Prosperity Bancshares, Inc. (PB) Earnings Call Transcript & Summary

All right. Good afternoon, everyone. This is Jon Arfstrom with RBC Capital Markets. We have our unplugged panel as the last event of the day. And I'm not sure how this is going to go because this is usually a pretty spirited panel. I've known these guys for the last 15 or 20 years, and we've been at this panel for the last 10 to 12 years. It's safe to say they've really chased everybody else away, so it's down to these 3. There's lots of perspective. They've all built these banks really from nothing to what they are today. And we call it unplugged because you're going to get opinions and thoughts, whether you agree or disagree, but these guys are usually right. They produce lots of growth. They've done lots of acquisitions. They have experience through the credit cycles. And they give each other a hard time, including me. We've had a lot of fun with this panel over the years, but we've never done it virtual. So we're going to try to keep things under control. The only thing I'd ask is for Ed and Dave and Johnny, just identify yourselves when you're talking, so people know. And what we'll do, just big picture will start out. Ed, give us 30,000-foot view of Wintrust. It doesn't have to be that long, but give us a kind of 30,000-foot view. How it started? Where you are today and then we'll move to Johnny and Dave. So take it away, Ed.

Thanks. So we're talking here from beautiful Rosemont, Illinois, world headquarters for Wintrust Financial. Wintrust started in 1991 at a card table idea, and we opened up in December '91 in 1,100 square feet with 11 employees. We've grown to be almost $37.5 billion in assets, 184 locations. Another $26 billion and who knows after this week, but in assets under administration and the wealth management group, we're very diversified. We run a community bank model with everything behind the scenes is, it doesn't touch a customer centralized. It's allowed us to grow rather handsomely. Just last year, recorded another record year. We grew $5.5 billion in net footings, up to that $37.5 billion, $1 billion in acquisitions, $4.5 billion organically. We're a company that's very diversified in terms of our income streams. We're very diversified in terms of our funding, very diversified in terms of our loan portfolio. We've been able to make money throughout the cycles, maybe not as much as people would like. But we've had a number of record years [indiscernible] we struggled to make at this time, but we're committed to the Chicago market, but in Chicago, you can walk any place, we get to 2 hours from Chicago. But we do have niche lending businesses. We -- I think, we have the largest insurance premium finance business in the country, in the world. We do business in Canada, the United States, Caribbean, makes up probably $7.5 billion of our assets. The franchise portfolio. We have a leasing portfolio, another number of other niches that we're in, warehouse lending. Another 1/3 of the portfolio comes from commercial real estate. And the other 1/3 comes from C&I. I asked Johnny before we started if he had the coronavirus. He said, Ed, let me tell you, we've been eating bat soup down here in Arkansas for so long, we're all immune. So with that, I'll turn it back to you, Jon.

On to you, Johnny. You're up.

I really -- I knew something was coming, but that picture of you naked with the mask on is hilarious. That's really one of the better pictures I've ever seen of you. But I'm not quite as bad. I'm the little boy here. We're about $15 billion. We run -- we operate in -- operation in New York as well as Florida, Alabama and Arkansas. Arkansas is one of the secret sauces of the company. The efficiency runs sub-40 efficiency, 2% ROAs. It's a pretty nice little county, makes a lot of profits. We make a lot of money and lots of capital quick. In the last 2 years, we've paid out $200,000 in dividends -- I mean, $200 million in dividends and bought back about $200 million worth of stock, and the sale, which is diluted by the way because I trade at about 2x tangible book, or used to before this week, and still returned over 20% return on tangible common equity. So it's -- I'm the founder. I'm the largest individual shareholder. We run it like a business, and we run it like it's our money. It's all our money. So it is -- I've enjoyed this panel with this great bunch for many years. They are -- the other 2 are okay bankers, they're okay. They don't run at the level I run, but I'm trying to bring them home. I'm trying to bring them home, and I think maybe in another 4, 5 years, Jon, if they continue to listen, the way they listen that we'll bring them home to be top-notch bankers. Now I'll turn it over to you, Dave, or is Dallas going to take it.

Well, let me start off. This is David Zalman, Chairman of Prosperity Bancshares. And again, we don't have any locations in New York City. So we're not as quite as sophisticated as Johnny is, but we're getting there. But we started the bank really with one location with about $40 million in size, about 10 employees. And from there, we bought failed banks throughout the '80s, and then, through the '90, started buying banks and grew the bank organically as well as through mergers and acquisitions. And today, we are a little over $30 billion in size. We just did one of the best deals, I think, that we've ever done, and that's to merge with the bank in Dallas. As Johnny calls him Dallas, Kevin Hanigan's Bank, Legacy Bank. And so today, we're probably -- when it's all said and done, we'll end up with about 285, maybe 275 after the consolidation, locations throughout Texas and Oklahoma. And that's where we are.

All right. Thanks, David. A lot of topics we could go after here, but maybe just there's a lot of volatility in the market. We have oil moving around. We have the market up and down, rates really at all-time lows. But I'm just curious if we just focus out what's your overall view on the economy? And what are you seeing in terms of your regional economies? Any impact from the virus? Anything that's changing? Maybe we'll start with you, Ed.

