Bob Mendes | March 22, 2016

Top of the Market?

This morning, the Nashville Post ran Geert De Lombaerde‘s quarterly story about the financial performance of local community banks. Geert asks the question whether the last quarter was the top of the banking cycle? He points out that the combined profits of 27 Middle Tennessee community banks are down for the first time since the end of 2013.  (Don’t worry too much, they still made a combined $72.4 million for the quarter.) He also points out that total value of bad loans seems to have bottomed out.

I have several observations about Geert’s article.

First, the mix of my practice often provides some commentary about where we are in the business cycle. When the economy hits a downturn, I become more weighted toward financial distress. (The litigation part of my practice doesn’t really get impacted by the business cycle – in good times, people fight over who gets the money and, in bad, they fight over who pays the money…) This quarter, I do have some financial distress situations going on, but I am working on plenty of non-insolvency transactions. I am as weighted in favor of non-insolvency transactions as I ever get. That would suggest that we are definitely not past the top of the market.

Second, my general perception is that borrowing is as easy now locally as it can be in the post-recession era. For maybe a year or so now, my experience is that most reasonably healthy borrowers can get multiple banks interested in talking about a loan with a few phone calls. This might not seem like a big deal, but just a few years ago, it took a lot more effort to find a loan.

Both of these observations suggest that the local market is still going very strongly.

My third maybe goes more to Geert’s point about community bank profitability being down. This month (March), I have had two community banks in separate insolvency situations make it clear that the deal they were offering was only good through March 31. I haven’t heard an offer with a “it’s only good through the end of the quarter” component for a long time.

When banks make a demand like this, they’ll try to claim that there is something about the borrower that makes the bank just want to be done and move on.  But, that’s typically a cover story…the real reason is that they are making a business decision that they want to get something accomplished on their own books before the end of the quarter. I can never know whether they are trying to accelerate a loss into that quarter or, if they have already written down the loan, they are maybe looking to record a gain in that quarter.

In the post-recession years, I don’t recall getting many demands to close by the end of a quarter.  If anything, for a long time, they wanted to get loans extended by the end of a quarter in order to push losses farther into the future.  I think they were trying to show a series of modestly bad quarters rather than a few startling bad quarters.

I don’t have enough visibility into what goes on behind closed doors with banks to know for sure, but it is interesting that I got two different “it’s only good through the end of the quarter” offers this month. If you made me guess, I would say that in both cases the banks will be able to record a gain with the settlements we are working out. That would suggest that these two banks are feeling the need to look loan-by-loan through their bad debt portfolio for ways to bump up this quarter’s profit. No surprise there, but I haven’t seen it in my practice for a while.

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Bob Mendes

Bob Mendes represents all of Nashville as a Council-At-Large member of Nashville’s Metro Council. He is Chair of the Council’s Charter Revision Committee, a member of the Metropolitan Audit Committee, and a member of the Council’s Budget & Finance Committee, Rules & Confirmations Committee, and Ad Hoc Affordable Housing Committee. Bob also practices business law at Waypoint Law PLLC. Bob’s complete bio is here. You can follow Bob @mendesbob.