Green Bancorp's surprise exit from energy lending has left others in the industry scrambling to make sense of what it means for them.
The Houston company said late Thursday that it will purge $277 million of energy loans and other classified assets by the end of this year. The recent downturn in oil — and a dismal outlook for its recovery — was a drag on performance and a distraction for management's dealings with investors.
The move makes Green the first Gulf Coast lender to call it quits on the struggling energy sector. Bad loans have taken large bites out of several banks' profits as oil firms struggle to stay afloat.
Green's exit creates more uncertainty at a time when most energy lenders have been reassuring investors that they have a handle on oil-related risks.
"I think it is a little wait-and-see in terms of what it means for other banks," said Emlen Harmon, an analyst at Jefferies.
For others, Green's situation is unique. In the lead-up to the announcement, the $3.7 billion-asset company's stock — for a host of reasons — had been trading at a significant discount to banks of similar size along the Gulf Coast.
Exiting the oil business will help Green clean up its books — and potentially return to making acquisitions, some industry observers said. At the same time, Green would be a much easier bank to acquire if it went ahead and did the hard work of purging its balance sheet of questionable energy credits.
While other lenders are steadily reducing the size of their energy portfolios, most industry observers expressed doubts that other banks would be as willing as Green to get out of the business. Green, formed in 2006, was a relative newcomer in the Texas oil patch.
"A lot of the other banks have been in the energy business for decades," said Brady Gailey, an analyst at Keefe, Bruyette & Woods.
Still, the move underscores the challenges small banks face in the sector, particularly in light of heightened regulatory oversight over certain types of loans. The pullback also spells more bad news for oil companies.
"It is just hard for community banks to serve the energy industry because there's so much scrutiny right now," said Curtis Carpenter, head of investment banking at Sheshunoff & Co. "You also wonder how it's going to impact the oil and gas business. It is getting hard for them to get the financing they need when they need it the most."
Green's exit was part of an earnings season where regulatory guidance and a recent shared national credit exam wreaked havoc on results after banks had to downgrade millions of dollars in energy related loans.
Banks of all sizes have boosted their loan-loss provisions, and Green was no exception. The company's provision spiked to $16 million in the first quarter, compared with $1.5 million a year earlier. Overall, profit fell 60%, to $1.8 million.
A large portion of Green's energy loans are focused on risky oilfield services sector, analysts said. During a Thursday call with investors, management said it was resolute in its choice to get out of oil.
"When we exit, I think we're going to stay out of it," Geoffrey Greenwade, Green's president and chief executive, said during the call. "In Dallas, Houston, Austin — our major markets — there's plenty of other businesses to participate in that don't have the volatility of commodity prices."
Other banks have changed their tune on oil in the past week.
Ralph Babb, chief executive of the $69 billion-asset Comerica, said he regretted bulking up on energy loans in the lead-up to the downturn, adding that the Dallas company will trim its exposure in coming months. "With every cycle, including this one, there are lessons to be learned that we plan to apply to this business going forward," he said.
Still, analysts cautioned against comparing Green with most other energy lenders.
In addition to its newcomer status, the company's stock has been hit harder than most other banks with oil concentrations. Green's stock has declined 46% in the past year, versus a 7% decline for the KBW Bank Index.
"Green is carrying a larger discount than their energy-exposed peers," Harmon said. "From that perspective, there's less to lose."
Management, which has expressed a desire to get back to buying banks, needs to improve the bank's buying power.
Acquisitions were a key part of Green's strategy when it went public in mid-2014. It has completed two deals, buying the $349 million-asset SharePlus Bank in Plano, Texas, and the $1.4 billion-asset Patriot Bank in Houston.
Green "would be selling at a marked discount if they tried to sell with a portfolio with a cloud over it," Carpenter said. "If the goal is to sell, they'd be much better off to work through those loans because you remove the uncertainty."
Regardless of the outcome, bankers and analysts alike will pay close attention to how Green works its way out of the business. Some of its tactics could prove useful for other banks looking to pare back exposure.
Some credits will likely be refinanced at other banks in the region, while other loans will be bought by private equity firms.
"The big question is how much of a discount will Green have to take to sell that paper," Gailey said. "That's the thing that the market will have to wait and see."
"There are a lot of loans involved," Carpenter said. "So you have to wonder how quickly they'll be able to get out of it all."