Wintrust Financial Corporation (WTFC) Earnings Call Transcript & Summary

[Audio Gap] With the preamble. And so we have Dave Zalman from Prosperity, John Allison from Home Bancshares and Ed Wehmer from Wintrust. And this is the Unplugged panel. And I want to say, guys, this is webcast. I want to remind you of that.

For how long?

Last time that guy took us off. We weren't on very long. Behave, I think.

I remember.

Jon, I actually think he's running this deal. I actually believe he's in charge.

This goes back to 2007, believe it or not. And Ed is retiring. He announced his retirement. We'll get into that in a second. So this is kind of our finale of the Unplugged panel. But it goes back to '07 when we held our conference on Martha's Vineyard. Ed and Johnny met, they got along. Dave was not there at that one. The next year, we talked...

They needed some class and then they asked me to come.

Next year, we took it to Boston and put Johnny and Ed on a panel with a couple of other bankers and they pulled me aside after the panel and said, "I don't want to be on that panel anymore". And then 2009, we added Dave.

I was only one that would join.

And we tried to add a fourth but it just hasn't been successful. So these guys have been on this panel together and beside the way I counted this is year 15. So thank you guys for doing that. And when we started this, I went back and I looked at some of your market caps and some of your assets and the first...

I was wondering about that.

Yes. The first panel in '09, Johnny, you were $500 million. $5 billion today. Dave, you're about $1.5 billion, $6.6 billion.

We're worth $1.5 billion?

And then Ed, you were about $800 million, a little over $5.5 billion today. So huge growth from these guys over the past 15 years. So it's pretty impressive.

You almost gone catches.

You're almost going to catch us. You all keep stepping up. I try to catch and they just keep moving up.

They keep moving up. Done pretty well though. So I guess the way we usually start this, we have each of we introduced your banks, and that used to be important because nobody really knew who you guys were. But let's just do it again for old times' sake. Ed, we'll start with you, introduce Wintrust.

Thank you, Jon. I'm going to start by saying, I appreciate being on the panel and all the support you gave to Wintrust over the years. Retirement is going to be fun. You have to get a farm animal to [doctor in Ukraine, though ].

We're not going there.

But Wintrust is 32 years old. Started on a card table on Chicago, Midwest, $53 billion in assets now, waiting for that beach ball underwater to come up and rates finally moving are coming out. Rates are probably moving so high, it might be considered one of those Chinese balloons, I think. Probably not going to try and shoot it down or anything, but a heck of a run in Wintrust, miles to go before we sleep. So we are very diversified on the asset side, great deposit base, and really the biggest bank, 3rd biggest bank headquartered in Chicago behind -- 1st in Chicago in terms of deposits. We're ahead of Northern deposits in Chicago also, so moved up and Chase and [ First Federal Account ] because we're coming after them.

So $0 billion to $50 billion, the beach ball analogy is the margin. So low rates, I'd always talked about the beach ball coming up from underwater, and that was the margin rising. You guys -- you finally got it, but we've been waiting for a while for that but we finally got it

I can take my beach ball and go home.

Take your beach ball and go home. So Johnny, how would you give us a little bit on Home.

It's -- number one, it's nice to be back. Thanks for the invitation to be back. We always enjoy RBC. We've become great friends of 3 of us over the years and pick at each other and trust each other, and it's been a lot of fun. And on this, we're about $24 billion now. When you said it was $500 million when we did the first one. We've grown the company over the years. I can't catch up with these guys because they both outgrown me, but it's been a -- almost turned out to be a really profitable operation. We run one 90%, one 2% ROAs. We run a really efficient company sub-40 to -- 42 to sub-40 efficiency ratios, we work really hard at it. It's been a lot of fun building this company over the years. We didn't deploy our money into securities, or we didn't deploy our money into low rate loans. We set on the money and build billions of dollars in cash and settlement cash and now we're deploying it into the market as we choose to deploy it in the market. The bad news is, I was around when Volcker pivoted in the late '70s, good news is that I was around when Volcker pivoted in the late '70s and then the come back in the '80s to fix it, type rates 21%. So I think it was February of 1982 where the U.S. government issued a 14.87%, 30-year treasury. So I'm sitting on enough cash, I'd probably take $1 billion of that, becomes around again. So I think that's not a bad place. So we've been pretty patient. Been premeditated with our moves, and it's paid off for our company, and we've hit -- we're hitting the record earnings streak. We've been running with record earnings. And I don't know that the first quarter this year will be a record, but it -- something doesn't blow up, it will be a great quarter for us. So we had -- we did the last deal we did in Texas -- acquisition in Texas, bought about a $6 billion bank. It's been kind of a rough ride with that deal a little bit, but we've turned it around. And I've never done a diluted deal. Everything I've ever done has been a accretive, accretive, accretive to book value, accretive to EPS and tangible book, but to tell you how quick this world's changed, December 31 of last year, the book on Happy Bank that we bought was a plus $27 million and we closed at April 1, and it was down $101 million. So $128 million swing in their securities book over that period of time. So I announced to the Street, I apologize and said, I think we've just done a dilutive transaction beyond our control. But as it turned out, the rest of our market stepped up and we turned it around and it has turned into an accretive transactions with a lot of hard work and a lot of hard effort and lot of premeditated moves. So that's kind of the story of Home.

When he saw Johnny Prime -- you didn't mention Johnny Prime.

I'll bring it back, bringing it back in time.

So Dave, how about you. I've covered you a long time, you're just a tiny -- you can command with a dream, and it's a big company now.

$40 million in size, not capital and total assets and about 10 to 12 associates and that was it. But then, today, we're, again, $37 billion company, primarily in Texas and Oklahoma. Again, we have locations in Dallas, Houston, Austin, West Texas, South Texas, East Texas, Primary -- Tulsa, Oklahoma City, we're not located along the border or El Paso, but pretty much cover Texas and Oklahoma pretty good. Again, we kind of grew from a real small bank and today do what other banks do, gather deposits, make loans, have middle market lending, warehouse finance lending, mortgage lending, wealth management. So a number of other things we've been very profitable, and it's been very good. I think when we started, when we went public, we didn't even have a $50 million market cap. Today, probably 6.5% to 7%, something like that. We have 2 -- we've just announced -- we've announced it some time ago, we were trying to close on this first quarter. We made 2 small acquisitions in West Texas. Somebody asked, why would you do a $2 billion, $1 billion or $3 billion? And I said well, that will give us about $6 billion, and I'll be bigger than Johnny in West Texas, so I just have to do it over there.

