Wintrust Financial (WTFC) Tops Q3 EPS by 3c, Revenues Beat

Wintrust Financial (NASDAQ: WTFC) reported Q3 EPS of $1.57, $0.03 better than the analyst estimate of $1.54. Revenue for the quarter came in at $347.49 million versus the consensus estimate of $341.57 million.

Edward J. Wehmer, President and Chief Executive Officer, commented, "Wintrust reported net income of $91.9 million for the third quarter of 2018, the eleventh consecutive quarter of record net income, and net income of $263.5 million for the first nine months of 2018. These results reflected the steady strength of our internal growth engine at Wintrust as we grew assets by $678 million compared to the prior quarter. The third quarter of 2018 was also characterized by strong deposit growth, increased deposit costs, higher levels of liquidity and the acquisition of Delaware Place Bank."Mr. Wehmer continued, "We grew our loan portfolio by $513 million during the third quarter, which included $151 million of loans acquired in relation to the acquisition of Delaware Place Bank. We experienced strong loan growth among our various loan categories during the period, including our commercial, commercial real estate and premium financing portfolios. We continue to take a measured approach in evaluating new loan opportunities. Our strategy to reduce our average loan to average deposit ratio below 90% continued in the third quarter. As part of this strategy, liquidity was accumulated and held to be invested at times that would yield appropriate spreads. During most of the third quarter, yields were not in an acceptable range to allow immediate significant deployment of short-term liquidity into longer-term, higher yielding securities. Thus, levels of liquidity were higher in the third quarter compared to the prior quarter. Had the excess interest-bearing cash accumulated during the quarter been invested in the longer-term, higher yielding securities, the net interest margin would have been positively impacted by approximately 2 basis points, negating the reported net interest margin decline during the current quarter. Despite the reduction in net interest margin, net interest income increased by $9.4 million in the third quarter of 2018 primarily as a result of growth in outstanding loans and one additional day in the third quarter compared to the second quarter. Our loan pipelines remain consistently strong. Total deposits increased $551 million over the second quarter of 2018 to $24.9 billion as strong deposit growth continued in the third quarter of 2018. This increase in deposits included $213 million from the acquisition of Delaware Place Bank. Organic deposit growth was primarily related to money market accounts and certificate of deposit accounts as active marketing campaigns continued into the third quarter."

Commenting on credit quality, Mr. Wehmer noted, "The Company continued its practice of addressing and resolving non-performing credits in a timely fashion in the third quarter of 2018. Non-performing loans totaled $127.2 million, or 0.55% of total loans, an increase of $43.9 million compared to the most recent quarter. This increase during the third quarter of 2018 was primarily the result of four relationships totaling $46.6 million within the commercial loan portfolio becoming non-performing during the period. These four credit relationships are well reserved at the end of the quarter and are expected to be substantially resolved by the end of the first quarter of 2019. We believe these specific relationships are not characteristic of the entire portfolio and do not represent a trend within our overall loan portfolio. As a result of the increase in non-performing loans, the allowance for loan losses as a percentage of non-performing loans decreased to 118% at the end of the third quarter from 172% at the end of the second quarter. Net charge-offs totaled $4.7 million in the current quarter, increasing $3.6 million from the second quarter of 2018. Additionally, net charge-offs as a percentage of average total loans increased to eight basis points from two basis points in the second quarter. The increase in net charge-offs during the third quarter was primarily the result of higher recoveries within the commercial real estate and residential real estate portfolios during the second quarter. The specific reserves recognized on the four noted non-performing credit relationships, net charge-offs during the period and additional reserves established for loan growth during the period primarily drove the $11.0 million of provision for credit losses recognized in the third quarter of 2018. We believe that the Company's reserves remain appropriate."

Mr. Wehmer further commented, "Mortgage banking revenue in the third quarter of 2018 totaled $42.0 million, an increase of $2.2 million compared to the second quarter of 2018. Mortgage loan origination volumes in the third quarter of 2018 increased slightly to $1.2 billion from $1.1 billion in the second quarter of 2018. The increase in mortgage banking revenue was primarily due to increased revenue from loans originated and sold during the third quarter, tempered by smaller positive fair market value adjustment to mortgage servicing rights and reduction of production margin. We continue to focus on efficiencies in our delivery channels and operating costs in our mortgage banking area. Home purchase activity represented 76% of the volume for the third quarter of 2018 compared to 80% in the second quarter of 2018. We expect lower origination volumes in the fourth quarter due to normal seasonality and higher mortgage rates."

Turning to the future, Mr. Wehmer stated, "As our growth engine continues its momentum towards the end of 2018, we expect continued organic growth in all areas of our business. Loan growth at the end of the third quarter should add to momentum into the fourth quarter as period-end loan balances exceeded the third quarter average balances by approximately $301 million. Wintrust continues to take a steady and measured approach to achieving our main objectives of growing franchise value, increasing profitability, leveraging our expense infrastructure and continuing to increase shareholder value. We remain well-positioned for a rising interest rate environment in the future, which, coupled with this loan growth and investing our liquidity, should continue to grow net interest income. Evaluating strategic acquisitions and organic branch growth will also be a part of our overall growth strategy with the goal of becoming Chicago’s bank and Wisconsin’s bank. To that end, in addition to the location acquired through the Delaware Place Bank, the Company opened three new branches in the third quarter of 2018 and will continue to evaluate future locations in our market area. Our opportunities for both internal growth and external growth remain consistently strong."

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