Wintrust Financial Corporation — Q2 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 quarter and six months ended June 30, 2020. Results were significantly affected by COVID-19, related economic disruption, and the adoption of CECL accounting on January 1, 2020.
Key financial results
| Metric | Q2 2020 | Comparable period |
|---|---|---|
| Net income | $21.7 million | $81.5 million in Q2 2019 |
| Diluted earnings per common share | $0.34 | $1.38 in Q2 2019 |
| Net interest income | $263.1 million | $266.2 million in Q2 2019 |
| Net interest margin | 2.73% | 3.62% in Q2 2019 |
| Provision for credit losses | $135.1 million | $24.6 million in Q2 2019 |
| Non-interest income | $162.0 million | $98.2 million in Q2 2019 |
| Non-interest expense | $259.4 million | $229.6 million in Q2 2019 |
- Six-month results: Net income was $84.5 million versus $170.6 million in 2019; diluted EPS was $1.38 versus $2.91. Net interest income was $524.6 million versus $528.2 million, while the provision for credit losses rose to $188.0 million from $35.2 million.
- Revenue and costs: Q2 net revenue (net interest income plus non-interest income) grew 17% to $425.1 million. Mortgage banking revenue increased to $102.3 million from $37.4 million, reflecting higher originations and production margins. Non-interest expense rose 13%, including higher staffing, mortgage commissions and incentive pay, acquisition-related data conversion costs, and FDIC insurance expense.
- Balance sheet at June 30: Total assets were $43.5 billion, up 29% from June 30, 2019. Loans were $31.4 billion, up 24%, and deposits were $35.7 billion, up 30%. Non-interest-bearing deposits were $10.2 billion, or 29% of deposits.
- Credit and liquidity: The allowance for loan and unfunded commitment losses was $373.1 million, or 1.19% of loans; it was 0.64% a year earlier. Non-performing loans were $188.3 million, or 0.60% of loans, compared with $113.4 million, or 0.45%, a year earlier. Cash and cash equivalents were $345.1 million, with a further $4.0 billion in interest-bearing bank deposits. Management reported approximately $4.4 billion in overnight liquid funds and interest-bearing bank deposits.
- Capital and debt: Shareholders’ equity was $4.0 billion. Regulatory ratios included an 8.8% common equity Tier 1 ratio, 10.1% Tier 1 capital ratio, 12.8% total capital ratio and 8.1% Tier 1 leverage ratio. The company issued $287.5 million of Series E preferred stock in May. FHLB advances, other borrowings and subordinated notes totaled $2.17 billion; junior subordinated debentures were an additional $253.6 million. The company reported compliance with its credit-facility covenants.
- Cash flows, first six months: Operating cash flow was negative $369.7 million, compared with positive $22.2 million in 2019; investing cash outflow was $6.0 billion, while financing provided $6.4 billion. Financing included $5.5 billion of net deposit growth and $277.4 million net proceeds from preferred stock. Cash and cash equivalents increased $58.6 million to $345.1 million.
Material changes and notable items
- The sharp increase in credit-loss provision reflects CECL adoption and deterioration in economic forecasts related to COVID-19. CECL adoption increased the allowance for credit losses by approximately $47.3 million and reduced retained earnings by $26.7 million, net of tax. Management’s allowance forecast assumes economic recovery during 2021, using an eight-quarter forecast period followed by a four-quarter reversion to historical loss rates.
- PPP lending contributed materially to loan, deposit and fee growth: Wintrust funded more than 11,000 loans with a June 30 carrying balance of approximately $3.3 billion. The company reported $91.0 million of net PPP fees to be recognized over the loans’ lives, adjusted for estimated prepayments. PPP loans are SBA-guaranteed, subject to program requirements and potential forgiveness.
- COVID-related loan modifications totaled approximately $1.7 billion at June 30. The company applied CARES Act relief to eligible modifications that otherwise could have been considered troubled debt restructurings. Separately, $702.7 million of COVID-modified loans moved from pass status at March 1 to special mention or substandard accrual by June 30.
- Mortgage production revenue benefited from unusually strong refinancing demand: Q2 originations for sale were $2.21 billion versus $1.15 billion a year earlier, and the production margin rose to 4.23% from 2.59%. MSR valuation changes, payoffs and paydowns reduced Q2 value, partly offset by capitalization of new servicing rights.
- Management temporarily suspended common-stock repurchases beginning in March to preserve liquidity. It declared a Q2 common dividend of $0.28 per share. Management stated it believed liquidity and capital were adequate, while noting uncertainty about the pandemic’s duration and consequences.
- No specific earnings or financial guidance was provided. Management cautioned that operating results are uncertain and not necessarily indicative of full-year results.
Outlook, risks and contingencies
Management identified the pandemic’s severity and duration, borrower repayment capacity, commercial and commercial real estate exposure, collateral values, low interest rates and margin pressure, deposit and liquidity trends, and potential further credit-loss provisions as key uncertainties. Additional risks include PPP compliance, loan-guarantee and forgiveness processes, cyber and operational risks from remote work, and volatile mortgage and wealth-management markets. Management noted that state emergency orders and delays in processing insurance return premiums contributed to higher 90-day past-due commercial premium-finance receivables; it believed reserves were appropriate but said subsequent increases in non-performing assets were possible.
The filing disclosed a PPP agent-fee class action alleging collective damages exceeding $3.8 billion; Wintrust Financial Corporation was voluntarily dismissed as a defendant, while Wintrust Bank remained named. Other disclosed matters included a pending appeal involving Northbrook Bank, a proposed wage-related settlement awaiting court approval, and Lehman-related litigation. Management said it did not expect the matters described to have a material adverse effect overall, but noted an unfavorable resolution could materially affect a particular period. The filing also reported no material weakness in disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether later-quarter credit trends, borrower modifications and charge-offs support the CECL allowance assumptions, especially for commercial, commercial real estate and premium-finance loans.
- The timing and amount of PPP fee recognition, loan forgiveness, SBA reimbursement, and any related agent-fee litigation or compliance exposure.
- Whether mortgage originations and margins remain elevated, and how refinancing, prepayments and MSR valuations affect recurring earnings.
- The sustainability of deposit growth and liquidity, including reliance on wholesale funding and the Canadian secured borrowing, and the effect of the suspended repurchase program and preferred issuance on capital and common-shareholder returns.
- Updates to the disclosed legal proceedings, COVID-related risks, regulatory capital ratios and management’s economic forecasts.