Wintrust Financial Corporation — Q3 2010 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 national specialty-finance operations and wealth-management services. This unaudited filing covers the quarter and nine months ended September 30, 2010; interim results are not necessarily indicative of full-year performance.
Key financial results
Amounts are in millions of dollars except per-share data and ratios.
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Net interest income | $103.0 | $87.7 | $303.2 | $224.9 |
| Non-interest income | $54.7 | $150.7 | $147.7 | $232.6 |
| Net revenue | $157.6 | $238.3 | $450.9 | $457.5 |
| Provision for credit losses | $25.5 | $91.2 | $95.9 | $129.3 |
| Non-interest expense | $99.7 | $92.6 | $276.3 | $253.8 |
| Net income | $20.1 | $32.0 | $49.1 | $44.9 |
| Diluted EPS | $0.47 | $1.07 | $1.12 | $1.25 |
| Fully taxable-equivalent net interest margin | 3.22% | 3.25% | 3.34% | 2.98% |
Balance sheet, capital and liquidity
- At September 30, 2010, total assets were $14.10 billion, loans were $9.81 billion (including $353.8 million of covered loans), deposits were $10.96 billion and shareholders’ equity was $1.40 billion.
- Cash and cash equivalents were $244.0 million at period-end. Interest-bearing deposits with banks were $1.22 billion, including $47.8 million restricted for securitization investors; the company reported more than $1 billion in overnight liquid funds and interest-bearing bank deposits.
- Borrowings included $600 million owed to securitization investors, $414.8 million of Federal Home Loan Bank advances, $241.5 million of other borrowings, $249.5 million of junior subordinated debentures and $55.0 million of subordinated notes. The company reported compliance with its debt covenants and sufficient liquidity and funding access.
- Estimated holding-company capital ratios were 10.0% leverage, 12.7% Tier 1 risk-based and 14.1% total risk-based, above the stated “well-capitalized” thresholds. Tangible common equity ratio was 5.9%, versus 4.5% a year earlier.
- For the first nine months, operating cash flow was $196.2 million, investing cash flow was negative $607.5 million and financing cash flow was $496.6 million, producing an $85.4 million increase in cash and cash equivalents.
Material changes versus comparable periods
- Q3 net income fell 37% year over year, while nine-month net income rose 9%. Q3 diluted EPS declined 56%; nine-month diluted EPS declined 10%, reflecting in part the larger share count after the March 2010 common-stock offering.
- Q3 net interest income increased 17%, helped by lower deposit costs and the acquired life-insurance premium-finance portfolio. The nine-month FTE margin rose to 3.34% from 2.98%; however, Q3 margin was slightly lower year over year and declined from 3.43% in Q2 2010, partly due to reduced accretion on purchased loans and lower yields on liquidity assets.
- Non-interest income fell sharply because Q3 2009 included a $113.1 million bargain-purchase gain on the life-insurance premium-finance acquisition. Q3 2010 included $6.6 million of bargain-purchase gains from the Ravenswood FDIC-assisted acquisition. Nine-month 2010 bargain-purchase gains totaled $44.0 million.
- Credit-loss provision and net charge-offs decreased substantially year over year. Q3 net charge-offs were $21.4 million versus $79.7 million; nine-month net charge-offs were $86.1 million versus $102.5 million. The allowance for loan losses was $110.4 million, up 12% from December 31, 2009.
- Total assets were up 16% from September 2009, loans up 19%, deposits up 11% and equity up 26%. Growth reflects acquisitions, premium-finance lending and the March common-stock issuance, which raised $210.4 million net from 6.67 million shares.
- Effective January 1, 2010, new accounting guidance required consolidation of the premium-finance securitization entity and accounting for the transaction as a secured borrowing rather than a sale. This added approximately $587.1 million of assets and $588.4 million of liabilities at adoption; current and prior periods are not directly comparable.
Management commentary, outlook and risks
- Management described local economic conditions as challenging, citing high unemployment and depressed real-estate values. It expects continued stress on loan quality and says it will maintain close attention to problem-loan identification, management and resolution. No numerical earnings or growth guidance is provided.
- Commercial real estate represented $3.33 billion, or 34%, of loans; more than 91% was in the company’s primary markets. Non-performing commercial real-estate loans were $83.3 million. The company’s strategy of resolving problem assets contributed to lower non-performing loans excluding covered loans, but other real estate owned was $76.7 million, versus $40.6 million a year earlier.
- Total non-performing loans were $281.3 million, including $147.0 million of covered loans acquired in FDIC-assisted transactions. Excluding covered loans, non-performing loans were $134.3 million, down from $231.7 million a year earlier. The FDIC agreed to reimburse 80% of specified covered-asset losses, subject to servicing requirements.
- Q3 included $1.4 million of mortgage-loan repurchase and indemnification expense; the company reported an $8.7 million estimated liability for expected repurchases. Management cautioned that future claims or losses may exceed reserves.
- A fraud incident affecting the commercial premium-finance industry increased Wintrust’s provision and net charge-offs by $15.7 million in Q2 2010. Management reported enhanced controls and no similar pattern found in its portfolio review.
- Regulatory changes, including the Dodd-Frank Act and proposed Basel III capital and liquidity standards, could increase compliance costs, capital needs and constraints on business activity. The company also cited risks from further economic or property-value deterioration, credit losses, interest-rate changes, funding costs, acquisitions and mortgage repurchase claims.
- The company participated in Treasury’s Capital Purchase Program; Series B preferred-stock terms restrict certain dividends and share repurchases. The common dividend declared was $0.09 per share in each of January and July 2010.
- On October 22, 2010, after quarter-end, a subsidiary acquired a Naperville branch, including approximately $23 million of deposits and $11 million of performing loans.
Important facts for investors to verify
- Whether credit quality continues to improve excluding covered loans, and how covered-loan delinquencies and FDIC reimbursements develop.
- Whether commercial real-estate values, non-performing assets, restructurings and OREO sales support the recorded allowance and valuations.
- Whether mortgage repurchase and indemnification claims remain within the $8.7 million estimated liability.
- How sustainable earnings are without acquisition-related bargain gains, and whether loan growth and purchased-loan accretion support net interest income and margin.
- How the securitization accounting change affects year-over-year comparisons, restricted liquidity and repayment obligations, including the $600 million notes due in 2014.
- The eventual implementation and financial effects of Dodd-Frank and Basel III, and any resulting changes to capital, liquidity, dividend or growth capacity.