Wintrust Financial: A Cheap Growth Bank
Apr/110
A winning strategy to owning bank stocks is to focus on banks with superior loan generating and deposit gathering capabilities. Another way to succeed in bank stocks is to own acquisitive banks during a period of low valuations such as in the early 1990’s coming out of the S&L crisis or today coming out of the credit crisis of 2008. One bank stock that is compelling is WinTrust Financial (WTFC) because it is one of the few banks with the ability to grow organically, and they are enhancing their franchise through low cost acquisitions. In addition, Wintrust’s valuation is reasonable given their ability to grow.
Background
Wintrust is the bank holding company for a group of community banks in suburban Chicago and Milwaukee markets. The bank was formed in 1991 by a group of experienced Chicago bankers when they formed Lake Forest Bank & Trust. They have grown the company by starting nine de novo banks and purchasing 12 other existing banks. After consolidating some of the acquisitions, the company owns 15 banks with 87 total branches. Each of these banks is used as a growth platform to grow loans and deposits in their respective communities. Wintrust has a history of organic growth.
Investment Thesis for Wintrust:
- Organic Growth – Wintrust has one of the best tracks records in the industry for organic loan and deposit growth. Since its formation, Wintrust has focused on taking market share from the large banks in Chicago. The company focuses on providing a better customer service to its customers by providing a local relationship. Wintrust expects each of its banks to grow loan balances $75 million in 2011.
- Valuation is low historically and in-line with peers – Wintrust trades at about 140% of tangible book value. From 2001 until the credit crisis hit in 2007, Wintrust traded between 215% and 360% of tangible book value. As the company’s credit costs decline and the bank’s earnings power is realized, I expect the valuation to reach at least 200% of tangible book value. Wintrust trades in-line with many of its peers who have lower growth rates. Some analysts will point to Wintrust’s more expensive Price-to Earnings multiple, but I believe these analysts underestimate the earnings power of Wintrust.
- Earnings power is underestimated – Wintrust has more earnings power than most investors believe. The two sources of their earnings power are lower credit costs and redeploying their excess liquidity into higher yielding assets. Most analysts correctly forecast the benefit of lower credit costs, but they underestimate the power of excess liquidity. WTFC has $2.5 billion of excess liquidity. If the bank redeployed $1.5 billion into assets yielding 5%, it would add $1 after-tax earnings per share. There are additional boosts to earnings power through lower FDIC assessments and the eventual paying of dividends by the FHLB of Chicago.
- Opportunistic acquisitions – In the current environment, Wintrust is able to make opportunistic acquisitions. In the last 12 months, Wintrust has bought five failed banks through FDIC-assisted transactions. Additionally, Wintrust bought a life insurance premium finance operation from AIG in a distressed sale in 2009. The FDIC deals are attractive because they drastically reduce the credit risk of the acquired bank through an FDIC guarantee of the assets, and Wintrust is able to acquire the deposits for either a very low or no premium. Wintrust may also take advantage of the low bank stock environment to purchase a whole bank in an unassisted deal, but there are probably 20 banks in the Chicago area that may be sold through FDIC-assisted deals in the next two years.
- Credit quality is manageable – Wintrust’s credit quality has outperformed its peers through the recession. As early as 2006, Wintrust pulled back from loan growth because they wouldn’t lower the credit underwriting guidelines. This conservatism kept credit quality reasonable.
Conclusion
We bought Wintrust for the Gator Small Cap Portfolio because we thought the valuation was compelling given the organic growth capabilities of the bank. We believe there are several drivers to a higher stock price: continued organic growth, additional low cost acquisitions, Wintrust’s stock rerated higher compared to peers due to higher growth, and bank stocks generally getting rerated higher due to lower credit costs.
ICBA Calls for Restoring GSE Preferred Dividends
Mar/100
Last week, Camden Fine, President and CEO of the Independent Community Bankers Association, sent a letter to Secretary of the Treasury Timothy Geithner asking Treasury to restore the dividends on Fannie Mae and Freddie Mac preferred stock. Reading the letter, the community bankers feel like they were sold a bill of goods by Hank Paulson. It seems that Paulson’s book has enraged the ICBA, especially the fact that Paulson was proud to keep his promise to his “Chinese friends” for making them whole on GSE senior debt and MBS.
Let me know if it feels like the political rhetoric has died down regarding the GSEs.
March 12, 2010
The Honorable Timothy Geithner
Secretary of the Treasury
U.S. Department of the Treasury
1500 Pennsylvania Avenue, N.W.
Washington, DC 20220
Dear Secretary Geithner:
On behalf of the 5,000 members of the Independent Community Bankers of America I urge prompt Treasury action to remedy the status of preferred shareholders of the Government Sponsored Enterprises Fannie Mae and Freddie Mac. As the Administration and Treasury continue to control Fannie Mae and Freddie Mac in conservatorship and seek resolution to this unique GSE status, it is imperative that community bank GSE preferred shareholders are made whole to bolster capital and lending levels in this challenging financial and economic environment.