It's only 2 weeks old. So it's hard to tell, but we have 11 confirmed cases in Illinois. I guess that's an epidemic. But we haven't seen the draconian measures taken in other parts of the country. But we have -- you could have some labor issues, but right now, it's business as usual. The mortgage is going through the roof right now here as people are refinancing. Our applications last year grew up 3x what they were last week in February. So there are some good things happening. Oil going down. We don't have any oil exposure really much at all. Maybe in our leasing portfolio, we've got some trucks or -- I know we have a submarine that goes out and looks at the underwater towers and stuff. But -- and in hospitality, we don't have a lot of exposure either, never have, which, [ Burk ], our credit guy is, not very hospitable, doesn't like hospitality. Our franchise portfolio is mostly built of franchises. We have to look up at the menu, not down at the menu. They seemed obviously very well in downtime. So we don't know what to expect in terms of the virus right now, but it hasn't had much of an effect on anybody, really, other than the only thing we have to fear is fear itself. The rate environment is crazy. We've lived through it before. So we all -- the margin will get hurt a little. We think we can make it up in the overhead side of things with the margin being depressed. I think I can get our debt and overhead ratio down into the 140s and maybe in the 130s. So that's a 25 basis point pickup on our net overhead ratio, which should offset an expected 40 basis point decrease in our margins. So it's going to be great. It's going to be a little volatile over time. And -- but I haven't seen much yet, but it's early in the game, and I'd like to see where it sets out.

Okay. So business as usual so far?

Yes. So far so good, other than I put hand away by it all the time, and that's about it.

All right. At least you're clean. Johnny, how about you? What are you seeing?

Well, it's been the last 24 months has been like a cram course in banking. I think we've seen about everything in the world. We had an '18 cranked ever quarter and then they go into files and then they go down, and then we've had a 50 basis point drop this time. It's been an amazing ride for 24 months and absolute -- the bankers they've had to hold the course and stay disciplined. It's been -- so far so good. We had -- continue to have -- we made $300 million in '18. We made $290 million last year. I had my first full year of dots -- I mean, of Durbin, and that cost me about $12 million. Actually, my '19 year was better than my '18 year. We've got -- asset quality around the country has been good. I guess the 0.5 point for me is that I haven't given my stuff away and I've written at high rates. And I've got an $11 billion book of loans that is north of 6% on the book. So I'm living on that, and that's churning out there for me at 6% today. That's -- it's pretty comforting when you see rates drop like they're dropping. And in my area, a lot of weak bankers, just they're like a dog in heat running up to the customer, what can I do to keep you. And then they'll drop from 5 to 4 to 3 to 2, and I just don't do that. So I'm sure I can get some repricing opportunities. Most of my stuff is fixed, about 70% is fixed, about 30% is variable. And no doubt, I get some pressure to lower some rates. There was -- the other day, a call came in from Arkansas that they just -- a competitor to bank had just quoted a guy 3 80 for 25 years. I don't know what the call was on the 3 80, 5 years or 7 years. But I had the customer at 5 80. They didn't get my customer, but they cost me 150 basis points. So it's frustrating when you see weak bankers give stuff away. I just don't give it away. I hold for my rights, and I hold tight to that. And if I have to give, I can. But in the meantime, I really have no complaints. We -- Arkansas hadn't had a case of -- nobody goes to Arkansas because there's nowhere you can go there. So nobody's got the virus in Arkansas. I guess, that kind of wraps up my presentation. David?

All right. So just -- before we lose this thought, I wanted to ask about pricing in the next round. But for those that haven't heard this before, we're losing LIBOR, maybe you could explain Johnny Prime, and why that might be a better index to use for loan pricing? What is Johnny Prime?

Well, it is the best prime that there is. I mean, it's been as more than Wall Street Prime or LIBOR or anything else. Johnny Prime was initiated in 2008 when everybody was dropping rates everywhere. And I instituted Johnny Prime at 6%, and I said, the world has kind of come to an end, 8% and 9%, if you all remember, and I said, I don't give a damn, I'll make it alone. And the rate's 6%, take it or leave it. And interestingly, the rest of the world fell in line. We actually still have today some on the books at Johnny Prime. That's a true story.

This is Edward. This is why we were thinking of adapting it, but we can't find anything that correlates to it. Johnny has the bad debt goes up, Johnny has a good debt goes down. We have to move forward...

I don't know if they could understand. It's complicated for Chicagoans. I mean they wouldn't be able to understand Johnny Prime.

Okay. All right. Well, Dave, we got a little sidetracked, David. But maybe talk us a little bit through your economies and what you're seeing and we're still rock-solid in Texas, but maybe touch a little bit on oil as well? And what kind of an impact that could have?

You want me to talk about on Friday or Monday, on how everything is.

That's a good question. I mean, give us -- just give us the lay of the land of the whole spectrum?

