Wintrust Financial Corporation — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. Wintrust is a financial holding company focused on community banking in the Chicago region, southern Wisconsin and northwest Indiana, with specialty finance and wealth management businesses operating more broadly. Unless otherwise stated, amounts are in U.S. dollars.
Financial performance and position
| Metric | Q1 2022 / March 31, 2022 | Comparable period |
|---|---|---|
| Net income | $127.4 million | $153.1 million in Q1 2021, down 17% |
| Diluted earnings per common share | $2.07 | $2.54 in Q1 2021 |
| Net interest income | $299.3 million | $261.9 million in Q1 2021, up 14% |
| Net interest margin | 2.60% GAAP; 2.61% fully taxable-equivalent | 2.53% GAAP; 2.54% fully taxable-equivalent in Q1 2021 |
| Non-interest income | $162.8 million | $186.5 million in Q1 2021, down 13% |
| Non-interest expense | $284.3 million | $286.9 million in Q1 2021, down 1% |
| Provision for credit losses | $4.1 million expense | $45.3 million benefit in Q1 2021 |
| Total assets | $50.25 billion | $45.68 billion at March 31, 2021 |
| Loans | $35.28 billion | $33.17 billion at March 31, 2021 |
| Total deposits | $42.22 billion | $37.87 billion at March 31, 2021 |
| Total shareholders’ equity | $4.49 billion | $4.25 billion at March 31, 2021 |
Cash from operations was $458.0 million, compared with $216.8 million in Q1 2021. Investing activities used $493.8 million, principally reflecting securities purchases and loan growth; financing activities provided $87.2 million. Cash and cash equivalents ended the quarter at $462.6 million. Management separately reported approximately $4.5 billion in overnight liquid funds and interest-bearing bank deposits.
At March 31, total borrowings included $1.24 billion of FHLB advances, $482.5 million of other borrowings, $437.0 million of subordinated notes and $253.6 million of junior subordinated debentures. The company reported a 6.9% tangible common equity ratio, 8.6% common equity Tier 1 ratio and 11.6% total capital ratio. It said it complied with applicable credit-agreement covenants.
Material changes and operating trends
- Net income fell primarily because Q1 2021 included a substantial credit-reserve release and mortgage banking revenue was lower in Q1 2022. Higher net interest income partly offset these factors.
- Mortgage banking revenue declined 32% to $77.2 million. Loans originated for sale fell to $895.5 million from $2.22 billion, and the production margin decreased to 1.67% from 3.66%, reflecting higher rates, lower refinance activity and lower sale margins.
- Net interest income benefited from loan growth, a $2.4 billion increase in average loans year over year, improved net interest margin and lower deposit costs. Specialty finance net interest income rose 23%, supported by premium-finance receivables growth.
- Loans grew to $35.28 billion from $34.79 billion at year-end 2021. Growth included commercial, commercial real estate, residential real estate and insurance premium-finance lending; PPP loans continued to run off and stood at $254.0 million.
- Deposits increased 11% year over year. Brokered deposits were $2.54 billion, or 6.0% of deposits, compared with 3.8% at year-end 2021.
- Non-performing loans improved to $57.3 million, or 0.16% of loans, from $99.1 million, or 0.30%, a year earlier. The allowance for loan and unfunded commitment losses was $301.2 million; net charge-offs were $2.5 million.
Outlook, risks and unusual items
- The filing provides no specific earnings or financial guidance. Management said it believed liquidity and capital were adequate and would continue to monitor funding and capital needs.
- Rising interest rates drove significant unrealized losses on available-for-sale securities: the portfolio had $196.8 million of gross unrealized losses at quarter-end. Other comprehensive loss was $120.1 million, reducing accumulated other comprehensive income to a loss of $116.0 million. Management attributed the securities losses to interest-rate, spread and market movements, said it did not consider them credit losses, and stated it did not intend to sell and was not more likely than not to be required to sell before recovery.
- Mortgage servicing rights (MSRs) increased in fair value by $43.4 million from changes in valuation assumptions; the quarter-end MSR balance was $199.1 million. MSR valuation depends on estimates including prepayment speeds, discount rates and servicing costs.
- During Q1, Wintrust terminated cash-flow hedge swaps with $1.0 billion notional value. In April 2022, it terminated additional swaps with $500 million notional each. Related gains remain in accumulated other comprehensive income and are expected to reduce interest expense as reclassified over the original contract terms.
- Interest-rate sensitivity modeling at March 31 estimated a one-year net interest income increase of 21.4% under an immediate +200 basis-point shock and a decrease of 11.3% under a −100 basis-point shock; the gradual-rate ramp scenario estimated +11.2% and −7.1%, respectively. These are model estimates, not forecasts.
- Management identified continuing uncertainties from COVID-19 and its variants, economic conditions, credit performance, market and interest-rate volatility, commercial real estate concentrations, cyber and technology risks, regulatory changes and the LIBOR transition. It noted that actual results may differ materially from forward-looking statements.
- The company reported $44.9 million of troubled debt restructurings. Management said reserves were appropriate but noted that future non-performing assets could rise. A previously disclosed California wage-payment matter was settled and payments completed; management said pending and threatened matters were not expected to have a material adverse effect, while acknowledging an unfavorable outcome could affect a particular period.
Important facts for investors to verify
- Whether loan growth, deposit composition and funding costs sustain net interest income as market rates and customer pricing change.
- Mortgage origination volumes, sale margins and the sensitivity of MSR valuations to prepayments and discount-rate assumptions.
- Credit quality trends, particularly commercial and commercial real estate exposures, problem loans, charge-offs and allowance adequacy.
- The potential effects of unrealized securities losses on capital and liquidity if securities must be sold or market values deteriorate further.
- Regulatory capital headroom, brokered-deposit trends, borrowing maturities and the company’s ability to maintain liquidity under stress.