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Wintrust Financial Corporation (WTFC - Snapshot Report) reported earnings per share of 71 cents in third-quarter 2013, beating the Zacks Consensus Estimate of 65 cents. Further, results increased from 66 cents earned in the prior-year quarter.

Wintrust’s results were driven by an increase in revenues, aided primarily by higher net interest income and improvement in provision for credit losses. However, rising expenses and decline in non-interest income remain plausible concerns.

Net income applicable to shareholders was $35.5 million in the reported quarter, up 10% from $32.3 in the year-ago quarter.

Performance in Detail

Wintrust’s net revenue was $196.4 million, up 0.5% year over year.

Wintrust’s net interest income (NII) rose 7% from the prior-year quarter to $141.8 million. The rise was driven by increase in average earning assets and lower interest expenses. Net interest margin (NIM) rose 7 basis points (bps) year over year to 3.57% due to the positive impact from the rise in NII.

Wintrust’s non-interest income fell 13% year over year to $54.7 million. The decline was primarily due to absence of bargain purchase gains, lower mortgage banking revenues and a decrease in fees related to covered call options. These negatives were partially offset by higher wealth management revenues, increased FDIC indemnification asset accretion and foreign currency re-measurement gains.

Further, non-interest expenses at Wintrust crept up 2% year over year to $127.2 million. The rise was mainly due to rise in salary and employee benefit costs as well as occupancy, data processing and equipment expenses, partially offset by decrease in other real estate owned (OREO) expenses and professional fees.

Credit Quality

Credit quality metrics improved in the reported quarter. Wintrust’s provision for credit losses decreased 36% from the prior-year quarter to $11.6 million. Net charge-offs as a percentage of loans, excluding covered loans, for the third quarter of 2013 totaled 34 basis points (bps) on an annualized basis compared with 59 bps in second-quarter 2013 and 60 bps in third-quarter 2012.

Excluding the allowance for covered loan losses, the allowance for credit losses as of Sep 30 totaled $108.5 million or 0.86% of total loans, compared with $110.4 million or 0.88% of total loans as of Jun 30 and $124.9 million or 1.09% of total loans as of Sep 30, 2012. The decrease in allowance for credit losses was primarily due to lower allowance for unfunded lending-related commitments during both periods.

Balance Sheet

Average loans and leases increased 7% year over year to $13.0 billion. Further, average total deposits increased 6% year over year to $14.6 billion.

Capital Ratios

Wintrust’s capital ratios were strong in the quarter. As of Sep 30, 2013, the tangible common equity ratio was 7.9%, up 50 bps year over year. Tangible common equity ratio was 8.7%, up 30 bps year over year.  However, Tier 1 capital to risk-weighted assets remained stable year over year at 12.2% in the quarter.

Acquisitions

On Jul 31, Wintrust announced the signing of a definitive agreement to acquire Diamond Bancorp, Inc. The company will acquire about $165 million in assets and approximately $135 million in deposits. Additionally, the outstanding shares of Diamond Bancorp’s common stock will be eligible for cash consideration under the terms of the merger.

Moreover, on Oct 1, Wintrust announced that its subsidiary, Barrington Bank, acquired certain assets and assumed certain liabilities of the mortgage banking business of Surety Financial Services.

Our Viewpoint

Wintrust has a solid franchise in the Midwest and is focused on capitalizing on growth opportunities. The opportunistic acquisitions and the in-store banking deal will likely boost the company’s growth prospects.

However, a tepid economic recovery, low interest rate environment and stringent regulations are matters of concern. Moreover, with expectations of a further rise in expenses, we remain somewhat skeptical about Wintrust’s ability to drive earnings in the quarters ahead.

Among other Midwest banks, Associated Banc-Corp (ASBC - Analyst Report) and Huntington Bancshares Incorporated (HBAN - Analyst Report) are scheduled to report their earnings results on Oct 17, while Lakeland Financial Corp. (LKFN - Snapshot Report) will likely report on Oct 25.

Wintrust currently carries a Zacks Rank #3 (Hold).
 

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