Yes. It's -- you are right. Texas is still -- and Oklahoma are doing very good. We have population growth. We have job growth. We have some bunch of people moving from California, primarily over to Austin and Dallas. They don't want to come to Houston, because we're too red necks over there. But overall, the consumer has been extremely strong. As you know, this is really not a monetary issue. This is something that's really caused more by panic and fear, but our customers, our employees and everybody, there is very low unemployment. People are making more money than they've ever made. They've been willing to spend it. And so when we look at loan committee, our loan committee has been starting early, an hour early. We start about 9:30, and it usually doesn't start until 10:30 and goes until the evening. So it's been strong. At the same time, there's no question that the panic and fear that's been brought here by everybody could change that to some degree. But just like I tell everybody, I mean, most of this, I think, is more of a panic and fear-driven deal. There's probably 30,000 to 60,000 people that die every year in the United States from flu. And I said, what would you do? Or what would you think if you turned on CNN or MSNBC or any of those that, today, we lost 150 people. Tomorrow, there's going to be 200 people. I mean, that's what's driving this, I think, at some point in time that people would get tired of this. I mean, the American people are very strong. I think that we will get through all of this. We've got through Y2K. We've got through SARS. We got through the swine flu, on and on and on. And I think that people will get -- I think, I don't want to make light of it because I know this is a sensitive issue, and it's easier to talk about this if your relatives or family don't have something like this. But it is something that we have. It's something that we're going to have to live with, and we'll continue to fight it, but we'll get through it. So let me leave there and talk a little bit about oil again because I kind of feel this is like 2015, 2016 again, where Texas is falling off into the Gulf of Mexico. In one day, the whole world is coming to an end. We lost almost 20% yesterday. It was a nice recovery today. Maybe our recovery was due to being at your conference, that was good, we came back up about 11%. But we have about $698 million in energy loans. When we did the merger with Legacy Bank in Dallas, we ended up having about $87 million on the side for those loans for their energy loans. So we actually have a reserve of about 21.7% for those loans. And most of all of their loans are about 87% of those loans are hedged at $50 plus, that goes anywhere from 12 months to 18 months. So we're covered there. And I would say that our portfolio, 40 -- 57% is from producers, 43% is service industry. Most of our service industries are companies that -- we haven't taken on a lot of new ones over the last few years. Most of these are companies that we have been banking for probably the last 20 or 30 years, and none of them are drillers. So not that -- it doesn't mean that they won't find some difficulties, but we're -- we have the people that haul off the saltwater that plug and abandon the wells that do the dirt work and do that kind of stuff. So we feel good there. So what I -- I really went back and I looked and I said, with everybody going so crazy with oil going down the way it was, I said, I went back to 2016 when our oil went down below $30 and the $27 range, and the 2 -- I look for the worst 2 years, and for the worst 2 years, I could find in charge-offs was 2016 and 2017. And we charged off $25.9 million. That's the worst, that was over 8 quarters and 2 years. So then I went back and I said, well, what's the worst charge-offs that we had over 2 years in any corner? And again, this was total charge offs. So I went back in June 30, 2016, through March 31, 2018, we had $34 million in charge-offs, and that included $25 million. And the $25 million that we have charge-offs on oil and gas, most of it was from an acquisition of a bank that we purchased in Oklahoma. In fact, it's in Oklahoma. So that -- so we feel pretty good where we're at. We all met our people and our management teams, and we talked about, are we missing something? We still feel extremely good. I think banking is completely different today than it was a number of years ago. Most banks today have about 10%, at least we did close to 10% tangible capital. For god's sake, we have almost $360 million in allowance for loan losses, that's 2%. So I think that we're in a lot different situation. This is more of a panic-driven, what you're seeing in the last few days. And I think that over time, that will subside and things will get better. Long story, but I want to get both the energy, how we're doing and how the energy is doing too at the same time.

And remind us, David, there was some initial fear that there would be credit problems outside of energy, and it seems like Houston and Dallas and other areas really sailed through it. It wasn't without maybe some job growth slowing, but...

You're exactly right. I tell everybody, I said, what happened in '16. I'd say, even today, we have $698 million in energy loans. In the last couple of months before today, our market cap went down $2 billion. So we could have charged off our energy portfolio 3x almost. So -- and that's the same thing in '16. I said, well, it's not what you have in energy, it's what you have here -- throughout Texas and the effects that it will call. And I would say that there are so many people moving in right now. If you look in the Austin area and Dallas area, I mean, every tech company from Apple to AMD to Samsung to -- it goes Intel and on, they're just -- they're hiring and bringing more and more people, and the Dallas market is really growing, people coming there. Houston, we're looking at 220,000 new jobs in 2020. 55,000 of those jobs, which is a little bit down, are in the Houston market. And again, probably Houston can be impacted probably more than others as much, but again, still very, very vibrant communities and very diversified.

Okay. Good. Johnny, what's going on in Florida? What's your assessment of the health of Florida?