I don't know about that. I'm going to buy something tomorrow.

Unhappy bank.

It's been a lot of fun being part of this. I sure value it.

Absolutely. Also we're open for questions if anybody has questions, just raise your hand and we can get them answered. So just the economy is another topic. We have a lot of debate internally in our research department about the economy and whether things are strong or are not strong. Ed, maybe you start out. How are things in Illinois and Wisconsin? What do you see in the economy?

Economy's not bad. I mean literally, essentially we call it the [ maniacal ] recession. You're not going to hand one of those with full employment, it's going to be weird if you do, but our company is pretty good. Labor is still the biggest issue for most of our clients, people out there that. They have -- hopefully, we get a -- we're going to get a new mayor in Chicago would be good. Hopefully, the right guy.

You didn't like to get [ Laurie ] involved? You wouldn't like that?

[ Laurie ] was kind of tough. But the economy is not bad. People are getting price, their prices pushed through. That's all accepted. So I think people are most worried about labor. And again, they still have labor shortages in Chicago.

Okay. But generally feels good.

No bubbles. 60% of our loan portfolio is out of Illinois. We set this up 30-something years ago. We said 2/3 of our capacity could be handled by -- probably should be normal banking. That's where we do our niche businesses. So if you think about that, we're kind of subject to the U.S. economy, too. And Canadian. We've got our Canadian prefinance operation up there. The other 1/3 is our premium finance, our niche businesses and $14 billion in premium finance business, a couple of billion in franchise, leasing a couple of billion dollars in all over the country. So very well diversified. I don't see any bubbles yet, but feel pretty good about where we are.

Johnny, how about you, you've got 3 different geographies in a way, but maybe there's a bunch of sub-geographies in there, but what are you seeing?

Well, Texas has always been a great state. Only in Texas. Only in Texas until you went to Oklahoma, but Texas a great state. Florida is a great state. And when failed banks hit, we were the biggest buyer in the country of failed banks, as you remember, and we bought all those failed banks back-to-back last week. And we didn't...

How many did you buy?

10.

We did 10 didn't we?

We tied for the last -- We probably did 20.

Anyway, the failed bank deal, but overall, you got Texas, you got Texas and Florida, which are the 2 most dynamic economies in the country, and where people move in, where they're going, they're going to Texas. They're not going to Illinois, they're going to Texas and they're going to Florida. And those states are booming, as you know. The good news is we didn't -- during the pandemics, we didn't get shut down in those states like other states shut down. We stayed open business. They don't -- their business positive in those states. They're Americans. I mean it's a great place to operate. And when you operate in 2 of the best states in the country and the corporate office is in Arkansas, which is lowest price place to operate, part of the secret sauce of this corporation is the fact that we operate in Arkansas and that the corporate overhead is low in that market. And I mean, our corporate office is $5 million corporate office is somewhere else, it would be $20 million, $30 million, $50 million corporate office. So we operate in that state. So the back office is all there. So it's really worked out really well for us. And then we expanded through the failed bank transaction, we ended up in New York through a failed bank, Doral, failed bank purchase, and that's been a really nice trade for us. We've been with them going on 8 years and then make about $70 million to $100 million a year, and they've never had a loss, and it's been a really long -- it's all nonrecourse financing different than I've ever done in our community footprint, but I like the way they underwrite, I like what they do and they've been very successful. Actually, we all -- I learn -- I have learned a lot from the guys that operate in our New York office. I just had 2 jets fly in about 3 months ago, 1 from Palm Beach and 1 from San Francisco with the same company. Now why these guys fly, over every bank in the country to come to Arkansas to sit down and try to make to do a loan. And I said to them, I said, "What the f are you doing here?" and he said, "Well, our banks are not lending to us and we need to borrow some money," and he said, "They said you got money." and I said, "I got money," but I said, you're really -- it was a complicated loan, it's about a $220 million loan, and I have said, you're in the wrong place. He said, "Why is that?" I said, "You need to go to New York and see my New York guy and let my New York guy deal with you," because as it turned out, we have not done the loan yet, but I sent him where I needed to send him because the expertise of our New York team is absolutely amazing. They've been great for us, a plus for us. We all allow 15% of our total assets in New York to have because the multiples that the Street pays you on that kind of business is much less than it pays the only community bank footprint. So overall, things are really pretty good. I'm glad to be where I am. I'm glad to have the expertise of our New York guys along associated with New York -- I mean, with Texas and the Florida, both of those. That's where people are moving. It's just really pretty incredible seeing what's going on in those states.

I think and they're playing on a grass runway.

I think they still have that windsock you gave them.

You know I told Donna a while ago, I said, I wish I hadn't thought about. I sold that cabin a couple of years ago, gone back and got that windsock that you sent me.

David, how about your market? It may be self-explanatory.

No. I mean after Johnny gave that kind of introduction in Texas, I don't know that I need to say a lot, but it is good. Texas we grew jobs, 650,000 jobs last year. People continue to move in from California throughout the United States. They like the most state income tax and a very friendly governor. So it's all been really good. We continue to grow. We continue to get more people. I think -- we now -- I think Texas is probably now has more Fortune 500 companies than any of the New York or California today. So we passed up California and Texas, just show you that we have so many people moving at the same time. And it's fast becoming the center of Western civilization and cultural enlightenment.

Johnny, you mentioned the Fed. How would you grade the Fed out of the [ domino ] today? Maybe it's another 50. I know you were pretty vocal 5 or 6 quarters ago about how the Fed was behind. How do you grade the Fed?

