Wintrust Financial Corporation — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. Wintrust is a financial holding company with community banking, specialty finance and wealth management businesses. Unless stated otherwise, amounts below are in U.S. dollars.
Financial performance and condition
| Metric | Q2 2014 | Q2 2013 | Change |
|---|---|---|---|
| Net interest income | $149.2 million | $135.8 million | +10% |
| Net interest margin, fully taxable equivalent | 3.62% | 3.50% | +12 basis points |
| Non-interest income | $54.1 million | $64.0 million | -15% |
| Non-interest expense | $133.6 million | $128.2 million | +4% |
| Provision for credit losses | $6.7 million | $15.4 million | Lower by $8.7 million |
| Net income | $38.5 million | $34.3 million | +12% |
| Diluted earnings per common share | $0.76 | $0.69 | +10% |
| Net revenue (net interest income plus non-interest income) | $203.3 million | $199.8 million | +2% |
For the first six months, net income was $73.0 million versus $66.4 million, and diluted EPS was $1.44 versus $1.34. Net interest income was $293.2 million versus $266.5 million; net interest margin was 3.61% versus 3.46%. Non-interest income fell 18% to $99.6 million, chiefly reflecting lower mortgage banking revenue and trading results. Non-interest expense rose 7% to $264.9 million.
- Balance sheet at June 30: Total assets were $18.90 billion; loans were $14.03 billion, including $275 million of covered loans; deposits were $15.56 billion; and shareholders’ equity was $2.00 billion.
- Funding and liquidity: Cash and cash equivalents were $357.0 million, with $506.9 million of interest-bearing bank deposits; management reported approximately $863.8 million in overnight liquid funds and interest-bearing bank deposits. Six-month operating cash flow was $126.8 million, investing cash outflow was $999.7 million, and financing cash inflow was $965.9 million. Ending cash and cash equivalents were $357.0 million, up from $233.3 million a year earlier.
- Debt: Notes payable, FHLB advances, other borrowings and subordinated notes totaled $764.3 million; junior subordinated debentures were a further $249.5 million. The company issued $140 million of 5.00% subordinated notes due 2024 in Q2, receiving $139.1 million net proceeds, and repaid $180 million of short-term broker borrowings.
- Capital: Consolidated leverage ratio was 10.5%, Tier 1 risk-based capital 11.7%, and total risk-based capital 13.2%. Tangible common equity ratio was 8.0%, up from 7.4% a year earlier.
- Credit: Excluding covered loans, non-performing loans were $88.7 million, or 0.64% of loans, versus $121.5 million, or 0.97%, a year earlier. The allowance for loan losses was $92.3 million, or 0.67% of loans, versus $106.8 million, or 0.85%. Q2 net charge-offs declined to $6.6 million from $18.4 million.
Material changes and drivers
- Loan growth was strong: loans excluding covered loans and mortgage loans held for sale increased to $13.75 billion from $12.52 billion a year earlier. Management attributed growth to commercial banking efforts and commercial and life insurance premium finance receivables.
- Deposits rose 8% year over year to $15.56 billion. Non-interest-bearing deposits increased to 20% of deposits from 17%, supporting a more favorable funding mix and lower interest costs.
- Lower credit costs and higher net interest income supported profit growth. These benefits were partly offset by lower mortgage banking income, trading losses and higher operating costs.
- Mortgage banking revenue declined 25% in Q2 to $23.8 million; loans originated or purchased for secondary-market sale were $840.9 million versus $1.1 billion. Wealth management revenue increased 15% to $18.2 million, with management citing new customers and market appreciation.
- Other real estate owned, excluding covered OREO, rose to $59.6 million from $50.5 million at year-end, partly because of transfers from recently acquired banks. First-half OREO expense was $6.5 million versus $0.7 million, partly reflecting a prior-year gain on a covered-property sale and higher current-period valuation write-downs.
Outlook, risks and unusual items
- No specific full-year earnings or financial guidance was provided. Management expected interest rates to rebound over time, anticipated continued strength in new-home-purchase mortgage originations as housing improved, and said it remained focused on growth subject to underwriting standards.
- Management cited continued low interest rates, increased lending competition and expected higher compliance costs, including costs associated with Dodd-Frank. Basel III rules were expected to apply beginning January 1, 2015, with provisions phased in through 2019; the company was still evaluating their impact.
- Interest-rate exposure modeling estimated net interest income would rise 5.0% under a gradual +200-basis-point scenario and fall 8.0% under a -200-basis-point scenario. These are simulations, not forecasts, and actual results may differ.
- Credit and concentration risks include commercial real estate: $4.4 billion, or 32% of loans excluding covered loans, with 92.7% located in the Chicago-area and southeastern Wisconsin markets. Management said commercial real-estate conditions remained stressed, while reporting improved non-performing balances.
- FDIC indemnification assets declined to $46.1 million from $85.7 million at year-end, principally reflecting changes in expected reimbursements and amortization. Covered loans and related losses remain subject to FDIC loss-sharing terms and servicing requirements.
- Acquisitions included a bank branch and two Canadian premium-finance businesses during Q2. Subsequent to quarter-end, Wintrust acquired a Wisconsin branch with approximately $81 million of loans and $36 million of deposits, and 11 Talmer branches with approximately $360 million of deposits.
- A Fair Labor Standards Act class action involving mortgage loan originator classification and compensation remained pending. The company said its reserve was immaterial; it could not predict the outcome or whether losses might exceed the reserve. Management believed other pending or threatened matters would not materially affect operations or financial condition, while noting an unfavorable resolution could affect a particular period.
- The company reported no material change in risk factors from its 2013 Form 10-K, no material change in internal control over financial reporting, and effective disclosure controls. The community banking goodwill impairment test found no impairment was more likely than not at June 30.
Important facts for investors to verify
- Whether loan and deposit growth can continue without weakening underwriting or funding costs, especially in commercial real estate and premium finance.
- Whether lower mortgage originations and derivative-related trading losses persist, and how wealth management growth performs if markets weaken.
- Future credit performance, charge-offs, OREO valuations and the adequacy of reserves; review the geographic concentration of commercial real-estate loans.
- The timing and amount of FDIC reimbursements and any changes in expected covered-asset losses.
- The effect of the new subordinated notes, Basel III implementation and regulatory compliance costs on capital and earnings.
- Subsequent acquisitions’ final purchase accounting, integration costs and contribution to results; also monitor the FLSA litigation and mortgage repurchase exposure.