I think Florida is in good shape. I saw -- I think I reported last quarter maybe that I saw ADRs on hotels go down for the first time. The Smith report, I believe it was, we got, and that's the first time I've seen ADRs go down. But there has to be -- we had done new hotels. I got about $1 billion worth of hotels. It concerns me a little bit from the hotel market right now because of the virus and the travel. I think we'll be fine. It just -- from the hotel aspect, somebody has got to be the last person on the chain letter. It looks to me like they keep building new and new wins, new with the big flag wins, and somebody has got to get hit. I don't think it's the low-cost carrier getting hit. I think it's somebody in the middle getting hit. I don't do refurbs on putting lipstick on a pig. I don't do that. We just do new hotels, but that concerned -- seeing ADRs drop a little bit in Florida concerned me a little bit. Economic activity in Florida has been good. Lots of deposits there. It's a great market. We've very few charge-offs, the asset quality in Florida has been really good. There's a lot more money in the deals in Florida than there ever has been. One good thing about this cycle is the amount of equity that's in the loan book. There is more equity in the loan book. I've made a statement a while back when I start seeing people raise leverage again. I'm seeing a little push to raise leverage back up. We spent 10 years building fortress balance sheets and could turn around and pass it all off in 24 or 36 months by going back to this high leverage. So I'm just not playing when I got $11 billion of loans, it's north of 6%. I'm just not doing the high leverage. I'm just not -- I'll just pass, I mean, because I'm still making lots of money. And this, too, shall pass at some point in time, and I think things will get better. I am concerned about the margins, what could happen to margins. I've been able to maintain my margin for the last 24 months. I think it's off the record in this crazy cycle we've been through. But I've been able to do that. And I'm at -- my actual margin in February went up, so I'm kind of optimistic I may end up having a pretty good first quarter. I'm not having big loan growth because I'm not giving it away. So I am having a little organic loan growth. I bought a little marine book the other day, about $400 million, $500 million worth of marine loans. I'm getting bigger in the marine business and I kind of like that business. But overall, things in Florida are about as good as they get. You don't see a lot -- multifamily is still happening a little bit there. I don't see a lot of condos. Someone asked me today about condo loans, if I got condo loans, and I said, I cannot remember the last condo loan that I did. And I'm sure I've got some, but I don't remember. I'm going to turn it over to you -- back to you, Jon.

Okay. Ed, have you seen anything out there that doesn't make sense from a competitive lending point of view? I mean, we've talked a little bit about loans outside the system and maybe there's more risk outside the system than in the banking system. But maybe just talk a little bit about what you see in terms of emerging risks?

Thanks, Jon. Well, HLPs have been in the market for a long time. And we went out on a de-risking journey starting last year, kind of pushed out a lot of the HLPs, a lot of private equity deals, where they weren't our clients, they weren't the lead. I think the -- last year was tough for us to hold our commercial, which makes up 1/3 of our book, our commercial middle-market business steady. We didn't grow it. Now we had to run like hell to do that, because either private equity is paying huge multiples, supported by banks and fincos, or we're getting refied out by banks and fincos. We, like Johnny and David, are very conservative in our lending. We don't change our loan policy, our pricing parameters for anything. Those are our circuit breakers. That's what threw us in a rope-a-dope back in '06. We're not afraid to do it again. So HLPs are pretty tough right now. Hospitality has never been high in our list. People always ask, well, you're in Illinois. And Illinois is fiscal -- got fiscal issues, Chicago has fiscal issues. If you look at our premium finance business and even our core business, if the core business has a connection in Chicago, we'll do out of state. So 53% of our loans, you take premium finance loans, the leasing, the warehouse loans -- not the warehouse, the franchise loans, they're all 53% out of state, and they have -- the commercial real estate book has a connection to Chicago. So we're more diversified than you think. We were able to grow our loans almost to what, we've grown 13% over the last 5 years, capped our growth rate that's rounded. We've been able to do that by taking advantage of the market turmoil that's going on here. One of our competitor's private bank sold to the Canadians. And they sold the Fifth Third, they're from Canada, too, I think. And they come in with their cultures and their customers don't like it. So that market disruption has been very good for us in terms of being able to pick up good, strong customers, plus our marketing in terms of Cubs, the White Sox, [indiscernible] the Brewers, Marquette, Northwestern, DePaul has really aligned us with Chicago. Our multi-branding approach helps us really -- Chicago itself has 72 neighborhoods. If you take all of the -- in our market areas, probably 150 communities that are all different. And we're able to market ourselves as a community bank. Again, everything that doesn't touch customers consolidate behind the scenes. We're able to give that high level of service the same time the high level of digital stuff, digital products, too. So we can compete with the big guys and the little guys all the same. So we -- credit is what is going to kill you. Your margin is going to be okay. You do -- you pull the things you can pull and the margin will be okay. You've got to be diligent on credit all the time. We've always operated at a fraction of our peer group in terms of charge-offs. It's in the nonperformers. We expect that to continue going forward, but we're not ready to call rope-a-dope yet because our volumes and our pipelines are so pretty good. We're getting deals on our terms, but we're not afraid to turn them down like Johnny said.

Okay. What -- just for the benefit of those listening, describe rope-a-dope? Give us rope-a-dope on one end?

In 2006, we -- all the circuit breakers went up, our profitability analysis. We couldn't get paid for the risk. We couldn't -- exceptions outside of our constant loan portfolio. Our loan policies were exceptional. And we said, no, we're not going to play the game. So we hunkered down and raised capital. And for 2 years, I caught a lot of grief. They call me chicken little, or you're going to miss the party. I used the analogy it's like a really good high school party. You know it was going to get busted that made our guys leave. For 2 years, they looked in the window and saw the party going and I would not let them go in. And true enough, fourth quarter '08, we were at your conference, I think, when Lehman went down. We put failed -- more failed banks anywhere in the country. We -- the Fed told us that in that 10 years from '08 to '18, we did more transactions, more whole bank, failed bank branches, portfolio purchases than any other bank in the country. So we had positioned ourselves. We had record years during the downturn as a result. So just sticking those -- banking hasn't changed since the [indiscernible] invented the first modern bank 600 years ago in terms of the risks. They're all the same. They have different covers on them, but they're all there. And as soon as you start thinking you are star in the market, you get your a** handed to you. And we don't want that. So we're old school conservative lenders. We take what the market gives us. Don't give us anything, we won't take it. We'll hunker down and wait it out.

