Wintrust Financial Corporation — Q3 2020 Form 10-Q
Reporting period: Quarter ended September 30, 2020; comparisons are primarily with Q3 2019 and the nine months ended September 30, 2019. Wintrust is a financial holding company focused on community banking in the Chicago area, southern Wisconsin and northwest Indiana, with national and Canadian specialty finance operations and regional wealth management services.
Financial performance and condition
| Metric | Q3 2020 / September 30, 2020 | Comparison |
|---|---|---|
| Net income | $107.3 million | Up 8% from $99.1 million in Q3 2019 |
| Net income per diluted common share | $1.67 | Down from $1.69 in Q3 2019 |
| Net interest income | $255.9 million | Down 3% year over year |
| Net interest margin | 2.56% | Down 81 basis points from 3.37% |
| Non-interest income | $170.6 million | Up 48%; mortgage banking revenue was $108.5 million, up 113% |
| Non-interest expense | $264.2 million | Up 13% |
| Total assets | $43.7 billion | Up 25% from September 30, 2019 |
| Loans, excluding loans held for sale | $32.1 billion | Up 25% year over year; includes $3.4 billion of PPP loans |
| Deposits | $35.8 billion | Up 25% year over year |
| Allowance for loan and unfunded commitment losses | $388.9 million | 1.21% of loans; versus $163.3 million and 0.64% a year earlier |
- Nine-month results: Net income was $191.8 million, down 29% from $269.7 million; diluted EPS was $3.06 versus $4.60. Net revenue rose 13% to $1.23 billion, while net interest income fell 2% to $780.5 million. Provision for credit losses increased to $213.0 million from $46.0 million.
- Cash flows, nine months: Operating activities used $423.2 million; investing activities used $6.12 billion; financing activities provided $6.56 billion. Cash and cash equivalents ended at $308.7 million, up $22.2 million. Mortgage loan originations and sales materially affect operating cash flows.
- Liquidity and funding: Management reported approximately $4.1 billion of overnight liquid funds and interest-bearing bank deposits. Deposits were the main funding source; FHLB advances were $1.23 billion. Total FHLB advances, other borrowings and subordinated notes were $2.17 billion; junior subordinated debentures were $253.6 million.
- Capital: At September 30, the Tier 1 leverage ratio was 8.2%, Tier 1 capital ratio 10.2%, common equity Tier 1 ratio 9.0%, and total capital ratio 12.9%. The company reported compliance with its credit agreement covenants and capital ratios above the stated “well-capitalized” thresholds.
Material changes and notable items
- Mortgage banking drove much of the quarterly revenue improvement: originations for sale were $2.23 billion versus $1.42 billion in Q3 2019, and production margin was 4.23% versus 2.88%.
- Lower interest rates compressed margins and reduced net interest income despite substantial loan growth. Q3 net interest margin was also down sequentially from 2.73% in Q2 2020.
- Wintrust adopted CECL on January 1, 2020, recording a $47.3 million cumulative-effect increase in the allowance for loan and lending commitments. The allowance for unfunded commitments was $62.9 million at quarter-end. Management attributed elevated 2020 credit provision primarily to CECL, pandemic-related economic uncertainty and forecast assumptions.
- Net charge-offs were $9.3 million in Q3 and $30.0 million year to date. Non-performing loans were $173.1 million, or 0.54% of loans, at September 30; non-performing assets were $182.3 million, or 0.42% of assets.
- COVID-19-related loan modifications totaled $413.4 million at quarter-end, down from $1.7 billion at June 30. Separately, approximately $406.1 million of modifications qualified for CARES Act relief from TDR classification. The filing also reports $78.5 million of TDR loans.
- The May 2020 issuance of Series E preferred stock generated $277.6 million in net proceeds; quarterly preferred dividends increased to $10.3 million, contributing to lower common EPS despite higher net income. Common dividends declared were $0.28 per share quarterly.
- Management reported no goodwill impairment as of September 30. The Lehman-related mortgage dispute was settled in October 2020 for an amount described as immaterial; a separate California wage claim settlement remained subject to court approval.
Outlook, commentary and risks
Management said the company believed it had adequate liquidity and capital to manage through the pandemic, while emphasizing that the duration and financial effects of COVID-19 remained highly uncertain. The filing provides no specific earnings or revenue guidance. Management identified potential further credit losses, borrower stress and collateral-value declines, sustained low rates and margin pressure, PPP compliance and guarantee risks, operational and cybersecurity exposures from remote work, and market, regulatory and funding risks. The company had authorized resumption of common-stock repurchases, subject to market conditions, liquidity and regulatory requirements.
Investor verification priorities
- Track credit quality, allowance adequacy, charge-offs, delinquency migration and the performance of pandemic-modified loans, especially commercial and commercial real estate exposures.
- Verify the pace and profitability of mortgage originations, production margins, servicing-rights valuation and whether elevated mortgage revenue persists.
- Assess net interest margin sensitivity to prolonged low rates, deposit pricing, and the transition away from LIBOR.
- Monitor PPP forgiveness, fee recognition, SBA guarantee compliance and the outcome of PPP agent-fee litigation.
- Review liquidity, deposit mix and concentration, borrowings, regulatory capital, and the effects of preferred dividends and any resumed share repurchases.
- Check subsequent filings for pandemic-related developments, contingencies, and updates to management’s economic forecasts and credit-loss estimates.