I mean, they had -- it had to blow up, right? It had to. I mean they pumped so much money into the economy. It had to blow. I mean the inflation had to be generated. My neighbors were asking me 2 years ago, what worries you? I said you guys, inflation. I said you create all less money and you're doing all this stuff. It's fiat currency. You got lots of paper. And obviously, you're using it. So they said, what do you mean? I said you're diluting the American public. They said, what do you mean by dilution? I said, well, get you a shot of whiskey in a shot glass, taste it and then pour that in a bucket of water and taste it. If we can't taste it, I said, that's exactly what's happening. You guys are diluting us into infinity in the world. It's got to -- something's got to blow, right? Something has to break somewhere, sometime, you can't continue to dilute, dilute, dilute and think that we're going to end up being the world currency -- remain the world currency. So I said we're going to have inflation and here it is. And that's why it was a lonely, lonely decision not to put money in securities or in low rate loans. They didn't have a 5 now, I didn't put it in there in a loan and I didn't put anything in securities. I just stop putting anything in securities and just built $4 billion or $5 billion worth of cash and set on it and then looking for opportunities at this point in time where to deploy that. Now much of my liquidity has run off. And the loan growth has grown, but I still have lots of liquidity. So I'm just sitting picking my spots in the marketplace where I think is the place to do. I've never been in a position like this in my banking career to have this much money and have the ability to sit and the patience to sit and deploy it as I want to deploy it through the market. So I think long term, that's going to pay lots of dividends. We've had 2 record quarters in a row coming off this acquisition. We're going into the next -- I mean this quarter, and I think unless something blows somewhere, I think we'll have another really good quarter. And I think this could be the best -- should be the best year that Home Bancshares has ever had.

Ed, so what do you say on the Fed? What do you think?

On the comment was transitory, I said, are you smoking? What did Ronald Reagan say? What's the price you pay for the government? Because all the free stuff the government gives you, it isn't free. You know it was coming. I hope they keep raising the gas and just get it over with. It's good for us. We're still very well situated for rising rates. So I was worried about deposit beta. There was the buzzword. I think the asset, our portfolio, we got, what, $13 billion, $14 billion of loans that still have to reprice. That should handle any additional costs we have. We're going to lock in our margin right around 4, maybe it keeps going up, probably going to be a little higher. And we started on derivatives on the books to cover the downside there. We were at 2.53 for a little while, our margin. Fortunately, our mortgage business helped and PPP helped a lot too. And we started coming back up. Now we're going to double our earnings and our stock price the exact same as it was before. So kind of goofy, but we're going to have a record quarter and should keep going. As the Fed goes, I don't know. We'll see.

What about you, David?

We'll probably have to be careful and say that I do sit on the Federal Advisory Council. So I might have a little bit to do with that. I don't know. I was wrong. But I think that the -- I think that the Fed waited too long. There's no question about it for raising rates. And sometimes on my recommendation to the committees and the FMOC, I think a couple of times ago, I recognized maybe we shouldn't maybe just wait for a lag. And of course, they didn't listen to me instead of 50 basis, maybe cut it back to 25 and I felt bad after I recommended that because then you had like 514,000 new jobs that came up, which I still think is hard to reconcile to. So I think that the Fed is -- they're really they're going to -- where I think there was -- this is just my feeling. This is just my opinion. They would rather overshoot than undershoot. And I think where rates probably might have stopped here in the next time or so is probably not with the new -- with the unemployment where it is and where everything is. You're probably looking at a higher interest rate, maybe instead of a 5 handle, 6 handle. I hate to say that much, but I think they're going to -- they'd rather continue to raise rates. And again, if something happens in the world, and something changes and you had a war -- whatever, something with some catastrophe or you had a bunch of banks went out of crypto or something like that went crazy. I think you'd see a change. But right now, I think that probably they'll raise rates higher. I mean they want to bring inflation under control. So where we thought it was going to be is probably going to be higher. That's just my gut feeling. That's my opinion.

And during my career, this was normal. For most of the -- I mean these rates are basically get back to kind of normal. Average Fed fund rate for the last 50 years has been 5.44 so we didn't buy -- we got 1 scoop ice cream rather than 2 scoops and we bought a Galaxy 4, run the Galaxy 500, we bought a 2,500-square foot house, rather than a 3,500 square foot house. But we all lived and we all existed during that environment. And we'll live and exist through this. It's just an adjustment period. Rates are not going back to the sugar high that everybody ran on forever. A lot of these young people have never -- they think the world has come to end, and they've never seen -- they've never seen rates at this level. And when it hit, I said, I think Fed funds are going at 6%. And they call Donna and they said, Johnny bump his head. I mean what happened to Johnny. He said, someone said he said 6%. And I said, yes, I think it's conceivable, can go at it. And I hope we don't go past that. But it has -- they have to stop it. They have to stop it. There's no need in backing up today. We've already taken the pain, let's keep going until we stop it and kill it. Volker thought killed it in the '70, but the snake was still alive. You had to come back in the '80s and take it to 21% to cut the head off the snake and we need to do that. We need to cut the head off of it, and it may take -- I don't know take 7%, maybe 7.5%. I don't know what it's going to take. But the key is to get it stopped at this point in time because particularly, our seniors are really being punished as a result of this. They are the ones -- those people on fixed income are really struggling. My in-laws, I watch them struggle a little bit because of course, rates are up a little bit, so they can get a little money...

We can help them. I can help them.

Are you still driving the Galaxy 500?

I've traded it.

What are you driving now?

A bus.

And are you still living at 2,000-square foot house?

I sold it.

I think it's going to boil down to the government has got to stop spending. They're still spending too much. They got to cut back, not just us, they got to come back.

Yes. Open for questions, as always. So if you have questions, put your hand up. You kind of alluded to it, Johnny, but risks in the banking system from higher interest rates. We talked about some of your competitors taking on a lot of low rate, fixed rate loans during the pandemic. How pervasive was that? And where do you think that risk lies? And is it a risk?

I think it was extremely pervasive.

Securities as well, I guess is another question.

