Wintrust Financial Corporation — Q1 2017 Form 10-Q
Business and period: Wintrust is a financial holding company providing community banking mainly in the Chicago metropolitan area and southern Wisconsin, nationwide and Canadian specialty finance, and wealth management. This unaudited report covers the three months ended March 31, 2017; comparisons are primarily with Q1 2016 unless noted.
Financial performance and condition
| Metric | Q1 2017 / March 31, 2017 | Comparable period |
|---|---|---|
| Net income | $58.4 million | $49.1 million, Q1 2016 |
| Diluted EPS | $1.00 | $0.90, Q1 2016 |
| Net interest income | $192.6 million | $171.5 million, Q1 2016 |
| Net interest margin | 3.36% GAAP; 3.39% fully taxable-equivalent | 3.29%; 3.32%, respectively, Q1 2016 |
| Non-interest income | $68.8 million | $68.8 million, Q1 2016 |
| Non-interest expense | $168.1 million | $153.7 million, Q1 2016 |
| Provision for credit losses | $5.2 million | $8.0 million, Q1 2016 |
| Operating cash flow | $129.7 million | $66.6 million, Q1 2016 |
| Cash and cash equivalents | $217.1 million | $212.3 million, March 31, 2016 |
| Total assets | $25.8 billion | $23.5 billion, March 31, 2016 |
| Total loans, excluding covered loans and loans held for sale | $19.9 billion | $17.4 billion, March 31, 2016 |
| Total deposits | $21.7 billion | $19.2 billion, March 31, 2016 |
| Total shareholders’ equity | $2.76 billion | $2.42 billion, March 31, 2016 |
| Debt measures | $227.6 million FHLB advances; $238.8 million other borrowings; $139.0 million subordinated notes; $253.6 million junior subordinated debentures | Debt balances vary by category and period; see filing |
- Net income increased 19%; net revenue, defined as net interest income plus non-interest income, increased 9% to $261.3 million. Diluted EPS rose 11%.
- Loan growth, a higher net interest margin, increased wealth management revenue and operating lease income, and lower credit-loss provision supported earnings. The $3.4 million share-based compensation tax benefit also reduced the effective tax rate to 33.67% from 37.44%.
- Non-interest expense rose 9%, chiefly from staffing and acquisition-related costs, operating lease equipment depreciation, data processing, marketing, occupancy and other expenses. The efficiency ratio was 64.31% versus 64.34%.
- Net charge-offs were $1.6 million, or 0.03% of average loans on an annualized basis, compared with $3.5 million, or 0.08%, in Q1 2016. Non-performing loans were 0.40% of loans, down from 0.51% a year earlier; the allowance for credit losses was 0.64% of loans.
- Cash flow from investing was a use of $306.3 million, principally reflecting loan growth and securities purchases. Financing provided $123.7 million. Cash and cash equivalents decreased $52.9 million during the quarter.
- Management reported approximately $1.2 billion in overnight liquid funds and interest-bearing bank deposits and stated it believed funding and liquidity were sufficient. Regulatory capital ratios at March 31 included a 9.3% leverage ratio, 8.9% common equity Tier 1 ratio, and 12.2% total capital ratio; each exceeded the stated well-capitalized thresholds.
Material changes and developments
- Average loans excluding covered loans grew $2.4 billion year over year; period-end loans excluding covered loans and held-for-sale loans increased 14%. Growth included commercial, commercial real estate and life insurance premium finance lending.
- Average deposits increased 14% year over year. Average non-interest-bearing deposits increased 17%; brokered deposits were 5.8% of period-end deposits, versus 4.9% a year earlier.
- Net interest margin improved 7 basis points year over year and 15 basis points from Q4 2016, which management attributed sequentially to the December 2016 rate increase and improved earning-asset mix.
- Non-performing assets declined to $119.4 million from $130.7 million a year earlier. Troubled debt restructurings were $39.7 million across 85 credits, down from $52.6 million and 102 credits at March 31, 2016.
- After quarter-end, the company converted all remaining Series C preferred shares; holders received a total of 3.12 million common shares. The common dividend declared for Q1 was $0.14 per share, up from $0.12 in 2016.
- Operating cash flow increased year over year, while investing cash outflow narrowed from $517.7 million to $306.3 million. The company also reported a substantial increase in available-for-sale securities compared with March 2016.
Outlook, risks and unusual items
- The filing provides no quantified earnings or revenue guidance. Management described continued focus on loan growth, underwriting discipline, and expansion of wealth management, but cautioned that reported quarterly results are not necessarily indicative of full-year results.
- Key stated risks include borrower defaults and credit-loss estimates; commercial real estate conditions in the company’s core markets; interest-rate, liquidity and securities-value changes; competition and deposit pricing; acquisition integration; premium-finance fraud or insurer credit deterioration; regulatory and capital requirements; cyber and vendor risk; and mortgage repurchase or indemnification claims.
- Interest-rate sensitivity modeling projected one-year net interest income increases under rising-rate scenarios: static shock +9.3% for +100 basis points and +17.7% for +200; ramp scenarios +3.9% and +7.3%, respectively. A 100-basis-point decline projected decreases of 13.2% static and 4.8% ramp. These are model estimates, not forecasts.
- Unrealized securities losses included $50.5 million in available-for-sale securities and $21.1 million in held-to-maturity securities at quarter-end. Management said it did not consider these other-than-temporary impairments and did not expect to be forced to sell before recovery.
- Mortgage-related litigation includes a Lehman Holdings indemnification claim; the company recorded an immaterial reserve and the motion to dismiss remained pending. A separate RFC Liquidating Trust demand had no litigation filed, and the potential loss was not reasonably estimable. Management said the matters were not expected to materially adversely affect the company overall, while noting an unfavorable resolution could be material to a particular period.
- The company adopted share-based compensation accounting changes in Q1, recording $3.4 million of excess tax benefits in income tax expense. It was evaluating the effects of several future accounting standards, including revenue recognition and expected credit-loss accounting.
Investor verification priorities
- Assess whether loan growth and margin gains can persist as funding costs rise, and review the rate-sensitivity assumptions against actual balance-sheet repricing.
- Review loan mix and concentrations, especially commercial real estate, commercial lending and premium finance, alongside delinquencies, non-performing loans, charge-offs and allowance adequacy.
- Determine how much of earnings growth reflects recurring operating performance versus the $3.4 million tax benefit and prior-year unusual gains, including the $4.3 million debt-extinguishment gain in Q1 2016.
- Monitor deposit composition, brokered-deposit reliance, liquidity sources, debt maturities and covenant compliance, including the Canadian secured borrowing maturity in December 2017 and revolving facility maturity in December 2017.
- Track the resolution and potential exposure of mortgage-related claims, and the effect of the Series C conversion on future common-share dilution and per-share results.