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CST: 21/08/2019 23:26:41   

Wintrust Financial Corporation Reports Record Full-Year 2018 Net Income of $343.2 million, an Increase of 33% Over Prior Year and Fourth Quarter 2018 Net Income of $79.7 million, an Increase of 16% Over Prior Year

211 Days ago

ROSEMONT, Ill., Jan. 22, 2019 (GLOBE NEWSWIRE) -- Wintrust Financial Corporation (“Wintrust” or “the Company”) (Nasdaq: WTFC) announced record net income of $343.2 million or $5.86 per diluted common share for the year ended December 31, 2018 compared to net income of $257.7 million or $4.40 per diluted common share for the same period of 2017. The Company recorded net income of $79.7 million or $1.35 per diluted common share for the fourth quarter of 2018 compared to net income of $91.9 million or $1.57 per diluted common share for the third quarter of 2018 and $68.8 million or $1.17 per diluted common share for the fourth quarter of 2017.

Highlights of the Fourth Quarter of 2018 *:                

  • Total period-end loans increased by $697 million from the prior quarter. The increase included $119 million of loans acquired in relation to the previously-announced acquisition of certain assets and assumption of certain liabilities of American Enterprise Bank ("AEB") completed in early December.
  • Total deposits increased by $1.2 billion from the prior quarter. This increase included $151 million of deposits assumed in relation to AEB as well as additional incremental deposits generated subsequent to the previously-announced acquisition of Elektra Holding Company, LLC ("Elektra"), the parent company of Chicago Deferred Exchange Company, LLC ("CDEC"), offset by a reduction in brokered funds.
  • Period-end total loans outstanding ended the year $657 million higher than total average loans outstanding during the fourth quarter of 2018, providing positive momentum for net interest income in the first quarter of 2019.
  • Net interest margin increased by two basis points from the prior quarter which combined with $580 million of average earning asset growth created an increase in net interest income of $6.5 million from the prior quarter.
  • Market volatility and recent acquisitions resulted in the following items negatively impacting fourth quarter 2018 pre-tax earnings:
    • An $8.5 million negative fair value adjustment recognized on mortgage servicing rights related to changes in valuation assumptions and pay-offs contributed to mortgage banking revenue decreasing by $17.8 million compared to the third quarter of 2018.  Production revenue decreased due to lower origination volumes and lower revenue margins.
    • Recognized unrealized losses on equity securities of $2.6 million.
    • Recognized a $1.1 million foreign currency remeasurement loss, primarily related to weakness in Canadian currency.
    • Incurred $1.6 million of acquisition-related expenses.
  • Non-performing assets decreased by $17.5 million, now representing 0.44% of total assets. Non-performing loans decreased by $14.0 million while other real-estate owned decreased $3.5 million compared to the end of the third quarter of 2018.
  • Opened one new branch in the Brighton Park neighborhood of Chicago, Illinois, increasing our total branches to 167 locations.

* See "Supplemental Financial Measures/Ratios" on pages 10-11 for more information on non-GAAP measures.

Edward J. Wehmer, President and Chief Executive Officer, commented, "Wintrust reported record net income of $343.2 million for the year ended December 31, 2018, the eighth consecutive year of record net income.  Net income was $79.7 million for the fourth quarter of 2018, down from the third quarter of 2018 primarily due to market related adjustments resulting from quickly declining interest rates and lower equity markets late in the year.   These market related adjustments and acquisition-related expenses incurred in the fourth quarter negatively impacted our net overhead ratio by 18 basis points.   During the fourth quarter, total assets and deposits grew by over $1 billion while we leveraged acquisitions to enhance our deposit mix.  A substantial amount of the balance sheet growth occurred near the end of the quarter, which positions us well for the first quarter of 2019.  Additionally, we improved our net interest margin by two basis points and have seen deposit costs stabilizing.  The improvement in our funding mix should allow for further net interest margin expansion in the first quarter of 2019."

Mr. Wehmer continued, "We experienced strong loan growth in our commercial, commercial real-estate and premium finance receivables portfolios during the fourth quarter, increasing our total loans outstanding by $697 million.  Our loan pipelines remain consistently strong, and reflect opportunities to continue to grow loan balances during 2019.  Deposit growth outpaced loan growth during the fourth quarter, lowering our loan to deposit ratio to 91.3% at year-end.  Organic deposit growth in the fourth quarter occurred across all deposit categories, except time certificates of deposit.  The previously mentioned CDEC acquisition allowed the Company to bring $1.1 billion of low cost funding into our banks.  The new deposit source was utilized to optimize the balance sheet by reducing outstanding wholesale funding positions, including $696 million of wholesale wealth management deposits, $75 million of maturing brokered CDs and $200 million of short-term Federal Home Loan Bank advances.  We believe that we can continue to grow the CDEC deposit base which will further drive down the Company’s loan to deposit ratio to our desired operating range and enable us to expand our investment portfolio if opportunities and market conditions that meet our standards arise."

Commenting on credit quality, Mr. Wehmer noted, "During the fourth quarter of 2018, the Company continued its practice of addressing and resolving non-performing credits in a timely fashion.  Total non-performing assets declined $17.5 million during the fourth quarter, dropping to 0.44% of total assets.  Both non-performing loans and other real-estate owned declined during the quarter.  Additionally, near-term 60 to 89 day delinquent loans declined to $34.2 million or only 0.1% of total loans in the fourth quarter of 2018.  The allowance for loan losses as a percentage of non-performing loans ended the year at 135%.  Net charge-offs for the fourth quarter were 12 basis points of total average loan balances with full year net charge-offs at a historically low level of nine basis points of total average loan balances.  We believe that the Company’s reserves remain appropriate.  The Company begins 2019 with credit quality in a very strong position but will continue to be diligent in its review of credit."

Mr. Wehmer further commented, “Our mortgage banking and wealth management businesses were both impacted by volatile markets in the fourth quarter.  Mortgage banking revenue decreased $17.8 million.  The mortgage origination environment in the fourth quarter was challenging as normal seasonality was further pressured by declining demand leading to lower origination volumes and production margins.  Origination volumes decreased to $927.8 million, down from $1.2 billion in the third quarter.  Home purchase activity continues to make up the bulk of our originations accounting for 71% of origination volumes in the fourth quarter. For much of the fourth quarter, mortgage rates increased, however, during the closing weeks of 2018, a sudden shift downward in rates contributed to the negative fair value adjustment on our mortgage servicing rights portfolio of $8.5 million related to changes in valuation assumptions and pay-offs.  We continue to focus on efficiencies in our delivery channels and our operating costs in our mortgage banking area.  Our wealth management businesses experienced headwinds in the fourth quarter due to declining equity prices.  Despite these headwinds, wealth management revenue was essentially flat to the third quarter of 2018."

Turning to the future, Mr. Wehmer stated, “As 2019 begins, we expect our growth engines to continue their momentum.  We expect continued organic growth in all areas of our businesses.  Total period-end loans outstanding exceeded fourth quarter total average loans by $657 million, providing momentum for net interest income into the first quarter of 2019.  Net interest margin is expected to improve in first quarter of 2019 fueled by the CDEC acquisition and stabilizing retail deposit costs.  We will continue 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.  Evaluating strategic acquisitions and organic branch growth will also be a part of our overall growth strategy with the continued goal of becoming Chicago’s bank and Wisconsin’s bank.  We believe our opportunities for both internal growth and external growth remain consistently strong."

The graphs below illustrate certain highlights of the fourth quarter of 2018 and the year ended December 31, 2018.

http://resource.globenewswire.com/Resource/Download/34219f8f-0c04-4502-9e45-6f5f0582ff85

Wintrust’s key operating measures and growth rates for the fourth quarter of 2018, as compared to the sequential and linked quarters, are shown in the table below:

                % or(4)
basis point  (bp)
change from

3rd Quarter
2018
  % or
basis point  (bp)
change from
4th Quarter
2017
    Three Months Ended    
(Dollars in thousands)   December 31,
 2018
  September 30,
 2018
  December 31,
 2017
   
Net income   $ 79,657     $ 91,948     $ 68,781     (13 ) %   16   %
Net income per common share – diluted   $ 1.35     $ 1.57     $ 1.17     (14 ) %   15   %
Net revenue (1)   $ 329,396     $ 347,493     $ 300,137     (5 ) %   10   %
Net interest income   254,088     247,563     219,099     3   %   16   %
Net interest margin   3.61 %   3.59 %   3.45 %   2   bp   16   bp
Net interest margin - fully taxable equivalent (non-GAAP) (2)   3.63 %   3.61 %   3.49 %   2   bp   14   bp
Net overhead ratio (3)   1.79 %   1.53 %   1.69 %   26   bp   10   bp
Return on average assets   1.05 %   1.24 %   1.00 %   (19 ) bp   5   bp
Return on average common equity   10.01 %   11.86 %   9.39 %   (185 ) bp   62   bp
Return on average tangible common equity (non-GAAP) (2)   12.48 %   14.64 %   11.65 %   (216 ) bp   83   bp
At end of period                        
Total assets   $ 31,241,521     $ 30,142,731     $ 27,915,970     14   %   12   %
Total loans (5)   23,820,691     23,123,951     21,640,797     12   %   10   %
Total deposits   26,094,678     24,916,715     23,183,347     19   %   13   %
Total shareholders’ equity   3,267,570     3,179,822     2,976,939     11   %   10   %

(1) Net revenue is net interest income plus non-interest income. 
(2) See "Supplemental Financial Measures/Ratios" for additional information on this performance measure/ratio. 
(3) The net overhead ratio is calculated by netting total non-interest expense and total non-interest income, annualizing this amount, and dividing by that period's average total assets. A lower ratio indicates a higher degree of efficiency. 
(4) Period-end balance sheet percentage changes are annualized. 
(5) Excludes mortgage loans held-for-sale.

