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Prosperity Bancshares (PB) Rides on Buyouts Amid Margin Pressure

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Backed by a strong balance sheet and liquidity, Prosperity Bancshares, Inc. (PB - Free Report) is well-placed for organic and inorganic growth. With adequate capital distribution actions, the company remains attractive. Decline in mortgage income and pressure on margins are major near-term concerns.

Though PB’s net revenues took a dip in 2021, solid loan balances and efforts to improve fee income led to a four-year compound annual growth rate (CAGR) of 11.5% (ended 2022). The momentum persisted in the first half of 2023.

With steady loan demand, a solid deposit mix and efforts to improve fee income, the company’s top-line growth is expected to continue in the quarters ahead. We project total loans to rise 5.5% this year. Our estimates for total revenues suggest a CAGR of 5.3% by 2025.

Strategic acquisitions have been playing a pivotal role in driving Prosperity Bancshares’ revenues. Over the past years, the company has significantly expanded its operations through the buyout of community banks and branches of other banks.

It has completed more than 30 deals since 1998. In May 2023, the company acquired First Bancshares of Texas and signed a deal to acquire Lone Star State Bancshares in October 2022. These deals are expected to be earnings accretive. Given its strong balance sheet, the company is actively seeking out acquisitions as part of its expansion strategy.

The company has been engaging in strong capital distribution activities. It has maintained a track record of annually increasing its dividend since 1999, with the most recent hike announced in October 2022. The company announced a stock repurchase program to buy back 5% or 4.6 million shares in January 2023. The capital distribution activities seem sustainable, owing to the strong liquidity and balance sheet position.

Shares of the company have lost 10.6% in the past six months compared with the industry’s decline of 12%. PB currently carries a Zacks Rank #3 (Hold).

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However, pressure on margins is a matter of concern for PB. Net interest margin (NIM) declined to 3.14% and 3% in 2021 and 2022, respectively, despite a higher interest rate regime. The first half of 2023 also witnessed a decline in the metric to 2.83%. Due to funding cost pressure, NIM is not expected to have any significant improvement. We anticipate NIM to be 2.83% in 2023.

Another key issue to consider is the uncertainty about Prosperity Bancshares’ mortgage banking business performance. In 2021, mortgage income dropped, with the downtrend continuing in 2022 and the first six months of 2023.

Higher mortgage rates have been negatively impacting mortgage origination volumes and refinancing activities. Therefore, PB’s mortgage banking business performance is expected to remain weak in the upcoming quarters. We estimate mortgage banking income to decline 4.1% on a year-over-year basis in third-quarter 2023.

Bank Stocks Worth a Look

A couple of better-ranked stocks in the banking space are Southside Bancshares, Inc. (SBSI - Free Report) and ACNB Corporation (ACNB - Free Report) .

The consensus estimate for SBSI’s current year earnings has remained unchanged over the past 30 days. SBSI shares have declined 14.5% over the past six months. The stock currently sports a Zacks Rank of 1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Over the past six months, ACNB’s share price has gained 1.4%. The stock currently carries a Zacks Rank of 2 (Buy). The consensus estimate for ACNB’s earnings has remained unchanged over the past 30 days.

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Prosperity Bancshares, Inc. (PB) - free report >>

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