Capital One’s Benjamin Stacks Talks Growth and Conservative Underwriting

Stacks: I graduated [from Syracuse University] in 1988. I had absolutely no idea what I wanted to do for a living and went into a family business for three years—the restaurant business. My mother, in her second marriage, had married a restaurateur in Washington, D.C., so I said [to my stepfather] I’d love to work for you. He said, “Great, but you’re going to start as a busboy.” So, with a college degree, I started as a busboy and worked my way up and eventually ended up managing his restaurants. I worked for him for three years, managing a 200-seat restaurant and working 100 hours a week. I really honed a lot of who I was in a business and customer-service sense through that because I really hadn’t done anything like it before. Also, in realizing [that] I didn’t want to work 100 hours a week in that kind of environment—which was really high pressure and intense—I was thinking about what I wanted to do.

[My stepfather] dabbled in real estate, and that got me thinking that this was a pretty interesting way to go. I was fascinated by his business acumen and capabilities and what he was doing—he was buying downtrodden properties and fixing them up. I decided to go back to business school for a career change, so I went to the American University in D.C. to get my MBA. I went into finance and started a minor in real estate. In between the first and second year, through some connections, I got an internship at a bank here in New York, which at the time was called the East New York Savings Bank. East New York was M&T Bank (MTB)’s New York City outfit, so I interned there, had a fantastic experience and at the end of the summer they said, “Look when you graduate, if you’re interested, we’d love to have you back.”

Nine months later, in the spring of 1993, I was looking around at school for stuff to do in D.C., and I was speaking to the guys at East New York Savings Bank, and it was clearly the best opportunity I thought I had at the time. I spoke to my fiancée and said, “Let’s go to New York.” And she said, “Okay, we’ve been to New York a lot. I like visiting your parents there, but I’m not a huge fan.” So I said, “Let’s just go for a couple of years, let’s see how it goes.”

M&T made me an offer,  I signed up immediately and we moved to New York in the fall of 1993 after I had done a training program with M&T. We fell in love with the city immediately. We lived in the West Village and just became enamored with being here. There was so much activity, the cultural aspects of it were great, and we had a wonderful time and forgot about moving back to D.C.

Things at the bank were going very well. In fact I spent nine years at M&T. In 2002, I got an offer from HSBC. It was a great platform. I did a lot of interesting stuff, a lot of national, big syndicated deals—I had a much different experience than what I had at M&T. I spent almost five years there. In early 2007, I got an offer from Eurohypo [a division of Commerzbank], and the timing was really interesting. Three weeks after I got [there], the commercial mortgage-backed securities market started to blow up. By the end of 2007, Eurohypo had already gotten rid of half of its CMBS team. That was the first time I had been in an organization that had fired a whole bunch of people. It was really kind of shocking. In spring 2009, I poked my head around as Eurohypo was winding out [of real estate], and I was lucky enough to be introduced to Rick Lyon [the head of the commercial real estate at Capital One].

We hit it off immediately, and I thought this was a great opportunity to come to Capital One. It was somewhat of an unknown commodity—they had just bought North Fork Bank, and they were transforming the North Fork platform here into what Capital One has become today, which is a $50-billion-assets-under-management commercial real estate lending platform that spans soup-to-nuts agency financing to construction to long-term permanent loans. We run the gamut, and it’s become, I think, one of the marquee platforms in commercial real estate finance these days. There were some scary times there, but things have a way of working themselves out. And sometimes you make your own luck too.

Capital One is still in growth mode, correct? You’ve made some new hires in Boston and Los Angeles.

Capital One was transforming itself in 2005, 2006 and 2007, by buying Hibernia Bank, North Fork Bank and Chevy Chase Bank. That really started the transformation of Capital One from a card issuer to a diversified financial institution. First of all, we knitted together those three banks, which was not easy, because you have three different cultures. Rick jumped in with both feet and was just brilliant in his transformation of those [banks] into a single unit. We were doing that and fixing all of the problems we had inherited—every bank more or less had problems through the cycle. Once we got all that set, we started looking outside and said, What makes sense for our platform and where are we best positioned? In 2013, we bought Beech Street Capital, which was the largest commercial acquisition the bank had made prior to General Electric—we bought GE Capital’s healthcare lending group last fall. That was a big acquisition for us, and it really propelled us into being more of a national player than we had been.

That was a roadmap for some of our further expansion that we’re proceeding with on the balance-sheet side. We just opened an office in Boston. We’re opening an office in L.A. Last year, we opened an office in San Francisco. That complements our existing footprint of the New York area, Long Island, New Jersey, Mid-Atlantic including Philadelphia, Louisiana and Texas. Slowly. And it’s very methodical and very thought out. It’s a great growth story, and I give Rick a lot of the credit.

