Prosperity Bancshares plunges 8% on $2 billion Stellar acquisition
Investors balk at premium paid as Houston-based bank builds Texas footprint in cash-and-stock deal
Prosperity Bancshares shares tumbled more than 8% on Wednesday after the Houston-based lender announced a $2 billion acquisition of rival Stellar Bancorp, as investors questioned the premium being paid for the deal and the integration challenges ahead.
The stock dropped 8.4% to $66.75 in morning trading, wiping out approximately $590 million in market value. The decline came as Prosperity unveiled a definitive merger agreement to acquire Stellar in a cash-and-stock transaction that values the target at approximately 20% above its pre-announcement trading price.
Under the deal structure, Stellar shareholders will receive $11.36 in cash plus 0.3803 shares of Prosperity common stock for each share of Stellar common stock. The consideration is based on Prosperity's closing share price of $72.90 on January 27, the day before the announcement. The combined company will operate under the Prosperity brand and become the second-largest Texas-headquartered bank by deposits, with more than 330 banking centers across Texas and Oklahoma.
"This strategic transaction significantly enhances our presence in the greater Houston area and further strengthens our franchise in the Texas and Oklahoma markets," Prosperity said in a regulatory filing.
Stellar Bancorp, through its Stellar Bank subsidiary, operates 52 banking offices primarily concentrated in the Houston, Beaumont, and Dallas metropolitan areas. As of December 31, 2025, Stellar reported total assets of $10.8 billion, loans of $7.3 billion, and deposits of $9 billion, according to the company's business combination presentation.
The acquisition extends Prosperity's recent consolidation strategy in the competitive Texas banking market. The company has historically grown through acquisitions, building a network of nearly 280 banking centers prior to this deal. Adding Stellar's footprint, particularly in Houston, strengthens Prosperity's position in one of the nation's fastest-growing metropolitan areas.
However, investors have expressed skepticism about the deal's valuation and integration risks. Stellar's shares surged approximately 12% in premarket trading following the announcement, reflecting the premium paid by Prosperity. The stark divergence in shareholder reaction—Prosperity down sharply while Stellar rallied—highlighted the market's view that the acquirer may be overpaying.
Analyst sentiment toward Prosperity was mixed even before the acquisition announcement. Raymond James Financial downgraded the stock from "outperform" to "market perform" on January 7, citing "still-challenged loan and balance sheet and net interest income growth expectations." The firm noted modest return on equity and potential headwinds facing regional banks in the current interest rate environment.
Conversely, TD Cowen maintained a "buy" rating and raised its price target to $84 on January 7, suggesting some analysts see long-term value in Prosperity's strategic positioning. The overall analyst consensus from MarketBeat shows a "Moderate Buy" rating with an average 1-year price target of $80.50—well above Wednesday's trading level.
The merger, which has been unanimously approved by both companies' boards of directors, is expected to close in the second quarter of 2026, subject to regulatory approvals and Stellar shareholder approval. Key Stellar executives, including CEO Robert R. Franklin Jr. and President Ramon Vitulli, are expected to join Prosperity's leadership team following the transaction's completion, according to American Banker.
The acquisition comes at a challenging time for regional banks, which continue to face pressure from elevated funding costs and competitive deposit pricing. Prosperity's stock had been trading near its 52-week low of $60.04 prior to the announcement, reflecting broader concerns about the sector's profitability in a higher-rate environment.
Wednesday's sell-off places Prosperity shares at a price-to-book ratio of 0.92, suggesting the market values the bank below its book value. The stock's decline also pushed the dividend yield to approximately 3.5%, which could attract income-focused investors if the pullback continues.
For Prosperity, the success of the Stellar acquisition will hinge on its ability to realize cost synergies and cross-selling opportunities across the expanded branch network. The company will need to demonstrate that the premium paid for Stellar will be justified through improved earnings growth and market share gains in the competitive Texas banking landscape.
With the deal expected to close mid-year, investors will be watching closely for integration updates and management's ability to deliver on the strategic rationale outlined in the merger announcement. Until then, the market's initial skepticism is likely to weigh on Prosperity's shares.