Wintrust Financial Corporation Reports Record Third Quarter 2020 Net Income of $107.3 million and Year-to-Date Net Income of $191.8 million
ROSEMONT, Ill., Oct. 21, 2020 (GLOBE NEWSWIRE) — Wintrust Financial Corporation (“Wintrust”, “the Company” or “we”) (Nasdaq: WTFC) announced record net income of $107.3 million or $1.67 per diluted common share for the third quarter of 2020, an increase in diluted earnings per common share of 391% compared to the second quarter of 2020 and a decrease of 1% compared to the third quarter of 2019. The Company recorded net income of $191.8 million or $3.06 per diluted common share for the first nine months of 2020 compared to net income of $269.7 million or $4.60 per diluted common share for the same period of 2019.Highlights of the Third Quarter of 2020:
Comparative information to the second quarter of 2020Total assets increased by $192 million.Total loans increased by $733 million.Total deposits increased by $193 million.Net interest income decreased by $7.2 million primarily due to lower Paycheck Protection Program (“PPP”) loan fee accretion as a result of changes to the estimated timing of loan forgiveness. The Company recognized $17.4 million of PPP loan fee accretion in the third quarter of 2020 as compared to $25.1 million in the prior quarter. As of September 30, 2020, the Company had approximately $49.3 million of PPP loan fees that have yet to be recognized in income.The loans to deposits ratio ended the third quarter of 2020 at 89.7% as compared to 88.1% as of the prior quarter end. Excluding PPP loans, the loans to deposits ratio ended the third quarter of 2020 at 80.2%.Mortgage banking revenue increased by $6.2 million to $108.5 million for the third quarter of 2020 as compared to $102.3 million in the prior quarter.Loans originated for sale in the third quarter of 2020 totaled $2.2 billion, essentially unchanged from the prior quarter.Outstanding COVID-19 related loan modifications for customers totaled approximately $413 million or 1.4% of total loans, excluding PPP loans, as of September 30, 2020 as compared to $1.7 billion or 6.2% as of June 30, 2020.Provision for credit losses totaled $25.0 million in the third quarter of 2020 as compared to $135.1 million in the second quarter of 2020.Recorded net charge-offs of $9.3 million in the third quarter of 2020, of which $6.4 million were reserves on individually assessed loans as of the prior quarter end, as compared to net charge-offs of $15.4 million in the second quarter of 2020. Net charge-offs as a percentage of average total loans, totaled 12 basis points in the third quarter of 2020 on an annualized basis compared to 20 basis points on an annualized basis in the second quarter of 2020.The allowance for credit losses on our core loan portfolio is approximately 1.88% of the outstanding balance as of September 30, 2020, up from 1.85% as of the prior quarter end. See Table 12 for more information.Non-performing assets totaled $182.3 million, or 0.42% of total assets, as of September 30, 2020 as compared to $198.5 million, or 0.46% of total assets, as of the prior quarter end.Other items of note from the third quarter of 2020Recorded a decrease in the value of mortgage servicing rights related to changes in fair value model assumptions, net of derivative contract activity held as an economic hedge, of $3.0 million in the third quarter of 2020 as compared to a decline of $7.4 million in the prior quarter.Agreed to settle long standing recourse obligation disputes which resulted in an additional accrual of $3.1 million in the third quarter of 2020, recorded as a reduction to other mortgage banking revenue.Accrued $6.3 million of contingent consideration expense related to the previous acquisition of mortgage operations in the third quarter of 2020 as compared to $7.2 million in the prior quarter, which was recorded in other non-interest expense.Recorded acquisition related costs of $132,000 in the third quarter of 2020 as compared to $4.9 million in the prior quarter.Recorded a $9.0 million state income tax benefit in the third quarter of 2020 related to the settlement of an uncertain tax position. Net of the federal tax impact, the reduction to income tax expense was $7.1 million.Edward J. Wehmer, Founder and Chief Executive Officer, commented, “I remain very proud of the extraordinary effort put forth by our employees to support our customers and our communities amid the challenges of COVID-19. Wintrust reported record net income of $107.3 million for the third quarter of 2020, up from $21.7 million in the second quarter of 2020. The third quarter of 2020 was characterized by strong loan growth, declining net interest income primarily due to lower PPP loan fee accretion, strong mortgage banking revenue, increased allowance for credit losses coverage and a continued focus to increase franchise value in our market area.”Mr. Wehmer continued, “The Company grew total loans by $733 million or 9%, on an annualized basis, in the third quarter of 2020 as compared to the second quarter of 2020. The Company experienced growth in its commercial, commercial real estate and premium finance receivable portfolios. In addition, the Company originated approximately $27 million of PPP loans in the third quarter of 2020. Our loan pipelines remain strong and we expect to continue to grow loans in the fourth quarter of 2020 without compromising our credit standards. Total deposits increased by $193 million as compared to the second quarter of 2020 including $205 million of non-interest bearing deposit growth. We continue to emphasize growing our franchise including gathering low cost deposits which we believe will drive value in the long term. We have accumulated excess liquidity in recent quarters and believe that, if conditions allow for suitable deployment of such excess liquidity, we could potentially increase our net interest margin by 10-25 basis points, depending on the mix of earning assets of such reinvestment. Our loans to deposits ratio ended the quarter at 89.7% and we believe that we have sufficient liquidity to meet customer loan demand.”Mr. Wehmer commented, “Net interest income decreased in the third quarter of 2020 primarily due to lower PPP loan fee accretion as a result of changes to the estimated timing of loan forgiveness. The Company recognized $17.4 million of PPP loan fee accretion in third quarter of 2020 as compared to $25.1 million in the prior quarter. Excluding the impact of PPP fees, the Company effectively offset the net interest margin impact of declining earning asset yields through downward repricing of interest-bearing deposits. We expect that, absent changes to the level of PPP loan fee accretion, we can continue to mitigate loan yield compression with deposit repricing in the fourth quarter of 2020. Further, to the extent we identify prudent opportunities to deploy excess liquidity, we may be able to improve net interest margin.”Mr. Wehmer noted, “Our mortgage banking business delivered another record quarter of mortgage banking revenue in light of the demand associated with historically low long-term interest rates. Loan volumes originated for sale in the third quarter of 2020 were $2.2 billion, essentially unchanged from the second quarter of 2020. As a result of increases in both current and forecasted revenues given the favorable mortgage banking environment, the Company recorded increased contingent consideration expense related to the previous acquisition of mortgage operations. Additionally, the Company recorded a $3.0 million decrease in the value of mortgage servicing rights related to changes in fair value model assumptions. We are leveraging efficiencies in our delivery channels and staffing strategies to keep pace with unprecedented demand. The strong quarter of mortgage performance contributed to reporting a 0.87% net overhead ratio for the third quarter of 2020. We believe the fourth quarter of 2020 will provide another strong quarter for mortgage banking production.”Commenting on credit quality, Mr. Wehmer stated, “The Company recorded provision for credit losses of $25.0 million in the third quarter increasing our allowance for credit losses. The allowance for credit losses on our core loan portfolio as of September 30, 2020 is approximately 1.88% of the outstanding balance. Net charge-offs totaled $9.3 million in the third quarter of 2020, of which $6.4 million were reserves on individually assessed loans as of the prior quarter end, as compared to $15.4 million in the second quarter of 2020. Additionally, the level of non-performing assets decreased by $16.2 million to $182.3 million. We believe that the Company’s reserves remain appropriate and we remain diligent in our review of credit.”Mindful of the challenges ahead, Mr. Wehmer noted, “We leverage robust capital and liquidity management frameworks, which include stress testing processes, to assess and monitor risk and inform decision making. The Company’s capital ratios were stable in the third quarter of 2020 as net income supported asset growth. We believe the Company’s capital levels remain adequate and will evaluate if it is prudent to resume repurchasing common stock.”Mr. Wehmer concluded, “We remain committed to supporting our community, including the well-being and safety of our customers and employees. We believe that our opportunities for both internal and external growth remain consistently strong and were particularly enhanced as a result of our successful participation in PPP lending. However, we continue to carefully monitor the COVID-19 pandemic and evaluate the impact that it could have on the economy, our customers and our business. We remain focused on navigating the current environment by actively monitoring and managing our credit portfolio.”The graphs below illustrate certain financial highlights of the third quarter of 2020. See “Supplemental Non-GAAP Financial Measures/Ratios” at Table 18 for additional information with respect to non-GAAP financial measures/ratios, including the reconciliations to the corresponding GAAP financial measures/ratios.Graphs available at the following link: http://ml.globenewswire.com/Resource/Download/6ccf49fe-326a-4af9-87b2-479bbf0543eeSUMMARY OF RESULTS:BALANCE SHEETTotal asset growth of $192 million in the third quarter of 2020 was primarily comprised of a $733 million increase in loans, partially offset by a $417 million decrease in investment securities and a $189 million decrease in interest-bearing deposits with banks. The $733 million increase in loans is comprised of a $418 million increase in commercial loans, a $222 million increase in commercial real estate loans and a $148 million increase in premium finance receivables. The $417 million decrease in investment securities was primarily due to accelerated prepayments and exercised embedded call options. The Company believes that the $3.8 billion of interest-bearing deposits with banks held as of September 30, 2020 provides more than sufficient liquidity to operate its business plan.Total liabilities increased $108 million in the third quarter of 2020 resulting primarily from a $193 million increase in total deposits. The increase in deposits includes a $272 million increase in MaxSafe money market deposits and a $205 million increase in non-interest-bearing deposits, partially offset by a $197 million decrease in wealth management deposits. Our loans to deposits ratio ended the quarter at 89.7%. Management believes in substantially funding the Company’s balance sheet with core deposits and utilizes brokered or wholesale funding sources as appropriate to manage its liquidity position as well as for interest rate risk management purposes.For more information regarding changes in the Company’s balance sheet, see Consolidated Statements of Condition and Tables 1 through 3 in this report.NET INTEREST INCOMEFor the third quarter of 2020, net interest income totaled $255.9 million, a decrease of $7.2 million as compared to the second quarter of 2020 and a decrease of $8.9 million as compared to the third quarter of 2019. The $7.2 million decrease in net interest income in the third quarter of 2020 compared to the second quarter of 2020 was primarily due to $7.7 million less PPP loan fee accretion in the third quarter of 2020.Net interest margin was 2.56% (2.57% on a fully taxable-equivalent basis, non-GAAP) during the third quarter of 2020 compared to 2.73% (2.74% on a fully taxable-equivalent basis, non-GAAP) during the second quarter of 2020 and 3.37% (3.39% on a fully taxable-equivalent basis, non-GAAP) during the third quarter of 2019. The 17 basis point decrease in net interest margin in the third quarter of 2020 as compared to the second quarter of 2020 was attributable to a 32 basis point decline in the yield on earning assets and a four basis point decrease in the net free funds contribution partially offset by a 19 basis point decrease in the rate paid on interest-bearing liabilities. The 32 basis point decline in the yield on earning assets in the third quarter of 2020 as compared to the second quarter of 2020 was in part due to a 14 basis point impact attributed to the declining yield on PPP loans. The remaining 18 basis point decrease in earning asset yields, primarily due to declining loan yields, excluding PPP, was more than offset by a 19 basis point decrease in the rate paid on interest-bearing liabilities. The decrease in the rate paid on interest-bearing liabilities in the third quarter of 2020 as compared to the prior quarter is primarily due to a 20 basis point decrease in the rate paid on interest-bearing deposits as management initiated various deposit rate reductions given the low interest rate environment.For more information regarding net interest income, see Tables 4 through 8 in this report.ASSET QUALITYThe allowance for credit losses totaled $389.0 million as of September 30, 2020 an increase of $15.8 million as compared to $373.2 million as of June 30, 2020. The allowance for credit losses increased primarily due to portfolio changes partially offset by changes in the macroeconomic forecasted conditions which contributed to decrease reserves. Consistent with the recovery in economic activity since the end of the second quarter of 2020, the Company’s third quarter of 2020 macroeconomic forecasts of key model inputs (Gross Domestic Product, Baa Corporate Credit spreads, Dow Jones Total Stock Market Index and Commercial Real Estate Price Index) assume an improvement in the economic outlook compared to the macroeconomic forecasts used in the second quarter of 2020. While the uncertainties around the path of the recovery are still present, the third quarter of 2020 macroeconomic forecasts assume that the impact of those uncertainties on economic growth is relatively less severe compared to that assumed in the prior quarter. The Commercial, Industrial and Other portfolio realized a decrease in the allowance for credit losses as compared to the prior quarter-end, which was primarily driven by improving Dow Jones Total Stock Market Index and Baa Corporate Credit spread macroeconomic scenario variables. A deterioration in the CRE Price Index for the first portion of the Reasonable & Supportable period was a primary driver of increases in the allowance for credit losses of the Commercial Real Estate portfolios. Other key drivers of allowance for credit losses changes in these portfolios include, but are not limited to, net new loan growth and loan risk rating migration.The provision for credit losses totaled $25.0 million for the third quarter of 2020 compared to $135.1 million for the second quarter of 2020 and $10.8 million for the third quarter of 2019. For more information regarding the provision for credit losses, see Table 11 in this report.Management believes the allowance for credit losses is appropriate to account for expected credit losses. The Current Expected Credit Losses (“CECL”) standard requires the Company to estimate expected credit losses over the life of the Company’s financial assets at a certain point in time. There can be no assurances, however, that future losses will not significantly exceed the amounts provided for, thereby affecting future results of operations. A summary of the allowance for credit losses calculated for the loan components in the core loan portfolio, the niche and consumer loan portfolio and the purchased loan portfolio as of September 30, 2020, June 30, 2020 and March 31, 2020 is shown on Table 12 of this report.Net charge-offs totaled $9.3 million in