Home BancShares Inc. Chairman Johnny Allison delivered a stark warning to his fellow bankers Oct. 17, calling some of his peers "stupid" for offering certain loan terms.
Allison said his bank originated $710 million of loans in the third quarter, compared to its typical volume of $850 million to $1 billion per quarter. He said the bank walked away from $300 million to $400 million in volume because they were not willing to match on pricing or terms.
"There were less opportunities in most of our markets, and many banks are racing after those few deals that are out there. It appears to be a race to the dumbest," he said.
He said some banks and shadow banks are willing to offer sub-4% rates on 10-year, interest-only loans with nonrecourse provisions and 80% leverage. "You've won that deal. Congratulations. You have just won the stupid award," he said.
Allison said some lenders have dropped rates by 150 basis points to 200 basis points during the time the Federal Reserve has dropped its key rate by 50 basis points. He also invoked the 2008 financial crisis, saying the high leverage and nonrecourse provisions commonplace today were "things that we saw back before the '08 crash."
Allison also cited quotes from legendary investor Warren Buffett and JPMorgan Chase & Co. CEO Jamie Dimon that executives tend to follow the market no matter how irrational it gets. He said the lending landscape is at that stage and that bankers should focus on quality credits rather than mindlessly pursue the growth that investors can demand.
"These are really dangerous times for banks," he said. "This is a time to move cautiously. Banks have spent the last 10 years building their balance sheet with quality, high-yielding assets, and we could destroy all the good we built in much less time than it took to build it."