Edgar Filing: PROSPERITY BANCSHARES INC

FORM 425 FILING

Filed by Prosperity Bancshares, Inc.

Pursuant to Rule 425 under the Securities Act of 1933

Subject Company: Liberty Bancshares, Inc.

Commission File No. 333-106000

LOGO


PRESS RELEASE		For more information contact:

Prosperity Bancshares, Inc.^SM		Dan Rollins
Prosperity Bank Plaza		Senior Vice President
4295 San Felipe		713.693.9300
Houston, Texas 77027		dan.rollins@prosperitybanktx.com

FOR IMMEDIATE RELEASE

PROSPERITY BANCSHARES, INC.^SM

SECOND QUARTER EARNINGS UP 28.7%

•

Earnings Per Share up 14.7% to $0.39 (Diluted)

•

Recognized by Keefe Bruyette & Woods, Inc. for 10 Years of Earnings Growth

•

Non-Interest Income up 36.2%

•

Achieved 2Q04 Annualized Loan Growth of 10.8%

•

Continued Expansion across Texas

HOUSTON, July 14, 2004. Prosperity Bancshares, Inc. ^SM (NASDAQ: PRSP), the parent company of Prosperity Bank^{^®} today reported record earnings for the quarter and six months ended June 30, 2004. Net income for the quarter was $8.362 million or $0.39 per diluted common share, an increase in net income of $1.865 million or 28.7 percent, compared with $6.497 million or $0.34 per diluted common share for the same period in the prior year. Net income for the six months ended June 30, 2004 was $16.425 million or $0.77 per diluted common share, an increase in net income of $3.539 million, or 27.5 percent from the same period of 2003.

“Once again, our team of professional bankers has delivered outstanding results for our shareholders.

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We continue to believe that performance counts,” said David Zalman, Prosperity’s Chief Executive Officer and President. “Our customers grade our performance each day as we strive to build relationships based upon our core principles. We believe that banking customers today are looking for bankers that know them by name and are accessible. We believe that customers are tired of dealing with call centers and welcome our style of people to people banking.”

Mr. Zalman continued: “The recognition we continue to receive for our performance underscores the exceptional job our team is doing. Our inclusion in the Keefe Bruyette & Woods, Inc. 2004 Honor Roll is very gratifying for our team of Real Bankers ^SM.”

“In our ongoing effort to grow our loan portfolio, I am pleased to report that our loans grew during the past three months at an annualized rate of over ten percent,” added H. E. “Tim” Timanus, Jr., President and Chief Operating Officer of Prosperity Bank^{^®}. “Our growing team of lenders are winning business on a daily basis with our growing product menu.”

Prosperity completed the acquisition of MainBancorp, Inc. on November 1, 2003 and First State Bank of North Texas on December 9, 2003. The results of operations for these acquisitions have been included in the consolidated financial statements since their respective purchase dates.

Results of operations for the three months ended June 30, 2004 compared to the same period in 2003

For the three months ended June 30, 2004, net income was $8.362 million compared to $6.497 million for the same period in 2003, an increase of $1.865 million or 28.7 percent. Net income per diluted common share was $0.39 for the three months ended June 30, 2004 compared with $0.34 for the same period in 2003. Return on average assets, average common shareholders’ equity and average tangible shareholders’ equity for the three months ended June 30, 2004 was 1.37 percent, 14.63 percent and 32.21 percent, respectively.

Net interest income for the quarter ended June 30, 2004 increased 24.4 percent, to $19.351 million from $15.561 million during the same period in 2003. The increase was attributable primarily to a 25.7 percent increase in average earning assets which was partially offset by a 9 basis point decrease in the net interest margin on a tax equivalent basis.

Non-interest income increased 36.2 percent to $5.455 million for the three months ended June 30, 2004 compared with the same period in 2003. Non-interest expenses increased $2.142 million or 21.6 percent for the second quarter of 2004 compared with the second quarter of 2003. The increase in non-interest expenses was primarily attributable to the increased operating costs associated with the five additional banking centers acquired since June 30, 2003.

Loans at June 30, 2004 were $790.9 million, an increase of $91.4 million, or 13.1 percent, compared with $699.5 million at June 30, 2003. Annualized loan growth for the second quarter of 2004 was 10.8 percent.

