'Race to the dumbest': Irrational terms creep back into lending

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Irrational loan terms are creeping back into the banking system.

That was the message delivered by several bankers during recent conference calls to discuss third-quarter results. They argued that banks will need to resist the temptation to make compromises to boost lending volumes and offset margin pressure.

Bankers criticized unnamed competitors that were originating commercial loans below 4%, extending durations on fixed-rate loans out beyond a decade or were forgoing other standard safeguards.

“There were less opportunities in most of our markets, and many banks are racing after those few deals that are out there,” Johnny Allison, chairman of Home Bancshares in Conway, Ark., said during his company’s recent earnings call.

“There appears to be a race to the dumbest because you're just giving the stuff away,” Allison said. “You've won that deal. Congratulations: You’ve just won the stupid award.”

Lenders are becoming “increasingly irrational,” Christopher Holmes, president and CEO of FB Financial in Nashville, Tenn., said during a Tuesday conference call. “We’re content to walk away from some credits, because competitors in the markets are willing to accept risk that we consider foolish,” he said.

Holmes said some banks are allowing for 100% financing with no personal guarantees and lower equity investments by borrowers. Others are ignoring the loan-to-project cost for deals.

Home, the parent of Centennial Bank, has passed on loans after competitors offered 10-year interest-only loans with lower collateral requirements and up to 80% leverage, Allison said.

“I think there's a new cynicism about growing loans," said Chris Marinac, an analyst at Janney Montgomery Scott. "That wasn’t the case two quarters ago. People want to know where that loan growth is coming from and how unique it is.”

Banks aren’t the only lenders taking on more risk. Bankers noted that the institutional market and larger credit unions are aggressively going after commercial loans and commercial real estate credits.

Some bigger banks have also sounded an alarm on credit quality.

“It’s time to be cautious. It’s time to be very thoughtful,” Greg Carmichael, chairman, president and CEO of Fifth Third Bancorp in Cincinnati, said during his company’s call.

“It’s a time not to reach,” Carmichael added. “It’s a time to think about the bank you want to be long term — and expect a downturn. … Don’t worry about the balance sheet growth right now. Stay focused on quality.”

Several banks, including Cadence Bancorp. in Houston, Banc of California in Santa Ana and Great Western Bancorp in Sioux Falls, S.D., have reported steeper losses and provisioning in recent quarters, though leaders at those companies have said that isolated incidents, including fraud, are to blame.

Still, Allison and Holmes said they have decided to slow down their loan growth, even though doing so could put more pressure on their companies to boost revenue and profit in other ways.

At Home, loan originations in the third quarter were off 17% from recent averages, totaling $710 million. Allison said the average rate was 6.52% for loans originated in New York and 5.63% for loans made in Home’s other markets.

“We think there’s a little slowdown in the market and we're not opposed to that,” Allison said.


The same trend was apparent at FB Financial, where organic loans increased an at annualized growth rate of 5.2% after several quarters of double-digit increases. The company will “likely be satisfied” with mid- to high-single-digit growth in coming quarters, Holmes said.

Marinac said 3% to 5% year-over-year loan growth “seems about right” for banks heading into 2020, adding that he would prefer to see bigger banks staying closer to the low end of that range.

Decelerated loan growth could also ease some pressure to gather deposits. Holmes said his goal is to bring in enough deposits to maintain a 90% loan-to-deposit ratio.

“Still, we love stories where companies have been able to grow deposits,” Marinac said.

To be sure, bankers said there will be instances where they feel compelled to cut some slack — for existing customers with stellar credit profiles.

“We've offered some one-off pricing to good customers that we know and that we're comfortable with, in order to defend our relationships,” Holmes said. “But when you start to see some weakness in a credit, one strategy is let that loan refi away to another institution.”

John Reosti contributed to this article.

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