Green Bancorp at the end of 2014 had all the hallmarks of a big-time Texas energy lender — a substantial portfolio of energy-related loans along with a growing list of problem credits.
Thirty months and one energy bust later, the $4.1 billion-asset Green is turning itself into an up-and-coming Small Business Administration lender.
Green earned $1.93 million selling the guaranteed portions of SBA 7(a) loans in the first quarter, a 70% increase from the same period in 2016. Those numbers are no outlier, according to analyst Brian Zabora. In a research note Wednesday, Zabora, who follows the Houston company for Hovde Group, predicted income from SBA loan sales should average $1.5 million per quarter or more going forward. If its hits that mark, Green this year would essentially double the $3.3 million in SBA-related income it earned in 2016.
Green’s success is playing out against a backdrop of steady expansion for the SBA’s flagship 7(a) program. From Oct. 1 through June 23, 7(a) guaranteed loans totaled $18.1 billion, up 8% from the same period a year earlier.
That robust, ongoing growth appears to be exerting a sirenlike effect on a growing number of community banks.
“The premiums” investors pay for SBA-backed credits “are oftentimes double-digit, so it’s pretty attractive,” Zabora said.
Banks have shown a willingness to go to great lengths if it means increasing 7(a) lending.
In March, for instance, the $1.5 billion-asset Gulf Coast Bank & Trust in New Orleans moved to bolster its SBA operation, agreeing to acquire CapitalSpring SBLC, a nonbank SBA lender. Gulf Coast had been one of Louisiana’s largest SBA lenders, and the deal gave it a national platform. Byline Bank in Chicago followed a similar path in June 2016 when it paid $105 million for the $433 million-asset Ridgestone Financial Services, a Brookfield, Wis.-based lender with a national SBA-lending platform.
Green has not bought any banks recently, but its experience tracks closely with that of the $840 million-asset First Savings Financial Group in Clarksville, Ind., which entered the SBA market at the end of 2015, hiring a team of lenders who had worked at another bank. Between October and March, First Savings reported $1.8 million in income from selling the guaranteed portions of SBA loans.
President and CEO Geoff Greenwade said Green had been slowly building its operation since 2012. However, in April 2016 the bank opted to begin exiting the energy-lending sector after seeing oil prices tumble and problem loans surge.
Nonperformers peaked at $77.5 million, or 2% of total loans on March 31, 2016.
For all the paperwork and bureaucracy that accompanies a public-private partnership, SBA appeared to be a far less volatile alternative. Over the course of about eight months as it exited the energy space, Green quietly doubled the size of its SBA lending staff to 10 business development officers.
Green doesn’t focus on any industry segment, although it favors term real estate loans, which attract substantial premiums from investors, according to Greenwade.
With a larger team in place, Green has projected $6 million of income from SBA loan sales in 2017.
“We feel very good about that number and the pipeline activity we’re seeing,” Greenwade said Wednesday. “We’re seeing enough to feel good about the remainder of 2017 and into the first part of 2018.”
Zabora’s outlook for the company is similarly optimistic. He rates Green at “outperform,” calling for earnings per share of $1.05 this year and $1.41 in 2018.
While Green is content to limit the scope of its SBA activity to Texas, and has no plans to elevate SBA to a major line of business, it is an important component of its post-energy-crunch diversification. Greenwade isn’t shy about reinforcing success. He said he anticipates hiring another two or three SBA lenders, perhaps as early as the fourth quarter. In the meantime, he wants to confirm the back-office function is prepared for another growth spurt.
“I’m a big believer is SBA, but there’s a lot of paperwork involved,” Greenwade said. “I want to ensure the backroom structure is in place before we add more capacity.”
For the record, since unveiling its Managed Asset Reduction Strategy last spring, Green’s energy portfolio has declined by two-thirds, from about $292 million to less than $94 million.