Prosperity Bancshares Up on Earnings Beat, Revenues Fall

Shares of Prosperity Bancshares Inc. PB gained nearly 9% after the company reported fourth-quarter 2015 results on Wednesday, before the market opened. Earnings per share of $1.01 surpassed the Zacks Consensus Estimate of 99 cents. However, the figure was 10% below the year-ago quarter tally. Earnings included purchase accounting adjustments for both periods.

For 2015, earnings per share of $4.09 outpaced the Zacks Consensus Estimate of $4.07. However, the bottom line came in 5% below the prior year figure.

Shares of Prosperity Bancshares gained on earnings beat, which came on the back of lower expenses, higher non-interest income and continued inorganic growth efforts of the company. Further, the announcement of a share repurchase program also boosted investors’ confidence in the stock. However, pressurized revenues remained a major headwind.

Prosperity Bancshares’ net income fell 10% year over year to $70.5 million.  For 2015, net income declined 4% year over year to $286.6 million.

Performance Details

Net revenue decreased 11% from the prior-year quarter to $183.5 million. Also, it lagged the Zacks Consensus Estimate of $188.1 million.

For 2015, net revenue amounted to $751.3 million, down 5% from the prior year. Moreover, it missed the Zacks Consensus Estimate of $775.0 million.

Net interest income (excluding provision for credit losses) plunged 14% year over year to $153.3 million. The reduction was mainly owing to a decrease in loan discount accretion. Further, net interest margin, on a tax equivalent basis, declined 65 basis points (bps) year over year to 3.24%.

Non-interest income was up 3% year over year to $30.3 million. The rise was primarily led by net gain on sale of assets and other income.

Non-interest expenses declined 7% year over year to $77.9 million. The reduction was largely triggered by a fall in regulatory assessments, salary and benefits expense and net occupancy and equipment expense.

Efficiency ratio was 42.58%, up from 40.78% in the prior-year quarter. A rise in efficiency ratio indicates lower profitability.

As of Dec 31, 2015, total loans summed $9.4 billion, up 2% from Dec 31, 2014. Total deposits remained almost stable year over year at $17.7 billion.

Asset Quality

Prosperity Bancshares’ asset quality reflected a mixed bag during the quarter. The ratio of allowance for credit losses to total loans inched down 1 bps year over year to 0.86%. Moreover, net charge-offs totaled $0.1 million, down substantially from $3.2 million in the year-ago quarter.

Also, provision for credit losses decreased significantly year over year to $0.5 million. However, total nonperforming assets amounted to $43.5 million, up 18% from the prior-year quarter.

Capital and Profitability Ratios

As of Dec 31, 2015, Tier-1 risk-based capital ratio came in at 13.55% compared with 13.80% as of Dec 31, 2014. Moreover, total risk-based capital ratio stood at 14.25%, down from 14.56% at the end of the year-ago quarter.

Moreover, common equity tier 1 capital ratio (under Basel III, effective Jan 1, 2015) was 13.55% as of Dec 31, 2015.

The annualized return on average assets fell 18 bps year over year to 1.30% as of Dec 31, 2015. Similarly, annualized return on common equity stood at 8.17%, down 153 bps from the prior-year quarter.

Share Repurchase Announcement

Prosperity Bancshares announced the authorization of a stock repurchase program under which up to 5% or approximately 3.54 million shares of its outstanding stock may be acquired over the next twelve months at the discretion of management.

Our Viewpoint

We believe Prosperity Bancshares’ sturdy balance sheet makes it well positioned for future expansion through acquisitions. Also, the company’s efforts for organic and inorganic growth as well as yearly dividend hikes remain impressive. However, a concentrated loan portfolio and stringent regulations are expected to weigh on profitability in the near term.

Currently, Prosperity Bancshares has a Zacks Rank #4 (Sell).

Performance of Other Banks

Zions Bancorporation ZION reported fourth-quarter 2015 earnings of 43 cents, which surpassed the Zacks Consensus Estimate of 41 cents. The better-than-expected quarterly results were driven by improved net interest income and a decline in operating expenses, partly offset by elevated provisions for loan losses and lower non-interest income.

SVB Financial Group SIVB reported fourth-quarter 2015 adjusted earnings per share of $1.68, beating the Zacks Consensus Estimate of $1.52. Higher net interest income (NII), supported by appreciable growth in loans and deposits, contributed to the better-than-expected results. However, lower non-interest income and elevated non-interest expense were the undermining factors.

However, Westamerica Bancorp.’s WABC fourth-quarter 2015 earnings of 57 cents per share lagged the Zacks Consensus Estimate of 59 cents. The lower-than-expected quarterly results were the result of a decline in revenues. Further, decreasing loan balance was an undermining factor. However, a fall in operating expense was a tailwind.

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