Average loans for the three months ended June 30, 2004 increased 13.6 percent or $92.5 million to $772.5 million compared to $680.0 million for the same period last year. The provision for credit losses was $120,000 for the three months ended June 30, 2004.

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Non-performing assets totaled $1.609 million or 0.07 percent of average earning assets at June 30, 2004, compared with $2.564 million or 0.05 percent of average earning assets at December 31, 2003 and $2.242 million or 0.13 percent of average earning assets at June 30, 2003. At June 30, 2004, the allowance for credit losses was 1.31 percent of total loans, compared to 1.32 percent at June 30, 2003.

At June 30, 2004, Prosperity had $2.434 billion in total assets, $790.9 million in loans, $2.080 billion in deposits, and approximately 150,000 deposit and loan accounts. Assets, loans and deposits at June 30, 2004 grew by 22.7 percent, 13.1 percent and 19.1 percent, respectively, compared with their levels at June 30, 2003.

Results of Operations for the Six Months ended June 30, 2004 compared to the same period in 2003

Net income for the six months ended June 30, 2004 was $16.425 million or $0.77 per diluted common share, compared to $12.886 million or $0.67 per diluted common share, for the same period in 2003, an increase of 27.5 percent and 14.9 percent, respectively.

Prosperity’s return on average assets, average common shareholders’ equity and average tangible shareholders’ equity for the six months ended June 30, 2004 was 1.35 percent, 14.53 percent and 32.73 percent, respectively. Prosperity’s efficiency ratio was 47.53 percent for the six months ended June 30, 2004.

Net interest income for the six months ended June 30, 2004 increased 24.4 percent to $38.698 million compared with $31.106 million during the same time period in 2003. The increase was attributable primarily to a 28.2 percent increase in average earning assets and was partially offset by a decrease in the net interest margin, on a tax equivalent basis, from 3.74 percent to 3.59 percent. Non-interest income increased 36.8 percent to $10.727 million for the six months ended June 30, 2004 compared with the same period in 2003. Non-interest expenses increased $4.668 million or 23.5 percent compared with the same period in 2003.

Outlook

“For the full year of 2004, we are comfortable with the current consensus analysts’ estimates for earnings per share,” remarked David Hollaway, Prosperity’s Chief Financial Officer.

“We remain confident that our strategic direction and commitment to relationship banking with true customer service will continue to create long-term value for our shareholders,” added Ned S. Holmes, Prosperity’s Chairman of the Board of Directors.

Conference Call

Prosperity’s management team will host a conference call on Wednesday, July 14, 2004 at 10:30 a.m. Eastern Daylight Time (9:30 a.m. Central Daylight Time) to discuss the earnings results, the proposed acquisitions of Liberty Bank and Village Bank and Trust, business trends and their outlook for the rest of 2004. Individuals and investment professionals may participate in the call by
dialing 1-800-362-0571.

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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 “2^nd Quarter results and webcast link.”

Acquisition of Liberty Bank

On April 26, 2004, Prosperity Bancshares, Inc.^SM announced the signing of a definitive agreement to acquire Liberty Bank. Under terms of the agreement, Prosperity will issue approximately 1,300,000 shares of its common stock plus $10.5 million in cash, subject to adjustment, for all outstanding shares of Liberty Bank.

Liberty Bank is privately held and operates a total of six (6) banking offices in the Austin area. As of June 30, 2004, Liberty Bank had total assets of $178.7 million, loans of $120.3 million, deposits of $158.9 million and shareholders’ equity of $16.5 million.

The transaction is expected to close within the next 60 days. All necessary regulatory approvals have been received. Operational integration is anticipated to begin during the third quarter of 2004.

Acquisition of Village Bank and Trust

On May 12, 2004, Prosperity Bancshares, Inc.^SM announced the signing of a definitive agreement to acquire Village Bank and Trust. Under terms of the agreement, Prosperity will pay approximately $20.2 million in cash, subject to adjustment, for all outstanding shares of Village Bank & Trust.

Village Bank and Trust is privately held and operates one (1) banking office in the Lakeway area of Austin. As of June 30, 2004, Village Bank and Trust had total assets of $110.9 million, loans of $79.7 million, deposits of $97.3 million and shareholders’ equity of $10.4 million.

