HOUSTON, Oct. 24, 2012 /PRNewswire/ -- Prosperity Bancshares, Inc.^® (NYSE: PB), the parent company of Prosperity Bank^®, reported net income for the quarter ended September 30, 2012 of $46.176 million or $0.82 per diluted common share, an increase in net income of $9.803 million or 27.0%, compared with $36.373 million or $0.77 per diluted common share for the same period in 2011. Reported net income and earnings per share include the combined impact of preliminary purchase accounting adjustments and one-time merger expenses.

"I am proud to announce such positive results for the third quarter of 2012. We posted earnings of $46.2 million for the quarter, a 27% increase over the third quarter last year. Our diluted earnings per share for the quarter came in at $0.82 compared to $0.77 for the same period last year, representing a 6.5% increase," commented David Zalman, Chairman and Chief Executive Officer. "While such earnings include adjustments related to our recent acquisitions, the performance of our core bank remains strong. Additionally, our board of directors approved a 10.3% increase in our dividend to $0.86 per year or $0.215 per quarter for the next year. We are pleased to reward our shareholders with increased dividends as we work to continue building shareholder value."

"During the past quarter, we closed our merger with American State Financial Corporation in West Texas which added thirty-seven (37) locations in three new market areas: Lubbock, Midland-Odessa and Abilene. We are very excited about our new relationships and working together with their entire team," continued Zalman. "The team has worked diligently and tirelessly over the last month with the operational integration and we thank them for their dedication and hard work."

"We also recently completed our merger with Community National Bank, located in Bellaire, Texas in the Houston metropolitan area. We are excited about the Bellaire team joining us and increasing our presence in an area we already service. The management team and associates at Community National Bank will add to the already strong team we have in Houston," continued Zalman. "We owe all of our success to our team of associates and board members who have helped grow the company in the right direction with their insight and efforts and for that I say "thank you"! We would also like to thank all of our customers for their business and loyalty to our bank."

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. In addition, due to the application of purchase accounting and related entries and one-time merger expenses, Prosperity uses certain non-GAAP measures and ratios that exclude the impact of these items to evaluate its performance, including yield on loans and securities, net income, diluted earnings per share, efficiency ratio and allowance for credit losses to total loans (excluding acquired loans). 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 September 30, 2012

For the three months ended September 30, 2012, net income was $46.176 million compared with $36.373 million for the same period in 2011. Net income per diluted common share was $0.82 for the three months ended September 30, 2012 and $0.77 for the same period in 2011. Annualized returns on average assets, average common equity and average tangible common equity for the three months ended September 30, 2012 were 1.32%, 9.10% and 21.59%, respectively.

Net interest income before provision for credit losses for the quarter ended September 30, 2012 increased 29.5% to $106.893 million compared with $82.538 million during the same period in 2011. The increase was attributable to a 49.7% increase in average earning assets during the same period. Additionally, the average yield on interest earning assets decreased 69 basis points while the rate paid on interest bearing liabilities decreased 22 basis points for the same period. The net interest margin on a tax equivalent basis decreased to 3.52% for the three months ended September 30, 2012 compared with 4.02% for the same period in 2011. On a linked quarter basis, the tax equivalent net interest margin decreased three basis points to 3.52% for the three months ended September 30, 2012 from 3.55% reported for the three months ended June 30, 2012.

The yield on loans was impacted by the purchase accounting adjustments from recent acquisitions as described in the table below. As a result of these purchase accounting adjustments, Prosperity recorded a discount on loans of $104.931 million, of which $27.116 million relates to loans accounted for under ASC Topic 310-30 (formerly SOP 03-03) and the remaining $77.815 million relates to loans accounted for under ASC Topic 310-20 (formerly SFAS No. 91). All purchase accounting entries are preliminary and could be subject to change.

The yield on securities was also impacted by the purchase accounting adjustments from recent acquisitions as described in the table below. Prosperity recorded a premium on securities of $34.540 million which resulted in increased amortization of $3.451 million and a decreased yield on securities. In addition, in connection with the acquisition, American State Financial Corporation ("ASB") sold $574.0 million in securities yielding approximately 3.61% prior to July 1, 2012 and Prosperity reinvested those funds after acquisition date at a yield of approximately 1.70%. ASB recorded a gain of $44.2 million related to the sale of these securities which resulted in a lower fair value of the securities portfolio acquired from ASB. The effect of this sale is included in the table below.

The following table shows the book value of the investment portfolio and related net amortization as of and for the three month periods indicated below.

Non-interest income increased $9.247 million or 63.4% to $23.828 million for the three months ended September 30, 2012 compared with $14.581 million for the same period in 2011. The change includes increases in NSF fees, debit card and ATM card income, service charges on deposit accounts and other income due to the acquisition of ASB on July 1, 2012.

