##### Table of Contents





UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





FORM 10-Q





(Mark One)

|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2010

OR



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------

FOR THE TRANSITION PERIOD FROM  TO

COMMISSION FILE NUMBER: 000-25051





PROSPERITY BANCSHARES,
INC.®

(Exact name of registrant as specified in its charter)







|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|TEXAS                                                          |  | 74-2331986                          
|(State or other jurisdiction
of incorporation or organization) |  | (I.R.S. Employer
Identification No.)

Prosperity Bank Plaza

4295 San Felipe

Houston, Texas 77027

(Address of principal executive offices, including zip code)

(713) 693-9300

(Registrants telephone number, including area code)





Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90
days.    Yes  x    No   ̈

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files).    Yes   ̈    No   ̈

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.
See definitions of accelerated filer, large accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act:



|                        |  |                                                  |  |                           |  |  
|----------------------- |  | ------------------------------------------------ |  | ------------------------- |  | -
|Large Accelerated Filer |  | x                                                |  | Accelerated Filer         |  |  ̈
|                        |  |                                                  | 
|Non-accelerated Filer   |  |  ̈  (Do not check if a smaller reporting company) |  | Smaller Reporting Company |  |  ̈

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).    Yes   ̈    No  x

As of April 30, 2010, there were 46,617,635 outstanding shares of the registrants Common Stock, par value $1.00 per share.









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##### Table of Contents

PROSPERITY BANCSHARES, INC.
® AND SUBSIDIARIES

INDEX TO FORM 10-Q



|                             |  |                                                                                                                                                           |  |   
|---------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --
|                             |  | Page                                                                                                                                                     
|PART IFINANCIAL INFORMATION |  |                                                                                                                                                          
|                             |  |                                                                                                                                                          
|Item 1.                      |  | Interim Consolidated Financial Statements                                                                                                                 |  | 1 
|                             |  |                                                                                                                                                          
|                             |  | Consolidated Balance Sheets as of March 31, 2010 and December 31, 2009 (unaudited)                                                                        |  | 1 
|                             |  | Consolidated Statements of Income for the Three Months Ended March 31, 2010 and 2009 (unaudited)                                                          |  | 2 
|                             |  | Consolidated Statements of Changes in Shareholders Equity for the Year Ended December 31, 2009 and for
the Three Months Ended March 31, 2010 (unaudited) |  | 3 
|                             |  | Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2010 and 2009 (unaudited)                                                      |  | 4 
|                             |  | Notes to Interim Consolidated Financial Statements (unaudited)                                                                                            |  | 6 
|                             |  |                                                                                                                                                          
|Item 2.                      |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                                                     |  | 14
|                             |  |                                                                                                                                                          
|Item 3.                      |  | Quantitative and Qualitative Disclosures about Market Risk                                                                                                |  | 28
|                             |  |                                                                                                                                                          
|Item 4.                      |  | Controls and Procedures                                                                                                                                   |  | 28
|                             | 
|PART IIOTHER INFORMATION    |  |                                                                                                                                                          
|                             |  |                                                                                                                                                          
|Item 1.                      |  | Legal Proceedings                                                                                                                                         |  | 29
|                             |  |                                                                                                                                                          
|Item 1A.                     |  | Risk Factors                                                                                                                                              |  | 29
|                             |  |                                                                                                                                                          
|Item 2.                      |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                                                               |  | 29
|                             |  |                                                                                                                                                          
|Item 3.                      |  | Defaults upon Senior Securities                                                                                                                           |  | 29
|                             |  |                                                                                                                                                          
|Item 4.                      |  | [Reserved]                                                                                                                                                |  | 29
|                             |  |                                                                                                                                                          
|Item 5.                      |  | Other Information                                                                                                                                         |  | 29
|                             |  |                                                                                                                                                          
|Item 6.                      |  | Exhibits                                                                                                                                                  |  | 29
|                             | 
|Signatures                   |  | 30                                                                                                                                                       



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##### Table of Contents

PART IFINANCIAL INFORMATION



|ITEM 1. | INTERIM CONSOLIDATED FINANCIAL STATEMENTS
|------- | -----------------------------------------

PROSPERITY BANCSHARES,
INC.®AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)