They will come out of it. Those people will unwind this. But it will take 3 to 5 years to unwind that. I mean it will take a while. If they were doing fixed rate loans, it's going to take a while to turn that around. I think it was -- I think most banks in the system did that. I don't want to pat us on the back. It was scary as hell for me and my executive team, there's about 7 of us. We meet every day and to not deploy that -- I wouldn't even reinvest the money that came in off the securities. I just put it in Fed funds. Well, now fed funds is what 4.60%, not too bad a rate on a fed fund rate, right. And when you're sitting on that cash, and then once in a while, you see a perpetual deferred comes out that somebody run them has some really good friends that had to raise some capital because AOCI or whatever they had, and they're 7.5%, 7% perpetual preferred, and I said, well, give me $25 million of that and give me $25 million of this. And just kind of pick your spots. I like my position. I just really, really like my position where we sit today with the ability to do that. And I'm not patting myself on the back because it was one scary ride to make that call and turn out to be right, but it was -- I got into it with my CFO. He said, I said I don't want -- I said don't invest, don't even invest, don't reinvest the money coming off securities. He said, I don't guess we'll ever invest again, then. I don't start that d*** stuff with me. I was under pressure already, right? As you can imagine, you don't know me, I meant that. Don't start that with me. I don't know want to listen that. But anyway, that was the only controversy. I think right, Donna, we had on the executive team, everybody else stayed pretty hitched, but it was lonely, it really was lonely. And it turned out we were right.

So could bring the acquisition market back. Yes, I was going to ask about that. Let me ask Dave first, and then we're going to -- I want to go to this acquisition thing because I think that's probably real. But you get a little different approach, but somewhat similar to Johnny.

We've Been in banking since 1978. I think Johnny called it completely right. We continually bought in all markets and created this ladder in the securities portfolio. But Johnny is right today. We have $14 billion at 2%. It will take us 3 years or so to get -- you can do the math, if I'm reinvesting at 5%. You're talking about another $120 million a year in income. So we have a -- where a lot of banks have really hit their peak. We really -- we're just starting. We do have some -- so we invest in every market. We have that ladder, and we weighed out if we didn't do it, how much we were leaving on the table. So we did it, and that's the risk. But I think like these guys said, I've been in banking where I saw 20%, I think 19% on a CD in 1981, and I saw a 0% interest rates that I didn't think I'd ever see. So we've been in all markets. And I think if you're -- if you're running a good bank and you have to make great earnings and you have strong capital you're going to survive. You just have to -- you have to know where you're at, what you're going to do. So we're -- I'm excited of what I see for the future anyway, but it's going to take us a little time where Johnny is benefiting quite a bit right now, so.

And Ed, you guys had the liquidity buckets basically that you weighted...

We did the same thing. I mean we sat on a lot of liquidity and waited for the rates to move. I mean we -- as a company, our earnings have grown what, 12% the last 10 years. We've been through everything. We've been through '07/'08, 9/11 and '07/'08 and pandemic and now this we've increased earnings every year. So you just have -- you can't be [ aspire ], you got to take what the market gives you and if you get lousy rates, don't take it. But we're well situated right now, forever, I've been saying waiting for the beach ball for God's sake, finally came up. But we didn't do a lot of fixed rate lending. We did a lot of derivatives for our clients, and they're happy, we're happy. So we're in great shape from that perspective.

And you have some asset repricing coming?

Yes. Well, third for the premium finance business, the $8 billion or $9 billion of life insurance business, where we haven't had a lot of little loss, I guess. We had a loss and we had a little tiny, less than 1 basis point loss this year. But that's 1 year, it used to be LIBOR now it's on constant -- U.S. Treasury Constant Maturity Index. But that every year. If you go back a year, and we put it in our press release, we'll pick up 4% or 5% of that money as it reprices. The other prefinance business is $8 billion of $45,000 average ticket size, 9-month full payout loans. Those will reprice also basically at prime. So that should offset any deposit betas that we have to deal with, and we get the normal lift we've got anyhow. So it's great shape.

I don't -- we're going to get to deposits in a second. I think there's a question in the back.

Fresh with the small banks in Kansas. This have been the most entertainingly insightful session I've attended. So Johnny agreed with the reserve currency. So can you guys talk about a view on crypto, blockchain and all the other techno Silicon Valley things that you guys don't get while they don't make money on those things, you guys keep making money. Maybe you can talk about what do you think?

Crypto, blockchain...

And that's 3 different big -- crypto, blockchain and the FIS FiServ kind of guy, so I hope you're making money.

So I'm going -- if you're asking me, I'm going to straight into fintech and crypto. That's my 2 big -- that's my 2 big moves because last year, when I said all these deals and they said, oh, you in fintech, you've got to get in FinTech -- you've got -- Johnny, you're not in fintech, you got to get in fintech. I said, we got $10 million in it. not That's not enough. You really need to get in big. You need to get to crypto. Well, we just kind of do what we need to do. We stay down that path. We're bankers, we're going to continue to be bankers. We're not going to get too far off a base, it's good or bad or indifferent. So I've kind of stayed out of that field. I was going to -- when it was $9,000 a coin. I left town. I told Donna, so read about that d*** stuff. When I get back and tell me about it and see if I need to buy it. Well, it was $16,000 when I got back. So anyway, I didn't move into crypto and I stayed out of -- I've stayed pretty much out of fintech. The problem with fintech, and a lot of these people getting their money from the banks to do fintech is that they don't have -- they don't how to collect the money. They've never been in a downturn, right? They don't know if the -- who's the collector. They don't have a collector. They're depending on somebody else to collect and they're trying to get their funding from us. I had a former analyst calling me, he said -- they called Donna. He said, Donna, they missed one fintech company just lowered their credit standards on used cars to 300 and I said, I call him, I said, I've never seen a 300. You have to work to be the sorriest SOB in the world. There's no way to get to 300 unless you spend your life to be at 300. Well, guess what, they blew up. So there you go, that's what happens.

So in Holland, crypto -- by the tools in Holland or crypto, I mean same stuff not behind us.

