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Banks in oil patch try to shoot down bears, downplay risk of contagion

Bankersin oil-rich markets acknowledge there is stress in their energy loanportfolios, but they are holding firm that they have not seen contagion spreadto other areas yet.

Oilprices have remained under pressure for nearly two years, falling close to 60%since their peak in the summer of 2014. Banks in the oil patch have seen theirstock multiples erode during the same time frame as fears over their exposureto the energy sector and the possibility of contagion spreading to their localeconomies have weighed on investors' minds. While the recent rebound andstabilization in oil prices have offered those banks some relief, investorsremain skeptical that energy-related losses are in the rearview mirror andcontinue to wait for tail risk to emerge.

Thismuch was clear during first-quarter earnings season and at the Gulf South BankConference on May 2 and 3, when analysts and investors asked many banks if theyhad seen stress in their energy loan portfolios expand to other segments of thebalance sheet. Bankers said there are some pockets of weakness in Houston andmore energy-centric markets in the western and southern parts of Texas, butexecutives said they have not seen any signs of contagion spreading beyondtheir energy loan portfolios, at least yet.

"Therehasn't been any contagion to speak of yet," President and CEOJohn Hairston said at the conference. He added that the company's Baton Rouge,La., and New Orleans markets are performing particularly strong, noting thatthe latter is far more diversified today than it was during the oil-ledrecession in the 1980s.

Executivesfrom Houston-based Green BancorpInc. and Dallas-based PlainsCapital Corp., a unit of , agreed, sayingat the Gulf South event that they have not seen any hints of contagionspreading from energy so far.

Chairman andCEO James "Dan" Rollins III said at the conference that he has notseen much negative movement in the company's Texas markets. Like other bankers,he said Dallas and Austin, Texas, largely have not been impacted by weaker oilprices, while noting that he has seen some weakness and tougher real estatemarkets in Houston.

BarryHarvey, chief credit officer at TrustmarkCorp., said his company had not seen contagion spread in itsmarkets yet either. However, he said Trustmark is placing close attention torent concessions or any signs of hesitancy among investors to move forward withexisting projects.

Somebankers operating in oil-rich areas even expressed surprise that creditproblems had not spread from the energy sector to other lending segments suchas commercial real estate. C. Keith Cargill, president and CEO of Dallas-basedTexas Capital BancsharesInc., said that even though the Houston economy is more diversifiedtoday than it was 20 years ago, he would have expected the prolonged decline inoil prices to more negatively impact commercial real estate. He said the officemarket in Houston has held up better than expected, and noted that industrialand retail real estate credits remain strong as ever.

Theexecutive said Texas-based banks deserve some credit for lending much moreprudently in recent years than in past downturns, limiting advance rates oncommercial real estate credits.

"Candidly,we've been a bit surprised, too," Cargill said at the Gulf Southconference. "I think Houston has shown tremendous resilience."

OtherTexas- and Oklahoma-based lenders told similar stories on their recentfirst-quarter earnings conference calls. Cullen/Frost Bankers Inc. Chairman and CEO Phillip Greensaid on his company's first-quarter call that the company has seen verylittle spillover fromenergy weakness into other sectors in Texas.

"We'renot seeing much, if any, contagion in the portfolio right now," Chairmanand CEO Phillip Green said on the call. "You've got issues in the office towers. You've got subleases thereincreasing. There is some slowing in multifamily. Retail is extremely strong,still trying to catch up; single-family is doing well."

executives also noted on their company's first-quarter call that the Houston multifamily andoffice markets have experienced some weakness, and acknowledged that subleasespace has increased in the area. They said there is 9.4 million square feet ofsublease office space available in Houston right now, compared to the mostrecent norm of 3.3 million square feet of space. There is approximately 3.7million square feet of industrial space available for sublease in Houston,compared to the historical mean of 2.4 million square feet, they said.

Eventhough there is more sublease space available, Prosperity executives saidlandlords are finding other businesses that previously could not affordhigher-priced leases to occupy the space at discounted rates.  

"Thepetrochemical, medical and hospitality industries have taken up a lot of slackin the Houston and South Texas areas. I'm still amazed at the resiliency in themarkets we serve," Prosperity Chairman and CEO David Zalman said on the call.

Evenlenders with higher energy loan concentrations and significant exposure to notonly Texas but Oklahoma as well have downplayed the risk of contagion.BOK Financial Corp.,which reported inthe first quarter that more than 70% of its loan portfolio resided in Texas andOklahoma, said it has seen little spillover from the energy downturn in itsmarkets, with the exception of early signs of softness in the Houston realestate market, where shadow office inventory and price concessions on luxurymultifamily housing have emerged.

"Whenwe meet with investors from outside the region, they are surprised to hearthis, as well as skeptical. To be honest, we would have expected to seemore," BOK President and CEO Steven Bradshaw said on the call, accordingto a transcript.

Still,while BOK Financial and others seem optimistic at this point, they acknowledgethat the longer oil prices remain under pressure, the greater the risk ofcontagion becomes. Energy companies have made considerable cuts to theircapital expenditure plans already and are unlikely to increase spending nowdespite the recent rebound in oil prices, bankers said. executives said at theGulf South event that exploration and production companies are operating moreefficiently now and they expect them to hold the line on capital expendituresgoing forward.

Manyenergy companies have already begun some significant restructuring, and more isexpected to come. F. Scott Dueser, chairman, president and CEO of Abilene,Texas-based First FinancialBankshares Inc., said at the Gulf South conference that he grew upin the oil and gas business, noting that his father was a petroleum engineer.The executive said his family still owns his father's company, which he said isnot immune to the downturn either. Dueser said that company has been forced tolay off employees and restructure just like every other company in the energyspace.

Hesaid lower oil prices have hurt First Financial's markets more than they havehelped, highlighting that cutbacks from large oil and gas firms have offset anybenefit from consumers having more cash in their pockets. He said the Texaseconomy has still held up fairly well, noting that oil and gas firms madeplenty of money before the plunge in the oil prices and now have more capitalto withstand the current downturn than they did during the 1980s.

"Ihoped I'd never have to live through another cycle, but we're here,"Dueser said.