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Prosperity Bancshares' (PB) Loan Pipeline Aids Amid High Costs
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Prosperity Bancshares, Inc. (PB - Free Report) is well-positioned for revenue growth on the back of robust loan pipeline, deposits and efforts to strengthen fee income. Strong balance sheet keeps the capital distribution and inorganic expansion plans sustainable. Escalating expense base and subdued mortgage income remain headwinds. NIM contraction is another major woe.
Prosperity Bancshares' organic growth strategy is reflected in its revenue growth trajectory. Though revenues witnessed a dip in 2021 and 2023, it experienced a compound annual growth rate (CAGR) of 7.9% over the four years ended 2023. This growth was primarily driven by solid loan balances and efforts to improve fee income.
PB has been improving its deposit mix. As of Dec 31, 2023, roughly 36% of total deposits were non-interest-bearing deposits. Given the decent loan pipeline, strong deposit mix and a continuous growth in fee income, the company’s top line is expected to improve. We project total revenues to record a CAGR of 10.3% by 2026.
Moreover, total loans are projected to grow 4.5% in 2024.
Alongside organic growth initiatives, Prosperity Bancshares remain actively engaged in strategic buyouts. Since 1998, it has closed more than 30 deals, which, in turn, contributed to its top-line growth over the years.
In May 2023, the company acquired First Bancshares of Texas. In October 2022, it entered into an agreement to acquire Lone Star State Bancshares, which is expected to close as of Apr 1, 2024. These deals are likely to be accretive to PB’s earnings. As part of its expansion strategy, management remains interested in pursuing further strategic acquisitions on the back of strong balance sheet position.
First Citizens Bancshares, Inc. (FCNCA - Free Report) is another bank indulged in inorganic expansionary initiatives. The bank is set to buy SVB Global Services India LLP. The announcement comes roughly a year after its acquisition of failed Silicon Valley Bank (“SVB”).
Under the terms of the deal, FCNCA is set to acquire 100% stake in the India-based business. The transaction remains subjected to approval from United States Bankruptcy Court for Southern District of New York and Indian regulators. The deal is expected to close after the scheduled hearing on Apr 9, 2024, in bankruptcy court.
Further, Prosperity Bancshares’ capital distribution activities are impressive. The company has been consistently increasing its annual dividend since 1999, with the latest hike announced in October 2023.
Moreover, it announced a new share repurchase plan in January 2024, authorizing the buyback of up to 4.7 million shares. The program is set to expire on Jan 16, 2025. Strong balance sheet and liquidity positions are likely to keep the capital distribution plans sustainable.
Similarly, some banks have announced repurchase plans recently. On Mar 19, 2024, Guaranty Bancshares Inc. (GNTY - Free Report) announced a new repurchase program.
The plan authorizes GNTY to buyback up to 1.25 million shares. The program is set to expire on Apr 21, 2026. This program will replace the previous one announced in 2022 upon its expiry on Apr 21, 2024.
Nonetheless, pressure on margins remains a challenge for PB. Though net interest margin (NIM) witnessed a rise in 2020 and 2019, it experienced a dip afterward.
NIM contracted to 2.78% in 2023 from 3% in 2022 and 3.14% in 2021 on account of its liability-sensitive balance sheet. Despite asset repricing and expected rate cuts providing some relief, NIM improvement is unlikely amid the high-interest rate regime as funding costs will weigh on it. We estimate the metric to be 2.91% in 2024.
Uncertainty regarding Prosperity Bancshares’ mortgage banking business performance remains a major concern. Mortgage origination volumes and refinancing activities have been witnessing a declining trend due to high mortgage rates.
Despite a rise in mortgage income in 2023 on the back of strengthened pipeline, management remains apprehensive due to moderation in mortgage loan demand. Hence, mortgage banking business is expected to demonstrate a weak performance. Per our estimates, mortgage income is expected to fall 5.7% and 8.5% in 2024 and 2025, respectively.
PB’s escalated expense base remains a woe. While expenses reduced in 2021, the same witnessed a four-year (2019-2023) CAGR of 8.9%. Given the company’s ongoing investments in franchises and technological enhancements, strategic buyouts and inflationary pressures, the expenses are likely to stay elevated. We project total non-interest expenses to see a CAGR of 2.2% by 2026.
