Prosperity Bancshares Inc. of Houston received a pair of upgrades for closing its largest banking acquisition earlier than anticipated.
Bain Slack of Keefe, Bruyette & Woods Inc. raised his rating on the $4.5 billion-asset company's stock Monday to "outperform," from "market perform." Peter J. Winter of Bank of Montreal's Harris Nesbitt Corp. upgraded the stock to "outperform," from "neutral."
Both analysts said they are increasingly optimistic about Prosperity's outlook, mostly because its $238.7 million acquisition of SNB Bancshares Inc. of Sugar Land, Tex., closed April 1, several weeks earlier than expected.
When the deal was announced in November, analysts had expressed skepticism about the benefits for Prosperity, beyond the fact that it would expand in high-growth Texas markets. The $876.4 million-asset SNB was liability sensitive and had too much leverage on its balance sheet, analysts said.
However, Mr. Slack said in an interview Monday that SNB "massively" improved its balance sheet from the fourth quarter to the end of the first quarter.
"What that tells us is that the integration really started before the close of the deal," he said. "This gives Prosperity a head start with regard to the integration."
Prosperity said it would complete the integration by May 1.
Mr. Winter wrote in a note that SNB sold off $205 million of investment securities to pay down borrowings, improving its net interest margin by 68 basis points from the fourth quarter, to 3.64%. It also sold $40 million of loans and $12 million of nonperforming assets that Prosperity was not comfortable retaining, he wrote.
Dan Rollins, Prosperity's president and chief operating officer, said in an interview that the market "did not see the benefit of the SNB transaction when we made the announcement, or thought we overpaid." However, his company "believed all along that this was a perfect fit for us."
Prosperity's pristine credit quality and anticipated benefits from a steepening of the yield curve also contributed to the upgrades. The analysts said the company likely will not sell in the near term, though it has made several investment banks' merger and acquisition target lists.
The company has "some of the best credit metrics in the history," Mr. Winter said in an interview. "When credit quality does turn, these guys are going to be better positioned." Last week Prosperity said its first-quarter earnings rose 21.9% from a year earlier, to $12.9 million, or 46 cents a share. Its shares rose 2.5% early Monday but later fell to close up 0.8%.
