Good Riddance to Energy Loans: A Texas Bank's Survival Plan

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Wait till next year.

That's the message of the architects of the comeback plan at Green Bancorp in Houston, which has struggled alongside other Oil Patch lenders the past two years but remains determined to put its energy woes behind it – even if doing so means closing out 2016 with another outsize loan-loss provision.

Since mid-2015, the $3.9 billion-asset Green, corporate parent to Green Bank, has recorded provisions totaling just under $68 million, including $28.2 million for the three months ended Sept. 30. Chairman and CEO Manuel Mehos has warned that the company likely will take another $22 million in energy-related provisions over the fourth quarter of 2016 and the first quarter of 2017.

"Our plan was to give away our 2016 earnings, or a big chunk of them, to resolve this [oil-and-gas-reserve] portfolio, so it wouldn't be hanging on us for the next two or three years as we go forward," Mehos said in an interview in December.

Green's assertive turnaround plan – centered on a decision to get out of energy lending by the end of 2016 – and the second-guessing it invites are key reasons American Banker has tabbed Mehos and President Geoffrey D. Greenwade among its community bankers to watch in 2017.

Company officials have labeled their comeback plan the Managed Asset Reduction Strategy, or MARS. As part of it, a team of eight workout specialists has been systematically pruning energy credits from Green's loan book over the past eight months.

"If you go back to when we announced the initiative, which was at the first-quarter earnings call in late April, we discussed basically $277 million of loans that over a period of time we were interested in exiting," Greenwade said. "At the end of the third quarter, that number stood at $130 million."

"We're right on where we want to be," he continued. "We want to clean as much as we can out in the fourth quarter [of 2016], so starting off [in 2017] we should have a fairly clean year from that standpoint. I don't think there will be a lot of continued losses or overhang from having to manage energy loans."

Earlier this month, Green announced a $35 million private placement of subordinated debt, which should provide a boost to hopes of completing the MARS effort by the end of March.

There are doubters. Some observers have questioned the timing of MARS, noting Green unveiled it just as oil prices began to rebound, and other lenders have been at its doorstep looking to buy up the loans it wants to dump.

Still, prices remain significantly below pre-crash highs, and many experts believe full recovery for the energy sector remains years away.

That market pessimism drove Green in the direction of MARS, according to analyst Kevin Fitzsimmons, who covers the company for Hovde.

"I think they looked out over the next two or three years and said, 'We could be fighting this energy cycle for the next two or three years. It could still have an impact on our multiple, and it could take up a lot of our time and energy,' " Fitzsimmons said.

Indeed, energy lenders have experienced busts before, but Greenwade said few went on for as long or cut as deep as the slump that hit in 2015 and 2016.

"Oil prices hit their peak in the summer of 2014, so we're talking two and one-half years of decline, which is very unusual," Greenwade said. "If you go look at most of these downturns, it's pretty much of a 'V' and within six to nine months the supply-demand is corrected and there's recovery. With this downturn there was a long 'U.' I think that made a big difference in how much credit-quality damage it did to all the lenders out there."

According to Fitzsimmons, Green's overarching goal is to return to the growth path it charted when it announced its initial public offering in June 2014. "They've been very vocal since the IPO that they wanted to get up above $5 billion in assets," Fitzsimmons said. "They needed acquisitions to do that, and you needed an attractive multiple to do those acquisitions."

Green executives continue to describe themselves as long-term buyers, though a recent Sandler O'Neill research note speculated about the possibility of the company becoming a takeover target. Its relatively affordable stock price to tangible book value, its heavy private-equity ownership and other M&A activity in oil country all point in that direction, the mid-December note said.

The outcome of the MARS plan will have a strong role in Green's fate.

Hovde Group expects Green to earn 89 cents a share next year while SunTrust is projecting earnings of 86 cents a share.

That is a far cry from this year. Through Sept. 30, Green reported losses totaling $3.6 million, due primarily to energy-related loan losses. By contrast, Green earned a company record $15.4 million in 2015.

Though it once would have been an odd thing for a Texas lender to utter, Green executives say they will do just fine without energy lending.

To replace the earnings it formerly produced, Greenwade said Green would avoid focusing on a particular line of business, relying instead on bread-and-butter banking in its existing markets, particularly Dallas and Austin.

"I would say that there is some beauty to being generalists," Greenwade said. "You have a lot more variety and granularity of asset classes, collateral and industry types. We always think of ourselves as generalists."

Small Business Administration lending is one arena where Green would like to see its profile heightened, but even there, its designs are relatively modest. It has quietly doubled the size of its SBA team in 2016, from five lenders to 10. While no additional hires are planned, the company hopes to reap the benefits of its expansion in 2017.

"I look forward not only to loan production volume increasing, but our noninterest income from selling those guaranteed portions continuing to increase," Greenwade said. "Our ultimate goal – I think basically we're doing about $4 million a year in noninterest income from those sales – is to drive the total over the next few years to $10 million a year."

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