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Prosperity downplays risk of contagion spreading from falling oil prices

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Prosperity downplays risk of contagion spreading from falling oil prices

Despitethe considerable decline in oil prices, Prosperity Bancshares Inc. executives said that theTexas economy remains strong and likely will remain resilient now that priceshave stabilized.

Oil priceshave fallen nearly 60% since their peak in the summer of 2014, but haverebounded to the mid $40s after falling below $30 a barrel early in 2016. Oilprices have traded around the $40 level for much of the last month. DavidZalman, chairman and CEO of Houston-based Prosperity, said on a conference callto discuss the company's first-quarter results that the rebound in oil priceshave stabilized the market. He said if oil prices stay around $45 a barrel,that level likely would prevent contagion from spreading to lending segmentsoutside of direct loans to oil and gas companies.

Prosperityrecorded a loss in three credits in the first quarter from acquired banks,including two energy credits that resulted in total charge-offs of $6.0million. The company's provision for credit losses jumped to $14.0 million from$500,000 in the prior quarter and $1.3 million a year earlier.

Netincome available to common shareholders in the first quarter was $69.0 million,or 98 cents per share, compared to $73.6 million, or $1.05 per share in theyear-ago period.

TheS&P Capital IQ consensus estimate for normalized EPS for the company's 2016first-quarter was 95 cents.

Zalmansaid on the call that he believes the provision Prosperity recorded in thefirst quarter was "extraordinarily high." The executive acknowledgedthat the company would like to see oil prices rise to $55 to $60, highlightingthat many energy companies can make "pretty good money" at thoselevels. He further said that some energy-centric markets such as Houston,Midland/Odessa and areas in South Texas have been impacted more by falling oilprices than other areas. He said the Houston multifamily and office marketshave experienced some weakness, but noted that the company does not have anyexposure to office towers in Houston.

H.E."Tim" Timanus Jr., vice chairman at Prosperity, noted on the callthat vacancy rates in Houston remain reasonable. He said the current officevacancy rate in Houston is 14%, but said there is 9.4 million square feet ofsublease office space available right now, compared to the most recent norm of3.3 million square feet of space. Timanus said the current industrial vacancyrate in Houston is 5% and approximately 3.7 million square feet of space isavailable for sublease, compared to the historical mean of 2.4 million squarefeet.

"Thegood news is that tenants are paying their rent, so it's not a disastersituation," Timanus said on the call.  

Zalmansaid that even though more sublease space is becoming available, landlords arefinding other businesses that previously could not afford higher-priced leasesto occupy the space at discounted rates. He further noted that population andemployment growth in a number of Texas markets are still outperforming and"outshining" the rest of the U.S. He said the Houston market evencontinues to produce stronger population growth than most other metro areas.

"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," Zalman said on the call.