|                                                                                                                                                                                                                                                             |  |                                   |           |   |                  |   |           |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | --------------------------------- | --------- | - | ---------------- | - | --------- | -
|                                                                                                                                                                                                                                                             |  | March 31,2010                     |           |   | December 31,2009 |  
|                                                                                                                                                                                                                                                             |  | (In thousands, except share data) |          
|ASSETS                                                                                                                                                                                                                                                       |  |                                   |           |   |                  |   |           |  
|Cash and due from banks                                                                                                                                                                                                                                      |  | $                                 | 169,534   |   |                  | $ | 194,963   |  
|Federal funds sold                                                                                                                                                                                                                                           |  |                                   | 577       |   |                  |   | 354       |  
|                                                                                                                                                                                                                                                             |  |                                   |           |   |                  |   |           |  
|Total cash and cash equivalents                                                                                                                                                                                                                              |  |                                   | 170,111   |   |                  |   | 195,317   |  
|Securities available for sale, at fair value (amortized cost of $537,687 and $573,648, respectively)                                                                                                                                                         |  |                                   | 565,397   |   |                  |   | 599,503   |  
|Securities held to maturity, at cost (fair value of $4,097,286 and $3,633,753, respectively)                                                                                                                                                                 |  |                                   | 3,960,109 |   |                  |   | 3,518,787 |  
|Loans held for investment                                                                                                                                                                                                                                    |  |                                   | 3,348,383 |   |                  |   | 3,376,703 |  
|Allowance for credit losses                                                                                                                                                                                                                                  |  |                                   | (51,893   | ) |                  |   | (51,863   | )
|                                                                                                                                                                                                                                                             |  |                                   |           |   |                  |   |           |  
|Loans, net                                                                                                                                                                                                                                                   |  |                                   | 3,296,490 |   |                  |   | 3,324,840 |  
|Accrued interest receivable                                                                                                                                                                                                                                  |  |                                   | 30,554    |   |                  |   | 30,571    |  
|Goodwill                                                                                                                                                                                                                                                     |  |                                   | 890,123   |   |                  |   | 876,987   |  
|Core deposit intangibles, net of accumulated amortization of $43,652 and $41,362, respectively                                                                                                                                                               |  |                                   | 33,095    |   |                  |   | 35,385    |  
|Bank premises and equipment, net                                                                                                                                                                                                                             |  |                                   | 152,886   |   |                  |   | 148,855   |  
|Other real estate owned                                                                                                                                                                                                                                      |  |                                   | 12,991    |   |                  |   | 7,829     |  
|Bank Owned Life Insurance (BOLI)                                                                                                                                                                                                                             |  |                                   | 48,407    |   |                  |   | 48,091    |  
|Federal Home Loan Bank stock                                                                                                                                                                                                                                 |  |                                   | 10,610    |   |                  |   | 16,019    |  
|Leased assets                                                                                                                                                                                                                                                |  |                                   | 213       |   |                  |   | 326       |  
|Other assets                                                                                                                                                                                                                                                 |  |                                   | 47,747    |   |                  |   | 47,890    |  
|                                                                                                                                                                                                                                                             |  |                                   |           |   |                  |   |           |  
|TOTAL ASSETS                                                                                                                                                                                                                                                 |  | $                                 | 9,218,733 |   |                  | $ | 8,850,400 |  
|                                                                                                                                                                                                                                                             |  |                                   |           |   |                  |   |           |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                                                                                                         |  |                                   |           |   |                  |   |           |  
|LIABILITIES:                                                                                                                                                                                                                                                 |  |                                   |           |   |                  |   |           |  
|Deposits:                                                                                                                                                                                                                                                    |  |                                   |           |   |                  |   |           |  
|Noninterest-bearing                                                                                                                                                                                                                                          |  | $                                 | 1,525,079 |   |                  | $ | 1,492,612 |  
|Interest-bearing                                                                                                                                                                                                                                             |  |                                   | 6,073,900 |   |                  |   | 5,765,938 |  
|                                                                                                                                                                                                                                                             |  |                                   |           |   |                  |   |           |  
|Total deposits                                                                                                                                                                                                                                               |  |                                   | 7,598,979 |   |                  |   | 7,258,550 |  
|Other borrowings                                                                                                                                                                                                                                             |  |                                   | 15,879    |   |                  |   | 26,140    |  
|Securities sold under repurchase agreements                                                                                                                                                                                                                  |  |                                   | 68,441    |   |                  |   | 72,596    |  
|Accrued interest payable                                                                                                                                                                                                                                     |  |                                   | 7,173     |   |                  |   | 7,343     |  
|Other liabilities                                                                                                                                                                                                                                            |  |                                   | 58,089    |   |                  |   | 42,261    |  
|Junior subordinated debentures                                                                                                                                                                                                                               |  |                                   | 92,265    |   |                  |   | 92,265    |  
|                                                                                                                                                                                                                                                             |  |                                   |           |   |                  |   |           |  
|Total liabilities                                                                                                                                                                                                                                            |  |                                   | 7,840,826 |   |                  |   | 7,499,155 |  
|                                                                                                                                                                                                                                                             |  |                                   |           |   |                  |   |           |  
|COMMITMENTS AND CONTINGENCIES                                                                                                                                                                                                                                |  |                                   |           |   |                  |   |           |  
|SHAREHOLDERS EQUITY:                                                                                                                                                                                                                                        |  |                                   |           |   |                  |   |           |  
|Preferred stock, $1 par value; 20,000,000 shares authorized; none issued or outstanding                                                                                                                                                                      |  |                                   |          |   |                  |   |          |  
|Common stock, $1 par value; 200,000,000 shares authorized; 46,612,698 and 46,577,968 shares issued at March 31, 2010 and
December 31, 2009, respectively; 46,575,610 and 46,540,880 shares outstanding at March 31, 2010 and December 31, 2009, respectively |  |                                   | 46,613    |   |                  |   | 46,578    |  
|Capital surplus                                                                                                                                                                                                                                              |  |                                   | 872,102   |   |                  |   | 870,460   |  
|Retained earnings                                                                                                                                                                                                                                            |  |                                   | 441,788   |   |                  |   | 418,008   |  
|Accumulated other comprehensive incomenet unrealized gain on available for sale securities, net of tax of $9,698 and
$9,049, respectively                                                                                                                   |  |                                   | 18,011    |   |                  |   | 16,806    |  
|Less treasury stock, at cost, 37,088 shares                                                                                                                                                                                                                  |  |                                   | (607      | ) |                  |   | (607      | )
|                                                                                                                                                                                                                                                             |  |                                   |           |   |                  |   |           |  
|Total shareholders equity                                                                                                                                                                                                                                   |  |                                   | 1,377,907 |   |                  |   | 1,351,245 |  
|                                                                                                                                                                                                                                                             |  |                                   |           |   |                  |   |           |  
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                                                                                                   |  | $                                 | 9,218,733 |   |                  | $ | 8,850,400 |  
|                                                                                                                                                                                                                                                             |  |                                   |           |   |                  |   |           |  

See notes to interim condensed consolidated financial statements.



1



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##### Table of Contents

PROSPERITY BANCSHARES, INC.
®AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)



|                                                      |  |                                               |        |      |   |        
|----------------------------------------------------- |  | --------------------------------------------- | ------ | ---- | - | -------
|                                                      |  | Three Months Ended March 31,                 
|                                                      |  | 2010                                          |        | 2009
|                                                      |  | (Dollars in thousands, except per share data)
|INTEREST INCOME:                                      |  |                                               |        |      |   |        
|Loans, including fees                                 |  | $                                             | 51,453 |      | $ | 55,802 
|Securities                                            |  |                                               | 45,014 |      |   | 49,726 
|Federal funds sold                                    |  |                                               | 29     |      |   | 36     
|Deposits in other financial institutions              |  |                                               |       |      |   | 2      
|                                                      |  |                                               |        |      |   |        
|Total interest income                                 |  |                                               | 96,496 |      |   | 105,566
|                                                      |  |                                               |        |      |   |        
|                                                      |  |                                              
|INTEREST EXPENSE:                                     |  |                                               |        |      |   |        
|Deposits                                              |  |                                               | 17,485 |      |   | 29,457 
|Junior subordinated debentures                        |  |                                               | 791    |      |   | 1,119  
|Notes payable and other borrowings                    |  |                                               | 448    |      |   | 912    
|                                                      |  |                                               |        |      |   |        
|Total interest expense                                |  |                                               | 18,724 |      |   | 31,488 
|                                                      |  |                                               |        |      |   |        
|                                                      |  |                                              
|NET INTEREST INCOME                                   |  |                                               | 77,772 |      |   | 74,078 
|PROVISION FOR CREDIT LOSSES                           |  |                                               | 4,410  |      |   | 6,125  
|                                                      |  |                                               |        |      |   |        
|NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES |  |                                               | 73,362 |      |   | 67,953 
|                                                      |  |                                               |        |      |   |        
|                                                      |  |                                              
|NONINTEREST INCOME:                                   |  |                                               |        |      |   |        
|Customer service fees                                 |  |                                               | 11,589 |      |   | 12,372 
|Other                                                 |  |                                               | 1,389  |      |   | 2,645  
|                                                      |  |                                               |        |      |   |        
|Total noninterest income                              |  |                                               | 12,978 |      |   | 15,017 
|                                                      |  |                                               |        |      |   |        
|                                                      |  |                                              
|NONINTEREST EXPENSE:                                  |  |                                               |        |      |   |        
|Salaries and employee benefits                        |  |                                               | 21,112 |      |   | 22,648 
|Net occupancy expense                                 |  |                                               | 3,434  |      |   | 3,978  
|Depreciation expense                                  |  |                                               | 2,006  |      |   | 2,001  
|Data processing                                       |  |                                               | 1,415  |      |   | 2,055  
|Communications expense                                |  |                                               | 2,019  |      |   | 2,217  
|Core deposit intangibles amortization                 |  |                                               | 2,290  |      |   | 2,664  
|Other                                                 |  |                                               | 7,449  |      |   | 8,460  
|                                                      |  |                                               |        |      |   |        
|Total noninterest expense                             |  |                                               | 39,725 |      |   | 44,023 
|                                                      |  |                                               |        |      |   |        
|                                                      |  |                                              
|INCOME BEFORE INCOME TAXES                            |  |                                               | 46,615 |      |   | 38,947 
|PROVISION FOR INCOME TAXES                            |  |                                               | 15,617 |      |   | 13,469 
|                                                      |  |                                               |        |      |   |        
|                                                      |  |                                              
|NET INCOME                                            |  | $                                             | 30,998 |      | $ | 25,478 
|                                                      |  |                                               |        |      |   |        
|                                                      |  |                                              
|EARNINGS PER SHARE                                    |  |                                               |        |      |   |        
|Basic                                                 |  | $                                             | 0.67   |      | $ | 0.55   
|                                                      |  |                                               |        |      |   |        
|                                                      |  |                                              
|Diluted                                               |  | $                                             | 0.66   |      | $ | 0.55   
|                                                      |  |                                               |        |      |   |        

