After my father-in-law passed away, we inherited some shares in Prosperity Bancshares (NYSE:PB).
He had helped found a bank in his small hometown in Texas. That bank was sold to Prosperity. He stuck the shares in his portfolio and distributed them to his offspring. It was no big deal.
We used the money to help finance the kids' college educations. Both will come out with degrees, debt free. In part as a tribute to my father-in-law, and in part in thanks for what the bank's shares had done for us, I bought some for my own retirement account.
Since then, they have more than doubled in value.
What's going on? Oil, my friend. Black gold, Texas tea.
Prosperity is basically a roll-up of literally dozens of small-town Texas banks, built over the last decade by David Zalman, who started his career as a cashier in El Campo. Prosperity is still based in El Campo, a small town between Houston and Victoria along US 59, which the state wants to turn into Interstate 69. There is nothing fancy about the way Prosperity Bank operates. Their business is selling money for more than they pay to acquire it.
The shale oil boom, however, struck in many areas that are served by the bank. When landowners in those areas signed leases, or when their kids got jobs as a result of the boom, they put that money into their local Prosperity Bank. When they decided to buy a new pick-up truck, or add on to their homes due to their new prosperity, they usually did it through Prosperity. It has a dominant position in these small towns. It has the goodwill of the old local bank, and its competitors - when they bother to show up - tend to be big national banks lacking that goodwill.
Zalman has put the bank's wealth into buying other banks. Just this month the company bought FVNB, or First Victoria National Bank, which has 34 offices including 12 in Houston, where the bank is achieving almost as strong a position as a community bank as it has in small town Texas. Prosperity is also closing on a bank in Oklahoma. The bank switched its listing from the NASDAQ, where it was PRSP, to the New York Stock Exchange, with the symbol PB, at the end of 2011.
For the third quarter the bank's deposits grew by $1.5 billion, its loan portfolio grew 21.7% to over $1.1 billion, and its "troubled assets" ratio is consistently below 2.5%, compared with a current national average of about 10%. Deposit Accounts gives it a rating of A+.
Prosperity's fate is closely tied to that of the Texas oil boom. You might almost see it as a canary in the coal mine for that boom, as loans are bound to start going bad before the boom peters out.
Fracking is not controversial in Texas, despite occasional reports of tap water catching on fire because natural gas has seeped through cracks in the Earth created by the practice.
Still, there are two ways in which this can end. Either fracking expands dramatically on a global basis so that an oil glut causes prices to plummet. Alternatively, high depletion rates can cause costs to skyrocket while the amount of oil and gas recovered plummets.
Both will happen in time.
Meanwhile, Prosperity prospers, and so do its shareholders. I currently have 235 shares, mostly acquired in 2010, and with dividends reinvested that stake has grown almost over 50% in value. I'm going to let it ride, and if you like banks that make money, you might consider picking some up yourself. Then watch oil prices carefully.
Disclosure: I am long PB. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.