Business context and reporting period
Wintrust Financial Corporation is an Illinois-based financial holding company operating community banking, specialty finance and wealth management businesses, primarily in the Chicago metropolitan area and southern Wisconsin. This Form 10-K covers the fiscal year ended December 31, 2016; quarterly figures below compare fourth-quarter 2016 with fourth-quarter 2015.
At year-end, the company reported $25.7 billion of assets and operated 15 bank subsidiaries through 155 banking locations. Its audited financial statements received an unqualified opinion, as did management’s and the auditor’s assessments of internal control over financial reporting.
Financial performance and condition
- Revenue and earnings: Net revenue was $1.048 billion, up 15% from $913.1 million in 2015. Net income rose 32% to $206.9 million from $156.7 million; diluted EPS increased to $3.66 from $2.93. Net income applicable to common shareholders was $192.4 million.
- Interest income and margin: Net interest income increased 13% to $722.2 million. Net interest margin declined 10 basis points to 3.24% (3.26% fully tax-equivalent), as loan pricing pressure, runoff of covered loans and higher funding costs partly offset asset growth.
- Fees and expenses: Non-interest income rose 20% to $325.4 million, led by mortgage banking, operating leases, deposit service charges and customer swap fees. Non-interest expense increased 8% to $681.7 million, including higher salaries, lease depreciation and FDIC insurance costs. The efficiency ratio improved to 65.55% from 68.84%.
- Returns: Return on average assets was 0.85%, versus 0.75%; return on average common equity was 8.37%, versus 7.15%.
- Balance sheet and funding: Loans excluding covered loans grew 15% to $19.7 billion; deposits increased 16% to $21.7 billion. Non-interest-bearing deposits were 27% of year-end deposits, up from 26%. Total shareholders’ equity was $2.70 billion. Year-end assets increased 12% to $25.7 billion.
- Credit quality: Net charge-offs excluding covered loans fell to $16.9 million from $19.2 million. Non-performing loans were $87.5 million, or 0.44% of loans, compared with $84.1 million, or 0.49%. The allowance for loan losses excluding covered loans increased to $122.3 million, or 0.62% of loans, from $105.4 million, or 0.62%. Other real estate owned declined to $40.3 million from $43.9 million.
- Cash flow and liquidity: Operating cash flow was $309.1 million; investing cash outflow was $2.49 billion and financing cash inflow was $2.18 billion. Cash and cash equivalents decreased $5.8 million to $270.0 million, while interest-bearing deposits with banks were $980.5 million. Management also reported $1.3 billion of overnight liquid funds and interest-bearing bank deposits. The company had an undrawn $75 million revolver and reported $3.3 billion of additional FHLB borrowing capacity, subject to collateral and terms.
- Debt and capital: Year-end balances included $153.8 million of FHLB advances, $262.5 million of other borrowings, $139.0 million of subordinated notes and $253.6 million of junior subordinated debentures. Regulatory ratios were 11.9% total capital, 9.7% Tier 1, 8.6% Common Equity Tier 1 and 8.9% Tier 1 leverage; the company reported exceeding well-capitalized standards.
Fourth-quarter comparison
Fourth-quarter 2016 net income was $54.6 million and diluted EPS was $0.94, compared with $35.5 million and $0.64 in fourth-quarter 2015. Net interest income increased to $190.8 million from $167.2 million; provision for credit losses was $7.4 million versus $9.1 million. Non-interest expense was $180.4 million versus $166.8 million.
Material changes versus the prior year
- Loan and deposit growth, acquisitions and higher commercial activity expanded the balance sheet; loans excluding covered balances grew 15% and deposits 16%.
- Net interest income grew on higher average earning assets, but margin narrowed from 3.34% to 3.24%.
- Mortgage banking revenue increased to $128.7 million from $115.0 million, with originations rising to $4.4 billion from $3.9 billion. Operating lease income rose to $16.4 million from $2.7 million as leasing expanded.
- Net gains on investment securities increased to $7.6 million from $0.3 million. The company also recorded a $3.6 million net gain on debt extinguishment, including a $4.3 million gain from retiring $15 million of junior subordinated debentures, partly offset by FHLB prepayment costs.
- Non-interest expense rose $53.3 million; salaries and benefits increased $23.1 million, and operating-lease equipment depreciation increased $11.5 million.
- In June 2016, Wintrust issued 3 million common shares and received $152.9 million net proceeds. The company acquired Generations Bancorp, First Community Financial Corporation and approximately $561.4 million of franchise loans and related relationships.
- Common dividends increased to $0.12 per share quarterly from $0.11 in 2015. In January 2017, the board approved a $0.14 quarterly dividend.
Outlook, commentary, risks and contingencies
Management described continued low interest rates and intense competition, and emphasized disciplined loan growth, deposit-mix improvement, cost control and strategic expansion. The filing provides no quantified earnings or revenue guidance. Management expects regulatory compliance costs to remain a pressure and stated that the effect of future regulation, including under the incoming administration, was uncertain.
- Interest-rate exposure: The company’s simulations showed net interest income increasing 18.5% under a static +200 basis-point shock and 7.6% under a gradual +200 basis-point ramp at year-end 2016; a static -200 basis-point scenario showed a 19.6% decline. These are modeled estimates, not forecasts.
- Credit and geographic concentration: Commercial real estate was 31% of loans excluding covered loans, with about 90% located in Illinois and Wisconsin. Commercial loans were 30% of the portfolio. Management cited local economic, real estate and Illinois fiscal conditions as risks.
- Specialty finance risks: Premium finance lending is exposed to agent and broker fraud, collection timing and insurer credit quality; two insurers represented approximately 13% and 5% of premium finance receivables.
- Mortgage recourse and litigation: The mortgage repurchase and indemnification reserve was $4.2 million. Lehman Holdings’ loan-related action had an immaterial reserve, but ultimate exposure was uncertain. A demand from RFC Liquidating Trust had no reasonably estimable liability. A FINRA matter involving WHI was settled for a reduced amount after a $1.54 million award.
- Other notable items: A 2016 review of intercompany subordinated notes prompted capital classification changes at subsidiary banks; management said the banks remained well-capitalized after corrective actions. The company reported $11.6 million of gross unrecognized tax benefits at year-end. The new CECL credit-loss standard was under evaluation and was expected to apply to the company in 2020.
- Subsequent event: In February 2017, the company acquired certain assets and assumed certain liabilities of American Homestead Mortgage; that business originated approximately $55 million of residential mortgages in 2016.
Important facts for investors to verify
- Whether loan and deposit growth can continue without further net interest margin compression or weakening underwriting standards.
- How credit performance, allowance coverage and non-performing assets evolve, particularly in commercial real estate and premium finance.
- The sustainability of non-interest income growth, including mortgage banking, lease income, securities gains and derivative-related fees, and the related expense burden.
- Liquidity and holding-company funding capacity, including reliance on subsidiary dividends, wholesale sources, collateral availability and credit-facility covenants.
- Potential effects of interest-rate changes, securities valuation losses and the implementation of CECL and other regulatory requirements.
- Developments in mortgage repurchase claims, the Lehman and RFC matters, tax examinations and the company’s disclosed unrecognized tax benefits.