Wintrust Financial Corporation — 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. The filing also reports fourth-quarter results. Wintrust is a Rosemont, Illinois-based financial holding company operating community banking, specialty finance and wealth management businesses, primarily in the Chicago metropolitan area and southern Wisconsin. Total assets were approximately $20.0 billion.
Financial performance and condition
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Net revenue | $813.8 million | $773.0 million | Up 5% |
| Net interest income | $598.6 million | $550.6 million | Up 9% |
| Net income | $151.4 million | $137.2 million | Up 10% |
| Diluted earnings per common share | $2.98 | $2.75 | Up 8% |
| Net interest margin | 3.53% | 3.50% | Up 3 basis points |
| Efficiency ratio | 66.89% | 64.57% | Higher; less efficient |
| Return on average assets | 0.81% | 0.79% | Up 2 basis points |
- Non-interest income was $215.2 million, down 3%, mainly reflecting mortgage banking revenue declining $15.2 million to $91.6 million. Non-interest expense rose 9% to $546.8 million, including higher salaries, incentive compensation and occupancy costs.
- Fourth-quarter net income was $38.1 million, versus $35.3 million in fourth-quarter 2013; diluted EPS was $0.75 versus $0.70.
- Year-end assets rose 11% to $20.0 billion. Loans excluding covered loans increased 12% to $14.4 billion; deposits rose 11% to $16.3 billion. Non-interest-bearing deposits were 22% of deposits at year-end, compared with 19% a year earlier.
- Net cash provided by operating activities was $235.8 million; investing activities used $1.87 billion and financing activities provided $1.60 billion. Cash and cash equivalents ended the year at $230.7 million, down from $263.9 million. Separately, management reported $1.2 billion of overnight liquid funds and interest-bearing deposits with banks.
- Capital ratios at December 31 were 13.0% total capital to risk-weighted assets, 11.6% Tier 1 capital to risk-weighted assets and 10.2% Tier 1 leverage. The banks were categorized as well-capitalized.
Asset quality, debt and liquidity
- Credit quality improved: non-performing loans excluding covered loans fell to $78.7 million from $103.3 million; net charge-offs excluding covered loans declined to $27.2 million from $56.1 million. The allowance for loan losses excluding covered loans was $91.7 million, or 0.64% of those loans, versus $96.9 million, or 0.75%, in 2013.
- Commercial real estate was $4.5 billion, or 31% of loans excluding covered loans; more than 92% was located in Illinois and Wisconsin. Management cited ongoing concentration in the company’s home markets.
- Funding included $733.1 million of Federal Home Loan Bank advances, $140.0 million of 5.00% subordinated notes due 2024, $249.5 million of junior subordinated debentures and $196.5 million of other borrowings. The company had no year-end balance drawn on its new $150 million credit facilities.
- Management described liquidity as supported by deposits, liquid investments and access to external funding. Approximately $47.5 million was available for bank dividends to the parent without prior regulatory approval at January 1, 2015, subject to capital requirements.
Material changes and management commentary
- Higher loan balances and a lower cost of interest-bearing deposits drove net interest income growth. Average loan yields declined 11 basis points to 4.23%, while the average rate paid on interest-bearing deposits fell 6 basis points to 0.39%.
- Mortgage loans originated or purchased for sale were $3.2 billion, down from $3.7 billion in 2013; mortgage banking revenue fell 14%. Wealth management revenue increased 13% to $71.3 million.
- Wintrust acquired banking locations and deposits in Wisconsin and Illinois and acquired two Canadian insurance premium finance businesses. A further Wisconsin bank acquisition closed in January 2015. Management said acquisitions and branch expansion support growth in existing and adjacent markets.
- The company issued $140 million of subordinated notes in June 2014 and completed a Canadian receivables financing transaction recorded as a $129.1 million secured borrowing at year-end.
- Management emphasized measured growth, funding-mix improvement, expense control and interest-rate risk management. It expects additional compliance costs from regulatory changes; the filing provides no specific earnings or revenue guidance.
Risks, contingencies and unusual items
- Key risks include sensitivity to interest rates, local economic and real estate conditions, commercial and commercial real estate credit exposure, competition, acquisition integration, and dependence on deposits and subsidiary dividends. Regulatory changes, including Basel III and mortgage rules, could raise costs or constrain operations.
- Management reported six interest-rate cap derivatives with $620 million notional used as an economic hedge; mark-to-market movements contributed $1.4 million of trading losses in 2014. The company also relies on derivatives and covered-call fees to manage returns and interest-rate exposure.
- Mortgage repurchase and indemnification liability was $3.1 million at year-end, down from $3.8 million. The company also disclosed a Fair Labor Standards Act class action involving mortgage loan originators; its reserve was described as immaterial, but the ultimate outcome could not be predicted.
- Unrealized losses on available-for-sale securities were $38.0 million at year-end. Management said it did not consider the securities other-than-temporarily impaired and did not expect to be required to sell them before recovery.
- Basel III capital rules took effect for the company on January 1, 2015, with several requirements phased in through 2019. Management expected to exceed fully phased-in well-capitalized requirements, but noted that higher capital needs could affect returns and distributions.
Investor verification priorities
- Verify whether loan growth and deposit mix improvements can sustain net interest income as asset yields, funding costs and interest rates change.
- Review commercial real estate and commercial loan concentrations, allowance adequacy, charge-offs, non-performing assets and the performance of restructured loans.
- Assess the quality and durability of mortgage banking and wealth management revenues, and whether expense growth can be contained as the company expands.
- Confirm capital and liquidity headroom under Basel III, credit-facility covenants and restrictions on subsidiary dividends and shareholder distributions.
- Track acquisition integration, Canadian premium finance exposure, insurer concentration and the outcome of mortgage repurchase claims and pending litigation.