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Prosperity Bancshares (PB) Rides on Loans Amid Margin Pressure
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Prosperity Bancshares’ (PB - Free Report) robust loan balances, improving deposit mix and a rise in fee income will continue to aid revenues. The bank’s inorganic growth efforts are praiseworthy. However, mounting expenses, margin pressure and weakness in the mortgage business are worrisome.
Prosperity Bancshares’ organic growth strategy is impressive. While the company’s net revenues declined in 2021, it witnessed a compound annual growth rate (CAGR) of 11.5% over the five-year period between 2018 and 2022, and the upward trend continued in the first quarter of 2023.
A rise in loan demand, a solid deposit mix and growth in fee income are expected to keep supporting the company’s top-line growth. While we expect total revenues to decline 1.2% in 2023, it is projected to rebound and grow 5.6% and 11.4% in 2024 and 2025, respectively.
Acquisitions are other major contributors to the company’s top-line growth. Over the years, it has significantly expanded its operations through the buyout of community banks and branches of other banks. Since 1998, it has completed more than 30 deals. These deals have helped the company boost its top and bottom lines.
In October 2022, the company signed two separate agreements to acquire Lone Star State Bancshares and First Bancshares of Texas. In May 2023, the First Bancshares deal was closed. Both deals are expected to be earnings accretive. In 2019, the bank acquired LegacyTexas Financial, which continues to support its financials. Given a strong balance sheet position, the company is actively seeking acquisitions as part of its expansion strategy.
However, Prosperity Bancshares’ expenses have been elevated over the past several years. The company’s non-interest expenses witnessed a five-year (ended 2022) CAGR of 10.4%, with the upward trend persisting in the first quarter of 2023. As the company continues to invest in franchises, grow through acquisitions and stay under inflationary pressure, overall costs are expected to be elevated. We expect non-interest expenses to see a CAGR of 2.1% over the three years ended 2025.
Pressure on the net interest margin (NIM) is a major concern for PB. Though the company’s NIM increased to 3.64% in 2020 and 3.32% in 2019, the same witnessed a decline before that — 3.18% in 2018, 3.19% in 2017, 3.35% in 2016, 3.38% in 2015 and 3.80% in 2014. The downward trend continued in 2021 and 2022, when NIM declined to 3.14% and 3.00%, respectively.
While the company’s NIM increased year over year in the first quarter of 2023, the metric is not expected to witness significant improvement in the quarters ahead due to its liability-sensitive balance sheet. We project NIM to decline to 2.93% in 2023.
Ambiguity about the performance of Prosperity Bancshares’ mortgage banking business is another headwind. While the company’s mortgage income increased in 2020 and 2019, supported by low mortgage rates, the same witnessed a decline in the years before that.
In 2021, mortgage income plunged, with the downtrend persisting in 2022 and the first quarter of 2023. Rising mortgage rates have been adversely impacting mortgage origination volumes and refinancing activities. Thus, the company’s mortgage banking business’s performance is expected to get hurt in the quarters ahead. We anticipate mortgage income to witness a decline of 29% in 2023.
Shares of this Zacks Rank #3 (Hold) company have lost 21.1% over the past six months compared with the industry's decline of 31.7%.
Image Source: Zacks Investment Research
Stocks to Consider
A couple of better-ranked stocks from the finance space are and First Citizens BancShares (FCNCA - Free Report) and The Bancorp (TBBK - Free Report) .
First Citizens BancShares currently sports a Zacks Rank #1 (Strong Buy). Earnings estimates for 2023 have been revised 67.2% upward over the past 30 days. In the past six months, FCNCA’s shares have rallied 59.8%. You can see the complete list of today’s Zacks #1 Rank stocks here.
Earnings estimates for The Bancorp have been revised 6.5% upward for 2023 over the past 30 days. Shares of TBBK have gained 1.5% over the past six months. Currently, the company flaunts a Zacks Rank #1.