I use probably an example here a couple or 4 years ago, I talked about the Indian bird. It's the big ostrich. My father and was a dentist, he's invested in everything. He is paying $30,000 a bird and $3,000 per [ Negus ]. I said what are you going to do with that ostrich? I say, well, you can use the oil and the feathers and all this stuff. And about 12 months later, they turned all these birds loose, they started going from field to field because nobody wanted to pay them. That's the way I feel about the crypto, the Indian birds I got to say. It's just the same things I just don't think it's -- to me, it's not a real deal.

So okay. On the side, can you talk about actual investment in technology in your banks?

I'm sorry. I wanted to comment on your blockchain though. I didn't mean to throw crypto and blockchain to the same category because blockchain is more of a software and it's probably going to have a lot of value and add a lot to it. But probably banks, the amount of money that we're spending the majority of all our -- I wouldn't say the majority of all the money, but we spend it in 2 places, I think, are some of the biggest expenses. And that's technology. We probably spend more money there. I really feel in the future that technology, the more digital products that you have, the more technology you have and the easier it is for your customer to get access to you and how easy and user-friendly it is, is going to make a difference of your success or not successful. That doesn't mean that you're going to do away with people. But because I think everybody, we have a mission statement and the mission statement is kind of corn ball, but I came up with it. And it's -- I say when a customer comes in, you smile, try to call the customer by name #2, and you try to say yes. But everybody wants to be known. If you're a customer, everybody wants to be known, but also costs are going up so much, expenses are going up so much. The minimum wage, and you're paying people, even tellers $20 plus an hour. You're going to have to get -- I think you're going to move more toward AI probably and the delivery system, the delivery system is going to be really based on technology. And the better you have in the -- and not just have the fanciest technology, how easy is it for a guy 60 years old or 65 years old to use that technology. So I think it takes 2 things. I think it takes service, knowing the customer. Don't forget that fundamental, but also make it easy for the customer to -- it's like right now, you see everybody guys my age, are texting, everybody else was doing it 10, 15 years ago, but now everybody's texting. So you want to make it easy. I just think you want to make it easy, really.

So here's the statement, true or not. Many believe that long term, funding the loan growth is going to be the largest challenge to bank margins over the next several years. True? False?

I think it depends on your -- I think it really depends on who you are. Like we have a $14 billion bond portfolio that $2.2 billion rolls off every year. We've got tons of liquidity coming off of ours. So we have tons of liquidity. I do think though, if you're a bank that's got 100% loan-to-deposit ratio, it's definitely going to be an issue. There's no question about it. But I think it depends on your bank, but for us, we have a 66% loan-to-deposit ratio. We have plenty -- in fact, this is a time for us. Usually, a lot of other people lend up and loan up as much as they can. And so when times come like this right now, it really becomes an opportunity for us. We've actually made -- I can't believe that even the borrowers do it. But some of these multifamily projects where we used to get -- we used to make a loan of 65% loan to cost, we're doing loans now at 50% loan to cost. But we have to do it just so that it shows that a cash flow of 300 basis points of stress but things have just cost so much that you would have to do 50% and first, they get mad and leave and then they come back and say, by the way, let's talk some more, and then you get it.

The truth is that those who have money today are driving the bus, and they're setting the terms and the rates and they have the ability to set the terms and the rates on loans better than -- I mean a lot of banks are out of money. Donna and I were just in Dallas and we were visiting with the guy. I've told a story today 4, 5 times. But guy's -- 108%. He's trying to sell me his bank. Dallas trying to set these his bank. The 108% loan to deposit and his margins are going straight down. And I said, well, so you want me to buy your bank. He said, well, I'd like to have your stock and I said, I bet you would. I bet you would like to have my stock. I said, so you me to buy your bank and your problem that you've got to be my property. Well, he said, I didn't look at that way, you can fix it. I said, yes, I can fix it, but what is the cost to fix it? Because you've screwed it up, and then I take it and fix it. We had another bank and the guy was sort of in a similar situation and I say tell you, well, if you'll pay me $100 million, I'll take it. So that's what from guys that's been acquisitive in the marketplace like us, we're looking at these trades out there today. And what is the book, let's say the book, the loan yield on this book is 2.70% or 3%. What's it worth? What's that worth in the market? How much are you going to mark that loan book? And then you go to AOCI and you mark that. So I think M&A, I think it's going to really be tough to do M&A in this environment. Now you can play a game with the marks, you can play whatever game you want to play with the market and make the deal looks halfway good. I don't know how you make a deal with that. I don't know how you make one work.

You can make it look good from an earnings standpoint, but really the dilution that you get from the day pre -- that...

I don't know how you do that. So I mean, I'm my own fishing, right? I'm my own fishing. The Fed call us and, look, everybody is not going to make it through this, keep your powder dry we need you all. We trust you all, we need job and come in. So we're kind of sitting there and looking for -- why would I do a deal now that was dilutive or even a breakeven when there's opportunities, I think, coming down the stream here with some banks. You've seen it. We've all seen it. We've all seen the ones that are 108% loan to deposit that their margin is going down, they're out of money, and they're telling the loan losses on. We don't have any money other than the cash flow we get in of our securities and our loans. That's how we got Texas, we're seeing -- we're running into that in Texas. So puts us in a pretty good position. But why would anybody want to buy -- it's for sale, just one case would want to buy that. So I think it's going to be an interesting 2 or 3 years here and maybe some real opportunities as they stick their head up.

Funding matters. It was free and declining for 15 years, and it feels like it's going the other way.

Deposit is what your bank is really worth. Deposit base is what you're all about. We're fortunate that 15 charters, multiple brands, we can go into a market that's maybe $100 million are new brands, $100 million in assets and offer big rates to get people over. They don't cannibalize whole systems or marginal cost of funds is a bad. Follow what I'm saying?

Yes, that makes some sense.

Yes.

So we're amortizing a bank, Johnny's bank, but not Ed's bank, right?

