Business context and reporting period
Wintrust Financial Corporation is a financial holding company serving the Chicago metropolitan area, southern Wisconsin and northwest Indiana, with specialty finance businesses nationally and in Canada, and wealth management operations. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2019.
Financial performance and condition
| Metric | Q3 2019 | Comparable period |
|---|---|---|
| Net income | $99.1 million; up 8% | $91.9 million in Q3 2018 |
| Diluted EPS | $1.69 | $1.57 in Q3 2018 |
| Net interest income | $264.9 million; up 7% | $247.6 million in Q3 2018 |
| Net interest margin | 3.37% | 3.59% in Q3 2018 |
| Non-interest income | $115.1 million; up 15% | $99.9 million in Q3 2018 |
| Non-interest expense | $234.6 million; up 10% | $213.6 million in Q3 2018 |
For the first nine months, net income was $269.7 million, up 2%, and diluted EPS was $4.60 versus $4.50. Net interest income rose 12% to $793.0 million, while net interest margin edged down to 3.56% from 3.58%. Non-interest income rose 5% to $295.0 million; expenses increased 10% to $678.5 million. Nine-month provision for credit losses was $46.0 million, versus $24.4 million.
- Balance sheet at September 30: assets of $34.9 billion, up 16% year over year; loans of $25.7 billion, up 11%; deposits of $28.7 billion, up 15%.
- Liquidity: management reported approximately $2.7 billion in overnight liquid funds and interest-bearing bank deposits. Cash and cash equivalents ended at $448.8 million, up $56.6 million during the first nine months.
- Cash flow: operating activities used $23.0 million in the first nine months, compared with $261.1 million provided in 2018; investing activities used $2.79 billion, largely reflecting loan growth and higher bank deposits; financing activities provided $2.87 billion, including $2.45 billion of deposit growth and $296.6 million net proceeds from subordinated notes.
- Credit quality: non-performing loans were $114.3 million, or 0.44% of loans, versus 0.55% a year earlier. The allowance for credit losses was $163.3 million, or 0.64% of loans, versus 0.65%. Nine-month net charge-offs increased to $36.9 million from $12.5 million.
- Capital and debt: shareholders’ equity was $3.54 billion. Common equity Tier 1 was 9.3%, Tier 1 capital 9.7%, and total capital 12.4%. Subordinated notes rose to $436.0 million after a $300 million issuance; the company also had $574.8 million of FHLB advances and $253.6 million of junior subordinated debentures.
Material changes versus prior periods
- Q3 earnings growth reflected stronger net interest income and mortgage banking revenue, partly offset by lower margin and higher expenses. Management attributed net interest income growth chiefly to loan growth, despite higher funding costs.
- Mortgage banking revenue increased 21% in Q3 to $50.9 million, but declined 6% for the nine-month period to $106.4 million. Q3 mortgage originations for sale were $1.42 billion versus $1.15 billion a year earlier; production margin rose to 3.01% from 2.19%.
- Salary and benefit costs increased 14% in Q3, which management linked to acquisition-related and growth-related staffing, higher mortgage incentives and employee insurance costs. The quarter also benefited from FDIC assessment credits.
- Loan growth included commercial, commercial real estate and premium finance portfolios. Oak Bank’s parent, Rush-Oak Corporation, was acquired in May 2019; the company recorded $10.7 million of goodwill.
- For the first nine months, community banking segment profit declined 3% to $182.6 million; specialty finance profit rose 9% to $67.2 million; wealth management profit rose 36% to $20.0 million.
Outlook, risks and unusual items
- No specific earnings or financial guidance was provided. Management cited continued loan and deposit growth and increased mortgage banking and wealth management revenue, while noting margin pressure from funding costs.
- Management said the allowance was appropriate and the loan portfolio diversified and well secured. However, net charge-offs rose, and TDRs totaled $66.3 million across 230 credits. New TDRs during the first nine months totaled $46.8 million, compared with $24.8 million in the same 2018 period.
- The company adopted lease accounting in 2019, recognizing a $192.1 million lease liability and a $160.9 million right-of-use asset at September 30. It is preparing for CECL, effective in 2020, and had begun model validation and parallel testing; the adoption impact was not quantified.
- Interest-rate sensitivity models showed estimated one-year net interest income changes at September 30 of +20.7% under a static +200-basis-point shock and −11.9% under a static −100-basis-point shock; gradual ramp scenarios were +10.1% and −5.6%, respectively. These are modeled outcomes, not forecasts.
- Subsequent to quarter-end, Wintrust completed acquisitions of STC Bancshares on October 7 and SBC, Incorporated on November 1. On October 24, the board authorized up to $125 million in common-stock repurchases.
- Legal matters include mortgage-related and other claims; management reported immaterial reserves for specified matters and stated that pending matters were not expected to have a material adverse effect overall, while acknowledging an unfavorable outcome could affect a particular period.
Important facts for investors to verify
- Whether loan and deposit growth can continue without further net interest margin compression as deposit and other funding costs evolve.
- Whether rising charge-offs and TDR activity indicate broader deterioration; review commercial, commercial real estate and premium finance exposures and allowance assumptions.
- The sustainability of mortgage banking results, including production margins, refinancing mix, MSR valuation assumptions and servicing-related fair-value changes.
- The effects of the 2019 and subsequent acquisitions on integration costs, growth, goodwill and capital, and whether the authorized repurchase proceeds.
- Future CECL implementation impact, regulatory capital levels, available liquidity and the company’s ability to meet debt and covenant obligations.