Illinois bhc mimicked Ali’s famous strategy to avoid credit woes
By Steve Cocheo, executive editor,
Localized strategy coupled with careful jabs pays off for multibank holding company, especially as means of bringing in large stable deposits
Wintrust Financial Corp.’s leaders pride themselves on minimal use of wholesale funding, in the form of Federal Home Loan Bank advances and brokered CDs. What comparatively little the $11.3 billion-assets holding company uses serves asset-liability management purposes.
The bulk of the company’s funding comes from what Wintrust’s 15 subsidiary banks in Illinois and Wisconsin can raise in their own markets. As the company’s 2008 annual report stated: “The right side of our balance sheet is the envy of our peers. We are predominantly core funded and do not need to rely as heavily on institutional funding as do a number of our competitors. We believe this equates to a very strong franchise.”
This franchise gave Wintrust a leg up when large depositors began to get nervous last year. To understand why, you have to understand Wintrust.
Structure begets strategy
Wintrust began with a single bank in 1991 and grew as much by new bank formation as through acquisition. It relies on local market dominance.
As President and CEO Edward J. Wehmer explained at an analysts’ conference held in late summer, the company’s game plan has long been to push for the number one or number two market share slot for each of its subsidiary banks. The company’s banks serve the greater Chicago and Milwaukee areas.
Analyst Tom Brown of Bankstocks.com likes the company, and, indeed, his investment firm, Second Curve Capital, has a position in Wintrust. He says Wintrust has made good choices in structure and strategy. If a bank isn’t going to be one of the five largest banks in the U.S., Brown believes, it is critical to stress local connections and decisionmaking, and also to think out of the box. Brown says Wehmer and David Dykstra, senior executive vice-president and COO, have a knack for finding ways to generate returns, even when it means doing unusual things.
In the last year or so, Wintrust has been in conservative mode, determining not to put on weaker assets just to be able to maintain the rate of growth.
“We saw opportunities for those who could weather the storm, and keep their powder dry,” said Wehmer. “It’s times like these that money returns to its rightful owners.” In the 2008 annual report the bank ran a table showing the first- or second-place market status of each bank subsidiary.
Wehmer’s statement deals in part with future lending volume, but Wintrust has been biding its time, in what management in 2007 dubbed its “rope-a-dope” strategy.
The company adopted the concept from boxer Muhammad Ali, who used it against then-heavyweight champ George Foreman in their 1974 “Rumble in the Jungle” fight in what was then Zaire. Ali’s plan was to start leaning on the ropes of the ring, and let Foreman consume his energy trying to pound Ali into submission, with punches didn’t do much damage. The strategy worked, regaining the championship for Ali, the older fighter.
For Wintrust, the strategy was to not compromise credit standards, but to pull back from credit opportunities that management didn’t see as prime. In the meantime, it would gather and husband strength, in further capital—both through TARP and private placement—and by building its deposit base.
Analyst Brown saw the holdback as a gutsy move. “There’s the pressure from guys like me to grow” that comes at times when the smart move is not to beat out dumb or irrational competition, he says. In the short term, the analyst community doesn’t reward this. In fact, says Brown, “the first thing that happens is you take a bunch of criticism.”
MaxSafe scores for Wintrust
One of the company’s funding strategies was an innovative approach to gathering large deposits that was designed to capitalize on the affluent public’s interest in safety. It was a strategy intended to advance the company’s interests in a significant way while it minimized aggressive portfolio building.
“A common myth around rope-a-dope has been that Ali just leaned on the ropes,” the 2008 report states. “The truth is that Ali also took advantage of any openings that presented themselves, using well-placed jabs to score points and weaken his opponent. Our adaptation is similar. We’re not just taking it. We’re hitting back when and where it makes sense. Our MaxSafe Account is a perfect example.”
The MaxSafe concept resembles the technique used by the ABA-endorsed CDARS program (see the box in this department, p. 16). Unlike CDARS, which relies on a network of participating banks, MaxSafe operates wholly under the holding company’s umbrella. It relies on the fact that each separately chartered bank owned by Wintrust has separate deposit insurance. By combining the power of separate charters and insurance coverages with multiple depositor capacities under FDIC rules, MaxSafe promotes the availability of up to $3.75 million in deposit insurance coverage.
