WINTRUST FINANCIAL CORPORATION The following discussion and analysis of financial condition as ofMarch 31, 2020 compared withDecember 31, 2019 andMarch 31, 2019 , and the results of operations for the three month periods endedMarch 31, 2020 andMarch 31, 2019 , should be read in conjunction with the unaudited consolidated financial statements and notes contained in this report and the risk factors discussed herein and under Item 1A of the Company's 2019 Annual Report on Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties and, as such, future results could differ significantly from management's current expectations. See the last section of this discussion for further information on forward-looking statements.
Introduction
Wintrust is a financial holding company that provides traditional community banking services, primarily in theChicago metropolitan area, southernWisconsin and northwestIndiana , and operates other financing businesses on a national basis and inCanada through several non-bank business units. Additionally, Wintrust offers a full array of wealth management services primarily to customers in theChicago metropolitan area, southernWisconsin and northwestIndiana . Overview Impact of COVID-19 InMarch 2020 , the outbreak of COVID-19 was recognized as a global pandemic by theWorld Health Organization , resulting in unprecedented uncertainty and volatility in world-wide financial markets. Governments' actions calling for shelter in place and social distancing have led to rapid changes in business revenues, increased unemployment, and have impacted consumer activity; all of which have impacted and may continue to impact the Company's current and future results. The Company activated its pandemic response plan in early March, as well as applicable elements of its business continuity plan. In order to protect the health of our customers and employees, and in accordance with applicable government directives, we have modified certain of our business protocols to direct employees to work from home unless their role requires them to be on site, in which case we have implemented enhanced safety measures including social distancing, enhanced cleaning and sanitization, and certain personal protective equipment, as well as the closure of most branch lobbies and the use of our branch drive-up facilities to meet our customer's banking needs unless specific services require lobby service by appointment. OnMarch 27, 2020 , the Coronavirus Aid, Relief, and Economic Security ("CARES") Act was enacted. The CARES Act includes appropriations and other measures designed to address the impact of the COVID-19 pandemic, including the Paycheck Protection Program ("PPP"), which is designed to aid eligible small and medium-sized businesses through federally-guaranteed loans distributed through certain banks, under the administration of theSmall Business Administration ("SBA"). As ofApril 30, 2020 , the Company had secured authorization from the SBA to fund approximately 11,000 PPP loans totaling approximately$3.5 billion . See Part I, Item 1, note 19 "Subsequent Events" of this Form 10-Q for the fiscal quarter endedMarch 31, 2020 . PPP loans are forgivable under certain circumstances, including the borrower's use of certain loan proceeds to fund employee payroll during the eight-week period following disbursement of the borrower's PPP loan. Although the SBA has issued some recent guidance regarding the reporting of PPP loans by lenders as a prerequisite to receipt of lenders' loan processing fees, the SBA has not yet issued definitive guidance as to the administration of the loan forgiveness and guaranty process and there can be no assurances as to such process or the timing or receipt of loan processing fees or guaranty proceeds. The Company estimates loan processing fees, net of deferred origination costs and agency fees as allowed by law, to be approximately 2.50% to 2.75% of the final loan principal balance, which would be recognized to net interest income over the life of the loans or shorter if repaid prior to maturity. All of our three primary business segments, community banking, specialty finance and wealth management, have been uniquely impacted and will likely continue to be impacted by the COVID-19 pandemic, requiring the implementation of certain responses as circumstances evolve. As non-exclusive examples of such impacts, our community banking business, including our mortgage business, has received and will continue to receive borrower requests for temporary payment relief including payment deferrals. Our insurance premium finance business is impacted by certain state legislation prohibiting cancelling of insurance policies for designated periods. Our wealth management business is impacted by factors including increased stock market volatility.
Given the significant uncertainty regarding future economic conditions, the Company has taken actions to help ensure that it has adequate liquidity and capital to manage through the COVID-19 pandemic, including the temporary suspension of our common stock repurchase program. We believe the Company has adequate liquidity and capital to effectively manage through the COVID-19
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pandemic. However, we will continue to prudently evaluate and expand liquidity sources, including the possible utilization of the PPP liquidity facility, if necessary. We continue to monitor the impact of COVID-19 closely; however, the extent to which the COVID-19 pandemic will impact our operations and financial conditions is highly uncertain. Please also refer to Part II, Item 1A, "Risk Factors" of this Form 10-Q for additional information.
