Wintrust Financial Corporation — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. Wintrust provides community banking, specialty finance and wealth management services, principally in the Chicago metropolitan area and southern Wisconsin, with specialty finance operations across the U.S. and Canada.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net interest income | $184.6 million | $165.5 million | $531.4 million | $474.3 million |
| Non-interest income | $86.6 million | $65.0 million | $240.2 million | $206.5 million |
| Net revenue | $271.2 million | $230.5 million | $771.6 million | $680.8 million |
| Net income | $53.1 million | $38.4 million | $152.3 million | $121.2 million |
| Diluted EPS | $0.92 | $0.69 | $2.72 | $2.29 |
| Net interest margin | 3.21% | 3.31% | 3.25% | 3.36% |
| Efficiency ratio, FTE | 65.54% | 69.02% | 65.11% | 67.50% |
Q3 net income rose 38% and diluted EPS rose 33% year over year. Management attributed higher earnings mainly to loan growth, higher mortgage and wealth management revenue, investment securities gains and operating lease income. These gains were partly offset by higher staffing and other operating expenses. Net interest margin declined as asset yields compressed; management cited accelerated mortgage-backed securities premium amortization as a factor in the sequential quarterly decline.
For the first nine months, operating cash flow was negative $83.0 million, versus positive $11.9 million in 2015. Investing activities used $2.012 billion, primarily reflecting securities purchases, loan growth and $578.3 million net cash paid in business combinations. Financing activities provided $2.066 billion, largely from $2.408 billion of deposit growth. Cash and cash equivalents declined $28.8 million to $246.9 million.
Financial position, liquidity and credit
- At September 30, 2016, total assets were $25.32 billion, up 15% from September 30, 2015. Loans excluding covered loans and mortgage loans held for sale were $19.10 billion, up 17%; deposits were $21.15 billion, up 16%.
- Deposits remained the primary funding source. Non-interest-bearing deposits were $5.71 billion, or 27% of deposits. Total period-end liabilities were $22.65 billion and shareholders’ equity was $2.67 billion.
- FHLB advances were $419.6 million, down from $853.4 million at December 31, 2015. Other borrowings were $241.4 million; subordinated notes were $138.9 million and junior subordinated debentures were $253.6 million. The $75 million revolving credit facility had no outstanding balance.
- Management reported approximately $1.1 billion in overnight liquid funds and interest-bearing bank deposits and stated that funding sources were adequate for ongoing needs. Total capital ratios included a 9.0% leverage ratio, 8.7% common equity Tier 1 ratio and 12.1% total capital ratio; each exceeded the disclosed well-capitalized benchmark.
- Non-performing loans excluding covered assets and PCI loans were $83.1 million, or 0.44% of loans, versus $86.0 million, or 0.53%, a year earlier. Non-performing assets were $118.6 million, or 0.47% of assets, compared with $138.0 million, or 0.63%. The allowance for credit losses was $119.3 million; net charge-offs were $14.1 million for the nine-month period.
- Total troubled debt restructurings were $44.3 million across 89 credits, down from $59.3 million a year earlier. Management considered the allowance appropriate, while noting that its estimates depend on credit, collateral and economic assumptions.
Material changes and notable items
- Loan growth reflected commercial and commercial real estate expansion, life insurance premium finance growth, the March acquisition of Generations Bancorp, and an August purchase of approximately $560.9 million in performing franchise-related loans and relationships from a GE Capital affiliate.
- In June 2016, Wintrust issued 3 million common shares, receiving net proceeds of approximately $152.8 million. Common dividends declared were $0.12 per share per quarter in 2016.
- In January 2016, the company repurchased $15 million of its trust preferred securities, extinguishing related junior subordinated debentures and recording a $4.3 million gain. This contributed to nine-month non-interest income; it is not recurring operating revenue.
- Wintrust announced an agreement to acquire First Community Financial Corporation. At September 30, the target had approximately $172 million in assets, $81 million in loans and $147 million in deposits.
- On October 11, 2016, after quarter-end, a FINRA panel awarded $1.5375 million in damages against wealth-management subsidiary Wayne Hummer Investments. Management said the award partly contributed to lower wealth-management segment income in the current periods; investors should verify the accounting and cash impact.
Outlook, risks and contingencies
The filing provides no specific earnings or revenue guidance. Management described continued focus on loan growth where opportunities meet underwriting standards, maintaining liquidity and expanding wealth management. It cited competitive and pricing pressure in life insurance premium finance.
Key risks include regional economic and commercial real estate exposure, credit losses and reserve estimation, interest-rate and margin sensitivity, deposit competition and liquidity, acquisition execution, mortgage repurchase and indemnification claims, cybersecurity and vendor disruptions, and regulatory or capital requirements. In a modeled one-year static shock scenario, net interest income increased 10.1% for a 100-basis-point rate rise and decreased 10.4% for a 100-basis-point decline; modeled results are not forecasts. The Lehman-related mortgage claim had an immaterial reserve, while the potential RFC Liquidating Trust liability was not reasonably estimable. Management stated that pending and threatened matters were not expected to materially adversely affect the company, but noted outcomes could be material in a particular period.
The filing reported effective disclosure controls and no material changes in internal control over financial reporting. It reported no material changes to the risk factors in the 2015 Form 10-K.
Important facts for investors to verify
- Whether loan and deposit growth can continue without further net interest margin compression or weaker underwriting quality.
- Credit trends, particularly commercial and commercial real estate exposures, charge-offs, criticized loans, and the adequacy of the allowance as the portfolio expands.
- The drivers and sustainability of non-interest income, including securities gains, mortgage banking revenue, operating lease income and the nonrecurring debt-extinguishment gain.
- The timing and financial-statement treatment of the post-quarter $1.5375 million arbitration award, and developments in mortgage-related legal claims.
- Acquisition integration and performance, including the announced First Community transaction, and the liquidity and funding effects of continued growth.
- Capital and interest-rate sensitivity, including the impact of the changing regulatory-capital treatment of junior subordinated debentures.