Yes, I think a lot of banks loosened standards to compete over the last several years (all banks’ money is equally green the last time I checked) but such loosening has been – as it generally is – largely product dependent. For example, just about any S&L in the country has had to loosen standards to get business. Also, just about any construction lender in the boom-time states – CA, AZ, NV, FL, etc. – also loosened standards. In addition, large commercial real estate loans – that is, $5 million-plus – in the major metroplexes have also been underpriced and undertermed for several years. So, yes, there has been a race to the bottom, but it’s been far more pronounced in certain product classes and geographies than others.
BUT, there are plenty of banks who chose to shrink (in these competitive product markets) or who don’t compete in the hypercompetitive geographies. Not every banker will take undue risk for growth. Plenty of them saw all of this coming in some way, shape or form.
The two banks I’m directly involved with have the luxury of being private banks with a small number of shareholders. We do what we think is prudent. Period. We’re not trying to talk up a stock price or impress our shareholders with “false” growth. These banks are run to make money for the long term. No short cuts. And there are lots of other banks like ours out there. But they tend not to make the headlines and seem woefully behind the times when things are booming. But we (and they) will all experience bumps in the road over the next few years as things slow down – a recession is not all fun and games even if you’re doing everything the “right” way. That’s the nature of the business.
Over the next two years I think we’ll see some recapitalizations of high profile large banks, small banks and several outright failures as well, particularly in the glamour states of CA, AZ, NV, FL, etc. I’m starting to see mid-sized recapitalization proposals ($25-$75 million) cross my desk as I write this. The next few years will provide plenty of opportunities for those with dry powder.
Yes, most real estate assets will have valuation issues. (And some more than others, obviously.) But this isn’t the end of the world. An example. Let’s say we make a $2 million loan on a small commercial property worth $3 million. The interest coverage is 1.3x and the cap rate is 7%. Now let’s say a tenant or two goes BK and the re-rental rate is lower and the interest coverage declines to 1.1x. And the cap rate increases to 9% from 7%. So maybe the value declines such that now we have an 85%-90% LTV loan. Is that a big deal? No. Are we happy about it? No. But as long as the borrower can keep paying and the decline in value is still below 100% LTV it’s not a big deal. You have to assume that this sort of stuff will happen every few years. It’s the nature of the business. But it’s not the end of the world. Frankly, we WANT other banks to tighten their lending standards because we want higher rates and better terms and conditions for our loans.
