Wintrust Financial Corporation — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016. Wintrust is a financial holding company focused on community banking in the Chicago metropolitan area and southern Wisconsin, with specialty finance and wealth management businesses. Results are unaudited; management cautions that quarterly results are not necessarily indicative of full-year performance.
Financial performance and position
| Metric | Q1 2016 | Prior comparable period |
|---|---|---|
| Net interest income | $171.5 million | $151.9 million |
| Non-interest income | $68.8 million | $64.5 million |
| Net income | $49.1 million | $39.1 million |
| Diluted earnings per common share | $0.90 | $0.76 |
| Net interest margin, fully taxable-equivalent | 3.32% | 3.42% |
| Efficiency ratio, fully taxable-equivalent | 63.96% | 67.90% |
| Return on average assets | 0.86% | 0.80% |
- Net revenue was $240.3 million, up 11%; net income rose 26%. The effective tax rate was 37.4%, compared with 38.0%.
- Non-interest expense increased 4% to $153.7 million, chiefly from acquisition-related and growth-related staffing, equipment, and data-processing costs.
- Operating cash flow was $66.4 million; investing cash flow was negative $517.7 million and financing cash flow was positive $387.8 million. Cash and cash equivalents decreased $63.5 million to $212.3 million.
- At March 31, total assets were $23.5 billion, loans excluding covered loans were $17.4 billion, deposits were $19.2 billion, and shareholders’ equity was $2.42 billion. Year over year, assets rose 15%, loans 17%, and deposits 13%.
- Funding included $799.5 million of FHLB advances, $253.1 million of other borrowings, $138.9 million of subordinated notes, and $253.6 million of junior subordinated debentures. The $75 million revolving credit facility was undrawn; the term facility balance was $63.7 million.
- Management reported approximately $1.0 billion in overnight liquid funds and interest-bearing bank deposits and cited deposits, short-term investments, and external funding access as liquidity sources.
- Consolidated regulatory capital ratios included a 12.1% total capital-to-risk-weighted-assets ratio, 9.6% Tier 1 capital ratio, and 8.4% common equity Tier 1 ratio. Tangible common equity was 7.2%, down from 7.9% a year earlier.
Material changes and management commentary
- Average loans excluding covered loans increased about $2.5 billion year over year. Management attributed growth to commercial and commercial real estate lending, life insurance premium finance, acquisitions, and commercial banking initiatives. Average earning-asset yield declined 12 basis points year over year; the FTE net interest margin fell 10 basis points.
- Non-interest income growth included higher interest-rate swap fees, deposit service charges, operating lease income, and securities gains. Mortgage banking revenue fell 22% to $21.7 million, primarily on lower originations; covered-call option fees also declined.
- In January, Wintrust acquired $15.0 million of trust preferred securities, extinguishing related junior subordinated debt and recognizing a $4.3 million gain. This was a material, non-recurring contributor to income. The quarter also included the March 31 acquisition of Generations Bancorp, adding one Wisconsin banking location; preliminary purchase accounting included $11.3 million of goodwill.
- Credit indicators were mixed: non-performing loans excluding covered assets and PCI loans were $89.5 million, or 0.51% of loans, versus $81.8 million and 0.55% a year earlier. The allowance for credit losses was 0.64% of loans, unchanged year over year. Provision for credit losses increased to $8.0 million from $6.1 million; net charge-offs were $3.5 million versus $3.1 million.
- Management said it maintained underwriting standards and considered the allowance appropriate. It noted commercial and commercial real estate concentrations and that some regional real estate markets remained stressed.
Outlook, risks, contingencies, and unusual items
- The filing provides no specific earnings or growth guidance. Management expressed continued focus on qualifying commercial and commercial real estate lending and growing wealth management; future results remain subject to the risks described in the filing.
- Interest-rate sensitivity modeling estimated that a static, instantaneous +100 basis-point rate shock would increase one-year net interest income 8.9%, while a -100 basis-point shock would reduce it 8.7%. Under the gradual ramp scenario, the corresponding estimates were +3.7% and -3.7%; these are simulations, not forecasts.
- Regulatory capital matter after quarter-end: On April 29, 2016, the OCC advised that subordinated notes used to bolster Tier 2 capital at four subsidiary national banks did not meet applicable requirements. The banks repaid the affected intercompany debt and Wintrust replaced it with Tier 1 capital. The company said the banks remained well capitalized after the substitution, but Beverly Bank’s recalculated total capital ratio was 9.7%, below the 10% well-capitalized threshold. Wintrust obtained a lender waiver for any technical Credit Agreement default related to the recalculated ratios.
- Legal matters include a Lehman Holdings mortgage-loan indemnification complaint, for which Wintrust has an immaterial reserve, and demands from RFC Liquidating Trust and a brokerage competitor. Management said the latter matters were not reasonably estimable; it believed pending matters would not have a material adverse effect overall, while acknowledging an unfavorable outcome could be material for a particular period.
- Key disclosed risks include regional economic and commercial real estate weakness, loan-loss estimation, interest-rate and liquidity exposure, acquisition integration, premium-finance credit and fraud risks, mortgage repurchase/indemnification claims, cybersecurity and technology/vendor failures, and regulatory or capital changes. Management reported no material change to the risk factors in its 2015 Form 10-K.
Important facts for investors to verify
- Whether loan growth can continue without weakening credit quality; monitor non-performing loans, past-due commercial real estate loans, charge-offs, and reserve coverage.
- How sustainable earnings are after excluding the $4.3 million debt-extinguishment gain, and whether margin pressure and higher operating costs persist.
- The status and ongoing implications of the OCC’s subordinated-debt ruling, subsidiary-bank capital ratios, and the Credit Agreement waiver.
- Generations acquisition integration and final purchase accounting, including goodwill and acquired-credit exposures.
- Developments in mortgage-related indemnification and other legal matters, whose potential losses are partly unestimable in the filing.