Hank's Small Banks

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PRSP..Growth,, Location..

Prosperity Bancshares, Inc.(R) Reports Strong 2009 Earnings
- 4Q 2009 Earnings Per Share of $0.65 (diluted)
- Non-Performing Assets equal 0.22% of 4Q Average Earning Assets
- Total Risk Based Capital is 13.86%
- Tier 1 Leverage Capital is 6.47%


HOUSTON, Jan. 22 /PRNewswire-FirstCall/ -- Prosperity Bancshares, Inc.® (Nasdaq: PRSP), the parent company of Prosperity Bank®, reported net income for the quarter ended December 31, 2009 of $30.569 million or $0.65 per diluted common share, an increase in net income of $7.884 million or 34.8%, compared with $22.685 million or $0.49 per diluted common share for the same period in 2008. Prosperity also reported net income for the year ended December 31, 2009 of $111.879 million or $2.41 per diluted common share, up 32.4% from 2008 net income of $84.507 million and up 29.6% from 2008 diluted earnings per common share of $1.86.

Excluding impairment charges on Prosperity's Fannie Mae and Freddie Mac perpetual preferred securities of $14.025 million pre-tax during the third quarter of 2008, net income for the year ended December 31, 2008 would have been $93.623 million or $2.06 per diluted common share.

Prosperity was included in the January 18, 2010 issue of Forbes magazine in their list of "Good Banks/Bad Banks" as the 4th best bank in the nation. The report considered eight measures of asset quality, capital adequacy and profitability. In addition, Prosperity was recently recognized by Morningstar for its strong performance in their article entitled "Our Favorite Texas Banking Franchises."

"We continue to be pleased with our performance during these challenging economic conditions," said David Zalman, Prosperity's Chairman and Chief Executive Officer. "Our bankers remain focused on growing our bank one customer at a time in a prudent fashion."

In addition to Prosperity's GAAP (generally accepted accounting principles) financial reporting, Prosperity's management includes certain non-GAAP financial measures to evaluate its performance. Specifically, Prosperity reviews return on average tangible common equity, tangible book value per share and the tangible equity to tangible assets ratio. Prosperity also reviews its non-interest expense, net income, earnings per share and related performance ratios for the twelve month period ending December 31, 2008 excluding the non-recurring impairment charge on Fannie Mae and Freddie Mac perpetual preferred securities. Prosperity has included in this Earnings Release information relating to these non-GAAP financial measures for the applicable periods presented. Please refer to the "Notes to Selected Financial Data" at the end of this Earnings Release for a reconciliation of these non-GAAP financial measures.

Results of operations for the three months ended December 31, 2009

For the three months ended December 31, 2009, net income was $30.569 million compared with $22.685 million for the same period in 2008. Net income per diluted common share was $0.65 for the three months ended December 31, 2009 and $0.49 for the same period in 2008. Returns on average assets, average common equity and average tangible common equity for the three months ended December 31, 2009 were 1.39%, 9.11% and 28.50%, respectively. Prosperity's efficiency ratio (excluding net gains and losses on the sale of securities and assets and impairment charge on write-down of securities) was 42.44% for the three months ended December 31, 2009.

Net interest income before provision for credit losses for the quarter ended December 31, 2009 increased 25.2% to $80.089 million compared with $63.957 million during the same period in 2008. The increase was attributable primarily to lower deposit pricing. The net interest margin on a tax equivalent basis increased to 4.24% for the three months ended December 31, 2009 compared with 3.65% for the same period in 2008, primarily impacted by the Franklin Bank transaction in 2008.

Non-interest income increased $1.203 million or 8.9% to $14.711 million for the three months ended December 31, 2009 compared with $13.508 million for the same period in 2008. The increase was mainly attributable to a decrease in losses on the sale of ORE.

Non-interest expense increased $2.590 million or 6.9% to $40.176 million for the fourth quarter of 2009 compared with $37.586 million for the fourth quarter of 2008. The increase was mainly attributable to increased FDIC assessments.

