Wintrust Financial Corporation — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. Wintrust is a financial holding company focused on community banking in the Chicago area and southern Wisconsin, with specialty finance and wealth management businesses. Figures below are in U.S. dollars; financial statement amounts are unaudited.
Key financial metrics
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net interest income | $165.5 million | $151.7 million | $474.3 million | $444.9 million |
| Non-interest income | $65.0 million | $58.0 million | $206.5 million | $157.6 million |
| Non-interest expense | $160.0 million | $138.5 million | $461.6 million | $403.4 million |
| Net income | $38.4 million | $40.2 million | $121.2 million | $113.3 million |
| Diluted EPS | $0.69 | $0.79 | $2.29 | $2.23 |
| Net interest margin, FTE | 3.33% | 3.46% | 3.39% | 3.56% |
- Balance sheet at September 30: Total assets were $22.0 billion, up 15% year over year. Loans excluding covered loans were $16.3 billion, up 16%; deposits were $18.2 billion, up 13%. Shareholders’ equity was $2.34 billion.
- Credit and asset quality: Allowance for loan losses excluding covered loans was $103.0 million, or 0.63% of those loans. Non-performing loans excluding covered loans were $86.0 million (0.53% of loans), versus $81.1 million (0.58%) a year earlier. Third-quarter net charge-offs were $5.7 million, compared with $7.0 million a year earlier.
- Cash flows, nine months: Operating activities provided $37.1 million, investing activities used $847.5 million, and financing activities provided $830.4 million. Cash and cash equivalents ended at $250.7 million, up $19.9 million from year-end 2014. Cash flow reflects substantial loan growth and securities activity.
- Funding and capital: Period-end FHLB advances were $451.3 million; other borrowings, $260.0 million; subordinated notes, $140.0 million; and junior subordinated debentures, $268.6 million. The company reported $951.8 million of overnight liquid funds and interest-bearing bank deposits. Regulatory capital ratios included a 9.2% leverage ratio, 10.3% Tier 1 risk-based ratio, 8.6% common equity Tier 1 ratio, and 12.6% total capital ratio; management said the company remained well-capitalized.
Material changes and management commentary
- Third-quarter net income fell 5% year over year, while nine-month net income rose 7%. Revenue growth was offset in the quarter by a 16% increase in non-interest expense, including acquisition costs, staffing and compensation, technology, occupancy, and marketing costs. The company recorded $5.7 million of acquisition-related charges in Q3 and $7.5 million year to date. Excluding these charges, adjusted diluted EPS was $0.75 for Q3 and $2.38 year to date; these are non-GAAP measures.
- Net interest income rose 9% in Q3, principally on loan growth, but the FTE margin narrowed 13 basis points year over year. Management cited loan-yield pricing pressure, runoff in covered loans, and added funding costs. Average non-interest-bearing deposits increased to 25% of average deposits in Q3, from 20% a year earlier.
- Non-interest income increased 12% in Q3 and 31% year to date. Drivers included mortgage banking, covered-call fees, deposit charges and customer interest-rate swap fees. Mortgage banking revenue was $27.9 million in Q3 and $91.7 million year to date.
- Four acquisitions were completed in 2015: Delavan, North Bank, Suburban and Community Financial Shares. They added banking locations and contributed to loan, deposit, goodwill and expense growth. Goodwill was $472.2 million at quarter-end.
- Commercial real estate loans were $5.3 billion, 33% of loans excluding covered loans; 87% of this portfolio was in Illinois and Wisconsin. Management reported stable credit metrics overall, but non-performing loans increased from June, partly due to one $9.3 million commercial relationship placed on non-accrual at quarter-end. Other real estate owned excluding covered assets was $51.9 million.
- Management described continued low interest rates and stronger lending competition. It emphasized disciplined underwriting, expense control, loan and deposit growth, and liquidity management. No specific earnings or balance-sheet guidance was provided. Management expected mortgage purchase originations to benefit if housing conditions continued improving and anticipated higher compliance costs from regulatory requirements.
Risks, contingencies and unusual items
- Interest-rate sensitivity modeling showed estimated one-year net interest income increases under rising-rate scenarios and declines under a 100-basis-point rate decrease: static shock results were +15.6% at +200 basis points and -11.1% at -100 basis points; ramp results were +6.7% and -4.0%, respectively. These are modeled estimates, not forecasts.
- Mortgage investors may seek repurchase or indemnification for loans sold; the related liability was $3.7 million at September 30, 2015. A Lehman Brothers Holdings indemnity demand was reserved at an amount management described as immaterial. An RFC Liquidating Trust demand had no reasonably estimable loss range at filing.
- The company settled an FLSA class action for an immaterial amount; the court approved the settlement in June 2015. Management said pending and threatened matters were not expected to have a material adverse effect overall, while noting an unfavorable resolution could materially affect a particular period.
- FDIC loss-share arrangements cover certain acquired assets, generally reimbursing 80% of covered losses, but include servicing requirements and potential clawbacks. The reported FDIC indemnification balance was a $3.0 million liability at September 30, 2015.
- Management identified risks including local commercial real estate and borrower conditions, credit losses, interest-rate and market changes, acquisition integration, competition, regulatory costs and capital requirements, technology and vendor disruptions, and mortgage repurchase claims. No material changes to the 2014 Form 10-K risk factors were reported.
Important facts for investors to verify
- Whether loan growth and acquisition contributions can offset margin compression and rising operating costs.
- Whether credit quality remains stable, especially the new $9.3 million non-accrual relationship and concentrated commercial real estate exposure.
- How recurring earnings compare with results excluding acquisition-related charges, and how integration costs develop.
- Whether the $951.8 million of reported liquid funds and diversified funding sources remain adequate as the balance sheet grows.
- Potential outcomes and reserve adequacy for mortgage repurchase and indemnification demands, including the RFC matter.
- The effect on regulatory capital of the 2016 change in Tier 1 eligibility for junior subordinated debentures and the terms of the Series D preferred stock.