Prosperity Bancshares (Nasdaq:PRSP) reported solid financial results and strong loan growth in its most recent quarter as the bank was buoyed by a strong economy in its service area.
TUTORIAL: Mergers and Acquisitions
Prosperity Bancshares is a bank holding company that owns Prosperity Bank, which has $9.5 billion in assets and operates 175 branches in Texas. The bank has grown rapidly over the last decade and has acquired 20 other banks since 1998.
Prosperity Bancshares has benefited from the better performance of the Texas economy relative to the rest of the United States, and has managed to navigate through the recession and financial crisis better than its peers.
Other banks have been trying to increase its exposure to Texas. Comerica (NYSE:CMA) recently announced the purchase of Sterling Bancshares (Nasdaq:SBIB), a bank with $5.2 billion in assets that operates in the major cities in Texas.
Prosperity Bancshares reported net income of $33.9 million, or 72 cents per diluted share in the first quarter of 2011. This was a 9% increase over the same quarter in 2010.
Prosperity Bancshares reported strong loan growth in the first quarter of 2011, something that JP Morgan (NYSE:JPM) and many other larger banks were unable to do. The bank grew loans at an annualized rate of 8.6% on a sequential basis, excluding loans acquired in two acquisitions. This continues a historical record of loan growth that the bank reported from 2004 to 2008, growth that paused during the recent recession.
Deposits also grew rapidly during the quarter and totaled $7.81 billion on March 31, 2011, up from $7.45 billion in the previous quarter. This rate of growth was 4.9%, or 19.4% on an annualized basis.
One advantage that Prosperity Bancshares enjoys compared to its peers is the high percentage of deposits that are non interest bearing. The bank reported $1.7 billion in non interest bearing deposits at the end of the first quarter of 2011. This represented 22% of its total deposit base, and helps lower the banks total cost of funding.
Prosperity Bancshares reported excellent asset quality in the quarter and had a total of $12.9 million in non-performing assets. More than 50% of these non-performing assets were in the construction area, where the bank has 14% of its loan portfolio concentrated.
Prosperity Bancshares reported a tangible book value of $11.31 per share as of the end of the first quarter of 2011. (For related reading, see Digging Into Book Value) This represented growth on both a sequential and year over year basis as shown in the table below.
|March 2011||March 2010||December 2010|
|Tangible Book Value||$ 11.31||$ 9.76||$ 10.70|
Prosperity Bancshares is selling at around $44 per share, or just under four times its tangible book value. This is an expensive valuation for a bank in the current environment, although not unusual for Prosperity Bancshares as investors have typically paid up for the company due to its higher growth characteristics.
Prosperity Bancshares has historically grown its tangible book value at a rapid pace, increasing it from the $4.96 per share level at the end of 2004. The bank has been helped with this growth through a large number of acquisitions, including eight since 2004.
Prosperity Bancshares turned in a good quarter with strong loan growth, making the bank the envy of many of its peers. The bank was helped by having its operations in Texas, which has done better than most other areas during the recession and financial crisis.
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