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Prosperity Bancshares (PB) Rides on Loans Amid Margin Pressure
Prosperity Bancshares’ (PB - Free Report) robust loan balances, improving deposit mix and a rise in fee income will continue to aid revenues. The bank’s inorganic growth efforts are praiseworthy. However, mounting expenses, margin pressure and weakness in the mortgage business are worrisome.
Prosperity Bancshares’ organic growth strategy is impressive. While the company’s net revenues declined in 2021, it witnessed a compound annual growth rate (CAGR) of 11.5% over the five-year period between 2018 and 2022, and the upward trend continued in the first quarter of 2023.
A rise in loan demand, a solid deposit mix and growth in fee income are expected to keep supporting the company’s top-line growth. While we expect total revenues to decline 1.2% in 2023, it is projected to rebound and grow 5.6% and 11.4% in 2024 and 2025, respectively.
Acquisitions are other major contributors to the company’s top-line growth. Over the years, it has significantly expanded its operations through the buyout of community banks and branches of other banks. Since 1998, it has completed more than 30 deals. These deals have helped the company boost its top and bottom lines.
In October 2022, the company signed two separate agreements to acquire Lone Star State Bancshares and First Bancshares of Texas. In May 2023, the First Bancshares deal was closed. Both deals are expected to be earnings accretive. In 2019, the bank acquired LegacyTexas Financial, which continues to support its financials. Given a strong balance sheet position, the company is actively seeking acquisitions as part of its expansion strategy.
However, Prosperity Bancshares’ expenses have been elevated over the past several years. The company’s non-interest expenses witnessed a five-year (ended 2022) CAGR of 10.4%, with the upward trend persisting in the first quarter of 2023. As the company continues to invest in franchises, grow through acquisitions and stay under inflationary pressure, overall costs are expected to be elevated. We expect non-interest expenses to see a CAGR of 2.1% over the three years ended 2025.
Pressure on the net interest margin (NIM) is a major concern for PB. Though the company’s NIM increased to 3.64% in 2020 and 3.32% in 2019, the same witnessed a decline before that — 3.18% in 2018, 3.19% in 2017, 3.35% in 2016, 3.38% in 2015 and 3.80% in 2014. The downward trend continued in 2021 and 2022, when NIM declined to 3.14% and 3.00%, respectively.
While the company’s NIM increased year over year in the first quarter of 2023, the metric is not expected to witness significant improvement in the quarters ahead due to its liability-sensitive balance sheet. We project NIM to decline to 2.93% in 2023.
Ambiguity about the performance of Prosperity Bancshares’ mortgage banking business is another headwind. While the company’s mortgage income increased in 2020 and 2019, supported by low mortgage rates, the same witnessed a decline in the years before that.
In 2021, mortgage income plunged, with the downtrend persisting in 2022 and the first quarter of 2023. Rising mortgage rates have been adversely impacting mortgage origination volumes and refinancing activities. Thus, the company’s mortgage banking business’s performance is expected to get hurt in the quarters ahead. We anticipate mortgage income to witness a decline of 29% in 2023.
Shares of this Zacks Rank #3 (Hold) company have lost 21.1% over the past six months compared with the industry's decline of 31.7%.
Image Source: Zacks Investment Research
Stocks to Consider
A couple of better-ranked stocks from the finance space are and First Citizens BancShares (FCNCA - Free Report) and The Bancorp (TBBK - Free Report) .
First Citizens BancShares currently sports a Zacks Rank #1 (Strong Buy). Earnings estimates for 2023 have been revised 67.2% upward over the past 30 days. In the past six months, FCNCA’s shares have rallied 59.8%. You can see the complete list of today’s Zacks #1 Rank stocks here.
Earnings estimates for The Bancorp have been revised 6.5% upward for 2023 over the past 30 days. Shares of TBBK have gained 1.5% over the past six months. Currently, the company flaunts a Zacks Rank #1.