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Loan Growth Aids Prosperity Bancshares, Mortgage Fees a Woe

Prosperity Bancshares’ PB profitability has primarily been supported by higher interest rates, steady loan growth, inorganic expansion efforts and improving asset quality. Further, enhanced capital deployment activities indicate a strong balance sheet position of the company. However, mounting operating expenses and dismal mortgage business remain major concerns.

Prosperity Bancshares has been recording a consistent improvement in loans, which, coupled with improving interest rates and strategic acquisitions will support the bank’s revenues. Although its top line declined at a three-year (2015-2017) CAGR of 1.2%, the trend has reversed in the first nine months of 2018. This uptrend is expected to continue in the quarters ahead.

Improving credit quality is another positive for Prosperity Bancshares. Net charge-off rates and allowance for credit losses to total loans ratio have been declining over the past few years. While asset quality deteriorated in 2016 mainly due to a stressed energy portfolio, rebound in oil prices and improving economic conditions led to an improvement in 2017. The momentum is expected to continue in the upcoming quarters as well.

However, disappointing mortgage banking business is a cause of concern for Prosperity Bancshares. Higher interest rates have lowered origination volume and led to a fall in mortgage banking fees in first nine months of 2018. This trend is likely to continue in the near term as well, with assumption thatthe operating backdrop is not expected to change much.

Further, Prosperity Bancshares’ expenses, which have remained toward the higher side, are expected to rise further, given its investment in franchise and inorganic growth efforts. Management expects quarterly expenses in the $82-$83 million range, going forward.

Analysts seem to have a bearish stance on Prosperity Bancshares. The stock has been witnessing downward estimate revisions. Over the past 60 days, the Zacks Consensus Estimate for earnings has declined nearly 1% for 2018 and 1.6% for 2019. The stock currently carries a Zacks Rank #3 (Hold).

So far this year, the stock has lost 1.5% compared with 13% decline of the industry it belongs to.

Stocks to Consider

Some stocks worth a look in the finance space are People's Utah Bancorp PUB, Webster Financial Corporation WBS and Ares Capital Corporation ARCC, each carrying a Zacks Rank of 2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

People's Utah Bancorp’s earnings estimates for the current year have been marginally revised upward over the past 60 days. Also, its shares have gained 5.8% so far this year.

Webster Financial’s earnings estimates for the current year have been revised 3.3% upward over the past 60 days. So far this year, its shares have gained 5%.

Ares Capital’s earnings estimates for 2018 have moved up 2.5% over the past 60 days. Its share price has rallied 7.4% so far this year.

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