Wintrust Financial Corp. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; comparisons are primarily with 2018. This is an annual filing, not a standalone fourth-quarter report. Wintrust is a financial holding company operating community banking, specialty finance and wealth management businesses, with most banking activity in the Chicago area, southern Wisconsin and northwest Indiana.
Financial performance and condition
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Net interest income | $1.055 billion | $964.9 million | +9% |
| Non-interest income | $407.2 million | $356.2 million | +14% |
| Net revenue | $1.462 billion | $1.321 billion | +11% |
| Provision for credit losses | $53.9 million | $34.8 million | +55% |
| Non-interest expense | $928.1 million | $826.1 million | +12% |
| Net income | $355.7 million | $343.2 million | +4% |
| Diluted EPS | $6.03 | $5.86 | +3% |
The net interest margin declined 14 basis points to 3.45% (3.47% fully taxable-equivalent). Return on average assets was 1.07%, down from 1.18%; return on average common equity was 10.41%, down from 11.26%. The efficiency ratio increased to 63.63% from 62.40%. Management stated a goal of keeping the net overhead ratio below 1.50%; the reported 2019 ratio was 1.57%.
Balance sheet and liquidity: Total assets rose 17% to $36.6 billion; loans increased 13% to $26.8 billion and deposits increased 15% to $30.1 billion. Cash and cash equivalents were $286.5 million at year-end, while interest-bearing deposits with banks were $2.16 billion. Management reported $2.5 billion in overnight liquid funds and interest-bearing bank deposits, compared with $1.5 billion in 2018. The average loans-to-deposits ratio was 91.4%, versus 93.7%.
Cash flow: Operating activities provided $266.0 million, down from $377.2 million. Investing activities used $4.02 billion, primarily reflecting loan growth, investment purchases and higher bank deposits; financing activities provided $3.65 billion, including deposit growth and subordinated-note proceeds. Cash and cash equivalents decreased $105.7 million to $286.5 million.
Debt and capital: Year-end balances included $674.9 million of FHLB advances, $418.2 million of other borrowings, $436.1 million of subordinated notes and $253.6 million of junior subordinated debentures. The company issued $300 million of 4.85% subordinated notes due 2029 during 2019. Company capital ratios were 9.2% CET1, 9.6% Tier 1, 12.2% total capital and 8.7% Tier 1 leverage; all subsidiary banks were reported well-capitalized. Total shareholders’ equity was $3.69 billion.
Material changes and business developments
- Net interest income grew with average earning assets, but margin compression—especially higher deposit costs—limited the benefit. The average rate paid on interest-bearing deposits rose to 1.35% from 0.95%.
- Credit costs rose: provision was $53.9 million and net charge-offs increased to $49.5 million from $19.7 million. Non-performing loans were $117.6 million, or 0.44% of loans, compared with $113.2 million, or 0.48%, in 2018. The allowance for loan losses was $156.8 million.
- Non-interest income growth included mortgage banking revenue of $154.3 million, up 13%; trust and asset management revenue of $78.3 million, up 14%; and operating lease income of $47.0 million, up 22%. Brokerage revenue declined 16% to $18.8 million.
- Non-interest expense increased 12%, led by salaries and benefits, up $66.3 million, and higher equipment, occupancy and marketing costs. Lower FDIC insurance costs and data processing expense partly offset the increases.
- Wintrust acquired three Illinois banking companies in 2019: SBC, STC and ROC. Together, the acquisitions added banking locations and contributed to balance-sheet growth; the company recorded approximately $71.1 million of goodwill for them. It also opened six Chicago-area branches and one Florida branch.
- Segment net income was $238.5 million for community banking (down from $240.8 million), $89.4 million for specialty finance (up from $82.1 million), and $27.8 million for wealth management (up from $20.3 million).
Outlook, risks and unusual items
Management provided no specific quantified earnings or revenue guidance. It described continued focus on loan and deposit growth, measured acquisitions and branch expansion, expense control, and leveraging existing infrastructure. Management cited ongoing investment in technology and regulatory costs as pressures. Its interest-rate sensitivity analysis estimated that a parallel +100 basis-point move would increase one-year net interest income by 9.7% under a static shock scenario and 4.8% under a gradual ramp scenario; a -100 basis-point move would reduce it by 10.9% and 5.0%, respectively. These are model estimates, not forecasts.
- Credit and concentration: Commercial real estate was 30% of loans; 86% of that portfolio was in the primary market area. Commercial and commercial real estate charge-offs accounted for $35.9 million of 2019 net charge-offs. The allowance estimate is judgmental and was the auditor’s critical audit matter.
- CECL: Adopted January 1, 2020. Before adoption, management estimated a 25%–40% increase in the allowance for credit losses on loans and related commitments; the actual adoption adjustment and subsequent effects should be checked against later filings.
- Interest rates and funding: Results are sensitive to deposit pricing, asset repricing and rate movements. The filing also identifies LIBOR transition risk, including potential contract amendments and disputes.
- Premium finance: The business relies on agents and brokers and may face fraud, collection and insurer-credit risks. One insurer represented approximately 13% of premium-finance balances.
- Legal and contingent matters: The Lehman Holdings mortgage claims remained unresolved, with the company’s recorded reserve described as immaterial; potential loss beyond reserves could not be estimated clearly. A Northbrook Bank case was dismissed with prejudice, but plaintiffs appealed. Management did not expect the disclosed matters to materially affect overall operations or financial condition, while noting an unfavorable result could affect a particular period.
- Capital returns: Common dividends were $1.00 per share in 2019; the board later declared $0.28 quarterly for February 2020. A $125 million repurchase authorization was approved, and 576,469 shares were repurchased in January and February 2020 for about $37.1 million.
- Audit and controls: The auditor issued unqualified opinions on the financial statements and internal control over financial reporting. The critical audit matter was the allowance for loan losses, including judgment in qualitative reserve factors.
Important facts for investors to verify
- Whether elevated charge-offs and provisions persist, particularly in commercial lending, and how the allowance and CECL adoption develop.
- Whether loan growth and acquisitions produce returns that offset margin pressure, rising operating expenses and integration costs.
- Deposit mix, deposit pricing, liquidity availability and compliance with debt covenants and regulatory capital buffers.
- Performance and valuation assumptions for mortgage servicing rights, including prepayments, servicing costs and related hedges.
- Updates on the Lehman Holdings claims, Northbrook Bank appeal and mortgage repurchase or indemnification exposure.
- Execution of the repurchase authorization and the effect of dividends and buybacks on capital, especially given restrictions on upstream bank dividends.