Certain returns, yields, performance ratios, or quarterly growth rates are “annualized” in this presentation to represent an annual time period. This is done for analytical purposes to better discern for decision-making purposes underlying performance trends when compared to full-year or year-over-year amounts. For example, a 5% growth rate for a quarter would represent an annualized 20% growth rate. Additional supplemental financial information showing quarterly trends can be found on the Company’s website at www.wintrust.com by choosing “Financial Reports” under the “Investor Relations” heading, and then choosing “Financial Highlights.”

 

WINTRUST FINANCIAL CORPORATION
Selected Financial Highlights

    Three Months Ended   Years Ended
(Dollars in thousands, except per share data)   December 31,
 2018
  September 30,
 2018
  December 31,
 2017
  December 31,
 2018
  December 31,
 2017
Selected Financial Condition Data (at end of period):                    
Total assets   $ 31,241,521     $ 30,142,731     $ 27,915,970          
Total loans (7)   23,820,691     23,123,951     21,640,797          
Total deposits   26,094,678     24,916,715     23,183,347          
Junior subordinated debentures   253,566     253,566     253,566          
Total shareholders’ equity   3,267,570     3,179,822     2,976,939          
Selected Statements of Income Data:                    
Net interest income   $ 254,088     $ 247,563     $ 219,099     $ 964,903     $ 832,076  
Net revenue (1)   329,396     347,493     300,137     1,321,053     1,151,582  
Net income   79,657     91,948     68,781     343,166     257,682  
Net income per common share – Basic   $ 1.38     $ 1.59     $ 1.19     $ 5.95     $ 4.53  
Net income per common share – Diluted   $ 1.35     $ 1.57     $ 1.17     $ 5.86     $ 4.40  
Selected Financial Ratios and Other Data:                    
Performance Ratios:                    
Net interest margin   3.61 %   3.59 %   3.45 %   3.59 %   3.41 %
Net interest margin - fully taxable equivalent (non-GAAP) (2)   3.63 %   3.61 %   3.49 %   3.61 %   3.44 %
Non-interest income to average assets   0.99 %   1.34 %   1.18 %   1.23 %   1.21 %
Non-interest expense to average assets   2.78 %   2.87 %   2.87 %   2.85 %   2.78 %
Net overhead ratio (3)   1.79 %   1.53 %   1.69 %   1.62 %   1.56 %
Return on average assets   1.05 %   1.24 %   1.00 %   1.18 %   0.98 %
Return on average common equity   10.01 %   11.86 %   9.39 %   11.26 %   9.26 %
Return on average tangible common equity (non-GAAP) (2)   12.48 %   14.64 %   11.65 %   13.95 %   11.63 %
Average total assets   $ 30,179,887     $ 29,525,109     $ 27,179,484     $ 29,028,420     $ 26,369,702  
Average total shareholders’ equity   3,200,654     3,131,943     2,942,999     3,098,740     2,842,081  
Average loans to average deposits ratio (excluding covered loans)   92.4 %   92.2 %   92.3 %   93.7 %   92.7 %
Period-end loans to deposits ratio (excluding covered loans)   91.3 %   92.8 %   93.3 %        
Common Share Data at end of period:                    
Market price per common share   $ 66.49     $ 84.94     $ 82.37          
Book value per common share (2)   $ 55.71     $ 54.19     $ 50.96          
Tangible common book value per share (2)   $ 44.73     $ 44.16     $ 41.68          
Common shares outstanding   56,407,558     56,377,169     55,965,207          
Other Data at end of period:(6)                    
Leverage Ratio (4)   9.1 %   9.3 %   9.3 %        
Tier 1 capital to risk-weighted assets (4)   9.6 %   10.0 %   9.9 %        
Common equity Tier 1 capital to risk-weighted assets (4)   9.2 %   9.5 %   9.4 %        
Total capital to risk-weighted assets (4)   11.6 %   12.0 %   12.0 %        
Allowance for credit losses (5)   $ 154,164     $ 151,001     $ 139,174          
Non-performing loans   113,234     127,227     90,162          
Allowance for credit losses to total loans (5)   0.65 %   0.65 %   0.64 %        
Non-performing loans to total loans   0.48 %   0.55 %   0.42 %        
Number of:                    
Bank subsidiaries   15     15     15          
Banking offices   167     166     157          

(1) Net revenue includes net interest income and non-interest income. 
(2) See “Supplemental Financial Measures/Ratios” for additional information on this performance measure/ratio. 
(3) The net overhead ratio is calculated by netting total non-interest expense and total non-interest income, annualizing this amount, and dividing by that period’s total average assets. A lower ratio indicates a higher degree of efficiency. 
(4) Capital ratios for current quarter-end are estimated. 
(5) The allowance for credit losses includes both the allowance for loan losses and the allowance for unfunded lending-related commitments, but excludes the allowance for covered loan losses. 
(6) Asset quality ratios exclude covered loans. 
(7) Excludes mortgage loans held-for-sale.

 

WINTRUST FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION

    (Unaudited)   (Unaudited)    
(In thousands)   December 31,
 2018
  September 30,
 2018
  December 31,
 2017
Assets            
Cash and due from banks   $ 392,142     $ 279,936     $ 277,534  
Federal funds sold and securities purchased under resale agreements   58     57     57  
Interest bearing deposits with banks   1,099,594     1,137,044     1,063,242  
Available-for-sale securities, at fair value   2,126,081     2,164,985     1,803,666  
Held-to-maturity securities, at amortized cost   1,067,439     966,438     826,449  
Trading account securities   1,692     688     995  
Equity securities with readily determinable fair value   34,717     36,414      
Federal Home Loan Bank and Federal Reserve Bank stock   91,354     99,998     89,989  
Brokerage customer receivables   12,609     15,649     26,431  
Mortgage loans held-for-sale   264,070     338,111     313,592  
Loans, net of unearned income   23,820,691     23,123,951     21,640,797  
Allowance for loan losses   (152,770 )   (149,756 )   (137,905 )
Net loans   23,667,921     22,974,195     21,502,892  
Premises and equipment, net   671,169     664,469     621,895  
Lease investments, net   233,208     199,241     212,335  
Accrued interest receivable and other assets   696,707     700,568     567,374  
Trade date securities receivable   263,523         90,014  
Goodwill and other intangible assets   619,237     564,938     519,505  
Total assets   $ 31,241,521     $ 30,142,731     $ 27,915,970  
Liabilities and Shareholders’ Equity            
Deposits:            
Non-interest bearing   $ 6,569,880     $ 6,399,213     $ 6,792,497  
Interest bearing   19,524,798     18,517,502     16,390,850  
 Total deposits   26,094,678     24,916,715     23,183,347  
Federal Home Loan Bank advances   426,326     615,000     559,663  
Other borrowings   393,855     373,571     266,123  
Subordinated notes   139,210     139,172     139,088  
Junior subordinated debentures   253,566     253,566     253,566  
Accrued interest payable and other liabilities   666,316     664,885     537,244  
Total liabilities   27,973,951     26,962,909     24,939,031  
Shareholders’ Equity:            
Preferred stock   125,000     125,000     125,000  
Common stock   56,518     56,486     56,068  
Surplus   1,557,984     1,553,353     1,529,035  
Treasury stock   (5,634 )   (5,547 )   (4,986 )
Retained earnings   1,610,574     1,543,680     1,313,657  
Accumulated other comprehensive loss   (76,872 )   (93,150 )   (41,835 )
Total shareholders’ equity   3,267,570     3,179,822     2,976,939  
Total liabilities and shareholders’ equity   $ 31,241,521     $ 30,142,731     $ 27,915,970  

 