Okay. And then if you were #1, Ed, David and Johnny were probably a close second and third for a number of transactions over that time period. David, give us an update in terms of how things are going with legacy? And I know Kevin is on the line as well, but talk about the size of that deal? How it all came together? And how it's going so far?

Well, I -- again, I think it's been great. Kevin has been great. We might even let him jump in here if you'll let him talk. But the commonalities between us is that we meet on a weekly basis. We hadn't -- we met in a week or so. But our management teams, we talk about things. We've been able to keep all the people, and it's just been really great. So Kevin, do you want to jump in and talk about it a little bit?

Sure, David. Thanks. And again, when Ed was talking about rope-a-dope, I thought he was talking about Johnny. I thought I'd run up and join the party. But look, David is right. Things are going way better than -- if we don't expect them to go well, they're going better than we even expected. It helps on the front end when you spend a couple of years really getting to know each other as you think about putting the banks together. It also helps when you lock up almost 100% of your lenders under 1- and 2-year contracts with tails on them for additional years. And I think we locked up all but one lender. So things are coming together really well. The teams are meeting weekly at the executive level to knock off decisions. In 4-plus, almost 5 months of regular meetings, there hasn't been anything that the executive team has disagreed on. So it's -- things are going well across the board. We're looking forward to getting the integration done the first week in June.

Jon, I don't mean to be disrespectful, but Dallas hasn't been with the GOAT. So I don't think he has the right to speak yet until he has been with the GOAT.

You stuck me with a goat a couple of years ago.

We'll move to you, Johnny. We'll take that off, and we'll move to you. You talked -- you touched on the marine deal, and I want you to help us understand a little bit. There was really 2 acquisitions there. And then I want you to talk a little bit about CFG in that transaction, and it's been a while, but give us an update in terms of how that business is doing, and if things get bumpy, do you see any elevated risk in that business. So marine and then CFG?

Okay. Well, the marine is -- we're in the boat capital of the world, right? We're in Fort Lauderdale, Miami and the Keys and Palm Beach. So we're not in the boat business. You had -- we didn't even make boat loans, I'm a boater. I'm in the boat business. I'm one of those sick guys that buys a new boat every 4 or 5 years, but...

That's because, Johnny, you blow them up, though. Yes, I remember, didn't you blow one up?

I blew one up. Yes, I below one up. I didn't like it, so that's insured, bought me a new boat. I didn't blow it up, my captain blew it up. Anyway, we decided -- we looked at the marine business and decided to play with it. There was an acquisition, a bank bought another bank that had a marine book in it, and they wanted to sell the marine book, it wasn't their cup of tea. And we bought about $400 million back in '18, I believe it was, right down in '18. And we liked the business. Actually, we grew the business about $50 million, $60 million last year. It holds top underwriting. It's not 14-foot flat bottoms with 20-horse mercury there, $350,000 to $400,000 boats. Average credit score is 761. It's really performed very well. And interestingly enough, we bought the platform in the first buy, and the same guy that was there went over to another bank and originated through wholesale floor planning as well as retail paper originated another $400 million, that bank got sold, and that book of business came out. So we got about $1 billion of it now, growing that business. And the first $400 million was a mirror image of the second $400 million. So the same guy originated both books of business. So we like the marine business. We think that's a plus for us. The -- and actually in '08, '09 and '10, it held up pretty well. And the second question, John, was CFG. New York has really done well. We have never had a past due since we started the company. We've never had -- we've had a couple of classified credits from time to time. It has -- makes about $70 million, $80 million a year pretax. It just continues to perform. Chris Poulton and his team run a great group. They do an excellent job. They're -- we're running about $1.7 billion out of there now, $1.6 billion, $1.7 billion. They have -- they can go to $2.1 billion. I capped it at 15% assets just because I thought that was enough. It's primarily construction lending, but it's not all construction lending, it's actually 3 different phases, kind of loan to loan. And loan to loan on one part and construction is part of it. I think we only got about $500 million or $600 million in straight construction loans. So the performance of them has been excellent. They -- I didn't have any intention of opening a New York office in any way until I met this team of people. And when I met them, I actually met to visit with them. Snoot -- I was going to snoot for about 30 minutes and that turned into a 3-hour meeting with those guys. And it's been [indiscernible] in lots of respect. They're one of the best underwriters I've ever seen. I actually like the way they underwrite the $1.7 billion, better than I do the other $10 billion. I think they do a better job of underwriting than the rest of everyone. So as a result of that, we're giving them a little more influence in the whole group as to helping us grow lenders in these markets to help us do a better job of underwriting these bigger, more complicated credits. If there's a big complicated credit, we usually send it to New York to underwrite.

And so far, just you feel great about credit in terms of what they're doing, it sounds like?

