Business context and reporting period
Wintrust Financial Corporation filed this Form 10-K for the fiscal year ended December 31, 2010. It is a financial holding company with approximately $14.0 billion in assets, operating community banks primarily in the Chicago area and southeastern Wisconsin, nationwide specialty-finance businesses, and wealth-management operations. The filing also provides unaudited fourth-quarter results.
Financial results and condition
| Metric | 2010 | 2009 |
|---|---|---|
| Total assets at year-end | $14.0 billion | $12.2 billion |
| Loans, excluding covered loans | $9.60 billion | $8.41 billion |
| Deposits | $10.80 billion | $9.92 billion |
| Net interest income | $415.8 million | $311.9 million |
| Net revenue | $608.0 million | $629.5 million |
| Provision for credit losses | $124.7 million | $167.9 million |
| Non-interest expense | $382.5 million | $344.1 million |
| Net income | $63.3 million | $73.1 million |
| Diluted earnings per common share | $1.02 | $2.18 |
Net interest margin was 3.37% on a tax-equivalent basis, up from 3.01%; the efficiency ratio rose to 63.77% from 54.44%. Management’s non-GAAP core pre-tax earnings increased to $196.5 million from $122.8 million; this measure excludes specified credit, OREO, acquisition and securities items.
Operating cash flow was $205.4 million, investing cash flow was negative $582.3 million, and financing cash flow was positive $390.8 million. Cash and cash equivalents ended the year at $172.6 million; interest-bearing deposits with banks were a further $865.6 million, some restricted for securitization investors. Year-end shareholders’ equity was $1.44 billion. Total liabilities were $12.54 billion, including $10.80 billion of deposits, $600 million in securitization borrowings, $423.5 million of Federal Home Loan Bank advances, and $249.5 million of junior subordinated debentures. Regulatory capital ratios were 13.8% total risk-based, 12.5% Tier 1 risk-based and 10.1% leverage; all subsidiary banks were categorized as well-capitalized.
Fourth-quarter 2010 net income was $14.2 million, compared with $28.2 million in fourth-quarter 2009. Fourth-quarter diluted earnings per share were a loss of $0.06, including an $11.4 million non-cash deemed preferred-stock dividend associated with the Series B redemption.
Material changes versus the prior comparable period
- Net interest income grew 33%, supported by loan growth, lower deposit funding costs and increased accretion on acquired life-insurance premium-finance loans. Net interest margin improved 36 basis points.
- Annual net income declined 13% despite lower credit-loss provision: non-interest income fell 40%, mainly because bargain-purchase gains declined to $44.2 million from $156.0 million in 2009. Non-interest expense increased 11%.
- Credit-loss provision decreased by $43.3 million and net charge-offs fell to $109.7 million from $137.4 million. However, non-performing loans increased to $142.1 million from $131.8 million, and delinquencies of 30 days or more and still accruing increased to $146.9 million from $108.6 million.
- Three FDIC-assisted bank acquisitions added locations, assets and deposits. The FDIC agreed to share 80% of losses on specified acquired assets, subject to servicing and reporting requirements. The company reported $44.2 million of 2010 bargain-purchase gains.
- New accounting rules required consolidation of the premium-finance securitization from January 1, 2010, adding approximately $587 million of assets and $588 million of liabilities at adoption. The filing says this makes current-period balances not directly comparable with prior periods.
- Wintrust raised nearly $540 million net through 2010 common-stock and tangible-equity-unit offerings, repurchased the $250 million Series B preferred stock for $251.3 million, and ended the year with substantially higher equity. Share count increased materially.
Outlook, commentary, risks and unusual items
Management described local economic and real-estate conditions as challenging and expected continued stress on credit quality. It emphasized problem-loan monitoring and resolution, while pursuing lending where opportunities met underwriting standards and selectively expanding through acquisitions. The filing provides no specific numerical earnings or revenue guidance.
- Commercial real estate was 34% of the loan portfolio; 91.5% of that portfolio was in Illinois and Wisconsin. Non-performing commercial real-estate loans were $94.0 million, including exposure to stressed land and construction lending.
- Second-quarter industry fraud affecting premium-finance companies increased Wintrust’s net charge-offs and provision by $15.7 million. The company said it strengthened controls and found no similar situation in its portfolio review.
- Mortgage repurchase and indemnification expense was $11.0 million in 2010, versus $0.9 million in 2009; the year-end estimated liability was $8.9 million. Actual claims may differ from estimates.
- Liquidity and funding risks include deposit competition, restricted securitization assets, and a possible rapid-amortization event if securitization covenants are breached. The company reported approximately $1 billion in overnight liquid funds and interest-bearing bank deposits.
- The Dodd-Frank Act and Basel III proposals could increase compliance costs or capital and liquidity requirements; their ultimate effects were uncertain. One bank’s “needs improvement” CRA rating restricts certain expansion activities.
- Interest-rate exposure remains material. Management’s model estimated that a gradual 200-basis-point rate increase would raise one-year net interest income 5.3%, while a 200-basis-point decrease would reduce it 7.0%; actual results may differ.
- Ernst & Young issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Management reported effective disclosure controls and internal controls.
Important facts for investors to verify
- Whether credit quality improves: track non-performing and past-due loans, commercial real-estate exposure, charge-offs, OREO and the adequacy of the $113.9 million loan-loss allowance.
- How much recurring earnings depend on acquired-loan accretion, bargain-purchase gains, securities gains and other nonrecurring items; review the non-GAAP core pre-tax reconciliation.
- Whether mortgage repurchase claims exceed the $8.9 million reserve, and whether premium-finance fraud controls prevent repeat losses.
- The performance and covenant headroom of the $600 million securitization, including FDIC loss-share recoveries and servicing compliance for acquired assets.
- The effect of increased share count and tangible equity units on diluted earnings per share, future capital needs and dividend capacity.
- How new regulation affects capital, funding costs, consumer and mortgage operations, and the bank’s CRA-related limits on expansion.