Wintrust Financial Corporation — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; balance-sheet comparisons are primarily with March 31, 2020 and December 31, 2020. Wintrust is a financial holding company operating community banks mainly in the Chicago area, southern Wisconsin and northwest Indiana, alongside national specialty finance and wealth management businesses.
Financial performance and condition
| Metric | Q1 2021 | Comparable period / change |
|---|---|---|
| Net income | $153.1 million | $62.8 million in Q1 2020; up 144% |
| Diluted EPS | $2.54 | $1.04 in Q1 2020 |
| Net interest income | $261.9 million | $261.4 million in Q1 2020; nearly flat |
| Net interest margin | 2.53% | 3.12% in Q1 2020; down 59 basis points |
| Non-interest income | $186.5 million | $113.2 million in Q1 2020; up 65% |
| Non-interest expense | $286.9 million | $234.6 million in Q1 2020; up 22% |
| Total assets | $45.7 billion | $38.8 billion at March 31, 2020 |
| Total loans | $33.2 billion | $27.8 billion at March 31, 2020 |
| Total deposits | $37.9 billion | $31.5 billion at March 31, 2020 |
- Revenue and earnings: Net revenue was $448.4 million, up 20% year over year. Mortgage banking revenue rose to $113.5 million from $48.3 million, reflecting higher production and servicing-related fair-value gains. Production margin was 3.21%, compared with 4.06% a year earlier. Wealth management income also increased, supported by market appreciation and higher asset levels.
- Credit costs: The company reported a $45.3 million provision benefit (release), versus a $53.0 million provision expense in Q1 2020. Management attributed the change mainly to improved economic forecasts and loan-portfolio characteristics. Net charge-offs were $13.3 million. The allowance for loan and unfunded lending-related commitments was $321.2 million, or 0.97% of loans; excluding PPP loans, the ratio was 1.08%.
- Asset quality: Non-performing loans were $99.1 million, or 0.30% of loans, down from $179.4 million, or 0.65%, at March 31, 2020. COVID-19-modified loans totaled $253.7 million at quarter-end; approximately $175.2 million qualified for CARES Act relief from TDR classification.
- Cash flow: Operating activities provided $216.8 million, investing activities used $855.7 million, and financing activities provided $742.8 million. Cash and cash equivalents ended the quarter at $426.4 million, versus $349.4 million a year earlier. The filing describes approximately $3.8 billion of overnight liquid funds and interest-bearing bank deposits as available liquidity at quarter-end.
- Funding and capital: Deposits were the primary funding source. Borrowings included $1.23 billion of FHLB advances, $516.9 million of other borrowings, $436.6 million of subordinated notes and $253.6 million of junior subordinated debentures. Regulatory ratios included an 8.2% Tier 1 leverage ratio, 10.2% Tier 1 capital ratio, 9.0% common equity Tier 1 ratio and 12.6% total capital ratio. The common dividend was $0.31 per share, up from $0.28 in Q1 2020.
Material changes and management commentary
- Loan growth reflected PPP lending and growth in commercial, commercial real estate and life insurance premium finance portfolios. PPP loans totaled approximately $3.3 billion at March 31, 2021; since program participation began, Wintrust had funded over 19,400 PPP loans with an approximately $4.8 billion carrying balance. Net PPP fees of $143.1 million are to be recognized over loan lives, subject to estimated prepayments.
- Lower market interest rates reduced asset yields and compressed net interest margin, while lower deposit costs and growth in earning assets largely held net interest income steady.
- Non-interest expense rose mainly because of higher incentive compensation and mortgage commissions, as well as increased staffing and technology-related costs. Management also cited increased FDIC insurance expense, partly associated with asset growth.
- Available-for-sale securities declined to $2.43 billion from $3.06 billion at year-end 2020, while held-to-maturity securities increased to $2.17 billion from $579.1 million. Other comprehensive income included a $44.7 million after-tax loss on available-for-sale securities, partly offset by derivative gains.
- Management said liquidity and capital were adequate to manage through COVID-19, but emphasized that the pandemic’s duration and effects—including variant strains and the pace of recovery—remain uncertain. The filing gives no quantitative earnings or full-year financial guidance.
Risks, contingencies and unusual items
- Key risks include pandemic-related borrower stress, potential future credit-reserve increases, commercial real estate conditions, interest-rate and margin sensitivity, deposit competition, mortgage-market and servicing valuation changes, cyber and vendor risks, and the transition away from LIBOR. Management uses an eight-quarter economic forecast in its credit-loss model and acknowledges that estimates depend on judgment and changing conditions.
- Mortgage banking results were affected by material MSR valuation movements: the MSR balance reached $124.3 million, including $18.0 million of positive fair-value changes in the quarter. These valuations depend on assumptions such as prepayment speeds and discount rates.
- Potential legal matters included a Northbrook Bank case alleging losses exceeding $6 million, which was awaiting an appellate decision. The company said it could not estimate potential liability. Other described matters were settled or dismissed, or were considered immaterial; management said pending matters were not expected to have a material adverse effect, while noting an unfavorable outcome could affect a particular period.
- A subsequent branch transaction closed April 23, 2021: Greenwoods assumed approximately $77.4 million of deposits and acquired three Wisconsin branch locations and related assets.
- The company reported no material changes to its previously disclosed risk factors, effective disclosure controls, and no common-share repurchases during the quarter.
Important facts for investors to verify
- Whether the large credit-reserve release is sustainable, and how updated economic assumptions, borrower performance and COVID-19 modifications affect future provisions and charge-offs.
- How much PPP fee income will be recognized, and how forgiveness and repayment timing affect reported loan growth and earnings.
- Whether mortgage production, margins and MSR valuations remain resilient as interest rates and refinancing activity change.
- Whether deposit growth and funding costs support net interest income as excess liquidity is deployed and asset yields remain under pressure.
- How credit quality, commercial real estate concentrations and capital ratios evolve, including under less favorable economic scenarios.