales increased to $3.9 billion from $2.5 billion.
- Lower credit-loss provisions supported earnings: total provision was $76.4 million, compared with $102.6 million. Non-interest expense rose mainly from increased staffing, variable compensation, and growth-related costs.
- Bargain purchase gains fell to $7.5 million from $38.0 million, so reported earnings growth was achieved despite less acquisition-related gain income.
- Wintrust issued $126.5 million of Series C convertible preferred stock, receiving $122.7 million net proceeds. It also repaid the securitization notes and restructured $292.5 million of FHLB advances, paying $22.4 million in prepayment fees.
Outlook, commentary, risks, and unusual items
- Management emphasized disciplined loan growth, improving credit measures, a lower-cost deposit mix, and continued pursuit of acquisitions and lending opportunities. The filing does not provide a specific numerical earnings or revenue forecast.
- Management cautioned that economic weakness and depressed real-estate values could continue to pressure borrowers and collateral values. Commercial real estate was 31% of the loan portfolio, and more than 88% of that exposure was in the company’s primary markets.
- Premium finance receivables are exposed to agent and broker fraud and to insurer financial condition; one insurer represented about 11% of those balances. Commercial premium finance past-due balances temporarily rose following policy-cancellation restrictions after Superstorm Sandy; management did not expect material additional losses and anticipated normalization in 2013.
- Mortgage loan sale representations and warranties remain a contingency. The estimated repurchase and indemnification liability increased to $4.3 million from $2.5 million.
- FDIC-assisted acquisitions carry loss-sharing and servicing requirements; failure to comply could reduce reimbursement. In 2012, the Company completed multiple bank, branch, Canadian premium finance, and trust-business acquisitions. A planned First Lansing Bancorp acquisition was announced for 2013; Second Federal’s deposits and operations were divested in February 2013.
- Interest-rate risk, acquisition integration, regulatory changes (including proposed capital rules and required stress testing), FDIC premiums, and mortgage regulation may affect future performance. A 100-basis-point rate increase was estimated to increase one-year net interest income by 2.4%; a 100-basis-point decrease was estimated to reduce it by 3.5%.
- The Company reported no material pending legal proceeding expected to adversely affect its financial position. Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether loan-quality improvement continues and whether the allowance remains adequate as commercial and commercial-real-estate lending expands.
- The sustainability of mortgage banking gains and the adequacy of mortgage repurchase and indemnification reserves.
- Performance and integration of 2012 acquisitions, FDIC loss-share reimbursements, and the announced First Lansing transaction.
- Deposit growth, funding costs, liquidity, and the effects of scheduled maturities and any future capital requirements.
- Potential dilution and dividend constraints associated with convertible preferred stock, tangible equity units, and regulatory or credit-facility restrictions.