Non-interest expense increased $19.091 million or 46.4% to $60.242 million for the three months ended September 30, 2012 compared with $41.151 million for the same period in 2011. The change is primarily due to the acquisition of ASB. Prosperity's efficiency ratio (excluding net gains and losses on the sale of securities and assets) was 46.07% for the three months ended September 30, 2012. Non-interest expense for the three months ended September 30, 2012 includes one-time merger expenses of approximately $5.404 million, pre-tax ($3.513 million after tax). Excluding these charges, the efficiency ratio would have been 41.93% for the three months ended September 30, 2012. Refer to the "Notes to Selected Financial Data" at the end of this Earnings Release for a reconciliation of this non-GAAP financial measure.

Earnings per share and net income were also impacted by purchase accounting adjustments, one-time merger expenses of $5.404 million (pre-tax) and the sale of ASB securities prior to acquisition, as reflected in the table below.

Average loans increased 39.9% or $1.475 billion to $5.169 billion for the quarter ended September 30, 2012 compared with $3.694 billion for the same period in 2011. Average deposits increased 41.7% or $3.194 billion to $10.846 billion for the quarter ended September 30, 2012 compared with $7.653 billion for the same period in 2011.

Loans at September 30, 2012 were $5.079 billion, an increase of $1.341 billion or 35.9%, compared with $3.738 billion at September 30, 2011 and an increase of $1.313 billion or 34.9% compared with $3.766 billion at December 31, 2011. Linked quarter loans increased $1.129 billion or 28.6% at September 30, 2012 compared with loans of $3.950 billion at June 30, 2012. As reflected in the table below, loan growth was impacted by the acquisition of Texas Bankers, Inc., The Bank Arlington and ASB. Excluding loans acquired in these acquisitions and new production at the acquired banking centers since the respective acquisition dates, year over year loan growth increased 4.4%.

Deposits at September 30, 2012 were $10.955 billion, an increase of $3.156 billion or 40.5%, compared with $7.799 billion at September 30, 2011 and an increase of $2.894 billion or 35.9% compared with $8.060 billion at December 31, 2011. Linked quarter deposits increased $2.560 billion or 30.5% at September 30, 2012 compared with deposits of $8.395 billion at June 30, 2012. As reflected in the table below, deposit growth was impacted by the acquisition of Texas Bankers, Inc., The Bank Arlington and ASB. Excluding deposits assumed and new deposits generated at the acquired banking centers since the respective acquisition dates, year over year deposit growth increased 6.9%.

The table below provides detail on loans acquired and deposits assumed in the Texas Bankers, Inc., The Bank Arlington and the ASB transactions completed on January 1, 2012, April 1, 2012 and July 1, 2012, respectively:

At September 30, 2012, Prosperity had $13.712 billion in total assets, $5.079 billion in loans, and $10.955 billion in deposits. Assets, loans and deposits at September 30, 2012 increased by 43.3%, 35.9% and 40.5%, respectively, compared with levels at September 30, 2011.

Asset Quality

Non-performing assets totaled $14.051 million or 0.11% of average earning assets at September 30, 2012 compared with $13.363 million or 0.16% of average earning assets at September 30, 2011 and $11.873 million or 0.12% of average earnings assets at June 30, 2012. The allowance for credit losses was 1.00% of total loans at September 30, 2012 compared with 1.40% at September 30, 2011 and 1.28% of total loans at June 30, 2012. Excluding acquired loans from Texas Bankers, Inc., The Bank Arlington and the ASB transactions, the allowance for credit losses was 1.27% of remaining loans. Refer to the "Notes to Selected Financial Data" at the end of this Earnings Release for a reconciliation of this non-GAAP financial measure.

The provision for credit losses was $1.800 million for the three months ended September 30, 2012 and $950,000 for the three months ended September 30, 2011. Net charge offs were $1.255 million for the three months ended September 30, 2012 and $368,000 for the three months ended September 30, 2011.

The provision for credit losses was $2.550 million for the nine months ended September 30, 2012 compared to $4.050 million for the nine months ended September 30, 2011. Net charge offs were $3.217 million for the nine months ended September 30, 2012 compared to $3.121 million for the nine months ended September 30, 2011.

Results of operations for the nine months ended September 30, 2012

For the nine months ended September 30, 2012, net income was $119.635 million compared with $105.343 million for the same period in 2011. Net income per diluted common share was $2.37 for the nine months ended September 30, 2012 compared with $2.24 for the same period in 2011. Annualized returns on average assets, average common equity and average tangible common equity for the nine months ended September 30, 2012 were 1.35%, 9.08% and 21.80%, respectively.

