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Prosperity Bancshares' (PB) Buyouts Aid Amid Pressure on NIM
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Prosperity Bancshares Inc. (PB - Free Report) remains well-poised for growth given strategic acquisitions, solid loans and deposits, and a solid balance sheet. However, pressure on net interest margin (NIM) and muted mortgage banking business performance are headwinds.
Prosperity Bancshares remains focused on its organic growth strategy. Though the company’s net revenues dipped in 2023 and in the first quarter of 2024, the metric experienced a compound annual growth rate (CAGR) of 7.9% over the four years ended 2023. The growth was primarily driven by solid loan balances, strategic buyouts, and modest fee income growth.
Further, PB has been able to improve its deposit mix. As of Mar 31, 2024, roughly 35.1% of total deposits were non-interest-bearing deposits. The company’s top line is likely to grow in the upcoming quarters in the light of a decent loan pipeline, solid deposit mix, and efforts to boost fee income. We estimate total revenues to witness a 9.2% CAGR by 2026. Additionally, we project total loans to rise 3.5% in 2024.
Moreover, acquisitions have been a significant contributor to Prosperity Bancshares' revenue growth. The company has expanded its operations via acquisitions of community banks and branches of other banks over the years. Since 1998, it has completed more than 30 deals. This April, the company acquired Lone Star State Bancshares while it acquired First Bancshares of Texas in 2023. These deals are likely to be accretive to the earnings. Thus, a solid balance sheet position enables the company to actively pursue opportunistic expansions as part of its inorganic growth strategy.
Similarly, earlier this year, WaFd Inc. (WAFD - Free Report) acquired Luther Burbank Corporation. The acquisition will be almost 8% accretive to WAFD’s earnings in fiscal 2025 and result in some cost savings too. The acquisition led WAFD to enter the lucrative California market.
As of Mar 31, 2024, PB’s other borrowings were $3.9 billion, and cash and due from banks were $1.1 billion. Despite a high debt burden, the company has been running off its debt through repayments via reduction of its securities book to reduce debt strains. Given the debt payoff initiatives and decent earnings strength, the company is well-equipped to address its near-term debt obligations in the event of economic turmoil.
Nonetheless, the pressure on margins remains a challenge for Prosperity Bancshares. The company’s net interest margin (NIM) contracted to 2.78% in 2023 from 3% in 2022, primarily attributed to its liability-sensitive balance sheet. The downtrend persisted during the first quarter of 2024 on a year-over-year basis. Though asset repricing, the Lone Star acquisition, and expected rate cuts may offer support to some extent, improvement in NIM is likely to be marginal amid rising funding costs. We project the metric to be 2.92% in 2024.
Likewise, Valley National Bancorp (VLY - Free Report) is facing pressure on NIM because of elevated funding costs. Hence, the metric declined in 2023 and in the first quarter of 2024. With the Federal Reserve expected to keep the rates high for a long time, VLY is less likely to witness solid NIM expansion anytime soon.
Moreover, uncertainties about Prosperity Bancshares’ mortgage banking business performance are another concern. Mortgage origination volumes and refinancing activities have been subdued amid the high mortgage rate scenario. Thus, the company’s mortgage income dipped in 2022 and 2021. Though the trend reversed in 2023 and in the first three months of 2024, given the improving pipeline, modest mortgage loan demand is likely to adversely impact the performance of the mortgage banking business. While we expect mortgage income to be $3.1 million this year, indicating a 34.2% rise, the same is unlikely to reach the 2020 and 2021 levels anytime soon.
Over the past six months, shares of the company have lost 10.5% compared with the industry’s decline of 2.4%.
Image: Bigstock
Prosperity Bancshares' (PB) Buyouts Aid Amid Pressure on NIM
Prosperity Bancshares Inc. (PB - Free Report) remains well-poised for growth given strategic acquisitions, solid loans and deposits, and a solid balance sheet. However, pressure on net interest margin (NIM) and muted mortgage banking business performance are headwinds.
Prosperity Bancshares remains focused on its organic growth strategy. Though the company’s net revenues dipped in 2023 and in the first quarter of 2024, the metric experienced a compound annual growth rate (CAGR) of 7.9% over the four years ended 2023. The growth was primarily driven by solid loan balances, strategic buyouts, and modest fee income growth.
Further, PB has been able to improve its deposit mix. As of Mar 31, 2024, roughly 35.1% of total deposits were non-interest-bearing deposits. The company’s top line is likely to grow in the upcoming quarters in the light of a decent loan pipeline, solid deposit mix, and efforts to boost fee income. We estimate total revenues to witness a 9.2% CAGR by 2026. Additionally, we project total loans to rise 3.5% in 2024.
Moreover, acquisitions have been a significant contributor to Prosperity Bancshares' revenue growth. The company has expanded its operations via acquisitions of community banks and branches of other banks over the years. Since 1998, it has completed more than 30 deals. This April, the company acquired Lone Star State Bancshares while it acquired First Bancshares of Texas in 2023. These deals are likely to be accretive to the earnings. Thus, a solid balance sheet position enables the company to actively pursue opportunistic expansions as part of its inorganic growth strategy.
Similarly, earlier this year, WaFd Inc. (WAFD - Free Report) acquired Luther Burbank Corporation. The acquisition will be almost 8% accretive to WAFD’s earnings in fiscal 2025 and result in some cost savings too. The acquisition led WAFD to enter the lucrative California market.
As of Mar 31, 2024, PB’s other borrowings were $3.9 billion, and cash and due from banks were $1.1 billion. Despite a high debt burden, the company has been running off its debt through repayments via reduction of its securities book to reduce debt strains. Given the debt payoff initiatives and decent earnings strength, the company is well-equipped to address its near-term debt obligations in the event of economic turmoil.
Nonetheless, the pressure on margins remains a challenge for Prosperity Bancshares. The company’s net interest margin (NIM) contracted to 2.78% in 2023 from 3% in 2022, primarily attributed to its liability-sensitive balance sheet. The downtrend persisted during the first quarter of 2024 on a year-over-year basis. Though asset repricing, the Lone Star acquisition, and expected rate cuts may offer support to some extent, improvement in NIM is likely to be marginal amid rising funding costs. We project the metric to be 2.92% in 2024.
Likewise, Valley National Bancorp (VLY - Free Report) is facing pressure on NIM because of elevated funding costs. Hence, the metric declined in 2023 and in the first quarter of 2024. With the Federal Reserve expected to keep the rates high for a long time, VLY is less likely to witness solid NIM expansion anytime soon.
Moreover, uncertainties about Prosperity Bancshares’ mortgage banking business performance are another concern. Mortgage origination volumes and refinancing activities have been subdued amid the high mortgage rate scenario. Thus, the company’s mortgage income dipped in 2022 and 2021. Though the trend reversed in 2023 and in the first three months of 2024, given the improving pipeline, modest mortgage loan demand is likely to adversely impact the performance of the mortgage banking business. While we expect mortgage income to be $3.1 million this year, indicating a 34.2% rise, the same is unlikely to reach the 2020 and 2021 levels anytime soon.
Over the past six months, shares of the company have lost 10.5% compared with the industry’s decline of 2.4%.
Image Source: Zacks Investment Research
Prosperity Bancshares currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.