the third quarter of 2020, a $6.1 million decrease from $15.4 million in the second quarter of 2020 and a $165,000 decrease from $9.4 million in the third quarter of 2019. Net charge-offs as a percentage of average total loans, totaled 12 basis points in the third quarter of 2020 on an annualized basis compared to 20 basis points on an annualized basis in the second quarter of 2020 and 15 basis points on an annualized basis in the third quarter of 2019. For more information regarding net charge-offs, see Table 10 in this report.As of September 30, 2020, $49.9 million of all loans, or 0.2%, were 60 to 89 days past due and $186.5 million, or 0.6%, were 30 to 59 days (or one payment) past due. As of June 30, 2020, $79.3 million of all loans, or 0.3%, were 60 to 89 days past due and $166.4 million, or 0.5%, were 30 to 59 days (or one payment) past due. Many of the commercial and commercial real-estate loans shown as 60 to 89 days and 30 to 59 days past due are included on the Company’s internal problem loan reporting system. Loans on this system are closely monitored by management on a monthly basis.The Company’s home equity and residential real estate loan portfolios continue to exhibit low delinquency rates as of September 30, 2020. Home equity loans at September 30, 2020 that are current with regard to the contractual terms of the loan agreement represent 98.3% of the total home equity portfolio. Residential real estate loans at September 30, 2020 that are current with regards to the contractual terms of the loan agreements comprised 98.2% of total residential real estate loans outstanding. For more information regarding past due loans, see Table 13 in this report.Outstanding COVID-19 related loan modifications for customers totaled approximately $413 million or 1.4% of total loans, excluding PPP loans as of September 30, 2020 as compared to $1.7 billion or 6.2% as of June 30, 2020. The outstanding modifications primarily changed terms to interest-only payments.The ratio of non-performing assets to total assets was 0.42% as of September 30, 2020, compared to 0.46% at June 30, 2020, and 0.38% at September 30, 2019. Non-performing assets totaled $182.3 million at September 30, 2020, compared to $198.5 million at June 30, 2020 and $132.0 million at September 30, 2019. Non-performing loans totaled $173.1 million, or 0.54% of total loans, at September 30, 2020 compared to $188.3 million, or 0.60% of total loans, at June 30, 2020 and $114.3 million, or 0.44% of total loans, at September 30, 2019. The decrease in non-performing loans as of September 30, 2020 as compared to June 30, 2020 is primarily due to an $18.8 million decrease in total non-performing premium finance receivable balances. State emergency orders and pandemic delays on processing of return premiums, which serve as our collateral, contributed to the increase in 90 day past due premium finance receivables in the second quarter of 2020. As state emergency orders expired in the third quarter of 2020, many of the non-performing premium finance receivables were modified and returned to current as of September 30, 2020. Other real estate owned (“OREO”) of $9.2 million at September 30, 2020 decreased by $1.0 million compared to $10.2 million at June 30, 2020 and decreased $8.3 million compared to $17.5 million at September 30, 2019. Management is pursuing the resolution of all non-performing assets. At this time, management believes OREO is appropriately valued at the lower of carrying value or fair value less estimated costs to sell. For more information regarding non-performing assets, see Table 14 in this report.NON-INTEREST INCOMEWealth management revenue increased by $2.3 million during the third quarter of 2020 as compared to the second quarter of 2020 primarily due to increased asset management fees and brokerage commissions. Wealth management revenue is comprised of the trust and asset management revenue of The Chicago Trust Company and Great Lakes Advisors, the brokerage commissions, managed money fees and insurance product commissions at Wintrust Investments and fees from tax-deferred like-kind exchange services provided by the Chicago Deferred Exchange Company.Mortgage banking revenue increased by $6.2 million in the third quarter of 2020 as compared to the second quarter of 2020, primarily due to a $5.8 million increase in revenue related to mortgage servicing rights activity. Loans originated for sale were $2.2 billion in the third quarter of 2020, essentially unchanged from the second quarter of 2020. The percentage of origination volume from refinancing activities was 59% in the third quarter of 2020 as compared to 70% in the second quarter of 2020. Mortgage banking revenue includes revenue from activities related to originating, selling and servicing residential real estate loans for the secondary market.During the third quarter of 2020, the fair value of the mortgage servicing rights portfolio increased primarily due to increased capitalization of $20.9 million during the third quarter. This increase was partially offset by a negative fair value adjustment of $3.0 million as well as a reduction in value of $7.9 million due to payoffs and paydowns of the existing portfolio. The Company entered into interest rate swaps at the beginning of the fourth quarter of 2019 to economically hedge a portion of the potential negative fair value changes recorded in earnings related to its mortgage servicing rights portfolio. During the second quarter of 2020, the Company terminated the interest rate swaps. No economic hedges were outstanding relative to the mortgage servicing rights portfolio as of September 30, 2020 or June 30, 2020.Other non-interest income decreased by $1.4 million in the third quarter of 2020 as compared to the second quarter of 2020 primarily due to lower swap fees with commercial clients.For more information regarding non-interest income, see Tables 15 and 16 in this report.NON-INTEREST EXPENSESalaries and employee benefits expense increased by $9.9 million in the third quarter of 2020 as compared to the second quarter of 2020. The $9.9 million increase is comprised of an increase of $4.8 million in employee benefits expense, an increase of $2.8 million in salaries expense, and an increase of $2.3 million in commissions and incentive compensation. The increase in employee benefits expense is primarily due to increases in employee insurance expense related to higher medical claims in the third quarter of 2020. The increase in salaries expense is primarily related to increased staffing costs to support mortgage origination. The increase in commissions and incentive compensation is primarily due to a reversal of expense associated with the Company’s long term incentive program recorded in the second quarter of 2020.Equipment expense totaled $17.3 million in the third quarter of 2020, an increase of $1.4 million as compared to the second quarter of 2020. This increase is primarily due to increased software licensing expenses.Professional fees totaled $6.5 million in the third quarter of 2020, a decrease of $1.2 million as compared to the second quarter of 2020. The decrease in the third quarter relates primarily to lower legal and consulting fees during the period. Professional fees include legal, audit and tax fees, external loan review costs, consulting arrangements and normal regulatory exam assessments.Data processing expenses totaled $5.7 million in the third quarter of 2020, a decrease of $4.7 million as compared to the second quarter of 2020. The decrease in the third quarter relates primarily to conversion costs of $4.5 million associated with the Countryside Bank acquisition recognized in the second quarter of 2020.Miscellaneous expense in the third quarter of 2020 increased $1.1 million as compared to the second quarter of 2020. The increase in the third quarter is primarily due to higher loan expenses. The third quarter of 2020 included $6.3 million of contingent consideration expense related to the previous acquisition of mortgage operations as compared to $7.2 million in the prior quarter. The liability for contingent consideration expense related to the previous acquisition of mortgage operations is based upon forward looking mortgage origination volumes and the estimated profitability of that operation. Should those assumptions change going forward, the liability may need to be increased or decreased. The contractual period covering contingent consideration ends in January 2023. Miscellaneous expense also includes ATM expenses, correspondent bank charges, directors fees, telephone, travel and entertainment, corporate insurance, dues and subscriptions, problem loan expenses and lending origination costs that are not deferred.For more information regarding non-interest expense, see Table 17 in this report.INCOME TAXESThe Company recorded income tax expense of $30.0 million in the third quarter of 2020 compared to $9.0 million in the second quarter of 2020 and $35.5 million in the third quarter of 2019. The effective tax rates were 21.83% in the third quarter of 2020 compared to 29.46% in the second quarter of 2020 and 26.36% in the third quarter of 2019. The effective tax rate in the third quarter of 2020 reflects a $9.0 million state income tax benefit related to the settlement of an uncertain tax position. Net of the federal tax impact, the reduction to income tax expense was $7.1 million.BUSINESS UNIT SUMMARYCommunity BankingThrough its community banking unit, the Company provides banking and financial services primarily to individuals, small to mid-sized businesses, local governmental units and institutional clients residing primarily in the local areas the Company services. In the third quarter of 2020, this unit expanded its loan and deposit portfolios. However, the banking segment also experienced net interest margin compression primarily due to lower PPP loan fee accretion in the third quarter of 2020 as compared to the second quarter of 2020.Mortgage banking revenue was $108.5 million for the third quarter of 2020 an increase of $6.2 million as compared to the second quarter of 2020 primarily due to a $5.8 million increase in revenue related to mortgage servicing rights activity. Services charges on deposit accounts totaled $11.5 million in the third quarter of 2020 an increase of $1.1 million as compared to the second quarter of 2020 primarily due to higher account analysis and overdraft fees. The Company’s gross commercial and commercial real estate loan pipelines remained strong as of September 30, 2020. Before the impact of scheduled payments and prepayments, gross commercial and commercial real estate loan pipelines were estimated to be approximately $1.3 billion to $1.5 billion at September 30, 2020. When adjusted for the probability of closing, the pipelines were estimated to be approximately $850 million to $950 million at September 30, 2020.Specialty FinanceThrough its specialty finance unit, the Company offers financing of insurance premiums for businesses and individuals, equipment financing through structured loans and lease products to customers in a variety of industries, accounts receivable financing and value-added, out-sourced administrative services and other services. Originations within the insurance premium financing receivables portfolio were $2.8 billion during the third quarter of 2020 and average balances increased by $582.1 million as compared to the second quarter of 2020. The increase in average balances was more than offset by margin compression in this portfolio resulting in a $1.3 million decrease in interest income attributed to the lower market rates of interest associated with the insurance premium finance receivables portfolio. The Company’s leasing business grew during the third quarter of 2020, with its portfolio of assets, including capital leases, loans and equipment on operating leases, increasing by $20.3 million to $2.0 billion at the end of the third quarter of 2020. Revenues from the Company’s out-sourced administrative services business were $1.1 million in the third quarter of 2020, an increase of $144,000 from the second quarter of 2020.Wealth ManagementThrough four separate subsidiaries within its wealth management unit, the Company offers a full range of wealth management services, including trust and investment services, tax-deferred like-kind exchange services, asset management, securities brokerage services and 401(k) and retirement plan services. Wealth management revenue increased by $2.3 million in the third quarter of 2020 compared to the second quarter of 2020, totaling $25.0 million in the third quarter of 2020. Increases in asset management fees were primarily due to favorable equity market performance during the third quarter of 2020. At September 30, 2020, the Company’s wealth management subsidiaries had approximately $28.2 billion of assets under administration, which included $3.5 billion of assets owned by the Company and its subsidiary banks, representing a $1.2 billion increase from the $27.0 billion of assets under administration at June 30, 2020.ITEMS IMPACTING COMPARATIVE FINANCIAL RESULTSPaycheck Protection ProgramOn March 27, 2020, the President of the United States signed the CARES Act which authorized the Small Business Administration (“SBA”) to guarantee loans under the PPP for small businesses who meet the necessary eligibility requirements in order to keep their workers on the payroll. The Company began accepting applications on April 3, 2020. As of September 30, 2020, the Company secured authorization from the SBA and funded over 12,000 PPP loans with a carrying balance of approximately $3.4 billion.AcquisitionsOn November 1, 2019, the Company completed its acquisition of SBC, Incorporated (“SBC”). SBC was the parent company of Countryside Bank. Through this business combination, the Company acquired Countryside Bank’s six banking offices located in Countryside, Burbank, Darien, Homer Glen, Oak Brook and Chicago, Illinois. As of the acquisition date, the Company acquired approximately $620 million in assets, including approximately $423 million in loans, and approximately $508 million in deposits. The Company recorded goodwill of approximately $40 million on the acquisition.On October 7, 2019, the Company completed its acquisition of STC Bancshares Corp. (“STC”). STC was the parent company of STC Capital Bank. Through this business combination, the Company acquired STC Capital Bank’s five banking offices located in the communities of St. Charles, Geneva and South Elgin, Illinois. As of the acquisition date, the Company acquired approximately $250 million in assets, including approximately $174 million in loans, and approximately $201 million in deposits. The Company recorded goodwill of approximately $19 million on the acquisition.On May 24, 2019, the Company completed its acquisition of Rush-Oak Corporation (“ROC”). ROC was the parent company of Oak Bank. Through this business combination, the Company acquired Oak Bank’s one banking location in Chicago, Illinois. As of the acquisition date, the Company acquired approximately $223 million in assets, including approximately $125 million in loans, and approximately $161 million in deposits. The Company recorded goodwill of approximately $12 million on the acquisition.Adoption of New Credit Losses Accounting StandardBeginning in 2020, the Company adopted CECL, which impacted the measurement of the Company’s allowance for credit losses (including the allowance for unfunded lending-related commitments). CECL replaced the previous incurred loss methodology, which delayed recognition until such loss was probable, with a methodology that reflects an estimate of lifetime expected credit losses considering current economic condition and forecasts. Though other assets, including investment securities and other receivables, were considered in-scope of the standard and required a measurement of the allowance for credit loss, the most significant impact of CECL remains within the Company’s loan portfolios and related lending commitments. For more information regarding the adoption of CECL, see the “Asset Quality” section and the asset quality Tables 10-14 in this report.WINTRUST FINANCIAL CORPORATION
Key Operating MeasuresWintrust’s key operating measures and growth rates for the third quarter of 2020, as compared to the second quarter of 2020 (sequential quarter) and third quarter of 2019 (linked quarter), are shown in the table below:(1) Period-end balance sheet percentage changes are annualized.