See notes to interim consolidated financial statements.



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##### Table of Contents

PROSPERITY BANCSHARES, INC.
® AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY

(UNAUDITED)



|                                                                                                 |  |                                                         |  |         |        |          |   |          |                                |   |          |   |       |                     |        |        |   |      |   |  |   |           |  
|------------------------------------------------------------------------------------------------ |  | ------------------------------------------------------- |  | ------- | ------ | -------- | - | -------- | ------------------------------ | - | -------- | - | ----- | ------------------- | ------ | ------ | - | ---- | - |  | - | --------- | -
|                                                                                                 |  | Common Stock                                            |  | Capital |        | Retained |   |          | AccumulatedOther
Comprehensive |   | Treasury |   |       | Total
Shareholders |       
|                                                                                                 |  | Shares                                                  |  | Amount  |        | Surplus  |   | Earnings |                                |   | Income   |   | Stock |                     |        | Equity |  
|                                                                                                 |  | (Amounts in thousands, except share and per share data) | 
|                                                                                                 |  |                                                         |  |         |        |          |  
|BALANCE AT JANUARY 1, 2009                                                                       |  | 46,116,801                                              |  | $       | 46,117 |          | $ | 867,380  |                                | $ | 332,363  |   |       | $                   | 9,853  |        | $ | (607 | ) |  | $ | 1,255,106 |  
|Comprehensive Income:                                                                            |  |                                                         |  |         |        |          |   |          |                                |   |          |   |       |                     |        |        |   |      |   |  |   |           |  
|Net income                                                                                       |  |                                                         |  |         |        |          |   |          |                                |   | 111,879  |   |       |                     |        |        |   |      |   |  |   | 111,879   |  
|Net change in unrealized gain on available for sale securities (net of tax of $3,700)            |  |                                                         |  |         |        |          |   |          |                                |   |          |   |       |                     | 6,953  |        |   |      |   |  |   | 6,953     |  
|                                                                                                 |  |                                                         |  |         |        |          |   |          |                                |   |          |   |       |                     |        |        |   |      |   |  |   |           |  
|Total comprehensive income                                                                       |  |                                                         |  |         |        |          |   |          |                                |   |          |   |       |                     |        |        |   |      |   |  |   | 118,832   |  
|Common stock issued in connection with the exercise of stock options and restricted stock awards |  | 461,167                                                 |  |         | 461    |          |   | 1,565    |                                |   |          |   |       |                     |        |        |   |      |   |  |   | 2,026     |  
|Stock based compensation expense                                                                 |  |                                                         |  |         |        |          |   | 1,515    |                                |   |          |   |       |                     |        |        |   |      |   |  |   | 1,515     |  
|Cash dividends declared, $0.568 per share                                                        |  |                                                         |  |         |        |          |   |          |                                |   | (26,234  | ) |       |                     |        |        |   |      |   |  |   | (26,234   | )
|                                                                                                 |  |                                                         |  |         |        |          |   |          |                                |   |          |   |       |                     |        |        |   |      |   |  |   |           |  
|                                                                                                 |  |                                                         |  |         |        |          |  
|BALANCE AT DECEMBER 31, 2009                                                                     |  | 46,577,968                                              |  |         | 46,578 |          |   | 870,460  |                                |   | 418,008  |   |       |                     | 16,806 |        |   | (607 | ) |  |   | 1,351,245 |  
|Comprehensive income:                                                                            |  |                                                         |  |         |        |          |   |          |                                |   |          |   |       |                     |        |        |   |      |   |  |   |           |  
|Net income                                                                                       |  |                                                         |  |         |        |          |   |          |                                |   | 30,998   |   |       |                     |        |        |   |      |   |  |   | 30,998    |  
|Net change in unrealized gain on available for sale securities (net of tax of $649)              |  |                                                         |  |         |        |          |   |          |                                |   |          |   |       |                     | 1,205  |        |   |      |   |  |   | 1,205     |  
|                                                                                                 |  |                                                         |  |         |        |          |   |          |                                |   |          |   |       |                     |        |        |   |      |   |  |   |           |  
|Total comprehensive income                                                                       |  |                                                         |  |         |        |          |   |          |                                |   |          |   |       |                     |        |        |   |      |   |  |   | 32,203    |  
|Common stock issued in connection with the exercise of stock options and restricted stock awards |  | 34,730                                                  |  |         | 35     |          |   | 851      |                                |   |          |   |       |                     |        |        |   |      |   |  |   | 886       |  
|Stock based compensation expense                                                                 |  |                                                         |  |         |        |          |   | 791      |                                |   |          |   |       |                     |        |        |   |      |   |  |   | 791       |  
|Cash dividends declared, $0.155 per share                                                        |  |                                                         |  |         |        |          |   |          |                                |   | (7,218   | ) |       |                     |        |        |   |      |   |  |   | (7,218    | )
|                                                                                                 |  |                                                         |  |         |        |          |   |          |                                |   |          |   |       |                     |        |        |   |      |   |  |   |           |  
|BALANCE AT MARCH 31, 2010                                                                        |  | 46,612,698                                              |  | $       | 46,613 |          | $ | 872,102  |                                | $ | 441,788  |   |       | $                   | 18,011 |        | $ | (607 | ) |  | $ | 1,377,907 |  
|                                                                                                 |  |                                                         |  |         |        |          |   |          |                                |   |          |   |       |                     |        |        |   |      |   |  |   |           |  

See notes to interim consolidated financial statements.



