Wintrust Financial Corporation — 2020 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2020. The filing also reports fourth-quarter results. Wintrust is a Rosemont, Illinois-based financial holding company with community banking, specialty finance, and wealth management businesses, principally serving the Chicago area, southern Wisconsin, and northwest Indiana.
Business context and financial results
| Metric | 2020 | 2019 |
|---|---|---|
| Total assets, year-end | $45.1 billion | $36.6 billion |
| Total loans, year-end | $32.1 billion | $26.8 billion |
| Total deposits, year-end | $37.1 billion | $30.1 billion |
| Net revenue | $1.644 billion | $1.462 billion |
| Net interest income | $1.040 billion | $1.055 billion |
| Provision for credit losses | $214.2 million | $53.9 million |
| Net income | $293.0 million | $355.7 million |
| Diluted EPS | $4.68 | $6.03 |
| Net interest margin | 2.72% | 3.45% |
| Return on average assets | 0.71% | 1.07% |
- Revenue and earnings: Net revenue rose 12%, but net income fell 18% and diluted EPS fell 22%. Mortgage banking was the main revenue driver: revenue increased to $346.0 million from $154.3 million, as originations for sale rose to $8.0 billion from $4.5 billion.
- Margins and expenses: Net interest income declined 1% as the lower-rate environment compressed margin by 73 basis points, partly offset by growth in earning assets. Non-interest expense rose 12% to $1.040 billion; salary and benefit expense increased 15% to $626.1 million.
- Cash flow: Net cash used for operating activities was $518.5 million; investing activities used $7.182 billion and financing activities provided $7.737 billion. Year-end cash and cash equivalents were $322.5 million. Separately, cash and interest-bearing deposits with banks totaled approximately $5.1 billion, a broader measure of on-balance-sheet liquidity.
- Credit quality: Net charge-offs were $40.3 million, down from $49.5 million. Non-performing loans rose to $127.5 million from $117.6 million, while non-performing loans as a share of loans declined to 0.40% from 0.44%. The allowance for credit losses was $380.0 million, or 1.18% of loans, versus $158.5 million, or 0.59%, a year earlier.
- Debt and capital: Year-end borrowings included $1.228 billion of FHLB advances, $518.9 million of other borrowings, $436.5 million of subordinated notes, and $253.6 million of junior subordinated debentures. Regulatory capital ratios were 8.8% CET1, 10.0% Tier 1, 12.6% total capital, and 8.1% leverage; the company and its banks met applicable well-capitalized standards and the capital conservation buffer.
- Liquidity and funding: Deposits increased 23%; non-interest-bearing deposits were 32% of year-end deposits, up from 24%. The average loans-to-deposits ratio was 88.8%, compared with 91.4%. Management stated that liquidity and capital were adequate to manage through the pandemic.
Material changes and unusual items
- Wintrust adopted CECL on January 1, 2020. The adoption increased the allowance for credit losses by approximately $47.4 million and reduced retained earnings, net of tax, by $26.7 million. The 2020 provision also reflected pandemic-related economic forecasts and portfolio changes.
- PPP lending materially expanded the balance sheet: year-end PPP loans were approximately $2.7 billion after SBA forgiveness. The company originated more than 12,000 loans and reported $91.9 million of net fees to be recognized over the loans’ lives, adjusted for estimated prepayments.
- The company issued $287.5 million of Series E preferred stock in May 2020, repurchased $92.1 million of common stock, and paid $64.5 million in common dividends. The board later declared a $0.31 quarterly common dividend, up from $0.28 in 2020.
- Fourth-quarter net income was $101.2 million, or $1.63 diluted EPS. Fourth-quarter provision for credit losses was $1.2 million, compared with $25.0 million in the third quarter and $135.1 million in the second quarter. The filing attributes the unusually high second-quarter provision to the pandemic outlook and CECL estimates.
- Management recorded a $1.4 million impairment charge for planned branch closures. In January 2021, Wintrust announced the sale of three Wisconsin branches and plans to close 10 additional locations.
- Operating cash flow was negative largely amid the scale and timing of mortgage loan originations and sales; investing cash outflows included loan growth and higher bank deposits. Funding inflows included deposit growth and increased borrowings.
Outlook, commentary, risks, and contingencies
- The filing provides no quantitative earnings or revenue guidance. Management emphasized continued uncertainty about COVID-19’s effects, low interest rates, credit performance, and economic recovery. It expects continued investment in technology and regulatory compliance, while seeking expense control and growth through existing operations.
- Key risks include pandemic-related borrower stress and further credit losses; commercial real estate exposure concentrated in the company’s primary markets; margin pressure from low rates; deposit and liquidity fluctuations; and operational, cyber, vendor, regulatory, and competition risks. Management cautioned that future non-performing assets and credit provisions could rise.
- At year-end, approximately $344.8 million of loans had COVID-related modifications. The company also reported $6.4 billion of commercial, commercial real estate, and construction lending commitments and $2.3 billion of commitments to sell mortgage loans.
- Mortgage repurchase and indemnification liability was $0.8 million. The Lehman Holdings matter was settled for an amount described as immaterial; a proposed California wage settlement was reserved at an immaterial amount. A Northbrook Bank appeal remained pending, with the company stating it could not estimate potential liability. A PPP agent-fee class action involving the company and a bank was voluntarily dismissed in January 2021.
- The company identified LIBOR transition as an operational and contractual risk. It also noted possible changes in regulatory requirements and that dividend and capital distributions depend on regulatory limits and subsidiary-bank earnings.
- Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. The auditor identified the allowance for credit losses and goodwill valuation as critical audit matters.
Most important facts for investors to verify
- Whether the $380.0 million allowance adequately reflects pandemic-related credit risk, particularly in commercial real estate, and how much of its year-over-year increase stems from CECL adoption versus subsequent economic forecasts.
- PPP fee recognition, forgiveness and repayment timing, and any impact of subsequent PPP rounds on earning assets, deposits, and net interest margin.
- Whether mortgage banking revenue remains sustainable if refinancing demand and production margins normalize, and whether MSR valuation assumptions and mortgage recourse reserves remain appropriate.
- Deposit growth and mix, liquidity available beyond reported cash equivalents, and the cost and maturity profile of FHLB advances and other borrowings.
- Whether capital, dividend plans, and buybacks remain consistent with regulatory requirements and the company’s ability to receive dividends from subsidiary banks.
- Developments in the Northbrook Bank appeal, other legal contingencies, COVID-related loan modifications, and the announced branch transactions and closures.