Prosperity Bancshares Inc.'s $135.7 million, all-stock deal for FirstCapital Bankers Inc. of Corpus Christi links a cost-cutting buyer with a target that has plenty to cut, according to analysts.
Buying the $774 million-asset FirstCapital would give Prosperity, of Houston, its first meaningful operations in the fast-growing Corpus Christi market.
The deal, announced Tuesday, would also give the $2.7 billion-asset Prosperity a chance to do what it does best - take over a struggling company and whip it into shape.
FirstCapital has had some problems with asset quality. It reported nonperforming loans of $6.1 million (or 1.18% of total loans) for the third quarter. However, its bigger issues have been on the cost side. At the end of the third quarter its efficiency ratio was 83.3%. The average for commercial banks with between $500 million and $1 billion of assets was 59.3%, according to the Federal Deposit Insurance Corp. Prosperity's ratio was 48.6%.
The management team at Prosperity "is licking their chops at the opportunity to squeeze some cost saves out of this," said Barry McCarver, an analyst with Stephens Inc. in Little Rock. "They've taken a hard look at this, and clearly that's the game plan they have in mind."
Prosperity said it expects to trim 27% from FirstCapital's noninterest expenses, which totaled $8.4 million for the third quarter and $22.6 million for the first nine months.
If it succeeds, the savings would fall to Prosperity's bottom line.
Scott Alaniz, who covers Texas banks for Sandler O'Neill & Partners LP, said he believes Prosperity - which has bought 14 banks since October 1998 - would have "no trouble at all" meeting its cost-cutting goal.
"That's one thing Prosperity is pretty good at," Mr. Alaniz said. "They're a serial acquirer. When they do their due diligence, they do a very thorough job and make a good case for their acquisitions."
FirstCapital Bank was founded Jan. 1, 1949. Though it has an 8.3% share of Corpus Christi's $3.8 billion deposit market, it has had difficulty generating the profits that would be expected from a company its size. Its return on equity was 5.62% last year and 4.3% for the first nine months of this year.
Despite those figures, David Zalman, Prosperity's president and chief executive, said FirstCapital was very attractive. He said Prosperity has been looking for some time to expand in Corpus Christi and Victoria, where FirstCapital also has significant operations.
It has also been working to expand its loan portfolio - and acquiring FirstCapital's $518 million of loans would accomplish that.
Prosperity's loan-to-deposit ratio was 43% as of Sept. 30. The industry average for a commercial bank with assets of between $1 billion and $10 billion was roughly 91%, according to the FDIC.
Mr. Zalman said FirstCapital has agreed to dispose of about $20 million of loans that do not meet Prosperity's underwriting standards before the deal closes in the first quarter. Still, "the majority of their loan portfolio and their customers will fit with ours."
Prosperity plans to retain FirstCapital's management team, and Mr. Zalman said it wants to keep as many loan officers as it can.
D. Michael Hunter, FirstCapital's chairman, president, and CEO, would become Prosperity's vice chairman. Steve Hipes, FirstCapital Bank's president, would become the chairman of Prosperity's south Texas area, and several other FirstCapital officers would become senior officers at Prosperity.
The deal would give Prosperity 90 branches, including 15 in Corpus Christi, 34 in Houston, 11 in Dallas, and seven in Austin.