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##### Table of Contents

PROSPERITY BANCSHARES, INC.
®AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)



|                                                                                  |  |                             |          |   |      |   |          |  
|--------------------------------------------------------------------------------- |  | --------------------------- | -------- | - | ---- | - | -------- | -
|                                                                                  |  | Three Months EndedMarch 31, |         
|                                                                                  |  | 2010                        |          |   | 2009 |  
|                                                                                  |  | (Dollars in thousands)      |         
|                                                                                  |  |                            
|CASH FLOWS FROM OPERATING ACTIVITIES:                                             |  |                             |          |   |      |   |          |  
|Net income                                                                        |  | $                           | 30,998   |   |      | $ | 25,478   |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                             |          |   |      |   |          |  
|Depreciation and amortization                                                     |  |                             | 4,296    |   |      |   | 4,682    |  
|Provision for credit losses                                                       |  |                             | 4,410    |   |      |   | 6,125    |  
|Net premium amortization (discount accretion) on investments                      |  |                             | 2,324    |   |      |   | (1,309   | )
|Stock based compensation expense                                                  |  |                             | 791      |   |      |   | 326      |  
|Net amortization of premium on loans and deposits                                 |  |                             | (237     | ) |      |   | (2,220   | )
|Loss (gain) on sale of assets and other real estate                               |  |                             | 294      |   |      |   | (119     | )
|Decrease in other assets and accrued interest receivable                          |  |                             | 5,474    |   |      |   | 8,256    |  
|Increase in accrued interest payable and other liabilities                        |  |                             | 13,998   |   |      |   | 12,886   |  
|                                                                                  |  |                             |          |   |      |   |          |  
|Net cash provided by operating activities                                         |  |                             | 62,348   |   |      |   | 54,105   |  
|                                                                                  |  |                             |          |   |      |   |          |  
|                                                                                  |  |                            
|CASH FLOWS FROM INVESTING ACTIVITIES:                                             |  |                             |          |   |      |   |          |  
|Proceeds from maturities and principal paydowns of held to maturity securities    |  |                             | 245,201  |   |      |   | 183,720  |  
|Purchase of held to maturity securities                                           |  |                             | (689,171 | ) |      |   | (124,845 | )
|Proceeds from maturities and principal paydowns of available for sale securities  |  |                             | 536,284  |   |      |   | 120,260  |  
|Purchase of available for sale securities                                         |  |                             | (499,999 | ) |      |   |         |  
|Net decrease in loans                                                             |  |                             | 41,278   |   |      |   | 50,999   |  
|Purchase of Franklin Bank branches                                                |  |                             |         |   |      |   | (65      | )
|Purchase of
1stChoice Bancorp                                                     |  |                             |         |   |      |   | (7       | )
|Purchase of Banco Popular branches                                                |  |                             |         |   |      |   | (20      | )
|Cash and cash equivalents acquired in the purchase of U.S. Bank branches          |  |                             | 344,722  |   |      |   |         |  
|Premium paid for U.S. Bank branches                                               |  |                             | (13,136  | ) |      |   |         |  
|Purchase of bank premises and equipment                                           |  |                             | (6,297   | ) |      |   | (30,284  | )
|Net decrease in interest-bearing deposits in financial institutions               |  |                             |         |   |      |   | 106      |  
|Net proceeds from sale of bank premises, equipment and other real estate          |  |                             | 9,806    |   |      |   | 4,040    |  
|                                                                                  |  |                             |          |   |      |   |          |  
|Net cash (used in) provided by investing activities                               |  |                             | (31,312  | ) |      |   | 203,904  |  
|                                                                                  |  |                             |          |   |      |   |          |  



(Table continued on following page)



4



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##### Table of Contents

|                                                                |  |                             |         |   |      |   |          |  
|--------------------------------------------------------------- |  | --------------------------- | ------- | - | ---- | - | -------- | -
|                                                                |  | Three Months EndedMarch 31, |        
|                                                                |  | 2010                        |         |   | 2009 |  
|                                                                |  | (Dollars in thousands)      |        
|CASH FLOWS FROM FINANCING ACTIVITIES:                           |  |                             |         |   |      |   |          |  
|Net decrease in noninterest-bearing deposits                    |  | $                           | (14,412 | ) |      | $ | (12,978  | )
|Net decrease in interest-bearing deposits                       |  |                             | (21,082 | ) |      |   | (88,629  | )
|Net repayments from short-term borrowings                       |  |                             |        |   |      |   | (200,000 | )
|Net repayments from long-term borrowings                        |  |                             | (10,261 | ) |      |   | (954     | )
|Net repayments from securities sold under repurchase agreements |  |                             | (4,155  | ) |      |   | (14,244  | )
|Proceeds from exercise of stock options                         |  |                             | 886     |   |      |   | 368      |  
|Payments of cash dividends                                      |  |                             | (7,218  | ) |      |   | (6,337   | )
|                                                                |  |                             |         |   |      |   |          |  
|Net cash used in financing activities                           |  |                             | (56,242 | ) |      |   | (322,774 | )
|                                                                |  |                             |         |   |      |   |          |  
|                                                                |  |                            
|NET DECREASE IN CASH AND CASH EQUIVALENTS                       |  | $                           | (25,206 | ) |      | $ | (64,765  | )
|CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                  |  |                             | 195,317 |   |      |   | 228,633  |  
|                                                                |  |                             |         |   |      |   |          |  
|CASH AND CASH EQUIVALENTS, END OF PERIOD                        |  | $                           | 170,111 |   |      | $ | 163,868  |  
|                                                                |  |                             |         |   |      |   |          |  
|                                                                |  |                            
|NONCASH ACTIVITIES:                                             |  |                             |         |   |      |   |          |  
|                                                                |  |                            
|SUPPLEMENTAL DISCLOSURES:                                       |  |                             |         |   |      |   |          |  
|Cash paid for interest                                          |  | $                           | 18,894  |   |      | $ | 34,300   |  
|Cash paid for income taxes                                      |  |                             | 3,250   |   |      |   | 2,500    |  

See notes to interim
consolidated financial statements.



5



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##### Table of Contents

PROSPERITY BANCSHARES, INC.
® AND SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2010

(UNAUDITED)

1. BASIS
OF PRESENTATION

The interim consolidated financial statements include the accounts of Prosperity
Bancshares, Inc.® (the Company) and its wholly-owned subsidiaries, Prosperity
Bank® (the Bank) and Prosperity Holdings of Delaware, LLC. All significant inter-company
transactions and balances have been eliminated.

