Story URL: http://news.medill.northwestern.edu/chicago/news.aspx?id=101115
Story Retrieval Date: 5/25/2013 2:48:19 PM CST
For one bank holding company based in Lake Forest, surviving the financial crisis has depended on using Muhammad Ali’s approach to fighting George Foreman in 1974.
Wintrust Financial Corp. initiated the strategy, dubbed “Rope-a-Dope,” three years ago. Like Ali’s method of holding back at first, then attacking his opponent after he was worn out, the company slowed the growth of its banking business as the mortgage industry began showing cracks in 2007 after lowering underwriting standards for loans. The company continued its conservative lending practices, and as liquidity in the market declined, it raised $50 million in capital. Wintrust was waiting for the weak competitors to step out of the ring.
Then the government announced Tuesday it will invest $250 billion in banks around the country.
“I feel like the brother of the prodigal son. For three years we’re at home working with our head down, not going to the party,” President and CEO of Wintrust Edward J. Wehmer said in an interview. “And then the prodigal son comes home. ‘Woo hoo! We had a great time at the party. This is great! We got paid big money.’”
For the community banks that have played by the book, maintaining adequate capital and prudent lending standards, the bailout plan stirs up anger and resentment. But even if it saves some reckless banks, Wehmer is still getting ready to take advantage of new opportunities in the market.
“Jan. 1, 2009 we’re coming off the ropes and getting in the game again.” Wintrust will compete more aggressively for deposits, boost loan rates to improve margins, and resume territorial expansion. But it also faces a writeoff of $100 million in bad loans.
Analyst Brad Milsaps of Sandler O’Neill + Partners LP wrote in a research note, “Although we believe WTFC to be a strong underwriter, the level of the loan loss reserve leaves little margin for error and almost no cushion for writing down problem loans.” The earnings could be hit significantly if the credit markets weaken, he stated. On Sept. 29 Milsaps downgraded Wintrust to sell because the stock was selling at nearly 20 times his 2009 earnings estimate, which he said left "little room for further price appreciation given the difficult operating environment." The stock was then selling at $32.06; it closed at $29.29 on Thursday.
Analysts estimate Wintrust's 2008 earnings will fall to $1.48 per diluted share from last year's $2.24.
Wintrust is a $9.9 billion financial services holding company for 15 banks operating at more than 40 locations in mostly affluent suburbs stretching from the southwest of Chicago all the way up to Milwaukee. Among them are Lake Forest Bank & Trust Co., Hinsdale Bank & Trust Co., North Shore Community Bank & Trust Co., Beverly Bank & Trust in Chicago, and Old Plank Trail Community Bank in Frankfort, Mokena and New Lenox.
It also owns a finance company, a mortgage company and venerable Chicago broker Wayne Hummer & Co.
Wintrust’s community banking business started in 1991 at a card table with a box of cigars and a case of beer, said Wehmer. As smaller banks were being bought up by larger banks, Wehmer and a group of bankers and local business people decided on a business model that would keep community banks intact as separate entities, but supported by a multi-billion organization behind them. With each bank locally controlled, the company could build a local core deposit base and provide personalized service. “People know you by name,” said Wehmer. “It’s like the Cheers of banking.”
Before 2007, Wintrust's total assets grew by about $1 billion or more each year, rising from $2.3 billion in 2001 to $9.2 billion in 2006. In the last two years, as loan problems loomed, growth has slowed to several hundred million dollars annually.
Many lenders were caught up in the mortgage mania, the belief that real estate values would continue to rise, leading them to issue adjustable rate mortgages and other real estate loans with little or no down payments to people who couldn't always afford to pay them back. But, Wehmer declared, "we never changed standards for loans--we've been consistent."
“Three years ago in March 2005 we said this is crazy. This market is out of control,” Wehmer recalled. “People have left their reservations as it relates to good underwriting and we were growing like this and I stopped it.” Despite being called “chicken little,” Wehmer slowed his asset growth by stopping the opening of new banks, lowering CD interest rates, and holding back on loan deals. The company essentially braced itself for the storm with the goal of coming out of it first.
When Wehmer decided to raise $50 million in additional capital a few months ago, he thought he had gotten the best deal of the year.
“Now the government offers a better deal than I got in the market, so again I feel like a chump because I played it by the book and did the right thing,” he said.
The government is investing $250 billion in banks, with the first $150 billion going to nine of the largest U.S. banks. The rest is available to banks not deemed too sick to save. For those that do receive the cash, the Treasury would get preferred shares of bank stock that pay 5 percent interest for up to five years and 9 percent interest after that.
“These guys got to the position they were in by being stupid,” Wehmer said. “And now you’re going to give them more bullets for their gun to continue going out and be stupid.”
With more competitors potentially surviving with the government’s help, Wehmer believes the opportunities will still be out there, but will take longer to arise. The real issue the government has not solved yet is the housing crisis, Wehmer said. “That’s what caused this whole thing.”
Like other small banks, Wintrust has not been invulnerable to the impact from the large scale financial woes plaguing the country’s largest banks.
With the Federal Reserve lowering its federal funds rate to stimulate lending, the company has suffered a lower margin from loans. Wehmer is waiting for the prime rate to return to its traditional 5, 6 or 7 percent range. The company’s net income was $11.3 million for the three months ended June 30, down 27 percent from $15.4 million a year earlier. It reports for the third quarter next week.
Wintrust is also facing about $100 million of nonperforming assets, mostly mortgages that have not been paid back as expected. “You work through them, you charge them off,” said Wehmer. But the company had only $57.6 million set aside in its allowance for loan losses as of June 30, up 14 percent from $50.4 million on Dec. 31, 2007.
The strength of the company lies in its deposit base. Total deposits were $7.8 billion as of June 30, up 4 percent from $7.5 billion on Dec. 31, 2007. The company has seen an increase in deposits after it launched its MaxSafe Money Market Account, which allows customers to obtain up to $3.75 million of Federal Deposit Insurance Corp. coverage by spreading the money amongst the company’s 15 chartered banks. Net loans also are growing, if modestly. The net loan amount was $7.1 billion as of June 30, up 5 percent from $6.8 billion on Dec. 31, 2007.
In the fourth quarter Wehmer wants Wintrust to reprice its loan portfolio to get its profit margin up and to carefully pick the best loan opportunities and slowly grow its loans. Once the new year begins, Wehmer intends to get back to doing what he’s done in previous years—have each chartered bank grow $50 million to $75 million in assets a year and open a new branch every two years, and open a brand new bank every two years, Wehmer said.
“Who would’ve thought you would have no liquidity in the market? You just got to be careful, but at the same time take advantage of these opportunities.”