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Prosperity Bancshares, Inc. (PRSP)

Q3 2009 Earnings Call

October 16, 2009 10:30 am ET

Executives

Dan Rollins – President, Chief Operating Officer

David Zalman – Chairman, Chief Executive Officer

H.E. Timanus, Jr. – Vice Chairman

David Hollaway – Chief Financial Officer

Analysts

Ken Zerbe – Morgan Stanley

Andy Stapp - B. Riley & Company

Joe Stieven - Stieven Capital

Terry Mcevoy - Oppenheimer & Co.

Bain Slack - Keefe, Bruyette & Woods

John Rodis - Howe Barnes Hoefer & Arnett Inc.

Christopher Marinac - Fig Partners, LLC

James Margard - Ranier

Matt Olney - Stephens Inc.

John Pancari - Fox-Pitt Kelton

Jennifer Demba - Suntrust Robinson Humphrey

Presentation

Operator

Good day everyone and welcome to today’s program. At this time all participants are in listen-only mode. Later you will have the opportunity to ask questions during the question and answer session. Please note this call will be recorded. I will be standing by if you should need any assistance.

It is now my pleasure to turn the call over to Mr. Dan Rollins.

Dan Rollins

Thank you. Good morning, ladies and gentlemen. Welcome to Prosperity Bancshares’ third quarter 2009 earnings conference call. This call is being broadcast live over the internet at prosperitybanktx.com and will be available for replay at the same location for the next few weeks.

I’m Dan Rollins, President and Chief Operating Officer of Prosperity Bancshares. Here with me today is David Zalman, our Chairman and Chief Executive Officer; H.E. Timanus, Jr., Vice Chairman; and David Hollaway, Chief Financial Officer.

David Zalman will lead off with a review of the highlights of our recent quarter. He will be followed by David Hollaway who will spend a few minutes reviewing some of the recent financial statistics. Tim Timanus will discuss our lending activities including asset quality. Finally, we’ll open the call for questions.

During the call, interested parties may participate live by following the instructions that will be provided by our call moderator, Shannon or you may email questions to investor.relations@prosperitybanktx.com.

I assume you’ve all received a copy of the earnings announcement we released earlier this morning. If not, please call Tracy Schmidt at 281-269-7221 and she will fax a copy to you.

Before we begin, let me make the usual disclaimers. Certain of the matters discussed in this presentation may constitute forward-looking statements for the purposes of federal securities laws and as such may involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of Prosperity Bancshares to be materially different from future results, performance, or achievements expressed or implied by such forward-looking statements.

Additional information concerning factors that could cause actual results to be materially different than those in the forward-looking statements can be found in Prosperity Bancshares’ filings with the Securities and Exchange Commission, including its Forms 10-Q and 10-K and other reports and statements we have filed with the SEC. All forward-looking statements are expressly qualified in their entirety by these cautionary statements.

Let me turn our call over to David.

David Zalman

Thank you, Dan. I would like to welcome everyone to our third quarter 2009 conference call. I am delighted to report another quarter of solid performance by our team. Among our successes this quarter are the operating earnings increase to $29.3 million or $0.63 per diluted share. That’s compared to $24.6 million or $0.53 per diluted share for the same period in 2008.

This represents an increase in earnings per share of 18.9%. For comparison purposes, I’ve excluded the loss on the Fannie Mae and Freddie Mac preferred stock that we recorded during the third quarter of last year. GAAP earnings for the third quarter of 2008 were $0.33 per diluted share. The $0.63 was an increase of 18.9% over the $0.53 in the same quarter last year.

Our third quarter net interest margin was 4.08% compared with 4.15% for the same period of 2008 and 4.04% for the second quarter of 2009. Our non-performing assets increased 3 basis points to 29 basis points of average earning assets from 26 basis points in the same period last year and from 26 basis points at the June 30, 2009.

Our Tier 1 risk based capital ratio is 11.85% at quarter end. Our total risk based capital ratio is 13.01% at quarter end and our Tier 1 leveraged capital ratio is 6.09% for the quarter ending September 30, 2009. That’s compared to 5.81% for the quarter ending June 30, 2009, a 28 basis point increase in one quarter or a 19.3% increase on an annualized basis.

Our efficiency ratio improved to 44.6% from last year’s 49%. Our loan loss reserve increased to 1.39% from 1.05% for the same period last year. Our allowance for loan loss has increased 39% over the past year to $47.3 million compared to $33.9 million for the same period last year. Our earnings momentum continues to be very strong. This is especially true when you take into consideration the additional $16.5 million in provision expense over last year for nine months and an additional $10.2 million in FDIC insurance expense over last year for nine months.

These two items alone have increased our nine month total expenses by $26.7 million above last year’s level. A little bit about loans: excluding the loans that were acquired in the FDIC Franklin Bank transaction, loans remain relatively flat for the quarter, decreasing less than 1% on a lean quarter basis.

Additionally, it should be noted that our construction loans decreased 32.1% on an annualized basis or $49.3 million from June 30, 2009. Excluding the reduction in construction loans, we actually experienced an increase in loans for the quarter. We continue to see opportunities for loans that we did not have a year ago. We continue to record deposit inflows. Again, excluding the deposits assumed in the FDIC Franklin transaction, linked quarter deposits increased 4.1% on an annualized basis.

A little bit about the Texas economic outlook is that we believe Texas is one of the best places to be living and working in today’s economic environment. Unemployment in the state is two percentage points below the national average. It has one of the lowest rates of housing repossession. There is no state income tax. There is no tax on capital gains in Texas. Also, the Lone Star State has more Fortune 500 headquarters than any other state. California has 51, New York has 56, and Texas has 64. AT&T, Dell, Texas Instruments, Continental Airlines, ExxonMobile, JC Penney, American Airlines, ConocoPhillips, Southwest Airlines, and Halliburton are all located in Texas.

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