The accompanying unaudited interim consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for interim financial information and with the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, the statements reflect all adjustments necessary for a fair presentation of the financial position, results of operations
and cash flows of the Company on a consolidated basis, and all such adjustments are of a normal recurring nature. These financial statements and the notes thereto should be read in conjunction with the Companys Annual Report on Form 10-K for
the year ended December 31, 2009. Operating results for the three-month period ended March 31, 2010 are not necessarily indicative of the results that may be expected for the year ending December 31, 2010 or any other period.

2. INCOME PER COMMON SHARE

The following table illustrates the computation of basic and diluted earnings per share:



|                                                    |  |                                       |        |      |   |       
|--------------------------------------------------- |  | ------------------------------------- | ------ | ---- | - | ------
|                                                    |  | Three Months EndedMarch 31,          
|                                                    |  | 2010                                  |        | 2009
|                                                    |  | (In thousands, except per share data)
|                                                    |  |                                      
|Net income available to shareholders                |  | $                                     | 30,998 |      | $ | 25,478
|                                                    |  |                                       |        |      |   |       
|                                                    |  |                                      
|Weighted average shares outstanding                 |  |                                       | 46,553 |      |   | 46,086
|Potential dilutive shares                           |  |                                       | 305    |      |   | 53    
|                                                    |  |                                       |        |      |   |       
|Weighted average shares and equivalents outstanding |  |                                       | 46,858 |      |   | 46,139
|                                                    |  |                                       |        |      |   |       
|                                                    |  |                                      
|Basic earnings per share                            |  | $                                     | 0.67   |      | $ | 0.55  
|                                                    |  |                                       |        |      |   |       
|Diluted earnings per share                          |  | $                                     | 0.66   |      | $ | 0.55  
|                                                    |  |                                       |        |      |   |       

The incremental shares for the assumed exercise of the
outstanding options were determined by application of the treasury stock method. There were no stock options exercisable during the quarter ended March 31, 2010 or 2009 that would have had an anti-dilutive effect on the above computation.

3. NEW ACCOUNTING STANDARDS

Accounting Standards Updates

Accounting Standards Update (ASU) No. 2009-16, Transfers and Servicing (Topic 860)Accounting for Transfers of
Financial Assets.ASU 2009-16 amends prior accounting guidance to enhance reporting about transfers of financial assets, including securitizations, and where companies have continuing exposure to the risks related to transferred
financial assets. ASU 2009-16 eliminates the concept of a qualifying special-purpose entity and changes the requirements for derecognizing financial assets. ASU 2009-16 also requires additional disclosures about all continuing
involvements with transferred financial assets including information about gains and losses resulting from transfers during the period. The provisions of ASU 2009-16 became effective on January 1, 2010 and did not have a significant impact
on the Companys financial statements.



6



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##### Table of Contents

PROSPERITY BANCSHARES, INC.
®AND SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS(Continued)

MARCH 31, 2010

(UNAUDITED)



ASU No. 2009-17, Consolidations (Topic 810)Improvements to
Financial Reporting by Enterprises Involved with Variable Interest Entities. ASU 2009-17 amends prior guidance to change how a company determines when an entity that is insufficiently capitalized or is not controlled through voting
(or similar rights) should be consolidated. The determination of whether a company is required to consolidate an entity is based on, among other things, an entitys purpose and design and a companys ability to direct the activities of the
entity that most significantly impact the entitys economic performance. ASU 2009-17 requires additional disclosures about the reporting entitys involvement with variable-interest entities and any significant changes in risk exposure
due to that involvement as well as its effect on the entitys financial statements. As further discussed below, ASU No. 2010-10, Consolidations (Topic 810), deferred the effective date of ASU 2009-17 for a reporting
entitys interests in investment companies. The provisions of ASU 2009-17 became effective on January 1, 2010 and did not have a significant impact on the Companys financial statements.

ASU No. 2010-06, Fair Value Measurements and Disclosures (Topic 820)Improving Disclosures About Fair Value
Measurements.ASU 2010-06 requires expanded disclosures related to fair value measurements including (i) the amounts of significant transfers of assets or liabilities between Levels 1 and 2 of the fair value hierarchy and
the reasons for the transfers, (ii) the reasons for transfers of assets or liabilities in or out of Level 3 of the fair value hierarchy, with significant transfers disclosed separately, (iii) the policy for determining when transfers
between levels of the fair value hierarchy are recognized and (iv) for recurring fair value measurements of assets and liabilities in Level 3 of the fair value hierarchy, a gross presentation of information about purchases, sales,
issuances and settlements. ASU 2010-06 further clarifies that (i) fair value measurement disclosures should be provided for each class of assets and liabilities (rather than major category), which would generally be a subset of assets or
liabilities within a line item in the statement of financial position and (ii) a company should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements
for each class of assets and liabilities included in Levels 2 and 3 of the fair value hierarchy. The disclosures related to the gross presentation of purchases, sales, issuances and settlements of assets and liabilities included in Level 3
of the fair value hierarchy will be required for the Company beginning January 1, 2011. The remaining disclosure requirements and clarifications made by ASU 2010-06 became effective for the Company on January 1, 2010 (see
Note 4Fair Value), and did not have a significant impact on the Companys financial statements.

4. FAIR VALUE

Effective January 1, 2008, the Company adopted FASB ASC Topic 820, Fair Value Measurement and Disclosures. ASC
Topic 820, which defines fair value, addresses aspects of the expanding application of fair value accounting and establishes a consistent framework for measuring fair value. Fair value represents the estimated price that would be received from
selling an asset or paid to transfer a liability, otherwise knows as an exit price.

Fair Value Hierarchy

ASC Topic 820 specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques
are observable or unobservable. In accordance with ASC Topic 820, these inputs are summarized in the three broad levels listed below:



| |  |  | Level 1Quoted prices in active markets for identical assets or liabilities. Level 1 assets include U.S. Treasury securities that are highly
liquid and are actively traded in over-the-counter markets.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



7



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##### Table of Contents

PROSPERITY BANCSHARES, INC.
®AND SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS(Continued)

MARCH 31, 2010

(UNAUDITED)



| |  |  | Level 2Other significant observable inputs (including quoted prices in active markets for similar assets or liabilities) or other inputs that are
observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. The Companys Level 2 assets include U.S. government and agency mortgage-backed debt securities, corporate securities,
municipal bonds and CRA funds.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Level 3Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or
liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair values
requires significant management judgment or estimation.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In determining the appropriate levels, the Company
performs a detailed analysis of the assets and liabilities that are subject to ASC Topic 820.