I could do that 100 times in Milwaukee. Milwaukee is kind of tough because the unions are kind of goofy, but in Northwest Indiana and Chicago, we've got a great reputation. We won the J.D. Power Award a couple of years, 3 or 4 the last 5 years. We won 8 [ National Grouch Awards ] this year, 7 last year, means our products are just as good as anybody else's. So a lot are better. Spent a lot of money on fintech, put it all in place so that we can [ notice that we attain ] better products are delivery systems, [ kill them ] with service. That's what we do. But loan demand is kind of going to slow down a little bit, I think. And you sold raised deposits. But I agree with you. You got to keep your powder dry because you're going to have opportunities to buy. Right now, pricing is so stupid. I mean there was a bank in Miami that we know when the guy was talking to us and too, I thought it was worth in 20 basis points, same as you talked about, and somebody bought it for 2x book. Go figure. Did you look at it too?

I looked at it, but the guy was a billionaire that owned it, and he was going to end up being my largest shareholder. He wouldn't be as big as I was, but the only way to fix it was strip it. We're just stripping. That was only way to fix it, we'll just strip it. And I didn't want my second largest shareholder outside of myself being p*** off at me because I stripped his bank that he'd owned for 35 years. But that was the only way to fix it. So I just walked on it. I didn't participate.

But do you think there's more stuff like that that's coming?

It has to. I think it has to. I mean, I call it one guy. I was bouncing right off the bottom, and I called him and I said, looks like you got yourself well pickle here and I said -- he said, well, I do. And he said, I want them to quit raising rates. I said they're not going to quit raising rates. He said it's killing me and I said, I understand that it's killing, but you've got more to come. And I'm not sure we're going to put a deal together anyway. But I think it made him mad. He hadn't called me back. It's been a month. So can I just bouncing off. I thought there might be a trade there somewhere, but there wasn't. But there will be. There will be. There will be to happen.

It happened before. We forgot the acquisitions at Wintrust. So I've done a lot of deals before in my previous life, but always after one of these events, guys kind of throwing the towel great opportunities to expand that way and make accretive deals, and I have to live on the accretion. That kills you.

Dave, what are you seeing as far as M&A?

M&A is different right now. The 2 deals, we were lucky that we did, they were about 100% loan to deposit, so they are pretty high. So we didn't have any security like you did with Happy. So we didn't have to book -- that's a bad way you had to take that. I think the AOCI is changing the dynamics of the M&A right now. I think that a lot of people thought, well, if you have this loss, it's an unrealized loss, and it doesn't really matter. And the regulators really don't care that much because it doesn't come against your capital. I think all of that has changed. I think it does matter. And I think that regulators have finally said, okay, this is an issue. I mean this is an issue. I mean, I don't know if this is the exact -- I don't know if you should quote it or not because I don't know exactly I was talking to guys there's 365 banks having the 4,000 something that really, if you took the AOCI out of it, they'd have a negative tangible net worth. And so I think that becomes an issue. So I think with M&A going forward, you're probably -- especially if we're going to do a bigger deal, where in the past, we did a deal, you would just take the bonds and you just mark it to market. Like you said, you got your money back. But the dilution to the -- and you do, but the dilution to the capital is so much now because it's so big in some of these banks, they're going to have to split that with you and they're going to say, well, you're going to get the -- their comment would be you're going to get that money back. And I always tell them, well, you'll get it back too if you're a shareholder, so you'll just have to participate it. So you have to split it with me. So I think that there is going to be more M&A. I think that this liquidity, I think, is going to be a big issue. I think there's even a possibility, I don't want to throw stuff out of the air. But what I see with some of the banks that have crypto in that, I think that's a real issue with their borrowings that they're borrowing from the Federal Home Loan Bank. And I think some of that stuff that can happen could cause even more stress on the system. Sometimes you bank with us as 1 or 2 banks, but I think that could cause even more stress on the system. And when that happens, it's going to even be bigger liquidity issues. And I think banks that have liquidity and good credit are really going to -- it's going to be an opportunity, maybe 6 months from now, maybe not today, it may be 6 months. But I think there's going to be a real opportunity going forward. Yes, I do.

Hopefully, you've got to change the government so you can get deals done quickly.

Well, that's the other issue. Can you get done if you know what I mean.

AOCI is not real until it is and in it's real. So I asked the regulators at the last exit exam, I said they talk five minutes about all the ratios they have. Of course, ours, I can't tell you what it is, but it's as good as it gets. So they talk 5 minutes about that, and then they just open up now. They're just a conversation of what's going on here, what's happening here? What are you seeing there? And the -- there is AOCI, I asked what are you going to do on AOCI? What's your look there? He said, people may not be able to borrow from the Federal Home Loan Bank. They may pull them back. If the rate percentage is down to a certain point, they may not be able to borrow from the Federal Home Loan Bank. I found that interesting. That's the first.

I had lunch for meeting with the lady that had the agency what is it that controls Fannie Mae and Freddie Mac and also Federal Loan Bank and FSA. I said, well, is that true because I've heard that. And she said, well, again, this is just what she says. She said, that's not necessarily true of your -- if they had called their own regulator and the regulator calls them then they will. And I was really surprised because before that, I was with the FDIC Director, Gruenberg in his position as completely different than the old FDIC director.

That is a clear evidence that it's up in the air. Typical government.

Yes. I'm not going to talk about today. We'll talk about running your banks. I think all seem like you're just really enjoying that. But my question is do you have an end game? I'm thinking long, long term, not just through this cycle, but is there -- the 3 of you -- because you all are doing amazing jobs right now. Is this going to ever end? Are you going to -- you have some 20-year plan or -- is there something out there that you're thinking about? I get to this point and then maybe do something else or find a bigger fish or just go on forever. I mean, obviously, we don't...