First Quarter Highlights
The Company recorded net income of$62.8 million for the first quarter of 2020 compared to$89.1 million in the first quarter of 2019. The results for the first quarter of 2020 demonstrate continued momentum on our operating strengths including steady loan and deposit growth, and increased revenue from mortgage banking and wealth management services, offset by increased provision for credit losses primarily related to the implementation of CECL and the economic conditions created by the COVID-19 pandemic. Net interest income decreased in the current period as a result of a decrease in net interest margin partially mitigated by continued loan growth in the first quarter of 2020 compared to the same period of 2019. The Company increased its loan portfolio from$24.2 billion atMarch 31, 2019 and$26.8 billion atDecember 31, 2019 to$27.8 billion atMarch 31, 2020 . The increase in the current period compared to the prior periods was primarily a result of the Company's growth in the commercial, commercial real estate, commercial premium finance receivables and life insurance premium finance receivables portfolios. For more information regarding changes in the Company's loan portfolio, see Financial Condition - Interest Earning Assets and Note 6 - Loans of the Consolidated Financial Statements in Item 1 of this report. The Company recorded net interest income of$261.4 million in the first quarter of 2020 compared to$262.0 million in the first quarter of 2019. The nearly sustained level of net interest income recorded in the first quarter of 2020 compared to the first quarter of 2019 resulted primarily from a$3.1 billion increase in average loans, and a$1.9 billion increase in other earning assets, offset by a reduction in the yield on earning assets. This was partially offset by a$4.0 billion increase in the average balance of interest-bearing liabilities at a lower cost of funds, (see "Net Interest Income" for further detail). Non-interest income totaled$113.2 million in the first quarter of 2020 compared to$81.7 million in the first quarter of 2019. This increase was primarily the result of higher mortgage banking revenue and wealth management revenue (see "Non-Interest Income" for further detail). Non-interest expense totaled$234.6 million in the first quarter of 2020, increasing$20.3 million , or 9%, compared to the first quarter of 2019. The increase compared to the first quarter of 2019 was primarily attributable to higher salary and employee benefit costs caused by the addition of employees from acquisitions and increased staffing as the Company grows and increased equipment expense (see "Non-Interest Expense" for further detail). Management considers the maintenance of adequate liquidity to be important to the management of risk. During the first quarter of 2020, the Company continued its practice of maintaining appropriate funding capacity to provide the Company with adequate liquidity for its ongoing operations. In this regard, the Company benefited from its strong deposit base, a liquid short-term investment portfolio and its access to funding from a variety of external funding sources. AtMarch 31, 2020 , the Company had approximately$2.3 billion in overnight liquid funds and interest-bearing deposits with banks. Total cash inflows by the Company during the first quarter of 2020 were offset by$204.3 million in cash collateral posted to unaffiliated derivative counterparties in which the Company held a net liability position in such derivative transactions as well as the origination of mortgage loans pending the ultimate sale of such loans into the secondary market followingMarch 31, 2020 . 51
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Table of Contents RESULTS OF OPERATIONS Earnings Summary
The Company's key operating measures and growth rates for the three months ended
Three months ended
(Dollars in thousands, except per share
Percentage (%) or
data) 2020 2019 Basis Point (bp) Change
Net income $ 62,812 $ 89,146 (30 )%
Pre-tax income, excluding provision for
credit losses (non-GAAP) (2) 140,044 129,269 8
Pre-tax income, excluding provision for
credit losses and MSR valuation
adjustments (non-GAAP) (2) 150,441 138,013 9
Net income per common share-Diluted 1.04 1.52 (32 )
Net revenue (1) 374,685 343,643 9
Net interest income 261,443 261,986 -
Net interest margin 3.12 % 3.70 % (58)bp
Net interest margin - fully
taxable-equivalent (non-GAAP) (2) 3.14 3.72 (58 )
Net overhead ratio (3) 1.33 1.72 (39 )
Return on average assets 0.69 1.16 (47 )
Return on average common equity 6.82 11.09 (427 )
Return on average tangible common
equity (non-GAAP) (2) 8.73 14.14 (541 )
At end of period
Total assets $ 38,799,847 $ 32,358,621 20 %
Total loans, excluding loans
held-for-sale 27,807,321 24,214,629 15
Total loans, including loans
held-for-sale 28,464,255 24,463,186 16
Total deposits 31,461,660 26,804,742 17
Total shareholders' equity 3,700,393 3,371,972 10
Book value per common share (2) 62.13 57.33 8
Tangible common book value per share
(2) 50.18 46.38 8
Market price per common share 32.86 67.33 (51 )
Allowance for loan and unfunded
lending-related commitment losses to
total loans 0.91 % 0.66 % 25 bp
(1) Net revenue is net interest income plus non-interest income.