The following table summarizes
financial assets and financial liabilities measured at fair value on a recurring basis as of March 31, 2010, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:



|                                                                    |  |                        |   |         |   |         |  |       |   |  |   |        
|------------------------------------------------------------------- |  | ---------------------- | - | ------- | - | ------- |  | ----- | - |  | - | -------
|                                                                    |  | Level 1                |   | Level 2 |   | Level 3 |  | Total
|                                                                    |  | (Dollars in thousands)
|Available for sale securities (at fair value):                      |  |                        |   |         |   |         |  |       |   |  |   |        
|U.S Treasury securities and obligations of U.S. government agencies |  | $                      |  |         | $ | 1,030   |  | $     |  |  | $ | 1,030  
|States and political subdivisions (including QZAB)                  |  |                        |  |         |   | 57,302  |  |       |  |  |   | 57,302 
|Corporate debt securities and other                                 |  |                        |  |         |   | 9,225   |  |       |  |  |   | 9,225  
|Collateralized mortgage obligations                                 |  |                        |  |         |   | 1,103   |  |       |  |  |   | 1,103  
|Mortgage-backed securities                                          |  |                        |  |         |   | 496,737 |  |       |  |  |   | 496,737
|                                                                    |  |                        |   |         |   |         |  |       |   |  |   |        
|TOTAL                                                               |  | $                      |  |         | $ | 565,397 |  | $     |  |  | $ | 565,397
|                                                                    |  |                        |   |         |   |         |  |       |   |  |   |        

Certain assets and liabilities are measured at fair
value on a non-recurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). These
instruments include other real estate owned, repossessed assets and impaired loans per ASC Topic 310, Receivables. For the three months ended March 31, 2010, the Company had additions to impaired loans of $12.0 million and
additions to other real estate owned of $13.1 million, of which $12.0 million and $7.8 million were outstanding March 31, 2010, respectively. The remaining financial assets and financial liabilities measured at fair value on a non-recurring
basis that were recorded in 2010 and remained outstanding at March 31, 2010 were not significant.

The fair value of an
asset or liability is the price that would be received to sell that asset or paid to transfer that liability in an orderly transaction occurring in the principal market (or most advantageous market in the absence of a principal market) for such
asset or liability. In estimating fair value, the Company utilizes valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. Such valuation techniques are consistently applied. Inputs to
valuation techniques include the assumptions that market participants would use in pricing an asset or liability. FASB ASC Topic 820 establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active
markets for identical assets or liabilities and the lowest priority to unobservable inputs

These fair value disclosures
represent the Companys estimates based on relevant market information and information about the financial instruments. Fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk
characteristics of the various instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in the above
methodologies and assumptions could significantly affect the estimates.



8



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##### Table of Contents

PROSPERITY BANCSHARES, INC.
®AND SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS(Continued)

MARCH 31, 2010

(UNAUDITED)



The following methods and assumptions were used to estimate the fair value of each class
of financial instruments for which it is practicable to estimate that value:

Cash and Cash EquivalentsFor these
short-term instruments, the carrying amount is a reasonable estimate of fair value.

Federal Funds SoldThe
carrying amount is a reasonable estimate of fair value.

SecuritiesFor securities held as investments, fair value
equals quoted market price, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities.

Loans Held for InvestmentFor fixed rate loans and certain homogeneous categories of loans (such as some residential
mortgages and other consumer loans), fair value is estimated by discounting the future cash flows using the risk-free Treasury rate for the applicable maturity, adjusted for servicing and credit risk. The carrying value of variable rate loans
approximates fair value because the loans reprice frequently to current market rates.

DepositsThe fair value of
demand deposits, savings accounts and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of
similar remaining maturities.

Junior Subordinated DebenturesThe fair value of the junior subordinated debentures
was calculated using the quoted market prices, if available. If quoted market prices are not available, fair value is estimated using quoted market prices for similar subordinated debentures.

Other BorrowingsRates currently available to the Company for debt with similar terms and remaining maturities are used to
estimate the fair value of existing debt using a discounted cash flows methodology.

Securities Sold Under Repurchase
AgreementsThe fair value of securities sold under repurchase agreements is the amount payable on demand at the reporting date.

Off-Balance Sheet Financial InstrumentsThe fair value of commitments to extend credit and standby letters of credit is
estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreement and the present creditworthiness of the counterparties.

FASB ASC Topic 825, Financial Instruments, requires disclosure of the fair value of financial assets and financial liabilities,
including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis. The carrying amount and estimated fair values of the Companys financial instruments are as
follows:



|                                                                            |  |                        |           |                      |   |          
|--------------------------------------------------------------------------- |  | ---------------------- | --------- | -------------------- | - | ---------
|                                                                            |  | March 31, 2010        
|                                                                            |  | Carrying Amount        |           | Estimated Fair Value
|                                                                            |  | (Dollars in thousands)
|Financial assets:                                                           |  |                        |           |                      |   |          
|Cash and due from banks                                                     |  | $                      | 169,534   |                      | $ | 169,534  
|Federal funds sold                                                          |  |                        | 577       |                      |   | 577      
|Available for sale securities                                               |  |                        | 565,397   |                      |   | 565,397  
|Held to maturity securities                                                 |  |                        | 3,960,109 |                      |   | 4,097,286
|Loans held for investment and for sale (net of allowance for credit losses) |  |                        | 3,296,490 |                      |   | 3,297,557
|                                                                            |  |                        |           |                      |   |          
|Total                                                                       |  | $                      | 7,992,107 |                      | $ | 8,130,351
|                                                                            |  |                        |           |                      |   |          
|                                                                            |  |                       
|Financial liabilities:                                                      |  |                        |           |                      |   |          
|Deposits                                                                    |  | $                      | 7,598,979 |                      | $ | 7,616,423
|Other borrowings                                                            |  |                        | 15,879    |                      |   | 17,149   
|Securities sold under repurchase agreements                                 |  |                        | 68,441    |                      |   | 68,441   
|Junior subordinated debentures                                              |  |                        | 92,265    |                      |   | 92,292   
|                                                                            |  |                        |           |                      |   |          
|Total                                                                       |  | $                      | 7,775,564 |                      | $ | 7,794,305
|                                                                            |  |                        |           |                      |   |          



9



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##### Table of Contents

PROSPERITY BANCSHARES, INC.
®AND SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS(Continued)

MARCH 31, 2010

(UNAUDITED)



The Companys off-balance sheet commitments, which total $481.0 million at
March 31, 2010, are funded at current market rates at the date they are drawn upon. It is managements opinion that the fair value of these commitments would approximate their carrying value, if drawn upon.

The fair value estimates presented herein are based on pertinent information available to management at March 31, 2010. Although
management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since those dates and, therefore, current
estimates of fair value may differ significantly from the amounts presented herein.