The transaction is expected to close within the next 60 days and is subject to customary regulatory approvals. Operational integration is anticipated to begin during the fourth quarter of 2004.

Upon consummation of the Village Bank and Trust and Liberty Bank transactions, Prosperity will have a total of fifty-eight (58) banking centers, twenty-nine (29) in the Houston CMSA, eleven (11) in the Dallas area, seven (7) in the Austin area, and eleven (11) in eight contiguous counties south and southwest of Houston.

Corporate Profile

Prosperity Bancshares, Inc.^SM, a $2.4 billion Houston, Texas based regional financial holding company, formed in 1983, was recently named to the Keefe Bruyette & Woods, Inc. annual Honor Roll for achieving exceptional earnings per share growth for the past 10 years. Other past honors include recognition in Fortune magazine’s annual ranking of “America’s 100 Fastest-Growing Companies” as published in the June 2004 issue.

Operating under a community banking philosophy, Prosperity 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 consumers and small and medium sized

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businesses. In addition to established banking products, Prosperity offers a complete line of services including: Internet Banking services at www.prosperitybanktx.com, Retail Brokerage Services, MasterMoney Debit Cards, and 24 hour voice response banking. Prosperity currently operates fifty-one (51) full service banking locations, twenty-nine (29) in the Houston CMSA, eleven (11) in the Dallas area and eleven (11) in eight contiguous counties south and southwest of Houston.

Prosperity Bank^{^®} operates the following full service banking centers: Angleton, Bay City, Beeville, Blooming Grove, Clear Lake, Cleveland, Corsicana, Cuero, Dallas-Abrams Centre, Dallas-Camp Wisdom, Dallas-Cedar Hill, Dallas-Kiest, Dallas-Red Oak, Dallas-Preston Road, Dallas-Turtle Creek, Dallas-Westmoreland, Dayton, East Bernard, Edna, El Campo, Ennis, Galveston, Goliad, Hitchcock, Houston-Aldine, Houston-Bellaire, Houston-CityWest, Houston-Copperfield, Houston-Cypress, Houston-Downtown, Houston-Fairfield, Houston-Gladebrook, Houston-Highway 6, Houston-Medical Center, Houston-Memorial, Houston-Post Oak, Houston-River Oaks, Houston-Tanglewood, Houston-Waugh Drive, Houston-Woodcreek, Liberty, Magnolia, Mathis, Mont Belvieu, Needville, Palacios, Sweeny, Victoria, West Columbia, Wharton and Winnie.

- - -

In connection with the proposed merger of Liberty Bancshares, Inc. into Prosperity Bancshares, Inc., Prosperity Bancshares has previously filed with the Securities and Exchange Commission a registration statement on Form S-4 to register shares of Prosperity Bancshares common stock to be issued in one or more transactions involving the acquisition of businesses, assets, properties or securities. In connection with the proposed transaction between Prosperity Bancshares and Liberty Bancshares, the shares of common stock to be issued by Prosperity Bancshares to the shareholders of Liberty Bancshares have been registered under the registration statement on Form S-4 previously filed with the Securities and Exchange Commission.

INVESTORS AND SECURITY HOLDERS ARE ADVISED TO READ THE REGISTRATION STATEMENT AND THE PROSPECTUS INCLUDED WITHIN THE REGISTRATION STATEMENT BECAUSE THEY CONTAIN IMPORTANT INFORMATION ABOUT PROSPERITY BANCSHARES. Investors and security holders may obtain free copies of these documents through the website maintained by the SEC at http://www.sec.gov. Free copies of the prospectus may also be obtained 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 Bancshares’ telephone number is (713) 693-9300.

“Safe Harbor” Statement under the Private Securities Litigation Reform Act of 1995: This release contains, and the remarks by our 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 Bancshares, Inc. ^SM 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 whether we can: continue to sustain our current internal growth rate or our total growth rate; successfully close and integrate acquisitions; continue to provide products and services that appeal to our customers; continue to have access to the debt and equity capital we need to sustain our growth; and achieve our sales objectives. Other risks include 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); 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 our most recent Annual Report on Form 10-K.

Copies of Prosperity Bancshares, Inc.’s ^SM SEC filings may be downloaded from the Internet at no charge from www.prosperitybanktx.com.

