Wintrust Financial Corporation — Q2 2010 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2010. Wintrust is a financial holding company focused on community banking in the Chicago area and southeastern Wisconsin, with national specialty-finance operations and wealth-management services. Amounts below are in U.S. dollars; financial-statement amounts are rounded to millions.
Financial performance and condition
| Metric | Q2 / June 30, 2010 | Comparable period / change |
|---|---|---|
| Net interest income | $104.3 million | Up 44% from Q2 2009 |
| Net interest margin | 3.43% FTE | 2.91% FTE in Q2 2009 |
| Net revenue | $154.8 million | Up 31% from Q2 2009 |
| Provision for credit losses | $41.3 million | $23.7 million in Q2 2009 |
| Net income / diluted EPS | $13.0 million / $0.25 | $6.5 million / $0.06 in Q2 2009 |
| Six-month net income / diluted EPS | $29.0 million / $0.64 | $12.9 million / $0.12 in first half 2009 |
| Total assets | $13.71 billion | Up 21% from June 30, 2009 |
| Total loans / deposits | $9.60 billion / $10.62 billion | Up 26% / 16% from June 30, 2009 |
| Shareholders’ equity | $1.38 billion | Up 30% from June 30, 2009 |
| Cash flows, six months | Operating +$188.4 million; investing −$457.7 million; financing +$263.1 million | Cash and cash equivalents decreased $6.2 million to $152.4 million |
For the six months, non-interest income was $93.0 million and non-interest expense was $176.6 million. The efficiency ratio was 59.72% FTE for Q2, compared with 72.02% a year earlier. Return on average assets was 0.39% and return on average common equity was 2.98% in Q2.
At June 30, the allowance for loan losses was $106.5 million, or 1.14% of loans excluding covered loans. First-half net charge-offs were $64.7 million, versus $22.8 million in the prior-year period. Non-performing loans excluding covered loans were $135.4 million (1.45% of loans), down from $238.2 million (3.14%) a year earlier; acquired covered loans included another $104.6 million of non-accrual loans. Other real estate owned was $86.4 million, versus $41.4 million a year earlier.
Deposits were the principal funding source. The company reported $1.11 billion in interest-bearing deposits with banks and $1.42 billion in available-for-sale securities; some liquidity and loans were restricted to securitization investors, and $890 million of securities were pledged as collateral. Borrowings included $600 million owed to securitization investors, $415.6 million of FHLB advances, $218.4 million of other borrowings, and $249.5 million of junior subordinated debentures. Regulatory capital ratios at quarter-end were 10.2% leverage, 13.0% Tier 1 risk-based, and 14.3% total risk-based.
Material changes versus prior periods
- Results benefited from loan growth, lower deposit funding costs, and $26.5 million of Q2 bargain-purchase gains from FDIC-assisted acquisitions. Six-month bargain-purchase gains totaled $37.4 million, including recognition of the remaining gain on the 2009 life-insurance premium-finance portfolio acquisition. These gains are unusual and should be distinguished from recurring earnings.
- Wintrust acquired Lincoln Park Savings Bank and Wheatland Bank operations on April 23. FDIC loss-sharing agreements cover 80% of eligible losses on specified acquired assets. The transactions added $275.6 million of covered loans at quarter-end and generated a $114.1 million FDIC indemnification asset.
- New accounting requirements effective January 1, 2010 caused the premium-finance securitization entity to be consolidated and the transaction to be reported as a secured borrowing rather than a sale. The change added assets and liabilities, including $600 million of secured borrowings; prior periods were not retrospectively adjusted, limiting comparability.
- March’s common-stock offering raised $210.4 million net from 6.67 million shares. The larger share count affects per-share comparisons. Total shareholders’ equity increased from $1.14 billion at year-end 2009 to $1.38 billion.
- Mortgage banking revenue fell to $8.0 million in Q2 from $22.6 million a year earlier; mortgage loans originated and sold were $732.5 million versus $1.51 billion. Wealth-management revenue increased, while Q2 trading results shifted to a $1.5 million loss from an $8.3 million gain.
Outlook, commentary, risks and unusual items
- Management gave no specific earnings or financial guidance. It said economic weakness, unemployment, and depressed property values continued to pressure borrowers and expected continued stress on portfolio credit quality. It planned continued close monitoring and resolution of problem loans, while seeking to redeploy liquid assets into higher-yielding loans.
- Commercial real estate was 35% of total loans, with 91.5% of that portfolio in Illinois and Wisconsin. Management highlighted ongoing pressure in real estate, especially construction and land lending. An extended or accelerated decline in property values could increase defaults, foreclosures, and losses.
- Q2 fraud affecting premium-finance companies, including Wintrust’s property-and-casualty operation, increased provision and net charge-offs by $15.7 million. The company reported taking steps to reduce recurrence risk and said its portfolio review found no similar situations. Excluding this fraud, Q2 commercial premium-finance net charge-offs were $1.8 million.
- Mortgage loan purchasers increased indemnification and repurchase demands. Wintrust recorded $4.7 million of Q2 recourse expense and $8.2 million for the first half; further claims and losses remain a risk.
- The Federal Reserve ended new TALF lending on June 30, 2010, which could make similar future funding more costly. The $600 million securitization notes are due in full by February 17, 2014, subject to the transaction terms; early-amortization triggers and servicing requirements also apply. No early-amortization event had occurred at quarter-end.
- After quarter-end, Northbrook acquired certain assets and assumed deposits of Ravenswood Bank in an FDIC-assisted transaction announced August 6. The filing also cites acquisition integration, credit, liquidity, interest-rate, regulatory-capital, FDIC-insurance, and funding risks. Management reported compliance with debt covenants and effective disclosure controls.
Important facts for investors to verify
- How much of reported earnings and future performance depends on nonrecurring bargain-purchase gains, and what recurring earnings look like excluding them.
- Whether credit losses, especially commercial real estate and premium-finance losses, stabilize; verify allowance adequacy, charge-offs, criticized loans, and OREO dispositions.
- The size, timing, and ultimate cost of mortgage repurchase or indemnification claims.
- The cash-flow, liquidity, and balance-sheet effects of securitization consolidation, including restrictions on securitized assets and repayment terms.
- Integration outcomes and FDIC loss-sharing compliance for the Lincoln Park, Wheatland, and subsequent Ravenswood transactions; also monitor capital and dividend restrictions tied to the Treasury’s Series B preferred stock.