Houston-based banks feel less subprime pain -- Credit harm not as severe as in other regions

By PURVA PATEL
Dec. 5, 2007 Houston Chronicle

National banks that were heavy into the mortgage market in parts of the country where the credit crunch has taken its toll have taken billions in write-offs related to loan defaults.

Wells Fargo is taking a $1.4 billion fourth-quarter charge for expected losses related to home loans. Citigroup, Bank of America and Wachovia have also announced mortgage-related write-downs of $1 billion or more.

But most Houston-based banks have been bolstered by the area's relatively strong economy and have been spared major damage from loans sold to people in the subprime market with weak or bad credit. That's because most of the banks focus on servicing small businesses.

Some cutbacks -- Yet not all have escaped unscathed.

A couple of local banks — Encore Bank and Franklin Bank — have cut staffs, and stock prices for some have taken hits by the overall market pessimism. But few local bank officials say they have had direct issues with problem loans.

"The economy there continues to be better than anywhere else," Brad Milsaps, an equity analyst with Sandler O'Neill in Atlanta, said of Texas. "In the other parts of the Southwest, like Arizona, Nevada and California, as well as the Southeast, we certainly have seen more credit-related issues coming out."

Encore Bank, which went public in July, is cutting staff and expenses, though company officials say the move is being made to improve efficiency.

The bank is eliminating 17 positions, or 5 percent of its staff, which the company expects will save it about $2 million in 2008.

The bank saw its noninterest income drop 4.6 percent during the third quarter to $7.5 million from the third quarter of 2006. The bank credited the drop to reduced mortgage banking income, most of which was related to second mortgages.

Because of smaller loans and lower pricing, Encore has decided to keep many of its mortgage loans on the books for a while instead of selling them.

"We have very few loans with borrowers with credit scores that would be considered subprime," said James S. D'Agostino, Jr., Encore Bank's CEO. "Those that we have are related to our community reinvestment act efforts."

The bank continues to cautiously make home loans to consumers and construction loans to builders, he said.

More commercial loans

Houston-based Franklin Bank has had a strategy in place to move out of home loans and into commercial loans, including to builders, since 2003, the company has said.

The bank closed 12 of its mortgage offices outside of Texas and cut staff during the third quarter of 2007.

"We've made adjustments on the mortgage side to make it more efficient and profitable," said Glen Mealey, executive vice president.

Bank officials say Franklin has no exposure to the subprime market and has only made high-end loans. It does, however, have a sizable presence in areas of the country hit hard by the mortgage meltdown.

About 34 percent of Franklin's loan portfolio is composed of credit lines and loans to home builders and mortgage brokers across the U.S., with about 40 percent concentrated in Phoenix, Las Vegas and the states of Florida and California, according to a report by JP Morgan.

"In light of a notably 'below peer' reserve level and exposure to homebuilders and mortgage brokers across the U.S., we expect credit trends to come under pressure at Franklin over the next several quarters," according to the JP Morgan report in late October. But, the report notes, the bank's nonperforming assets and net charge-offs were contained during the third quarter.

Late last month, the bank noted that after conducting a review of its loan portfolio, it would set aside $20 million more for potential credit losses. It estimates losses to range between $5 million and $7.5 million in 2008.

Franklin said it increased the allowance to remove "perceived risks" in light of "unprecedented" market conditions, such as the deteriorating housing market, increased Chapter 11 filings by national home builders and liquidity issues in the mortgage markets.

Franklin posted improved earnings during the third quarter of $7.5 million, or 30 cents a diluted share, compared with $5.1 million, or 21 cents a diluted share, during the same period last year.

"Our focus is to grow and expand the community bank in Texas," said Andy Black, the bank's president. "We're bullish on Texas."

No exposure -- Other locally-based banks have been spared.

Dale Andreas, head of Amegy Mortgage Co., said the bank dodged the mortgage turmoil because it never made subprime loans.

Officials at Sterling Bancshares and Southwestern National Bank also said they've seen little effect because of their focus on small business.

Houston-based Sterling has no exposure to subprime or the slightly better Alt-A loans, CEO Downey Bridgwater said.

The bank sold its mortgage business to RBC Mortgage Co. in 2003 and has since focused on small-business lending.

Today, less than 2 percent of its loan portfolio is consumer-related and less than 5 percent is residential-construction-related, Bridgwater said.

"Just by the fact that we're in Houston and Texas in general, we'll have much less of a difficult time dealing with the issues a lot of other major metropolitan areas are facing," he said.