Wintrust Financial Corporation — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Wintrust is a financial holding company with community banking operations concentrated in the Chicago area, southern Wisconsin and northwest Indiana, plus national and Canadian specialty finance and wealth management businesses.
Financial performance and position
- Q2 earnings: Net income was $105.1 million, up from $21.7 million in Q2 2020; diluted EPS was $1.70 versus $0.34. Six-month net income was $258.3 million versus $84.5 million.
- Revenue and margins: Q2 net revenue (net interest income plus non-interest income) was $409.0 million, down 4% year over year. Net interest income rose 6% to $279.6 million, while non-interest income declined 20% to $129.4 million. Net interest margin was 2.62%, down 11 basis points year over year. The efficiency ratio increased to 68.71% from 61.13%.
- Key revenue mix: Q2 mortgage banking revenue fell 51% to $50.6 million; wealth management revenue rose 36% to $30.7 million. Six-month net revenue increased 7% to $857.4 million.
- Credit costs and profits: The company recorded a $15.3 million provision benefit in Q2, compared with a $135.1 million provision expense in Q2 2020. Q2 pre-tax income excluding provision for credit losses, a non-GAAP measure, was $128.9 million versus $165.8 million. Six-month provision benefit was $60.6 million.
- Loans and deposits: Loans were $32.9 billion, up 5% from June 2020; deposits were $38.8 billion, up 9%. Total assets were $46.7 billion, up 7%. The loan portfolio included $1.9 billion of PPP loans at quarter-end; more than 19,400 PPP loans totaling approximately $4.8 billion had been funded since program launch.
- Asset quality: Non-performing loans were $87.7 million, or 0.27% of loans, compared with $188.3 million, or 0.60%, a year earlier. Non-performing assets were $103.3 million, or 0.22% of assets. The allowance for loan losses was $261.1 million; loan-loss and unfunded-commitment allowances together equaled 0.92% of loans.
- Cash flow and liquidity: For the six months, operating cash flow was $648.8 million, investing cash outflow was $2.20 billion and financing cash inflow was $1.67 billion. Cash and cash equivalents ended at $435.0 million. Management reported approximately $5.1 billion in overnight liquid funds and interest-bearing bank deposits and stated it believed liquidity was adequate.
- Debt and capital: FHLB advances, other borrowings and subordinated notes totaled $2.20 billion; junior subordinated debentures added $253.6 million. The company reported a 9.0% common equity Tier 1 ratio, 10.1% Tier 1 capital ratio and 12.4% total capital ratio. It was in compliance with its credit-agreement covenants. The quarterly common dividend was $0.31 per share.
Material changes versus comparable periods
- Net income rose sharply year over year, primarily reflecting the credit-reserve release and higher net interest income, partly offset by lower mortgage banking revenue and higher operating expenses.
- Q2 non-interest expense increased 8% to $280.1 million; salaries and benefits rose 12% to $172.8 million. Six-month non-interest expense increased 15% to $567.0 million.
- Mortgage production for sale declined to $1.72 billion in Q2 from $2.21 billion a year earlier, and production margin fell to 2.18% from 4.23%.
- Non-performing loans and total delinquency indicators improved from June 2020. The allowance declined as management cited improved macroeconomic forecasts and portfolio characteristics.
- Available-for-sale securities fell to $2.19 billion from $3.19 billion at June 2020, while held-to-maturity securities rose to $2.50 billion from $728.5 million.
Outlook, commentary and risks
- No specific earnings or financial guidance is provided in the filing. Management described continued loan growth, stronger net interest income from earning-asset growth, and ongoing monitoring of credit and liquidity.
- Management attributed the reserve release to improved economic forecasts and loan portfolio characteristics, but cautioned that COVID-19 effects, including variants, remain uncertain. COVID-related modified loans totaled $145.6 million at June 30, including $102.8 million qualifying for temporary TDR relief.
- PPP loans generated $146.0 million of net fees to be recognized over their lives, subject to estimated prepayments and forgiveness activity.
- Interest-rate exposure remains material: modeled one-year net interest income sensitivity at June 30 was positive 24.6% under a static +200-basis-point shock and negative 6.9% under a static −100-basis-point shock. Actual outcomes may differ.
- Other cited risks include credit deterioration and collateral values, interest-rate and margin pressure, LIBOR transition, mortgage servicing-rights valuation and prepayments, cyber and vendor risks, competition, and COVID-related economic disruption. The filing reports no material change to the prior annual report’s risk factors.
- Unusual items included a $4.0 million net gain from the previously announced sale of three southwestern Wisconsin branches and the Q2 mortgage servicing-rights fair-value adjustment, which was unfavorable by $5.5 million. Management reported no goodwill impairment and no material expected adverse effect from pending legal matters; outcomes could still affect a particular period.
Important facts for investors to verify
- Whether the credit-reserve release is sustainable and how loan losses, delinquencies, non-performing assets and COVID-related accommodations evolve.
- PPP forgiveness pace, remaining deferred fees and the effect of repayments on loan growth and net interest income.
- Whether mortgage production margins and revenue stabilize, and how MSR valuation responds to rates and prepayments.
- Whether deposit growth and funding costs support margins, and whether the reported liquidity and capital levels remain adequate under stress.
- Interest-rate sensitivity assumptions, including the transition from LIBOR and the effects of rate changes on earnings and fair values.