(2) See following section titled, "Supplementary Financial Measures/Ratios" for
additional information on this performance measure/ratio.
(3) 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.
Certain returns, yields, performance ratios, and quarterly growth rates are
"annualized" throughout this report 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, balance sheet growth rates are most often expressed in
terms of an annual rate. As such, 5% growth during a quarter would represent an
annualized growth rate of 20%.
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SUPPLEMENTAL FINANCIAL MEASURES/RATIOS
The 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 and pre-tax
income, excluding provision for credit losses and MSR valuation adjustment.
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 (i) pre-tax income excluding provision for credit losses
and (ii) pre-tax income excluding provision for credit losses and MSR valuation
adjustment as useful measurements of the Company's core net income.
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A reconciliation of certain non-GAAP performance measures and ratios used by the
Company to evaluate and measure the Company's performance to the most directly
comparable GAAP financial measures is shown below:
Three Months Ended
March 31 ,March 31 , (Dollars and shares in thousands) 2020
2019
Reconciliation of Non-GAAP Net Interest Margin and Efficiency Ratio (A) Interest Income (GAAP)
$ 344,067 $
333,970
Taxable-equivalent adjustment:
- Loans 860
1,034
- Liquidity Management Assets 551
565
- Other Earning Assets 2
2
(B) Interest Income (non-GAAP)$ 345,480 $
335,571
(C) Interest Expense (GAAP) 82,624
71,984
(D) Net Interest Income (GAAP) (A minus C) 261,443
261,986
(E) Net Interest Income, fully taxable-equivalent (non-GAAP) (B minus C) 262,856
263,587
Net interest margin (GAAP) 3.12 % 3.70 % Net interest margin, fully taxable-equivalent (non-GAAP) 3.14
3.72
(F) Non-interest income$ 113,242 $
81,657
(G) (Losses) gains on investment securities, net (4,359 ) 1,364 (H) Non-interest expense 234,641 214,374 Efficiency ratio (H/(D+F-G)) 61.90 % 62.63 % Efficiency ratio (non-GAAP) (H/(E+F-G)) 61.67 %
62.34 % Reconciliation of Non-GAAP Tangible Common Equity ratio Total shareholders' equity
$ 3,700,393 $
3,371,972
Less: Non-convertible preferred stock (125,000 ) (125,000 ) Less: Intangible assets (687,626 ) (620,224 ) (I) Total tangible common shareholders' equity$ 2,887,767 $ 2,626,748 (J) Total assets$ 38,799,847 $ 32,358,621 Less: Intangible assets (687,626 ) (620,224 ) (K) Total tangible assets$ 38,112,221 $ 31,738,397 Common equity to assets ratio (GAAP) (L/J) 9.2 % 10.0 % Tangible common equity ratio (non-GAAP) (I/K) 7.6 % 8.3 % Reconciliation of tangible book value per share Total shareholders' equity$ 3,700,393 $ 3,371,972 Less: Preferred stock (125,000 ) (125,000 ) (L) Total common equity$ 3,575,393 $ 3,246,972 (M) Actual common shares outstanding 57,545
56,639
Book value per common share (L/M)$ 62.13 $
57.33
Tangible common book value per share (non-GAAP) (I/M)
46.38
Reconciliation of non-GAAP return on average tangible common equity (N) Net income applicable to common shares
$ 60,762 $
87,096
Add: Intangible asset amortization 2,863
2,942
Less: Tax effect of intangible asset amortization (799 ) (731 ) After-tax intangible asset amortization 2,064
2,211
(O) Tangible net income applicable to common shares (non-GAAP)
62,826 89,307
Total average shareholders' equity 3,710,169
3,309,078
Less: Average preferred stock (125,000 ) (125,000 ) (P) Total average common shareholders' equity 3,585,169
3,184,078
Less: Average intangible assets (690,777 )
(622,240 ) (Q) Total average tangible common shareholders' equity (non-GAAP)
2,894,392 2,561,838
Return on average common equity, annualized (N/P) 6.82 % 11.09 %
Return on average tangible common equity, annualized
(non-GAAP)
(O/Q) 8.73 % 14.14 %
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Reconciliation of Non-GAAP Pre-Tax, Pre-Provision Income and Pre-Tax, Pre-Provision, Pre-MSR Adjustment Income: Income before taxes
$ 87,083 $
118,645
Add: Provision for credit losses 52,961
10,624
Pre-tax income, excluding provision for credit losses (non-GAAP)
$ 140,044 $
129,269
Less: MSR valuation adjustment, net of (loss)/gain on derivative contract held as an economic hedge