WINTRUST FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

 
  Three Months Ended   Years Ended
(In thousands, except per share data) December 31,
 2018
  September 30,
 2018
  December 31,
 2017
  December 31,
 2018
  December 31,
 2017
Interest income                  
Interest and fees on loans $ 283,311     $ 271,134     $ 226,447     $ 1,044,502     $ 856,549  
Mortgage loans held-for-sale 3,409     5,285     3,291     15,738     12,332  
Interest bearing deposits with banks 5,628     5,423     2,723     17,090     9,252  
Federal funds sold and securities purchased under resale agreements             1     2  
Investment securities 26,656     21,710     18,160     87,382     63,315  
Trading account securities 14     11     2     43     25  
Federal Home Loan Bank and Federal Reserve Bank stock 1,343     1,235     1,067     5,331     4,370  
Brokerage customer receivables 235     164     150     723     623  
Total interest income 320,596     304,962     251,840     1,170,810     946,468  
Interest expense                  
Interest on deposits 55,975     48,736     24,930     166,553     83,326  
Interest on Federal Home Loan Bank advances 2,563     1,947     2,124     12,412     8,798  
Interest on other borrowings 3,199     2,003     1,600     8,599     5,370  
Interest on subordinated notes 1,788     1,773     1,786     7,121     7,116  
Interest on junior subordinated debentures 2,983     2,940     2,301     11,222     9,782  
Total interest expense 66,508     57,399     32,741     205,907     114,392  
Net interest income 254,088     247,563     219,099     964,903     832,076  
Provision for credit losses 10,401     11,042     7,772     34,832     29,768  
Net interest income after provision for credit losses 243,687     236,521     211,327     930,071     802,308  
Non-interest income                  
Wealth management 22,726     22,634     21,910     90,963     81,766  
Mortgage banking 24,182     42,014     27,411     136,990     113,472  
Service charges on deposit accounts 9,065     9,331     8,907     36,404     34,513  
(Losses) gains on investment securities, net (2,649 )   90     14     (2,898 )   45  
Fees from covered call options 626     627     1,610     3,519     4,402  
Trading (losses) gains, net (155 )   (61 )   24     11     (845 )
Operating lease income, net 10,882     9,132     8,598     38,451     29,646  
Other 10,631     16,163     12,564     52,710     56,507  
Total non-interest income 75,308     99,930     81,038     356,150     319,506  
Non-interest expense                  
Salaries and employee benefits 122,111     123,855     118,009     480,077     430,078  
Equipment 11,523     10,827     9,500     42,949     38,358  
Operating lease equipment depreciation 8,462     7,370     7,015     29,305     24,107  
Occupancy, net 15,980     14,404     14,154     57,814     52,920  
Data processing 8,447     9,335     7,915     35,027     31,495  
Advertising and marketing 9,414     11,120     7,382     41,140     30,830  
Professional fees 9,259     9,914     8,879     32,306     27,835  
Amortization of other intangible assets 1,407     1,163     1,028     4,571     4,401  
FDIC insurance 4,044     4,205     4,324     17,209     16,231  
OREO expense, net 1,618     596     599     6,120     3,593  
Other 19,068     20,848     17,775     79,570     71,969  
Total non-interest expense 211,333     213,637     196,580     826,088     731,817  
Income before taxes 107,662     122,814     95,785     460,133     389,997  
Income tax expense 28,005     30,866     27,004     116,967     132,315  
Net income $ 79,657     $ 91,948     $ 68,781     $ 343,166     $ 257,682  
Preferred stock dividends 2,050     2,050     2,050     8,200     9,778  
Net income applicable to common shares $ 77,607     $ 89,898     $ 66,731     $ 334,966     $ 247,904  
Net income per common share - Basic $ 1.38     $ 1.59     $ 1.19     $ 5.95     $ 4.53  
Net income per common share - Diluted $ 1.35     $ 1.57     $ 1.17     $ 5.86     $ 4.40  
Cash dividends declared per common share $ 0.19     $ 0.19     $ 0.14     $ 0.76     $ 0.56  
Weighted average common shares outstanding 56,395     56,366     55,924     56,300     54,703  
Dilutive potential common shares 892     918     1,010     908     1,983  
Average common shares and dilutive common shares 57,287     57,284     56,934     57,208     56,686  

 

EARNINGS PER SHARE

The following table shows the computation of basic and diluted earnings per share for the periods indicated:

      Three Months Ended   Years Ended
(In thousands, except per share data)     December 31,
 2018
  September 30,
 2018
  December 31,
 2017
  December 31,
 2018
  December 31,
 2017
Net income     $ 79,657     $ 91,948     $ 68,781     $ 343,166     $ 257,682  
Less: Preferred stock dividends     2,050     2,050     2,050     8,200     9,778  
Net income applicable to common shares—Basic (A)   77,607     89,898     66,731     334,966     247,904  
Add: Dividends on convertible preferred stock, if dilutive                     1,578  
Net income applicable to common shares—Diluted (B)   77,607     89,898     66,731     334,966     249,482  
Weighted average common shares outstanding (C)   56,395     56,366     55,924     56,300     54,703  
Effect of dilutive potential common shares:                      
Common stock equivalents     892     918     1,010     908     998  
Convertible preferred stock, if dilutive                     985  
Weighted average common shares and effect of dilutive potential common shares (D)   57,287     57,284     56,934     57,208     56,686  
Net income per common share:                      
Basic (A/C)   $ 1.38     $ 1.59     $ 1.19     $ 5.95     $ 4.53  
Diluted (B/D)   $ 1.35     $ 1.57     $ 1.17     $ 5.86     $ 4.40  

Potentially dilutive common shares can result from stock options, restricted stock unit awards, stock warrants, the Company’s convertible preferred stock and shares to be issued under the Employee Stock Purchase Plan and the Directors Deferred Fee and Stock Plan, being treated as if they had been either exercised or issued, computed by application of the treasury stock method. While potentially dilutive common shares are typically included in the computation of diluted earnings per share, potentially dilutive common shares are excluded from this computation in periods in which the effect would reduce the loss per share or increase the income per share. For diluted earnings per share, net income applicable to common shares can be affected by the conversion of the Company’s convertible preferred stock. Where the effect of this conversion would reduce the loss per share or increase the income per share for a period, net income applicable to common shares is not adjusted by the associated preferred dividends. On April 25, 2017, 2,073 shares of the Series C Preferred Stock were converted at the option of the respective holder into 51,244 shares of the Company's common stock, pursuant to the terms of the Series C Preferred Stock. On April 27, 2017, the Company caused a mandatory conversion of its outstanding 124,184 shares of Series C Preferred Stock into 3,069,828 shares of the Company's common stock at a conversion rate of 24.72 shares of common stock per share of Series C Preferred Stock. Cash was paid in lieu of fractional shares for an amount considered insignificant.

SUPPLEMENTAL FINANCIAL MEASURES/RATIOS

The accounting and reporting policies of Wintrust conform to generally accepted accounting principles (“GAAP”) in the United States and prevailing practices in the banking industry. However, certain non-GAAP performance measures and ratios are used by management to evaluate and measure the Company’s performance. These include taxable-equivalent net interest income (including its individual components), taxable-equivalent net interest margin (including its individual components), the taxable-equivalent efficiency ratio, tangible common equity ratio, tangible common book value per share and return on average tangible common equity. Management believes that these measures and ratios provide users of the Company’s financial information a more meaningful view of the performance of the Company's interest-earning assets and interest-bearing liabilities and of the Company’s operating efficiency. Other financial holding companies may define or calculate these measures and ratios differently.

Management reviews yields on certain asset categories and the net interest margin of the Company and its banking subsidiaries on a fully taxable-equivalent (“FTE”) basis. In this non-GAAP presentation, net interest income is adjusted to reflect tax-exempt interest income on an equivalent before-tax basis using tax rates effective as of the end of the period. This measure ensures comparability of net interest income arising from both taxable and tax-exempt sources. Net interest income on a FTE basis is also used in the calculation of the Company’s efficiency ratio. The efficiency ratio, which is calculated by dividing non-interest expense by total taxable-equivalent net revenue (less securities gains or losses), measures how much it costs to produce one dollar of revenue. Securities gains or losses are excluded from this calculation to better match revenue from daily operations to operational expenses. Management considers the tangible common equity ratio and tangible book value per common share as useful measurements of the Company’s equity.  The Company references the return on average tangible common equity as a measurement of profitability.

The following table presents a reconciliation of certain non-GAAP performance measures and ratios used by the Company to evaluate and measure the Company’s performance to the most directly comparable GAAP financial measures for the last five quarters.