It seems like some of this growth is coming during a time when banks are pulling back.

If I could title this conversation, I would say we’re playing the long game. We’re a conservative lender, and that’s borne by all of our experience in commercial real estate, which can be an aggressive, somewhat unregulated area of finance. We’re not trying to take advantage of a cycle and go crazy. We’re trying to build the foundation of a long-term business that’s commensurate with the businesses that our customers have built. A lot of our customers have been in business for decades or maybe 100 years. The way our Chairman and Chief Executive Officer Richard Fairbank has set up the company is to not worry about quarterly results as much as building a sustainable business that through any cycle will stand the test of time and will produce solid returns for the institution.

Sometimes that means that if our competitors are being really aggressive, we might lose out on a lot of business, but it also means when, say for instance this year, we’ve had a little bit of pullback in the CMBS market and there’s some general uncertainty about where the economy is going, we might get a little bit busier because some people are in flux. We are trying to be a go-to, reliable lender for the long-term for our customer base. It’s not, “Hey, I think I can make another 10 basis points if I take a little bit more risk.” We’re not like that at all.

If you look at the way Capital One itself is structured, we continually invest for the longer term. We’re in the middle of a technology transformation across the bank right now, so we’re investing heavily in that. We’re sacrificing near-term profits to invest in the business long-term. That’s a strategy message that we all adhere to, and that’s how we run our businesses. There are times when real estate lenders can be rather undisciplined, and we are not like that.

Could you speak to areas where the bank is pulling back, like condominium financing for instance?

A couple of years ago we were able to look forward at least a year, if not two, and say we really like this business and there are a lot of great sponsors involved, [but] we’re concerned with the amount of volume that’s come on the market, especially high-end. We consciously pulled back two years ago and really tempered our new lending on condominiums. Having said that, we’re still involved in the market, and you’ll probably see us do two or three deals this year in the condo market. But they’re extremely well structured, conservative, with top sponsors who have withstood previous recessions. We’re confident in the choices that we’ve made, and we’ll continue to look at doing some of these. But we certainly pulled back. We were doing a few a year, and now we’ll do one or two.

There hasn’t been external shock necessarily. Yet, a lot of lenders have pulled back, which is ultimately probably not a bad thing, but it’s the first time in my 25 years of doing this that—absent an external shock—people collectively pulled back. There’s a whole host of reasons for that—a lot of media discussions about oversupply of both condos and multifamily rentals. But the Basel III requirements kicked in, and that made people think long and hard about what kind of returns they needed for construction lending. Construction lending is very important for our customers, but from the bank’s perspective, it’s labor intensive, and it’s not the easiest thing to do in the world. We are very careful about how much we do of it and how we structure it.

Last month we published a story about how the High Volatility Commercial Real Estate rule is pushing construction lending to the private market. Are you seeing that?

It’s definitely a concern. I think the biggest issue was that people have interpreted the guidance around HVCRE differently. It didn’t make it difficult for a bank to do a deal because they could decide to do a deal if they wanted to or not if it was a bilateral deal between the bank and the sponsor. Where it became more of a problem was that in larger syndicated transactions people could have different interpretations and, therefore, view the structure of the deal differently. That became more of a concern in that, if you were underwriting a large construction loan and there was an HVCRE concern, people could view it differently or not participate and impact the liquidity of the syndication.

I think a number of people have determined that they [will] classify every loan as HVCRE just to make it easier, but there’s still a lot of uncertainty out there about it. But look, the bottom line between that and all the other regulations that were put in place is that the regulators wanted banks to be more conservative. That effect has certainly happened. When people want to borrow more money than 65 or even 70 percent [loan-to-value], they go to the mezzanine market. That’s what I believe the regulations were intended to do—push the riskier piece off the bank’s balance sheet into a mezzanine provider or somebody else who is willing to take that risk. I think the intent of the regulation has been achieved. Whether or not people agree with it is a different story. People are still making construction loans. The net result is that the pricing has gone up and not as many people want to do construction loans.

The other thing is that in New York we’re currently suffering from record asset prices and condo prices and brand new multifamily apartment rental prices. Office rents are also increasing. When all that stuff happens too, people get worried that we’re at the top of the cycle. People sit there and say, “How much more can this go on? And do I need to worry that the next leg of this [going] down instead of continuing to go up?” Those are the factors that are leading people to be cautious.

Has your underwriting changed because of all of that?

Capital One put a stake in the ground in 2009—before I got here, when Rick was building everything and the whole team was coalescing—we created underwriting standards that largely have not changed. One of the biggest mistakes a bank can make is changing its underwriting standards during a cycle. It’s a big danger that often happens because people want to put more money into real estate and they realize that their underwriting standards are too conservative, and they change them to get more business.