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Prosperity Bancshares Inc.’s (PB - Analyst Report) second-quarter 2013 earnings of 89 cents per share beat the Zacks Consensus Estimate by a penny. This also compares favorably with 78 cents earned in the year-ago quarter.

Better-than-expected performance came on the back of impressive top-line growth, partially offset by higher operating expenses and a rise in provision for credit losses. Further, loan and deposit balances improved in the quarter. However, capital and profitability ratios as well as credit quality were a mixed bag.

Net income came in at $53.8 million, up 45.6% year over year.

Performance Details

Prosperity’s total revenue in the reported quarter came in at $154.6 million, surging 45.1% from $106.5 million in the prior-year quarter. Moreover, this beat the Zacks Consensus Estimate of $144.0 million.

Net interest income rose 41.9% year over year to $118.7 million. The increase was primarily due to a rise in average interest-earning assets. However, net interest margin fell 12 basis points (bps) from the prior-year quarter to 3.43%.

Non-interest income augmented 85.1% year over year to $25.3 million. The increase was primarily due to a rise in NSF fees, ATM and debit card income and service charges, along with higher trust and mortgage income following the acquisition of American State Financial Corporation in July last year.

Non-interest expense came in at $61.3 million, up 50.3% from $40.8 million in the prior-year quarter. The rise was mainly due to additional non-interest expenses associated with the acquisitions of American State Financial and Coppermark Bancshares, Inc.

Efficiency ratio increased to 42.51% from 41.94% in the prior-year quarter. A rise in efficiency ratio indicates deterioration in profitability.

As of Jun 30, 2013, total loans were $6.2 billion, rising 56.3% from $4.0 billion as of Jun 30, 2012. Total deposits increased 49.0% year over year to $12.5 billion.

Asset Quality

Asset quality was mixed in the quarter. The ratio of allowance for credit losses to total loans declined 37 bps year over year to 0.91%. Further, net charge-offs were $1.4 million, down from $1.9 million in the year-ago quarter.

However, total nonperforming assets were $14.9 million, up 25.2% from the year-ago period. Likewise, provision for credit losses increased significantly to $2.5 million from $0.6 million in the prior-year quarter.

Profitability and Capital Ratios

Prosperity’s capital and profitability ratios depicted a mixed bag. As of Jun 30, 2013, Tier-1 risk-based capital ratio was 14.15%, compared with 16.42% as of Jun 30, 2012. Moreover, total risk-based capital ratio came in at 14.911% against 17.49% at the end of the year-ago quarter.

The annualized return on average assets was 1.33% as of Jun 30, 2013, compared with 1.35% as of Jun 30, 2012. Similarly, annualized return on common equity came in at 9.27%, up from 9.06% as of Jun 30, 2012.

Acquisitions

In Jul 2013, Prosperity signed a definitive merger deal with Victoria, Texas-based FVNB Corp. and its fully owned subsidiary, First Victoria National Bank. As per the agreement, Prosperity will issue nearly 5.6 million shares of its common stock, along with $91.3 million cash for FVNB Corp’s outstanding capital stock. The deal is expected close by the end of this year.

In Apr 2013, Prosperity concluded the acquisition of Coppermark Bancshares, Inc. and its wholly-owned subsidiary, Coppermark Bank. Upon acquisition, the company took over total assets worth $1.2 billion, total loans of $847.6 million and total deposits of $1.1 billion.

Performance of Other Southwest Banks

First Financial Bankshares Inc.’s (FFIN - Snapshot Report) second-quarter 2013 earnings were in line with the Zacks Consensus Estimate. The company’s performance resulted from increased revenues, partly offset by a rise in both expenses and provision for credit losses.

Among other Southwest banks, Texas Capital BancShares Inc. (TCBI - Analyst Report) is scheduled to announce results on Jul 25 and BOK Financial Corporation (BOKF - Analyst Report) on Jul 31.

Our Viewpoint

Prosperity’s strategic acquisitions and organic growth is quite impressive. Moreover, the company’s strong balance sheet is expected to bode well for its overall expansion going forward. However, the prevailing low interest-rate environment, significant exposure to the real estate loan portfolio and a stringent regulatory landscape are expected to adversely affect the company’s financials in the subsequent quarters.

Prosperity currently carries a Zacks Rank #2 (Buy).

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