Loans at December 31, 2009 were $3.377 billion, a decrease of $190.354 million or 5.3%, compared with $3.567 billion at December 31, 2008. Construction loans decreased $108.835 million over the past year. Loans decreased 0.9% or $29.434 million on a linked quarter basis compared with loans of $3.406 billion at September 30, 2009. As reflected in the table below, linked quarter loans for the fourth quarter of 2009 were impacted by a decrease in the loans acquired from the FDIC as a part of the Franklin Bank transaction.

Deposits at December 31, 2009 were $7.259 billion, a decrease of $44.747 million or 0.6%, compared with $7.303 billion at December 31, 2008. Excluding the deposits assumed as a part of the Franklin Bank transaction, deposits increased 11.0% or $582.739 million over the past year. Linked quarter deposits increased $140.557 million or 2.0% from $7.118 billion at September 30, 2009. As reflected in the table below, linked quarter deposits for the fourth quarter of 2009 were impacted by the deposits assumed from the FDIC as part of the Franklin Bank transaction.


Average loans increased 0.7% or $23.977 million to $3.390 billion for the quarter ended December 31, 2009 compared with $3.366 billion for the same period of 2008. Linked quarter average loans decreased 1.2% or $41.532 million from $3.431 billion at September 30, 2009. Average deposits increased 6.0% to $7.089 billion for the quarter ended December 31, 2009 compared with $6.686 billion for the same period of 2008. Linked quarter average deposits decreased 1.9% or $135.270 million from $7.224 billion at September 30, 2009.

At December 31, 2009, construction loans totaled $557.245 million, consisting of approximately $147 million of single family residential construction loans; $89 million of land development loans; $79 million of raw land loans; $101 million of residential lot loans; $52 million of commercial lot loans; and $90 million of commercial construction and other construction loans. This is a decrease of $6.861 million from construction loans at September 30, 2009.

At December 31, 2009, Prosperity had $8.850 billion in total assets, $3.377 billion in loans and $7.259 billion in deposits. Assets, loans and deposits at December 31, 2009 decreased by 2.4%, 5.3% and 0.6%, respectively, compared with their level at December 31, 2008.

Results of operations excluding impairment charges on Fannie Mae and Freddie Mac perpetual preferred securities

Prosperity incurred a non-cash impairment charge on its Fannie Mae and Freddie Mac perpetual preferred securities in the amount of $14.025 million pre-tax ($9.116 million after-tax) in the third quarter of 2008 equal to the full carrying cost of its investment in such securities. The table below presents select financial results before and after the impairment write-down for the related periods.


Results of operations for the twelve months ended December 31, 2009

For the twelve months ended December 31, 2009, net income was $111.879 million compared with $84.507 million for the same period in 2008. Net income per diluted common share was $2.41 for the twelve months ended December 31, 2009 compared with $1.86 for the same period in 2008. Excluding impairment charges on Prosperity's Fannie Mae and Freddie Mac perpetual preferred securities of $14.025 million pre-tax during the third quarter of 2008, net income for the year ended December 31, 2008 would have been $93.623 million or $2.06 per diluted common share.

Returns on average assets, average common equity and average tangible common equity for the twelve months ended December 31, 2009 were 1.26%, 8.57% and 28.66%, respectively. Prosperity's efficiency ratio (excluding net gains and losses on the sale of securities and assets) was 46.27% for the twelve months ended December 31, 2009.

Net interest income before provision for credit losses for the twelve months ended December 31, 2009 increased $79.372 million or 34.9%, to $307.101 million compared with $227.729 million during the same period in 2008. The increase was attributable primarily to a 30.26% increase in average earning assets and lower deposit pricing.

