Description

Wintrust is an amazing Chicago-area bank that has grown from 1 branch to 180 in thirty years and has trounced its peers on various metrics thanks to their conservative, down-to-earth, community-based approach. They are straight-shooters, they’re diversified, funding is 97% core deposits. They’ve been nimble over time with capital allocation and have integrated acquisitions really well. There’s nothing to hate here and this is all available for 1.15x tangible book.

How Wintrust got Here

Wintrust was founded in 1991, starting with a single branch, by three people who are still there: the straight-shooting CEO Ed Wehmer, the Chief Operating Officer and the Chief Credit Officer. At the time, community banks were getting bought out quickly by the big banks and the founders felt that the supply of community banks was shrinking too much compared to underlying demand. The company gradually grew both organically and via acquisitions, until 2006, when they realized the market was too crazy. Not wanting to lower their standards like their competitors or take unnecessary risks, they survived the crisis quite well (profitable in 2008). After 2008, they had the chance to acquire several banks via FDIC deals. Since then there’s been more strong growth, again via a combination of both organic and M&A. In 2020 things have not been too bad. They were able to distribute PPP loans faster than others and picked up 1000 new customers in the process. Today Wintrust has 180 branches mostly in the Chicago area (northern Illinois and southern Wisconsin), divided across 15 bank charters under their holding company. The 15-charter setup allows them to offer their MaxSafe deposit account, which provides customers the ability to have up to $3.75 million in FDIC insurance (a tranche of $250,000 x 15 banks – they do this under the hood of course; to the customer it’s one account; more details here: https://www.wintrust.com/business-solutions/mid-market/banking/maxsafe.html)

Through this ongoing growth, Wintrust is continuously adding to its edge by using a dual strategy of being community-oriented in all customer-facing aspects of the business while taking advantage of its scale to implement things that are otherwise only found at big banks. This manifests itself in many ways.

Community-Oriented Service:

- Community-oriented culture perpetuated in all aspects of the business; all marketing is produced in an internal agency so as to conserve this culture

- Smaller branches, smaller lines, longer interactions. Reserved spaces in the branch for specific needs like mortgages and businesses.

- Minimal "nuisance fees". They even have a plan in which they reimburse customers for their out-of-network ATM fees, effectively giving them the largest ATM network in the world (..will be tied in #1 position with anyone else who’ll choose to do this)

- Hosts financial education courses for people in specific life situations where finances change

- Present at various community events around the year

- Management of acquired banks stays in place: relationships with customers are maintained

- Each acquired bank keeps its name to reflect that continuity

- Accountability down to the lowest level across the organization to keep everyone involved

- No desire to expand geographically for no reason; strong preference for continuing to take market share in Chicago. [ they do believe however that in terms of physical locations, once they reach a ceiling, they could go to northwest Indiana, north Wisconsin, St-Louis or Minneapolis ]

Big-Bank-like Scale:

- Friendly service through technology: they have a 24-hour contact centre with the ability to see the person you're talking to

- Everything that doesn't touch the customer is consolidated for all the banks; this implies a lot of quality IT infrastructure; one system for all 15 banks. The company puts a big emphasis of staying on top of tech and is thus able to compete with big banks on that front.

- User interface of customer-facing tools is sophisticated and competitive with big banks

- Acquisitions are integrated professionally

- Product breadth significant enough to compete effectively with larger banks

- Able to provide larger credit facilities than smaller competitors

- Easier to attract talented staff

- Access to public capital markets

In 2008, Wintrust decided to implement the brand image of “Chicago’s Bank” because they were accumulating so many banks in Chicago, and believed that branding around one city will still be perceived as ‘local’ compared to the big banks. The new effort would would put the holding company’s name (Wintrust) in the spotlight. First, they implemented a two-brand identification strategy – keep each community bank’s name in place but add a tag line: “part of the Wintrust Community Banks family”. Then, they created partnerships with a lot of Chicago brands and institutions including major sports teams, colleges and charity boards. Similarly to the “Chicago’s Bank” branding, they added the “Wisconsin's Bank” branding as they expanded in Wisconsin. They now have the largest deposit base in Chicago among locally headquartered banks.

