Wintrust Financial Corporation — Q3 2018 Form 10-Q
Business context and reporting period. Wintrust is a financial holding company focused on community banking in the Chicago region, southern Wisconsin and northwest Indiana, with specialty finance businesses operating nationally and in Canada, and wealth management services. This unaudited filing covers the quarter and nine months ended September 30, 2018; comparisons are with the corresponding 2017 periods unless stated otherwise.
Key financial results and condition
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net income | $91.9 million | $65.6 million | $263.5 million | $188.9 million |
| Diluted earnings per common share | $1.57 | $1.12 | $4.50 | $3.23 |
| Net interest income | $247.6 million | $216.0 million | $710.8 million | $613.0 million |
| Net interest margin | 3.59% | 3.43% | 3.58% | 3.40% |
| Non-interest income | $99.9 million | $79.7 million | $280.8 million | $238.5 million |
| Non-interest expense | $213.6 million | $183.6 million | $614.8 million | $535.2 million |
- Q3 net revenue rose 18% to $347.5 million. The reported efficiency ratio was 61.50%, compared with 62.09% a year earlier.
- At September 30, total assets were $30.14 billion, loans were $23.12 billion, deposits were $24.92 billion and shareholders’ equity was $3.18 billion. Versus September 30, 2017, these increased 10%, 11%, 9% and 9%, respectively.
- Cash and cash equivalents were $280.0 million; management also reported approximately $1.4 billion in overnight liquid funds and interest-bearing bank deposits. For the first nine months, operating cash flow was $261.1 million, investing cash outflow $1.916 billion and financing cash inflow $1.657 billion; cash and cash equivalents increased $2.4 million.
- Non-deposit funding included $615.0 million of FHLB advances, $373.6 million of other borrowings, $139.2 million of subordinated notes and $253.6 million of junior subordinated debentures. The company added a $150 million term facility in September; its $50 million revolver had no balance at quarter-end. It reported compliance with the facility’s covenants.
- Reported capital ratios included a 9.3% leverage ratio, 9.5% common equity Tier 1 ratio and 12.0% total capital ratio. Tangible common equity ratio was 8.4% (a non-GAAP measure).
Material changes and operating drivers
- Profit growth reflected loan and earning-asset growth, improved net interest margin, stronger mortgage banking and wealth management revenue, and a lower effective tax rate. Q3 effective tax rate was 25.13%, versus 37.05% in Q3 2017, primarily due to the lower federal corporate tax rate under the Tax Act.
- Average loans excluding covered loans increased about $2.0 billion year over year for Q3. Period-end loans were up from $21.64 billion at December 31, 2017; commercial, commercial real estate and premium finance were key growth areas.
- Mortgage banking revenue increased 49% to $42.0 million in Q3. The filing attributes the rise to loan production and sales, MSR fair-value changes and servicing income; production margin declined to 2.19% from 2.51%. Mortgage servicing rights were $74.5 million, up from $29.4 million a year earlier, and loans serviced for others rose to $5.90 billion from $2.62 billion.
- Deposit interest expense increased to $48.7 million from $23.7 million in Q3. Management cited both higher average interest-bearing deposits and higher funding costs. Interest-bearing deposit cost was 1.06%, compared with 0.58% a year earlier.
- Non-interest expense rose 16% in Q3. Management cited acquisition-related staffing and consulting costs, compensation increases and incentives, and higher data processing, occupancy and marketing costs. CSC acquisition-related consulting fees were $2.1 million in Q3, with approximately $147,000 more expected in Q4.
- CSC was acquired on August 1, 2018; the company acquired approximately $282.2 million of assets, including $151.0 million of loans, assumed $213.1 million of deposits and recorded $27.2 million of goodwill. Veterans First was acquired in January 2018 and added mortgage servicing rights on loans with about $1.6 billion in unpaid principal balance.
Credit, outlook, risks and unusual items
- Credit quality warrants attention: non-performing loans rose to $127.2 million, or 0.55% of loans, from $78.0 million, or 0.37%, at September 30, 2017. Non-performing assets were $155.8 million, or 0.52% of assets. Nonaccrual loans increased sharply during Q3, mainly in commercial lending; management said reserves were appropriate and it was pursuing resolution of problem credits.
- The allowance for loan losses was $149.8 million, or 0.65% of loans, compared with $133.1 million, or 0.64%, a year earlier. Q3 provision for credit losses was $11.0 million versus $7.9 million; nine-month provision was $24.4 million versus $22.0 million. TDRs totaled $66.2 million across 111 credits, compared with $33.2 million across 78 credits a year earlier.
- Available-for-sale securities had $97.5 million of gross unrealized losses at quarter-end; held-to-maturity securities had $55.5 million. The company attributed these losses to interest rates, market spreads and market conditions, and stated it did not consider the securities other-than-temporarily impaired and did not expect to need to sell them before recovery. Accumulated other comprehensive loss was $93.2 million.
- Management provided no specific earnings or financial guidance. It described continued loan and deposit growth, business development and wealth-management expansion as priorities, while noting competition and pricing pressure in life-insurance premium finance. AEB acquisition plans announced in July remained prospective; AEB had approximately $200 million of assets and $157 million of deposits at June 30, 2018.
- Interest-rate simulations estimated one-year net interest income sensitivity at +18.1% for an instantaneous +200-basis-point shock and -10.0% for a -100-basis-point shock; gradual ramp scenarios were +8.5% and -4.2%, respectively. Actual outcomes may differ.
- The filing identifies credit, interest-rate, liquidity, market, competition, acquisition-integration, cybersecurity, regulatory and tax risks, among others. It reported no material change to the risk factors in the 2017 Form 10-K. Lehman-related litigation remained unresolved; the company said its reserve was immaterial but the ultimate outcome and potential exposure could not be determined. A separate JPMC mortgage claim had been reduced to an immaterial amount.
- Adoption of revenue-recognition guidance had no significant financial-statement impact. The company was evaluating the forthcoming lease standard and CECL expected-credit-loss standard. It recorded an additional $1.2 million net tax benefit in Q3 when finalizing Tax Act provisional amounts.
Investor facts to verify
- Investigate the Q3 increase in commercial nonaccruals and the size, collateral and resolution prospects of newly impaired loans; track subsequent nonperforming-loan and TDR trends.
- Assess whether deposit repricing and funding costs continue to outpace loan yields, and whether margin and deposit growth remain sustainable.
- Review mortgage production margins, MSR valuation assumptions and sensitivity to prepayments and discount rates.
- Confirm integration progress and realized contribution from CSC and Veterans First, and the status and terms of the proposed AEB transaction.
- Monitor unrealized securities losses, capital and liquidity measures, and compliance with debt covenants as market rates and funding needs change.
- Review subsequent disclosures on Lehman litigation, CECL implementation and the expected balance-sheet effects of lease accounting adoption.