Non-interest income increased $7.727 million or 14.8% to $60.097 million for the twelve months ended December 31, 2009 compared with $52.370 million for the same period in 2008. The increase was mainly attributable to a decrease in net loss on sale of ORE and increases in service charges on deposit accounts due to an increased number of deposit accounts assumed from the FDIC as a part of the Franklin Bank transaction and deposit accounts assumed from the Banco Popular and 1st Choice acquisitions.

Non-interest expense increased $25.904 million or 18.0% to $169.700 million for the twelve months ended December 31, 2009 compared with $143.796 million for the same period in 2008. The increase was due primarily to (i) an increase in salaries and benefits expense due to associates added in connection with the Franklin Bank transaction and the acquisition of Banco Popular and 1st Choice; (ii) an increase in FDIC assessments and (iii) an increase in general operating costs associated with the banking centers acquired in 2008 and the banking offices that were previously locations of Franklin Bank. Total non-interest expense for the twelve months ended December 31, 2008 included a $14.025 million impairment charge on write-down of securities.

Asset Quality

Non-performing assets totaled $16.356 million or 0.22% of average earning assets at December 31, 2009 compared with $14.368 million or 0.20% of average earning assets at December 31, 2008 and $21.920 million or 0.29% of average earnings assets at September 30, 2009. Non-performing assets at December 31, 2009 consist of $6.1 million in non-accrual loans, $2.3 million in accruing loans 90 or more days past due, approximately $116,000 in repossessed assets and $7.8 million in ORE. The allowance for credit losses was 1.54% of total loans at December 31, 2009, 1.04% at December 31, 2008 and 1.39% of total loans at September 30, 2009.

The provision for credit losses was $8.500 million for the three months ended December 31, 2009 and $6.000 million for the three months ended December 31, 2008. Prosperity's loan loss reserve model called for increased provisioning in the fourth quarter due to increased charge-offs resulting from a continued weak economy. Net charge offs were $3.949 million for the three months ended December 31, 2009 and $3.011 million for the three months ended December 31, 2008.

The provision for credit losses was $28.775 million for the twelve months ended December 31, 2009, an increase of $18.908 million compared with $9.867 million for the twelve months ended December 31, 2008. As mentioned earlier, Prosperity's loan loss reserve model called for increased provisioning in 2009 due to increased charge-offs resulting from a continued weak economy. Net charge offs were $13.881 million for the twelve months ended December 31, 2009 and $7.621 million for the twelve months ended December 31, 2008.

Conference Call

Prosperity's management team will host a conference call on Friday, January 22, 2010 at 10:30 a.m. Eastern Standard Time (9:30 a.m. Central Standard Time) to discuss Prosperity's fourth quarter and full year 2009 earnings. Individuals and investment professionals may participate in the call by dialing 1-800-894-5910, the reference code is PBTX.

Alternatively, individuals may listen to the live webcast of the presentation by visiting Prosperity's website at www.prosperitybanktx.com. The webcast may be accessed directly from Prosperity's Investor Relations page by clicking on the "4th Quarter Results and Webcast" link.

Acquisition of U. S. Bank's Texas Branches

On January 19, 2010, Prosperity announced the signing of a definitive agreement to acquire the three (3) Texas retail bank branches of U.S. Bank (USB). Prosperity Bank will pay a premium for approximately $420 million in deposits, as well as purchase certain loans and other assets attributable to the branches.

The three locations being acquired by Prosperity are the Texas locations U.S. Bank acquired from the FDIC on October 30, 2009 when U.S. Bank acquired the nine (9) subsidiary banks of FBOP Corporation. The Texas banks were Madisonville State Bank in Madisonville, Texas; Citizens National Bank in Teague, Texas; and North Houston Bank in Houston, Texas.

The agreement has been approved by both banks and is expected to close during the first quarter of 2010, although delays could occur. The transaction is subject to certain conditions, including customary regulatory approvals.

