Wintrust Financial Corporation — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Wintrust is a financial holding company with community banking, specialty finance and wealth management businesses, primarily serving the Chicago region and southern Wisconsin, with specialty finance operations nationally and in Canada. Amounts below are in U.S. dollars.
Financial performance and condition
| Metric | Q3 2023 / September 30, 2023 | Comparable period |
|---|---|---|
| Net income | $164.2 million; diluted EPS $2.53 | Q3 2022: $143.0 million; $2.21 |
| Net interest income | $462.4 million | Q3 2022: $401.4 million |
| Net interest margin | 3.60% GAAP; 3.62% fully taxable-equivalent | Q3 2022: 3.34%; 3.35% FTE |
| Net revenue | $574.8 million | Q3 2022: $502.9 million |
| Non-interest income / expense | $112.5 million / $330.1 million | Q3 2022: $101.5 million / $296.5 million |
| Loans / deposits | $41.4 billion / $45.0 billion | September 2022: $38.2 billion / $42.8 billion |
| Total assets / shareholders’ equity | $55.6 billion / $5.0 billion | September 2022: $52.4 billion / $4.6 billion |
For the first nine months, net income was $499.1 million, up 37% from $364.9 million; diluted EPS was $7.71 versus $5.78. Net interest income rose 32% to $1.37 billion, while non-interest income fell 9% to $333.3 million and non-interest expense rose 9% to $949.8 million. Nine-month net interest margin was 3.68%, compared with 2.96%.
Cash flow: For the nine months, operating activities provided $496.4 million, investing activities used $2.63 billion and financing activities provided $2.06 billion. Cash and cash equivalents ended at $418.1 million, down $72.8 million from the beginning of the period.
Debt and liquidity: Deposits were the principal funding source. FHLB advances were $2.33 billion; other borrowings $644.0 million; subordinated notes $437.7 million; and junior subordinated debentures $253.6 million. The term loan balance was $178.4 million, with no revolving-credit balance; the company reported compliance with applicable covenants. Management reported $15.5 billion of liquidity sources, approximately 124% of uninsured and uncollateralized deposits. Estimated uninsured deposits were $15.3 billion, including $2.7 billion fully collateralized.
Capital and credit: Tier 1 leverage, Tier 1 risk-based, common equity Tier 1 and total capital ratios were 9.2%, 10.2%, 9.3% and 12.0%, respectively. The allowance for loan and unfunded commitment losses was $399.2 million, or 0.96% of loans, versus 0.83% a year earlier. Non-performing loans were $133.1 million (0.32% of loans), compared with $97.6 million (0.26%) a year earlier; non-performing assets were $147.2 million. Nine-month net charge-offs were $30.6 million versus $15.2 million.
Material changes and drivers
- Management attributed higher quarterly earnings primarily to loan and earning-asset growth and improved net interest margin as asset yields rose. Average loans increased $3.3 billion year over year. Deposit interest costs also climbed substantially: Q3 deposit interest expense was $262.8 million versus $45.9 million in Q3 2022.
- Deposit balances grew year over year, but the mix shifted: non-interest-bearing deposits fell to 23% of period-end deposits from 32% a year earlier, while time deposits increased to 15% from 10%. Brokered deposits were $3.7 billion, or 8.2% of deposits, versus 5.9% a year earlier.
- Q3 non-interest income benefited from covered-call option fees of $4.2 million, up from $1.4 million. For the nine months, mortgage banking revenue declined 45% to $75.6 million, primarily because of lower mortgage originations and MSR activity; originations for sale were $1.5 billion versus $2.4 billion.
- Higher expenses included salaries and benefits, occupancy, data processing and FDIC insurance. Q3 included $2.9 million of impairment on two unused company-owned buildings and $1.5 million of impairment on certain operating lease assets.
- Wintrust acquired Rothschild & Co Asset Management U.S. on April 3, 2023, adding approximately $12.6 million in net assets and $2.6 million in goodwill.
- Available-for-sale securities had $703.9 million of gross unrealized losses at September 30, 2023. Held-to-maturity securities had a reported fair value of $3.06 billion versus $3.91 billion amortized cost. Accumulated other comprehensive loss was $642.7 million, compared with $458.7 million a year earlier.
Outlook, commentary and risks
The filing provides no specific earnings, growth or margin guidance. Management said it expects to continue monitoring interest rates and may execute additional derivatives to mitigate future net-interest-margin fluctuations. Its interest-rate simulations indicated that a parallel 200-basis-point increase would raise modeled one-year net interest income by 3.3% under a static shock scenario and 1.7% under a gradual ramp scenario; corresponding 200-basis-point decreases showed declines of 5.2% and 2.4%. These are model estimates, not forecasts.
Management described the deposit franchise and diversified funding sources as supporting liquidity, and said it believed reserves were appropriate. It also cautioned that economic uncertainty and forecasts could lead to higher credit provisions. Key disclosed risks include changes in rates and deposit competition, commercial real estate conditions and borrower performance, asset-value changes, credit losses, liquidity and capital access, cybersecurity and technology risks, regulatory changes and integration of acquisitions.
Three disclosed legal matters include an ERISA retirement-plan suit, a California wage-and-hour PAGA action, and a fair-lending class action. The fair-lending complaint was dismissed, followed by an amended complaint; the PAGA matter is stayed pending anticipated mediation. Management said it could not estimate potential liability for these matters but did not expect pending matters to materially adversely affect operations or financial condition; an unfavorable resolution could still affect a particular period. The filing reported no material changes to previously disclosed risk factors and no material changes in internal control over financial reporting.
Investor verification priorities
- Track deposit pricing, non-interest-bearing deposit retention, brokered-deposit reliance and the level of uninsured, uncollateralized deposits against available liquidity.
- Assess whether net interest income and margin remain resilient as deposit costs reprice and rates change; compare actual results with the company’s interest-rate sensitivity assumptions.
- Review commercial real estate exposures, delinquency and non-performing-loan trends, charge-offs, and the allowance assumptions tied to Baa spreads and the CRE Pricing Index.
- Monitor unrealized securities losses, accumulated other comprehensive loss and the distinction between available-for-sale and held-to-maturity portfolios.
- Check whether mortgage banking weakness, rising operating costs and one-time impairments persist, and evaluate the contribution from the wealth management acquisition.
- Follow the progress and potential financial impact of the disclosed litigation and any subsequent regulatory, liquidity or capital developments.