Prosperity's Zalman Bends His Own Rules in Pricey Deal

David Zalman dislikes bidding for banks — but he hates losing out on a target he really wants.

The chief executive of Prosperity Bancshares (PB) in Houston gave in just a little to snag the oldest independent bank in Texas, FVNB in Victoria, for $380 million in cash and stock this week.

Zalman says he has known the value of pairing with FVNB, parent of First Victoria National Bank, for years and approached its executives in March when he got word that it was mulling its options. His first offer was rebuffed. His second offer was, too, as FVNB had hired Keefe, Bruyette & Woods to weigh its alternatives.

Zalman returned with a third offer: take five days to get one rival (but realistic) bid and compare it with mine.

"We really don't like to do bid deals, but we'd reached an impasse and they wanted to go out and get another bid," Zalman said Monday. "Five days later, we came back and ultimately they picked our offer."

The final offer works out to about 2.54 times FVNB's tangible book value, based on Prosperity's closing stock price on June 26. The premium appears to be the highest among publicly disclosed deal values this year, but analysts who follow the $16.1 billion-asset Prosperity say it is money well spent.

"Lower premiums are better, obviously, but if you look at what they got, it makes sense," says John Rodis, an analyst at FIG Partners. "You get what you pay for."

Roughly 15 of FVNB's 34 branches are in overlapping markets, giving Prosperity a lot of room for cost savings. Analysts predict savings of around 25%.

Meanwhile, the deal also would give Prosperity a deeper presence in south Texas towns like Corpus Christi and Victoria. It also takes Prosperity to The Woodlands, a suburb north of Houston where Exxon Mobil is building a campus that will house more than 10,000 employees.

Prosperity also stands to benefit from FVNB's noninterest income, which makes up 25% of its revenue, analysts say. Prosperity's noninterest income makes up 17% of its revenue, making it considerably more dependent on loan spreads than most banks its size. M. Russell Marshall, FVNB's chief executive, is set to become Prosperity's chairman of wealth management and private banking.

Though Marshall would no longer be CEO of a bank, he says his roots are in trust services and that he is looking forward to helping develop that line of business for Prosperity. FVNB has $540 million under management, compared with $1 billion under management at Prosperity.

The market also endorsed the deal. On Tuesday, Prosperity's stock was trading at $54.69, up 5.6% since Friday's close.

High premiums can be tricky, because the market can sometimes miss the long-term value of the deal and instead focus on the sticker shock and punish the buyer. However, analysts warned that the market's reaction does not signal a new acceptance of higher prices, but rather a case-specific acknowledgement of an experienced and savvy buyer making a good pickup.

"Prosperity has built up a strong track record with its shareholder base of doing accretive deals," says Brad Milsaps, an analyst with Sandler O'Neill. "People tend to give them the benefit of the doubt in paying a fair price."

The rising stock price is further proof that the market is more interested in price to earnings, says Dan Bass, a managing director at Performance Trust Capital Partners. The deal is priced at 17.7 times FVNB's earnings; Prosperity trades at 16.5 times its earnings. When adjusted for an expected 25% cost savings, the multiple is closer to 11.7, Bass says.

"The market knows that Prosperity can deliver the cost savings," Bass says. "After cost savings, this deal is essentially accretive on day one and that is why you see the Street reacting."

Zalman says he doesn't like bidding because it is a rushed process solely focused on making the highest offer and often disregards the talented people who built the bank. Marshall says he knows the importance of a buyer not overpaying if part of the payment is in stock.

"If I'm taking stock, the last thing I want to do is make demands that he pay over the top," Marshall says. "It is has to be a win-win because it is a partnership going forward." Other sellers across the country who are salivating over the premium beware, though.

"I don't think you can extrapolate this pricing to other markets," Rodis says. "Texas, as we know, is different."