Wintrust Financial Corporation — Q1 2020 Form 10-Q
Business context and reporting period. Wintrust is a financial holding company focused on community banking in the Chicago area, southern Wisconsin and northwest Indiana, with specialty finance and wealth management businesses. This unaudited filing covers the three months ended March 31, 2020; balance-sheet comparisons are primarily with December 31, 2019 and March 31, 2019. Results reflect the initial COVID-19 disruption and adoption of the current expected credit loss standard (CECL) on January 1, 2020.
Financial performance and condition
| Metric | Q1 2020 | Comparable period / change |
|---|---|---|
| Net interest income | $261.4 million | $262.0 million in Q1 2019; essentially flat |
| Net interest margin | 3.12% | 3.70% in Q1 2019; down 58 basis points |
| Non-interest income | $113.2 million | $81.7 million; up 39%, led by mortgage banking |
| Non-interest expense | $234.6 million | $214.4 million; up 9% |
| Provision for credit losses | $53.0 million | $10.6 million in Q1 2019 |
| Net income | $62.8 million | $89.1 million; down 30% |
| Diluted EPS | $1.04 | $1.52; down 32% |
| Cash dividends declared per common share | $0.28 | $0.25 in Q1 2019 |
- Revenue and margins. Net revenue increased 9% to $374.7 million. Mortgage banking revenue rose to $48.3 million from $18.2 million, including increased production and derivative income. The lower net interest margin reflected reduced asset yields; loan growth largely offset the margin pressure in net interest income.
- Credit and asset quality. The $53.0 million provision primarily reflected CECL and deteriorating COVID-19 economic forecasts. Net charge-offs were $5.3 million. At quarter-end, loans were $27.8 billion, the allowance for loan losses was $216.1 million, and the allowance for unfunded commitment losses was $37.4 million. Non-performing loans were $179.4 million, or 0.65% of loans, versus $117.6 million, or 0.44%, at year-end 2019; the filing notes CECL-related classification changes, including $35.4 million of non-performing purchased credit-deteriorated loans.
- Balance sheet and liquidity. Total assets were $38.8 billion, up 20% year over year. Deposits were $31.5 billion, up 17% year over year; loans were up 15%. Cash and cash equivalents were $349.4 million, while cash, cash equivalents and interest-bearing bank deposits together were approximately $2.3 billion at quarter-end. Management said liquidity and capital were adequate and described access to FHLB, Federal Reserve and revolving-credit funding.
- Cash flow. Operating activities used $379.8 million, compared with $87.7 million provided in Q1 2019; investing activities used $1.45 billion, while financing activities provided $1.89 billion. Cash and cash equivalents increased $63.0 million to $349.4 million. Mortgage-loan originations and other working-capital movements contributed to operating cash use.
- Debt and capital. FHLB advances were $1.17 billion; other borrowings, $487.5 million; subordinated notes, $436.2 million; and junior subordinated debentures, $253.6 million. Regulatory capital ratios included an 8.9% common equity tier 1 ratio and an 11.9% total capital ratio, above the filing’s stated well-capitalized thresholds. The company repurchased $37.1 million of common stock in Q1, then temporarily suspended repurchases in response to COVID-19.
Material changes versus prior periods
- Net income fell 30%, despite higher net revenue, as the credit-loss provision increased substantially and expenses rose.
- Mortgage banking revenue increased sharply alongside mortgage originations for sale of $1.22 billion, versus $678.5 million in Q1 2019. Wealth management revenue rose 8% to $25.9 million.
- The allowance for credit losses on loans and lending-related commitments increased to $253.4 million from $158.5 million at year-end 2019. This reflects both CECL adoption and the quarter’s provision; the adoption itself produced a $47.3 million increase in the allowance for loans and lending-related commitments and a $26.7 million after-tax retained-earnings reduction.
- The net interest margin declined 58 basis points year over year. Total deposits and loans expanded, and total assets grew 20% year over year.
- Shareholders’ equity was $3.70 billion, up 10% year over year; tangible common equity ratio was 7.6%, compared with 8.3% a year earlier.
Outlook, commentary, risks and unusual items
- COVID-19 uncertainty. Management cited risks from borrower stress, delinquencies, collateral-value declines, lower interest rates, market volatility, operational disruption and potential further credit provisions. The ultimate impact was described as highly uncertain; the filing provides no earnings or full-year guidance.
- PPP activity after quarter-end. By April 30, 2020, the SBA had authorized approximately 11,000 Wintrust PPP loans totaling approximately $3.5 billion. This is a subsequent event, not a Q1-end loan balance. Management estimated net processing fees of approximately 2.50%–2.75% of final principal, subject to program rules and recognition over the loan term or sooner if repaid.
- Borrower relief. The company said it was working with affected borrowers and offering qualifying short-term modifications; COVID-related modifications completed in Q1 were not material. The filing noted uncertainty around later credit performance and the administration of PPP forgiveness and guarantees.
- MSR and market-sensitive items. Mortgage servicing rights fell to $73.5 million from $85.6 million at year-end, including a $14.6 million valuation decline from assumptions and $7.0 million from payoffs and paydowns, partly offset by a $4.2 million economic-hedge gain. Investment securities recorded net losses of $4.4 million, including market-related unrealized losses.
- Other contingencies. The filing describes litigation, including a mortgage-related Lehman matter and a pending appeal in a separate bank matter. Management stated that reserves for specified matters were immaterial and that known litigation was not expected to have a material adverse effect overall, while acknowledging unfavorable outcomes could affect a particular period.
Important facts for investors to verify
- Whether COVID-19-related borrower stress, delinquencies and charge-offs require further allowance increases; review CECL assumptions and the eight-quarter economic forecast.
- How PPP loans are funded, forgiven and serviced, and when processing fees are earned and collected.
- Whether deposit and loan growth, funding costs and the lower-rate environment sustain net interest income and liquidity.
- Changes in non-performing loans, criticized commercial and commercial real estate exposures, and collateral values, noting CECL affects period comparability.
- Capital and liquidity trends, including the impact of derivative collateral requirements and suspended share repurchases.
- Developments in MSR valuations, mortgage volumes, material litigation and any subsequent COVID-19 disclosures.