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Prosperity Bancshares, Inc. ^SM

Financial Highlights

(Dollars in thousands)


	Three Months Ended						Six Months Ended
	Jun 30, 2004			Jun 30, 2003			Jun 30, 2004			Jun 30, 2003
	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
Balance Sheet Averages
Total loans	$	772,496		$	679,976		$	771,751		$	675,365
Investment securities		1,429,320			1,070,663			1,411,466			1,030,442
Fed funds sold and other earnings		21,503			18,229			23,023			15,075

Total earning assets		2,223,319			1,768,868			2,206,240			1,720,882
Allowance for credit losses		(10,551	)		(9,338	)		(10,432	)		(9,454	)
Cash and due from banks		52,148			48,600			56,513			48,697
Goodwill		116,054			72,349			116,392			70,194
Core Deposit Intangibles (CDI)		8,264			4,145			8,092			4,189
Other real estate		52			1,241			109			696
Fixed assets, net		33,365			28,463			33,737			27,927
Other assets		19,464			20,442			19,657			20,378

Total assets	$	2,442,115		$	1,934,770		$	2,430,308		$	1,883,509

Non-interest bearing deposits	$	443,212		$	336,700		$	436,379		$	321,534
Interest bearing deposits		1,657,423			1,347,237			1,659,837			1,319,569

Total deposits		2,100,635			1,683,937			2,096,216			1,641,103
Federal funds purchased & other interest bearing liabilities		43,385			42,759			39,448			36,942
Junior subordinated debentures ^(A)		59,804			34,030			59,804			34,030
Other liabilities		9,602			10,406			8,814			10,686
Shareholders’ equity ^(B)		228,689			163,638			226,026			160,748

Total liabilities and equity	$	2,442,115		$	1,934,770		$	2,430,308		$	1,883,509

^(A) Due to the adoption of SFAS 150 on January 1, 2004, the junior subordinated debentures balance has been deconsolidated and reclassified to a liability from a mezzanine equity item.

^(B) Includes $526, $3,017, $1,169 and $2,801 in after tax unrealized (losses)/gains on available for sale securities for the three month periods ending June 30, 2004 and June 30, 2003 and the six month periods ending June 30, 2004 and June 30, 2003 respectively.

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Prosperity Bancshares, Inc. ^SM

Financial Highlights

(Dollars in thousands, except per share data)


	Three Months Ended				Six Months Ended
	Jun 30, 2004		Jun 30, 2003		Jun 30, 2004		Jun 30, 2003
	(Unaudited)		(Unaudited)		(Unaudited)		(Unaudited)
Income Statement Data
Interest on loans	$	12,149	$	11,524	$	24,462	$	22,955
Interest on securities		14,114		10,639		28,119		21,381
Interest on federal funds sold and other earning assets		50		51		104		91

Total interest income		26,313		22,214		52,685		44,427
Interest expense—deposits		5,686		5,789		11,467		11,615
Interest expense—debentures ^(C)		971		578		1,967		1,165
Interest expense—other		305		286		553		541

Total interest expense		6,962		6,653		13,987		13,321
Net interest income ^(D)		19,351		15,561		38,698		31,106
Provision for credit losses		120		120		240		240

Net interest income after provision for credit losses		19,231		15,441		38,458		30,866
Service charges on deposit accounts		4,830		3,370		9,590		6,625
Other income		625		635		1,137		1,219

Total non-interest income		5,455		4,005		10,727		7,844
Salaries and benefits		6,608		5,277		13,312		10,685
Intangible asset amortization		382		190		765		383
Net occupancy and equipment		1,286		989		2,556		1,943
Depreciation		689		615		1,390		1,221
Data processing		490		660		933		1,275
Other expenses		2,612		2,194		5,570		4,351

Total non-interest expenses		12,067		9,925		24,526		19,858
Net earnings before taxes		12,619		9,521		24,659		18,852
Federal income taxes		4,257		3,024		8,234		5,966

Net earnings available to common shareholders	$	8,362	$	6,497	$	16,425	$	12,886

Basic earnings per share	$	0.40	$	0.34	$	0.78	$	0.68
Diluted earnings per share	$	0.39	$	0.34	$	0.77	$	0.67

^(C) Due to the adoption of SFAS 150 on January 1, 2004, the Company now includes the dividend payments on junior subordinated debentures as part of interest expense rather than non-interest expense. Prior period data has been restated to reflect the adoption of SFAS 150.

