What happened

Shares of Green Bancorp Inc. (NASDAQ:GNBC) were up by about 10% as of 10:30 a.m. EDT on Tuesday. The parent company of Green Bank will merge with Veritex Holdings (NASDAQ:VBTX), creating a leading Texas community bank with approximately $7.5 billion in assets.

So what

Small community banks are increasingly merging with one another to cut costs and compete with larger regional rivals. When Green Bancorp is merged with Veritex Holdings, the combined institution will have roughly $5.9 billion in deposits scattered across 43 branches in Texas.

Federal Reserve building.

As the Fed raises interest rates, bank mergers and acquisitions are heating up. Image source: Getty Images.

A presentation explaining the rationale for the deal notes that the combined bank will be the 12th and 14th largest in the Dallas-Forth Worth-Arlington and the Houston-Woodlands-Sugar Land metropolitan statistical areas, respectively. Scale should beget some cost savings, as the banks assumed that they could shed about 11% of their combined noninterest expense by eliminating duplicated costs.

The all-stock deal calls for shareholders of Green Bancorp to receive 0.79 shares of Veritex Holdings for every share of Green Bancorp they own, valuing Green Bancorp at a relatively high multiple of 2.5 times tangible book value, and 15.2 times consensus earnings estimates in 2018.  

Now what

Wall Street seems to believe that Green Bancorp is getting the better end of the bargain. Veritex shares are down by about 4% in active trading today. At a recent price of $31.30 per share for Veritex, Green Bancorp shareholders would receive Veritex stock worth about $24.89 for every Green Bancorp share they own.

That said, shares of Green Bancorp are priced at a slight discount to their expected value upon closing, suggesting that investors see little risk that the deal falls through before the anticipated close in the first quarter of 2019. This deal, it seems, is as good as done.

Jordan Wathen has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.