Wintrust Financial Corporation — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011. Unaudited consolidated results; dollar amounts below are in millions unless noted. Wintrust operates community banking, specialty finance and wealth management businesses, principally in the Chicago area and southeastern Wisconsin, with certain specialty lending activities nationwide.
Key financial results
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net interest income | $118.4 | $103.0 | $336.7 | $303.2 |
| Provision for credit losses | $29.3 | $25.5 | $83.8 | $95.9 |
| Non-interest income | $67.2 | $54.7 | $144.8 | $147.7 |
| Non-interest expense | $106.3 | $99.7 | $301.6 | $276.3 |
| Net income | $30.2 | $20.1 | $58.4 | $49.1 |
| Diluted earnings per common share | $0.65 | $0.47 | $1.26 | $1.12 |
| Net interest margin, fully taxable-equivalent | 3.37% | 3.22% | 3.41% | 3.34% |
Q3 net income increased 50%; year-to-date net income rose 19%. Q3 return on average assets was 0.77%, return on average common equity was 7.94%, and the efficiency ratio was 57.21% (non-GAAP, fully taxable-equivalent basis). The effective tax rate was 39.7% for Q3 and 39.3% year to date.
Financial position, funding and cash flow
- At September 30, total assets were $15.9 billion, up 13% year over year; total loans were $11.0 billion, including $680 million of FDIC-covered loans. Loans excluding covered loans were $10.3 billion, up 9% year over year.
- Deposits were $12.3 billion, up 12% year over year. Non-interest-bearing deposits were $1.63 billion, or 13% of deposits, versus 10% a year earlier. Management reported more than $1.2 billion in overnight liquid funds and interest-bearing bank deposits.
- Shareholders’ equity was $1.53 billion. Tangible common equity was 7.4% of tangible assets, compared with 5.9% a year earlier. Regulatory capital ratios were 9.6% leverage, 11.9% Tier 1 risk-based and 13.2% total risk-based.
- Borrowings included $475 million of Federal Home Loan Bank advances, $448 million of other borrowings, $600 million of securitization borrowings, $249 million of junior subordinated debentures and $40 million of subordinated notes. The company reported compliance with debt covenants. Its credit agreement was amended after quarter-end to provide a $75 million revolving facility; no amount was drawn as of the filing date.
- For the first nine months, operating cash flow was $357 million, investing cash flow was negative $917 million, financing cash flow was positive $548 million, and cash and cash equivalents decreased $12 million to $161 million.
Material changes and notable items
- Q3 net interest income benefited from a larger earning-asset base and lower deposit costs. The deposit interest cost fell 43 basis points year over year. Sequentially, margin eased 3 basis points to 3.37%, in part because of increased low-yielding cash balances and pricing pressure in commercial premium finance.
- Q3 non-interest income included a $27.4 million bargain-purchase gain from the First Chicago FDIC-assisted acquisition. Total bargain-purchase gains were $38.0 million for the first nine months, versus $44.0 million in the prior-year period. These gains are significant, non-recurring acquisition items.
- Q3 non-interest income also rose with wealth-management revenue and covered-call fees, but mortgage banking revenue fell 31% year over year to $14.5 million as mortgage originations declined. Originations and sales were $642 million, down from $1.08 billion in Q3 2010; management cited a 40% decline in origination volumes.
- Loan growth reflected commercial lending, premium finance and acquisitions. Acquisitions included three FDIC-assisted banks, Elgin State Bank, Great Lakes Advisors and mortgage banking businesses. Great Lakes Advisors added approximately $2.4 billion in assets under management; Wintrust Wealth Management reported $12.8 billion in assets under administration.
- Operating costs rose 7% in Q3 and 9% year to date, driven mainly by acquisition-related staffing and growth. Year-to-date OREO expense increased 47% to $17.5 million, primarily from property valuation adjustments.
Credit quality, risks and outlook
- Non-performing loans excluding covered loans were $134 million, or 1.30% of loans, down from $142 million and 1.42% a year earlier. Non-performing assets were $231 million, or 1.45% of assets. Other real estate owned was $96.9 million, including $10.3 million obtained in the Elgin acquisition.
- Q3 net charge-offs excluding covered loans were $26.9 million, up from $21.4 million a year earlier; nine-month net charge-offs declined to $78.3 million from $86.1 million. The allowance for loan losses excluding covered loans was $118.6 million, or 1.15% of loans. Commercial real estate represented 34% of loans excluding covered loans; more than 91% of that portfolio was in the Chicago metropolitan area and southeastern Wisconsin.
- Management cited continuing stress in the economy and real estate markets, particularly land and construction lending, and warned that further deterioration could increase defaults, foreclosures and asset-value declines. It reported $70.8 million of non-performing commercial real estate loans, including $36.4 million in land and construction categories.
- FDIC loss-share agreements cover 80% of eligible losses on specified acquired assets, subject to servicing requirements and potential repayment to the FDIC if losses prove lower than estimates. The FDIC indemnification asset was $379 million at quarter-end.
- Other risks include premium-finance fraud and insurer credit deterioration, mortgage-loan repurchase or indemnification claims, interest-rate and market risk, acquisition integration, regulatory changes and commercial real estate concentration. The company disclosed a $7.8 million estimated liability for loans expected to be repurchased from investors.
- No specific earnings or financial guidance is provided in the supplied filing text. Management described continued lending and acquisition opportunities but did not quantify an outlook.
Important facts for investors to verify
- How much reported earnings depended on bargain-purchase gains, and how core earnings trend without those items.
- Whether commercial real estate delinquencies, charge-offs, OREO balances and valuation adjustments continue to improve or worsen.
- Allowance adequacy and the expected timing and collectability of the $379 million FDIC indemnification asset, including compliance with loss-share terms.
- Whether deposit growth can be deployed into loans at adequate spreads without further compressing net interest margin.
- The effect of lower mortgage volumes, premium-finance competition and any repurchase claims on recurring fee income and credit costs.
- Acquisition-related expense, integration progress, capital ratios and potential dilution from issued shares and outstanding equity-linked securities.