Wintrust Financial Corporation — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; balance-sheet comparisons are primarily with March 31, 2018 and December 31, 2018. Wintrust is a financial holding company focused on community banking in the Chicago region, specialty finance nationally and in Canada, and wealth management. Figures below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance and condition
| Metric | Q1 2019 / March 31, 2019 | Comparable period / change |
|---|---|---|
| Net income | $89.1 million | $82.0 million in Q1 2018; up 9% |
| Diluted EPS | $1.52 | $1.40 in Q1 2018; up 9% |
| Net interest income | $262.0 million | $225.1 million in Q1 2018; up 16% |
| Net interest margin | 3.70% GAAP; 3.72% fully taxable-equivalent | 3.54% and 3.56%, respectively, in Q1 2018 |
| Non-interest income | $81.7 million | $85.7 million in Q1 2018; down 5% |
| Non-interest expense | $214.4 million | $194.3 million in Q1 2018; up 10% |
| Total assets | $32.36 billion | $28.46 billion a year earlier; up 14% |
| Total loans | $24.21 billion | $22.06 billion a year earlier; up 10% |
| Total deposits | $26.80 billion | $23.28 billion a year earlier; up 15% |
| Shareholders’ equity | $3.37 billion | $3.03 billion a year earlier; up 11% |
| Allowance for credit losses | $159.6 million; 0.66% of loans | $140.7 million; 0.64% a year earlier |
- Revenue growth was led by higher loan balances and improved earning-asset yields. Average loans increased $2.2 billion year over year. The benefit was partly offset by higher interest expense: interest on deposits was $61.0 million versus $26.5 million in Q1 2018.
- Mortgage banking revenue fell 41% to $18.2 million, reflecting lower origination volumes and production margins and negative fair-value adjustments to mortgage servicing rights (MSRs). Wealth management revenue rose 4% to $24.0 million; specialty finance also contributed to growth.
- Expenses increased mainly from staffing and benefits, occupancy costs, and amortization of acquisition-related intangibles. The reported efficiency ratio was 62.63%, compared with 62.47% in Q1 2018.
- Operating cash flow was $87.7 million, versus $22.2 million in Q1 2018. Investing activities used $1.03 billion, principally reflecting loan growth and net increases in interest-bearing bank deposits; financing provided $822.5 million, including deposit growth. Cash and cash equivalents ended the quarter at $270.8 million, down from $392.2 million at year-end.
- Management reported approximately $1.9 billion of overnight liquid funds and interest-bearing deposits with banks and said it believed funding capacity was adequate. Total deposits were the primary funding source.
- At quarter-end, regulatory capital ratios included a 9.1% leverage ratio, 9.3% common equity Tier 1 ratio, and 11.7% total capital ratio. Management stated the company was committed to maintaining capital above well-capitalized levels.
Material changes, outlook and risks
- Credit quality: Non-performing loans rose to $117.6 million, or 0.49% of loans, from $89.7 million, or 0.41%, a year earlier. Total impaired loans were $144.1 million versus $103.1 million; troubled debt restructurings (TDRs) increased to $88.4 million from $47.7 million. Net charge-offs declined to $5.1 million from $6.7 million. Management considered the allowance appropriate.
- Funding and rates: Interest-bearing deposit costs increased year over year. Interest-rate simulations estimated net interest income would rise 7.8% in a static +100-basis-point scenario and decline 8.5% in a static -100-basis-point scenario; ramp scenarios estimated +3.5% and -3.3%, respectively. These are modeled sensitivities, not guidance.
- Acquisitions: Wintrust announced an agreement in February 2019 to acquire Rush-Oak Corporation, parent of Oak Bank, which had approximately $201 million in assets, $141 million in loans and $163 million in deposits as of March 31. The filing does not provide a completion date. Recent acquisitions and growth contributed to higher expenses.
- Accounting and unusual items: The company adopted lease accounting on January 1, 2019, recording a $196.9 million lease liability and $165.8 million right-of-use asset at quarter-end. Adoption of the new expected-credit-loss standard (CECL) was still in progress; it is effective for the company in 2020, and the filing does not provide a clear estimate of its financial impact. A $1.0 million non-tax-deductible settlement was included in Q1 miscellaneous expense. MSR valuation assumptions reduced Q1 mortgage banking revenue.
- Legal matters: The filing describes mortgage-related and other litigation. The company said the Lehman-related reserve was immaterial and management did not expect the disclosed matters to have a material adverse effect overall, while noting an unfavorable outcome could be material for a particular period. A separate JPMorgan/Bear Stearns dispute was settled for an immaterial amount.
- Guidance: No specific earnings, revenue, loan-growth or margin guidance is provided. Management described continued loan and deposit growth and its intention to grow wealth management, but cautioned that results are subject to forward-looking risks. Key disclosed risks include economic and real-estate conditions, credit losses, interest-rate changes, competition, acquisition integration, cybersecurity and technology, regulation, and funding and capital access.
Most important facts for investors to verify
- Whether loan growth and wider net interest margin can continue as deposit costs rise.
- Developments in non-performing loans, impaired credits, TDRs, charge-offs and reserve adequacy, particularly within commercial lending.
- Whether mortgage production and MSR valuations recover or remain a drag on non-interest revenue.
- The eventual CECL adoption impact and the integration, costs and timing of the announced Oak Bank acquisition.
- Liquidity, deposit composition and funding costs, alongside capital ratios and compliance with credit-facility covenants.
- Material developments in disclosed litigation and other contingencies.