Wintrust Financial Corporation — Q2 2011 Form 10-Q
Reporting period: Three and six months ended June 30, 2011. Figures are in U.S. dollars; financial amounts are stated in millions unless otherwise noted. The unaudited statements should be read with the company’s 2010 Form 10-K.
Business context
Wintrust is a financial holding company focused on community banking in the Chicago metropolitan area and southeastern Wisconsin, with specialty finance and wealth management businesses. Growth during the period included FDIC-assisted bank acquisitions and mortgage-banking acquisitions.
Key financial metrics
| Metric | Q2 2011 | Comparable period |
|---|---|---|
| Net income | $11.8 | $13.0 in Q2 2010 |
| Net income applicable to common shares | $10.7 | $8.1 in Q2 2010 |
| Diluted EPS | $0.25 | $0.25 in Q2 2010 |
| Net interest income | $108.7 | $104.3 in Q2 2010 |
| Net interest margin, fully taxable-equivalent | 3.40% | 3.43% in Q2 2010; 3.48% in Q1 2011 |
| Provision for credit losses | $29.2 | $41.3 in Q2 2010 |
| Non-interest income | $36.7 | $50.4 in Q2 2010 |
| Non-interest expense | $97.2 | $92.7 in Q2 2010 |
| Net revenue | $145.4 | $154.8 in Q2 2010 |
- For the first half, net income was $28.2 million versus $29.0 million; diluted EPS was $0.60 versus $0.64. Net interest income rose 9% to $218.3 million, while net revenue rose 1% to $295.9 million.
- Management’s non-GAAP core pre-tax earnings were $52.8 million in Q2, up 10% year over year, and $102.3 million for the first half, up 14%. This measure excludes provision for credit losses and specified items; it is not GAAP net income.
- Total assets were $14.6 billion at June 30, up 7% from a year earlier. Total loans were $10.3 billion, including $408.7 million of covered loans; loans excluding covered loans were $9.9 billion, up 6% year over year.
- Deposits were $11.3 billion, up 6% year over year. Non-interest-bearing deposits were $1.40 billion, or 12% of period-end deposits; management highlighted a favorable shift toward these deposits.
- Six-month operating cash flow was $375.6 million, investing cash flow was negative $766.1 million, and financing cash flow was positive $401.9 million. Cash and cash equivalents ended the period at $184.1 million.
- Reported borrowings included $423.5 million of FHLB advances, $432.7 million of other borrowings, $600 million of securitization borrowings, $40 million of subordinated notes and $249.5 million of junior subordinated debentures. Total shareholders’ equity was $1.47 billion.
- Regulatory capital ratios at June 30 were 10.3% leverage, 12.3% Tier 1 risk-based and 13.5% total risk-based. The company reported compliance with its debt covenants and stated its commitment to remain above “Well Capitalized” levels.
Material changes versus prior periods
- Q2 net income declined 10% year over year, although diluted EPS was unchanged. Lower bargain-purchase gains were a key factor: $0.7 million in Q2 2011 versus $26.5 million in Q2 2010. For the first half, such gains were $10.6 million versus $37.4 million.
- Net interest income increased as average loans grew, including covered loans, and deposit funding costs fell. Interest expense on deposits declined to $22.4 million from $31.6 million in Q2 2010. The margin nevertheless narrowed, partly because of lower accretion income on acquired life-insurance premium finance loans as prepayments slowed.
- Q2 provision expense declined year over year, and six-month net charge-offs fell to $51.4 million from $64.7 million. However, non-performing loans excluding covered loans rose to $156.1 million from $135.4 million at June 30, 2010.
- Non-interest expense rose 5% in Q2 and 11% for the first half, reflecting staffing and operating costs associated with acquisitions and growth, higher OREO expenses, and other costs. The efficiency ratio worsened to 67.22% from 59.72% in Q2 2010.
- Mortgage originations and sales fell: Q2 loans originated and sold were $458.5 million versus $732.5 million a year earlier. Mortgage revenue nevertheless increased to $12.8 million, mainly because of lower estimated investor indemnification and repurchase costs and improved pricing and fees.
- The company completed two FDIC-assisted bank acquisitions during Q1 2011, generating $10.6 million in first-half bargain-purchase gains. It also acquired two mortgage-banking businesses.
Outlook, commentary, risks and unusual items
- No specific earnings, revenue or margin guidance is provided. Management described ongoing loan and deposit growth, continued disciplined lending, and selective use of acquisition opportunities; results are not necessarily indicative of full-year performance.
- Credit risk remains significant amid weak real-estate conditions. Commercial real estate represented about one-third of loans excluding covered loans, and 91.5% of that portfolio was in Illinois and Wisconsin. Non-performing commercial real-estate loans were $89.8 million; land and construction exposures and local property values remain important sensitivities.
- At June 30, the allowance for loan losses excluding covered loans was $117.4 million, 1.18% of those loans. The allowance for covered loan losses was $7.4 million; qualifying covered-asset losses are subject to FDIC loss-sharing arrangements, generally reimbursing 80% subject to agreement terms and servicing requirements.
- Other indicators to monitor include $82.8 million of OREO, $159.7 million of loans 30 or more days past due and still accruing, and $103.0 million of restructured loans, of which $85.8 million were accruing. The company recorded an $8.1 million estimated liability for potential mortgage loan repurchases and indemnification.
- Mortgage banking faces industry-wide lower origination volumes and recourse risk from investor claims. Specialty finance is exposed to fraud risk; the company reported a $5.0 million insurance recovery in Q2 related to a $15.7 million 2010 commercial premium-finance fraud loss and described enhanced controls.
- Liquidity commentary cited more than $1.1 billion in overnight liquid funds and interest-bearing bank deposits, plus access to deposits and external funding. Some assets are restricted or pledged, including assets supporting the $600 million securitization; the company reported no early-amortization event at quarter end.
- Interest-rate simulation estimated net interest income would rise 8.1% under a +200-basis-point shock and fall 10.1% under a -200-basis-point shock. These are modeled estimates, not forecasts; actual results may differ.
- Subsequent events: Great Lakes Advisors, with approximately $2.4 billion in assets under management, was acquired July 1; an FDIC-assisted acquisition of First Chicago Bank & Trust was completed July 8; and an agreement to acquire Elgin State Bancorp was announced July 26.
Important facts for investors to verify
- Whether non-performing commercial and real-estate loans, delinquencies, charge-offs and OREO stabilize, and whether allowance levels remain adequate.
- The sustainability of core earnings and net interest income as acquired-loan accretion changes, deposits reprice and funding needs evolve.
- The extent of mortgage repurchase and indemnification claims relative to the $8.1 million recorded liability, and the impact of weaker originations on mortgage revenue.
- Acquisition integration, FDIC loss-share reimbursements and compliance with loss-share servicing requirements, including the effects of the July transactions.
- Liquidity and capital after growth and acquisitions, including restricted or pledged assets, securitization terms, debt maturities and the company’s ability to maintain capital above regulatory thresholds.
- Management’s adjusted core pre-tax measure and its exclusions, alongside GAAP earnings, and the effects of increased share dilution on per-share results.