CEO Interview: Johnny Allison Talks Capital, Asset Quality and the Fed

You might not have heard of Conway, Arkansas. But the town in central Arkansas, just outside of Little Rock, happens to have one of the top performing public banks in the country, $22 billion Home BancShares, which reported 1.8% return on average assets in the third quarter of 2023 and 1.4% ROAA for the full year of 2022. The bank reported an efficiency ratio of 46.4% in the third quarter, which helps propel earnings higher. Chairman and CEO John “Johnny” Allison is a longtime banker who remembers the interest rate environment of the 1980s. His experiences have led him to run his bank defensively. Home has a common equity tier 1 (CET1) capital ratio of 13.99%, compared to the 6.5% regulatory minimum for a well-capitalized institution.

Recently, he spoke to Vice President of Editorial & Research Emily McCormick for a story in the upcoming first quarter issue of Bank Director magazine. The shortened, edited transcript is below.

BD: I would love to hear how you approach capital.

We’re blessed to be a high-performing bank. That gives us the ability to pull lots of different handles on the capital side. If you’re running a 1% [return on assets] you can’t do as much as you do if you run a 1.8% or 1.9% ROA. We continue to buy back stock. We’ve continued to raise our dividend over the years, and we’ve continued to build capital. If push comes to shove, we’d pull back on some of those.

We’ve been through the worst financial crisis since the Great Depression. We lived through the worst health care crisis since 1917. We just raised rates faster than maybe ever in the history of the U.S. And you see what’s happening to many, many banks that are at 108% loan to deposits [ratio] and 8% or less capital. They’re struggling.

As my wife says, protect the chuckwagon first. We don’t know what’s coming next in this cycle. Banks doing silly stuff hurts us, too. They run up their loan-to-deposit ratio, and then they borrow all the money they can borrow. They’re running a 5.5% to 6% CD, which hurts all of us. It’s just ridiculous. They can’t make money with that. They’ve already screwed up their bank; now they’re screwing up the rest of us.

BD: I’m wondering how you’re looking at the uncertainty ahead?

We’re in the fastest raising rate environment in our lifetimes, or from the late ‘70s to ‘81. That’s why I don’t think the Fed is going to back up here; they can’t afford to. If they back up now, we’ll [have to] raise rates three or four years from now to 20%, like we had to [in the 1980s]. No one on my executive team lived through that. I was a young businessman, and I watched that. I said this time, ‘We’re not going to put any more money in securities.’ That was the loneliest business decision I’ve ever made in my life. I said, ‘Leave it in fed funds.’ I’m getting 40 basis points in fed funds, and I’d get 1.5% in a security. [My executive team was] thinking, ‘Johnny has lost his mind.’ [But] we made the right decision.

The world thinks the next shoe to drop is asset quality. We’re not going to have the type of problems we had in 2005. This has been a different cycle. People are getting real down payments, and that changes the world. The customers are not going to throw away the keys like they did in ’05, ’06, and ’07. You make your money when you put your assets on the book properly.

Twenty percent equity in a deal, that seems like quite a bit of money. But that 20% can dissipate in a rising rate environment. One day, you wake up and you’re 110% [loan to value] in a deal instead of 80%. We watch that closely, and we don’t give our loans away.

We have capital. We can do large transactions and small transactions because of how we’ve managed our balance sheet. I carry one of the largest reserves in the country. What I do know is that a 2% reserve works. If you want to make a safer banking system, require that for all banks.

What happens when times get really hard? You go back to where you put this bank together a brick at a time, and you put it together the right way. Here comes the big bad wolf, and he can’t blow this wall down.