Assumption of deposits and acquisition of certain assets from the FDIC as receiver for Franklin Bank, SSB

On November 7, 2008, Prosperity Bank® assumed approximately $3.6 billion of deposits, including all uninsured deposits, from the FDIC, acting in its capacity as receiver for Franklin Bank. The FDIC entered into a purchase and assumption agreement with Prosperity Bank, which paid a premium to ensure that all deposits of Franklin Bank, both insured and uninsured, were transferred to Prosperity Bank. Under terms of the purchase and assumption agreement, Prosperity acquired certain assets from the FDIC, including approximately $350 million in US Treasury and Agency Securities and approximately $350 million in performing loans. The remaining net proceeds were predominately invested in US Agency Securities.

While Franklin Bank operated forty-five (45) full service banking offices, Prosperity is operating thirty-three (33) of the locations as full-service banking centers following the completion of the operational integration which occurred during the first quarter of 2009. The former Franklin Bank locations not operated by Prosperity were closed and consolidated into nearby Prosperity Bank locations.

Acquisition of 1st Choice Bancorp, Inc.

On June 1, 2008, Prosperity completed its previously announced acquisition of 1st Choice Bancorp, Inc. and its wholly owned subsidiary, 1st Choice Bank. 1st Choice Bancorp, Inc. operated two (2) banking offices in Houston, Texas, with one location in South Houston and another in the Heights area, which was consolidated with Prosperity's Heights location and is located in 1st Choice's Heights banking office. As of May 31, 2008, 1st Choice Bancorp reported total assets of approximately $314.9 million, loans of approximately $192.7 million, deposits of approximately $285.2 million and stockholders' equity of approximately $26.4 million.

In connection with the acquisition, Prosperity issued 1,757,757 shares of its common stock and paid approximately $18.758 million in cash for all outstanding shares of 1st Choice Bancorp.

Acquisition of Banco Popular's Houston Branches

On January 10, 2008, Prosperity Bank® completed its previously announced acquisition of six (6) Houston retail bank branches from Banco Popular North America. The branches had approximately $125 million in combined deposits. All six (6) locations are now operating as full service banking centers of Prosperity Bank®.

Prosperity Bancshares, Inc.®

Prosperity Bancshares, Inc.®, an $8.9 billion Houston, Texas based regional financial holding company, formed in 1983, operates under a community banking philosophy and seeks to develop broad customer relationships based on service and convenience. Prosperity offers a variety of traditional loan and deposit products to its customers, which consist primarily of small and medium sized businesses and consumers. In addition to established banking products, Prosperity offers a complete line of services including: Internet Banking services at http://www.prosperitybanktx.com, Retail Brokerage Services, MasterMoney Debit Cards, and 24 hour voice response banking. Prosperity currently operates one hundred fifty-eight (158) full service banking locations; fifty-one (51) in the Houston area; twenty-seven (27) in the South Texas area including Corpus Christi and Victoria; twenty-four (24) in the Dallas/Fort Worth area; twenty (20) in the East Texas area; and twenty-seven (27) in the Central Texas area including Austin and San Antonio; and nine (9) in the Bryan/College Station area.

