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Prosperity Bancshares Beats Q3 Earnings, Hikes Dividend

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Prosperity Bancshares Inc.’s (PB - Analyst Report) third-quarter 2013 earnings of 91 cents per share beat the Zacks Consensus Estimate by a penny. This also compared favorably with 82 cents earned in the year-ago quarter.

Better-than-expected results benefited from rise in net interest income, partially offset by decreased non-interest income, higher operating expenses and rise in provision for credit losses. Further, capital and profitability ratios as well as loan and deposit balances improved while credit quality was a mixed bag.

Net income came in at $55.3 million, up 19.7% year over year.

Performance Details

Prosperity Bancshares’ total revenue in the reported quarter came in at $157.8 million, growing 11.5% from the prior-year quarter. Moreover, it surpassed the Zacks Consensus Estimate of $146.0 million.

Net interest income rose 18.4% year over year to $126.5 million. The increase was primarily due to a rise in average interest-earning assets. Also, net interest margin grew 7 basis points (bps) from the prior-year quarter to 3.59%.

Non-interest income declined 9.5% year over year to $21.6 million. The fall was primarily due to a decrease in debit card income following the Durbin Amendment, which became effective on Jul 1, 2013.

Non-interest expense came in at $61.5 million, up 2.1% from $60.2 million in the prior-year quarter. The rise was mainly due to additional non-interest expenses related to the acquisition of Coppermark Bancshares, Inc in April.

Efficiency ratio improved to 41.59% from 46.07% in the prior-year quarter. A fall in efficiency ratio indicates rise in profitability.

As of Sep 30, 2013, total loans were $6.2 billion, rising 21.7% from $5.1 billion as of Sep 30, 2012. Total deposits increased 13.7% year over year to $12.5 billion.

Asset Quality

Asset quality was a mixed bag in the quarter. The ratio of allowance for credit losses to total loans declined 3 bps year over year to 0.97%. Further, net charge-offs were $0.3 million, down 76.1% from $1.3 million in the year-ago quarter.

Also, total nonperforming assets were $12.7 million, down 9.7% from the year-ago period. However, provision for credit losses increased significantly to $4.0 million from $1.8 million in the prior-year quarter.

Profitability and Capital Ratios

Prosperity Bancshares’ capital and profitability ratios improved during the quarter. As of Sep 30, 2013, Tier-1 risk-based capital ratio was 14.74%, up 14.43% as of Sep 30, 2012. Moreover, total risk-based capital ratio came in at 15.55%, improving from 15.26% at the end of the year-ago quarter.

The annualized return on average assets was 1.37% as of Sep 30, 2013, compared with 1.32% as of Sep 30, 2012. Similarly, annualized return on common equity came in at 9.31%, up from 9.10% as of Sep 30, 2012.

Dividend Update

Along with the earnings release, Prosperity Bancshares announced a quarterly cash dividend of 24 cents per share, marking an 11.6% rise from the prior-quarter payout. The dividend will be paid on Jan 2, 2014 to shareholders of record as of Dec 16, 2013.

Acquisitions

In Aug 2013, Prosperity Bancshares entered into a definitive agreement with F&M Bancorporation Inc. (FMBC) to acquire the latter’s F&M Bank & Trust Company. As per the agreement, the company will issue nearly 3.3 million shares of its common stock and $47.0 million in cash for all outstanding shares of FMBC. The deal is expected to close by first-quarter 2014.

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

Performance of Other Regional Banks

First Financial Bankshares Inc.’s (FFIN - Snapshot Report) third-quarter 2013 earnings missed the Zacks Consensus Estimate. The results were affected by rise in operating expenses, deteriorating profitability ratios and higher provision for credit losses. However, top-line growth and an improved asset quality were the positives for the quarter.

Among other regional banks, Cullen/Frost Bankers, Inc. (CFR - Analyst Report) is scheduled to announce third-quarter results on Oct 30, while BofI Holding, Inc. (BOFI - Snapshot Report) will report fiscal first-quarter results on Nov 5.

Cullen/Frost Bankers with Zacks Earnings ESP of +1.04% and Zacks Rank #2 (Buy) makes us confident of an earnings beat this quarter. However, BofI Holding has earnings ESP of 0.00% and a Zacks Rank #3 (Hold), both of which reduce its chances of an earnings surprise.

Our Viewpoint

Prosperity Bancshares’ strategic acquisitions and organic growth are 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 will likely weigh on the company’s financials in the coming quarters.

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

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