Loan Pricing Turns Increasingly Irrational, CEOs Say

Competition for commercial loans in California is so fierce that Westamerica Bancorp (WABC) in San Rafael has largely stopped making them.

While most banks fattened up their loan books in 2012, the $5 billion-asset Westamerica shrunk its portfolio by 17% and increased its investments in low-yielding securities by 33%.

Its chairman and chief executive, David Payne, said this week that Westamerica would prefer to remain on the sidelines than compete with rivals that are lowering their underwriting standards just to win business.

"We're seeing extremely low and extremely aggressive pricing, especially on commercial real estate," Payne said Wednesday at an investor conference in Boston hosted by Keefe, Bruyette & Woods.

He said competitors are offering loans at interest rates of 3% to 4% and stretching repayment terms out to 10 or 15 years — a combination that may be fine now but will likely spell trouble for lenders when interest rates eventually rise.

"We're not out chasing loan yields," Payne said. "We do not want to be in position where we cannot sustain our margin when interest rates start to rise."

Bankers have been complaining about irrational price competition since the financial crisis ended, but some say it has gotten worse in recent quarters as many banks have returned to health and are in better position to go after loans. The problem, many say, is that there are only so many good loan deals to go around, and the result has been a gradual weakening of standards.

At JPMorgan Chase's (JPM) investor day Tuesday, Doug Petno, the bank's CEO of commercial banking, said it is seeing increasingly "irrational behavior in terms of structure and price. There's a lot of capital chasing a finite amount of opportunities."

Payne said that, in his market at least, it is other community banks that have been most aggressive in their pricing.

"I thought we were going to have a nice breather after the economic crisis and that we'd see some firming up of spreads and margins and improving long-term earnings prospects," Payne said. "Unfortunately, we've gotten back into our aggressive pricing tactics."

In Texas, however, the irrational competition is coming mainly from large banks, according to George Jones, the president and chief executive at the $10 billion-asset Texas Capital Bancshares (TCBI) in Dallas.

Large banks need to grow their loan books to cope with increased regulatory and margin pressure, and they are doing so by targeting small and middle-market borrowers that have historically banked with community banks and smaller regionals, Jones said.

"They want a bigger share of the market, and they are out there trying to buy it," Jones said at the KBW conference.

Texas Capital is not shying away from the competition, but its leaders admit that lenders are working extra hard to achieve its goal of double-digit loan growth this year.

"Our pipeline is stronger than it's ever been," said Keith Cargill, the bank's chief lending officer. "But it needs to be because we have to walk away from more deals."