  Three Months Ended   Years Ended
  December 31,   September 30,   June 30,   March 31,   December 31,   December 31,   December 31,
(Dollars and shares in thousands) 2018   2018   2018   2018   2017   2018   2017
Calculation of Net Interest Margin and Efficiency Ratio                          
(A) Interest Income (GAAP) $ 320,596     $ 304,962     $ 284,047     $ 261,205     $ 251,840     $ 1,170,810     $ 946,468  
Taxable-equivalent adjustment:                          
 - Loans 980     941     812     670     1,106     3,403     3,760  
 - Liquidity Management Assets 586     575     566     531     1,019     2,258     3,713  
 - Other Earning Assets 4     3     1     3     2     11     14  
(B) Interest Income - FTE $ 322,166     $ 306,481     $ 285,426     $ 262,409     $ 253,967     $ 1,176,482     $ 953,955  
(C) Interest Expense (GAAP) 66,508     57,399     45,877     36,123     32,741     205,907     114,392  
(D) Net Interest Income - FTE (B minus C) $ 255,658     $ 249,082     $ 239,549     $ 226,286     $ 221,226     $ 970,575     $ 839,563  
(E) Net Interest Income (GAAP) (A minus C) $ 254,088     $ 247,563     $ 238,170     $ 225,082     $ 219,099     $ 964,903     $ 832,076  
Net interest margin (GAAP-derived) 3.61 %   3.59 %   3.61 %   3.54 %   3.45 %   3.59 %   3.41 %
Net interest margin - FTE 3.63 %   3.61 %   3.63 %   3.56 %   3.49 %   3.61 %   3.44 %
(F) Non-interest income $ 75,308     $ 99,930     $ 95,233     $ 85,679     $ 81,038     $ 356,150     $ 319,506  
(G) (Losses) gains on investment securities, net (2,649 )   90     12     (351 )   14     (2,898 )   45  
(H) Non-interest expense 211,333     213,637     206,769     194,349     196,580     826,088     731,817  
Efficiency ratio (H/(E+F-G)) 63.65 %   61.50 %   62.02 %   62.47 %   65.50 %   62.40 %   63.55 %
Efficiency ratio - FTE (H/(D+F-G)) 63.35 %   61.23 %   61.76 %   62.23 %   65.04 %   62.13 %   63.14 %
Calculation of Tangible Common Equity ratio (at period end)                          
Total shareholders’ equity $ 3,267,570     $ 3,179,822     $ 3,106,871     $ 3,031,250     $ 2,976,939          
Less: Non-convertible preferred stock (125,000 )   (125,000 )   (125,000 )   (125,000 )   (125,000 )        
Less: Intangible assets (619,237 )   (564,938 )   (531,371 )   (533,910 )   (519,505 )        
(I) Total tangible common shareholders’ equity $ 2,523,333     $ 2,489,884     $ 2,450,500     $ 2,372,340     $ 2,332,434          
Total assets $ 31,241,521     $ 30,142,731     $ 29,464,588     $ 28,456,772     $ 27,915,970          
Less: Intangible assets (619,237 )   (564,938 )   (531,371 )   (533,910 )   (519,505 )        
(J) Total tangible assets $ 30,622,284     $ 29,577,793     $ 28,933,217     $ 27,922,862     $ 27,396,465          
Tangible common equity ratio (I/J) 8.2 %   8.4 %   8.5 %   8.5 %   8.5 %        
Calculation of book value per share                          
Total shareholders’ equity $ 3,267,570     $ 3,179,822     $ 3,106,871     $ 3,031,250     $ 2,976,939          
Less: Preferred stock (125,000 )   (125,000 )   (125,000 )   (125,000 )   (125,000 )        
(K) Total common equity $ 3,142,570     $ 3,054,822     $ 2,981,871     $ 2,906,250     $ 2,851,939          
(L) Actual common shares outstanding 56,408     56,377     56,329     56,256     55,965          
Book value per common share (K/L) $ 55.71     $ 54.19     $ 52.94     $ 51.66     $ 50.96          
Tangible common book value per share (I/L) $ 44.73     $ 44.16     $ 43.50     $ 42.17     $ 41.68          

 

Calculation of return on average common equity                          
(M) Net income applicable to common shares $ 77,607     $ 89,898     $ 87,530     $ 79,931     $ 66,731     $ 334,966     $ 247,904  
Add: After-tax intangible asset amortization 1,041     871     734     761     738     3,407     2,907  
(N) Tangible net income applicable to common shares $ 78,648     $ 90,769     $ 88,264     $ 80,692     $ 67,469     $ 338,373     $ 250,811  
Total average shareholders' equity $ 3,200,654     $ 3,131,943     $ 3,064,154     $ 2,995,592     $ 2,942,999     $ 3,098,740     $ 2,842,081  
Less: Average preferred stock (125,000 )   (125,000 )   (125,000 )   (125,000 )   (125,000 )   (125,000 )   (165,114 )
(O) Total average common shareholders' equity $ 3,075,654     $ 3,006,943     $ 2,939,154     $ 2,870,592     $ 2,817,999     $ 2,973,740     $ 2,676,967  
Less: Average intangible assets (574,757 )   (547,552 )   (533,496 )   (536,676 )   (519,626 )   (548,223 )   (519,910 )
(P) Total average tangible common shareholders’ equity $ 2,500,897     $ 2,459,391     $ 2,405,658     $ 2,333,916     $ 2,298,373     $ 2,425,517     $ 2,157,057  
Return on average common equity, annualized  (M/O) 10.01 %   11.86 %   11.94 %   11.29 %   9.39 %   11.26 %   9.26 %
Return on average tangible common equity, annualized (N/P) 12.48 %   14.64 %   14.72 %   14.02 %   11.65 %   13.95 %   11.63 %

 

BUSINESS UNIT SUMMARY

Community Banking

Through its community banking unit, the Company provides banking and financial services primarily to individuals, small to mid-sized businesses, local governmental units and institutional clients residing primarily in the local areas the Company services. In the fourth quarter of 2018, revenue within this unit was primarily driven by increased net interest income due to increased earning assets and a higher net interest margin. The net interest margin increased in the fourth quarter of 2018 compared to the third quarter of 2018 primarily as a result of higher yields within the loan portfolio. Mortgage banking revenue decreased by $17.8 million from $42.0 million for the third quarter of 2018 to $24.2 million for the fourth quarter of 2018. The lower revenue was primarily due to to lower origination volumes, lower revenue margins and a $8.5 million negative fair value adjustment recognized on mortgage servicing rights related to changes in valuation assumptions and pay-offs. Originations during the current period decreased to $927.8 million from $1.2 billion in the third quarter of 2018. Home purchases represented 71% of loan origination volume for the fourth quarter of 2018. The Company's gross commercial and commercial real estate loan pipelines remain strong. Before the impact of scheduled payments and prepayments, at December 31, 2018, gross commercial and commercial real estate loan pipelines totaled $1.1 billion, or $671.1 million when adjusted for the probability of closing, compared to $1.1 billion, or $693.5 million when adjusted for the probability of closing, at September 30, 2018.

Specialty Finance

Through its specialty finance unit, the Company offers financing of insurance premiums for businesses and individuals, equipment financing through structured loans and lease products to customers in a variety of industries and accounts receivable financing, value-added, out-sourced administrative services, and other services. In the fourth quarter of 2018, the specialty finance unit experienced higher revenue as a result of increased volumes and higher yields within its insurance premium financing receivables portfolio. Originations of $2.1 billion during the fourth quarter of 2018 resulted in a $25.1 million increase in average balances. The increase in average balances along with higher yields on these loans resulted in a $2.8 million increase in interest income attributed to this portfolio. The Company's leasing business showed steady growth during the fourth quarter of 2018, with its portfolio of assets, including capital leases, loans and equipment on operating leases, increasing $132.7 million to $1.2 billion at the end of the fourth quarter of 2018. Revenues from the Company's out-sourced administrative services business remained steady, totaling approximately $1.3 million in the fourth quarter of 2018 and $1.1 million in the third quarter of 2018.

Wealth Management

Through four separate subsidiaries within its wealth management unit, the Company offers a full range of wealth management services, including trust and investment services, tax-deferred like-kind exchange services, asset management, securities brokerage services and 401(k) and retirement plan services. Wealth management revenue remained flat in the fourth quarter of 2018 compared to the third quarter of 2018, totaling $22.7 million in the current period. At December 31, 2018, the Company’s wealth management subsidiaries had approximately $24.2 billion of assets under administration, which includes $3.6 billion of assets owned by the Company and its subsidiary banks, representing a $1.8 billion decrease from the $26.0 billion of assets under administration at September 30, 2018. The decrease in the fourth quarter of 2018 was primarily due to the impact of market conditions on the value of assets under administration. In December, the Company acquired CDEC, which provides Qualified Intermediary services (as defined by U.S. Treasury regulations) for taxpayers seeking to structure tax-deferred like-kind exchanges under Internal Revenue Code Section 1031.

 

LOANS

Loan Portfolio Mix and Growth Rates

                % Growth
(Dollars in thousands)   December 31,
 2018
  September 30,
 2018
  December 31,
 2017
  From (1)
September 30,
2018
  From
December 31,
2017
Balance:                    
Commercial   $ 7,828,538     $ 7,473,958     $ 6,787,677     19 %   15 %
Commercial real estate   6,933,252     6,746,774     6,580,618     11     5  
Home equity   552,343     578,844     663,045     (18 )   (17 )
Residential real estate   1,002,464     924,250     832,120     34     20  
Premium finance receivables - commercial   2,841,659     2,885,327     2,634,565     (6 )   8  
Premium finance receivables - life insurance   4,541,794     4,398,971     4,035,059     13     13  
Consumer and other   120,641     115,827     107,713     16     12  
Total loans, net of unearned income   $ 23,820,691     $ 23,123,951     $ 21,640,797     12 %   10 %
Mix:                    
Commercial   33 %   32 %   31 %        
Commercial real estate   29     29     30          
Home equity   2     3     3          
Residential real estate   4     4     4          
Premium finance receivables - commercial   12     12     12          
Premium finance receivables - life insurance   19     19     19          
Consumer and other   1     1     1          
Total loans, net of unearned income   100 %   100 %   100 %        

(1)  Annualized

 

Commercial and Commercial Real Estate Loan Portfolios

    As of December 31, 2018
        % of
Total
Balance
  Nonaccrual   > 90 Days
Past Due
and Still
Accruing
  Allowance
For Loan
Losses
Allocation
       