^(D) Net interest income on a tax equivalent basis would be $19,715 and $16,084 for the three months ended June 30, 2004 and June 30, 2003, respectively, and $39,598 and $32,194 for the six months ended June 30, 2004 and June 30, 2003, respectively.

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Prosperity Bancshares, Inc. ^SM

Financial Highlights

(Dollars and share amounts in thousands, except per share data)


	Three Months Ended				Six Months Ended
	Jun 30, 2004		Jun 30, 2003		Jun 30, 2004		Jun 30, 2003
	(Unaudited)		(Unaudited)		(Unaudited)		(Unaudited)
Common Share and Other Data
Employees—FTE		590		520		590		520

Book value per share	$	10.87	$	8.78	$	10.87	$	8.78
Tangible book value per share	$	5.07	$	4.26	$	5.07	$	4.26

Period end shares outstanding		21,000		18,972		21,000		18,972
Weighted average shares outstanding (basic)		20,967		18,953		20,952		18,935
Weighted average shares outstanding (diluted)		21,244		19,218		21,237		19,219

Non-accrual loans	$	1,385	$	892	$	1,385	$	892
Accruing loans 90 days or more days past due		176		293		176		293
Restructured loans		0		0		0		0

Total non-performing loans		1,561		1,185		1,561		1,185
Repossessed assets		0		50		0		50
Other real estate		48		1,007		48		1,007

Total non-performing assets	$	1,609	$	2,242	$	1,609	$	2,242

Allowance for credit losses at end of period	$	10,371	$	9,228	$	10,371	$	9,228
Net charge-offs	$	209	$	754	$	214	$	1,159

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Prosperity Bancshares, Inc. ^SM

Financial Highlights


	Three Months Ended						Six Months Ended
	Jun 30, 2004			Jun 30, 2003			Jun 30, 2004			Jun 30, 2003
	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
Performance Ratios
Return on average assets (annualized)		1.37	%		1.34	%		1.35	%		1.37	%
Return on average common equity (annualized)		14.63	%		15.88	%		14.53	%		16.03	%
Return on average tangible equity (annualized)		32.21	%		30.89	%		32.73	%		30.84	%
Net interest margin ^(E) (tax equivalent) (annualized)		3.55	%		3.64	%		3.59	%		3.74	%
Efficiency ratio ^(F)		48.66	%		50.73	%		47.53	%		50.98	%

Asset Quality Ratios
Non-performing assets to average earning assets		0.07	%		0.13	%		0.07	%		0.13	%
Non-performing assets to loans and other real estate		0.20	%		0.32	%		0.20	%		0.32	%
Net charge-offs to average loans		0.03	%		0.11	%		0.03	%		0.17	%
Allowance for credit losses to total loans		1.31	%		1.32	%		1.31	%		1.32	%

Common Stock Market Price
High	$	24.60		$	19.35		$	25.15		$	19.50
Low	$	21.89		$	16.61		$	21.89		$	16.53
Period end market price	$	24.35		$	19.21		$	24.35		$	19.21

^(E) Due to the adoption of SFAS 150 on January 1, 2004, the Company now includes the dividend payments on junior subordinated debentures as part of interest expense. Prior period data has been restated to reflect the adoption of SFAS 150. Prior to the adoption of SFAS 150, the Company reported net interest margins on a tax equivalent basis of 3.77% and 3.88% for the three months ended June 30, 2003 and the six months ended June 30, 2003, respectively. Had SFAS 150 not been adopted on January 1, 2004, the net interest margin on a tax equivalent basis would have been 3.73% for the three months ended June 30, 2004 and 3.77% for the six months ended June 30, 2004.

^(F) Calculated by dividing total non-interest expense (excluding securities losses and credit loss provisions) by net interest income plus non-interest income. Additionally, taxes are not part of this calculation.

