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Prosperity Bancshares Inc.’s (PB - Analyst Report) fourth-quarter 2013 earnings of 98 cents per share came ahead of the Zacks Consensus Estimate of 91 cents on the back of its efficient inorganic growth. The reported figure also compared favorably with 85 cents earned in the year-ago quarter.

Moreover, for the full year 2013, Prosperity Bancshares recorded earnings per share of $3.65 versus $3.23 in 2012. Earnings for the year also beat the Zacks Consensus Estimate of $3.58.

Better-than-expected results benefited from top-line growth, partially offset by rise in operating expenses and provision for credit losses. Further, healthy growth in loans and deposits, along with improved profitability ratios were tailwinds for the quarter. While capital ratios deteriorated, asset quality was a mixed bag.

Net income came in at $63.0 million, up 30.5% year over year. However, for the full year, net income came in at $221.4 million, increasing 31.9% from $167.9 billion in 2012.

Performance Details

Prosperity Bancshares’ total revenue in the quarter came in at $180.9 million, growing 27.6% year over year. Moreover, it surpassed the Zacks Consensus Estimate of $157.0 million.

For 2013, total revenue came in at $634.7 million, up nearly 28.1% from $495.4 million in 2012. Moreover, total revenue surpassed the Zacks Consensus Estimate of $578.0 million.

Net interest income rose 34.3% year over year to $145.5 million. The increase was primarily due to a 23.2% rise in average interest-earning assets. Also, net interest margin grew 29 basis points (bps) from the prior-year quarter to 3.82%.

Non-interest income increased 4.4% year over year to $25.2 million. The rise was attributable to the company’s three recent acquisitions completed during the year, partially offset by a fall in debit card income following the Durbin Amendment, which became effective on Jul 1, 2013.

Non-interest expenses were $68.6 million, up 20.4% from $57.0 million in the prior-year quarter. The rise was mainly due to additional non-interest expenses related to the acquisition of FVNB Corp. and First Victoria National Bank (FVNB) in November.

Efficiency ratio improved to 40.24% from 42.95% in the prior-year quarter. A fall in efficiency ratio indicates rise in profitability.

As of Dec 31, 2013, total loans were $7.8 billion, rising 50.1% from $5.1 billion as of Dec 31, 2012. Total deposits increased 31.3% year over year to $15.3 billion.

Asset Quality

Asset quality was a mixed bag in the quarter. The ratio of allowance for credit losses to total loans declined 14 bps year over year to 0.87%. Further, net charge-offs were $0.5 million, down 74.1% from $1.9 million in the year-ago quarter.

Total nonperforming assets were $22.5 million, up 72.9% from the year-ago period. Moreover, provision for credit losses increased significantly to $7.8 million from $3.5 million in the prior-year quarter.

Profitability and Capital Ratios

Prosperity Bancshares’ capital ratios deteriorated, while profitability ratios improved during the quarter. As of Dec 31, 2013, Tier-1 risk-based capital ratio was 13.29%, compared with 14.40% as of Dec 31, 2012. Moreover, total risk-based capital ratio came in at 14.03%, down from 15.22% at the end of the year-ago quarter.

The annualized return on average assets was 1.42% as of Dec 31, 2013, up from 1.36% as of Dec 31, 2012. Similarly, annualized return on common equity came in at 9.53%, up from 9.28% as of Dec 31, 2012.

Performance of Other Regional Banks

While PrivateBancorp, Inc. (PVTB - Snapshot Report) surpassed the Zacks Consensus Estimate driven by growth in top line and lower provision, KeyCorp (KEY - Analyst Report) beat the Zacks Consensus Estimate due to prudent expense management.

However, M&T Bank Corp. (MTB - Analyst Report) lagged the Zacks Consensus Estimate due to a rise in non-interest expenses.

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, rising expenses resulting from recent mergers and acquisitions 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 #3 (Hold).

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