(Dollars in thousands)   Balance  
Commercial:                    
Commercial, industrial and other   $ 5,120,096     34.6 %   $ 34,298     $     $ 46,586  
Franchise   948,979     6.4     16,051         8,919  
Mortgage warehouse lines of credit   144,199     1.0             1,162  
Asset-based lending   1,026,056     7.0     635         9,138  
Leases   565,680     3.8             1,502  
PCI - commercial loans (1)   23,528     0.2         3,313     519  
Total commercial   $ 7,828,538     53.0 %   $ 50,984     $ 3,313     $ 67,826  
Commercial Real Estate:                    
Construction   $ 760,824     5.2 %   $ 1,554     $     $ 8,999  
Land   141,481     1.0     107         3,953  
Office   939,322     6.4     3,629         6,239  
Industrial   902,248     6.1     285         6,088  
Retail   892,478     6.0     10,753         9,338  
Multi-family   976,560     6.6     311         9,395  
Mixed use and other   2,205,195     14.9     2,490         16,210  
PCI - commercial real estate (1)   115,144     0.8         6,241     45  
Total commercial real estate   $ 6,933,252     47.0 %   $ 19,129     $ 6,241     $ 60,267  
Total commercial and commercial real estate   $ 14,761,790     100.0 %   $ 70,113     $ 9,554     $ 128,093  
                     
Commercial real estate - collateral location by state:                    
Illinois   $ 5,336,454     77.0 %            
Wisconsin   684,425     9.9              
Total primary markets   $ 6,020,879     86.9 %            
Indiana   169,817     2.4              
Florida   52,237     0.8              
Michigan   40,110     0.6              
Other (no individual state greater than 0.6%)   650,209     9.3              
Total   $ 6,933,252     100.0 %            

(1)  Purchased credit impaired ("PCI") loans represent loans acquired with evidence of credit quality deterioration since origination, in accordance with ASC 310-30. Loan agings are based upon contractually required payments.

 

DEPOSITS

Deposit Portfolio Mix and Growth Rates

                % Growth
(Dollars in thousands)   December 31,
 2018
  September 30,
 2018
  December 31,
 2017
  From (1)
September 30,
2018
  From
December 31,
2017
Balance:                    
Non-interest bearing   $ 6,569,880     $ 6,399,213     $ 6,792,497     11 %   (3 )%
NOW and interest bearing demand deposits   2,897,133     2,512,259     2,315,055     61     25  
Wealth management deposits (2)   2,996,764     2,520,120     2,323,699     75     29  
Money market   5,704,866     5,429,921     4,515,353     20     26  
Savings   2,665,194     2,595,164     2,829,373     11     (6 )
Time certificates of deposit   5,260,841     5,460,038     4,407,370     (14 )   19  
Total deposits   $ 26,094,678     $ 24,916,715     $ 23,183,347     19 %   13 %
Mix:                    
Non-interest bearing   25 %   26 %   29 %        
NOW and interest bearing demand deposits   11     10     10          
Wealth management deposits (2)   12     10     10          
Money market   22     22     20          
Savings   10     10     12          
Time certificates of deposit   20     22     19          
Total deposits   100 %   100 %   100 %        

(1) Annualized 
(2) Represents deposit balances of the Company’s subsidiary banks from brokerage customers of Wintrust Investments, CDEC, trust and asset management customers of the Company and brokerage customers from unaffiliated companies which have been placed into deposit accounts.

 

Time Certificates of Deposit
Maturity/Re-pricing Analysis
As of December 31, 2018

(Dollars in thousands)   CDARs &
Brokered
Certificates
  of Deposit (1)
  MaxSafe
Certificates
  of Deposit (1)
  Variable Rate
Certificates
  of Deposit (2)
  Other Fixed
Rate
Certificates
  of Deposit (1)
  Total Time
Certificates of
Deposit
  Weighted-
Average

Rate of
Maturing

Time
Certificates

  of Deposit (3)
1-3 months   $ 59     $ 31,471     $ 102,531     $ 847,039     $ 981,100     1.39 %
4-6 months   249     30,229         862,207     892,685     1.59 %
7-9 months   75,077     24,145         666,487     765,709     1.76 %
10-12 months       12,813         563,031     575,844     1.75 %
13-18 months       19,315         941,117     960,432     2.10 %
19-24 months       14,684         274,076     288,760     2.42 %
24+ months   1,000     10,228         785,083     796,311     2.60 %
Total   $ 76,385     $ 142,885     $ 102,531     $ 4,939,040     $ 5,260,841     1.88 %

(1) This category of certificates of deposit is shown by contractual maturity date. 
(2) This category includes variable rate certificates of deposit and savings certificates with the majority repricing on at least a monthly basis. 
(3) Weighted-average rate excludes the impact of purchase accounting fair value adjustments.

 

NET INTEREST INCOME

The following table presents a summary of Wintrust’s average balances, net interest income and related net interest margins, calculated on a fully tax-equivalent basis, for the fourth quarter of 2018 compared to the third quarter of 2018 (sequential quarters) and fourth quarter of 2017 (linked quarters), respectively:

  Average Balance
for three months ended,
  Interest
for three months ended,
  Yield/Rate
for three months ended,
(Dollars in thousands) December 31,
 2018
  September 30,
 2018
  December 31,
 2017
  December 31,
 2018
  September 30,
 2018
  December 31,
 2017
  December 31,
 2018
  September 30,
 2018
  December 31,
 2017
Interest-bearing deposits with banks and cash equivalents(1) $ 1,042,860     $ 998,004     $ 914,319     $ 5,628     $ 5,423     $ 2,723     2.14 %   2.16 %   1.18 %
Investment securities(2) 3,347,496     3,046,272     2,736,253     27,242     22,285     19,179     3.23     2.90     2.78  
FHLB and FRB stock 98,084     88,335     82,092     1,343     1,235     1,067     5.43     5.54     5.15  
Liquidity management assets(3)(8) $ 4,488,440     $ 4,132,611     $ 3,732,664     $ 34,213     $ 28,943     $ 22,969     3.02 %   2.78 %   2.44 %
Other earning assets(3)(4)(8) 16,204     17,862     26,955     253     178     154     6.19     3.95     2.27  
Mortgage loans held-for-sale 265,717     380,235     335,385     3,409     5,285     3,291     5.09     5.51     3.89  
Loans, net of unearned
income(3)(5)(8)
23,164,154     22,823,378     21,080,984     284,291     272,075     227,467     4.87     4.73     4.28  
Covered loans         6,025             86             5.66  
Total earning assets(8) $ 27,934,515     $ 27,354,086     $ 25,182,013     $ 322,166     $ 306,481     $ 253,967     4.58 %   4.45 %   4.00 %
Allowance for loan and covered loan losses (154,438 )   (148,503 )   (138,584 )                        
Cash and due from banks 271,403     268,006     244,097                          
Other assets 2,128,407     2,051,520     1,891,958                          
Total assets $ 30,179,887     $ 29,525,109     $ 27,179,484                          
                                   
NOW and interest bearing demand deposits $ 2,671,283     $ 2,519,445     $ 2,284,576     $ 4,007     $ 2,479     $ 1,407     0.60 %   0.39 %   0.24 %
Wealth management deposits 2,289,904     2,517,141     2,005,197     7,119     8,287     4,059     1.23     1.31     0.80  
Money market accounts 5,632,268     5,369,324     4,611,515     16,936     13,260     4,154     1.19     0.98     0.36  
Savings accounts 2,553,133     2,672,077     2,741,621     3,096     2,907     2,716     0.48     0.43     0.39  
Time deposits 5,381,029     5,214,637     4,581,464     24,817     21,803     12,594     1.83     1.66     1.09  
Interest-bearing deposits $ 18,527,617     $ 18,292,624     $ 16,224,373     $ 55,975     $ 48,736     $ 24,930     1.20 %   1.06 %   0.61 %
Federal Home Loan Bank advances 551,846     429,739     324,748     2,563     1,947     2,124     1.84     1.80     2.59  
Other borrowings 385,878     268,278     255,972     3,199     2,003     1,600     3.29     2.96     2.48  
Subordinated notes 139,186     139,155     139,065     1,788     1,773     1,786     5.14     5.10     5.14  
Junior subordinated debentures 253,566     253,566     253,566     2,983     2,940     2,301     4.60     4.54     3.55  
Total interest-bearing liabilities $ 19,858,093     $ 19,383,362     $ 17,197,724     $ 66,508     $ 57,399     $ 32,741     1.33 %   1.17 %   0.75 %
Non-interest bearing deposits 6,542,228     6,461,195     6,605,553                          
Other liabilities 578,912     548,609     433,208                          
Equity 3,200,654     3,131,943     2,942,999                          
Total liabilities and shareholders’ equity $ 30,179,887     $ 29,525,109     $ 27,179,484                          
Interest rate spread(6)(8)                         3.25 %   3.28 %   3.25 %
Less:  Fully tax-equivalent adjustment             (1,570 )   (1,519 )   (2,127 )   (0.02 )   (0.02 )   (0.04 )
Net free funds/contribution(7) $ 8,076,422     $ 7,970,724     $ 7,984,289                 0.38     0.33     0.24  
Net interest income/ margin(8)  (GAAP)             $ 254,088     $ 247,563     $ 219,099     3.61 %   3.59 %   3.45 %
Fully tax-equivalent adjustment             1,570     1,519     2,127     0.02     0.02     0.04  
Net interest income/ margin - FTE (8)             $ 255,658     $ 249,082     $ 221,226     3.63 %   3.61 %   3.49 %

(1) Includes interest-bearing deposits from banks, federal funds sold and securities purchased under resale agreements. 
(2) Investment securities includes investment securities classified as available-for-sale and held-to-maturity, and equity securities with readily determinable fair values. Equity securities without readily determinable fair values are included within other assets. 
(3) Interest income on tax-advantaged loans, trading securities and investment securities reflects a tax-equivalent adjustment based on the marginal federal corporate tax rate in effect as of the applicable period. The total adjustments for the three months ended December 31, 2018, September 30, 2018 and December 31, 2017 were $1.6 million, $1.5 million and $2.1 million, respectively. 
(4) Other earning assets include brokerage customer receivables and trading account securities. 
(5) Loans, net of unearned income, include non-accrual loans. 
(6) Interest rate spread is the difference between the yield earned on earning assets and the rate paid on interest-bearing liabilities. 
(7) Net free funds are the difference between total average earning assets and total average interest-bearing liabilities. The estimated contribution to net interest margin from net free funds is calculated using the rate paid for total interest-bearing liabilities. 
(8) See “Supplemental Financial Measures/Ratios” for additional information on this performance ratio.