Yes. And actually, it's interesting, in tough, crazy times, that's when really opportunities seem to pop up. A lot of instances, people have a condo project, and they need to sell enough to get the mezz out. And the mezz is charged in 14% or 15%, 16%. And so they get enough, sell enough to the condo project, get the mezz out and they sell some more. Anyway, they kind of pay the note down to a point and then they need some refinancing. And so I've watched Chris Poulton and his team, in tough economic times, go in and take positions in some of these and refinance the condos out at $0.35 or $0.40 on the $1, which gives the developer a chance to survive. So -- but they do a really, really good job. I haven't seen any cracks in their armor as of yet. There might be one tomorrow. As much money as we lend over a period of time, there's always going to be a loss, but we have not had one. We had one senior lender -- we were senior in a $100 million apartment complex and the parent filed bankruptcy. I thought, wow, we're going to get it now. We'll see how this works. And we were senior at $55 million in the deal, went to a bankruptcy court and the low bid was $102 million. So the good news is we did it right. We underwrote it right. There was a lot more money in front of us. We are a great senior position, and we didn't lose a nickel and got all our interest.

Okay, good. Ed, back on the M&A topic, you've been somewhat active recently as well with a couple of deals in the CDEC deal. Talk about how those have gone? And then with this type of a rate and margin environment, do you expect to see more opportunities come your way?

Our acquisitions have all worked out better than we anticipated. The CDEC deal was, Chicago Deferred Exchange Corporation, they are the tops in the market in terms of being the executive adviser on 1031 trade. That brings us an average of $1 billion to $1.5 billion of very inexpensive money, helps diversify our deposit base. People are very elastic to the rates they get on those deals. So again, it's very inexpensive money for us, and that's worked out better than we anticipated. We've hired some salespeople around the country. I mean, there are 5 people we hired, or 6 people working there when we acquired them now, we've basically doubled them. Now they have 10. But it's worked out extremely well. On the banks that we've acquired recently, we did 3 last year, all of them have worked out extremely well. The one was STC, which is basically 100% overlap. We have 85% cost-outs that was converted, those cost-outs are being taken out, as we speak. Countryside was a little over $600 million bank we bought. They'll have about 45% cost-outs that will convert in April, and those costs will come out. So we've been very -- we've been good acquirers, I think. There's only one that I would want to mulligan on. That was one we did right before we went into rope-a-dope, and they -- it was really the majority of our problems we had during the downturn in '07 and '08. The market right now has gotten goofy. I think it will change. We've seen banks go on for 2x book. And it's a couple of drugs holding each other out, I guess. But we take what the market gives us. And it's not given us those banks acquisitions right now. We have 13 new branches over the next 18 months that will come on de novo. We've been very good at those with our name and recognition in Chicago. So they're very happy to see us, and we grow very nicely there. I think that this low rate environment that we're going into is going to hurt the $1 billion, $2 billion, [ 0 banks ], or $100 million banks a lot more than they are us, just have the ability to generate assets. Well, I think Johnny talked about repricing pressures. They're going to either have to go do unnatural things or submit to getting pricing back in line. So right now, we don't see much going on. We see up in Wisconsin, credit union starting to buy banks, which doesn't make a lot of sense. And so you can look at their bids and they're all -- our bid is off pretty much by the amount of tax benefit they get. But we've had times where acquisition markets dried up and we go to internal growth, but the way you get through these things is to grow through it, we're a growth company. If you look at our proxy peer group, over the last 10 years, when you look at the things we look at, tangible book value growth, earnings per share growth and asset growth, we have outperformed them by a factor of 2 to 3x over the last 10 years, and that's widening. So we think our approach works, not trying to get out over our skis too much, not doing anything stupid and take what the market gives us. That being said, I did make the comment in earnings call that you might have to look at larger banks that you're not normally -- you don't normally see us look at. We're a $38 billion bank. It's time, maybe $1 billion to $2 billion bank, we could look at bringing them into the fold, because I think it could be an extended period of low rates now. I heard one guy quoted said banking is going to turn into Amazon-like margins. And to do that, you're going to have to get scale and drive out the cost. So that's one thing we're looking at. We're not going to do anything stupid or anything that's going to tie us up, and we don't do any cancer transplants.

All right. Well, but it's clearly what David came to that conclusion with the bigger transaction. David, how about you? Do you feel like you're integrated with Legacy, and you can start looking again? And any changes in activity in Texas at all and in your surrounding regions?

Well, we would like to get the operational integration, and it's supposed to be scheduled for June 1. So we would like to get that done. And truly, I'd like to get about 6 months running and just make everybody comfortable. Even though we're already working together, our decision-making, our loan approval process and all that's working, I'd like to work that out. Having said that, before we did the deal with Legacy, yes, I think I've mentioned before, I had a couple of other deals that we're working that were larger in nature. And I would say that we would like to hold off. But again, the deal has worked so good with the Legacy team and Kevin and the talent that we have. I feel like if the other -- if one of the other deals wanted to go faster than that, and again, we would want to do it, we prefer staying in Texas or Oklahoma. That's our best deal right now. I mean, I think that's where we can benefit the most. And so that's what we're focused on. Having said that, we're still looking at some smaller deals at the same time. I think the pricing, I think, what's happening in the market the last couple of days, I know Kevin was working with somebody and the $1 billion bank or $2 billion bank and they called, we're supposed to meet this week and they decided, let's put it on hold for a while. So I think that they see that some of these smaller banks are really -- they're not really worth as much as they have been in the past. As Ed said, I think that you are going to have to be bigger, that there is going to have to be scale. And so I think the market is probably going to have to improve for maybe some of the smaller stuff to go, or else you pay cash, so that you can get the accretion. But trying to exchange your stock when it's lower like that just doesn't work so much.