While the main feature promoted is the federal insurance, the bank also brags on its bank subsidiaries’ health. Promotions refer to the fact that all 15 institutions are well-capitalized under federal standards. One of the program’s sales sheets, titled “The MaxSafe Banks,” features the logo, FDIC certificate number, and three key capital ratios for every bank, along with those for the corporation overall.
The roots of MaxSafe go back to Wintrust structure and strategy. The corporation is more than a collection of commercial banks. It includes other types of financial players, ranging from commercial finance companies to wealth management delivered by the Wayne Hummer Wealth Management firm that Wintrust acquired in 2002.
Soon after that acquisition, Wintrust began offering wealth management clients the ability to obtain extra FDIC coverage for large deposits by distributing uninsured amounts among Wintrust banks, to obtain coverage under those charters. (This formed the bank’s “Insured Bank Deposits” program.) In 2003, the company began making the service available to bank customers. It included in that offer the ability to have the multiple relationships brought together under a single unified bank statement and a single 1099 report, and initiated by a visit to any bank in the Wintrust family.
The banking crisis brought opportunity.
Knocks on industry bring attention
In September 2008, with public concern about financial services safety growing, the bank unveiled the beginnings of its MaxSafe line. Initially the bank promoted MaxSafe in two forms, MMDA accounts and CDs.
At the time of the announcement, all forms of the product totaled about $700 million. By the close of 2008, the company had more than $370 million in MaxSafe accounts and more than $700 million in the original Insured Bank Deposits program.
In a sense, the program reflects a definite choice management made to maintain local charters, local boards, and local connections, that pays off in the ability to offer this unusual service. “This product differentiates the company’s banks from many of its competitors that have consolidated their bank charters into branches,” the Wintrust annual report stated. Many Wintrust banks serve affluent neighborhoods in the company’s two states, and in general Wintrust considers $100,000 deposits from customers in those locales as “stable,” if not technically “core,” deposits.
Brown says other banks can learn from the intent of the Wintrust program, even if they don’t have the same structure. Brown says that research by First Manhattan Consulting Group indicates that 2% of retail bank customers account for 50% of a bank’s consumer deposits, and that 2% of a bank’s small business base accounts for about 50% of its commercial deposits.
Brown says that that argues that maintaining the confidence and peace of mind of those small portions of the customer base is critical—something that MaxSafe was clearly intended to do at a time when large depositors realized they were unprotected as the economy was trembling.
Building on an idea
Wintrust has expanded the MaxSafe concept in several ways since the year-ago unveiling. Nowadays there are variations on the program for individuals, businesses, nonprofit organizations, government entities, and condo/homeowners associations. (Wintrust serves some selected business niches, one of them being associations.) The bank also unveiled a twist on the product, called MaxSafe Treasury Management Account, late last year. MaxSafe TM serves as an alternative choice for controllers who are looking for a collateralized repurchase sweep account for their organizations. A benefit for Wintrust banks has been less necessity for tying up investment securities as collateral for ordinary repos. (Any swept funds beyond the maximum insured amounts need to be secured in the traditional way, as uninsured funds.)
The accounts can be opened online now, as well as at any of the company’s bank branches.
Reaping fruits of innovation
Wintrust’s financial reports indicate continuing benefit from the MaxSafe family of products. Midyear results indicate, for instance, that average money market accounts increased by 58% over midyear 2008. Growing non-CD deposits such as MMDAs has been a multi-year goal to raise net interest margins, and of that 58% growth, management reported that one-third came from the introduction of the MaxSafe MMDA variation.
As of midyear, more than 8% of total deposits came from individuals’ MaxSafe accounts (totaling $772 million at midyear). At midyear, NIM came in at 2.91%, versus 2.71% for the first quarter 2009, and 2.77% the year earlier.
As for “rope-a-dope,” that seems to be over, according to analyst Tom Brown.
While management in analyst meetings has spoken of 2009 as an opportunity to clean up the balance sheet, Brown sees Wintrust as coming off the ropes. The midyear acquisition of an insurance premium finance operation from AIG, to him, was a signal.
“I would argue that ‘rope-a-dope’ is done,” says Brown, “and they are coming out swinging.” BJ
The electronic version of this article available at: http://www.nxtbook.com/nxtbooks/sb/ababj1009/index.php?startid=12