For the fourth quarter of 2018, net interest income totaled $254.1 million, an increase of $6.5 million as compared to the third quarter of 2018 and an increase of $35.0 million as compared to the fourth quarter of 2017. Net interest margin was 3.61% (3.63% on a fully tax-equivalent basis) during the fourth quarter of 2018 compared to 3.59% (3.61% on a fully tax-equivalent basis) during the third quarter of 2018 and 3.45% (3.49% on a fully tax-equivalent basis) during the fourth quarter of 2017. The $6.5 million increase in net interest income in the fourth quarter of 2018 compared to the third quarter of 2018 was attributable to a $2.6 million increase from higher levels of earning assets and a $3.9 million increase due to a higher net interest margin during the period.

The following table presents a summary of Wintrust's average balances, net interest income and related interest margins, calculated on a fully tax-equivalent basis, for year ended December 31, 2018 compared to year ended December 31, 2017:

  Average Balance
for year ended,
  Interest
for year ended,
  Yield/Rate
for year ended,
(Dollars in thousands) December 31,
 2018
  December 31,
 2017
  December 31,
 2018
  December 31,
 2017
  December 31,
 2018
  December 31,
 2017
Interest-bearing deposits with banks and cash equivalents (1) $ 888,671     $ 856,020     $ 17,091     $ 9,254     1.92 %   1.08 %
Investment securities (2) 3,045,555     2,590,260     89,640     67,028     2.94     2.59  
FHLB and FRB stock 101,681     89,333     5,331     4,370     5.24     4.89  
Liquidity management assets(3)(8) $ 4,035,907     $ 3,535,613     $ 112,062     $ 80,652     2.78 %   2.28 %
Other earning assets(3)(4)(8) 20,681     25,951     777     662     3.75     2.55  
Mortgage loans held-for-sale 332,863     319,147     15,738     12,332     4.73     3.86  
Loans, net of unearned income(3)(5)(8) 22,500,482     20,469,799     1,047,905     858,058     4.66     4.19  
Covered loans     40,665         2,251         5.54  
Total earning assets(8) $ 26,889,933     $ 24,391,175     $ 1,176,482     $ 953,955     4.38 %   3.91 %
Allowance for loan and covered loan losses (148,342 )   (133,432 )                
Cash and due from banks 266,086     239,638                  
Other assets 2,020,743     1,872,321                  
Total assets $ 29,028,420     $ 26,369,702                  
                       
NOW and interest bearing demand deposits $ 2,436,791     $ 2,402,254     $ 9,773     $ 5,027     0.40 %   0.21 %
Wealth management deposits 2,356,145     2,125,177     27,839     13,952     1.18     0.66  
Money market accounts 5,105,244     4,482,137     42,973     12,588     0.84     0.28  
Savings accounts 2,684,661     2,471,663     11,444     7,715     0.43     0.31  
Time deposits 4,872,590     4,423,067     74,524     44,044     1.53     1.00  
Interest-bearing deposits $ 17,455,431     $ 15,904,298     $ 166,553     $ 83,326     0.95 %   0.52 %
Federal Home Loan Bank advances 713,539     380,412     12,412     8,798     1.74     2.31  
Other borrowings 289,615     255,136     8,599     5,370     2.97     2.10  
Subordinated notes 139,140     139,022     7,121     7,116     5.12     5.12  
Junior subordinated debentures 253,566     253,566     11,222     9,782     4.37     3.81  
Total interest-bearing liabilities $ 18,851,291     $ 16,932,434     $ 205,907     $ 114,392     1.09 %   0.67 %
Non-interest bearing deposits 6,545,251     6,182,048                  
Other liabilities 533,138     413,139                  
Equity 3,098,740     2,842,081                  
Total liabilities and shareholders’ equity $ 29,028,420     $ 26,369,702                  
Interest rate spread(6)(8)                 3.29 %   3.24 %
Less:  Fully tax-equivalent adjustment         (5,672 )   (7,487 )   (0.02 )   (0.03 )
Net free funds/contribution(7) $ 8,038,642     $ 7,458,741             0.32     0.20  
Net interest income/ margin(8)  (GAAP)         $ 964,903     $ 832,076     3.59 %   3.41 %
Fully tax-equivalent adjustment         5,672     7,487     0.02     0.03  
Net interest income/ margin - FTE (8)         $ 970,575     $ 839,563     3.61 %   3.44 %

(1) Includes interest-bearing deposits from banks, federal funds sold and securities purchased under resale agreements. 
(2) Investment securities includes investment securities classified as available-for-sale and held-to-maturity, and equity securities with readily determinable fair values. Equity securities without readily determinable fair values are included within other assets. 
(3) Interest income on tax-advantaged loans, trading securities and investment securities reflects a tax-equivalent adjustment based on a marginal federal corporate tax rate in effect as of the applicable period. The total adjustments for the twelve months ended December 31, 2018 and 2017 were $5.7 million and $7.5 million respectively. 
(4) Other earning assets include brokerage customer receivables and trading account securities. 
(5) Loans, net of unearned income, include non-accrual loans. 
(6) Interest rate spread is the difference between the yield earned on earning assets and the rate paid on interest-bearing liabilities. 
(7) Net free funds are the difference between total average earning assets and total average interest-bearing liabilities. The estimated contribution to net interest margin from net free funds is calculated using the rate paid for total interest-bearing liabilities. 
(8) See “Supplemental Financial Measures/Ratios” for additional information on this performance ratio.

For the year ended December 31, 2018, net interest income totaled $964.9 million, an increase of $132.8 million as compared to the year ended December 31, 2017. Net interest margin was 3.59% (3.61% on a fully tax-equivalent basis) for the year ended December 31, 2018 compared to 3.41% (3.44% on a fully tax-equivalent basis) for the year ended December 31, 2017. The $132.8 million increase in net interest income in the year ended 2018 compared to the same period of 2017 was attributable to a $81.5 million increase from higher levels of earning assets and a $51.3 million increase from rising rates.

Interest Rate Sensitivity

As an ongoing part of its financial strategy, the Company attempts to manage the impact of fluctuations in market interest rates on net interest income. Management measures its exposure to changes in interest rates by modeling many different interest rate scenarios.

The following interest rate scenarios display the percentage change in net interest income over a one-year time horizon assuming increases of 100 and 200 basis points and a decrease of 100 basis points. The Static Shock Scenario results incorporate actual cash flows and repricing characteristics for balance sheet instruments following an instantaneous, parallel change in market rates based upon a static (i.e. no growth or constant) balance sheet. Conversely, the Ramp Scenario results incorporate management’s projections of future volume and pricing of each of the product lines following a gradual, parallel change in market rates over twelve months.  Actual results may differ from these simulated results due to timing, magnitude, and frequency of interest rate changes as well as changes in market conditions and management strategies. The interest rate sensitivity for both the Static Shock and Ramp Scenario at December 31, 2018, September 30, 2018 and December 31, 2017 is as follows:

           
Static Shock Scenario   +200
Basis 
Points
  +100
 Basis
 Points
  -100
Basis
 Points
December 31, 2018   15.6 %   7.9 %   (8.6 )%
September 30, 2018   18.1 %   9.1 %   (10.0 )%
December 31, 2017   17.7 %   9.0 %   (11.8 )%

 

Ramp Scenario +200
Basis
Points
  +100
Basis
Points
  -100
Basis
Points
December 31, 2018 7.4 %   3.8 %   (3.6 )%
September 30, 2018 8.5 %   4.3 %   (4.2 )%
December 31, 2017 8.9 %   4.6 %   (5.1 )%

These results indicate that the Company has positioned its balance sheet to benefit from a rise in interest rates.  This analysis also indicates that the Company would benefit to a greater magnitude should a rise in interest rates be significant (i.e., 200 basis points) and immediate (Static Shock Scenario).