The company is patient and opportunistic with M&A, waiting for good valuations and focusing on organic growth whenever it’s expensive (like now). Asset growth is outpacing branch growth. They also have a history of buying back shares when that was an attractive option. Either way, more M&A opportunities should come. Community banks in metro areas are finding it hard to survive due to a tough regulatory environment, difficulty in getting good assets, in accessing capital and in trying to offer the range/quality of products that Wintrust offers. Wintrust is an acquirer of choice for them: they keep the all the top people that are familiar with the community (big banks would fire them) and so the entrepreneurial spirit and relationships remain while more/better products help the acquired bank do even better. This constant stream of small, bolt-on acquisitions over the years has led to Wintrust building a successful formula for integrating these banks and being known as a consolidator.

Segment Breakdown

Wintrust reports in results in three segments: Community Banking, Specialty Finance and Wealth Management. Funding is 97% core deposits. Brokered and wholesale funding are only used to the extent necessary to manage liquidity and interest rate risk.

Community Banking

The banking segment’s clients are similar to any typical community bank except that Wintrust can reach a bit higher in terms of size/types of clients due to its size and capabilities. There is great emphasis on conservatism, diversification and qualitative factors when judging potential borrowers. Over the years, charge-offs were always less than their peer group.

Their basic offering consists of:

- Full suite of consumer lending and C&I lending

- Mortgage production (retail origination and correspondent lending, VA loans): all in the U.S., 60% in the Chicago area. Certain loans are sold but servicing remains with Wintrust

Specialty Finance

Wintrust has entered lots of niche businesses including:

- Community Advantage: lending, deposit and cash management services to condo/housing associations

- Mortgage warehouse lending to brokers in the Chicago area

- Franchise lending

- Direct leasing and lease financing

- Asset-based lending for mid-market companies

- SBA Lending

- Commercial mortgages and construction loans

- Financial solutions for local government organizations as well as hospitals, non-profits, and educational institutions

- Premium finance: FIRSTInsurance Funding finances commercial insurance premiums, First Insurance Funding of Canada does the same in Canada, and Wintrust Life Finance finances life insurance premiums

- Tricom: AR financing, payroll funding and processing, and outsourced back office administrative services

The company's priority is always their local markets, so to the extent some of these niches involve business outside that area, they are only used to top off the balance sheet. Premium finance is ~30% of the balance sheet and commercial loans (both specialty and non-specialty) are ~50%.

Wealth Management

The wealth management segment comprises four businesses and $23 billion in AUM when excluding assets owned by Wintrust itself. The clients mostly consist of the bank’s customers but they do provide certain services to others. Services include asset management, full-service broker-dealer and 1031 exchange services. One point worth mentioning is that they bring the same values to this segment as the bank: For example: their high-net-worth segment will treat the $2-3 million portfolio the way a bigger bank would treat the $20 million portfolio. Another example: they cross-sell the services between segments in a manner where they’ll truly get to know customers and their needs, like a small business owner who needs help with wealth management.

Recent Developments

A couple of interesting recent developments worth mentioning:

- They are starting to look at banks with over $1 billion in assets for M&A. Is this a good thing? If the price is right and the target in the area, why not? They have a lot of experience integrating acquisitions. The more annoying thing is that with the stock trading so cheap, they don’t have a strong currency. They’ve recently reiterated that they always compare M&A with share buybacks though, so I trust them to keep allocating properly.

- Buybacks were suspended in Q1 due to the virus; under the right circumstances I’m sure they’d restart them

- In Q2 they grew total loans by $3.6 billion – almost all PPP lending – this is now 11% of their loan book.

- The premium finance businesses are growing well this year, in part due to hardening market.

- In Q2, they issued some preferreds

Valuation

So we have a company that has been profitable for 2 decades including in 2008, careful lenders, excellent capital allocators willing to buy back shares, good at growing organically and non-organically, with excellent operations in every aspect, clearly loved by their customers in terms of satisfaction scores and referral numbers.

Their tangible book CAGR of 8% since 2009 has outperformed the peer group and so have all kinds of other metrics.

The stock is at $59.25 compared to tangible book of $51.70

I think in this market, particularly if we see a value-growth rotation, it’s a great entry point. Also bear in mind that they don’t give guidance so opportunities might be generated that way as well.

Catalyst

- Value-to-growth rotation in the short-medium term

- More execution over the years, including M&A