Wintrust Financial Corp. and the "Rope-a-Dope" Strategy

Last week was a busy one for Wintrust Financial Corp.  Wintrust, a financial services holding company, is located in Lake Forest, Ill.  It has 15 wholly-owned banks with a variety of names in the Chicago and Milwaukee areas, and approximately $11.4 billion in assets (although its web site puts the number at about $10 billion).

We're watching Wintrust because last December it got $250 million in public money through the Treasury Department's Troubled Asset Relief program, in exchange for preferred stock and warrants.  

On Aug. 18, the company filed an 8-K with the Securities and Exchange Commission, documenting a presentation it gave at the 14th annual Howe Barnes Hoefer & Arnett Bank Conference.  The presentation itself was pretty unusual - or so it seemed to those of us who don't usually think that banking strategies have much in common with boxing.

However, Wintrust - which said that changes that it noticed in the first quarter of 2005 made it "apparent to us that a negative credit cycle was soon to be upon us" - said in the presentation (see slide 17) that it has responded with the "Rope-a-Dope" strategy.

For those who may have only a passing familiarity with boxing, rope-a-dope is a risky strategy that a competitor uses to wear out his opponent; the hope is that once the opponent is exhausted, the competitor will prevail.

So how does this relate to Wintrust?

Well, Wintrust defines its "rope-a-dope" strategy as:

• No change in loan underwriting - do not chase the herd!!
• Slow growth
• Shrink larger banks (run-off of CD-only customers)
• Grow newer banks
• Reduce relative cost of funds
• Discipline
• Mix
• Get paid for making loans - hand out credit with an eye dropper
• Control expenses
• Hunker down and ride it out

And according to the bank, its strategy is working pretty well.  It says that of the 14 publicly-traded bank holding companies in its geographical area, it is one of only six that turned a profit last year. Its percentage of charge-offs was 0.51%, whereas the rate for its competitor group was 1.98%.  And its rate of non-performing assets (NPAs) was 1.58%, compared to 4.74% for its competitors.  "Relatively speaking, and knock on wood, we are weathering the storm relatively well," the bankers said (see slide 18).

Wintrust said that $300 million of new capital ($250 million of which appears to be from the govenrment) allowed it to "start coming off the ropes - but cautiously" in the fourth quarter of 2008.  The bank said its hopes during the remainder of the year to "clear the 'junk' off the balance sheet" and "start 2010 with strong core earnings and a relatively clean balance sheet."  It also says that it will "retire TARP when it makes sense to do so. (see slide 32)"

Wintrust paid nearly $5.1 million in dividends to the Treasury at the end of May.

On Aug. 20, Wintrust filed another 8-K, which revealed changes to the compensation packages for several executives. According to the filing:

The salary adjustments are not intended to increase total annual compensation for the executive officers, but instead only to adjust the mix between fixed and variable compensation paid to them.

As a result of the changes, annual base salary increased for Edward J. Wehmer, President, Chief Executive Officer and Director, by $300,000 to $1,100,000, for David A. Dykstra, Senior Executive Vice President and Chief Operating Officer, by $225,000 to $825,000, for John S. Fleshood, Executive Vice President/Risk Management, by $30,000 to $308,000, for Richard B. Murphy, Executive Vice President and Chief Credit Officer, by $70,000 to $450,000, and for David L. Stoehr, Executive Vice President and Chief Financial Officer, by $75,000 to $355,000.

The Committee also determined that, in the case of Messrs. Wehmer and Dykstra, $100,000 and $75,000, respectively, of each year's base salary will be paid in Wintrust's common stock granted under Wintrust's 2007 Stock Incentive Plan....

Messrs. Wehmer and Dykstra may not sell or otherwise transfer the stock they receive in payment of base salary until the later of three years from the date of grant or until Wintrust repays the (TARP) investment in Wintrust, except upon their death or permanent disability.