Wintrust Financial Corporation — Q1 2012 Form 10-Q
Business context and reporting period
Wintrust is a financial holding company focused on community banking in the Chicago metropolitan area and southeastern Wisconsin, with nationwide specialty finance and regional wealth management operations. This unaudited filing covers the three months ended March 31, 2012; comparisons below are primarily with Q1 2011. Amounts are in U.S. dollars.
Financial performance and position
| Metric | Q1 2012 / March 31, 2012 | Comparable period |
|---|---|---|
| Net income | $23.2 million; diluted EPS $0.50 | $16.4 million; diluted EPS $0.36 in Q1 2011 |
| Net interest income | $125.9 million; fully taxable-equivalent net interest margin 3.55% | $109.6 million; margin 3.48% in Q1 2011 |
| Non-interest income / expense | $47.0 million / $117.8 million | $40.9 million / $98.1 million in Q1 2011 |
| Credit provision | $17.4 million | $25.3 million in Q1 2011 |
| Assets / loans / deposits | $16.17 billion / $11.41 billion total loans / $12.67 billion deposits | Assets $14.09 billion, loans $9.99 billion and deposits $10.92 billion at March 31, 2011 |
| Shareholders’ equity | $1.69 billion | $1.45 billion at March 31, 2011 |
| Cash flow | Operating cash flow $108.2 million; investing cash outflow $293.0 million; financing cash inflow $175.7 million. Cash and cash equivalents ended at $160.6 million. | Operating cash flow $351.1 million; investing cash outflow $234.3 million; financing cash outflow $114.9 million in Q1 2011 |
Net income applicable to common shares was $22.0 million. The filing reports basic EPS of $0.61 and diluted EPS of $0.50; the distinction and diluted-share effects merit review. Return on average assets was 0.59%, and return on average common equity was 5.90%.
At March 31, total borrowings listed as notes payable, FHLB advances, other borrowings, securitization borrowings and subordinated notes were $1.39 billion; junior subordinated debentures were a further $249.5 million. Deposits remained the primary funding source. Regulatory capital ratios were 10.5% leverage, 12.7% Tier 1 risk-based and 13.9% total risk-based, each above the filing’s stated “well-capitalized” thresholds. Management reported compliance with debt covenants.
Material changes versus prior comparable period
- Net income rose 42%; net interest income and net revenue increased 15%. Loan growth and lower deposit funding costs supported results.
- Average earning assets increased $1.5 billion year over year. Period-end loans excluding covered loans rose 12%, while deposits increased 16%.
- Net charge-offs declined to $14.4 million from $25.3 million; non-performing loans excluding covered loans fell to $113.6 million from $155.4 million. The non-performing-loan ratio declined to 1.06% from 1.63%.
- Non-interest expense increased 20%, led by salaries and benefits, which rose 23% to $69.0 million. GAAP efficiency ratio worsened to 68.24% from 65.05%; the company’s adjusted measure improved to 62.31% from 63.56%.
- Mortgage banking revenue increased 59% to $18.5 million, reflecting higher originations and gains on loan sales. Wealth management revenue rose 21%, partly due to the Great Lakes Advisors acquisition. Bargain-purchase gains fell to $0.8 million from $9.8 million.
Outlook, management commentary, risks and unusual items
- Management cited improving credit quality, loan growth and a favorable deposit mix, while noting continued economic and real-estate-market stress. The filing gives no quantified earnings or margin guidance.
- Commercial real estate was 33% of loans excluding covered loans; more than 92% of that portfolio was in the company’s primary markets. Management highlighted continued stress in real estate valuations, particularly land and construction lending.
- Although non-performing loans improved, loans excluding covered loans that were 30–89 days past due rose to $197.4 million at quarter-end from $139.5 million at December 31, 2011. Management attributed the increase partly to timing of payments and said affected commercial and CRE credits are monitored.
- Restructured loans reached $165.0 million, including $151.0 million accruing. Q1 additions were $39.7 million across 31 loans, versus $9.4 million across 15 loans in Q1 2011. The filing states $2.7 million of impairment was reserved.
- The company issued $126.5 million of Series C convertible preferred stock in March, with a 5% non-cumulative dividend rate if declared. It also purchased $172.0 million of securitization notes, reducing consolidated outstanding secured borrowings to $428.0 million; debt defeasance costs were $0.8 million. It paid $22.4 million in prepayment fees to restructure $292.5 million of FHLB advances.
- The February Charter National FDIC-assisted acquisition generated a $0.8 million bargain-purchase gain and added covered loans subject to an 80% FDIC loss-share arrangement. Loss-share reimbursement depends on compliance with servicing requirements; the FDIC indemnification asset was $263.2 million at quarter-end.
- Liquidity: management reported more than $1.0 billion in overnight liquid funds and interest-bearing bank deposits, but $529.4 million of those deposits were restricted for securitization investors. Investors should distinguish available liquidity from restricted balances.
- Other stated risks include further deterioration in the economy or property values, credit losses and allowance estimates, interest-rate and funding pressures, acquisition integration and FDIC loss-share exposure, mortgage repurchase or indemnification claims, and regulatory or capital changes. Management reported effective disclosure controls and no material change in internal control over financial reporting.
- Subsequent events included an April 2012 branch acquisition adding approximately $52 million of deposits, and a proposed Canadian premium-finance acquisition expected to close in Q2 subject to approvals and other conditions.
Important facts for investors to verify
- Whether rising 30–89-day delinquencies and the increase in restructured loans lead to renewed non-performing loans, charge-offs or higher provisions.
- The condition and geographic concentration of CRE exposures, particularly land and construction loans, and the sensitivity of collateral values to further market weakness.
- The quality and recoverability of the $263.2 million FDIC indemnification asset and compliance with loss-share servicing requirements.
- How much reported liquidity is unrestricted and immediately available, including the effect of securitization restrictions and funding maturities.
- The sustainability of mortgage banking revenue, acquisition-related contributions, and expense growth; also reconcile reported EPS and the company’s non-GAAP adjusted measures.
- Capital and dilution effects of Series C preferred stock and convertible securities, and the terms and completion risks of the announced Canadian acquisition.