Prosperity Bancshares Falls Despite Q1 Earnings Beat - Analyst Blog

Share price of Prosperity Bancshares Inc. 's ( PB ) fell nearly 1.0% following its first-quarter 2014 earnings release on Wednesday before the opening bell. Earnings per share came in at $1.01, which surpassed the Zacks Consensus Estimate of 98 cents and compared favorably with 86 cents earned in the year-ago quarter.

Though credit quality was mixed during the quarter, nonperforming assets continued to increase mainly due to further mergers and acquisitions (M&As) by the company. This could have possibly generated the negative market sentiment following the earnings release.

Better-than-expected revenues were driven by increase in interest income and non-interest income, as well as lower provision for credit losses. Moreover, healthy growth in loans and deposits, and improved profitability ratios were tailwinds. Nevertheless, higher expenses and deterioration in capital ratios were the headwinds.

Prosperity Bancshares' net income came in at $67.1 million, up 36.2% from $49.3 million in the prior-year quarter.

Performance Details

Prosperity Bancshares' total revenue in the quarter was $182.9 million, up 29.2% year over year. Moreover, it surpassed the Zacks Consensus Estimate of $172.0 million.

Net interest income rose 32.9% year over year to $143.7 million. The increase was primarily due to a 25.1% rise in average interest-earning assets. Moreover, net interest margin was up 21 basis points (bps) from the prior-year quarter to 3.57%.

Non-interest income increased 22.0% year over year to $28.6 million. The rise was primarily driven by higher fee and services charges led by the recent M&As and gains from sale of certain assets during the quarter. These positives were partially offset by a fall in mortgage income, credit card, debit card and ATM card income.

Non-interest expenses were $71.0 million, up 27.4% from the prior-year quarter. The rise was mainly due to additional expenses related to the acquisition of Coppermark Bancshares, Inc. and FVNB Corp.

Efficiency ratio improved to 42.04% from 42.40% in the prior-year quarter. A fall in efficiency ratio indicates rise in profitability.

As of Mar 31, 2014, total loans were $7.8 billion, rising 47.3% from Mar 31, 2013. Total deposits increased 32.0% year over year to $15.5 billion.

Asset Quality

Prosperity Bancshares' asset quality was a mixed bag in the quarter. The ratio of allowance for credit losses to total loans declined 18 bps year over year to 0.87%. Moreover, provision for credit losses decreased 78.6% to $0.6 million from the prior-year quarter.

However, net charge-offs were $0.8 million, up significantly from $0.3 million in the year-ago quarter. Total nonperforming assets were $18.7 million, up 3.1% from the year-ago period.

Profitability and Capital Ratios

While Prosperity Bancshares' capital ratios deteriorated, its profitability ratios improved during the quarter. As of Mar 31, 2014, Tier-1 risk-based capital ratio was 13.85%, compared with 14.77% as of Mar 31, 2013. Moreover, total risk-based capital ratio came in at 14.59%, down from 15.61% at the end of the year-ago quarter.

The annualized return on average assets was 1.43% as of Mar 31, 2014, up from 1.33% as of Mar 31, 2013. Similarly, annualized return on common equity came in at 9.52%, up from 9.23% as of Mar 31, 2013.

Our Viewpoint

Synergies from the recent M&As will continue to boost Prosperity Bancshares' top line in the forthcoming quarters. Moreover, the company's strong balance sheet is expected to bode well for its overall expansion going forward.

However, deterioration in credit quality and rising expenses keep us skeptical. Further, the low interest rate scenario and stringent regulatory requirements will likely weigh on the company's financials in the quarters ahead.

Currently, Prosperity Bancshares has a Zacks Rank #2 (Buy).

Performance of Other Banks

PrivateBancorp, Inc. ( PVTB ) surpassed the Zacks Consensus Estimate driven by growth net interest income, fall in provision for credit losses and lower non-interest expenses.

Associated Banc-Corp ( ASBC ) beat the Zacks Consensus Estimate on the back of rise in interest income and prudent cost control.

On the other hand, Umpqua Holdings Corporation 's ( UMPQ ) earnings lagged the Zacks Consensus Estimate due to increased non-interest expenses and lower non-interest income.

ASSOC BANC CORP (ASBC): Free Stock Analysis Report

PROSPERITY BCSH (PB): Free Stock Analysis Report

PRIVATEBANCORP (PVTB): Free Stock Analysis Report

UMPQUA HLDGS CP (UMPQ): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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