(2) See “Supplemental Non-GAAP Financial Measures/Ratios” at Table 18 for additional information on this performance measure/ratio.
(3) Net revenue is net interest income plus non-interest income.
(4) The net overhead ratio is calculated by netting total non-interest expense and total non-interest income, annualizing this amount, and dividing by that period’s average total assets. A lower ratio indicates a higher degree of efficiency.
(5) Excludes mortgage loans held-for-sale.Certain returns, yields, performance ratios, or quarterly growth rates are “annualized” in this presentation to represent an annual time period. This is done for analytical purposes to better discern, for decision-making purposes, underlying performance trends when compared to full-year or year-over-year amounts. For example, a 5% growth rate for a quarter would represent an annualized 20% growth rate. Additional supplemental financial information showing quarterly trends can be found on the Company’s website at www.wintrust.com by choosing “Financial Reports” under the “Investor Relations” heading, and then choosing “Financial Highlights.” WINTRUST FINANCIAL CORPORATION
Selected Financial Highlights(1) Excludes mortgage loans held-for-sale.
(2) Net revenue includes net interest income and non-interest income.
(3) See “Supplemental Non-GAAP Financial Measures/Ratios” at Table 18 for additional information on this performance measure/ratio.
(4) The net overhead ratio is calculated by netting total non-interest expense and total non-interest income, annualizing this amount, and dividing by that period’s total average assets. A lower ratio indicates a higher degree of efficiency.
(5) Capital ratios for current quarter-end are estimated.
(6) The allowance for credit losses includes both the allowance for loan losses and the allowance for unfunded lending-related commitments. Effective January 1, 2020, the allowance for credit losses also includes the allowance for investment securities as a result of the adoption of Accounting Standard Update (“ASU”) 2016-13, Financial Instruments – Credit Losses. WINTRUST FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION WINTRUST FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) TABLE 1: LOAN PORTFOLIO MIX AND GROWTH RATES AND COMMERCIAL REAL ESTATE BY STATE(1) Annualized. TABLE 2: DEPOSIT PORTFOLIO MIX AND GROWTH RATES(1) Annualized.
(2) Represents deposit balances of the Company’s subsidiary banks from brokerage customers of Wintrust Investments, Chicago Deferred Exchange Company, LLC (“CDEC”), trust and asset management customers of the Company and brokerage customers from unaffiliated companies which have been placed into deposit accounts. TABLE 3: TIME CERTIFICATES OF DEPOSIT MATURITY/RE-PRICING ANALYSIS
As of September 30, 2020(1) Weighted-average rate excludes the impact of purchase accounting fair value adjustments.TABLE 4: QUARTERLY AVERAGE BALANCES(1) Includes interest-bearing deposits from banks, federal funds sold and securities purchased under resale agreements.
(2) Investment securities includes investment securities classified as available-for-sale and held-to-maturity, and equity securities with readily determinable fair values. Equity securities without readily determinable fair values are included within other assets.
(3) Other earning assets include brokerage customer receivables and trading account securities.
(4) Loans, net of unearned income, include non-accrual loans.
(5) Net free funds are the difference between total average earning assets and total average interest-bearing liabilities. The estimated contribution to net interest margin from net free funds is calculated using the rate paid for total interest-bearing liabilities.
(6) See “Supplemental Non-GAAP Financial Measures/Ratios” at Table 18 for additional information on this performance measure/ratio.
(7) Effective January 1, 2020 this includes the allowance for investment security losses as a result of the adoption of ASU 2016-13, Financial Instruments – Credit Losses.
TABLE 5: QUARTERLY NET INTEREST INCOME(1) See “Supplemental Non-GAAP Financial Measures/Ratios” at Table 18 for additional information on this performance measure/ratio.
(2) Interest income on tax-advantaged loans, trading securities and investment securities reflects a taxable-equivalent adjustment based on the marginal federal corporate tax rate in effect as of the applicable period. TABLE 6: QUARTERLY NET INTEREST MARGIN(1) Interest rate spread is the difference between the yield earned on earning assets and the rate paid on interest-bearing liabilities.
(2) Net free funds are the difference between total average earning assets and total average interest-bearing liabilities. The estimated contribution to net interest margin from net free funds is calculated using the rate paid for total interest-bearing liabilities.
(3) See “Supplemental Non-GAAP Financial Measures/Ratios” at Table 18 for additional information on this performance measure/ratio. TABLE 7: YEAR-TO-DATE AVERAGE BALANCES, AND NET INTEREST INCOME AND MARGIN(1) Includes interest-bearing deposits from banks, federal funds sold and securities purchased under resale agreements.
(2) Investment securities includes investment securities classified as available-for-sale and held-to-maturity, and equity securities with readily determinable fair values. Equity securities without readily determinable fair values are included within other assets.
(3) Interest income on tax-advantaged loans, trading securities and investment securities reflects a taxable-equivalent adjustment based on a marginal federal corporate tax rate in effect as of the applicable period.
(4) Other earning assets include brokerage customer receivables and trading account securities.
(5) Loans, net of unearned income, include non-accrual loans.
(6) Interest rate spread is the difference between the yield earned on earning assets and the rate paid on interest-bearing liabilities.
(7) Net free funds are the difference between total average earning assets and total average interest-bearing liabilities. The estimated contribution to net interest margin from net free funds is calculated using the rate paid for total interest-bearing liabilities.
(8) See “Supplemental Non-GAAP Financial Measures/Ratios” at Table 18 for additional information on this performance ratio.
(9) Effective January 1, 2020 this includes the allowance for investment security losses as a result of the adoption of ASU 2016-13, Financial Instruments – Credit Losses.
TABLE 8: INTEREST RATE SENSITIVITYAs an ongoing part of its financial strategy, the Company attempts to manage the impact of fluctuations in market interest rates on net interest income. Management measures its exposure to changes in interest rates by modeling many different interest rate scenarios.The following interest rate scenarios display the percentage change in net interest income over a one-year time horizon assuming increases of 100 and 200 basis points and a decrease of 100 basis points. The Static Shock Scenario results incorporate actual cash flows and repricing characteristics for balance sheet instruments following an instantaneous, parallel change in market rates based upon a static (i.e. no growth or constant) balance sheet. Conversely, the Ramp Scenario results incorporate management’s projections of future volume and pricing of each of the product lines following a gradual, parallel change in market rates over twelve months. Actual results may differ from these simulated results due to timing, magnitude, and frequency of interest rate changes as well as changes in market conditions and management strategies. The interest rate sensitivity for both the Static Shock and Ramp Scenario is as follows: TABLE 9: MATURITIES AND SENSITIVITIES TO CHANGES IN INTEREST RATES
Graph available at the following link:
http://ml.globenewswire.com/Resource/Download/ef1ce1bb-9104-4a8b-93ff-34a8785c198eSource: BloombergAs noted in the table on the previous page, the majority of the Company’s portfolio is tied to LIBOR indices which, as shown in the table above, do not mirror the same changes as the Prime rate which has historically moved when the Federal Reserve raises or lowers interest rates. Specifically, the Company has $9.0 billion of variable rate loans tied to one-month LIBOR and $5.9 billion of variable rate loans tied to twelve-month LIBOR. The above chart shows: TABLE 10: ALLOWANCE FOR CREDIT LOSSES TABLE 11: ALLOWANCE AND PROVISON FOR CREDIT LOSSES BY COMPONENT TABLE 12: ALLOWANCE BY LOAN PORTFOLIOThe table below summarizes the calculation of allowance for loan losses and allowance for unfunded lending-related commitments losses for the Company’s core, niche and consumer and purchased loan portfolios, as of September 30, 2020, June 30, 2020, and March 31, 2020. TABLE 13: LOAN PORTFOLIO AGING TABLE 14: NON-PERFORMING ASSETS AND TROUBLED DEBT RESTRUCTURINGS (“TDRs”)(1) Prior to the adoption of ASU 2016-13, acquired loans with evidence of credit quality deterioration (purchased credit deteriorated loans, or “PCD loans”) were excluded from non-performing loans. PCD loans that meet the definition of non-accrual or are greater than 90 days past-due and still accruing interest are now included in non-performing loans and resulted in a $37.3 million increase in non-accrual loans upon adoption of ASU 2016-13 as of January 1, 2020.
(2) As of September 30, 2020, June 30, 2020, March 31, 2020, December 31, 2019, and September 30, 2019, no TDRs were past due greater than 90 days and still accruing interest. Non-performing Loans Rollforward(1) This includes activity for premium finance receivables and indirect consumer loans.(1) Included in total non-performing loans.Other Real Estate Owned TABLE 15: NON-INTEREST INCOMENM – Not meaningful. NM – Not meaningful. TABLE 16: MORTGAGE BANKING(1) Certain volume adjusted for the estimated pull-through rate of the loan, which represents the Company’s best estimate of the likelihood that a committed loan will ultimately fund.
