Wintrust Financial Corporation — Q2 2018 Form 10-Q
Business context and reporting period
Wintrust is a financial holding company focused on community banking in the Chicago region, southern Wisconsin and northwest Indiana, with specialty finance businesses operating nationally and in Canada, and wealth management services. This unaudited filing covers the quarter and six months ended June 30, 2018; comparisons are primarily with the same 2017 periods.
Financial performance and position
- Q2 earnings: Net income was $89.6 million, up 38% from $64.9 million. Diluted earnings per common share were $1.53, versus $1.11.
- Revenue and margins: Net interest income rose 17% to $238.2 million; non-interest income increased 6% to $95.2 million. Net revenue was $333.4 million, up 13%. Net interest margin was 3.61%, up 20 basis points year over year. Net interest expense increased 71% to $45.9 million, reflecting higher funding costs and balances.
- Costs and credit provision: Non-interest expense increased 13% to $206.8 million, led by salaries, acquisition-related staffing, marketing, and leasing costs. Provision for credit losses was $5.0 million, down from $8.9 million.
- Six-month results: Net income was $171.6 million, up 39%; diluted EPS was $2.93, versus $2.11. Net interest income rose 17% to $463.3 million, and non-interest income rose 14% to $180.9 million. Net interest margin was 3.58%, up 20 basis points.
- Balance sheet and liquidity: At June 30, total assets were $29.5 billion, loans $22.6 billion, deposits $24.4 billion, and shareholders’ equity $3.1 billion. Deposits rose 8% and loans 9% year over year. Management reported approximately $1.5 billion in overnight liquid funds and interest-bearing deposits with banks and said funding capacity was adequate.
- Cash flow, six months: Operating cash flow was $102.7 million; investing cash outflow was $1.35 billion, largely reflecting loan growth and securities purchases; financing cash inflow was $1.27 billion, primarily from deposit growth and borrowings. Cash and cash equivalents ended at $304.6 million, up $27.1 million from the start of the period.
- Debt and capital: FHLB advances were $667.0 million; other borrowings $255.7 million; subordinated notes $139.1 million; and junior subordinated debentures $253.6 million. Regulatory capital ratios included a 9.4% leverage ratio, 9.6% common equity Tier 1 ratio and 12.1% total capital ratio. The company reported compliance with its credit-agreement covenants.
Material changes versus comparable periods
- Management attributed earnings growth mainly to loan and deposit expansion, improved asset yields and net interest margin, higher mortgage banking and wealth management revenue, and a lower effective tax rate following the Tax Act. Q2’s effective tax rate fell to 26.3% from 36.3%.
- Commercial and life-insurance premium finance receivables were important sources of loan growth. Average loans increased about $2.0 billion year over year in Q2.
- Mortgage banking revenue rose 11% in Q2 to $39.8 million. The servicing portfolio grew to $5.2 billion from $2.3 billion a year earlier, including the effect of the Veterans First acquisition.
- Funding costs rose: the average rate on interest-bearing deposits increased to 0.84% in Q2 from 0.47% a year earlier. Non-interest-bearing deposits were 27% of average deposits, unchanged year over year.
- Accumulated other comprehensive loss widened to $81.2 million from $46.5 million a year earlier, largely reflecting unrealized losses on available-for-sale securities and foreign currency translation.
Outlook, risks, contingencies and unusual items
- The filing provides no specific earnings or revenue guidance. Management emphasized continued loan and deposit growth, subject to underwriting standards, and growth in wealth management and other businesses.
- Management described credit quality as stable and the allowance as appropriate. Non-performing loans were $83.3 million, or 0.37% of loans, versus 0.33% a year earlier. Total TDRs increased to $65.3 million from $33.1 million; 12 loans totaling $19.6 million were restructured in Q2 2018, compared with four totaling $2.2 million in Q2 2017. The allowance for loan losses was $143.4 million; allowance coverage was 172% of non-performing loans.
- Interest-rate risk is material: modeled one-year net interest income sensitivity at June 30 was +19.3% under a static +200-basis-point shock and -10.7% under a static -100-basis-point shock; gradual-ramp estimates were +8.7% and -4.4%, respectively. These are scenarios, not forecasts.
- Key disclosed risks include economic and real-estate weakness, credit losses, deposit competition and repricing, interest-rate and market changes, acquisition integration, cybersecurity and vendor failures, regulatory and capital requirements, and premium-finance fraud or collateral risks. Management noted increased competition and pricing pressure in life-insurance premium finance.
- The company acquired Veterans First in January 2018, recording $9.1 million of goodwill. On August 1, 2018, it acquired Chicago Shore Corporation, whose bank had approximately $247 million of assets. On July 31, it announced an agreement to acquire certain assets and assume certain liabilities of American Enterprise Bank, which had approximately $200 million of assets; completion remained pending.
- Legal matters include a Lehman Holdings loan-indemnification suit, for which the company recorded an immaterial reserve, and a $4.6 million indemnification demand from JPMorgan Chase related to older mortgage loans. Management said the ultimate outcomes were uncertain but did not expect the matters to have a material adverse effect overall; an unfavorable resolution could affect a particular period.
- Adoption of the new revenue-recognition standard had no significant financial-statement impact. The company was evaluating the upcoming lease and expected-credit-loss standards. It expected to complete its Tax Act accounting in Q4 2018; no provisional-tax adjustment was recorded in the first half.
Important facts for investors to verify
- Whether loan growth and net interest margin gains persist as deposit costs rise, and how deposit mix and funding sources evolve.
- Trends in non-performing loans, TDRs, charge-offs and the allowance, particularly in commercial and commercial real estate lending.
- The sustainability of mortgage banking results and the valuation assumptions and exposure associated with the growing, unhedged mortgage servicing rights portfolio.
- Integration costs and outcomes for Veterans First, Chicago Shore and the pending American Enterprise Bank transaction.
- Updates on the Lehman and JPMorgan mortgage-related claims, and the eventual impact of adopting lease and expected-credit-loss accounting standards.