$ (10,397 ) $
(8,744 ) Pre-tax income, excluding provision for credit losses and MSR valuation adjustments (non-GAAP)
$ 150,441 $
138,013
Critical Accounting Policies
The Company's Consolidated Financial Statements are prepared in accordance with GAAP inthe United States and prevailing practices of the banking industry. Application of these principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in the financial statements and accompanying notes. Certain policies and accounting principles inherently have a greater reliance on the use of estimates, assumptions and judgments, and as such have a greater possibility that changes in those estimates and assumptions could produce financial results that are materially different than originally reported. Estimates, assumptions and judgments are necessary when assets and liabilities are required to be recorded at fair value, when a decline in the value of an asset not carried on the financial statements at fair value warrants an impairment write-down or valuation reserve to be established, or when an asset or liability needs to be recorded contingent upon a future event, are based on information available as of the date of the financial statements; accordingly, as information changes, the financial statements could reflect different estimates and assumptions. Management views critical accounting policies to be those which are highly dependent on subjective or complex judgments, estimates and assumptions, and where changes in those estimates and assumptions could have a significant impact on the financial statements. Management currently views critical accounting policies to include the determination of the allowance for credit losses, including the allowance for loan losses and the allowance for losses on lending-related commitments, loans acquired with evidence of credit quality deterioration since origination, estimations of fair value, the valuations required for impairment testing of goodwill, the valuation and accounting for derivative instruments and income taxes as the accounting areas that require the most subjective and complex judgments, and as such could be most subject to revision as new information becomes available. For a more detailed discussion on these critical accounting policies, see "Summary of Critical Accounting Policies" beginning on page 53 of the Company's 2019 Form 10-K. The COVID-19 pandemic, specifically the uncertainty related to the ultimate magnitude of impact on the economy and banking industry, is expected to impact many of the estimates, assumptions, and judgments noted above that are used by management. This could result in volatility in the related accounting estimates, which will directly impact the Company's financial results. Please refer to Management's Discussion and Analysis of Financial Condition and Results of Operation -Overview section of this report for additional discussion of the impact of the COVID-19 pandemic.
Net Income
Net income for the quarter endedMarch 31, 2020 totaled$62.8 million , a decrease of$26.3 million , or 30%, compared to the quarter endedMarch 31, 2019 . On a per share basis, net income for the first quarter of 2020 totaled$1.04 per diluted common share compared to$1.52 for the first quarter of 2019. The most significant factors impacting net income for the first quarter of 2020 as compared to the same period in the prior year include increased mortgage banking revenue, partially offset by an increase in the provision for credit losses as a result of the adoption of CECL and economic conditions created by the COVID-19 pandemic as well as increased salaries and employee benefits expense. See "Net Interest Income", "Non-interest Income", "Non-interest Expense" and "Loan Portfolio and Asset Quality" for further detail.
Net Interest Income
The primary source of the Company's revenue is net interest income. Net interest
income is the difference between interest income and fees on earnings assets,
such as loans and securities, and interest expense on the liabilities to fund
those assets, including interest bearing deposits and other borrowings. The
amount of net interest income is affected by both changes in the level of
interest rates, and the amount and composition of earning assets and interest
bearing liabilities.