(2) Production revenue represents revenue earned from the origination and subsequent sale of mortgages, including gains on loans sold and fees from originations, processing and other related activities, and excludes servicing fees, changes in the fair value of servicing rights and changes to the mortgage recourse obligation and other non-production revenue. TABLE 17: NON-INTEREST EXPENSENM – Not meaningful.NM – Not meaningful.TABLE 18: SUPPLEMENTAL NON-GAAP FINANCIAL MEASURES/RATIOSThe accounting and reporting policies of Wintrust conform to generally accepted accounting principles (“GAAP”) in the United States and prevailing practices in the banking industry. However, certain non-GAAP performance measures and ratios are used by management to evaluate and measure the Company’s performance. These include taxable-equivalent net interest income (including its individual components), taxable-equivalent net interest margin (including its individual components), the taxable-equivalent efficiency ratio, tangible common equity ratio, tangible book value per common share, return on average tangible common equity and pre-tax income, excluding provision for credit losses. Management believes that these measures and ratios provide users of the Company’s financial information a more meaningful view of the performance of the Company’s interest-earning assets and interest-bearing liabilities and of the Company’s operating efficiency. Other financial holding companies may define or calculate these measures and ratios differently.Management reviews yields on certain asset categories and the net interest margin of the Company and its banking subsidiaries on a fully taxable-equivalent basis. In this non-GAAP presentation, net interest income is adjusted to reflect tax-exempt interest income on an equivalent before-tax basis using tax rates effective as of the end of the period. This measure ensures comparability of net interest income arising from both taxable and tax-exempt sources. Net interest income on a fully taxable-equivalent basis is also used in the calculation of the Company’s efficiency ratio. The efficiency ratio, which is calculated by dividing non-interest expense by total taxable-equivalent net revenue (less securities gains or losses), measures how much it costs to produce one dollar of revenue. Securities gains or losses are excluded from this calculation to better match revenue from daily operations to operational expenses. Management considers the tangible common equity ratio and tangible book value per common share as useful measurements of the Company’s equity. The Company references the return on average tangible common equity as a measurement of profitability. Management considers pre-tax income, excluding provision for credit losses, as a useful measurement of the Company’s core net income. WINTRUST SUBSIDIARIES AND LOCATIONSWintrust is a financial holding company whose common stock is traded on the Nasdaq Global Select Market (Nasdaq: WTFC). Its 15 community bank subsidiaries are: Lake Forest Bank & Trust Company, N.A., Hinsdale Bank & Trust Company, N.A., Wintrust Bank, N.A., in Chicago, Libertyville Bank & Trust Company, N.A., Barrington Bank & Trust Company, N.A., Crystal Lake Bank & Trust Company, N.A., Northbrook Bank & Trust Company, N.A., Schaumburg Bank & Trust Company, N.A., Village Bank & Trust, N.A., in Arlington Heights, Beverly Bank & Trust Company, N.A. in Chicago, Wheaton Bank & Trust Company, N.A., State Bank of The Lakes, N.A., in Antioch, Old Plank Trail Community Bank, N.A. in New Lenox, St. Charles Bank & Trust Company, N.A. and Town Bank, N.A., in Hartland, Wisconsin.In addition to the locations noted above, the banks also operate facilities in Illinois in Addison, Algonquin, Aurora, Bloomingdale, Bolingbrook, Buffalo Grove, Burbank, Cary, Clarendon Hills, Crete, Countryside, Darien, Deerfield, Des Plaines, Downers Grove, Elgin, Elk Grove Village, Elmhurst, Evanston, Evergreen Park, Frankfort, Geneva, Glen Ellyn, Glencoe, Glenview, Gurnee, Grayslake, Hanover Park, Highland Park, Highwood, Hoffman Estates, Homer Glen, Itasca, Joliet, Lake Bluff, Lake Villa, Lansing, Lemont, Lindenhurst, Lynwood, Markham, Maywood, McHenry, Mokena, Mount Prospect, Mundelein, Naperville, North Chicago, Northfield, Norridge, Oak Lawn, Oak Brook, Orland Park, Palatine, Park Ridge, Prospect Heights, Ravinia, Riverside, Rolling Meadows, Roselle, Round Lake Beach, Shorewood, Skokie, South Holland, Spring Grove, Steger, Stone Park, Vernon Hills, Wauconda, Waukegan, Western Springs, Willowbrook, Wilmette, Winnetka and Wood Dale, and in Wisconsin in Albany, Burlington, Clinton, Darlington, Delafield, Delavan, Elm Grove, Genoa City, Kenosha, Lake Geneva, Madison, Menomonee Falls, Milwaukee, Monroe, Pewaukee, Racine, Sharon, Wales, Walworth and Wind Lake, and in Dyer, Indiana and in Naples, Florida.Additionally, the Company operates various non-bank business units:FIRST Insurance Funding, a division of Lake Forest Bank & Trust Company, N.A., and Wintrust Life Finance, a division of Lake Forest Bank & Trust Company, N.A., serve commercial and life insurance loan customers, respectively, throughout the United States.First Insurance Funding of Canada serves commercial insurance loan customers throughout Canada.Tricom, Inc. of Milwaukee provides high-yielding, short-term accounts receivable financing and value-added out-sourced administrative services, such as data processing of payrolls, billing and cash management services, to temporary staffing service clients located throughout the United States.Wintrust Mortgage, a division of Barrington Bank & Trust Company, N.A., engages primarily in the origination and purchase of residential mortgages for sale into the secondary market through origination offices located throughout the United States. Loans are also originated nationwide through relationships with wholesale and correspondent offices.Wintrust Investments, LLC is a broker-dealer providing a full range of private client and brokerage services to clients and correspondent banks located primarily in the Midwest.Great Lakes Advisors LLC provides money management services and advisory services to individual accounts.The Chicago Trust Company, N.A., a trust subsidiary, allows Wintrust to service customers’ trust and investment needs at each banking location.Wintrust Asset Finance offers direct leasing opportunities.CDEC provides Qualified Intermediary services (as defined by U.S. Treasury regulations) for taxpayers seeking to structure tax-deferred like-kind exchanges under Internal Revenue Code Section 1031.FORWARD-LOOKING STATEMENTSThis document contains forward-looking statements within the meaning of federal securities laws. Forward-looking information can be identified through the use of words such as “intend,” “plan,” “project,” “expect,” “anticipate,” “believe,” “estimate,” “contemplate,” “possible,” “will,” “may,” “should,” “would” and “could.” Forward-looking statements and information are not historical facts, are premised on many factors and assumptions, and represent only management’s expectations, estimates and projections regarding future events. Similarly, these statements are not guarantees of future performance and involve certain risks and uncertainties that are difficult to predict, such as the impacts of the COVID-19 pandemic, and which may include, but are not limited to, those listed below and the Risk Factors discussed under Item 1A of the Company’s 2019 Annual Report on Form 10-K and in any of the Company’s subsequent SEC filings. The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and is including this statement for purposes of invoking these safe harbor provisions. Such forward-looking statements may be deemed to include, among other things, statements relating to the Company’s future financial performance, the performance of its loan portfolio, the expected amount of future credit reserves and charge-offs, delinquency trends, growth plans, regulatory developments, securities that the Company may offer from time to time, and management’s long-term performance goals, as well as statements relating to the anticipated effects on financial condition and results of operations from expected developments or events, the Company’s business and growth strategies, including future acquisitions of banks, specialty finance or wealth management businesses, internal growth and plans to form additional de novo banks or branch offices. Actual results could differ materially from those addressed in the forward-looking statements as a result of numerous factors, including the following:the severity, magnitude and duration of the COVID-19 pandemic and the direct and indirect impact of such pandemic, as well as responses to the pandemic by the government, businesses and consumers, on our operations and personnel, commercial activity and demand across our business and our customers’ businesses;the disruption of global, national, state and local economies associated with the COVID-19 pandemic, which could affect the Company’s liquidity and capital positions, impair the ability of our borrowers to repay outstanding loans, impair collateral values and further increase our allowance for credit losses;the impact of the COVID-19 pandemic on our financial results, including possible lost revenue and increased expenses (including the cost of capital), as well as possible goodwill impairment charges;economic conditions that affect the economy, housing prices, the job market and other factors that may adversely affect the Company’s liquidity and the performance of its loan portfolios, particularly in the markets in which it operates;negative effects suffered by us or our customers resulting from changes in U.S. trade policies;the extent of defaults and losses on the Company’s loan portfolio, which may require further increases in its allowance for credit losses;estimates of fair value of certain of the Company’s assets and liabilities, which could change in value significantly from period to period;the financial success and economic viability of the borrowers of our commercial loans;commercial real estate market conditions in the Chicago metropolitan area and southern Wisconsin;the extent of commercial and consumer delinquencies and declines in real estate values, which may require further increases in the Company’s allowance for credit losses;inaccurate assumptions in our analytical and forecasting models used to manage our loan portfolio;changes in the level and volatility of interest rates, the capital markets and other market indices (including developments and volatility arising from or related to the COVID-19 pandemic) that may affect, among other things, the Company’s liquidity and the value of its assets and liabilities;a prolonged period of near zero interest rates and potentially negative interest rates, either broadly or for some types of instruments, which may affect the Company’s net interest income and net interest margin, and which could materially adversely affect the Company’s profitability;competitive pressures in the financial services business which may affect the pricing of the Company’s loan and deposit products as well as its services (including wealth management services), which may result in loss of market share and reduced income from deposits, loans, advisory fees and income from other products;failure to identify and complete favorable acquisitions in the future or unexpected difficulties or developments related to the integration of the Company’s recent or future acquisitions;unexpected difficulties and losses related to FDIC-assisted acquisitions;harm to the Company’s reputation;any negative perception of the Company’s financial strength;ability of the Company to raise additional capital on acceptable terms when needed;disruption in capital markets, which may lower fair values for the Company’s investment portfolio;ability of the Company to use technology to provide products and services that will satisfy customer demands and create efficiencies in operations and to manage risks associated therewith;failure or breaches of our security systems or infrastructure, or those of third parties;security breaches, including denial of service attacks, hacking, social engineering attacks, malware intrusion or data corruption attempts and identity theft;adverse effects on our information technology systems resulting from failures, human error or cyberattacks;adverse effects of failures by our vendors to provide agreed upon services in the manner and at the cost agreed, particularly our information technology vendors;increased costs as a result of protecting our customers from the impact of stolen debit card information;accuracy and completeness of information the Company receives about customers and counterparties to make credit decisions;ability of the Company to attract and retain senior management experienced in the banking and financial services industries;environmental liability risk associated with lending activities;the impact of any claims or legal actions to which the Company is subject, including any effect on our reputation;losses incurred in connection with repurchases and indemnification payments related to mortgages and increases in reserves associated therewith;the loss of customers as a result of technological changes allowing consumers to complete their financial transactions without the use of a bank;the soundness of other financial institutions;the expenses and delayed returns inherent in opening new branches and de novo banks;examinations and challenges by tax authorities, and any unanticipated impact of the Tax Act;changes in accounting standards, rules and interpretations such as the new CECL standard and related changes to address the impact of COVID-19, and the impact on the Company’s financial statements;the ability of the Company to receive dividends from its subsidiaries;uncertainty about the discontinued use of LIBOR and transition to an alternative rate;a decrease in the Company’s capital ratios, including as a result of declines in the value of its loan portfolios, or otherwise;legislative or regulatory changes, particularly changes in regulation of financial services companies and/or the products and services offered by financial services companies, including those changes that are in response to the COVID-19 pandemic, including without limitation the CARES Act and the rules and regulations that may be promulgated thereunder;a lowering of our credit rating;changes in U.S. monetary policy and changes to the Federal Reserve’s balance sheet, including changes in response to the COVID-19 pandemic or otherwise;regulatory restrictions upon our ability to market our products to consumers and limitations on our ability to profitably operate our mortgage business;increased costs of compliance, heightened regulatory capital requirements and other risks associated with changes in regulation and the regulatory environment;the impact of heightened capital requirements;increases in the Company’s FDIC insurance premiums, or the collection of special assessments by the FDIC;delinquencies or fraud with respect to the Company’s premium finance business;credit downgrades among commercial and life insurance providers that could negatively affect the value of collateral securing the Company’s premium finance loans;the Company’s ability to comply with covenants under its credit facility; andfluctuations in the stock market, which may have an adverse impact on the Company’s wealth management business and brokerage operation.Therefore, there can be no assurances that future actual results will correspond to these forward-looking statements. The reader is cautioned not to place undue reliance on any forward-looking statement made by the Company. Any such statement speaks only as of the date the statement was made or as of such date that may be referenced within the statement. The Company undertakes no obligation to update any forward-looking statement to reflect the impact of circumstances or events after the date of the press release. Persons are advised, however, to consult further disclosures management makes on related subjects in its reports filed with the Securities and Exchange Commission and in its press releases.CONFERENCE CALL, WEBCAST AND REPLAYThe Company will hold a conference call on Thursday, October 22, 2020 at 1:00 p.m. (Central Time) regarding third quarter and year-to-date 2020 results. Individuals interested in listening should call (877) 363-5049 and enter Conference ID #5903949. A simultaneous audio-only webcast and replay of the conference call as well as an accompanying slide presentation may be accessed via the Company’s website at https://www.wintrust.com, Investor Relations, Investor News and Events, Presentations & Conference Calls. The text of the third quarter and year-to-date 2020 earnings press release will be available on the home page of the Company’s website at https://www.wintrust.com and at the Investor Relations, Investor News and Events, Press Releases link on its website.
