As Prosperity Bancshares Inc. in Houston was rolling up small Texas banks in recent years, it often bumped up against Franklin Bank Corp., another acquisitive company in its hometown that on several occasions frustrated Prosperity by outbidding it.
It turns out that losing out to Franklin was not such a bad thing for Prosperity. When Franklin's $5.1 billion-asset thrift failed last week, Prosperity won the bidding for its 46 branches — at a cost far below what it might have once paid.
Dan Rollins, Prosperity's president and chief operating officer, said he is not exactly cheering Franklin's demise, but he could not be happier that his company gained $3.7 billion of deposits for a mere $60 million, or a 1.7% premium, in one fell swoop. Franklin had paid $383 million for its 10 whole-bank or branch acquisitions since it was formed in 2002, according to data from Carson Medlin Co.
"Some of the banks that Franklin bought over the last few years we were also in the game for, and for whatever reason Franklin decided to pay more than what we were willing to pay," Mr. Rollins said.
Many of the branches Prosperity got from Franklin are in fast-growing eastern Texas markets north of Houston. It now has roughly 190 branches in the state, and the purchase vaulted it from 11th to 7th in Texas deposit share, with 1.6%, according to a research note from Christopher Marinac, an analyst at FIG Partners LLC.
"We are very excited," Mr. Rollins said. "This significantly improves our presence across the state."
When Franklin was seized last week, it became the first bank or thrift based in Houston to fail since 1993, at the height of banking industry's crisis. It was done in largely by bad mortgages and construction loans originated outside Texas.
Within its home state, its loans were performing well, and as part of its purchase, Prosperity will get to cherry-pick the best of them, he said. (It agreed to buy $850 million of the failed thrift's assets.)
Brett Rabatin, a senior bank analyst with First Horizon National Corp.'s FTN Midwest Research Securities Corp., said buying the Franklin deposits was a "home run" for Prosperity.
"This is going to be a nicely accretive deal," he said. "When you buy deposits for a really low price, it tends to be accretive quickly, particularly if you don't have to raise a bunch of capital to do it."
Bain Slack, an analyst at KBW Inc.'s Keefe, Bruyette & Woods Inc., said: "It is good for Prosperity that in these times the stronger banks that acquire the weak institutions will benefit. This is a sign of Prosperity having run their bank properly when things were good, and now they can benefit that times are tough."
Mr. Rollins said eastern Texas is one area where Prosperity had been eager to expand, because the area has experienced strong, energy-related job growth, and destruction from recent hurricanes has fueled a building boom.
Prosperity has made more than 20 acquisitions in Texas this decade, but "we had hardly stuck our toe in the pool in east Texas, with just two offices," he said. "Now with 22 offices, we are here and swimming with everybody else."
The purchase also significantly boosted Prosperity's visibility in the Bryan/College Station area. Franklin's last acquisition was for First National Bank of Bryan in 2007 and that bank (which retained its name) has 19% of the deposits in that region, according to Federal Deposit Insurance Corp. data.
Mr. Rollins, who was in Bryan when regulators seized Franklin and was still there early this week, said the Bryan operation tripled Prosperity's deposits in the market. "This is a wonderful fit for us." First National Bank of Bryan is an "old-time community bank with strong people and a good reputation," he said. "You know it's important to us, because I came here first."
Analysts said the acquisition will put some stress on Prosperity's capital levels initially, though some expected deposit runoff will alleviate some of the strain.
The purchase included $1.7 billion of brokered deposits that are expected to run off immediately, and because Franklin was paying more for deposits than Prosperity, advertising rates as high as 4%, about $500 million more will run off in the coming months, Mr. Slack said.
Analysts said that because Prosperity did not acquire any of Franklin's bad assets, there is not any additional credit risk on the balance sheet, so they are more comfortable with the lower capital levels.
Prosperity's Tier 1 ratio was at 13.3% at the end of the third quarter. After the brokered deposits run off, the figure is expected to settle at around 10.4%. The total capital ratio after the brokered deposits run off is expected to be 11.3% of assets, and Prosperity is expected to end up with $8.8 billion of assets.
"The size of this deal might have been a little bigger than Prosperity was hoping for, so they may have to raise capital to bolster the capital ratios a little bit," Mr. Rabatin said.
Mr. Rollins said his company has not reached a decision about whether to raise more capital.