Prosperity Bancshares (PB) Stock Up 2.2% On Q4 Earnings Beat

Shares of Prosperity Bancshares Inc. (NYSE:PB) jumped 2.2% in response to fourth-quarter and 2019 results. Adjusted earnings of $1.44 per share surpassed the Zacks Consensus Estimate of $1.23.

Results were primarily driven by the closure of merger with LegacyTexas Financial Group, Inc. on Nov 1, 2019. The deal supported the company’s top-line growth and also resulted in rise in loan and deposit balances. However, increase in operating expenses and a rise in provisions acted as headwinds.

Results in the reported quarter excluded LegacyTexas Financial merger-related charges. Including this, net income available to common shareholders was $86.1 million or $1.01 per share compared with $83.3 million or $1.19 per share in the prior-year quarter.

Adjusted earnings of $5.02 per share in 2019 outpaced the consensus estimate of $4.79. Including merger-related charges, net income available to common shareholders was $332.6 million or $4.52 per share compared with $321.8 million or $4.61 per share in 2018.

Revenues & Expenses Rise

Net revenues in the quarter were $267.5 million, up 43.6% from the prior-year quarter. Also, the figure beat the Zacks Consensus Estimate of $248.7 million.

In 2019, net revenues grew almost 10% to $820.1 million. Further, it surpassed the Zacks Consensus Estimate of $801.7 million.

Net interest income was $232 million, surging 47.6% year over year. The rise was mainly due to merger and higher loan discount accretion. Net interest margin, on a tax-equivalent basis, jumped 50 basis points (bps) to 3.66%.

Non-interest income increased 22.1% to $35.5 million.

Non-interest expenses jumped 93.6% year over year to $156.5 million. The increase was largely due to the merger-related expenses, additional expenses related to two months of
operations pertaining to the LegacyTexas and lending function.

As of Dec 31, 2019, total loans were $18.8 billion, up 76.6% from the prior-quarter end. Total deposits grew 42.9% to $24.2 billion on a sequential basis.

Credit Quality Worsens

Provision for credit losses increased 54.5% to $1.7 million. Also, net charge-offs were $1.2 million, rising substantially year over year. As of Dec 31, 2019, total non-performing assets were $62.9 million, increasing significantly from $19 million.

However, the ratio of allowance for credit losses to total loans was down 36 bps year over year to 0.46%.

Strong Capital & Profitability Ratios

As of Dec 31, 2019, Tier-1 risk-based capital ratio was 12.30%, compared with 16.32% as of Dec 31, 2018. Moreover, total risk-based capital ratio was 12.70% compared with 16.99% at the end of the year-ago quarter.

Further, common equity tier 1 capital ratio was 12.30%, up from 16.32% in the prior-year quarter.

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The annualized return on average assets was 1.19%, down from 1.47%. Annualized return on common equity was 6.33% compared with 8.25% in the prior-year quarter.

Share Repurchase Update

Concurrent with the earnings release, Prosperity Bancshares announced share repurchase authorization of 4.7 million shares. The buyback plan will expire on Jan 28, 2021.

Our Take

Prosperity Bancshares’ solid loan and deposit balances, and improving economy are likely to support profitability. While elevated expense levels and lower interest rates are major near-term concerns, the acquisition of LegacyTexas Financial is likely to be a key positive for the company.