Comparative information to the second quarter of 2020Total assets increased by $192 million.Total loans increased by $733 million.Total deposits increased by $193 million.Net interest income decreased by $7.2 million primarily due to lower Paycheck Protection Program (“PPP”) loan fee accretion as a result of changes to the estimated timing of loan forgiveness. The Company recognized $17.4 million of PPP loan fee accretion in the third quarter of 2020 as compared to $25.1 million in the prior quarter. As of September 30, 2020, the Company had approximately $49.3 million of PPP loan fees that have yet to be recognized in income.The loans to deposits ratio ended the third quarter of 2020 at 89.7% as compared to 88.1% as of the prior quarter end. Excluding PPP loans, the loans to deposits ratio ended the third quarter of 2020 at 80.2%.Mortgage banking revenue increased by $6.2 million to $108.5 million for the third quarter of 2020 as compared to $102.3 million in the prior quarter.Loans originated for sale in the third quarter of 2020 totaled $2.2 billion, essentially unchanged from the prior quarter.Outstanding COVID-19 related loan modifications for customers totaled approximately $413 million or 1.4% of total loans, excluding PPP loans, as of September 30, 2020 as compared to $1.7 billion or 6.2% as of June 30, 2020.Provision for credit losses totaled $25.0 million in the third quarter of 2020 as compared to $135.1 million in the second quarter of 2020.Recorded net charge-offs of $9.3 million in the third quarter of 2020, of which $6.4 million were reserves on individually assessed loans as of the prior quarter end, as compared to net charge-offs of $15.4 million in the second quarter of 2020. Net charge-offs as a percentage of average total loans, totaled 12 basis points in the third quarter of 2020 on an annualized basis compared to 20 basis points on an annualized basis in the second quarter of 2020.The allowance for credit losses on our core loan portfolio is approximately 1.88% of the outstanding balance as of September 30, 2020, up from 1.85% as of the prior quarter end. See Table 12 for more information.Non-performing assets totaled $182.3 million, or 0.42% of total assets, as of September 30, 2020 as compared to $198.5 million, or 0.46% of total assets, as of the prior quarter end.Other items of note from the third quarter of 2020Recorded a decrease in the value of mortgage servicing rights related to changes in fair value model assumptions, net of derivative contract activity held as an economic hedge, of $3.0 million in the third quarter of 2020 as compared to a decline of $7.4 million in the prior quarter.Agreed to settle long standing recourse obligation disputes which resulted in an additional accrual of $3.1 million in the third quarter of 2020, recorded as a reduction to other mortgage banking revenue.Accrued $6.3 million of contingent consideration expense related to the previous acquisition of mortgage operations in the third quarter of 2020 as compared to $7.2 million in the prior quarter, which was recorded in other non-interest expense.Recorded acquisition related costs of $132,000 in the third quarter of 2020 as compared to $4.9 million in the prior quarter.Recorded a $9.0 million state income tax benefit in the third quarter of 2020 related to the settlement of an uncertain tax position. Net of the federal tax impact, the reduction to income tax expense was $7.1 million.Edward J. Wehmer, Founder and Chief Executive Officer, commented, “I remain very proud of the extraordinary effort put forth by our employees to support our customers and our communities amid the challenges of COVID-19. Wintrust reported record net income of $107.3 million for the third quarter of 2020, up from $21.7 million in the second quarter of 2020. The third quarter of 2020 was characterized by strong loan growth, declining net interest income primarily due to lower PPP loan fee accretion, strong mortgage banking revenue, increased allowance for credit losses coverage and a continued focus to increase franchise value in our market area.”Mr. Wehmer continued, “The Company grew total loans by $733 million or 9%, on an annualized basis, in the third quarter of 2020 as compared to the second quarter of 2020. The Company experienced growth in its commercial, commercial real estate and premium finance receivable portfolios. In addition, the Company originated approximately $27 million of PPP loans in the third quarter of 2020. Our loan pipelines remain strong and we expect to continue to grow loans in the fourth quarter of 2020 without compromising our credit standards. Total deposits increased by $193 million as compared to the second quarter of 2020 including $205 million of non-interest bearing deposit growth. We continue to emphasize growing our franchise including gathering low cost deposits which we believe will drive value in the long term. We have accumulated excess liquidity in recent quarters and believe that, if conditions allow for suitable deployment of such excess liquidity, we could potentially increase our net interest margin by 10-25 basis points, depending on the mix of earning assets of such reinvestment. Our loans to deposits ratio ended the quarter at 89.7% and we believe that we have sufficient liquidity to meet customer loan demand.”Mr. Wehmer commented, “Net interest income decreased in the third quarter of 2020 primarily due to lower PPP loan fee accretion as a result of changes to the estimated timing of loan forgiveness. The Company recognized $17.4 million of PPP loan fee accretion in third quarter of 2020 as compared to $25.1 million in the prior quarter. Excluding the impact of PPP fees, the Company effectively offset the net interest margin impact of declining earning asset yields through downward repricing of interest-bearing deposits. We expect that, absent changes to the level of PPP loan fee accretion, we can continue to mitigate loan yield compression with deposit repricing in the fourth quarter of 2020. Further, to the extent we identify prudent opportunities to deploy excess liquidity, we may be able to improve net interest margin.”Mr. Wehmer noted, “Our mortgage banking business delivered another record quarter of mortgage banking revenue in light of the demand associated with historically low long-term interest rates. Loan volumes originated for sale in the third quarter of 2020 were $2.2 billion, essentially unchanged from the second quarter of 2020. As a result of increases in both current and forecasted revenues given the favorable mortgage banking environment, the Company recorded increased contingent consideration expense related to the previous acquisition of mortgage operations. Additionally, the Company recorded a $3.0 million decrease in the value of mortgage servicing rights related to changes in fair value model assumptions. We are leveraging efficiencies in our delivery channels and staffing strategies to keep pace with unprecedented demand. The strong quarter of mortgage performance contributed to reporting a 0.87% net overhead ratio for the third quarter of 2020. We believe the fourth quarter of 2020 will provide another strong quarter for mortgage banking production.”Commenting on credit quality, Mr. Wehmer stated, “The Company recorded provision for credit losses of $25.0 million in the third quarter increasing our allowance for credit losses. The allowance for credit losses on our core loan portfolio as of September 30, 2020 is approximately 1.88% of the outstanding balance. Net charge-offs totaled $9.3 million in the third quarter of 2020, of which $6.4 million were reserves on individually assessed loans as of the prior quarter end, as compared to $15.4 million in the second quarter of 2020. Additionally, the level of non-performing assets decreased by $16.2 million to $182.3 million. We believe that the Company’s reserves remain appropriate and we remain diligent in our review of credit.”Mindful of the challenges ahead, Mr. Wehmer noted, “We leverage robust capital and liquidity management frameworks, which include stress testing processes, to assess and monitor risk and inform decision making. The Company’s capital ratios were stable in the third quarter of 2020 as net income supported asset growth. We believe the Company’s capital levels remain adequate and will evaluate if it is prudent to resume repurchasing common stock.”Mr. Wehmer concluded, “We remain committed to supporting our community, including the well-being and safety of our customers and employees. We believe that our opportunities for both internal and external growth remain consistently strong and were particularly enhanced as a result of our successful participation in PPP lending. However, we continue to carefully monitor the COVID-19 pandemic and evaluate the impact that it could have on the economy, our customers and our business. We remain focused on navigating the current environment by actively monitoring and managing our credit portfolio.”The graphs below illustrate certain financial highlights of the third quarter of 2020. See “Supplemental Non-GAAP Financial Measures/Ratios” at Table 18 for additional information with respect to non-GAAP financial measures/ratios, including the reconciliations to the corresponding GAAP financial measures/ratios.Graphs available at the following link: http://ml.globenewswire.com/Resource/Download/6ccf49fe-326a-4af9-87b2-479bbf0543eeSUMMARY OF RESULTS:BALANCE SHEETTotal asset growth of $192 million in the third quarter of 2020 was primarily comprised of a $733 million increase in loans, partially offset by a $417 million decrease in investment securities and a $189 million decrease in interest-bearing deposits with banks. The $733 million increase in loans is comprised of a $418 million increase in commercial loans, a $222 million increase in commercial real estate loans and a $148 million increase in premium finance receivables. The $417 million decrease in investment securities was primarily due to accelerated prepayments and exercised embedded call options. The Company believes that the $3.8 billion of interest-bearing deposits with banks held as of September 30, 2020 provides more than sufficient liquidity to operate its business plan.Total liabilities increased $108 million in the third quarter of 2020 resulting primarily from a $193 million increase in total deposits. The increase in deposits includes a $272 million increase in MaxSafe money market deposits and a $205 million increase in non-interest-bearing deposits, partially offset by a $197 million decrease in wealth management deposits. Our loans to deposits ratio ended the quarter at 89.7%. Management believes in substantially funding the Company’s balance sheet with core deposits and utilizes brokered or wholesale funding sources as appropriate to manage its liquidity position as well as for interest rate risk management purposes.For more information regarding changes in the Company’s balance sheet, see Consolidated Statements of Condition and Tables 1 through 3 in this report.NET INTEREST INCOMEFor the third quarter of 2020, net interest income totaled $255.9 million, a decrease of $7.2 million as compared to the second quarter of 2020 and a decrease of $8.9 million as compared to the third quarter of 2019. The $7.2 million decrease in net interest income in the third quarter of 2020 compared to the second quarter of 2020 was primarily due to $7.7 million less PPP loan fee accretion in the third quarter of 2020.Net interest margin was 2.56% (2.57% on a fully taxable-equivalent basis, non-GAAP) during the third quarter of 2020 compared to 2.73% (2.74% on a fully taxable-equivalent basis, non-GAAP) during the second quarter of 2020 and 3.37% (3.39% on a fully taxable-equivalent basis, non-GAAP) during the third quarter of 2019. The 17 basis point decrease in net interest margin in the third quarter of 2020 as compared to the second quarter of 2020 was attributable to a 32 basis point decline in the yield on earning assets and a four basis point decrease in the net free funds contribution partially offset by a 19 basis point decrease in the rate paid on interest-bearing liabilities. The 32 basis point decline in the yield on earning assets in the third quarter of 2020 as compared to the second quarter of 2020 was in part due to a 14 basis point impact attributed to the declining yield on PPP loans. The remaining 18 basis point decrease in earning asset yields, primarily due to declining loan yields, excluding PPP, was more than offset by a 19 basis point decrease in the rate paid on interest-bearing liabilities. The decrease in the rate paid on interest-bearing liabilities in the third quarter of 2020 as compared to the prior quarter is primarily due to a 20 basis point decrease in the rate paid on interest-bearing deposits as management initiated various deposit rate reductions given the low interest rate environment.For more information regarding net interest income, see Tables 4 through 8 in this report.ASSET QUALITYThe allowance for credit losses totaled $389.0 million as of September 30, 2020 an increase of $15.8 million as compared to $373.2 million as of June 30, 2020. The allowance for credit losses increased primarily due to portfolio changes partially offset by changes in the macroeconomic forecasted conditions which contributed to decrease reserves. Consistent with the recovery in economic activity since the end of the second quarter of 2020, the Company’s third quarter of 2020 macroeconomic forecasts of key model inputs (Gross Domestic Product, Baa Corporate Credit spreads, Dow Jones Total Stock Market Index and Commercial Real Estate Price Index) assume an improvement in the economic outlook compared to the macroeconomic forecasts used in the second quarter of 2020. While the uncertainties around the path of the recovery are still present, the third quarter of 2020 macroeconomic forecasts assume that the impact of those uncertainties on economic growth is relatively less severe compared to that assumed in the prior quarter. The Commercial, Industrial and Other portfolio realized a decrease in the allowance for credit losses as compared to the prior quarter-end, which was primarily driven by improving Dow Jones Total Stock Market Index and Baa Corporate Credit spread macroeconomic scenario variables. A deterioration in the CRE Price Index for the first portion of the Reasonable & Supportable period was a primary driver of increases in the allowance for credit losses of the Commercial Real Estate portfolios. Other key drivers of allowance for credit losses changes in these portfolios include, but are not limited to, net new loan growth and loan risk rating migration.The provision for credit losses totaled $25.0 million for the third quarter of 2020 compared to $135.1 million for the second quarter of 2020 and $10.8 million for the third quarter of 2019. For more information regarding the provision for credit losses, see Table 11 in this report.Management believes the allowance for credit losses is appropriate to account for expected credit losses. The Current Expected Credit Losses (“CECL”) standard requires the Company to estimate expected credit losses over the life of the Company’s financial assets at a certain point in time. There can be no assurances, however, that future losses will not significantly exceed the amounts provided for, thereby affecting future results of operations. A summary of the allowance for credit losses calculated for the loan components in the core loan portfolio, the niche and consumer loan portfolio and the purchased loan portfolio as of September 30, 2020, June 30, 2020 and March 31, 2020 is shown on Table 12 of this report.Net charge-offs totaled $9.3 million in the third quarter of 2020, a $6.1 million decrease from $15.4 million in the second quarter of 2020 and a $165,000 decrease from $9.4 million in the third quarter of 2019. Net charge-offs as a percentage of average total loans, totaled 12 basis points in the third quarter of 2020 on an annualized basis compared to 20 basis points on an annualized basis in the second quarter of 2020 and 15 basis