I'm the lowest one on the table and just so you understand, I only buy green bananas. So someone says, it's a 3-year earn-back to tangible book and I say, b***, probably won't be around 3 years or 5-year earn-back to tangible book. I said, I said I need something that earns back tomorrow, today, this afternoon, as a tangible book. My attitude is that I'll find a partner at some point in time. There's only a few banks in the country that I'd mix my money with that I believe in that I think are solid companies that I could do something with at some point in time. I don't -- an MOE doesn't exist. There is no such thing as an MOE. But my thought is, at some point in time, I'll find a partner that makes sense for my shareholders because I'm not an employee, I'm an owner. I have a lot of stock. So this will go on for years and years and years into my kids and grandkids. So my thought is that I find the right partner that I hook up with I trust my money with. And there's not like 5 or 6 in the country, and they may not be interested in Home Bancshares. But my thought is that's where I'll go at some point in time for my deal, then I don't want to just sell it. I think I wanted to continue on. It's a great company, high performance, and I think we find the right partner, we hook up with that partner. That's my thought.

They're the best ones right next to you right.

How about you, Dave?

To me, that's -- I think that's one of the biggest questions and my point where I'm at right now. Probably the majority of my network lies in this company. And so I asked myself the question, what is the end game. And I think that you really have to really look and say, okay, is there something? Something comes around, I think you always should look at the shareholder. If it's a shareholder value, we should consider it. I think that if you're not doing that, you -- let me back up. I said you should always look at -- you should always have a succession plan. And I think that's the most important thing. If that happens, it's good. I mean there's several $500 billion banks that would love to have one of the bigger banks in Texas and Oklahoma. So I think that there's always a market for us, probably. There are several that are not there, and they would love to be there. But I think that you always should have a succession plan. And that's one of my biggest deals. And if that doesn't happen ever, then that you have people in the place. And that's where I'm probably focused on more on that right now than I'm doing anything else. It was building that next generation of an area Chairman or President for Houston, Dallas, San Antonio, West Texas, Austin, all these places and then your executive committee members, it's that group that's probably 40-ish, 45, 40-on, and that's what I'm focusing on right now and picking all those people in the event something like that doesn't happen really. So I don't know if that answers the question or not.

And Ed, you're in the middle of it.

I've done it. Yes. done it. But I will say, I won't speak for Tim, who is going to be running it. Don't screw it up, Tim. The -- I guess I'll use the f word. Don't f it up. Although I know I can't do that. But I was told by -- we just got this go on my first nonexecutive Chairman told me, Ed, anybody can sell that, everybody can build. I took that to heart. He's right. Our model will work any place in the country, and it works very well. So I would imagine that I was still there, I'd say we're going to keep going and growing. I think the opportunities are great. Midwest, Michigan, Indiana, Iowa, you tell a Dave, you like Iowa right? It's not walking around, they say, Iowa but there will be times around but we came the realization on the succession plan about 8 years ago when I started thinking about what we're going to do, for all we're all the same age, we going to leave it at the same time. We elevated people threw them into the water today and they're all swimming great. Our culture is so different than a big bank culture. Particularly Charlie. Put Charlie really close to the customer. That the guys make their decision to put guard rails up, they have to make the decision. They actually got to run something and feel good about it. And I think that model will continue to work. Real close to customer, paid $304 get a customer, you're going to have go for $10 fee gets this, that, no. Big banks can't hold a candle to us. I think our model is very good. It can continue to grow but it won't be me then. It would be Tim. So good luck, Tim.

One of the biggest challenges we had is we started off as a $40 million bank and we really didn't have any money to pay these guys, and so we ended up giving them stock and it's always giving them stock and a lot of those top people who help us build it they ended up with $15 million to $20 million. They don't want to work anymore. So I've had to go out and get younger people and bring them in there because we gave them stock in lieu of money, and of course, that all worked out for them, but that and they're happy now. So they're real happy.

And we've done the same thing with our entire executive community, all of them are multimillionaires, and they should be because they've helped build this corporation. They're all invested in the stock. They take the bonuses of the stock, and we create problems for them over the years with a bogey and they've hit the bogey and it's over and above the salaries and bonuses, and it's been fun sitting back watching those people get wealthy. And -- but they don't -- most of us who get wealthy don't realize we're wealthy, don't pay attention to that. We just have our own way of operating that we do. We go we don't feel that way. We don't have that feel of, hey, I'm rich. You don't feel that we feel like you got to get up in the morning and get the work. You got things to do and get it done. And as they say, things happen while you're planning other things, right? So that's kind of how I look at it. I'm proud we have created -- I think I told this before, we've created more millionaires in Arkansas than J.B. Hunt, Tyson Foods or Walmart for individuals and my people in Arkansas. And when they have the list of the top -- the wealthiest people in Arkansas that own public stocks and there's more Home Bancshares people on that list than there are anybody else's company, and I'm very, very proud of that. So it's very rewarding to see those people do that well.

Are those Confederate dollars or America dollars?

Credit comes up. It's the one that we've got 10 or 12 minutes left. Credit comes up. I guess we were talking about these marks in AOCI. And I guess none of that matters until credit becomes a problem, right? So I guess I've been surprised by the resilience in credit and the resilience of the economy. But where are the problems in credit? Are you seeing anything at your bank doesn't feel that way, David, but where do you think the problems are going to show up?

I'm probably not the right one to ask because we have $27 million in nonperforming assets and $311 million in reserves. So we -- I haven't seen the credit issue. I think that banks are more capitalized right now more than they've ever been, the underwriting has been better. I think that some of the banks that were running a little bit hotter. They're -- I think the bigger issue -- credit will be an issue with the higher interest rates, but I think the real issue for banks is going to be the liquidity issue, I think, going and trying to build something going forward. But I see credit. I think credit is still pretty good, really. Right now, I think there's -- again, you don't want to invest in office space. Well, let me say -- let me take that. That's regional too. I mean if you're in San Francisco, you certainly don't want office space downtown. If you're in Dallas or Houston or something. The markets are still pretty good. A properties better than B property. And so I think you just got to be careful. You don't want to invest in big, you don't want to be financing big box stores, single box store, you don't want to be financing B and C office buildings. But I think credits are still pretty good right now.

Ed, you talked about a little bit of a slowdown, what do you think on credit? I mean, you've -- if you go back, you really pulled back. You had epitome of a bank growth stock and you pulled back before the financial crisis that cost you a lot of market cap and you came out of it without any issues. But are you seeing anything now that bothers you?

