Prosperity Bancshares Drops Despite Q2 Earnings Beat

Shares of Prosperity Bancshares Inc. (PB) went down 1.1% following its second-quarter 2014 earnings release on Friday before the opening bell. Earnings per share came in at $1.08 surpassing the Zacks Consensus Estimate of $1.02. Moreover, earnings per share escalated 21.3% from the year-ago quarter.

The negative market sentiment in spite of strong earnings results could have been triggered by the continually mounting expenses as well nonperforming assets due to mergers and acquisitions (M&As) by the company.

Strong results were driven by increase in revenue, partly offset by higher provision for credit losses and elevating expenses. Solid growth in loans and deposits and improved profitability ratios were the positives while deterioration in capital ratios were among the negatives.

Prosperity Bancshares’ net income came in at $75.5 million, up 40.2% from the prior-year quarter. Results comprised of a one-time pre-tax merger expenses of $2.0 million related to the F&M Bancorp acquisition.

Prosperity Bancshares - Earnings Surprise | FindTheBest

Performance Details

Prosperity Bancshares’ total revenue grew 42.7% year over year to $220.5 million. Moreover, it exceeded the Zacks Consensus Estimate of $195.0 million.

Net interest income (excluding provision for credit losses) rose 46.6% year over year to $174.1 million. The upswing was mainly owing to a 30.7% rise in average interest-earning assets. Moreover, net interest margin inched up 40 basis points (bps) year over year to 3.83%.

Non-interest income totaled $34.0 million, up 34.5% year over year. The rise was primarily driven by higher fee and services charges as well as trust and brokerage income led by the recent M&As. However, this was partially offset by a reduction in mortgage income, credit card, debit card and ATM card income.

Non-interest expenses came in at $88.7 million, up 44.7% from the year-ago quarter. The surge was triggered by additional expenses related to the acquisition of FVNB Corp and F&M Bancorp.

Efficiency ratio increased 39 bps year over year to 42.9%. A rise in efficiency ratio indicates lower profitability.

As of Jun 30, 2014, total loans summed $9.3 billion, growing 50.8% from Jun 30, 2013. Total deposits climbed 38.2% year over year to $17.3 billion. The growth in loans and deposits was largely induced by the recent acquisitions.

Asset Quality

Prosperity Bancshares’ asset quality continued to reflect mixed results. The ratio of allowance for credit losses to total loans plunged 12 bps year over year to 0.79%. Moreover, net charge-offs totaled $0.2 million, substantially down from $1.4 million in the year-ago quarter.

However, provision for credit losses increased significantly to $6.3 million from $2.550 million in the prior-year quarter. Total nonperforming assets amounted to $28.5 million, up 91.9% year over year.

Profitability and Capital Ratios

As of Jun 30, 2014, Tier-1 risk-based capital ratio was 12.5%, compared with 14.15% as of Jun 30, 2013. Moreover, total risk-based capital ratio came in at 13.18%, down from 14.91% at the end of the year-ago quarter.

The annualized return on average assets rose 9 bps year over year to 1.42% as of Jun 30, 2014. Similarly, annualized return on common equity came in at 9.75%, up 48 bps from the prior-year quarter.

Our Viewpoint

Prosperity Bancshares’ top line will continue to improve propelled by the synergies from the M&As. Moreover, the company’s focus on inorganic growth along with strong balance sheet will assist its overall expansion going forward.

However, struggling credit quality and mounting expenses remain great cause of concern. Also, the low interest rate scenario and stringent regulatory requirements will likely keep the company’s financials under pressure in the coming period.

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

Performance of Other Western Banks

PrivateBancorp, Inc. (PVTB) beat the Zacks Consensus Estimate driven by an increase in net interest and non interest income, and fall in provision for loan and covered loan losses, and lower non-interest expenses.

Associated Banc-Corp (ASBC) came in line with the Zacks Consensus Estimate on the back of rise in net interest income and fall in expenses, offset by lower non-interest income and higher provisions.

On the other hand, Umpqua Holdings Corporation’s (UMPQ) earnings lagged the Zacks Consensus Estimate due to a fall in net income as well as non-interest income and higher non-interest expenses.

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