Prosperity Bancshares (PB) in Houston, a prolific acquirer in recent months, is finding that its deals are producing a nice boost to fee income.

During the second quarter, noninterest income at the $16 billion-asset company nearly doubled from a year earlier, at $25.2 million.

The spike represents a new wrinkle for Prosperity, which has a reputation for tight-fisted efficiency and a conservative approach to lending. When it comes to fees, the company has, for years, lagged similar sized banks.

"Historically, Prosperity has been a very spread-income-focused bank," says Gary Tenner, an analyst at D.A. Davidson. "There has not been a lot of fee income."

Things appear to be changing, though. Prosperity began reporting a steady rise in noninterest income about a year ago, after buying American State Financial of Lubbock, Texas. Its latest acquisition — the $2.4 billion-asset FVNB Corp. — should lead to continued increases in fee income, David Zalman, Prosperity's chairman and chief executive, said during a July 30 conference in New York hosted by Keefe, Bruyette & Woods.

Prosperity agreed last month to pay $374 million in cash for the Victoria, Texas, company. It expects to close on the FVNB acquisition in the fourth quarter. As soon as the deal closes, Prosperity intends to launch a statewide wealth management and private banking effort that will be led by M. Russell Marshall, FVNB's chairman and chief executive.

The post is familiar territory for Marshall, who was an executive in FVNB's trust operations before becoming a corporate executive. (FVNB reported $540 million of assets under management at the end of 2012.) Marshall passed on an opportunity to become a regional president at Prosperity to return to private banking, Zalman said.

Marshall "would have naturally become one of the head guys running our operations [in south Texas], but he wants to create a private banking group for the whole state of Texas," Zalman said at the KBW conference. "That will really help us increase trust assets in the major metropolitan market of Houston and probably central Texas."

Trust services are a relatively new business for Prosperity. As late as 2011, the company reported no income from fiduciary activities. It obtained a $1 billion trust business when it bought American State, though those operations are concentrated in western Texas.

From a trust standpoint, Prosperity only has a negligible presence in the eastern part of the state, including Houston.

To be sure, the act of launching a business line is no guarantee of future success, and there are boatloads of competitors chasing private-banking dollars around Texas. But the Houston angle is what makes Prosperity's new play so intriguing — and plausible.

With roughly 5 million people and an economy that is projected to surpass $500 billion, Houston is the fourth-biggest metropolitan market in the country, according to the Greater Houston Partnership. Moreover, the area is filling up with young business owners and entrepreneurs — prime candidates for private banking services.

Houston was ranked the nation's top city for small business growth in a survey conducted earlier this year by, a portal that connects borrowers and lenders.

Biz2Credit began noticing an uptick in applications in Houston about two years ago, says Rohit Arora, the firm's chief executive. Biz2Credit now receives more applications from Texas than any other state, surpassing totals from New York and California, which have traditionally been leaders in small business creation.

Houston's start-ups are far from the traditional mom-and-pop shops. The average young business there has seven employees and revenues in excess of $400,000, Biz2Credit found.

Targeting Houston for private banking makes sense, Arora says, because the owners of many of the city's new small businesses are well on their way to becoming the type of high-net-worth individuals that bankers covet.

Competition remains a challenge in Texas as Prosperity seeks to build a private banking franchise, Tenner says. Still he adds that the company should be able to capture a fair share of business.

Prosperity's trust fees, which totaled $1.9 million through the first half of 2013, should double next year, Tenner says. "The FVNB acquisition should give them a leg up in growing that fee income, particularly on the trust side," Tenner adds.

Trust services are not the only business from which Prosperity is looking to squeeze additional fee income. The company also inherited a small credit card business when it bought American State. It is now busy cross selling cards to its considerably larger customer base.

"We're really expanding their credit card business," Zalman said. "We're trying to take it bank-wide and get about 60,000 new accounts. So we're really focused on building our noninterest income."

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