5. GOODWILL AND CORE DEPOSIT INTANGIBLES

Changes in the carrying amount of the Companys goodwill and core deposit intangibles (CDI) for three
months ended March 31, 2010 were as follows:



|                                  |  |                        |         |                          |   |        |  
|--------------------------------- |  | ---------------------- | ------- | ------------------------ | - | ------ | -
|                                  |  | Goodwill               |         | Core Deposit Intangibles |  
|                                  |  | (Dollars in thousands) |        
|                                  |  |                       
|Balance as of December 31, 2009   |  | $                      | 876,987 |                          | $ | 35,385 |  
|Amortization                      |  |                        |        |                          |   | (2,290 | )
|Acquisition of U.S. Bank branches |  |                        | 13,136  |                          |   |       |  
|                                  |  |                        |         |                          |   |        |  
|Balance as of March 31, 2010      |  | $                      | 890,123 |                          | $ | 33,095 |  
|                                  |  |                        |         |                          |   |        |  

Purchase accounting adjustments to prior year acquisitions were made to adjust deferred tax asset and
liability balances. Goodwill is recorded on the acquisition date of each entity. The Company may record subsequent adjustments to goodwill for amounts undeterminable at acquisition date, such as deferred taxes and real estate valuations, and
therefore the goodwill amounts reflected in the table above may change accordingly. The Company initially records the total premium paid on acquisitions as goodwill. After finalizing the valuation, core deposit intangibles are identified and
reclassified from goodwill to core deposit intangibles on the balance sheet. This reclassification has no effect on total assets, liabilities, shareholders equity, net income or cash flows. Management performs an evaluation annually, and more
frequently if a triggering event occurs, of whether any impairment of the goodwill and other intangibles has occurred. If any such impairment is determined, a write-down is recorded. As of March 31, 2010, there were no impairments recorded on
goodwill.

Although the Bank completed the U.S. Bank branch acquisition in March 2010, the Company has not yet determined the
allocation of the purchase price to CDI with respect to the U.S. Bank deposits assumed and accordingly no amortization expense was recorded in 2010. The Company expects the completion of the allocation to result in an increase in CDI and a
corresponding increase in amortization expense in future periods.

CDI is amortized on an accelerated basis over their
estimated lives, which the Company believes is between 8 and 10 years. Gross core deposit intangibles outstanding were $76.7 million at March 31, 2010 and December 31, 2009. Net core deposit intangibles outstanding were $33.1 million and
$35.4 million at the same dates, respectively. Amortization expense related to intangible assets totaled $2.3 million and $2.7 million for the three months ended March 31, 2010 and 2009, respectively. The estimated aggregate future amortization
expense for intangible assets remaining as of March 31, 2010 is as follows (dollars in thousands):



|               |  |   |       
|-------------- |  | - | ------
|Remaining 2010 |  | $ | 6,450 
|               | 
|2011           |  |   | 7,410 
|               | 
|2012           |  |   | 6,024 
|               | 
|2013           |  |   | 4,182 
|               | 
|2014           |  |   | 3,066 
|               | 
|Thereafter     |  |   | 5,963 
|               |  |   |       
|               | 
|Total          |  | $ | 33,095
|               |  |   |       



10



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##### Table of Contents

PROSPERITY BANCSHARES, INC.
®AND SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS(Continued)

MARCH 31, 2010

(UNAUDITED)



6. STOCK BASED COMPENSATION

At March 31, 2010, the Company had three stock-based employee compensation plans and four stock option plans assumed in connection
with acquisitions under which no additional options will be granted. Two of the three plans adopted by the Company have expired and therefore no additional awards may be issued under those plans. The Company accounts for stock-based employee
compensation plans using the fair value-based method of accounting in accordance with ASC Topic 718. ASC Topic 718 was effective for companies in 2006; however, the Company has been recognizing compensation expense since January 1, 2003. The
Company recognized $791,000 and $326,000 in stock-based compensation expense for the three months ended March 31, 2010 and 2009, respectively. There was approximately $252,000 and $79,000 of income tax benefit recorded for the stock-based
compensation expense for the same periods.

During 2004, the Companys Board of Directors and shareholders approved the
Prosperity Bancshares, Inc. 2004 Stock Incentive Plan (the 2004 Plan). The Company has granted shares (restricted stock) to certain directors, officers and associates under the 2004 Plan. The awardee is not entitled to the
shares until they vest, which is generally over a 1 to 5 year period, but the awardee is entitled to receive dividends on and vote the shares prior to vesting. The shares granted do not have a cost to the awardee and the only requirement of vesting
is continued service to the Company. Compensation cost related to restricted stock is calculated based on the fair value of the shares at the date of grant. If the awardee leaves the Company before the shares vest, the unvested shares are forfeited.
As of March 31, 2010, there were 368,182 shares of restricted stock outstanding with a weighted average grant date fair value of $36.00 per share.

Stock options are issued at the current market price on the date of the grant, subject to a pre-determined vesting period with a
contractual term of 10 years. Options assumed in connection with acquisitions also have a contractual term of 10 years from date of original issuance under the original plan. The fair value of stock options granted is estimated at the date of grant
using the Black-Scholes option-pricing model. Stock-based compensation expense is recognized ratably over the requisite service period for all awards.

The fair value of options was estimated using an option-pricing model with the following weighted average assumptions as of the dates
indicated:



|                         |  |           |   |  |       |  
|------------------------ |  | --------- | - |  | ----- | -
|                         |  | March 31, |  
|                         |  | 2010      |   |  | 2009  |  
|Expected life (in years) |  | 5.11      |   |  | 5.10  |  
|Risk free interest rate  |  | 3.95      | % |  | 4.16  | %
|Volatility               |  | 21.28     | % |  | 21.18 | %
|Dividend yield           |  | 1.26      | % |  | 1.21  | %



11



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##### Table of Contents

PROSPERITY BANCSHARES, INC.
®AND SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS(Continued)

MARCH 31, 2010

(UNAUDITED)



