It has been about a month since the last earnings report for Prosperity Bancshares (PB). Shares have lost about 0.6% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is Prosperity Bancshares due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.
Prosperity Bancshares Q2 Earnings Beat, Revenues Down Y/Y
Prosperity Bancshares Inc.’s second-quarter 2020 adjusted earnings per share of $1.25 surpassed the Zacks Consensus Estimate of $1.09. However, the bottom line decreased 10.1% from the first quarter.
The results were primarily driven by an increase in net interest income. The company’s balance sheet position remained strong during the quarter. However, higher expenses, decline in fee income and a drastic jump in provision for credit losses were the undermining factors.
After considering merger-related charges and income tax benefit, net income available to common shareholders was $130.9 million, which was relatively stable on a sequential basis.
Revenues Down, Expenses Rise
Net revenues were $284.6 million, down 2% from the prior quarter. Nonetheless, the figure beat the Zacks Consensus Estimate of $279 million.
Net interest income was $259 million, up 1.1% from the first quarter. The increase was primarily driven by lower interest expense, partially offset by a decrease in loan discount accretion and interest income on securities.
Net interest margin, on a tax-equivalent basis, declined 12 basis points (bps) sequentially to 3.69%.
Non-interest income plunged 25.3% year over year to $25.7 million. The fall was mainly due to a loss on write-down of assets and decrease in NSF fees.
Non-interest expenses increased 7.7% from the first quarter to $134.4 million. The increase was largely due to merger-related expenses, and salaries and benefits costs.
As of Jun 30, 2020, total loans were $21 billion, up 9.9% from first quarter-end. Total deposits rose 9.8% sequentially to $26.2 billion.
Credit Quality Worsens
Provision for credit losses was $10 million compared with no provisions in first-quarter 2020. Net charge-offs were $13 million, up substantially from $0.8 million in the first quarter.
As of Jun 30, 2020, total non-performing assets were $77.9 million, which increased 15.9% sequentially. However, the ratio of allowance for credit losses to total loans was 1.54%, down 17 bps from the first quarter.
Capital Ratios Improve, Profitability Ratios Worsen
As of Jun 30, 2020, Tier-1 risk-based capital ratio was 12.29%, up from 12.27% on Mar 31, 2020. Moreover, total risk-based capital ratio was 13.36% compared with 12.27% at first quarter-end.
The annualized return on average assets was 1.61%, down from 1.67% at first quarter-end. Annualized return on common equity was 8.84% compared with 8.86% in the first quarter.
Share Repurchase Update
During the quarter, the company did not repurchase any shares.
For the third quarter 2020, core NIM is expected to be relatively stable, given the current economic conditions, with some additional pressure owing to loan repricing.
Non-interest expenses are anticipated within $118-$119 million. This excludes additional cost savings of nearly $7-$9 million per quarter from the LegacyTexas Financial acquisition.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in estimates review.
At this time, Prosperity Bancshares has an average Growth Score of C, though it is lagging a lot on the Momentum Score front with an F. However, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Prosperity Bancshares has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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