points on an annualized basis in the third quarter of 2019. For more information regarding net charge-offs, see Table 10 in this report.As of September 30, 2020, $49.9 million of all loans, or 0.2%, were 60 to 89 days past due and $186.5 million, or 0.6%, were 30 to 59 days (or one payment) past due. As of June 30, 2020, $79.3 million of all loans, or 0.3%, were 60 to 89 days past due and $166.4 million, or 0.5%, were 30 to 59 days (or one payment) past due. Many of the commercial and commercial real-estate loans shown as 60 to 89 days and 30 to 59 days past due are included on the Company’s internal problem loan reporting system. Loans on this system are closely monitored by management on a monthly basis.The Company’s home equity and residential real estate loan portfolios continue to exhibit low delinquency rates as of September 30, 2020. Home equity loans at September 30, 2020 that are current with regard to the contractual terms of the loan agreement represent 98.3% of the total home equity portfolio. Residential real estate loans at September 30, 2020 that are current with regards to the contractual terms of the loan agreements comprised 98.2% of total residential real estate loans outstanding. For more information regarding past due loans, see Table 13 in this report.Outstanding COVID-19 related loan modifications for customers totaled approximately $413 million or 1.4% of total loans, excluding PPP loans as of September 30, 2020 as compared to $1.7 billion or 6.2% as of June 30, 2020. The outstanding modifications primarily changed terms to interest-only payments.The ratio of non-performing assets to total assets was 0.42% as of September 30, 2020, compared to 0.46% at June 30, 2020, and 0.38% at September 30, 2019. Non-performing assets totaled $182.3 million at September 30, 2020, compared to $198.5 million at June 30, 2020 and $132.0 million at September 30, 2019. Non-performing loans totaled $173.1 million, or 0.54% of total loans, at September 30, 2020 compared to $188.3 million, or 0.60% of total loans, at June 30, 2020 and $114.3 million, or 0.44% of total loans, at September 30, 2019. The decrease in non-performing loans as of September 30, 2020 as compared to June 30, 2020 is primarily due to an $18.8 million decrease in total non-performing premium finance receivable balances. State emergency orders and pandemic delays on processing of return premiums, which serve as our collateral, contributed to the increase in 90 day past due premium finance receivables in the second quarter of 2020. As state emergency orders expired in the third quarter of 2020, many of the non-performing premium finance receivables were modified and returned to current as of September 30, 2020. Other real estate owned (“OREO”) of $9.2 million at September 30, 2020 decreased by $1.0 million compared to $10.2 million at June 30, 2020 and decreased $8.3 million compared to $17.5 million at September 30, 2019. Management is pursuing the resolution of all non-performing assets. At this time, management believes OREO is appropriately valued at the lower of carrying value or fair value less estimated costs to sell. For more information regarding non-performing assets, see Table 14 in this report.NON-INTEREST INCOMEWealth management revenue increased by $2.3 million during the third quarter of 2020 as compared to the second quarter of 2020 primarily due to increased asset management fees and brokerage commissions. Wealth management revenue is comprised of the trust and asset management revenue of The Chicago Trust Company and Great Lakes Advisors, the brokerage commissions, managed money fees and insurance product commissions at Wintrust Investments and fees from tax-deferred like-kind exchange services provided by the Chicago Deferred Exchange Company.Mortgage banking revenue increased by $6.2 million in the third quarter of 2020 as compared to the second quarter of 2020, primarily due to a $5.8 million increase in revenue related to mortgage servicing rights activity. Loans originated for sale were $2.2 billion in the third quarter of 2020, essentially unchanged from the second quarter of 2020. The percentage of origination volume from refinancing activities was 59% in the third quarter of 2020 as compared to 70% in the second quarter of 2020. Mortgage banking revenue includes revenue from activities related to originating, selling and servicing residential real estate loans for the secondary market.During the third quarter of 2020, the fair value of the mortgage servicing rights portfolio increased primarily due to increased capitalization of $20.9 million during the third quarter. This increase was partially offset by a negative fair value adjustment of $3.0 million as well as a reduction in value of $7.9 million due to payoffs and paydowns of the existing portfolio. The Company entered into interest rate swaps at the beginning of the fourth quarter of 2019 to economically hedge a portion of the potential negative fair value changes recorded in earnings related to its mortgage servicing rights portfolio. During the second quarter of 2020, the Company terminated the interest rate swaps. No economic hedges were outstanding relative to the mortgage servicing rights portfolio as of September 30, 2020 or June 30, 2020.Other non-interest income decreased by $1.4 million in the third quarter of 2020 as compared to the second quarter of 2020 primarily due to lower swap fees with commercial clients.For more information regarding non-interest income, see Tables 15 and 16 in this report.NON-INTEREST EXPENSESalaries and employee benefits expense increased by $9.9 million in the third quarter of 2020 as compared to the second quarter of 2020. The $9.9 million increase is comprised of an increase of $4.8 million in employee benefits expense, an increase of $2.8 million in salaries expense, and an increase of $2.3 million in commissions and incentive compensation. The increase in employee benefits expense is primarily due to increases in employee insurance expense related to higher medical claims in the third quarter of 2020. The increase in salaries expense is primarily related to increased staffing costs to support mortgage origination. The increase in commissions and incentive compensation is primarily due to a reversal of expense associated with the Company’s long term incentive program recorded in the second quarter of 2020.Equipment expense totaled $17.3 million in the third quarter of 2020, an increase of $1.4 million as compared to the second quarter of 2020. This increase is primarily due to increased software licensing expenses.Professional fees totaled $6.5 million in the third quarter of 2020, a decrease of $1.2 million as compared to the second quarter of 2020. The decrease in the third quarter relates primarily to lower legal and consulting fees during the period. Professional fees include legal, audit and tax fees, external loan review costs, consulting arrangements and normal regulatory exam assessments.Data processing expenses totaled $5.7 million in the third quarter of 2020, a decrease of $4.7 million as compared to the second quarter of 2020. The decrease in the third quarter relates primarily to conversion costs of $4.5 million associated with the Countryside Bank acquisition recognized in the second quarter of 2020.Miscellaneous expense in the third quarter of 2020 increased $1.1 million as compared to the second quarter of 2020. The increase in the third quarter is primarily due to higher loan expenses. The third quarter of 2020 included $6.3 million of contingent consideration expense related to the previous acquisition of mortgage operations as compared to $7.2 million in the prior quarter. The liability for contingent consideration expense related to the previous acquisition of mortgage operations is based upon forward looking mortgage origination volumes and the estimated profitability of that operation. Should those assumptions change going forward, the liability may need to be increased or decreased. The contractual period covering contingent consideration ends in January 2023. Miscellaneous expense also includes ATM expenses, correspondent bank charges, directors fees, telephone, travel and entertainment, corporate insurance, dues and subscriptions, problem loan expenses and lending origination costs that are not deferred.For more information regarding non-interest expense, see Table 17 in this report.INCOME TAXESThe Company recorded income tax expense of $30.0 million in the third quarter of 2020 compared to $9.0 million in the second quarter of 2020 and $35.5 million in the third quarter of 2019. The effective tax rates were 21.83% in the third quarter of 2020 compared to 29.46% in the second quarter of 2020 and 26.36% in the third quarter of 2019. The effective tax rate in the third quarter of 2020 reflects a $9.0 million state income tax benefit related to the settlement of an uncertain tax position. Net of the federal tax impact, the reduction to income tax expense was $7.1 million.BUSINESS UNIT SUMMARYCommunity BankingThrough its community banking unit, the Company provides banking and financial services primarily to individuals, small to mid-sized businesses, local governmental units and institutional clients residing primarily in the local areas the Company services. In the third quarter of 2020, this unit expanded its loan and deposit portfolios. However, the banking segment also experienced net interest margin compression primarily due to lower PPP loan fee accretion in the third quarter of 2020 as compared to the second quarter of 2020.Mortgage banking revenue was $108.5 million for the third quarter of 2020 an increase of $6.2 million as compared to the second quarter of 2020 primarily due to a $5.8 million increase in revenue related to mortgage servicing rights activity. Services charges on deposit accounts totaled $11.5 million in the third quarter of 2020 an increase of $1.1 million as compared to the second quarter of 2020 primarily due to higher account analysis and overdraft fees. The Company’s gross commercial and commercial real estate loan pipelines remained strong as of September 30, 2020. Before the impact of scheduled payments and prepayments, gross commercial and commercial real estate loan pipelines were estimated to be approximately $1.3 billion to $1.5 billion at September 30, 2020. When adjusted for the probability of closing, the pipelines were estimated to be approximately $850 million to $950 million at September 30, 2020.Specialty FinanceThrough its specialty finance unit, the Company offers financing of insurance premiums for businesses and individuals, equipment financing through structured loans and lease products to customers in a variety of industries, accounts receivable financing and value-added, out-sourced administrative services and other services. Originations within the insurance premium financing receivables portfolio were $2.8 billion during the third quarter of 2020 and average balances increased by $582.1 million as compared to the second quarter of 2020. The increase in average balances was more than offset by margin compression in this portfolio resulting in a $1.3 million decrease in interest income attributed to the lower market rates of interest associated with the insurance premium finance receivables portfolio. The Company’s leasing business grew during the third quarter of 2020, with its portfolio of assets, including capital leases, loans and equipment on operating leases, increasing by $20.3 million to $2.0 billion at the end of the third quarter of 2020. Revenues from the Company’s out-sourced administrative services business were $1.1 million in the third quarter of 2020, an increase of $144,000 from the second quarter of 2020.Wealth ManagementThrough four separate subsidiaries within its wealth management unit, the Company offers a full range of wealth management services, including trust and investment services, tax-deferred like-kind exchange services, asset management, securities brokerage services and 401(k) and retirement plan services. Wealth management revenue increased by $2.3 million in the third quarter of 2020 compared to the second quarter of 2020, totaling $25.0 million in the third quarter of 2020. Increases in asset management fees were primarily due to favorable equity market performance during the third quarter of 2020. At September 30, 2020, the Company’s wealth management subsidiaries had approximately $28.2 billion of assets under administration, which included $3.5 billion of assets owned by the Company and its subsidiary banks, representing a $1.2 billion increase from the $27.0 billion of assets under administration at June 30, 2020.ITEMS IMPACTING COMPARATIVE FINANCIAL RESULTSPaycheck Protection ProgramOn March 27, 2020, the President of the United States signed the CARES Act which authorized the Small Business Administration (“SBA”) to guarantee loans under the PPP for small businesses who meet the necessary eligibility requirements in order to keep their workers on the payroll. The Company began accepting applications on April 3, 2020. As of September 30, 2020, the Company secured authorization from the SBA and funded over 12,000 PPP loans with a carrying balance of approximately $3.4 billion.AcquisitionsOn November 1, 2019, the Company completed its acquisition of SBC, Incorporated (“SBC”). SBC was the parent company of Countryside Bank. Through this business combination, the Company acquired Countryside Bank’s six banking offices located in Countryside, Burbank, Darien, Homer Glen, Oak Brook and Chicago, Illinois. As of the acquisition date, the Company acquired approximately $620 million in assets, including approximately $423 million in loans, and approximately $508 million in deposits. The Company recorded goodwill of approximately $40 million on the acquisition.On October 7, 2019, the Company completed its acquisition of STC Bancshares Corp. (“STC”). STC was the parent company of STC Capital Bank. Through this business combination, the Company acquired STC Capital Bank’s five banking offices located in the communities of St. Charles, Geneva and South Elgin, Illinois. As of the acquisition date, the Company acquired approximately $250 million in assets, including approximately $174 million in loans, and approximately $201 million in deposits. The Company recorded goodwill of approximately $19 million on the acquisition.On May 24, 2019, the Company completed its acquisition of Rush-Oak Corporation (“ROC”). ROC was the parent company of Oak Bank. Through this business combination, the Company acquired Oak Bank’s one banking location in Chicago, Illinois. As of the acquisition date, the Company acquired approximately $223 million in assets, including approximately $125 million in loans, and approximately $161 million in deposits. The Company recorded goodwill of approximately $12 million on the acquisition.Adoption of New Credit Losses Accounting StandardBeginning in 2020, the Company adopted CECL, which impacted the measurement of the Company’s allowance for credit losses (including the allowance for unfunded lending-related commitments). CECL replaced the previous incurred loss methodology, which delayed recognition until such loss was probable, with a methodology that reflects an estimate of lifetime expected credit losses considering current economic condition and forecasts. Though other assets, including investment securities and other receivables, were considered in-scope of the standard and required a measurement of the allowance for credit loss, the most significant impact of CECL remains within the Company’s loan portfolios and related lending commitments. For more information regarding the adoption of CECL, see the “Asset Quality” section and the asset quality Tables 10-14 in this report.WINTRUST FINANCIAL CORPORATION
Key Operating MeasuresWintrust’s key operating measures and growth rates for the third quarter of 2020, as compared to the second quarter of 2020 (sequential quarter) and third quarter of 2019 (linked quarter), are shown in the table below:(1) Period-end balance sheet percentage changes are annualized.