Not really. Our nonperforming is like $70 million. About $30 million of that is premium finance where you're just trying to get the buy back. So we put in the reserve last quarter based on what a sausage maker, CECL pulled out, you throw it all in, you get a number, you got to use it. But there are no bubbles.

That create some overlays for that constraint.

Yes, somebody know he has 0, a couple -- how do you get 0 out of that? Anyhow, right now, we don't see any issues. We've got a $1.3 billion office portfolio, non-big re. It's mostly out in the 'burbs. But 40% of it is medical and non-big build, non-big bank, that big stuff in the average size, about $1 million alone. So it's mostly in the neighborhoods we're in and that sort of thing. I'll take bubbles right now. So you under were underwriting work for real estate is actually pretty good right now. As you said, again, 50% down and great rates used to be SOFR plus 230 -- SOFR plus 300, 350, right? Our points...

I just don't think the credit is going to be the issue right now that I can see.

What about you, Johnny. What do you think?

Well, I'll always run the -- I heard about the CECL deal. I wasn't really sure who he was and...

He's Beanie's friend, His brother's Ben. Ben CECL.

I know one thing, a 2% reserve has always work. I always run a 2% reserve. I have about $270 million in reserves for my company. I go to -- think about it, if I got -- we've got $9 million in capital and $2 million in reserves, that's $11 million. I got $10 million in capital and $1 million of reserve, that's $11 million. So because it's my largest asset, I sleep pretty good at knowing that I carry this kind of reserve and I list air with too much reserve. And I think that's good to do because I don't know CECL has ever been the guy CECL has ever been to Conway, Arkansas. I don't know if he's ever been there. So I'm going to continue. When you all see me take $150 million or $200 million out of reserve and put into income, you'll know if somebody's stuck a gun to my head. So that's all the way I'm going to do that because what difference does it make? It's our money. You can count it as capital, it belongs to us. And I've already allocated when the crap hit the fan with the pandemic, I took $100 million out and put in reserve, and I just left it there. So and I will continue to leave it there. But why not? It doesn't matter. It just makes me sleep better at night, that makes my shareholders sleep better at night. And I just think it's -- that's the reserve course. Asset quality has remained very strong. The only weakness I've seen that I have is in memory care. I'm seeing memory care not work. I'm seeing it not work because the people that have dementia don't live as long and the churn is much faster and it's hard to fill it back. So I've seen that struggle. I have about 60 million of memory care with this one customer. We did it right. I mean nonrecourse, 50%. So we're not losing money. But that deal is not cash flowing. The mass money in that deal has been supporting the hole, it hit in it. Yes. interestingly, they did them as separate loans, and they want to keep Palm Beach and Naples. They want to keep those 2 as for you. But the others, they want to throw back at me. So anyway, I'm 50 cents on the dollar, not worried about it. But you ask if I've seen a break increase, that was really interesting to me that -- it's a great plan when we look back the baby boomers are coming through, right? They're coming through, there's going to be more people with dementia. We need to build more memory care centers, and we'll really do well. That's sounding wonderful, but the cost of taking care of the memory care centers is higher than they anticipated. In addition, the churn and a lot of people are doing the pandemic went and got their family members to brought them back out, brought them home and took care of them. So that -- from an asset class, that is interesting to watch for. So I mean we've got $60 million, we actually got $100 million of it, but just one customer got a mass money in 6 of the same deals. So interesting. Outside of that, I don't see anything to speak of at all. So I just maintain their reserves, excess capital, excess reserves, just err on the side of being very, very, very conservative and still do almost a 2% ROA over quarter.

Any last question? Started a little bit early so that we're off on the clock. But just to summarize, a decent economy, things to watch. Loan growth is there, slowing a little bit, funding more critical than ever and really not seeing anything on credit. Stay tuned on M&A.

Yes. And I probably need to watch. I think we put out -- they asked what our loan growth would be. And I think we said mid-single digit. We'll probably do a little bit better than that first quarter. I was concerned that the last 2 loan committees, we saw a lot less and I said wait, these higher interest rates, we've got half of what we normally saw. And then Kevin mentioned to me, today, the loan committee this week's back up to where we were. So I kind of thought that maybe it was going back a little bit, but do think it's still been pretty good.

I think it's going to slow down. I think we're going to see it slow down. I mean some of these deals don't work. If I earn about a 4.20% margin to do that. If you go out and get money today, it's a 5.00% right?

I wouldn't even know what a 4.20% looks like.

Well, I'll show you what it looks. I'll send you a picture of a 4.20%. You got to ride with a 9 handle. But if some of these deals don't work in a 9 handle, I mean if you want to maintain -- if I want to -- want to tell my loan officers, I said, we're running about a 4.20% and if I go out and buy money, which I'm not doing well have to, I say it's 5%. So these out-of-bank -- these banks are out of money. They got -- if they want to maintain a 3% margin, they got the -- they're going to pay 8% that the loan is going to have a 8 handle. But we're righting 8 and 9 where we're in. We haven't brought back Johnny Prime. That would be 10.

I wonder where Johnny Prime was today.

Ed, anything else to add?

No. I think is going to be an issue for a lot of banks. And I do believe that it's going to up in a lot more acquisitions, opportunities taking place. And we always -- it's the color we always take what the market gives us. Trying to be smarter in the market. They got good -- it's given us great organic growth for the last 3.5 -- we haven't done a bank deal in 3.5 years. And we bought a portfolio of Allstate insurance loans. We just did a wealth management deal. But I think it's -- if you open up -- it will open up again and we'll be the guys.

Well, Ed, thank you. Best of luck with your back healing as well and best of luck in retirement.

Thank you. Haven't totally retired. Well, I'll be around.

I have one question. Are you the new heir apparent?

Yes.

I don't know if he's going to be here, but you'll have to be initiated in.

I'm going to have the interview...

You have to certainly needed the initiation.

Absolutely. That will happen behind the curtain but we'll need to get on with it.