Maturities and Sensitivities of Loans to Changes in Interest Rates

The following table classifies the loan portfolio at December 31, 2018 by date at which the loans reprice or mature, and the type of rate exposure:

As of December 31, 2018 One year or less   From one to five
years
  Over five years    
(Dollars in thousands)       Total
Commercial              
Fixed rate $ 154,368     $ 1,105,414     $ 665,595     $ 1,925,377  
Variable rate 5,896,481     6,531     149     5,903,161  
Total commercial $ 6,050,849     $ 1,111,945     $ 665,744     $ 7,828,538  
Commercial real estate              
Fixed rate 369,120     1,930,892     315,343     2,615,355  
Variable rate 4,288,293     29,455     149     4,317,897  
Total commercial real estate $ 4,657,413     $ 1,960,347     $ 315,492     $ 6,933,252  
Home equity              
Fixed rate 11,712     15,125     18,543     45,380  
Variable rate 506,963             506,963  
Total home equity $ 518,675     $ 15,125     $ 18,543     $ 552,343  
Residential real estate              
Fixed rate 30,724     22,568     229,433     282,725  
Variable rate 55,329     303,383     361,027     719,739  
Total residential real estate $ 86,053     $ 325,951     $ 590,460     $ 1,002,464  
Premium finance receivables - commercial              
Fixed rate 2,762,211     79,448         2,841,659  
Variable rate              
Total premium finance receivables - commercial $ 2,762,211     $ 79,448     $     $ 2,841,659  
Premium finance receivables - life insurance              
Fixed rate 15,303     10,977     3,690     29,970  
Variable rate 4,511,824             4,511,824  
Total premium finance receivables - life insurance $ 4,527,127     $ 10,977     $ 3,690     $ 4,541,794  
Consumer and other              
Fixed rate 75,263     10,312     2,176     87,751  
Variable rate 32,848     42         32,890  
Total consumer and other $ 108,111     $ 10,354     $ 2,176     $ 120,641  
Total per category              
Fixed rate 3,418,701     3,174,736     1,234,780     7,828,217  
Variable rate 15,291,738     339,411     361,325     15,992,474  
Total loans, net of unearned income $ 18,710,439     $ 3,514,147     $ 1,596,105     $ 23,820,691  
Variable Rate Loan Pricing by Index:              
Prime $ 2,480,764              
One- month LIBOR 8,076,230              
Three- month LIBOR 458,994              
Twelve- month LIBOR 4,741,121              
Other 235,365              
Total variable rate $ 15,992,474              

http://resource.globenewswire.com/Resource/Download/23ff1660-84db-4ebe-8d4a-50f6b99bed74

Source: Bloomberg

As noted in the table on the previous page, the majority of the Company’s portfolio is tied to LIBOR indices which, as shown in the table above, do not mirror the same increases as the Prime rate when the Federal Reserve raises interest rates.  Specifically, the Company has $8.1 billion of variable rate loans tied to one-month LIBOR and $4.7 billion of variable rate loans tied to twelve-month LIBOR. The above chart shows:

    Changes in
    Prime   1-month
LIBOR
  12-month
LIBOR
First Quarter 2018   +25 bps   +32 bps   +55 bps
Second Quarter 2018   +25 bps   +21 bps   +10 bps
Third Quarter 2018   +25 bps   +17 bps   +16 bps
Fourth Quarter 2018   +25 bps   +24 bps   +9 bps

 

NON-INTEREST INCOME

The following table presents non-interest income by category for the periods presented:

    Three Months Ended                
    December 31,   September 30,   December 31,   Q4 2018 compared to
Q3 2018
  Q4 2018 compared to
Q4 2017
(Dollars in thousands)   2018   2018   2017   $ Change   % Change   $ Change   % Change
Brokerage   $ 4,997     $ 5,579     $ 6,067     $ (582 )   (10 )%   $ (1,070 )   (18 )%
Trust and asset management   17,729     17,055     15,843     674     4     1,886     12  
Total wealth management   $ 22,726     $ 22,634     $ 21,910     $ 92     %   $ 816     4 %
Mortgage banking   24,182     42,014     27,411     (17,832 )   (42 )   (3,229 )   (12 )
Service charges on deposit accounts   9,065     9,331     8,907     (266 )   (3 )   158     2  
(Losses) gains on investment securities, net   (2,649 )   90     14     (2,739 )   NM     (2,663 )   NM  
Fees from covered call options   626     627     1,610     (1 )       (984 )   (61 )
Trading (losses) gains, net   (155 )   (61 )   24     (94 )   NM     (179 )   NM  
Operating lease income, net   10,882     9,132     8,598     1,750     19     2,284     27  
Other:                            
Interest rate swap fees   2,602     2,359     1,963     243     10     639     33  
BOLI   (466 )   3,190     754     (3,656 )   NM     (1,220 )   NM  
Administrative services   1,260     1,099     1,103     161     15     157     14  
Early pay-offs of capital leases   3     11     7     (8 )   (73 )   (4 )   (57 )
Miscellaneous   7,232     9,504     8,737     (2,272 )   (24 )   (1,505 )   (17 )
Total Other   $ 10,631     $ 16,163     $ 12,564     $ (5,532 )   (34 )%   $ (1,933 )   (15 )%
Total Non-Interest Income   $ 75,308     $ 99,930     $ 81,038     $ (24,622 )   (25 )%   $ (5,730 )   (7 )%

 

    Years Ended        
    December 31,   December 31,   $   %
(Dollars in thousands)   2018   2017   Change   Change
Brokerage   $ 22,391     $ 22,863     $ (472 )   (2 )%
Trust and asset management   68,572     58,903     9,669     16  
Total wealth management   $ 90,963     $ 81,766     $ 9,197     11 %
Mortgage banking   136,990     113,472     23,518     21  
Service charges on deposit accounts   36,404     34,513     1,891     5  
(Losses) gains on investment securities, net   (2,898 )   45     (2,943 )   NM  
Fees from covered call options   3,519     4,402     (883 )   (20 )
Trading gains (losses), net   11     (845 )   856     NM  
Operating lease income, net   38,451     29,646     8,805     30  
Other:                
Interest rate swap fees   11,027     7,379     3,648     49  
BOLI   4,982     3,524     1,458     41  
Administrative services   4,625     4,165     460     11  
Early pay-offs of capital leases   601     1,228     (627 )   (51 )
Miscellaneous   31,475     40,211     (8,736 )   (22 )
Total Other   $ 52,710     $ 56,507     $ (3,797 )   (7 )%
Total Non-Interest Income   $ 356,150     $ 319,506     $ 36,644     11 %

NM - Not meaningful

Notable contributions to the change in non-interest income are as follows:

The decrease in mortgage banking revenue in the fourth quarter of 2018 as compared to the third quarter of 2018 resulted primarily from lower origination volumes, lower revenue margins and a $8.5 million negative fair value adjustment recognized on mortgage servicing rights related to changes in valuation assumptions and pay-offs. Mortgage loans originated or purchased for sale totaled $927.8 million in the fourth quarter of 2018 as compared to $1.2 billion in the third quarter of 2018 and $879.4 million in the fourth quarter of 2017. Mortgage banking revenue includes revenue from activities related to originating, selling and servicing residential real estate loans for the secondary market. Mortgage revenue is also impacted by changes in the fair value of mortgage servicing rights ("MSRs") as the Company does not hedge this change in fair value. Additionally, through the acquisition of Veterans First, the Company acquired approximately $13.8 million of MSRs in the first quarter of 2018. The Company records MSRs at fair value on a recurring basis. The table below presents additional selected information regarding mortgage banking revenue for the respective periods.

    Three Months Ended   Years Ended
(Dollars in thousands)   December 31,
 2018
  September 30,
 2018
  December 31,
 2017
  December 31,
 2018
  December 31,
 2017
Originations:                    
Retail originations   $ 463,196     $ 642,213     $ 744,496     $ 2,412,232     $ 3,142,824  
Correspondent originations   289,101     310,446     134,904     848,997     549,261  
Veterans First originations   175,483     199,774         694,209      
Total originations (A)   $ 927,780     $ 1,152,433     $ 879,400     $ 3,955,438     $ 3,692,085  
                     
Purchases as a percentage of originations   71 %   76 %   67 %   75 %   75 %
Refinances as a percentage of originations   29     24     33     25     25  
Total   100 %   100 %   100 %   100 %   100 %
                     
Production Margin:                    
Production revenue (B) (1)   $ 18,657     $ 25,253     $ 20,603     $ 92,250     $ 90,458  
Production margin (B / A)   2.01 %   2.19 %   2.34 %   2.33 %   2.45 %
                     
Mortgage Servicing:                    
Loans serviced for others (C)   $ 6,545,870     $ 5,904,300     $ 2,929,133          
MSRs, at fair value (D)   75,183     74,530     33,676          
Percentage of MSRs to loans serviced for others (D / C)   1.15 %   1.26 %   1.15 %        
                     
Components of Mortgage Banking Revenue:                    
Production revenue   $ 18,657     $ 25,253     $ 20,603     $ 92,250     $ 90,458  
MSR - current period capitalization   9,683     11,340     5,179     33,071     18,341  
MSR - collection of expected cash flows - paydowns (2)   (496 )   (282 )       (1,910 )    
MSR - collection of expected cash flows - payoffs   (896 )   (799 )   (963 )   (3,129 )   (2,595 )
MSR - changes in fair value model assumptions   (7,638 )   1,077     46     (331 )   (1,173 )
Servicing income   4,917     3,942     1,942     15,268     6,417  
Other   (45 )   1,483     604     1,771     2,024  
Total mortgage banking revenue   $ 24,182     $ 42,014     $ 27,411     $ 136,990     $ 113,472  

(1) Production revenue represents revenue earned from the origination and subsequent sale of mortgages, including gains on loans sold and fees from originations, processing and other related activities, and excludes servicing fees, changes in the fair value of servicing rights and changes to the mortgage recourse obligation. 
(2) Change in MSR value due to collection of expected cash flows from paydowns and payoffs in 2017 is combined and shown in total in the payoff line.  The component detail is not available for 2017.