Okay. I want to ask Ed and Johnny about this as well, but I'll start with you, Dave. One of the benefits of lower rates is the mortgage business. And you picked up the mortgage warehouse business. And curious how you're feeling about that? And we expect that's a business that you can grow over time and mortgage in general?

We -- it's one of the -- surprisingly, it's one of the areas of the bank that scared me, the mortgage warehouse. And now it seems to be, as Kevin puts in, it's really easy. It's like a drug once you get on and you can't get off of it. But Kevin and I have talked about this a lot. And it's been very helpful right now because where we had borrowed money from the Federal Home Loan Bank to fund the loan [indiscernible] years ago, now, really, we can just take our bond funds that are rolling off this year and fund that and not borrow from the Federal Home Loan Bank and also improve our net interest margin. But as far as expanding it, I'm learning it from Kevin as we go. But the low part of the mortgage warehouse for them has been around $800 million. The high point was about $2 billion. And I don't think that we want to grow it above, you'll probably see it fluctuate between $800 million and $2 billion. I don't think that we want to go. It doesn't seem that investors are wanting or willing to pay you for that kind of business. But I have to say right now, it's awfully nice as a side business to put our excess funds that normally would have gone into a bond portfolio at a very low yield to fund that. So that's been -- to me, that's been a real positive, and I like it right now.

Okay. Johnny, do you -- any benefits to your business from lower rates? And do you think, like Dave mentioned, lower rates could shake out some of these smaller banks that might have some of the rational pricing expectations for M&A?

Again, on the mortgage side, too, I think we're having record locks every month on the mortgage side. And it's booming. That -- also our customers that are in the housing business, we've got some big customers that build homes, 2,000, 3,000, 4,000 homes a year. And those guys are really doing well. Last year, it came -- [indiscernible] came in my place, and we were -- I've said, what's your plans for '19? What are you thinking for '20? What are you thinking? He's, well, I'm going to pull all this talk, and we'll pull it out of fifth gear and put it in fourth gear and slow it down just a little bit. And so I called him about 2 months ago, and I said, what do you think? He said, I should have left it in fifth gear. He said I should have never cut it back and put it in fourth gear. And he said, I should have built another 400, 500 homes, because I got the business for that. So that business appears to really be doing extremely well around the country. As a result of that, the mortgage side is really good. So far as low rates, I don't -- we -- I was asked at the RBC Conference by a big shareholder of mine about 3 or 4 years ago, you may remember this, Jon, what was I going to do when rates went negative? And I said, I don't know. I don't know what I'd do when it happens. But we may be closer to that now than what we've been in the past. So I'm not -- you got the 10-year down in the 1, so the bola can change below that. This is kind of an interesting time. This will be new lessons to learn for all of us to see it in rates this low. And how can you -- my margin is about 3.96. It's hard to maintain a 3.96 margin when you're writing in the 3. So I hadn't figured out how to do that yet. But I'm just going to hold the course. I think the important thing is to hold the course and don't overreact. And if you got a twist a knob, just twist it slightly and remain the course. This, too, shall change again, I'm not sure which way it goes, whether it's going to be positive for us or negative for us. I would -- it appears that it might be negative for us. But I'm just going to hold the course and sit tight and watch what other people do. And I'm just going to visit my friends and see what -- how they react to this low rates.

I'll help you, Johnny.

Thank you very much. I appreciate that. I might go up to Chicago visit. I saw where Ed's governor got out of jail the other day, I thought that was good.

[indiscernible]

I might go up and visit with him. They seem to be pretty sharp up there in that area.

And we know, Johnny, how much you like to watch.

So Ed, let's talk about mortgage for you. Obviously, it's been -- you were probably called crazy when you were scooping up mortgage companies for next to nothing. But talk a little bit about what you're seeing and kind of the benefit to your model from having that line of business?

