The Bank Slate


How Prosperity juggled M&A talks with two banks

The management team at Prosperity Bancshares in Houston had a busy summer.

The $37.8 billion-asset company’s executives juggled negotiations and due diligence for its pending purchases of Lone Star State Bancshares in Lubbock, Texas, and First Bancshares of Texas in Midland.

Prosperity announced in October that it would buy both companies for a total of $570 million.

Lone Star’s first contact with Prosperity predated the onset of the Covid pandemic, while conversations with First Bancshares began last June, according to a regulatory filing tied to both transactions.

In early 2020, Lone Star’s investment bank contacted five potential buyer, including Prosperity, but the process was suspended when the pandemic took hold. The process resumed in the second half of 2021 – Lone Star and its investment bank had discussions with seven prospects, including Prosperity.

First Bancshares’ board asked its investment bank to contact potential suitors in late April. Ken Burgess Jr., the company’s chairman and CEO, and Don Cosby, its president, met with a potential partner in late May, but the parties eventually declined to pursue a merger.

Members of the Prosperity and Lone Star management teams met in Lubbock, Texas, on July 12 to discuss a potential deal. The same day, Prosperity’s management team met with First Bancshares’ investment bank to discuss a deal’s preliminary terms.

On July 18, Prosperity and Lone Star entered into a nondisclosure and confidentiality agreement to allow for due diligence. Two days later, Prosperity’s management team met with the top two executives at First Bancshares to discuss certain aspects of a merger, including the potential merits, risks and viability of a deal.

Prosperity sent Lone Star a nonbinding letter of intent on July 22 that consisted of about 2.4 million shares of stock and $64.1 million of cash. The parties negotiated a revised letter of intent over the next week, with the same structure and price, but “made certain changes, including with respect to the provisions governing purchase price adjustments.”

Prosperity sent its initial letter of intent to First Bancshares on July 29. The parties signed a nondisclosure and confidentiality agreement the same day.

Lone Star’s board on Aug. 1 unanimously authorized management to finalize a nonbinding letter of intent.

Prosperity and First Bancshares approved a revised letter of intent on Aug. 3, which was finalized five days later. The management teams met several times in August and September.

Prosperity sent the first draft of its merger agreement to Lone Star on Sept. 12, leading to negotiations over terms such as purchase price adjustments, the disposition of Lone Star equity-based awards, termination rights and employee matters, among other things.

First Bancshares’ board voted on Sept. 16 to proceed with the proposed merger. Prosperity sent First Bancshares its initial merger agreement on Sept. 27, leading to an exchange of several drafts over the next two weeks.

Prosperity and First Bancshares executives met on Sept. 30 to discuss Prosperity’s corporate strategy, credit quality and loan portfolio. They also covered Prosperity’s financial performance for 2021 and year-to-date 2022, along with key assumptions for projected performance and earnings, operational and legal matters and regulatory compliance.

The Lone Star and First Bancshares boards unanimously approved their merger agreements on Oct. 10. Both deals, the first for Prosperity since 2019, were announced the next day.

Prosperity will pay $228.7 million for the $1.4 billion-asset Lone Star and $341.6 million for the $2.1 billion-asset First Bancshares. The deals, expected to close in the first quarter, price Lone Star at 189% of its tangible book value and First Bancshares at 162% of its tangible book value.

Prosperity plans to cut about a quarter of each seller’s annual noninterest expenses. It expects to incur about $27.1 million of merger-related expenses tied to both acquisitions. About $1.5 million of annual interchange revenue from the selling banks will be lost due to the Durbin Amendment.

The deals should be about 5.9% accretive to Prosperity’s 2023 earnings per share, and 8.9% accretive the next year. It should take less than three years for Prosperity to earn back an expected 4.3% dilution to its tangible book value.

Alan Lackey, Lone Star’s CEO, will join Prosperity as its west Texas area president. He has a three-year employment agreement, according to the latest regulatory filing.

Prosperity said in the filing that it plans to pay about $1.5 million to Lone Star executives tied to their change-in-control agreements.

Burgess, First Bancshares’ CEO, along with Brad Burgess, Greg Burgess and Jeremy Bishop, will join Prosperity as regional presidents overseeing specific geographic markets in west Texas and central Texas. Ken and Brad Burgess collectively own about 2.9% of First Bancshares’ stock.

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