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Prosperity Beats, Hikes Dividend

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Prosperity Bancshares Inc. (PB - Free Report) reported its third quarter 2012 adjusted earnings of 83 cents per share, marginally surpassing the Zacks Consensus Estimate of 80 cents. The results also compared favorably with the prior-year quarter earnings of 77 cents.

After incorporating the collective impact of preliminary purchase accounting adjustments and one-time merger expenses, net income came in at $46.2 million or 82 cents compared with $36.4 million or 77 cents in the year-ago period.

The improvement in the results came on the back of increased top line, partially offset by increases in operating expenses. Moreover, asset quality, loan, and deposit balances witnessed growth in the quarter. Capital ratios also showed improvement.

Performance in Detail

Prosperity’s total revenue came in at $141.5 million, rising 31.3% from $107.8 million in the prior-year quarter.

Net interest income surged 29.5% year over year to $106.9 million. The elevation was mainly attributable to increase in earning assets. However, net interest margin dipped 50 basis points from the prior-year quarter to 3.52%.

Non-interest income stood at $23.8 million, jumping 63.4% from $14.6 million in the prior-year quarter. The increase was primarily due to higher non-sufficient funds fees, debit card and ATM card income, service charges on deposit accounts and other income from the recent acquisition of American State Financial Corporation and its wholly owned subsidiary American State Bank.

Non-interest expense was $60.2 million, up 46.4% from $41.2 million in the prior-year quarter. The rise was mainly a result of the acquisition of American State Financial and its subsidiary bank.

The efficiency ratio climbed to 46.07% from 42.38% in the prior quarter. The hike in efficiency ratio indicates deterioration in profitability.

Asset Quality

Asset quality witnessed improvements in the quarter. The ratio of allowance for credit losses to average loans dipped to 1.00% from 1.28% in the prior quarter and 1.40% in the prior-year quarter.

Further, the ratio of net charge offs to average loans came in at 0.02% in the reported quarter, down from 0.05% in the previous quarter but up from 0.01% in the year-ago quarter. Total nonperforming assets stood at $14.1 million, down 18.3% from last quarter and 5.1% from the year-ago period.

Loans and Deposits

Webster’s total loans in the reported quarter were $5.1 billion, rising 28.6% from previous quarter and 35.9% from the prior-year quarter. The improvement was mainly driven by acquired loans.

Total deposits expanded 30.5% sequentially and 40.5% on a year-over-year basis to $11.0 billion. The increase was primarily due to the higher levels of demand deposits and interest-bearing deposits.

Profitability and Capital Ratios

Prosperity’s profitability and capital ratios exhibited a modest  improvement. As of September 30, 2012, tier 1 risk-based capital ratio was 14.43% compared with 16.42% as of June 30, 2012 and 15.47% as of September 30, 2011.

Total risk-based capital ratio came in at 15.26% as against 17.49% in the prior quarter and 16.69% in the prior-year quarter. Tangible equity to tangible assets ratio stood at 6.49%, down from 7.08% as of June 30, 2012 and 6.89% as of September 30, 2011.

The annualized return on average assets was 1.32% in the reported quarter compared with 1.35% as of June 30, 2012 and 1.52% as of September 30, 2011. As of September 30, 2012, annualized return on common equity came in at 9.10%, up from 9.06% as of June 30, 2012 but down from 9.51% as of September 30, 2011. Book value per common share was recorded at $36.36, up from $34.63 in the prior quarter and $32.87 in the year-ago period.

Dividend Update

Concurrent with the earnings releases, Prosperity announced a dividend hike of 10.3% to $0.215, payable on December 31, to shareholders of record as of December 14, 2012.

Recent Acquisitions

Earlier this month, Prosperity concluded the acquisition of Community National Bank. Upon acquisition, the former will take over total assets worth $183.0 million, total loans of $68 million and total deposits of 164.6 million.

Further, in July, Prosperity completed the acquisition of American State financial Corporation and its subsidiary – American State Bank. This added total assets worth $3.16 billion, total loans of $1.24 billion and total deposits of 2.51 billion.

Our Viewpoint

We are quite impressed with Prosperity’s acquisition spree, sound capital deployment activities and decent top-line growth. Moreover, the company’s constantly improving credit quality and strong balance sheet are expected to be beneficial to its overall expansion in the future.

Nevertheless, we are concerned about the impacts of the prevailing low interest rate environment, sluggish economic growth and stringent regulatory landscape on the company’s financials in the subsequent quarters.

Prosperity currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. Other Zacks #3 Rank bank stocks include Hancock Holding Company .

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