The abrupt action by then Treasury Secretary Henry Paulson to seize Fannie and Freddie through conservatorship was unjustly done in a way that needlessly crushed the value of GSE preferred shares, injuring over a thousand community banks that purchased these shares as a safe AAArated investment at the encouragement of their bank regulators. Since banks received special regulatory capital treatment for them and since banks are generally prohibited from investing in stock of other corporations, Fannie and Freddie preferred stock were important investments with full regulatory blessing.
Shockingly, Secretary Paulson fully acknowledges in his new book On the Brink that this action constituted an “ambush.” It took place shortly after he and the GSE regulators issued statements that supported the ongoing viability and capital levels of the GSEs in their current form as “shareholder-owned companies,” in order to “calm the market fears of a government takeover that would wipe out shareholders.” Now there is no doubt the government’s action was indeed an unjustified “ambush” structured in a way that continues to have detrimental consequences on many community banks that relied on the guidance of Treasury and bank regulators and were intentionally deceived on their Fannie and Freddie preferred holdings.
Americans expect and demand much better from their government and leaders. The lCBA urges the Treasury to help restore the value of the Fannie and Freddie community bank preferred share holdings to levels prior to the abrupt conservatorship of Fannie and Freddie. Preferred Fannie and Freddie shareholders should be compensated for the government’s action of eliminating all dividend payments and placing the preferred shares in a second position.
Rather than help stabilize the financial sector and boost lending, this government “ambush” further hurt banks’ capital levels, weakened the banks and reduced available credit. Such rogue changing of the rules governing preferred stock contracts also sent the entire market for financial preferred shares into a freefall, making it even more difficult for financial firms to raise needed capital. Notably, nearly $36 billion in Fannie and Freddie preferred stock was outstanding prior to their conservatorship. An estimated $15 to $20 billion was held by the banking sector and almost one-third of banks reported holdings including many Main Street community banks.
The Troubled Asset Relief Fund devoted $700 billion to help restoring financial sector credit and to increase lending with mixed use and results to date. However, if we truly want to help stabilize the financial sector, boost small business credit and economic growth, Treasury must also restore a reasonable value to GSE preferred stock so that affected banks can again increase their lending.
ICBA urges immediately restoring the dividend payments on Fannie and Freddie preferred shares and paying injured holders the amount of suspended dividends from September 7, 2008 on an estimated $20 billion in GSE preferred holdings. As the Administration works to remove the GSEs from conservatorship ICBA urges it be done in a way that will restore a reasonable value to the preferred shares. Helping restore the $15 to $20 billion in community banks capital value crushed by the unwarranted Treasury actions perpetrated on preferred shares can foster $150 billion to $200 billion in new lending as banks can leverage this capital.
Sadly, the Treasury and policymakers were forewarned of the distress and fallout that lmnecessarilv crushing GSE preferred shares would cause. For example, the attached letter dated August 271h, 2008 specifically warned of the community banks’ significant GSE preferred holdings that typically pay a fixed dividend and take priority over common stock. Unfortunately, Treasury chose to ignore the warnings when they turned the GSE preferred stock upside down when placing Fannie and Freddie into conservatorship on September 7, 2008. Mr. Paulson acknowledges in his book that he ambushed Fannie and Freddie shareholders in part to help satisfy the Chinese government, which owned billions of dollars in Fannie and Freddie bonds. Mr. Paulson notes that he called “my old friend Zhou Xiaochuan,” the head of the Central Bank of China, and China’s key financial leaders and said: “I always said we’d live up to our obligations.” ICBA believes it is now time to live up to United States obligations and help spur lending by compensating Fannie and Freddie preferred shareholders for the unjust actions of the government.
Sincerely,
/s/
Camden R. Fine
President and CEO
cc: The Honorable David Axelrod, Assistant to the President and Senior Advisor
The Honorable Lawrence Summers, Assistant to the President for Economic Policy and
Director, National Economic Council
The Honorable Eric Holder, Jr., U.s. Attorney General
The Honorable Michael Barr, Assistant Secretary for Financial Institutions
The Honorable Herb Allison, Jr, Assistant Secretary for Financial Institutions
The Honorable Barney Frank, Chairman, House Financial Services Committee
The Honorable Spencer Bachus, Ranking Member House Financial Services Committee
The Honorable Chris Dodd, Chairman, Senate Committee on Banking
The Honorable Richard Shelby, Ranking Member, Senate Committee on Banking
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