Central Texas Area -

Austin -

Allandale

Cedar Park

Congress

183

Lakeway

Liberty Hill

Northland

Oak Hill

Parmer Lane

Research Blvd

Rollingwood

Slaughter Lane

Bryan/College Station -

Bryan

Bryan-East

Bryan-North

College Station

Greens Prairie

Wellborn Road

Rock Prairie

Other Central Texas Locations -

Bastrop

Caldwell

Dime Box

Dripping Springs

Elgin

Flatonia

Georgetown

Kingsland

La Grange

Lexington

Navasota

New Braunfels

Round Rock

San Antonio

Schulenburg

Smithville

Weimar

Dallas/Fort Worth Area -

Dallas -

Abrams Centre

Balch Springs

Camp Wisdom

Cedar Hill

Central Expressway

Frisco

Frisco-West

Kiest

Preston Road

Red Oak

The Colony

Turtle Creek

Westmoreland

Fort Worth -

Haltom City

Keller

Roanoke

Stockyards

Other Dallas/Fort Worth Locations -

Azle

Ennis

Gainesville

Mesquite

Muenster

Sanger

Waxahachie

East Texas Area -

Athens

Athens-South

Blooming Grove

Canton

Carthage

Corsicana

Crockett

Eustace

Grapeland

Gun Barrel City

Jacksonville

Kerens

Longview

Mount Vernon

Palestine

Rusk

Seven Points

Tyler

Tyler-University

Winnsboro

Houston Area -

Houston -

Aldine

Bellaire

Clear Lake

Copperfield

Cypress

Downtown

Fairfield

Gessner

Gladebrook

Harrisburg

Heights

Highway 6 West

Hillcroft

Little York

Medical Center

Memorial Drive

Pasadena

Pecan Grove

River Oaks

Sugar Land

SW Medical Center

Tanglewood

Uptown

Waugh Drive

Westheimer

Woodcreek

Other Houston Area

Locations -

Angleton

Bay City

Beaumont

Cinco Ranch

Cleveland

East Bernard

El Campo

Dayton

Galveston

Groves

Hempstead

Hitchcock

Katy

Liberty

Magnolia

Mont Belvieu

Nederland

Needville

Sweeny

Tomball

Waller

West Columbia

Wharton

Winnie

Wirt

South Texas Area -

Corpus Christi -

Airline

Carmel

Northwest

Saratoga

Water Street

Other South Texas

Locations -

Alice

Aransas Pass

Beeville

Cuero

Edna

Goliad

Gonzales

Hallettsville

Kingsville

Mathis

Palacios

Pleasanton

Port Aransas

Port Lavaca

Portland

Rockport

Seguin

Sinton

Victoria

Victoria-North

Yoakum

Yorktown

Return on average assets (annualized)(I)
1.39%
1.09%
1.26%
1.20%

Return on average common equity (annualized)(I)
9.11%
7.30%
8.57%
7.09%

Return on average tangible common equity (annualized)(I)
28.50%
24.89%
28.66%
24.16%

Net interest margin(J)

(tax equivalent) (annualized)
4.24%
3.65%
4.08%
3.96%

Efficiency ratio(K)
42.44%
48.60%
46.27%
46.51%

Asset Quality Ratios

Non-performing assets to average earning assets
0.22%
0.20%
0.22%
0.25%

Non-performing assets to loans and other real estate
0.48%
0.40%
0.48%
0.40%

Net charge-offs to average loans
0.12%
0.09%
0.40%
0.23%

Allowance for credit losses to total loans
1.54%
1.04%
1.54%
1.04%

Prosperity's management uses certain non-GAAP (generally accepted accounting principles) financial measures to evaluate its performance. Specifically, Prosperity reviews tangible book value per share, return on average tangible common equity and the tangible equity to tangible assets ratio for internal planning and forecasting purposes. Prosperity also reviews its net income, earnings per share, non-interest expense and related performance ratios for the twelve month period ended December 31, 2008 excluding the non-recurring impairment charge on Fannie Mae and Freddie Mac perpetual preferred securities. Prosperity has included in this Earnings Release information relating to these non-GAAP financial measures for the applicable periods presented. Prosperity believes these non-GAAP financial measures provide information useful to investors in understanding Prosperity's financial results and Prosperity believes that its presentation, together with the accompanying reconciliations, provides a better understanding of factors and trends affecting Prosperity's business and allows investors to view performance in a manner similar to management, the entire financial services sector, bank stock analysts and bank regulators. Further, Prosperity believes that these non-GAAP measures provide useful information by excluding certain items that may not be indicative of its core operating earnings and business outlook. These non-GAAP measures should not be considered a substitute for GAAP basis measures and results and Prosperity strongly encourages investors to review its consolidated financial statements in their entirety and not to rely on any single financial measure. Because non-GAAP financial measures are not standardized, it may not be possible to compare these financial measures with other companies' non-GAAP financial measures having the same or similar names.