(2) See “Supplemental Non-GAAP Financial Measures/Ratios” at Table 18 for additional information on this performance measure/ratio.
(3) Net revenue is net interest income plus non-interest income.
(4) The net overhead ratio is calculated by netting total non-interest expense and total non-interest income, annualizing this amount, and dividing by that period’s average total assets. A lower ratio indicates a higher degree of efficiency.
(5) Excludes mortgage loans held-for-sale.Certain returns, yields, performance ratios, or quarterly growth rates are “annualized” in this presentation to represent an annual time period. This is done for analytical purposes to better discern, for decision-making purposes, underlying performance trends when compared to full-year or year-over-year amounts. For example, a 5% growth rate for a quarter would represent an annualized 20% growth rate. Additional supplemental financial information showing quarterly trends can be found on the Company’s website at www.wintrust.com by choosing “Financial Reports” under the “Investor Relations” heading, and then choosing “Financial Highlights.” WINTRUST FINANCIAL CORPORATION
Selected Financial Highlights(1) Excludes mortgage loans held-for-sale.
(2) Net revenue includes net interest income and non-interest income.
(3) See “Supplemental Non-GAAP Financial Measures/Ratios” at Table 18 for additional information on this performance measure/ratio.
(4) The net overhead ratio is calculated by netting total non-interest expense and total non-interest income, annualizing this amount, and dividing by that period’s total average assets. A lower ratio indicates a higher degree of efficiency.
(5) Capital ratios for current quarter-end are estimated.
(6) The allowance for credit losses includes both the allowance for loan losses and the allowance for unfunded lending-related commitments. Effective January 1, 2020, the allowance for credit losses also includes the allowance for investment securities as a result of the adoption of Accounting Standard Update (“ASU”) 2016-13, Financial Instruments – Credit Losses. WINTRUST FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION WINTRUST FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) TABLE 1: LOAN PORTFOLIO MIX AND GROWTH RATES AND COMMERCIAL REAL ESTATE BY STATE(1) Annualized. TABLE 2: DEPOSIT PORTFOLIO MIX AND GROWTH RATES(1) Annualized.
(2) Represents deposit balances of the Company’s subsidiary banks from brokerage customers of Wintrust Investments, Chicago Deferred Exchange Company, LLC (“CDEC”), trust and asset management customers of the Company and brokerage customers from unaffiliated companies which have been placed into deposit accounts. TABLE 3: TIME CERTIFICATES OF DEPOSIT MATURITY/RE-PRICING ANALYSIS
As of September 30, 2020(1) Weighted-average rate excludes the impact of purchase accounting fair value adjustments.TABLE 4: QUARTERLY AVERAGE BALANCES(1) Includes interest-bearing deposits from banks, federal funds sold and securities purchased under resale agreements.
(2) Investment securities includes investment securities classified as available-for-sale and held-to-maturity, and equity securities with readily determinable fair values. Equity securities without readily determinable fair values are included within other assets.
(3) Other earning assets include brokerage customer receivables and trading account securities.
(4) Loans, net of unearned income, include non-accrual loans.
(5) Net free funds are the difference between total average earning assets and total average interest-bearing liabilities. The estimated contribution to net interest margin from net free funds is calculated using the rate paid for total interest-bearing liabilities.
(6) See “Supplemental Non-GAAP Financial Measures/Ratios” at Table 18 for additional information on this performance measure/ratio.
(7) Effective January 1, 2020 this includes the allowance for investment security losses as a result of the adoption of ASU 2016-13, Financial Instruments – Credit Losses.
TABLE 5: QUARTERLY NET INTEREST INCOME(1) See “Supplemental Non-GAAP Financial Measures/Ratios” at Table 18 for additional information on this performance measure/ratio.
(2) Interest income on tax-advantaged loans, trading securities and investment securities reflects a taxable-equivalent adjustment based on the marginal federal corporate tax rate in effect as of the applicable period. TABLE 6: QUARTERLY NET INTEREST MARGIN(1) Interest rate spread is the difference between the yield earned on earning assets and the rate paid on interest-bearing liabilities.
(2) Net free funds are the difference between total average earning assets and total average interest-bearing liabilities. The estimated contribution to net interest margin from net free funds is calculated using the rate paid for total interest-bearing liabilities.
(3) See “Supplemental Non-GAAP Financial Measures/Ratios” at Table 18 for additional information on this performance measure/ratio. TABLE 7: YEAR-TO-DATE AVERAGE BALANCES, AND NET INTEREST INCOME AND MARGIN(1) Includes interest-bearing deposits from banks, federal funds sold and securities purchased under resale agreements.
(2) Investment securities includes investment securities classified as available-for-sale and held-to-maturity, and equity securities with readily determinable fair values. Equity securities without readily determinable fair values are included within other assets.
(3) Interest income on tax-advantaged loans, trading securities and investment securities reflects a taxable-equivalent adjustment based on a marginal federal corporate tax rate in effect as of the applicable period.
(4) Other earning assets include brokerage customer receivables and trading account securities.
(5) Loans, net of unearned income, include non-accrual loans.
(6) Interest rate spread is the difference between the yield earned on earning assets and the rate paid on interest-bearing liabilities.
(7) Net free funds are the difference between total average earning assets and total average interest-bearing liabilities. The estimated contribution to net interest margin from net free funds is calculated using the rate paid for total interest-bearing liabilities.
(8) See “Supplemental Non-GAAP Financial Measures/Ratios” at Table 18 for additional information on this performance ratio.
(9) Effective January 1, 2020 this includes the allowance for investment security losses as a result of the adoption of ASU 2016-13, Financial Instruments – Credit Losses.
TABLE 8: INTEREST RATE SENSITIVITYAs an ongoing part of its financial strategy, the Company attempts to manage the impact of fluctuations in market interest rates on net interest income. Management measures its exposure to changes in interest rates by modeling many different interest rate scenarios.The following interest rate scenarios display the percentage change in net interest income over a one-year time horizon assuming increases of 100 and 200 basis points and a decrease of 100 basis points. The Static Shock Scenario results incorporate actual cash flows and repricing characteristics for balance sheet instruments following an instantaneous, parallel change in market rates based upon a static (i.e. no growth or constant) balance sheet. Conversely, the Ramp Scenario results incorporate management’s projections of future volume and pricing of each of the product lines following a gradual, parallel change in market rates over twelve months. Actual results may differ from these simulated results due to timing, magnitude, and frequency of interest rate changes as well as changes in market conditions and management strategies. The interest rate sensitivity for both the Static Shock and Ramp Scenario is as follows: TABLE 9: MATURITIES AND SENSITIVITIES TO CHANGES IN INTEREST RATES
Graph available at the following link:
http://ml.globenewswire.com/Resource/Download/ef1ce1bb-9104-4a8b-93ff-34a8785c198eSource: BloombergAs noted in the table on the previous page, the majority of the Company’s portfolio is tied to LIBOR indices which, as shown in the table above, do not mirror the same changes as the Prime rate which has historically moved when the Federal Reserve raises or lowers interest rates. Specifically, the Company has $9.0 billion of variable rate loans tied to one-month LIBOR and $5.9 billion of variable rate loans tied to twelve-month LIBOR. The above chart shows: TABLE 10: ALLOWANCE FOR CREDIT LOSSES TABLE 11: ALLOWANCE AND PROVISON FOR CREDIT LOSSES BY COMPONENT TABLE 12: ALLOWANCE BY LOAN PORTFOLIOThe table below summarizes the calculation of allowance for loan losses and allowance for unfunded lending-related commitments losses for the Company’s core, niche and consumer and purchased loan portfolios, as of September 30, 2020, June 30, 2020, and March 31, 2020. TABLE 13: LOAN PORTFOLIO AGING TABLE 14: NON-PERFORMING ASSETS AND TROUBLED DEBT RESTRUCTURINGS (“TDRs”)(1) Prior to the adoption of ASU 2016-13, acquired loans with evidence of credit quality deterioration (purchased credit deteriorated loans, or “PCD loans”) were excluded from non-performing loans. PCD loans that meet the definition of non-accrual or are greater than 90 days past-due and still accruing interest are now included in non-performing loans and resulted in a $37.3 million increase in non-accrual loans upon adoption of ASU 2016-13 as of January 1, 2020.
(2) As of September 30, 2020, June 30, 2020, March 31, 2020, December 31, 2019, and September 30, 2019, no TDRs were past due greater than 90 days and still accruing interest. Non-performing Loans Rollforward(1) This includes activity for premium finance receivables and indirect consumer loans.(1) Included in total non-performing loans.Other Real Estate Owned TABLE 15: NON-INTEREST INCOMENM – Not meaningful. NM – Not meaningful. TABLE 16: MORTGAGE BANKING(1) Certain volume adjusted for the estimated pull-through rate of the loan, which represents the Company’s best estimate of the likelihood that a committed loan will ultimately fund.
