Prosperity Bancshares (PB) Rides on Buyouts Amid Margin Pressure
Prosperity Bancshares’ PB is well poised to grow organically and inorganically, driven by a solid balance sheet and liquidity position. However, mounting expenses, margin pressure and weakness in the mortgage business are near-term headwinds.
Prosperity Bancshares’ organic growth strategy is impressive. While the company’s net revenues declined in 2021, it witnessed a compound annual growth rate (CAGR) of 11.5% over the four-year period between 2018 and 2022. The upward trend continued in the first half of 2023. The company has also been able to improve its deposit mix. Driven by decent loan demand, a solid deposit mix and a rise in fee income, the company’s top-line growth is expected to continue.
Acquisitions are other significant contributors to the company’s top-line growth. Since 1998, it has completed more than 30 deals. These deals have helped the company boost the top and the bottom line. In May 2023, the company acquired First Bancshares of Texas, while in October 2022, the company signed a deal to acquire Lone Star State Bancshares (expected to close in the third quarter of 2023). Given a strong balance sheet position, the company actively seeks acquisitions as part of its expansion strategy.
However, pressure on the net interest margin (NIM) is a concern for Prosperity Bancshares. Though the company’s NIM increased to 3.64% in 2020 and 3.32% in 2019, the same witnessed a decline before that. The downward trend continued in 2021 and 2022, when NIM declined to 3.14% and 3.00%, respectively. In the first half of 2023, the company’s NIM declined to 2.83%. Despite the high interest rate environment, the metric is not expected to improve significantly in the quarters ahead due to funding cost pressure.
Also, Prosperity Bancshares’ expenses have been elevated. The company’s non-interest expenses witnessed a five-year (ended 2022) CAGR of 10.4%, with the upward trend persisting in the first six months of 2023. As the company continues to invest in franchises, grow through acquisitions and stay under inflationary pressure, overall costs are expected to be elevated.
Ambiguity about the performance of Prosperity Bancshares’ mortgage banking business is another headwind. Higher mortgage rates have been adversely impacting mortgage origination volumes and refinancing activities. Mortgage income plunged in 2021, with the downtrend persisting in 2022 and the first six months of 2023. Thus, the company’s mortgage banking business’s performance is expected to get hurt in the quarters ahead.
Shares of this Zacks Rank #3 (Hold) company have lost 17.8% in the past year compared with the industry's decline of 21.4%.
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Banks to Consider
A couple of better-ranked stocks from the banking space are PCB Bancorp PCB and The Bancorp TBBK.
PCB Bancorp currently carries a Zacks Rank #2 (Buy). Earnings estimates for 2023 have been revised 3.8% upward over the past 30 days. In the past six months, PCB’s shares have declined 11.3%. You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.
Earnings estimates for The Bancorp have been revised 1.7% north for 2023 over the past 30 days. Shares of TBBK have rallied 15.3% in the past six months. Currently, the company carries a Zacks Rank #2.
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