Wintrust Financial Corporation — Q3 2021 Form 10-Q
Business context and reporting period. This unaudited filing covers the quarter and nine months ended September 30, 2021. Wintrust operates community banks principally in the Chicago area, southern Wisconsin and northwest Indiana, alongside national and Canadian specialty-finance businesses and wealth management operations.
Financial performance and condition
| Metric | Q3 2021 | Prior comparable period | Nine months 2021 | Prior comparable period |
|---|---|---|---|---|
| Net interest income | $287.5 million | $255.9 million | $829.0 million | $780.5 million |
| Net interest margin | 2.58% | 2.56% | 2.58% | 2.79% |
| Net income | $109.1 million | $107.3 million | $367.4 million | $191.8 million |
| Diluted earnings per common share | $1.77 | $1.67 | $6.00 | $3.06 |
| Net revenue | $424.0 million | $426.5 million | $1.281 billion | $1.226 billion |
| Non-interest expense | $282.1 million | $264.2 million | $849.1 million | $758.2 million |
- Balance sheet and liquidity: Total assets were $47.8 billion, loans $33.3 billion and deposits $40.0 billion at quarter-end. Deposits rose 11% and loans rose 4% year over year. Management reported approximately $5.7 billion in overnight liquid funds and interest-bearing bank deposits and said liquidity and capital were adequate.
- Cash flow: Operating activities provided $731.0 million in the first nine months, versus $423.2 million used in the comparable 2020 period. Investing activities used $3.367 billion and financing activities provided $2.776 billion. The filing’s cash flows include significant loan, deposit, securities and mortgage-production activity.
- Credit: The provision for credit losses was a benefit of $7.9 million in Q3 and $68.6 million year to date, compared with expense of $25.0 million and $213.0 million, respectively, in 2020. The allowance for loan and unfunded commitment losses was $296.1 million, or 0.89% of loans, at September 30. Non-performing loans were $90.0 million (0.27% of loans), down from $173.1 million (0.54%) a year earlier.
- Debt and capital: FHLB advances, other borrowings and subordinated notes totaled $2.18 billion; junior subordinated debentures added $253.6 million. The company reported a Tier 1 leverage ratio of 8.1%, Tier 1 capital ratio of 9.9%, CET1 ratio of 8.9% and total capital ratio of 12.1%. It stated that it was in compliance with credit-agreement covenants.
- Margins and efficiency: Q3 GAAP net interest margin was 2.58%, up 2 basis points year over year but down 4 basis points sequentially. The nine-month margin declined 21 basis points year over year. The Q3 non-GAAP efficiency ratio was 66.03%, versus 61.86% a year earlier.
Material changes versus prior periods
- Q3 net income increased 2% year over year, while nine-month net income increased 92%. Management attributed earnings improvement in part to credit-reserve releases and higher net interest income.
- Q3 net interest income increased 12%, supported by earning-asset growth, including $1.4 billion higher average loans, and lower deposit costs. Nine-month net interest income rose 6% despite lower margin.
- Q3 non-interest income fell 20%, primarily because mortgage banking revenue declined 49% to $55.8 million. Mortgage loans originated for sale fell to $1.56 billion from $2.23 billion, and production margin declined to 2.68% from 3.77%.
- Wealth management revenue rose 26% in Q3, which management linked to higher market values of managed assets and growth in customer and advisor relationships. Non-interest expense rose 7% in Q3; year-to-date it rose 12%, with higher compensation, technology, occupancy and marketing costs.
- Total assets increased 9% year over year. The loan mix shifted as PPP balances declined with SBA forgiveness, while commercial, commercial real estate, residential real estate and premium-finance portfolios grew.
Outlook, risks and unusual items
- The filing provides no specific earnings, revenue or margin guidance. Management described continued growth efforts and said it would maintain liquidity and capital while monitoring COVID-19 effects; it cautioned that the pandemic and variants could still affect borrowers, operations and results.
- Credit-reserve releases reflected improved macroeconomic forecasts and loan-portfolio characteristics. The allowance depends on forecasts and management assumptions; management noted that future non-performing assets could increase and that pandemic effects remain uncertain.
- Key exposures include interest-rate and margin changes, commercial real estate concentration in Illinois and Wisconsin (81.2% of CRE loans), borrower credit deterioration, premium-finance fraud and competition, mortgage origination and servicing variability, and the transition away from LIBOR. A 100-basis-point rate decline modeled a 7.8% reduction in one-year net interest income under the static scenario and 3.8% under the ramp scenario.
- At September 30, derivative liabilities totaled $161.3 million. The filing notes that certain counterparties could terminate derivatives following specified defaults or a failure to maintain required capital status; the fair value of derivatives subject to such provisions in a net liability position was $115.7 million.
- After quarter-end, Wintrust announced an agreement to purchase approximately $570 million of loans to about 1,800 Allstate agents. The board also authorized up to $200 million of additional share repurchases on October 28, 2021, in addition to approximately $23 million remaining under the prior authorization.
- A Northbrook Bank lawsuit alleging involvement in a hedge-fund fraud was dismissed with prejudice, and an appeal was affirmed; plaintiffs’ petition for Illinois Supreme Court review remained pending. Management said pending and threatened matters were not expected to have a material adverse effect overall, while noting an unfavorable resolution could affect a particular period.
Investor verification priorities
- Check whether credit-reserve releases are sustainable and track subsequent loan ratings, delinquencies, non-performing assets, charge-offs and COVID-related modifications.
- Assess underlying earnings excluding reserve releases, mortgage-banking volatility and unusual investment-security or other income items.
- Monitor loan and deposit growth, PPP runoff, funding mix, liquidity deployment and the effect of deposit pricing on net interest margin.
- Review commercial real estate concentration, especially in the Chicago-area and southern Wisconsin markets, and sensitivity to economic or property-value deterioration.
- Verify the terms, funding and integration of the announced Allstate-agent loan portfolio purchase and the pace of share repurchases.
- Track capital ratios, debt maturities and covenant compliance, as well as exposure to LIBOR transition and derivative termination provisions.