Wintrust Financial Corporation — Q2 2022 Form 10-Q
Business context and reporting period. Wintrust is an Illinois-based financial holding company with community banking operations concentrated in the Chicago area, southern Wisconsin and northwest Indiana, plus national specialty finance and wealth management businesses. This unaudited report covers the quarter and six months ended June 30, 2022; comparisons below are generally with the same 2021 period.
Financial performance and condition
| Metric | Q2 2022 | Q2 2021 |
|---|---|---|
| Net interest income | $337.8 million | $279.6 million |
| Net interest margin | 2.92% | 2.62% |
| Provision for credit losses | $20.4 million | $(15.3) million (release) |
| Non-interest income | $102.9 million | $129.4 million |
| Non-interest expense | $288.7 million | $280.1 million |
| Net income | $94.5 million | $105.1 million |
| Diluted EPS | $1.49 | $1.70 |
- For the first six months, net income was $221.9 million versus $258.3 million; diluted EPS was $3.56 versus $4.24. Net interest income rose 18% to $637.1 million, while non-interest income fell 16% to $265.7 million.
- Q2 net revenue was $440.7 million, up 8%. The efficiency ratio was 64.36%, compared with 68.71%; return on average assets was 0.77% versus 0.92%.
- Total assets were $51.0 billion at June 30, 2022, up 9% year over year. Loans were $37.1 billion, up 13%; deposits were $42.6 billion, up 10%.
- Shareholders’ equity was $4.73 billion. Tangible common equity ratio was 7.2%; book value per common share was $71.06 and tangible book value was $59.87.
- At June 30, reported holding-company capital ratios included Tier 1 leverage of 8.8%, Tier 1 capital of 9.9%, common equity Tier 1 of 9.0%, and total capital of 11.9%.
- For the six months, operating cash flow was $823.3 million, investing cash outflow was $1.39 billion, and financing cash inflow was $657.5 million. Cash and cash equivalents ended the period at $498.9 million.
- Management reported approximately $3.8 billion of overnight liquid funds and interest-bearing bank deposits. Total deposits were the primary funding source; other borrowings, FHLB advances and subordinated notes totaled $2.09 billion, with a further $253.6 million of junior subordinated debentures outstanding.
Material changes and notable items
- Loan growth and higher net interest margin lifted net interest income. Average loans increased $2.8 billion year over year in Q2; management attributed margin improvement to asset mix and deposit costs, among other factors.
- Net income declined 10% in Q2, principally because the prior-year quarter included a credit reserve release while the current quarter had a provision, and because mortgage banking revenue was lower. These effects partly offset stronger net interest income.
- Mortgage banking revenue fell 34% to $33.3 million in Q2. Loans originated for sale were $821.0 million versus $1.72 billion, as higher rates reduced refinancing activity and production margins also declined. MSR fair value adjustments were favorable in the quarter.
- Net losses on investment securities were $7.8 million in Q2, mainly from unrealized losses on equity investments. Separately, rising rates drove substantial unrealized losses on available-for-sale securities: $362.0 million gross at quarter-end. The company reported a $273.5 million after-tax six-month AFS securities loss in other comprehensive income and accumulated other comprehensive loss of $243.0 million.
- June 2022 common-stock offering: 3.45 million shares, with approximately $285.7 million of net proceeds. The company reported no common-share repurchases during the quarter or six-month period.
- Credit metrics remained low by reported measures: non-performing loans were $72.4 million, or 0.20% of loans, versus $87.7 million, or 0.27%, a year earlier. The allowance for loan and unfunded commitment losses was $312.1 million, 0.84% of loans; net charge-offs were $9.5 million in Q2.
Management outlook, risks and contingencies
- No numerical earnings or growth guidance is provided in the supplied filing text. Management said it believed liquidity and capital were adequate and would continue to prudently evaluate funding sources.
- Management cited organic loan growth, higher net interest income and historically good credit quality as operating strengths, while noting uncertainty in economic conditions and credit-loss forecasts. The allowance model uses an eight-quarter third-party economic forecast and is subject to significant estimation judgment.
- Interest-rate exposure is material: modeled one-year net interest income sensitivity at June 30 was +17.0% under a static +200-basis-point shock and −12.6% under a static −100-basis-point shock; gradual-ramp scenarios were +10.2% and −6.9%, respectively. Actual results may differ from these simulations.
- Key disclosed risks include economic and borrower deterioration, commercial real estate conditions in the company’s core region, changing interest rates and securities valuations, deposit competition, COVID-19 effects, cyber and vendor risks, regulatory changes, and the LIBOR transition. The company reported that 61% of variable-rate loans remained LIBOR-indexed at June 30, down from 85% a year earlier.
- Two new mortgage-related lawsuits were filed in May 2022: a California PAGA wage-payment matter and a putative fair-lending class action in Illinois. The company disputes the allegations and said potential liability could not be estimated. Management believes pending matters will not have a material adverse effect overall, though an unfavorable resolution could be material to a particular period.
- Management reported compliance with covenants on its credit facilities. The $100 million revolving facility had no outstanding balance at June 30, 2022 and was scheduled to mature September 13, 2022; the $69.6 million term-facility balance is due by September 2023.
Important facts for investors to verify
- Whether loan growth and the improved net interest margin persist as deposit pricing responds to rising rates.
- Mortgage banking revenue, origination volumes and MSR valuations under continued rate and housing-market changes.
- Credit quality trends, especially commercial and premium-finance exposures, and whether the allowance remains adequate under changing economic forecasts.
- The effect of AFS securities unrealized losses on tangible capital, liquidity flexibility and future earnings if securities are sold.
- Outcomes and potential costs of the newly disclosed lawsuits, and the status or refinancing of the revolving credit facility at its stated September 2022 maturity.