Prosperity Bancshares’ Buyouts & Loans Aid Amid Pressure on NIM

Prosperity Bancshares Inc. PB remains well-positioned for growth given the 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.

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Organic Growth Efforts to Aid Revenues: Prosperity Bancshares remains focused on its organic growth strategy. Though the company’s net revenues dipped in 2023, the metric experienced a compound annual growth rate (“CAGR”) of 7.9% over the four years ended 2023. The momentum continued during the first three quarters of 2024. 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 Sept. 30, 2024, roughly 34.9% 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 7.2% CAGR by 2026. Additionally, we expect total loans to rise 3.6% in 2024.

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Strategic Buyouts: 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 and completed its integration in October. Also, 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.

Balance Sheet Strength: As of Sept. 30, 2024, PB’s other borrowings were $3.9 billion, and cash and due from banks were $2.2 billion. Despite a high debt burden, the company has been running off its debt through repayments via the reduction of PB’s securities book to decrease 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.

Prosperity Bancshares currently carries a Zacks Rank #3 (Hold). In the past six months, shares of the company have gained 24.5% compared with the industry’s growth of 24.1%.

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Net Interest Margin Under Pressure: The pressure on margins remains a challenge for Prosperity Bancshares. The company’s NIM contracted to 2.78% in 2023 from 3% in 2022, primarily attributed to its liability-sensitive balance sheet. The trend reversed during the first nine months of 2024 on the back of higher average yields and earning assets.
 
Though asset repricing, the Lone Star acquisition and recent interest rate cuts may offer support to some extent, improvement in NIM is unlikely amid rising funding cost pressures and a still-high-interest-rate scenario. We expect the metric to be 2.97% in 2024.

Subdued Mortgage Banking Business Performance: Uncertainties regarding 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 quarters of 2024, given the improving pipeline, modest mortgage loan demand on account of still-high interest rates is likely to adversely impact the performance of the mortgage banking business. While we expect mortgage income to be $2.9 million this year, indicating a 27.1% rise, the same is unlikely to reach the 2020 levels anytime soon.

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