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Prosperity Bancshares, Inc. ^SM

Financial Highlights

(Dollars in thousands)


	Jun 30, 2004			Mar 31, 2004			Dec 31, 2003			Sep 30, 2003			Jun 30, 2003
Balance Sheet Data (at period end)
Total loans	$	790,920		$	770,223		$	770,053		$	700,221		$	699,525
Investment securities ^(G)		1,418,364			1,426,636			1,376,880			1,150,893			1,088,507
Federal funds sold and other earning assets		7,849			28,323			11,992			52,321			5,426

Total earning assets		2,217,133			2,225,182			2,158,925			1,903,435			1,793,458
Allowance for credit losses		(10,371	)		(10,460	)		(10,370	)		(9,061	)		(9,228	)
Cash and due from banks		48,782			55,524			71,983			51,746			66,606
Goodwill		116,574			116,123			118,012			76,941			77,530
Core deposit intangibles (CDI)		8,080			8,461			6,743			4,315			4,479
Other real estate		48			80			246			765			1,007
Fixed assets, net		32,762			33,651			34,299			28,278			29,228
Other assets		21,336			20,992			20,649			23,530			21,227

Total assets	$	2,434,344		$	2,449,553		$	2,400,487		$	2,079,949		$	1,984,307

Non-interest bearing deposits	$	444,067		$	443,137		$	467,389		$	374,877		$	362,193
Interest bearing deposits		1,635,850			1,679,724			1,616,359			1,452,401			1,384,355

Total deposits		2,079,917			2,122,861			2,083,748			1,827,278			1,746,548
Federal funds purchased and other interest bearing liabilities		58,940			30,578			30,936			31,074			28,992
Junior subordinated debentures ^(H)		59,804			59,804			59,804			46,917			34,030
Other liabilities		7,457			10,383			6,411			5,701			8,147

Total liabilities		2,206,118			2,223,626			2,180,899			1,910,970			1,817,717
Shareholders’ equity ^(I)		228,226			225,927			219,588			168,979			166,590

Total liabilities and equity	$	2,434,344		$	2,449,553		$	2,400,487		$	2,079,949		$	1,984,307

^(G) Includes ($4,483), $2,783, $3,115, $2,112 and $5,645 in unrealized (losses)/gains on available for sale securities for the quarterly periods ending June 30, 2004, March 31, 2004, December 31, 2003, September 30, 2003 and June 30, 2003 respectively.

^(H) Due to the adoption of SFAS 150 on January 1, 2004, the junior subordinated debentures balance has been deconsolidated and reclassified to a liability from a mezzanine equity item.

^(I) Includes ($2,914), $1,809, $2,024, $1,373 and $3,670 in after tax unrealized (losses)/gains on available for sale securities for the quarterly periods ending June 30, 2004, March 31, 2004, December 31, 2003, September 30, 2003 and June 30, 2003 respectively.

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Prosperity Bancshares, Inc. ^SM

Financial Highlights


	Three Months Ended
	Jun 30, 2004		Mar 31, 2004		Dec 31, 2003		Sep 30, 2003
	(Unaudited)		(Unaudited)		(Unaudited)		(Unaudited)
Comparative Quarterly Asset Quality, Performance & Capital Ratios
Return on average assets (annualized)	1.37	%	1.33	%	1.28	%	1.29	%
Return on average common equity (annualized)	14.63	%	14.44	%	15.01	%	15.45	%
Return on average tangible equity (annualized)	32.21	%	33.28	%	30.23	%	30.85	%
Net interest margin ^(J) (tax equivalent) (annualized)	3.55	%	3.63	%	3.68	%	3.39	%

Efficiency ratio	48.66	%	50.60	%	53.69	%	50.25	%
Non-performing assets to average earning assets	0.07	%	0.03	%	0.05	%	0.08	%
Non-performing assets to loans and other real estate	0.20	%	0.08	%	0.13	%	0.20	%
Net charge-offs to average loans	0.03	%	0.00	%	0.02	%	0.04	%
Allowance for credit losses to total loans	1.31	%	1.36	%	1.35	%	1.29	%

Tier 1 risk-based capital	17.40	%	16.68	%	16.69	%	16.09	%

Total risk-based capital	18.50	%	17.78	%	17.84	%	17.20	%

Tier 1 leverage capital	7.10	%	6.87	%	6.70	%	6.85	%

Equity to assets	9.38	%	9.23	%	9.15	%	8.13	%

^(J) Due to the adoption of SFAS 150 on January 1, 2004, the Company now includes the dividend payments on junior subordinated debentures as part of interest expense. Prior period data has been restated to reflect the adoption of SFAS 150. Prior to the adoption of SFAS 150, the Company reported net interest margins on a tax equivalent basis of 3.84% and 3.54% for the three months ended December 31, 2003 and September 30, 2003, respectively. Had SFAS 150 not been adopted on January 1, 2004, the net interest margin on a tax equivalent basis would have been 3.73% and 3.78% for the three months ended June 30, 2004 and March 31, 2004, respectively.

