Wintrust Financial Corporation — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. Wintrust is a financial holding company focused on community banking in the Chicago region, southern Wisconsin and northwest Indiana, alongside national and Canadian specialty finance businesses and wealth management.
Financial performance
| Metric | Q1 2023 | Comparable period |
|---|---|---|
| Net interest income | $458.0 million | $299.3 million in Q1 2022 |
| Net interest margin | 3.81% (3.83% fully taxable-equivalent) | 2.60% (2.61% FTE) in Q1 2022 |
| Non-interest income | $107.8 million | $162.8 million in Q1 2022 |
| Non-interest expense | $299.2 million | $284.3 million in Q1 2022 |
| Provision for credit losses | $23.0 million | $4.1 million in Q1 2022 |
| Net income | $180.2 million; diluted EPS $2.80 | $127.4 million; diluted EPS $2.07 in Q1 2022 |
| Operating cash flow | $68.4 million | $458.0 million in Q1 2022 |
Net income increased 41% year over year, supported chiefly by higher net interest income as loan balances and yields rose with interest rates. Diluted EPS rose 35%. The FTE efficiency ratio improved to 52.78% from 61.04%; the net overhead ratio increased to 1.49% from 1.00%. Return on average assets was 1.40%, and return on average common equity was 15.67%.
Financial position, funding and credit
- Assets and loans: Total assets were $52.9 billion, up 5% year over year. Loans were $39.6 billion, up 12% year over year and $369 million from December 31, 2022.
- Deposits and liquidity: Deposits totaled $42.7 billion, up 1% year over year but down $184 million sequentially. Management reported deposit stability amid industry disruption, while noting migration from non-interest-bearing accounts to interest-bearing products. Non-interest-bearing deposits were 26% of period-end deposits, versus 32% a year earlier. Brokered deposits were $4.0 billion, or 9.4% of deposits.
- Uninsured deposits were estimated at $14.8 billion, of which $1.8 billion were fully collateralized. Liquidity sources totaled $10.9 billion, approximately 84% of uninsured, uncollateralized deposits. The company said additional collateral pledging was underway and expected liquidity sources to substantially exceed that deposit measure in Q2. It had registered for the Federal Reserve’s Bank Term Funding Program but said it had not participated and did not intend to participate.
- Borrowings and capital: FHLB advances were $2.32 billion. FHLB advances, other borrowings, subordinated notes and junior subordinated debentures together totaled approximately $3.59 billion. Tier 1 leverage was 9.1%, CET1 was 9.2%, and total capital was 12.1%. The company reported compliance with its borrowing covenants.
- Credit: The allowance for loan losses was $288.0 million; the allowance for loan and unfunded commitment losses was $375.8 million, equal to 0.95% of loans. Net charge-offs were $5.5 million, versus $2.5 million a year earlier. Non-performing loans were $100.7 million, essentially flat sequentially but up from $57.3 million a year earlier; nonaccrual loans rose to $90.2 million from $44.9 million a year earlier. Management said reserves were appropriate but warned that economic uncertainty could drive future increases.
- Securities and equity: Shareholders’ equity was $5.02 billion. AOCI loss improved to $367.4 million from $427.6 million at year-end. Available-for-sale securities had $482.4 million of gross unrealized losses; held-to-maturity securities’ fair value was about $630 million below amortized cost. Management attributed the unrealized losses primarily to interest-rate and market changes, said it did not intend to sell the AFS securities, and considered forced sales before recovery unlikely.
Material changes and management commentary
- Net interest income rose 53% year over year; margin increased 121 basis points. Management attributed the change to higher earning-asset yields and loan growth, partly offset by rising funding costs. Interest expense on deposits increased to $144.8 million from $14.9 million a year earlier.
- Non-interest income fell 34%, mainly because mortgage banking revenue dropped 76% to $18.3 million as higher rates reduced mortgage originations and refinancing. Mortgage loans originated for sale were $372.3 million, versus $895.5 million a year earlier.
- Non-interest expense rose 5%, reflecting higher salaries, data processing and other costs, partly offset by lower commissions and mortgage-related lending expenses.
- Management described credit quality metrics as generally good, but cited loan growth and less favorable macroeconomic forecasts—particularly Baa corporate credit spreads—as drivers of higher credit-loss provision. The filing’s sensitivity analysis indicates that changes in credit spreads and commercial real estate prices can materially affect modeled reserves.
- Interest-rate sensitivity scenarios showed positive modeled net interest income effects from rising rates and negative effects from falling rates, though sensitivities had diminished from 2022. Management said it had repositioned exposures with collars, swaps and a greater share of longer-term fixed-rate originations, and expected to consider additional derivatives.
- No quantitative full-year earnings or margin guidance is provided in the supplied filing text. Management emphasizes forward-looking uncertainty, including interest rates, deposit competition and behavior, economic conditions, commercial real estate, credit losses, securities values, and market confidence in financial institutions.
Unusual items, contingencies and subsequent events
- Adoption of ASU 2022-02 produced a $741,000 cumulative-effect adjustment to the allowance for credit losses and a $544,000 after-tax reduction to retained earnings.
- On April 3, 2023, Wintrust completed its acquisition of Rothschild & Co Asset Management U.S.; the acquired entities were merged into Great Lakes Advisors.
- On May 5, 2023, the company restated its Series D preferred-stock terms to replace the future three-month LIBOR reference with CME Term SOFR plus the applicable spread adjustment. The filing also reported a change in the principal accounting officer.
- The filing describes ERISA, California PAGA and fair-lending litigation. Management disputes the claims and says it cannot estimate potential liability; it does not expect the matters, based on current information, to have a material adverse effect overall, while acknowledging an unfavorable resolution could affect a particular period.
- Management identified the allowance for credit losses, fair values, goodwill impairment, derivatives and income taxes as significant estimation areas. The filing reports effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How deposit balances, uninsured and uncollateralized deposits, brokered funding and available collateral evolve after the Q1 banking-sector disruption.
- Whether deposit repricing continues to pressure net interest margin as interest rates and funding competition change.
- Trends in nonaccrual and non-performing loans, charge-offs, and the assumptions underlying CECL reserves, especially for commercial and commercial real estate exposures.
- The company’s capacity and intent to hold securities through recovery, given the sizable unrealized loss position in AFS and HTM portfolios.
- Mortgage banking performance, integration and results of the Rothschild & Co Asset Management U.S. acquisition, and developments in the disclosed litigation.