Wintrust Financial Corporation — Q3 2014 Form 10-Q
Business context and reporting period. Wintrust is a financial holding company focused on community banking in the Chicago metropolitan area and southern Wisconsin, with national and Canadian specialty-finance operations and wealth-management services. This unaudited report covers the quarter and nine months ended September 30, 2014; comparisons below are with the corresponding 2013 periods unless stated otherwise.
Financial performance and position
Q3 results: Net income was $40.2 million, up 13%; diluted earnings per share were $0.79, versus $0.71. Net interest income rose 7% to $151.7 million. Non-interest income increased 6% to $58.0 million, while non-interest expense rose 9% to $138.5 million. Net interest margin was 3.46%, down from 3.57% a year earlier and 3.62% in Q2 2014. The efficiency ratio worsened to 65.76% from 64.60%.
Nine-month results: Net income increased 11% to $113.3 million and diluted EPS increased 9% to $2.23. Net interest income grew 9% to $444.9 million; non-interest income fell 10% to $157.6 million, primarily reflecting lower mortgage banking revenue. Non-interest expense increased 7% to $403.4 million. Net interest margin improved to 3.56% from 3.49%.
Balance sheet at September 30: Total assets were $19.17 billion, up 8% year over year. Loans excluding covered loans and loans held for sale were $14.05 billion, up 12%; deposits were $16.07 billion, up 10%. Shareholders’ equity was $2.03 billion. Non-interest-bearing deposits were 20% of deposits, compared with 18% a year earlier.
Credit quality: Non-performing loans, excluding covered loans, declined to $81.1 million, or 0.58% of loans, from $123.3 million, or 0.98%, a year earlier. The allowance for loan losses excluding covered loans was $91.0 million, or 0.65% of loans, versus $107.2 million, or 0.85%. Q3 net charge-offs were $7.0 million, compared with $11.3 million. Commercial real estate comprised 32% of loans excluding covered loans, with 92.8% of that portfolio in Illinois and Wisconsin.
Cash flow, liquidity, and funding: For the first nine months, operating cash flow was $158.7 million, investing cash flow was negative $990.4 million, and financing cash flow was positive $855.3 million. Cash and cash equivalents increased $23.6 million to $287.4 million. Management reported approximately $907.8 million in overnight liquid funds and interest-bearing deposits with banks. At quarter-end, funding included $347.5 million of Federal Home Loan Bank advances, $51.5 million of other borrowings, $140.0 million of subordinated notes, and $249.5 million of junior subordinated debentures.
Capital: The company reported a 10.0% leverage ratio, 11.7% Tier 1 risk-based capital ratio, and 13.1% total risk-based capital ratio. Tangible common equity was 7.9% of tangible assets. Management stated it expected to remain well capitalized under fully phased-in Basel III requirements.
Material changes versus comparable periods
- Q3 earnings growth reflected higher net interest income, lower credit provision, and stronger mortgage banking and wealth-management revenue; higher operating expenses partially offset the gains.
- Loan and deposit growth was supported by commercial lending, premium-finance receivables, and acquisitions. Total assets grew 8% year over year.
- Q3 margin declined sequentially and year over year. Management cited the cost of newly issued subordinated debt, competitive loan pricing, acquisition-related excess liquidity, and runoff of covered loans.
- Nine-month non-interest income declined, principally because mortgage originations and related revenue were lower than in 2013. Wealth-management revenue increased 13% for the nine-month period.
- The allowance and non-performing loan measures improved year over year; the company continued to resolve problem loans and other real estate owned.
Outlook, commentary, risks, and unusual items
- No specific earnings or financial guidance is provided. Management described an environment of persistently low interest rates and increased lending competition. It expects purchase-related mortgage originations to benefit as the housing market improves, while noting refinancing volumes and pricing remain sensitive to rates and competition.
- Management emphasized disciplined lending and expense control, but expects additional compliance costs from the changing regulatory environment, including Dodd-Frank requirements.
- Interest-rate exposure remains important: the company reported that modeled net interest income rises under rate-increase scenarios and falls under rate-decrease scenarios. These are simulations, not forecasts, and depend on assumptions about rates, balances, and management actions.
- Commercial real estate is a material concentration, predominantly in the company’s core region. Other stated risks include economic and collateral-value deterioration, loan losses, acquisition integration, FDIC loss-share arrangements, premium-finance fraud or credit deterioration, mortgage repurchase obligations, market movements, and regulatory or capital changes.
- During 2014, Wintrust acquired Wisconsin bank branches and deposits and acquired Canadian insurance-premium-financing businesses. It announced an agreement in October 2014 to acquire Delavan Bancshares. It also issued $140 million of 5.00% subordinated notes due 2024. The October 2014 amendment extended the company’s $100 million revolving credit facility to December 15, 2014; the facility had no amount outstanding at September 30.
- Q3 mortgage banking revenue was $26.7 million; nine-month revenue was down 24% year over year. The company recognized $4.9 million in fees from covered-call options in the first nine months. Stock-based compensation included unusual first-quarter charges of $2.1 million and $3.0 million related to modifications of 2011 long-term incentive awards.
- A Fair Labor Standards Act class action involving mortgage loan originators remained pending. The company said its reserve was immaterial, but noted that an unfavorable resolution could affect results or financial condition in a particular period.
Most important facts for investors to verify
- Whether loan growth and acquisition contributions can sustain earnings while Q3 net interest margin is under pressure.
- The quality and concentration of commercial real-estate and premium-finance loans, and whether lower non-performing balances and reserves remain adequate as loans season.
- Mortgage banking revenue trends, operating expense growth, and the company’s ability to improve efficiency.
- Liquidity, deposit mix, debt costs, revolving-facility terms, and capital ratios as Basel III rules take effect.
- Integration and expected economics of recent acquisitions and the announced Delavan transaction, plus exposure to litigation and mortgage repurchase claims.