Wintrust Financial Corporation — Q1 2015 Form 10-Q
Business context and period. Wintrust is a financial holding company focused on community banking in the Chicago metropolitan area and southern Wisconsin, with specialty finance businesses in the U.S. and Canada and wealth management operations. This unaudited report covers the three months ended March 31, 2015; comparisons are primarily with Q1 2014.
Financial results and condition
- Profit and revenue: Net income was $39.1 million, up 13% from $34.5 million. Diluted EPS increased to $0.76 from $0.68. Net revenue—net interest income plus non-interest income—rose 14% to $216.4 million.
- Interest income and margins: Net interest income increased 5% to $151.9 million. Fully taxable-equivalent net interest margin was 3.42%, down from 3.61% a year earlier and 3.46% in Q4 2014. Management attributed the year-over-year margin decline primarily to lower loan yields, runoff of covered loans, and additional funding costs from subordinated notes and the Canadian secured borrowing.
- Non-interest income and expenses: Non-interest income rose 42% to $64.5 million, led by mortgage banking revenue of $27.8 million (up 69%), wealth management revenue of $18.1 million (up 8%), and covered-call fees of $4.4 million. Non-interest expense increased 12% to $147.3 million, including a 13% rise in salaries and benefits to $90.1 million. The efficiency ratio improved to 67.90% from 69.02%.
- Credit costs and asset quality: The provision for credit losses was $6.1 million versus $1.9 million; excluding covered loans, it was $6.2 million versus $3.3 million. Net charge-offs excluding covered loans fell to $3.1 million from $7.8 million. Non-performing loans excluding covered loans were $81.8 million, or 0.55% of loans, compared with $90.1 million, or 0.69%, a year earlier. The allowance for loan losses was $94.4 million; total allowance for credit losses, including unfunded commitments, was $95.3 million.
- Balance sheet and growth: Total assets were $20.4 billion, up 12% year over year. Loans excluding covered loans and loans held for sale were $15.0 billion, up 14%; deposits were $16.9 billion, up 12%. Non-interest-bearing deposits were 22% of deposits, versus 18% a year earlier. Commercial real-estate loans were $4.7 billion, about 32% of loans excluding covered loans, with 89.7% located in the company’s primary markets.
- Cash flow and liquidity: Operating cash flow was negative $118.3 million, compared with positive $162.3 million in Q1 2014; mortgage-loan originations and changes in operating assets and liabilities affected the period. Investing activities provided $37.7 million and financing activities provided $140.8 million. Cash and cash equivalents increased $60.2 million to $290.9 million; management also reported approximately $988.7 million of overnight liquid funds and interest-bearing bank deposits.
- Debt and capital: At March 31, Federal Home Loan Bank advances were $416.0 million, other borrowings $187.0 million, subordinated notes $140.0 million, and junior subordinated debentures $249.5 million. The company had no outstanding balance on its $150 million revolving and term credit facilities and reported compliance with their covenants. Shareholders’ equity was $2.13 billion. Regulatory ratios included a 9.2% leverage ratio, 10.1% Tier 1 risk-based ratio, 9.1% common equity Tier 1 ratio, and 12.5% total capital ratio; management stated the company remained well-capitalized.
Material changes and notable developments
- Growth in average loans, excluding covered loans, was a key contributor to higher net interest income; the filing attributes growth to commercial lending, commercial real estate, life insurance premium finance, and acquisitions.
- Mortgage banking benefited from higher originations, with $941.7 million of mortgage loans originated or purchased for sale versus $527.3 million in Q1 2014. Management said refinancing activity supplemented purchase originations in the low-rate environment.
- Expense growth outpaced net interest income growth, particularly in employee compensation, occupancy, marketing, professional fees, and miscellaneous costs. Lower OREO expense partly offset the increases.
- Delavan Bancshares was acquired on January 16, 2015; Wintrust acquired assets with a fair value of about $223.9 million, including $128.0 million of loans, and assumed about $185.6 million of liabilities, including $170.2 million of deposits. Goodwill recorded was $16.7 million.
- After quarter-end, Wintrust announced definitive agreements to acquire Suburban Illinois Bancorp, North Bank, and Community Financial Shares. The filing provides target balance-sheet information as of December 31, 2014 but no acquisition completion dates.
- Q1 included $15.6 million of after-tax unrealized gains on available-for-sale securities, partly offset by $9.0 million of after-tax foreign-currency translation losses. The Canadian specialty-finance operations contributed to currency translation effects.
Outlook, risks, and contingencies
- No numerical earnings or revenue guidance is provided. Management cited continued loan and deposit growth, a favorable mortgage banking environment, and efforts to improve funding mix, while noting continued low interest rates and increased bank competition.
- Management expects compliance with Dodd-Frank and other regulatory changes to require additional management attention and resources. Basel III capital rules became applicable beginning January 1, 2015, with certain provisions phased in through 2019; management said the company remained well-capitalized.
- Credit risks include economic deterioration, borrower defaults, commercial real-estate exposure and local market conditions. Management reported $30.0 million of non-performing commercial real-estate loans and identified the concentration in Chicago-area and southern Wisconsin properties as a key exposure.
- Mortgage repurchase and indemnification claims are a risk: the estimated liability was $3.7 million at March 31, 2015, versus $3.1 million at year-end 2014 and $2.6 million a year earlier.
- Legal matters include an FLSA class action involving mortgage loan originator classification and compensation, and a Lehman Brothers Holdings indemnification demand related to previously sold loans. The company reserved amounts it considered immaterial; management said outcomes could nevertheless be material to a particular period if unfavorable.
- Interest-rate simulations showed estimated one-year net interest income sensitivity at March 31, 2015 of +16.7% for a static +200-basis-point shock and +6.8% for a gradual +200-basis-point ramp; corresponding -100-basis-point scenarios were -9.3% and -3.7%. These are modeled estimates, not forecasts.
- Management identified critical estimates involving loan-loss allowances, acquired credit-impaired loans, fair value, goodwill impairment, derivatives, and income taxes. The filing cautions that actual results may differ from forward-looking statements and that quarterly results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether loan growth and the stronger non-interest income mix can continue to offset margin compression and higher operating costs.
- How credit costs, delinquencies, non-performing loans, and the allowance develop—especially across commercial real estate and premium finance.
- Whether mortgage banking revenue remains sustainable if refinancing volumes or market conditions change, and whether repurchase claims increase.
- The funding, integration, and capital effects of the announced acquisitions, and the impact of phased-in Basel III requirements.
- The ultimate outcomes and any additional exposure from the FLSA litigation and Lehman indemnification demand.
- The drivers of negative operating cash flow and the durability of liquidity, deposit growth, and capital ratios.