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LegacyTexas sees improving middle-tier CRE in Houston despite oil downturn

executives said Texas credit quality is performing well throughout the downturnin energy and that there appears to be little effect on the bank's commercial realestate exposures.

In fact,management said during the July 20 earnings call that the average debt-service coverageratio on its holdings actually increased in the second quarter.

"Frankly,I'm surprised that the debt-service coverage ratios went up," said CEO KevinHanigan.

He attributedthe improvement to the company's positioning in Houston's commercial real estatemarket. The metro area is significantly overbuilt in "Class A" commercialreal estate space, which commands the highest rates. However, the bank focuses onmore affordable Class B space that has been less affected. Further, he said tenantsare renewing leases that were originally signed in 2011, a relatively low pointin the credit cycle. Therefore, while oil weakness has hurt some tenants' balancesheets, they remain improved from five years ago.

Hanigansaid it appears that the price of oil will continue to edge higher considering U.S.production has been slashed. Given some improving balance sheets and stronger oilprices, Hanigan said the amount of criticized and classified energy loans couldbe at a peak.

"Balancesheets are getting restored either through better cash flows and then not puttingit into drilling yet, and/or private equity coming in."