Net interest income before provision for credit losses for the nine months ended September 30, 2012 increased $25.824 million or 10.5%, to $272.405 million compared with $246.581 million during the same period in 2011. The increase was attributable primarily to a 25.3% increase in average earning assets during the same period.

Non-interest income increased $9.451 million or 22.5% to $51.429 million for the nine months ended September 30, 2012 compared with $41.978 million for the same period in 2011. The change was mainly attributable to an increase in debit and ATM card income, an increase in service charges on deposits accounts and an increase in other income, primarily due to the acquisition of ASB.

Non-interest expense increased $16.129 million or 12.9% to $141.489 million for the nine months ended September 30, 2012 compared with $125.360 million for the same period in 2011. The change is primarily due to increases in salaries and employee benefits expense for the nine months ended September 30, 2012 compared to the same period in 2011 and is due to the acquisition of ASB. Prosperity's efficiency ratio was 43.69% for the nine months ended September 30, 2012. Non-interest expense for the nine months ended September 30, 2012 also includes one-time merger expenses of approximately $5.404 million, pre-tax ($3.513 million after tax). Excluding these charges, the efficiency ratio would have been 42.02% for the nine months ended September 30, 2012. Refer to the "Notes to Selected Financial Data" at the end of this Earnings Release for a reconciliation of this non-GAAP financial measure.

Dividend

Prosperity Bancshares, Inc. declared a fourth quarter cash dividend of $0.215, an increase of 10.3% over the third quarter dividend of $0.195, to be paid on December 31, 2012 to all shareholders of record as of December 14, 2012.

Conference Call

Prosperity's management team will host a conference call on Wednesday, October 24, 2012 at 10:30 a.m. Eastern Daylight Time (9:30 a.m. Central Daylight Time) to discuss Prosperity's third quarter earnings. Individuals and investment professionals may participate in the call by dialing 800-862-9098, 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 Home page under News and Events.

Acquisition of Community National Bank

On October 1, 2012, Prosperity completed the previously announced acquisition of Community National Bank, Bellaire, Texas. Community National Bank operated one (1) banking office in Bellaire, Texas, in the Houston Metropolitan Area. As of September 30, 2012, Community National Bank reported total assets of $183.0 million, total loans of $68.0 million and total deposits of $164.6 million.

Pursuant to the terms of the acquisition agreement, Prosperity issued 372,282 shares of Prosperity common stock plus $11.4 million in cash for all outstanding shares of Community National Bank capital stock which resulted in a premium of $10.6 million.

Acquisition of American State Financial Corporation

On July 1, 2012, Prosperity completed the previously announced acquisition of American State Financial Corporation and its wholly owned subsidiary American State Bank (collectively referred to as "ASB"). American State Bank operated thirty-seven (37) full service banking offices in eighteen (18) counties across West Texas. As of June 30, 2012, ASB, on a consolidated basis, reported total assets of $3.16 billion, total loans of $1.24 billion and total deposits of $2.51 billion.

Pursuant to the terms of the acquisition agreement, Prosperity issued 8,524,835 shares of Prosperity common stock plus $178.5 million in cash for all outstanding shares of American State Financial Corporation capital stock which resulted in a premium of $240.4 million.

Acquisition of The Bank Arlington

On April 1, 2012, Prosperity completed the previously announced acquisition of The Bank Arlington. The Bank Arlington operated one (1) banking office in Arlington, Texas, in the Dallas/Fort Worth CMSA. As of March 31, 2012, The Bank Arlington reported total assets of $37.3 million, total loans of $22.8 million and total deposits of $33.2 million.

Pursuant to the terms of the acquisition agreement, Prosperity issued 135,389 shares of Prosperity common stock for all outstanding shares of The Bank Arlington capital stock which resulted in a premium of $2.8 million.

Acquisition of Texas Bankers, Inc.

On January 1, 2012, Prosperity completed the previously announced acquisition of Texas Bankers, Inc. and its wholly-owned subsidiary, Bank of Texas, Austin, Texas. The three (3) Bank of Texas banking offices in the Austin, Texas CMSA consisted of a location in Rollingwood, which was consolidated with Prosperity's Westlake location and remains in Bank of Texas' Rollingwood banking office; one banking center in downtown Austin, which was consolidated into Prosperity's downtown Austin location; and another banking center in Thorndale. Prosperity now operates thirty-four (34) banking centers in the Central Texas area including Austin and San Antonio. Texas Bankers, Inc. reported, on a consolidated basis, total assets of $77.0 million, total loans of $27.6 million and total deposits of $70.4 million as of December 31, 2011.