Well, we've always had these internal hedges. And the mortgage area is one that's been very good for us. Notwithstanding the MSRs, which move all over the place. And we don't even pay attention to those. That's just -- that's an accounting gimmick for future value of your servicing. I care about -- we're making money on our servicing today. But volumes are up 3x, and we'll start seeing that in March. And we expect that to continue if rates hold where they are through the rest of the year. We've been able to raise the spreads on these because everybody else is. So just this week, we raised them 40 basis points. So again, great spreads out of the business. One of the ancillary elements to this is our ability to [ deliver ] these days, but cross-sell or optimize our client relationship and bringing in more business on the retail banking side by keeping and servicing the mortgages that are in our footprint. We have close to 20,000 customers, all they have is a mortgage with us, and that number is -- we work on that all the time to bring in just to continue to grow market share. I still believe the left-hand side of the -- or the right-hand side of the balance sheet is your franchise value and you're 96% core funded. It's not bad. But it's very helpful right now, the more Veterans First out of the California and Utah is doing well. The Chicago area is doing well. 60% of the applications are coming through our new front end, which helps the profitability and the timing of our fulfillment. We do go overseas. We use a company in India to do all the non-customer stuff, and that's -- and they do it on a unit basis that -- so they have the fixed costs in there. They do it on a variable cost at about 1/3 to 40% of what we pay here. So we've been able to drive the cost down on that business also, which is nice. Our mortgage warehouse business, usually around $200 million, $300 million, so that's a triple also. So that will help us through the cycle. What's interesting is, we expect our margin to go -- well, we don't expect, but it's probably going to go to where it was at the low end when last time, we had 0 rates, which is around 2 80. We thought that we could maintain our -- defend our 3 20 margin that we want to. We don't change in rates. So we did it in January and February, but this is going to be kind of painful going through this. But the mortgage business, the mortgage warehouse business and the -- our capital markets business on the swap side plus our growth should drive our net overhead ratio down into the 1 30s. That's the case. The net 40 basis point drop to the margin to be offset by 25 or 30 basis points in overhead because of how we structured with the mortgage side of the business. So we also think what does your retail customer need? They need a mortgage. They need CD and they need their checking accounts. We've got to be able to provide on those 3 things to sell them other things, too. So it's the backbone of our mortgage operation here in Chicago, too. We're very pleased with how it's performing and especially right now.

Okay. We only got few minutes left. I'll just throw it out there. I think you guys all have buybacks in place. And with some of the volatility in the market and your stocks down, just curious how you guys are thinking about buyback appetite?

I'll jump into that. We -- with our stock price going down, I had mentioned last time, we started buying, we have as much as 5% of our stock that we can buy back. And I said last time, whenever it dropped below $64, we'd be in the market. But we're out there buying as much as we can every day. Sometimes we're limited by how much we can buy just because so many of our people within the bank are buying stock, which is really nice to see. I mean, I've never seen -- I had one guy today said he's going to put 80% of this 401(k)in our stock, another regional president bought 500,000. I mean, it's really -- it's -- I really like what I'm seeing. Our people like it. This has been a real opportunity for us because we really feel -- we feel good where we're at with the bank. And really, we're going to continue buying as much as we can.

Okay. Johnny, how about you?

We've been in the market for -- we've been buying about $120 million a year. I've bought outside of this year and cut it in half by about $60 million and put $60 million back just as for a rainy day fund, put back about $30 million last year. I started that midyear. And -- but I've been in with both feet here the last 3 or 4 days. I've been buying 50,000 to 70,000 to 100,000 shares a day of our stock. I mean, it's on sale. It got us down to -- I mean, they -- not only me. I looked at Ed today, it got him down to -- all the way -- he's all the way up to 6x earnings. I mean, his numbers are crazy, and they got me 7 or 7.5x earnings. And so when it's on sale like that, you just buy. So even though I only allocated like $15 million a quarter to buy back stock, I've increased that the last week when this opportunity came up. It just -- I mean, it's just crazy. You look at not only that, I've been buying bank stocks myself personally. I mean, you can get -- so there's bank stocks out there you can buy that are yielding 8-plus percent that are great banks. So I mean, this deal is really pretty silly. I think it's an overreaction. I know we got the virus out there, and I agree with David that it doesn't impact us unless we had family members that were impacted with it, but I think this is an overreaction. The best thing I've gotten out of modeling lately is I had my quants model the pandemic of these different viruses it passed through. On average, it lasts about 5 months, this has been around about 2, so I think we'll be out of it in about 3 more months or 2.5 more months. So I think this will pass and move on. But for that to impact the stocks the way they did is -- I think this may be one of those times in life that you remember that this is one of the times where you -- if you've got liquidity, you get in the market. And I did. I had lots of liquidity and I just stepped up into the market and buying good bank stocks, just own them because they're good operations. People know what they're doing. They run good businesses. And this -- I mean, if it's all over this virus deal, I think that will be over with in 2 or 3 months.

Johnny, are those Arkansas quants? Or what kind of quants are those?

None of these. I can say what, these guys were imported. I can promise you that. I can't understand what you're saying.

I never could either.

Ed any closing thoughts? Any buyback thinking from you or just thoughts on your valuation?

Well, I think our valuation is crazy. We are buying our stock back, but publicly, we know they bought about $38 million. If the stock was in the $60s, every $25 million was $0.04 a share. Becomes just a financial, is it better to buy a bank, better to grow or better to buy your stock back. And we look at it all the time. We balance it just write out of the [indiscernible] book. I don't even need a quant to do that. I think, Johnny, in Arkansas, the clients, they don't even wear shoes so they can count their toes right away, right?

That's exactly right. It's a real advantage for us. I think that's a real -- matter of fact, I don't have any on now.

Well, guys...

A very important factor. I love it.

That's our time. And I think we'd all agree that the teasing and insults in person are more fun. So hopefully, we get you all back in March of 2021. But thanks, guys, for doing this virtually unchartered territory, but thanks a lot, guys. I really appreciate it.

You're welcome. Hey, Jon, we didn't get kicked off the air, did we, like we have in the past?

No. We didn't

We didn't get kicked off the air at all, and we got a new guy busted in on us. I mean Dallas isn't in the damn deal and he doesn't even -- he's not even invited yet. I got to get him with the goat.

I think you do.

Send pictures.

I got pictures of you.

I got to...

All right, operator. We can wrap it up. We're good.