Page 11 of 15

Prosperity Bancshares, Inc. ^SM

Supplemental Financial Data (Unaudited)

(Dollars in thousands)


	Three Months Ended Jun 30, 2004
	Average Balance			Interest Income/ Interest Expense		Yield/ Rate
YIELD ANALYSIS
Interest Earning Assets:
Loans	$	772,496		$	12,149	6.29	%
Investment securities		1,429,320			14,124	3.95	%
Federal funds sold		21,503			40	0.74	%

Total interest earning assets		2,223,319		$	26,313	4.73	%

Allowance for credit losses		(10,551	)
Non-interest earning assets		229,347

Total assets	$	2,442,115

Interest Bearing Liabilities:
Interest bearing demand deposits	$	466,618		$	1,189	1.02	%
Savings and money market deposits		473,290			856	0.72	%
Certificates and other time deposits		717,515			3,641	2.03	%
Junior subordinated debentures		59,804			971	6.49	%
Federal funds purchased and other borrowings		43,385			305	2.81	%

Total Interest Bearing Liabilities		1,760,612		$	6,962	1.58	%

Non-interest Bearing Liabilities:
Non-interest bearing demand deposits		443,212
Other liabilities		9,602

Total liabilities		2,213,426
Shareholders’ equity		228,689

Total Liabilities and Shareholders’ Equity	$	2,442,115

Net Interest Income & Margin				$	19,351	3.48	%
Net Interest Income & Margin (tax equivalent) ^(K)				$	19,746	3.55	%

^(K) Due to the adoption of SFAS 150 on January 1, 2004, the Company now includes the dividend payments on junior subordinated debentures as part of interest expense rather than non-interest expense. Also in compliance with SFAS 150, the junior subordinated debentures balance has been deconsolidated and reclassified to a liability from a mezzanine equity item. Had SFAS 150 not been adopted on January 1, 2004, the net interest margin on a tax equivalent basis would have been 3.73% for the three months ended June 30, 2004.

Page 12 of 15

Prosperity Bancshares, Inc. ^SM

Supplemental Financial Data (Unaudited)

(Dollars in thousands)


	Three Months Ended Jun 30, 2003
	Average Balance			Interest Income/ Interest Expense		Yield/ Rate
YIELD ANALYSIS
Interest earning assets:
Loans	$	679,976		$	11,524	6.78	%
Investment securities		1,070,663			10,639	3.97	%
Federal funds sold		18,229			51	1.12	%

Total interest earning assets		1,768,868		$	22,214	5.02	%

Allowance for credit losses		(9,338	)
Non-interest earning assets		175,240

Total assets	$	1,934,770

Interest Bearing Liabilities:
Interest bearing demand deposits	$	353,286		$	1,075	1.22	%
Savings and money market deposits		390,676			891	0.91	%
Certificates and other time deposits		603,275			3,823	2.53	%
Junior subordinated debentures		34,030			578	6.79	%
Federal funds purchased and other borrowings		42,759			286	2.68	%

Total Interest bearing Liabilities		1,424,026		$	6,653	1.87	%

Non-interest bearing Liabilities:
Non-interest bearing demand deposits		336,700
Other liabilities		10,406

Total liabilities		1,771,132
Shareholders’ equity		163,638

Total Liabilities and Shareholders’ Equity	$	1,934,770

Net Interest Income & Margin				$	15,561	3.52	%
Net Interest Income & Margin (tax equivalent)^(L)				$	16,084	3.64	%

^(L) Due to the adoption of SFAS 150 on January 1, 2004, the Company now includes the dividend payments on junior subordinated debentures as part of interest expense rather than non-interest expense. Prior period data has been restated to reflect the adoption of SFAS 150. Prior to adoption of SFAS 150, the Company reported a net interest margin on a tax equivalent basis of 3.77% for the three months ended June 30, 2003. Also in compliance with SFAS 150, the junior subordinated debentures balance has been deconsolidated and reclassified to a liability from a mezzanine equity item.