The net losses recognized in the fourth quarter of 2018 on investment securities are primarily due to $2.6 million of unrealized losses on equity securities held by the Company, including a large cap value mutual fund.

The increase in operating lease income in the fourth quarter of 2018 compared to the third quarter of 2018 is primarily related to growth in business from the Company's leasing divisions during the period.

The Company has typically written call options with terms of less than three months against certain U.S. Treasury and agency securities held in its portfolio for liquidity and other purposes. Management has entered into these transactions with the goal of economically hedging security positions and enhancing its overall return on its investment portfolio by using fees generated from these options to compensate for net interest margin compression. These option transactions are designed to mitigate overall interest rate risk and do not qualify as hedges pursuant to accounting guidance. There were no outstanding call option contracts at December 31, 2018, September 30, 2018 or December 31, 2017.

The decrease in BOLI income was primarily the result of higher income in the third quarter of 2018 due to death benefits received during that period on certain insurance policies and lower market returns during the fourth quarter of 2018 on certain investments supporting deferred compensation plan benefits.

The decrease in miscellaneous non-interest income in the fourth quarter of 2018 as compared to the third quarter of 2018 is primarily due to negative adjustments from foreign currency remeasurement and losses from investments in partnerships.

NON-INTEREST EXPENSE

The following table presents non-interest expense by category for the periods presented:

    Three Months Ended                
    December 31,   September 30,   December 31,   Q4 2018 compared to
Q3 2018
  Q4 2018 compared to
Q4 2017
(Dollars in thousands)   2018   2018   2017   $ Change   % Change   $ Change   % Change
Salaries and employee benefits:                            
Salaries   $ 67,708     $ 69,893     $ 58,239     $ (2,185 )   (3 )%   $ 9,469     16 %
Commissions and incentive compensation   33,656     34,046     40,723     (390 )   (1 )   (7,067 )   (17 )
Benefits   20,747     19,916     19,047     831     4     1,700     9  
Total salaries and employee benefits   122,111     123,855     118,009     (1,744 )   (1 )   4,102     3  
Equipment   11,523     10,827     9,500     696     6     2,023     21  
Operating lease equipment depreciation   8,462     7,370     7,015     1,092     15     1,447     21  
Occupancy, net   15,980     14,404     14,154     1,576     11     1,826     13  
Data processing   8,447     9,335     7,915     (888 )   (10 )   532     7  
Advertising and marketing   9,414     11,120     7,382     (1,706 )   (15 )   2,032     28  
Professional fees   9,259     9,914     8,879     (655 )   (7 )   380     4  
Amortization of other intangible assets   1,407     1,163     1,028     244     21     379     37  
FDIC insurance   4,044     4,205     4,324     (161 )   (4 )   (280 )   (6 )
OREO expense, net   1,618     596     599     1,022     NM     1,019     NM  
Other:                            
Commissions - 3rd party brokers   779     1,059     1,057     (280 )   (26 )   (278 )   (26 )
Postage   2,047     2,205     1,427     (158 )   (7 )   620     43  
Miscellaneous   16,242     17,584     15,291     (1,342 )   (8 )   951     6  
Total other   19,068     20,848     17,775     (1,780 )   (9 )   1,293     7  
Total Non-Interest Expense   $ 211,333     $ 213,637     $ 196,580     $ (2,304 )   (1 )%   $ 14,753     8 %

 

    Years Ended        
    December 31,   December 31,   $   %
(Dollars in thousands)   2018   2017   Change   Change
Salaries and employee benefits:                
Salaries   $ 266,563     $ 226,151     $ 40,412     18 %
Commissions and incentive compensation   135,558     133,511     2,047     2  
Benefits   77,956     70,416     7,540     11  
Total salaries and employee benefits   480,077     430,078     49,999     12  
Equipment   42,949     38,358     4,591     12  
Operating lease equipment depreciation   29,305     24,107     5,198     22  
Occupancy, net   57,814     52,920     4,894     9  
Data processing   35,027     31,495     3,532     11  
Advertising and marketing   41,140     30,830     10,310     33  
Professional fees   32,306     27,835     4,471     16  
Amortization of other intangible assets   4,571     4,401     170     4  
FDIC insurance   17,209     16,231     978     6  
OREO expense, net   6,120     3,593     2,527     70  
Other:                
Commissions - 3rd party brokers   4,264     4,178     86     2  
Postage   8,685     6,763     1,922     28  
Miscellaneous   66,621     61,028     5,593     9  
Total other   79,570     71,969     7,601     11  
Total Non-Interest Expense   $ 826,088     $ 731,817     $ 94,271     13 %

Notable contributions to the change in non-interest expense are as follows:

Salaries and employee benefits expense decreased in the fourth quarter of 2018 compared to the third quarter of 2018 primarily as a result of lower commissions related to mortgage loan originations, higher salary deferrals related to loan origination costs and a reduction in costs related to deferred compensation plans impacted by market returns of related BOLI investments.

The increase in operating lease equipment depreciation in the fourth quarter of 2018 compared to the third quarter of 2018 is primarily related to growth in business from the Company's leasing divisions during the period.

The decrease in advertising and marketing expenses during the fourth quarter of 2018 compared to the third quarter of 2018 is primarily related to lower expenses for community advertisements and sponsorships. Marketing costs are incurred to promote the Company's brand, commercial banking capabilities, the Company's various products, to attract loans and deposits and to announce new branch openings as well as the expansion of the Company's non-bank businesses. The level of marketing expenditures depends on the timing of sponsorship programs and type of marketing programs utilized which are determined based on the market area, targeted audience, competition and various other factors.

INCOME TAXES

The Company recorded income tax expense of $28.0 million in the fourth quarter of 2018 compared to $30.9 million in the third quarter of 2018 and $27.0 million in the fourth quarter of 2017. The effective tax rates were 26.01% in the fourth quarter of 2018, 25.13% in the third quarter of 2018 and 28.19% in the fourth quarter of 2017. For the year ended December 31, 2018, the Company recorded income tax expense of $117.0 million (25.42% effective tax rate) compared to $132.3 million (33.93% effective tax rate) for the same period of 2017. The lower effective tax rate for the 2018 year-to-date period as compared to the same period of 2017 was primarily due to the reduction of the federal corporate income tax rate effective in 2018 as a result of the enactment of the Tax Cuts and Jobs Act on December 22, 2017. During the fourth quarter of 2017, the Company recorded a provisional tax benefit of $7.6 million related to the enactment of the Tax Cuts and Jobs Act, and during the third quarter of 2018, the Company finalized the provisional amounts and recorded an additional net tax benefit of $1.2 million. The effective tax rates were also impacted by excess tax benefits related to share-based compensation. These excess tax benefits were $160,000 in the fourth quarter of 2018 and $370,000 in the third quarter of 2018, compared to $1.2 million in the fourth quarter of 2017. Excess tax benefits were $3.9 million and $6.2 million for the years ended 2018 and 2017, respectively. Excess tax benefits are expected to be higher in the first quarter when the majority of the Company's share-based awards vest, and will fluctuate throughout the year based on the Company's stock price and timing of employee stock option exercises and vesting of other share-based awards.

ASSET QUALITY

Allowance for Credit Losses, excluding covered loans

    Three Months Ended   Years Ended
    December 31,   September 30,   December 31,   December 31,   December 31,
(Dollars in thousands)   2018   2018   2017   2018   2017
Allowance for loan losses at beginning of period   $ 149,756     $ 143,402     $ 133,119     $ 137,905     $ 122,291  
Provision for credit losses   10,401     11,042     7,772     34,832     29,982  
Other adjustments (1)   (79 )   (18 )   698     (181 )   573  
Reclassification (to) from allowance for unfunded lending-related commitments   (150 )   (2 )   7     (126 )   69  
Charge-offs:                    
Commercial   6,416     3,219     1,340     14,532     5,159  
Commercial real estate   219     208     1,001     1,395     4,236  
Home equity   715     561     728     2,245     3,952  
Residential real estate   267     337     542     1,355     1,284  
Premium finance receivables - commercial   1,741     2,512     2,314     12,228     7,335  
Premium finance receivables - life insurance                    
Consumer and other   148     144     207     880     729  
Total charge-offs   9,506     6,981     6,132     32,635     22,695  
Recoveries:                    
Commercial   225     304     235     1,457     1,870  
Commercial real estat