(2) Production revenue represents revenue earned from the origination and subsequent sale of mortgages, including gains on loans sold and fees from originations, processing and other related activities, and excludes servicing fees, changes in the fair value of servicing rights and changes to the mortgage recourse obligation and other non-production revenue. TABLE 17: NON-INTEREST EXPENSENM – Not meaningful.NM – Not meaningful.TABLE 18: SUPPLEMENTAL NON-GAAP FINANCIAL MEASURES/RATIOSThe accounting and reporting policies of Wintrust conform to generally accepted accounting principles (“GAAP”) in the United States and prevailing practices in the banking industry. However, certain non-GAAP performance measures and ratios are used by management to evaluate and measure the Company’s performance. These include taxable-equivalent net interest income (including its individual components), taxable-equivalent net interest margin (including its individual components), the taxable-equivalent efficiency ratio, tangible common equity ratio, tangible book value per common share, return on average tangible common equity and pre-tax income, excluding provision for credit losses. Management believes that these measures and ratios provide users of the Company’s financial information a more meaningful view of the performance of the Company’s interest-earning assets and interest-bearing liabilities and of the Company’s operating efficiency. Other financial holding companies may define or calculate these measures and ratios differently.Management reviews yields on certain asset categories and the net interest margin of the Company and its banking subsidiaries on a fully taxable-equivalent basis. In this non-GAAP presentation, net interest income is adjusted to reflect tax-exempt interest income on an equivalent before-tax basis using tax rates effective as of the end of the period. This measure ensures comparability of net interest income arising from both taxable and tax-exempt sources. Net interest income on a fully taxable-equivalent basis is also used in the calculation of the Company’s efficiency ratio. The efficiency ratio, which is calculated by dividing non-interest expense by total taxable-equivalent net revenue (less securities gains or losses), measures how much it costs to produce one dollar of revenue. Securities gains or losses are excluded from this calculation to better match revenue from daily operations to operational expenses. Management considers the tangible common equity ratio and tangible book value per common share as useful measurements of the Company’s equity. The Company references the return on average tangible common equity as a measurement of profitability. Management considers pre-tax income, excluding provision for credit losses, as a useful measurement of the Company’s core net income. WINTRUST SUBSIDIARIES AND LOCATIONSWintrust is a financial holding company whose common stock is traded on the Nasdaq Global Select Market (Nasdaq: WTFC). Its 15 community bank subsidiaries are: Lake Forest Bank & Trust Company, N.A., Hinsdale Bank & Trust Company, N.A., Wintrust Bank, N.A., in Chicago, Libertyville Bank & Trust Company, N.A., Barrington Bank & Trust Company, N.A., Crystal Lake Bank & Trust Company, N.A., Northbrook Bank & Trust Company, N.A., Schaumburg Bank & Trust Company, N.A., Village Bank & Trust, N.A., in Arlington Heights, Beverly Bank & Trust Company, N.A. in Chicago, Wheaton Bank & Trust Company, N.A., State Bank of The Lakes, N.A., in Antioch, Old Plank Trail Community Bank, N.A. in New Lenox, St. Charles Bank & Trust Company, N.A. and Town Bank, N.A., in Hartland, Wisconsin.In addition to the locations noted above, the banks also operate facilities in Illinois in Addison, Algonquin, Aurora, Bloomingdale, Bolingbrook, Buffalo Grove, Burbank, Cary, Clarendon Hills, Crete, Countryside, Darien, Deerfield, Des Plaines, Downers Grove, Elgin, Elk Grove Village, Elmhurst, Evanston, Evergreen Park, Frankfort, Geneva, Glen Ellyn, Glencoe, Glenview, Gurnee, Grayslake, Hanover Park, Highland Park, Highwood, Hoffman Estates, Homer Glen, Itasca, Joliet, Lake Bluff, Lake Villa, Lansing, Lemont, Lindenhurst, Lynwood, Markham, Maywood, McHenry, Mokena, Mount Prospect, Mundelein, Naperville, North Chicago, Northfield, Norridge, Oak Lawn, Oak Brook, Orland Park, Palatine, Park Ridge, Prospect Heights, Ravinia, Riverside, Rolling Meadows, Roselle, Round Lake Beach, Shorewood, Skokie, South Holland, Spring Grove, Steger, Stone Park, Vernon Hills, Wauconda, Waukegan, Western Springs, Willowbrook, Wilmette, Winnetka and Wood Dale, and in Wisconsin in Albany, Burlington, Clinton, Darlington, Delafield, Delavan, Elm Grove, Genoa City, Kenosha, Lake Geneva, Madison, Menomonee Falls, Milwaukee, Monroe, Pewaukee, Racine, Sharon, Wales, Walworth and Wind Lake, and in Dyer, Indiana and in Naples, Florida.Additionally, the Company operates various non-bank business units:FIRST Insurance Funding, a division of Lake Forest Bank & Trust Company, N.A., and Wintrust Life Finance, a division of Lake Forest Bank & Trust Company, N.A., serve commercial and life insurance loan customers, respectively, throughout the United States.First Insurance Funding of Canada serves commercial insurance loan customers throughout Canada.Tricom, Inc. of Milwaukee provides high-yielding, short-term accounts receivable financing and value-added out-sourced administrative services, such as data processing of payrolls, billing and cash management services, to temporary staffing service clients located throughout the United States.Wintrust Mortgage, a division of Barrington Bank & Trust Company, N.A., engages primarily in the origination and purchase of residential mortgages for sale into the secondary market through origination offices located throughout the United States. Loans are also originated nationwide through relationships with wholesale and correspondent offices.Wintrust Investments, LLC is a broker-dealer providing a full range of private client and brokerage services to clients and correspondent banks located primarily in the Midwest.Great Lakes Advisors LLC provides money management services and advisory services to individual accounts.The Chicago Trust Company, N.A., a trust subsidiary, allows Wintrust to service customers’ trust and investment needs at each banking location.Wintrust Asset Finance offers direct leasing opportunities.CDEC provides Qualified Intermediary services (as defined by U.S. Treasury regulations) for taxpayers seeking to structure tax-deferred like-kind exchanges under Internal Revenue Code Section 1031.FORWARD-LOOKING STATEMENTSThis document contains forward-looking statements within the meaning of federal securities laws. Forward-looking information can be identified through the use of words such as “intend,” “plan,” “project,” “expect,” “anticipate,” “believe,” “estimate,” “contemplate,” “possible,” “will,” “may,” “should,” “would” and “could.” Forward-looking statements and information are not historical facts, are premised on many factors and assumptions, and represent only management’s expectations, estimates and projections regarding future events. Similarly, these statements are not guarantees of future performance and involve certain risks and uncertainties that are difficult to predict, such as the impacts of the COVID-19 pandemic, and which may include, but are not limited to, those listed below and the Risk Factors discussed under Item 1A of the Company’s 2019 Annual Report on Form 10-K and in any of the Company’s subsequent SEC filings. The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and is including this statement for purposes of invoking these safe harbor provisions. Such forward-looking statements may be deemed to include, among other things, statements relating to the Company’s future financial performance, the performance of its loan portfolio, the expected amount of future credit reserves and charge-offs, delinquency trends, growth plans, regulatory developments, securities that the Company may offer from time to time, and management’s long-term performance goals, as well as statements relating to the anticipated effects on financial condition and results of operations from expected developments or events, the Company’s business and growth strategies, including future acquisitions of banks, specialty finance or wealth management businesses, internal growth and plans to form additional de novo banks or branch offices. Actual results could differ materially from those addressed in the forward-looking statements as a result of numerous factors, including the following:the severity, magnitude and duration of the COVID-19 pandemic and the direct and indirect impact of such pandemic, as well as responses to the pandemic by the government, businesses and consumers, on our operations and personnel, commercial activity and demand across our business and our customers’ businesses;the disruption of global, national, state and local economies associated with the COVID-19 pandemic, which could affect the Company’s liquidity and capital positions, impair the ability of our borrowers to repay outstanding loans, impair collateral values and further increase our allowance for credit losses;the impact of the COVID-19 pandemic on our financial results, including possible lost revenue and increased expenses (including the cost of capital), as well as possible goodwill impairment charges;economic conditions that affect the economy, housing prices, the job market and other factors that may adversely affect the Company’s liquidity and the performance of its loan portfolios, particularly in the markets in which it operates;negative effects suffered by us or our customers resulting from changes in U.S. trade policies;the extent of defaults and losses on the Company’s loan portfolio, which may require further increases in its allowance for credit losses;estimates of fair value of certain of the Company’s assets and liabilities, which could change in value significantly from period to period;the financial success and economic viability of the borrowers of our commercial loans;commercial real estate market conditions in the Chicago metropolitan area and southern Wisconsin;the extent of commercial and consumer delinquencies and declines in real estate values, which may require further increases in the Company’s allowance for credit losses;inaccurate assumptions in our analytical and forecasting models used to manage our loan portfolio;changes in the level and volatility of interest rates, the capital markets and other market indices (including developments and volatility arising from or related to the COVID-19 pandemic) that may affect, among other things, the Company’s liquidity and the value of its assets and liabilities;a prolonged period of near zero interest rates and potentially negative interest rates, either broadly or for some types of instruments, which may affect the Company’s net interest income and net interest margin, and which could materially adversely affect the Company’s profitability;competitive pressures in the financial services business which may affect the pricing of the Company’s loan and deposit products as well as its services (including wealth management services), which may result in loss of market share and reduced income from deposits, loans, advisory fees and income from other products;failure to identify and complete favorable acquisitions in the future or unexpected difficulties or developments related to the integration of the Company’s recent or future acquisitions;unexpected difficulties and losses related to FDIC-assisted acquisitions;harm to the Company’s reputation;any negative perception of the Company’s financial strength;ability of the Company to raise additional capital on acceptable terms when needed;disruption in capital markets, which may lower fair values for the Company’s investment portfolio;ability of the Company to use technology to provide products and services that will satisfy customer demands and create efficiencies in operations and to manage risks associated therewith;failure or breaches of our security systems or infrastructure, or those of third parties;security breaches, including denial of service attacks, hacking, social engineering attacks, malware intrusion or data corruption attempts and identity theft;adverse effects on our information technology systems resulting from failures, human error or cyberattacks;adverse effects of failures by our vendors to provide agreed upon services in the manner and at the cost agreed, particularly our information technology vendors;increased costs as a result of protecting our customers from the impact of stolen debit card information;accuracy and completeness of information the Company receives about customers and counterparties to make credit decisions;ability of the Company to attract and retain senior management experienced in the banking and financial services industries;environmental liability risk associated with lending activities;the impact of any claims or legal actions to which the Company is subject, including any effect on our reputation;losses incurred in connection with repurchases and indemnification payments related to mortgages and increases in reserves associated therewith;the loss of customers as a result of technological changes allowing consumers to complete their financial transactions without the use of a bank;the soundness of other financial institutions;the expenses and delayed returns inherent in opening new branches and de novo banks;examinations and challenges by tax authorities, and any unanticipated impact of the Tax Act;changes in accounting standards, rules and interpretations such as the new CECL standard and related changes to address the impact of COVID-19, and the impact on the Company’s financial statements;the ability of the Company to receive dividends from its subsidiaries;uncertainty about the discontinued use of LIBOR and transition to an alternative rate;a decrease in the Company’s capital ratios, including as a result of declines in the value of its loan portfolios, or otherwise;legislative or regulatory changes, particularly changes in regulation of financial services companies and/or the products and services offered by financial services companies, including those changes that are in response to the COVID-19 pandemic, including without limitation the CARES Act and the rules and regulations that may be promulgated thereunder;a lowering of our credit rating;changes in U.S. monetary policy and changes to the Federal Reserve’s balance sheet, including changes in response to the COVID-19 pandemic or otherwise;regulatory restrictions upon our ability to market our products to consumers and limitations on our ability to profitably operate our mortgage business;increased costs of compliance, heightened regulatory capital requirements and other risks associated with changes in regulation and the regulatory environment;the impact of heightened capital requirements;increases in the Company’s FDIC insurance premiums, or the collection of special assessments by the FDIC;delinquencies or fraud with respect to the Company’s premium finance business;credit downgrades among commercial and life insurance providers that could negatively affect the value of collateral securing the Company’s premium finance loans;the Company’s ability to comply with covenants under its credit facility; andfluctuations in the stock market, which may have an adverse impact on the Company’s wealth management business and brokerage operation.Therefore, there can be no assurances that future actual results will correspond to these forward-looking statements. The reader is cautioned not to place undue reliance on any forward-looking statement made by the Company. Any such statement speaks only as of the date the statement was made or as of such date that may be referenced within the statement. The Company undertakes no obligation to update any forward-looking statement to reflect the impact of circumstances or events after the date of the press release. Persons are advised, however, to consult further disclosures management makes on related subjects in its reports filed with the Securities and Exchange Commission and in its press releases.CONFERENCE CALL, WEBCAST AND REPLAYThe Company will hold a conference call on Thursday, October 22, 2020 at 1:00 p.m. (Central Time) regarding third quarter and year-to-date 2020 results. Individuals interested in listening should call (877) 363-5049 and enter Conference ID #5903949. A simultaneous audio-only webcast and replay of the conference call as well as an accompanying slide presentation may be accessed via the Company’s website at https://www.wintrust.com, Investor Relations, Investor News and Events, Presentations & Conference Calls. The text of the third quarter and year-to-date 2020 earnings press release will be available on the home page of the Company’s website at https://www.wintrust.com and at the Investor Relations, Investor News and Events, Press Releases link on its website.