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Prosperity Bancshares Inc.’s (PB - Analyst Report) first-quarter 2013 adjusted earnings of 86 cents per share marginally exceeded the Zacks Consensus Estimate of 84 cents. This also compares favorably with the year-ago earnings of 77 cents.

The improvement came on the back of better top-line performance, partially offset by higher operating expenses. Moreover, loan and deposit balances improved in the quarter. Further, capital ratios were stable, while credit quality was a mixed bag.

Net income in the quarter came in at $49.3 million up 35.1% year over year.

Performance in Detail

Prosperity’s total revenue in the reported quarter came in at $141.5 million, soaring 34.0% from $105.6 million in the prior-year quarter. Moreover, this beat the Zacks Consensus Estimate of $132.0 million by 7.2%.

Net interest income surged 32.1% year over year to $108.1 million. However, net interest margin dipped 22 basis points from the prior-year quarter to 3.42%.

Non-interest income augmented 68.1% year over year to $23.4 million. The increase was primarily due to the acquisition of American State Financial Corporation (“ASB”).

Non-interest expense came in at $55.8million, up 37.8% from $40.5 million in the prior-year quarter. The rise was mainly due to additional non-interest expenses associated with ASB.

The efficiency ratio increased to 42.40% from 42.23% in the prior-year quarter. The rise in efficiency ratio indicates deterioration in profitability.

As of Mar 31, 2013, total loans were $5.3 billion, rising 35.8% from $3.9 billion as of Mar 31, 2012. Total deposits increased 37.1% year over year to $11.7 billion.

Asset Quality

Asset quality was mixed in the quarter. The ratio of allowance for credit losses to total loans dipped to 1.05% from 1.33% in the prior-year quarter.

On the other hand, net charge offs were $0.32 million, significantly up from $0.1 million in the year-ago quarter. Moreover, total nonperforming assets stood at $18.1 million, up 21.9% from the year-ago period. Likewise, provision for credit losses increased significantly to $2.8 million from $0.2 million in the prior-year quarter.

Profitability and Capital Ratios

Prosperity’s capital and profitability ratios exhibited a modestly cautious approach in 2013. As of Mar 31, 2013, tier-1 risk-based capital ratio was 14.77% compared with 15.70% as of Mar 31, 2012. Moreover, total risk-based capital ratio came in at 15.61% as against 16.80% at the end of the year-ago quarter.

The annualized return on average assets was 1.33% as of Mar 31, 2013 compared with 1.39% as of Mar 31, 2012. Similarly, annualized return on common equity came in at 9.23%, up from 9.15% as of Mar 31, 2012.

Acquisitions

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.

In Jan 2013, Prosperity closed the acquisition of East Texas Financial Services Inc. and its fully-owned subsidiary First Federal Bank Texas. Following the acquisition, the company took over total assets worth $165.0 million, total loans of $129.3 million and total deposits of $112.3 million.

Performance of Other Stocks in the Same Sector

Comerica Inc.’s (CMA - Analyst Report) first-quarter 2013 earnings beat the Zacks Consensus Estimate. The results reflected reduced expenses, partially offset by decline in revenues.

Fifth Third Bancorp’s (FITB - Analyst Report) first-quarter 2013 adjusted earnings per share beat the Zacks Consensus Estimate by a nickel. Improved credit quality aided by lower provision for loans and leases and strong capital position were the positives.

BB&T Corporation’s (BBT - Analyst Report) first-quarter 2013 earnings marginally surpassed the Zacks Consensus Estimate. The results reflected growth in revenues and lower provision for credit losses, partially offset by a rise in operating expenses.

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, sluggish economic growth, significant exposure to 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 #3 (Hold).
 

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