Prosperity Bancshares Inc. still has an appetite for M&A even after announcing two deals at once.

The Houston-based company's announced acquisitions of Lone Star State Bancshares Inc. and First Bancshares of Texas Inc. mark its first whole-bank transactions since the company acquired LegacyTexas Financial Group Inc. three years ago, which had $10.46 billion in total assets when the deal was announced in June 2019. But even when combined, the deals are relatively small for Prosperity and leave room for more M&A if future targets arise, according to a company executive and equity analysts.

Lone Star State reported $1.31 billion in total assets at June 30, making up just about 3% of Prosperity's $37.39 billion in total assets at the same time. The First Bancshares of Texas deal is slightly bigger, with the target reporting $2.12 billion in total assets at June 30, or just over 5% of Prosperity's size.

While Prosperity has struck deals for larger targets than Lone Star State and First Bancshares of Texas over the past decade, the two bite-sized deals are reminiscent of the company's prior M&A strategy.

"We've built Prosperity Bank on doing smaller community bank deals, so in many respects, this is going back to our original roots of buying smaller community banks that kind of fit what we do," President and COO Kevin Hanigan told S&P Global Market Intelligence in an interview.

The First Bancshares of Texas deal in particular plays into Prosperity's penchant for taking smaller, slower-growing banks in new markets, and turning them into "cash cows," Hovde analyst Brett Rabatin said in an interview with Market Intelligence.

Given the current economic and regulatory environment, smaller deals can be more attractive, Rabatin said.

"They're growing some more in the state and investors are getting what they want," Rabatin said. "These bite-sized deals to some degree, make a lot more sense, just given where we are in the cycle as well as the receptivity towards sizing of acquisitions."

But the company is not shutting the door on future M&A, even with the two deals in tow.

"There hasn't been a lot of M&A activity given the economic backdrop today, but once people start seeing things like this announced, it tends to get people scratching their heads," Hanigan said. "We do have an appetite for further M&A. Definitely."

D.A. Davidson analyst Gary Tenner wrote in an Oct. 11 note that he expects Prosperity "will remain engaged with other M&A opportunities concurrent with working to close [and] integrate these acquisitions."

What made the two bite-sized targets attractive?

Prosperity was drawn to the two targets because of the similarities in their lending portfolios with Prosperity's and the markets they are in, Hanigan said. The targets' focus in commercial real estate, as well as oil and gas and agriculture, was particularly attractive, Hanigan said.

The two deals will also place Prosperity among the top three in market share in markets like Midland and Lubbock while extending its footprint into new markets in Northern Texas and outside of Austin, according to Hanigan.

"That was important to us. We always say we'd like to be at these top five market share wherever we are," Hanigan said.

Furthermore, the acquisition by Prosperity also comes with larger lending limits for the smaller banks, First Bancshares of Texas President Don Cosby said in an interview.

"We were constrained to some extent by some of the regulatory lending and the commercial real estate guidelines starting to impact us," Cosby said. "We think that the bigger bank with a lower loan-to-deposit ratio will allow us to continue to grow our part of the portfolio going forward."

Analysts applaud

Equity analysts were upbeat on the dual deal announcements.

"The price is very reasonable and adds some nice EPS accretion. This is a nice deal for Prosperity," Keefe Bruyette & Woods analyst Brady Gailey said in an interview.

While announcing, closing and integrating two deals at once can present challenges, Piper Sandler analyst Brad Milsaps said the deals are "right down the middle of the fairway for [Prosperity] given their digestible size as [Prosperity] has proven to be an excellent acquirer of banks like Lonestar and First Bancshares over its history."

The Street also reacted positively to the acquisition announcements. Prosperity's stock price closed up 2.28% on the day of the deal announcements, compared to a 2.06% decline in the KBW Nasdaq Bank Index. The company's stock price has remained up, closing up 8.49% on Oct. 17 from the day before the deal announcement, compared to a 4.48% rise in the KBW Nasdaq Bank Index over the same period.

Milsaps attributed the rise to "the digestible size of these deals, earnings accretion, and some relief that [Prosperity] did not announce a much larger transaction."