Prosperity Bancshares Inc. (PB) delivered yet another positive earnings surprise, with fourth-quarter 2014 earnings per share of $1.12 outpacing the Zacks Consensus Estimate of $1.08. Moreover, earnings per share escalated 14.3% from the year-ago quarter.
For full-year 2014, earnings per share came in at $4.32, beating the Zacks Consensus Estimate of $4.15. Moreover, the bottom line was 18.4% above the prior-year figure of $3.65.
Despite the strong quarterly performance, the share price of Prosperity Bancshares recorded only 1.3% rise since the company reported earnings on Jan 23. This was probably owing to concerns triggered by an increase in expenses as well as nonperforming assets, led by the mergers and acquisitions (M&As) undertaken by the company.
Better-than-expected results were driven by higher revenues, backed by growth in loans and deposits, and lower provisions. Capital and profitability ratios displayed strength. However, escalating expenses and weak credit metrics were the negatives.
Prosperity Bancshares’ fourth-quarter net income grew 24.2% year over year to $78.2 million. Also, for 2014, net income increased 34.3% year over year to $297.4 million.
Performance Details
Revenue for the fourth quarter, net of interest expense, increased 21.8% year over year to $207.9 million. Moreover, it exceeded the Zacks Consensus Estimate of $203.1 million.
Total revenue for 2014 increased 33.6% year over year to $794.0 million. Further, it surpassed the Zacks Consensus Estimate of $772 million.
Net interest income (excluding provision for credit losses) rose 22.2% year over year to $177.8 million. The upswing was mainly attributable to a 19.4% rise in average interest-earning assets. Moreover, net interest margin on a tax-equivalent basis climbed 7 basis points (bps) year over year to 3.89%
Non-interest income totaled $30.1 million, up 19.7% year over year. The rise was primarily driven by higher fees, credit and debit card income as well as service charges related to the acquisition of FVNB Corp and F&M Bancorp.
Non-interest expenses surged 23.6% year over year to $84.8 million. The increase was triggered by additional expenses from the above-mentioned M&As and a rise in salary and benefit costs.
Efficiency ratio climbed 57 bps year over year to 40.78%. An increase in efficiency ratio indicates lower profitability.
As of Dec 31, 2014, total loans summed $9.2 billion, rising 18.9% from Dec 31, 2013. Total deposits rose 15.7% year over year to $17.7 billion. The growth in loans and deposits was largely induced by the recent acquisitions.
Asset Quality
Prosperity Bancshares’ asset quality deteriorated during the quarter. Provision for credit losses reduced 19.3% year over year to $6.4 million, while the ratio of allowance for credit losses to total loans remained stable year over year at 0.87%.
However, net charge-offs totaled $3.2 million, substantially up from $0.5 million in the year-ago quarter. Further, total nonperforming assets amounted to $36.9 million, up 64.1% year over year.
Capital and Profitability Ratios
As of Dec 31, 2014, Tier-1 risk-based capital ratio came in at 13.80%, compared with 13.29% as of Dec 31, 2013. Moreover, total risk-based capital ratio stood at 14.56%, up from 14.03% at the end of the year-ago quarter.
The annualized return on average assets inched up 6 bps year over year to 1.48% as of Dec 31, 2014. Similarly, annualized return on common equity stood at 9.70%, up 17 bps from the prior-year quarter.
Our Viewpoint
Prosperity Bancshares is poised to grow both on the organic and inorganic fronts, given its strong balance sheet position. Synergies gained from M&As will continue to augur well for the company’s future. As such, the stock remains an attractive pick for yield-seeking investors.
However, mounting expenses and exposure to the risky real estate portfolio can threaten the company’s future growth. Further, a low interest rate environment and stringent regulations will probably make it more difficult for the company to turn things around in its favor.
Currently, Prosperity Bancshares has a Zacks Rank #3 (Hold).
Other Western Banks
Among other Southwest banks, Texas Capital BancShares Inc. (TCBI) reported fourth-quarter 2014 earnings per share of 78 cents, in line with the Zacks Consensus Estimate. Higher revenues and loan growth marked the positives for the company, while elevated expenses and provisions were on the downside.
Cullen/Frost Bankers, Inc. (CFR) and BOK Financial Corp. (BOKF) are scheduled to report results on Jan 28.
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