Page 13 of 15

Prosperity Bancshares, Inc. ^SM

Supplemental Financial Data (Unaudited)

(Dollars in thousands)


	Six Months Ended Jun 30, 2004
	Average Balance			Interest Income/ Interest Expense		Yield/ Rate
YIELD ANALYSIS
Interest earning assets:
Loans	$	771,751		$	24,462	6.34	%
Investment securities		1,411,466			28,130	3.99	%
Federal funds sold		23,023			93	0.81	%

Total interest earning assets		2,206,240		$	52,685	4.78	%

Allowance for credit losses		(10,432	)
Non-interest earning assets		234,500

Total assets	$	2,430,308

Interest Bearing Liabilities:
Interest bearing demand deposits	$	478,649		$	2,444	1.02	%
Savings and money market deposits		472,465			1,751	0.74	%
Certificates and other time deposits		708,723			7,272	2.05	%
Junior subordinated debentures		59,804			1,967	6.58	%
Federal funds purchased and other borrowings		39,448			553	2.80	%

Total Interest Bearing Liabilities		1,759,089		$	13,987	1.59	%

Non-interest Bearing Liabilities:
Non-interest bearing demand deposits		436,379
Other liabilities		8,814

Total liabilities		2,204,282
Shareholders’ equity		226,026

Total Liabilities and Shareholders’ Equity	$	2,430,308

Net Interest Income & Margin				$	38,698	3.51	%
Net Interest Income & Margin (tax equivalent)^(M)				$	39,598	3.59	%

^(M) Due to the adoption of SFAS 150 on January 1, 2004, the Company now includes the dividend payments on junior subordinated debentures as part of interest expense rather than non-interest expense. Also in compliance with SFAS 150, the junior subordinated debentures balance has been deconsolidated and reclassified to a liability from a mezzanine equity item. Had SFAS 150 not been adopted on January 1, 2004, the net interest margin on a tax equivalent basis would have been 3.77% for the six months ended June 30, 2004.

Page 14 of 15

Prosperity Bancshares, Inc. ^SM

Supplemental Financial Data (Unaudited)

(Dollars in thousands)


	Six Months Ended Jun 30, 2003
	Average Balance			Interest Income/ Interest Expense		Yield/Rate
YIELD ANALYSIS
Interest earning assets:
Loans	$	675,365		$	22,955	6.80	%
Investment securities		1,030,442			21,381	4.15	%
Federal funds sold		15,075			91	1.21	%

Total interest earning assets		1,720,882		$	44,427	5.16	%

Allowance for credit losses		(9,454	)
Non-interest earning assets		172,081

Total assets	$	1,883,509

Interest Bearing Liabilities:
Interest bearing demand deposits	$	344,401		$	2,076	1.21	%
Savings and money market deposits		383,972			1,838	0.96	%
Certificates and other time deposits		591,196			7,701	2.61	%
Junior subordinated debentures		34,030			1,165	13.69	%
Federal funds purchased and other borrowings		36,942			541	2.93	%

Total Interest Bearing Liabilities		1,390,541		$	13,321	1.92	%

Non-interest Bearing Liabilities:
Non-interest bearing demand deposits		321,534
Other liabilities		10,686

Total liabilities		1,722,761
Shareholders’ equity		160,748

Total Liabilities and Shareholders’ Equity	$	1,883,509

Net Interest Income & Margin				$	31,106	3.62	%
Net Interest Income & Margin (tax equivalent) ^(N)				$	32,194	3.74	%

^(N) Due to the adoption of SFAS 150 on January 1, 2004, the Company now includes the dividend payments on junior subordinated debentures as part of interest expense rather than non-interest expense. Prior period data has been restated to reflect the adoption of SFAS 150. Prior to adoption of SFAS 150, the Company reported a net interest margin on a tax equivalent basis of 3.88% for the six months ended June 30, 2003. Also in compliance with SFAS 150, the junior subordinated debentures balance has been deconsolidated and reclassified to a liability from a mezzanine equity item.

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Page 15 of 15