Pursuant to the terms of the acquisition agreement, Prosperity issued 314,953 shares of Prosperity common stock for all outstanding shares of Texas Bankers capital stock which resulted in a premium of $5.2 million.

Pending Acquisition of East Texas Financial Services, Inc.

On December 9, 2011, Prosperity entered into a definitive agreement to acquire East Texas Financial Services, Inc. (OTC BB: FFBT) and its wholly-owned subsidiary, First Federal Bank Texas ("Firstbank"). Firstbank operates four (4) banking offices in the Tyler MSA, including three locations in Tyler, Texas and one location in Gilmer, Texas. As of September 30, 2012, Firstbank reported total assets of $191.1 million, total loans of $139.2 million and total deposits of $116.0 million.

Under the terms of the definitive agreement, Prosperity will issue up to 531,000 shares of Prosperity common stock for all outstanding shares of East Texas Financial Services capital stock, subject to certain conditions and potential adjustments. Pending the satisfaction of closing conditions, the closing is expected to occur in early 2013.

Prosperity Bancshares, Inc.^®

Prosperity Bancshares Inc.^®, recently named "America's Best Bank" by Forbes, is a $13.7 billion Houston, Texas based regional financial holding company, formed in 1983. Operating under a community banking philosophy and seeking 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, 24 hour voice response banking, Trust and Wealth Management; and Mobile Banking. Prosperity currently operates two hundred thirteen (213) full service banking locations; fifty-nine (59) in the Houston area; twenty (20) in the South Texas area including Corpus Christi and Victoria; thirty-five (35) in the Dallas/Fort Worth area; twenty-one (21) in the East Texas area; thirty-four (34) in the Central Texas area including Austin and San Antonio; thirty-four (34) in the West Texas area including Lubbock, Midland-Odessa and Abilene; and ten (10) in the Bryan/College Station area.

In connection with the proposed merger of East Texas Financial Services, Inc. into Prosperity, Prosperity has filed with the Securities and Exchange Commission a registration statement on Form S-4 to register the shares of Prosperity's common stock to be issued to the stockholders of East Texas Financial Services. The registration statement includes a proxy statement/prospectus which was sent to the stockholders of East Texas Financial Services seeking their approval of the proposed transaction.

WE URGE INVESTORS AND SECURITY HOLDERS TO READ THE REGISTRATION STATEMENT ON FORM S-4, THE PROXY STATEMENT/PROSPECTUS INCLUDED WITHIN THE REGISTRATION STATEMENT ON FORM S-4 AND ANY OTHER RELEVANT DOCUMENTS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IN CONNECTION WITH THE PROPOSED TRANSACTION BECAUSE THEY CONTAIN IMPORTANT INFORMATION ABOUT PROSPERITY, EAST TEXAS FINANCIAL SERVICES AND THE PROPOSED TRANSACTION.

Investors and security holders may obtain free copies of these documents through the website maintained by the Securities and Exchange Commission at http://www.sec.gov. Documents filed with the SEC by Prosperity will be available free of charge by directing a request by telephone or mail to Prosperity Bancshares, Inc., Prosperity Bank Plaza, 4295 San Felipe, Houston, Texas 77027 Attn: Investor Relations. Prosperity's telephone number is (281) 269-7199.

"Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995: This release contains, and the remarks by Prosperity's management on the conference call may contain, forward-looking statements within the meaning of the securities laws that are based on current expectations, assumptions, estimates and projections about Prosperity, and its subsidiaries. These forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties, many of which are outside of Prosperity's control, that may cause actual results to differ materially from those expressed or implied by the forward-looking statements. These risks and uncertainties include but are not limited to whether Prosperity can: successfully identify acquisition targets and integrate the businesses of acquired companies and banks; continue to sustain its current internal growth rate or total growth rate; provide products and services that appeal to its customers; continue to have access to debt and equity capital markets; and achieve its sales objectives. Other risks include, but are not limited to: the possibility that credit quality could deteriorate; actions of competitors; changes in laws and regulations (including changes in governmental interpretations of regulations and changes in accounting standards); a deterioration or downgrade in the credit quality and credit agency ratings of the securities in Prosperity's securities portfolio; customer and consumer demand, including customer and consumer response to marketing; effectiveness of spending, investments or programs; fluctuations in the cost and availability of supply chain resources; economic conditions, including currency rate fluctuations and interest rate fluctuations; weather; and the stock price volatility associated with "small-cap" companies. These and various other factors are discussed in Prosperity's Annual Report on Form 10-K for the year ended December 31, 2011 and other reports and statements Prosperity has filed with the SEC. Copies of the SEC filings for Prosperity Bancshares^® may be downloaded from the Internet at no charge from www.prosperitybanktx.com.