Texas Bank Steering Clear of Out-of-State Loans - TheStreet

Texas Bank Steering Clear of Out-of-State Loans

With its shares held back by concerns about its exposure to problem CRE loans outside its home state of Texas, Sterling Bancshares plans to stay local from now on.
Publish date:

Updated to correct name of the Credit Suisse analyst covering Sterling Bancshares.



) --

Sterling Bancshares


is going to stay local from now on.

The $5 billion-asset Texas bank's balance sheet is being weighed down by its outsized commercial real estate portfolio and construction loans, primarily because of souring loans made outside of its home state, and it expects it's going to take a while to work the problems out.

>>>Five Banks With Fractured CRE Loan Books

"Two to three years from now we hope

to be working all in Texas, only in Texas," J. Downey Bridgwater, Sterling's Chairman, CEO and President, said on an earnings call in April in response to an analyst's question about future strategy. "And we will abolish any out-of-state lending that is not relationship based."

"In other words, if we have

a Texas company

or Texas borrower

that wants to have a vacation home

in Colorado, we might consider something like that," Bridgwater said. "But as far as generating new commercial credits with collateral outside of the state of Texas that's not relationship based,

we intend to have zero."

Despite a few peaks and valleys, the stock finished Thursday almost flat year-to-date, and it was down a penny to $5.11 in midday trading on Friday. Declining commercial real estate values have stressed Sterling's $3.2 billion loan portfolio over the past two years because they make up a little more than half its total book - the highest percentage of its Texas peers. The bank also has another 11% worth of exposure to construction loans, according to Credit Suisse, which initiated coverage of the stock with a neutral rating this week.

While the fallout from the

commercial bubble

hasn't turned out as dire as many had once predicted, it has still taken on many smaller banks. Sterling's management has made it clear that loans made outside the Longhorn state have been its most troublesome.

"The most stressed that we have seen today on a relative basis has been in our out-of-state commercial real estate portfolio," Bob Smith, Sterling's Chief Credit Officer, said on the earnings call.

The Small Business Administration-related portion of Sterling's commercial real estate loan book is roughly $355 million, or 11% of the bank's portfolio, according to Credit Suisse. Of that amount, 13% of the loans were classified as nonperforming as of March 31, Sterling has said. The bank hasn't made a new out-of-state loan since 2008.

Meantime, at the end of the first quarter, Sterling Bancshares said non-performing assets totaled $153 million, or 3.04%, of total assets vs. $119 million, or 2.42%, as of Dec. 31. Net charge-offs totaled $21 million, one-third of which was related to properties secured by collateral outside of Texas.

Credit Suisse analyst Michael Zaremski expects the company's long-term earnings power is likely to be "subdued" while it works to exit non-core out-of-state loans wind down construction loans, but he doesn't think the stock can go much lower from here.

"We believe that SBIB offers minimal downside risk with material upside potential, as the company has an asset-sensitive balance sheet, the benefit of operating in a relatively healthy Texas economy (beyond 2010), and is a large stakeholder that could shake things up in coming years," he told clients in a research note.

Zaremski singled out Sterling as one of his

four more likely potential takeover targets

in the next few years from the among the regional banks, and said a sharper than expected rise in interest rates would be a boon to the company because of it's sitting on a hefty cash position of roughly $360 million. He views credit risks as manageable because of Sterling's excess capital levels and an expectation that it should be able to return to profitability by the end of the year. Zaremski is looking for a profit of a nickel per share in the fourth quarter, while the current average estimate of analysts polled by

Thomson Reuters

is for breakeven results in the December period.

Oppenheimer analyst Terry McEvoy is also fairly bullish on the stock, saying recently that he now has "greater confidence in the underlying health of the company's problematic out-of-Texas loan portfolio," after traveling with management to see investors. McEvoy has an outperform rating on the shares.

Sterling's management "has been pleased with where appraisals have been coming in on these problem assets, and it sounds to us as though they are more positive about the near-term credit performance of the company," McEvoy told clients in a June 8 research note.

Investors will get more clarity on the direction of credit costs at Sterling on July 19, when the bank is slated to report its second-quarter results. Wall Street's current consensus estimate is for a loss of 4 cents a share.

--Written by Laurie Kulikowski in New York.