Prosperity Bancshares Inc.'s (PB) fourth quarter 2012 adjusted earnings of 85 cents per share exceeded the Zacks Consensus Estimate by a cent. The results also compares favorably with the prior-year quarter earnings of 77 cents.

Better-than-expected quarterly results came on the back of increased top line, partially offset by higher operating expenses. Moreover, loan and deposit balances improved in the quarter. Further, capital ratios were stable, while credit quality was a mixed bag.

Net income in the fourth quarter came in at $48.3 million compared with $36.4 million in the year-ago period.

In 2012, earnings stood at $3.23 per share, surpassing the Zacks Consensus Estimate of $3.21. This also climbed 7.3% from $3.01 recorded in 2011.

Performance in Detail

Prosperity's total revenue in the reported quarter came in at $141.8 million, soaring 36.7% from $103.723 million in the prior-year quarter.  Moreover, this was ahead of the Zacks Consensus Estimate of $130.0 million.

In 2012, total revenue was $495.4 million, jumping 15.8% year over year. This also surpassed the Zacks Consensus Estimate of $456.0 million.

Net interest income surged 35.2% year over year to $108.3 million. However, net interest margin dipped 29 basis points from the prior-year quarter to 3.53%.

Non-interest income augmented 71.4% year over year to $24.1 million. The increase was primarily due to higher non-sufficient funds fees, debit card and ATM card income, service charges on deposit accounts, trust, mortgage origination and other income as a result of the acquisition of American State Financial Corporation.

Non-interest expense reached $57.0 million, up 48.4% from $38.4 million in the prior-year quarter. The rise was mainly a result of the acquisition of American State Financial.

The efficiency ratio climbed to 42.95% from 40.77% in the prior-year quarter. The rise in efficiency ratio indicates deterioration in profitability.

As of Dec 31, 2012, total loans were $5.2 billion, rising 37.6% from $3.8 billion as of Dec 31, 2011. Total deposits expanded 44.4% year over year to $11.6 billion. The rise in both loans and deposits was mainly driven by acquired loans.

Asset Quality

Asset quality witnessed mixed movements in the reported quarter. The ratio of allowance for credit losses to total loans dipped to 1.01% from 1.37% in the prior-year quarter. Further, net charge offs were $1.9 million, down 7.5% year over year.  

However, total nonperforming assets stood at $13.0 million, up 8.0% from the year-ago period. Likewise, provision for credit losses increased significantly from the prior-year quarter to $3.6 million.

Profitability and Capital Ratios

Prosperity's capital and profitability ratios exhibited a modestly cautious approach in 2012. As of Dec 31, 2012, tier-1 risk-based capital ratio was 14.40% compared with 15.90% as of Dec 31, 2011. Moreover, total risk-based capital ratio came in at 15.22% as against 17.09% in the last year.

The annualized return on average assets was 1.36% as of Dec 31, 2012 compared with 1.50% as of Dec 31, 2011. Similarly, annualized return on common equity came in at 9.28%, down from 9.35% as of Dec 31, 2011.

Acquisitions

In Jan 2013, Prosperity concluded the acquisition of East Texas Financial Services Inc. and its fully-owned subsidiary First Federal Bank Texas. Upon acquisition, the company took over total assets worth $191.2 million, total loans of $139.2 million and total deposits of $114.4 million.

In Dec 2012, in an effort to expand in the state of Oklahoma, Prosperity signed a definitive merger deal to acquire Coppermark Bancshares, Inc. and the latter's fully-owned subsidiary Coppermark Bank. According to the agreement, the company will issue 3,258,845 shares of its common stock and pay $60.0 million in cash for Coppermark's outstanding capital stock. The acquisition is anticipated to be completed during the late first quarter or early second quarter of this year.

Our Viewpoint

We are quite impressed with Prosperity's acquisition spree and decent organic growth. Moreover, the company's constantly improving credit quality and strong balance sheet are expected to be beneficial to its overall expansion in the future.

Yet, we are concerned about the impacts of the prevailing low interest rate environment, sluggish economic growth, significant exposure to real estate loan portfolio and stringent regulatory landscape on the company's financials in the subsequent quarters.

Another south-west bank, BOK Financial Corporation (BOKF), will report its fourth-quarter earnings on Jan 30, 2013.

Prosperity currently retains a Zacks Rank #2 (Buy). Other south-west banks that are worth considering include First Financial Bankshares Inc. (FFIN) and Texas Capital BancShares Inc. (TCBI), both carrying a Zacks Rank #2 (Buy) and are worth considering.
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Tickers in this Article: PB, TCBI, BOKF, FFIN

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