Wintrust Financial Corporation — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Wintrust is a financial holding company with community banking, specialty finance and wealth management businesses. Unless noted, figures are consolidated; dollar amounts are in U.S. dollars.
Financial performance
- Second-quarter earnings: Net income was $154.8 million, up 64% year over year; diluted EPS was $2.38, versus $1.49. Net revenue was $560.6 million, up 27%.
- Net interest income and margin: Q2 net interest income was $447.5 million, up 32% year over year. Net interest margin was 3.64% (3.66% on a fully taxable-equivalent basis), versus 2.92% a year earlier, but below 3.81% in Q1 2023. Management attributed the annual increase primarily to loan growth and higher asset yields; rising deposit costs weighed on the sequential result.
- Six-month results: Net income was $334.9 million, up 51%; diluted EPS was $5.18, versus $3.56. Net interest income rose 42% to $905.5 million. Net interest margin was 3.72%, versus 2.76% in the first half of 2022.
- Other income and expenses: Q2 non-interest income increased 10% to $113.0 million, including no net investment-security loss compared with a $7.8 million loss in Q2 2022. Mortgage banking revenue declined 10% to $30.0 million. Non-interest expense rose 11% to $320.6 million, led by salaries and benefits, technology and FDIC insurance costs. The Q2 efficiency ratio was 56.95% on a non-GAAP basis.
- Cash flows: For the first half, operating cash flow was $408.2 million, down from $823.3 million; investing used $1.232 billion and financing provided $846.4 million. Cash and cash equivalents increased $23.0 million to $513.9 million.
Financial position, funding and credit
- Balance sheet and lending: Total assets were $54.3 billion, up 7% year over year. Loans were $41.0 billion, up 11%; deposits were $44.0 billion, up 3%.
- Deposit mix and liquidity: Non-interest-bearing deposits fell to $10.6 billion from $13.9 billion a year earlier, while interest-bearing deposits increased. Brokered deposits were $4.09 billion, or 9.3% of deposits, versus 4.2% a year earlier. Management reported $14.4 billion of total liquidity sources, equal to 123% of $11.7 billion in uninsured, uncollateralized deposits. The company had registered for, but had not used and did not intend to use, the Federal Reserve’s Bank Term Funding Program.
- Borrowings and capital: FHLB advances, other borrowings and subordinated notes totaled $3.13 billion; junior subordinated debentures added $253.6 million. The company reported a 9.3% common equity tier 1 ratio, 10.1% Tier 1 capital ratio and 11.9% total capital ratio. It was in compliance with applicable debt covenants.
- Credit quality: The allowance for loan and unfunded commitment losses was $387.4 million, or 0.94% of loans. First-half provision was $51.6 million; net charge-offs were $22.5 million, versus $12.0 million a year earlier. Nonperforming loans were $108.7 million, up from $72.4 million a year earlier, and nonperforming assets were 0.22% of assets versus 0.16%. Management said reserves were appropriate but noted uncertainty in economic forecasts.
- Securities and accumulated other comprehensive loss: Available-for-sale securities had $526.5 million of gross unrealized losses; held-to-maturity securities had $677.4 million of gross unrealized losses and a reported fair value about $676.6 million below carrying value. Accumulated other comprehensive loss was $474.1 million. Management attributed securities losses primarily to market interest rates and spreads, and said it did not intend or expect to be required to sell the affected available-for-sale securities before recovery.
Changes, outlook and risks
- Growth in loans and higher interest rates drove much of the improvement in net interest income and earnings. Deposit costs rose materially, and the Q2 margin declined sequentially.
- Mortgage originations for sale were $578 million in Q2, versus $821 million a year earlier; management cited higher rates and reduced refinancing incentives. The company also sold $30.2 million of mortgage servicing rights during Q2.
- Credit-loss provisioning reflected loan growth and forecast inputs, particularly Baa corporate credit spreads and the Commercial Real Estate Pricing Index. Management cautioned that economic and forecast uncertainty could affect future reserves and losses.
- Interest-rate sensitivity modeling showed estimated one-year net interest income changes of +5.7% and -7.9% under static +200 and -200 basis-point shocks, respectively. Management said it had used collars and swaps to hedge variable-rate loan exposures and expected to continue monitoring risk; these are modeled estimates, not earnings guidance.
- No specific earnings or financial guidance was provided. Risks identified include economic and CRE conditions, deposit competition and funding costs, interest-rate changes, credit losses, market-value changes, cybersecurity and operational disruption, regulatory and FDIC costs, and acquisition integration.
- Wintrust acquired Rothschild & Co Asset Management U.S. on April 3, 2023, recording approximately $2.6 million of goodwill. The filing also describes pending ERISA, California PAGA and fair-lending litigation; management considered the allegations meritless but said potential liability could not be estimated. The ERISA complaint was dismissed in July, followed by an amended complaint in August.
Most important facts for investors to verify
- Whether deposit retention, deposit mix and funding costs stabilize, particularly given the decline in non-interest-bearing deposits and increase in brokered deposits.
- Whether loan growth and margin trends persist as deposit rates reprice and the rate environment changes.
- Credit performance in commercial real estate and other portfolios, including nonperforming loans, charge-offs and the assumptions supporting the allowance.
- The potential effects of unrealized securities losses and hedging positions on capital, liquidity and future net interest income.
- Developments in the pending legal matters and the integration and performance of the Rothschild asset-management acquisition.