I thought Texas-based Prosperity Bancshares (NYSE:PB) looked like an interesting value back in late January of 2015, and the shares are up more than 10% since then but it has not been a smooth ride. Like other Texas banks, including Cullen/Frost (NYSE:CFR), Texas Capital (NASDAQ:TCBI), International Bancshares (NASDAQ:IBOC), and Green Bancorp (NASDAQ:GNBC), Prosperity shares had a rough time from late 2015 into early 2016 on worries that the steep decline in energy prices would undermine the bank's credit quality and loan growth in Texas and Oklahoma.
There are signs of weakness that shouldn't be ignored, including rising unemployment and shaky commercial real estate numbers in Houston, but Prosperity continues to have a strong credit quality profile, a good efficiency ratio, and a very disciplined overall approach. On the other hand, loan growth is weak and I have more doubts now about Prosperity's ability to grow outside of M&A. I believe that Prosperity can post mid-to-high single-digit earnings growth from here (equating to a low double-digit ROE down the road), but that no longer supports a compelling buy thesis.
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Can Prosperity Bancshares Build Value Outside Of M&A?