Wintrust Financial Corporation — 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. This is an annual filing; fourth-quarter figures are included where available. Wintrust is an Illinois financial holding company serving primarily the Chicago metropolitan area and southeastern Wisconsin, with national specialty-finance operations. Its three segments are community banking, specialty finance and wealth management.
Key financial results
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Total assets, year-end | $15.89 billion | $13.98 billion | +14% |
| Net interest income | $461.4 million | $415.8 million | +11% |
| Net interest margin | 3.42% | 3.37% | +5 basis points |
| Net revenue | $651.1 million | $608.0 million | +7% |
| Non-interest income | $189.7 million | $192.2 million | -1% |
| Non-interest expense | $420.4 million | $382.5 million | +10% |
| Provision for credit losses | $102.6 million | $124.7 million | -18% |
| Net income | $77.6 million | $63.3 million | +22% |
| Diluted earnings per common share | $1.67 | $1.02 | +$0.65 |
| Return on average assets / common equity | 0.52% / 5.11% | 0.47% / 3.01% | Improved |
Fourth-quarter 2011 net income was $19.2 million and diluted EPS was $0.41, compared with $14.2 million and a diluted loss per share of $0.06 in fourth-quarter 2010. Fourth-quarter 2011 net interest income was $124.6 million; provision for credit losses was $18.8 million.
- Balance sheet and funding: Loans excluding covered loans were $10.52 billion, up 10%; total deposits were $12.31 billion, up 14%. Shareholders’ equity was $1.54 billion, up 7%.
- Credit quality: Non-performing loans excluding covered loans were $120.1 million, down from $142.0 million; the ratio to loans declined to 1.14% from 1.48%. Net charge-offs were $103.3 million versus $109.7 million. The allowance for loan losses excluding covered loans was $110.4 million, or 1.05% of loans. Other real estate owned rose to $86.5 million from $71.2 million.
- Cash flow: Operating cash flow was $365.7 million, investing cash flow was negative $958.4 million and financing cash flow was positive $589.8 million. Cash and cash equivalents ended the year at $169.7 million. Management reported $919 million of overnight liquid funds and interest-bearing deposits with banks.
- Debt and capital: Key borrowings included $600 million of securitization debt, $474.5 million of Federal Home Loan Bank advances, $443.8 million of other borrowings, $249.5 million of junior subordinated debentures, $52.8 million of notes payable and $35 million of subordinated notes. Regulatory capital ratios were 13.0% total capital, 11.8% Tier 1 risk-based capital and 9.4% leverage; all banks were categorized as well capitalized.
Material changes and business developments
- Growth in net interest income reflected higher average earning assets and lower deposit costs. Average loan yield fell to 5.03% from 5.67%, but the average rate paid on interest-bearing deposits fell to 0.88% from 1.32%.
- Credit-loss provision declined, while operating costs increased, primarily from staffing and employee benefits associated with growth and acquisitions. OREO expense also increased, mainly due to valuation adjustments.
- Mortgage originations and sales fell to $2.55 billion from $3.75 billion; mortgage banking revenue declined 7% to $56.9 million. Management attributed lower volume to industry conditions, prior-year refinancing activity and its exit from wholesale origination in late 2010.
- Wintrust completed three FDIC-assisted bank acquisitions in 2011 and acquired Elgin State Bank, Great Lakes Advisors and mortgage-banking businesses. FDIC-assisted acquisitions generated $38.0 million in bargain-purchase gains. The company ended the year with 15 banks and 99 banking locations.
- The company’s common stock closed 2011 at $28.05, down from $33.03 at year-end 2010. The annual common dividend was $0.18 per share; the board approved a $0.09-per-share semiannual dividend in January 2012.
Outlook, risks and unusual items
- The filing provides no formal numerical earnings or revenue guidance. Management described continued economic and real-estate-market stress, and said it would continue close monitoring and resolution of problem loans while pursuing growth opportunities that meet underwriting standards.
- Credit and concentration risks remain material: commercial real estate was 31% of the loan portfolio, and 92.4% of commercial real-estate loans were in Illinois and Wisconsin. Management highlighted continued vulnerability to weaker property values and local economic conditions.
- Commercial premium-finance lending has third-party fraud and collection risks. A 2010 industry fraud event increased 2010 provision and net charge-offs by $15.7 million; Wintrust recovered $5.0 million through insurance in 2011. Life-premium-finance exposures also depend on insurance-carrier strength and policy collateral.
- Other risks include interest-rate changes, mortgage repurchase and indemnification claims, integration and servicing requirements in FDIC-assisted acquisitions, liquidity and capital access, and regulatory changes, including implementation of Dodd-Frank. A subsidiary bank had a “needs improvement” CRA rating, which can restrict certain expansion activities.
- Notable income items included $38.0 million of bargain-purchase gains and $13.6 million of covered-call option fees in 2011. The adjusted pre-tax earnings measure of $225.5 million is non-GAAP and excludes provision for credit losses and specified items; it should not be treated as GAAP earnings.
- At year-end, $600 million of securitization notes remained outstanding. Breaching specified covenants could trigger rapid amortization and an accelerated repayment requirement. The company reported compliance with its corporate credit-facility covenants.
- Management reported no material pending legal proceedings and no material weaknesses in internal control. The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether commercial real-estate credit performance, OREO balances and reserve coverage continue to improve, particularly in the company’s concentrated home markets.
- How much future earnings depend on acquisition-related gains, covered-loan accretion and other nonrecurring or variable income items.
- Whether deposit growth and lower funding costs can offset loan-yield pressure and rising operating expenses.
- The outlook for mortgage volumes, mortgage repurchase claims and the $2.5 million year-end repurchase and indemnification liability.
- Compliance with securitization and credit-facility covenants, the timing of debt maturities, and the ability of bank subsidiaries to upstream dividends while maintaining regulatory capital.
- The final terms, regulatory status and financial contribution of announced post-year-end acquisitions and expansion plans.