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Quarter Ended
The following table presents a summary of the Company's average balances, net
interest income and related net interest margins, including a calculation on a
fully taxable equivalent basis, for the first quarter of 2020 as compared to the
fourth quarter of 2019 (sequential quarters) and first quarter of 2019 (linked
quarters):
Average Balance Interest Yield/Rate
for three months ended, for three months ended, for three months ended,
Mar 31, Dec 31, Mar 31, Mar 31, Dec 31, Mar 31, Mar 31, Dec 31, Mar 31, (Dollars in thousands) 2020 2019 2019 2020 2019 2019 2020 2019 2019 Interest-bearing deposits with banks and cash equivalents(1)$ 1,418,809 $ 2,206,251 $ 897,629 $
4,854
%
Investment securities (2) 4,780,709 3,909,699 3,630,577 33,018 28,184 28,521 2.78 2.86 3.19 FHLB and FRB stock 114,829 94,843 94,882 1,577 1,328 1,355 5.52 5.55 5.79 Liquidity management assets(3)(8)$ 6,314,347 $ 6,210,793 $ 4,623,088 $
39,449
% Other earning assets(3)(4)(8) 19,166 18,353 13,591 167 176 165 3.50 3.83 4.91 Mortgage loans held-for-sale 403,262 381,878 188,190 3,165 3,201 2,209 3.16 3.33 4.76
Loans, net of unearned income(3)(5)(8) 26,936,728 26,137,722 23,880,916 302,699 308,947 298,021 4.52 4.69
5.06
Total earning
assets(8) $ 33,673,503 $ 32,748,746 $ 28,705,785 $
345,480
% Allowance for loan losses (176,291 ) (167,759 ) (157,782 ) Cash and due from banks 321,982 316,631 283,019 Other assets 2,806,296 2,747,572 2,385,149 Total assets$ 36,625,490 $ 35,645,190 $ 31,216,171 NOW and interest bearing demand deposits$ 3,113,733 $ 3,016,991 $ 2,803,338 $
3,665
%
Wealth management deposits 2,838,719 2,934,292 2,614,035 6,935 7,867 7,000 0.98 1.06 1.09
Money market accounts 7,990,775 7,647,635 5,915,525
22,363 25,603 19,460 1.13 1.33 1.33
Savings accounts 3,189,835 3,028,763 2,715,422
5,790 6,145 4,249 0.73 0.80 0.63 Time deposits 5,526,407 5,682,449 5,267,796 28,682 30,487 25,654 2.09 2.13 1.98
Interest-bearing
deposits$ 22,659,469 $ 22,310,130 $ 19,316,116 $
67,435
%
Federal Home Loan Bank advances 951,613 596,594 594,335 3,360 1,461 2,450 1.42 0.97 1.67 Other borrowings 469,577 415,092 465,571 3,546 3,273 3,633 3.04 3.13 3.16
Subordinated notes 436,119 436,025 139,217
5,472 5,504 1,775 5.02 5.05 5.10 Junior subordinated debentures 253,566 253,566 253,566 2,811 2,890 3,150 4.39 4.46 4.97 Total interest-bearing liabilities$ 24,770,344 $ 24,011,407 $ 20,768,805 $
82,624
%
Non-interest bearing deposits 7,235,177 7,128,166 6,444,378 Other liabilities 909,800 883,433 693,910 Equity 3,710,169 3,622,184 3,309,078 Total liabilities and shareholders' equity$ 36,625,490 $ 35,645,190 $ 31,216,171 Interest rate spread(6)(8) 2.79 % 2.80 % 3.34 % Less: Fully tax-equivalent adjustment (1,413 ) (1,466 ) (1,601 ) (0.02 ) (0.02 ) (0.02 ) Net free funds/contribution(7)$ 8,903,159 $ 8,737,339 $ 7,936,980 0.35 0.39 0.38 Net interest income/ margin (GAAP)(8) $
261,443
% Fully taxable-equivalent adjustment 1,413 1,466 1,601 0.02 0.02 0.02 Net interest income/margin, fully taxable-equivalent (non-GAAP)(8) $
262,856
%
(1) Includes interest-bearing deposits with 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 tax-equivalent adjustment based on the marginal federal
corporate tax rate in effect as of the applicable period. The total
adjustments for the three months ended
respectively.
(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 Financial Measures/Ratios" for additional information on
this performance ratio.
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For the first quarter of 2020, net interest income totaled$261.4 million , a decrease of$0.4 million as compared to the fourth quarter of 2019, and a decrease of$543,000 as compared to the first quarter of 2019. Net interest margin was 3.12% (3.14% on a fully taxable-equivalent basis, non-GAAP) during the first quarter of 2020 compared to 3.17% (3.19% on a fully taxable-equivalent basis, non-GAAP) during the fourth quarter of 2019, and 3.70% (3.72% on a fully taxable-equivalent basis, non-GAAP) during the first quarter of 2019.
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