Wintrust Financial Corporation — Q2 2017 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 operating nationally and in Canada, and wealth management services. This unaudited quarterly report covers the three and six months ended June 30, 2017; comparisons below are to the corresponding 2016 periods unless stated otherwise.
Financial performance and position
| Metric | Q2 2017 | Q2 2016 | First half 2017 | First half 2016 |
|---|---|---|---|---|
| Net income | $64.9 million | $50.0 million | $123.3 million | $99.2 million |
| Diluted earnings per common share | $1.11 | $0.90 | $2.11 | $1.80 |
| Net interest income | $204.4 million | $175.3 million | $397.0 million | $346.8 million |
| Net interest margin | 3.41% | 3.24% | 3.38% | 3.26% |
| Net revenue | $294.4 million | $260.1 million | $555.7 million | $500.3 million |
| Non-interest income | $90.0 million | $84.8 million | $158.7 million | $153.6 million |
| Non-interest expense | $183.5 million | $171.0 million | $351.7 million | $324.7 million |
| Provision for credit losses | $8.9 million | $9.1 million | $14.1 million | $17.2 million |
- At June 30, 2017, total assets were $26.9 billion, up 10% year over year. Total loans excluding covered loans and mortgage loans held for sale were $20.7 billion, up 14%; deposits were $22.6 billion, up 13%.
- For Q2, management reported a 62.36% GAAP efficiency ratio (65.73% a year earlier) and a 1.00% return on average assets (0.85% a year earlier). The net overhead ratio was 1.44%, compared with 1.46%.
- Six-month cash flow: operating activities provided $124.7 million, versus $92.4 million used in the first half of 2016; investing activities used $1.220 billion and financing activities provided $1.121 billion. Cash and cash equivalents ended the period at $296.2 million. The filing separately reports approximately $1.3 billion in overnight liquid funds and interest-bearing bank deposits.
- Shareholders’ equity was $2.84 billion. Regulatory capital ratios included a 9.3% common equity Tier 1 ratio, 9.8% Tier 1 risk-based ratio, 12.0% total risk-based capital ratio and 9.2% leverage ratio; management said capital remained above “well-capitalized” thresholds.
- Deposits were the principal funding source. At quarter-end, FHLB advances were $318.3 million, other borrowings $277.7 million, subordinated notes $139.0 million and junior subordinated debentures $253.6 million. The $75 million revolving credit facility had no outstanding balance; the company reported compliance with credit-agreement covenants.
Material changes versus comparable periods
- Q2 net income increased 30%, while diluted EPS rose 23%. Management attributed the improvement chiefly to loan growth and higher net interest margin, along with higher operating lease income, wealth management revenue and a reduction in the estimated FDIC indemnification liability.
- Average loans excluding covered loans increased about $2.4 billion year over year in Q2. Growth was concentrated in commercial, commercial real estate and premium finance lending. Average deposits rose 12%; average non-interest-bearing deposits increased 13%.
- Credit indicators improved: non-performing loans were 0.33% of loans excluding covered loans, versus 0.48% a year earlier; non-performing assets were 0.40% of assets, versus 0.52%. Non-accrual loans were $61.8 million, compared with $77.2 million. The allowance for credit losses was 0.63% of loans, versus 0.64%.
- Non-interest expense increased 7% in Q2, driven principally by staffing and benefits, operating-lease equipment depreciation, professional fees, marketing and data processing. Mortgage banking revenue was slightly lower, and fees from covered call options and securities gains were substantially lower than in Q2 2016.
- Series C preferred stock was mandatorily converted into common shares in April 2017, removing the Series C preferred balance and increasing common shares outstanding. The quarterly common dividend was $0.14 per share, up from $0.12 in 2016.
Outlook, commentary, risks and unusual items
- No specific earnings or growth guidance was provided. Management described continued loan and deposit growth, improving credit quality and a focus on new commercial and commercial real estate lending where opportunities meet underwriting standards. It also identified wealth management growth and revenue diversification as priorities.
- A $4.9 million reduction in the estimated FDIC indemnification liability, primarily related to clawback provisions in loss-sharing agreements, contributed to Q2 other income. The filing also reports $3.9 million of excess share-based compensation tax benefits in the first half, lowering the effective tax rate; these benefits may fluctuate.
- Key risks include economic and real-estate downturns, borrower defaults and credit-loss estimates, interest-rate and securities-market movements, deposit competition and funding costs, acquisition integration, FDIC loss-sharing and clawback provisions, premium-finance fraud or collateral risks, regulatory changes, cybersecurity and vendor failures, and mortgage repurchase or indemnification claims.
- Interest-rate simulations showed estimated one-year net interest income sensitivity at June 30, 2017 of +19.3% under a static +200-basis-point shock and −13.5% under a static −100-basis-point shock; ramp scenarios were +7.8% and −4.6%, respectively. These are modeled outcomes, not forecasts.
- Legal matters include a Lehman Holdings mortgage-loan indemnification claim, for which the company recorded an immaterial reserve, and an RFC Liquidating Trust demand whose potential liability was not reasonably estimable. Management stated that it did not expect the matters to have a material adverse effect overall, but noted an unfavorable outcome could materially affect a particular period.
- The company said there were no material changes to the risk factors in its 2016 Form 10-K. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting reported for the quarter.
Important facts for investors to verify
- Whether loan and deposit growth can continue without weakening underwriting standards or increasing funding costs; in particular, monitor commercial real estate concentration and specialty-finance credit performance.
- Whether lower non-performing loan levels and the allowance remain adequate as the portfolio expands; review charge-offs, delinquencies and management’s estimates of expected losses.
- How much Q2 earnings depended on the $4.9 million FDIC liability adjustment and first-half tax benefits, and whether underlying operating trends support reported growth.
- Exposure to changing interest rates, including the modeled sensitivity, deposit repricing, derivative positions and unrealized securities losses.
- Resolution and potential exposure from mortgage-related legal claims, FDIC loss-sharing clawbacks and other contingencies; the filing does not provide a clear estimate for the RFC demand.
- Funding and capital resilience, including the Canadian secured borrowing agreement maturing December 2017, covenant compliance, and the ability to sustain dividends while funding growth.