Prosperity Bancshares Set to Acquire Tradition Bancshares - Analyst Blog

In a bid to boost an already successful inorganic growth story, Prosperity Bancshares Inc.PB is seeking to strengthen its foothold at the headquarters in Houston. The company inked a deal to acquire Houston-based Tradition Bancshares, Inc. in a stock-and-cash deal on Thursday.

The Southwest bank has grown considerably through strategic acquisitions, which has helped it become the second largest commercial bank in Texas in terms of deposits. As of Jun 30, 2015, the company had $9.1 billion in loans and $17 billion in deposits.

Notably, Texas outpaces the overall U.S. economy with lower unemployment rate in Jun 2015 and higher consumer confidence during Jul 2015. More impressively, the unemployment rate in Texas has been at or below the national rate for 102 consecutive months. Thus, an increased market share in lucrative Texas markets enhances Prosperity Bancshares's long-term prospects.

Details of the Deal

As part of the deal, Prosperity Bancshares will acquire Tradition Bancshares as well as its parent company, Tradition Bank. The company will issue 679,679 shares valued at roughly $37.4 million (based on the company's share price as on Aug 6), and deploy additional $39 million in cash to acquire all outstanding shares of Tradition Bancshares.

Also, Senior Chairman at Tradition Bancshares, Downy Vickery and Chairman, Craig Wooten, will become Executive Vice Presidents at Prosperity Bancshares, to supervise the company's lending business. Further, CEO Charlie Norris will be appointed as Regional President to look over and manage the acquired banking offices.

Houston-based Tradition Bancshares operates through a network of 7 banking offices and 3 banking centers. As of Jun 30, 2015, the company has total consolidated assets of $522.1 million, total loans of $242.4 million and total deposits worth $463.8 million.

The deal has been approved by board of directors of both parties, and is expected to close in fourth-quarter 2015. Operational integration, however, will begin during the first quarter of 2016. Moreover, there can be delays in completion as the deal still awaits approval from Tradition Bancshares' shareholders and regulators.

The latest development marks the bank's 29th acquisition since its inception in 1998. Prior to this, the company had closed the acquisition of Tulsa-based F&M Bancorporation Inc. in 2014.

While the acquisition looks promising, shares of Prosperity Bancshares slid 1.24% to $55.05 per share on Thursday. We believe the overall negative sentiments in the market triggered the fall.

Our Take

While Prosperity Bancshares is poised to capitalize on the potential in the Texas region with meaningful acquisitions, we remain apprehensive regarding its loan portfolio, which is largely (more than 72%) skewed toward the real estate sector. We expect focus on portfolio diversification will help the company generate better revenues, going forward. Until then, the gradually recovering housing sector will likely bring some relief on that front.

Additionally, Prosperity Bancshares has ample cash balance and a healthy capital position to effectively pursue further buyouts.

Nevertheless, acquisition-related expenses have been a major headwind for the company. But an anticipated fall in professional expenses might help offset such a rise.

For 2015, Prosperity Bancshares's revenue is expected to decline at a rate of negative 3.8%; while earnings per share are expected to fall 5.01% year over year - according to the Zacks Consensus Estimate.

Prosperity Bancshares currently carries a Zacks Rank #3 (Hold).

First Financial Bankshares Inc. FFIN , BOK Financial Corporation BOKF , BancFirst Corporation BANF are better-ranked stocks in the same industry. All these stocks hold a Zacks Rank #2 (Buy).

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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