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Prosperity Bancshares' (PB) Loan Pipeline Aids Amid High Costs
Prosperity Bancshares, Inc. (PB - Free Report) is well-positioned for revenue growth on the back of robust loan pipeline, deposits and efforts to strengthen fee income. Strong balance sheet keeps the capital distribution and inorganic expansion plans sustainable. Escalating expense base and subdued mortgage income remain headwinds. NIM contraction is another major woe.
Prosperity Bancshares' organic growth strategy is reflected in its revenue growth trajectory. Though revenues witnessed a dip in 2021 and 2023, it experienced a compound annual growth rate (CAGR) of 7.9% over the four years ended 2023. This growth was primarily driven by solid loan balances and efforts to improve fee income.
PB has been improving its deposit mix. As of Dec 31, 2023, roughly 36% of total deposits were non-interest-bearing deposits. Given the decent loan pipeline, strong deposit mix and a continuous growth in fee income, the company’s top line is expected to improve. We project total revenues to record a CAGR of 10.3% by 2026.
Moreover, total loans are projected to grow 4.5% in 2024.
Alongside organic growth initiatives, Prosperity Bancshares remain actively engaged in strategic buyouts. Since 1998, it has closed more than 30 deals, which, in turn, contributed to its top-line growth over the years.
In May 2023, the company acquired First Bancshares of Texas. In October 2022, it entered into an agreement to acquire Lone Star State Bancshares, which is expected to close as of Apr 1, 2024. These deals are likely to be accretive to PB’s earnings. As part of its expansion strategy, management remains interested in pursuing further strategic acquisitions on the back of strong balance sheet position.
First Citizens Bancshares, Inc. (FCNCA - Free Report) is another bank indulged in inorganic expansionary initiatives. The bank is set to buy SVB Global Services India LLP. The announcement comes roughly a year after its acquisition of failed Silicon Valley Bank (“SVB”).
Under the terms of the deal, FCNCA is set to acquire 100% stake in the India-based business. The transaction remains subjected to approval from United States Bankruptcy Court for Southern District of New York and Indian regulators. The deal is expected to close after the scheduled hearing on Apr 9, 2024, in bankruptcy court.
Further, Prosperity Bancshares’ capital distribution activities are impressive. The company has been consistently increasing its annual dividend since 1999, with the latest hike announced in October 2023.
Moreover, it announced a new share repurchase plan in January 2024, authorizing the buyback of up to 4.7 million shares. The program is set to expire on Jan 16, 2025. Strong balance sheet and liquidity positions are likely to keep the capital distribution plans sustainable.
Similarly, some banks have announced repurchase plans recently. On Mar 19, 2024, Guaranty Bancshares Inc. (GNTY - Free Report) announced a new repurchase program.
The plan authorizes GNTY to buyback up to 1.25 million shares. The program is set to expire on Apr 21, 2026. This program will replace the previous one announced in 2022 upon its expiry on Apr 21, 2024.
Nonetheless, pressure on margins remains a challenge for PB. Though net interest margin (NIM) witnessed a rise in 2020 and 2019, it experienced a dip afterward.
NIM contracted to 2.78% in 2023 from 3% in 2022 and 3.14% in 2021 on account of its liability-sensitive balance sheet. Despite asset repricing and expected rate cuts providing some relief, NIM improvement is unlikely amid the high-interest rate regime as funding costs will weigh on it. We estimate the metric to be 2.91% in 2024.
Uncertainty regarding Prosperity Bancshares’ mortgage banking business performance remains a major concern. Mortgage origination volumes and refinancing activities have been witnessing a declining trend due to high mortgage rates.
Despite a rise in mortgage income in 2023 on the back of strengthened pipeline, management remains apprehensive due to moderation in mortgage loan demand. Hence, mortgage banking business is expected to demonstrate a weak performance. Per our estimates, mortgage income is expected to fall 5.7% and 8.5% in 2024 and 2025, respectively.
PB’s escalated expense base remains a woe. While expenses reduced in 2021, the same witnessed a four-year (2019-2023) CAGR of 8.9%. Given the company’s ongoing investments in franchises and technological enhancements, strategic buyouts and inflationary pressures, the expenses are likely to stay elevated. We project total non-interest expenses to see a CAGR of 2.2% by 2026.