A summary of changes in outstanding options during the three months ended March 31,
2010 is set forth below:



|                                         |  |                  |   |  |                                |       |                                           |      |                          |   |       
|---------------------------------------- |  | ---------------- | - |  | ------------------------------ | ----- | ----------------------------------------- | ---- | ------------------------ | - | ------
|                                         |  | Number ofOptions |   |  | Weighted AverageExercise Price |       | Weighted AverageRemaining ContractualTerm |      | Aggregate IntrinsicValue
|                                         |  | (In thousands)   |   |  |                                |       | (In years)                                |      | (In thousands)          
|                                         |  |                  |   | 
|Options outstanding, beginning of period |  | 856              |   |  | $                              | 25.88 |                                           |      |                          |   |       
|Options granted                          |  |                 |   |  |                                |      |                                           |      |                          |   |       
|Options forfeited                        |  |                 |   |  |                                |      |                                           |      |                          |   |       
|Options exercised                        |  | (35              | ) |  |                                | 25.48 |                                           |      |                          |   |       
|                                         |  |                  |   |  |                                |       |                                           |      |                          |   |       
|                                         |  |                  |   | 
|Options outstanding, end of period       |  | 821              |   |  | $                              | 25.90 |                                           | 4.75 |                          | $ | 12,384
|                                         |  |                  |   |  |                                |       |                                           |      |                          |   |       
|                                         |  |                  |   | 
|Options vested or expected to vest       |  | 796              |   |  | $                              | 25.62 |                                           | 4.68 |                          | $ | 12,239
|                                         |  |                  |   |  |                                |       |                                           |      |                          |   |       
|                                         |  |                  |   | 
|Options exercisable, end of period       |  | 459              |   |  | $                              | 23.34 |                                           | 3.77 |                          | $ | 8,100 
|                                         |  |                  |   |  |                                |       |                                           |      |                          |   |       

No options were granted during the three months ended
March 31, 2010 or 2009. The total intrinsic value of the options exercised during the three month periods ended March 31, 2010 and 2009 was $539,000 and $231,000, respectively. The total fair value of shares vested during the three month
period ended March 31, 2010 and 2009 was approximately $80,000 and $86,000, respectively.

A summary of changes in
non-vested options is set forth below:



|                                                    |  |                              |   |      |                                       |      |                  |     |   |                                       |   |     
|--------------------------------------------------- |  | ---------------------------- | - | ---- | ------------------------------------- | ---- | ---------------- | --- | - | ------------------------------------- | - | ----
|                                                    |  | Three Months Ended March 31,
|                                                    |  | 2010                         |   | 2009
|                                                    |  | Number ofOptions             |   |      | Weighted AverageGrant Date Fair Value |      | Number ofOptions |     |   | Weighted AverageGrant Date Fair Value
|                                                    |  | (In thousands)               |   |      |                                       |      | (In thousands)   |     |   |                                      
|                                                    |  |                              |   |     
|Non-vested options outstanding, beginning of period |  | 376                          |   |      | $                                     | 6.78 |                  | 529 |   |                                       | $ | 6.52
|Options granted                                     |  |                             |   |      |                                       |     |                  |    |   |                                       |   |    
|Non-vested options forfeited                        |  |                             |   |      |                                       |     |                  | (2  | ) |                                       |   | 4.34
|Options vested                                      |  | (14                          | ) |      |                                       | 5.62 |                  | (15 | ) |                                       |   | 5.58
|                                                    |  |                              |   |      |                                       |      |                  |     |   |                                       |   |     
|Non-vested options outstanding, end of period       |  | 362                          |   |      | $                                     | 6.83 |                  | 512 |   |                                       | $ | 6.87
|                                                    |  |                              |   |      |                                       |      |                  |     |   |                                       |   |     

The Company received $886,000 and $368,000 in cash
from the exercise of stock options during the three month periods ended March 31, 2010 and 2009, respectively. There was no tax benefit realized from option exercises of the share-based payment arrangements during the three month periods ended
March 31, 2010 and 2009.

As of March 31, 2010, there was $12.3 million of total unrecognized compensation expense
related to stock-based compensation arrangements. That cost is expected to be recognized over a weighted average period of 3.1 years.



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##### Table of Contents

PROSPERITY BANCSHARES, INC.
®AND SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS(Continued)

MARCH 31, 2010

(UNAUDITED)



7. CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ITEMS

Contractual Obligations

The following table summarizes the Companys contractual obligations and other commitments to make future payments as of
March 31, 2010 (other than deposit obligations). The payments do not include pre-payment options that may be available to the Company. The Companys future cash payments associated with its contractual obligations pursuant to its junior
subordinated debentures, FHLB notes payable and operating leases as of March 31, 2010 are summarized below. Payments for junior subordinated debentures include interest of $69.5 million that will be paid over future periods. Future interest
payments were calculated using the current rate in effect at March 31, 2010. With respect to floating interest rates, the payments were determined based on the 3-month LIBOR in effect at March 31, 2010. The current principal balance of the
junior subordinated debentures at March 31, 2010 was $92.3 million. Payments for FHLB notes payable include interest of $4.8 million that will be paid over the future periods. Payments related to leases are based on actual payments specified in
underlying contracts.



|                                     |  |                        |       |                 |   |                 |  |            |        |       |   |         |  |   |        
|------------------------------------ |  | ---------------------- | ----- | --------------- | - | --------------- |  | ---------- | ------ | ----- | - | ------- |  | - | -------
|                                     |  | Payments due in:      
|                                     |  | RemainingFiscal 2010   |       | Fiscal2011-2012 |   | Fiscal2013-2014 |  | Thereafter |        | Total
|                                     |  | (Dollars in thousands)
|                                     |  |                        |       |                 |  
|Junior subordinated debentures       |  | $                      | 2,289 |                 | $ | 6,103           |  | $          | 6,103  |       | $ | 147,258 |  | $ | 161,753
|Federal Home Loan Bank notes payable |  |                        | 1,884 |                 |   | 4,062           |  |            | 3,258  |       |   | 11,458  |  |   | 20,662 
|Operating leases                     |  |                        | 3,202 |                 |   | 6,709           |  |            | 4,103  |       |   | 833     |  |   | 14,847 
|                                     |  |                        |       |                 |   |                 |  |            |        |       |   |         |  |   |        
|Total                                |  | $                      | 7,375 |                 | $ | 16,874          |  | $          | 13,464 |       | $ | 159,549 |  | $ | 197,262
|                                     |  |                        |       |                 |   |                 |  |            |        |       |   |         |  |   |        

Off-Balance Sheet Items

In the normal course of business, the Company enters into various transactions, which, in accordance with accounting principles generally
accepted in the United States, are not included in its consolidated balance sheets. The Company enters into these transactions to meet the financing needs of its customers. These transactions include commitments to extend credit and standby letters
of credit, which involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amounts recognized in the consolidated balance sheets.

The Companys commitments associated with outstanding standby letters of credit and commitments to extend credit as of
March 31, 2010 are summarized below. Since commitments associated with letters of credit and commitments to extend credit may expire unused, the amounts shown do not necessarily reflect the actual future cash funding requirements:



|                             |  |                        |         |                 |   |                 |  |            |       |       |   |         |  |   |        
|---------------------------- |  | ---------------------- | ------- | --------------- | - | --------------- |  | ---------- | ----- | ----- | - | ------- |  | - | -------
|                             |  | RemainingFiscal 2010   |         | Fiscal2011-2012 |   | Fiscal2013-2014 |  | Thereafter |       | Total
|                             |  | (Dollars in thousands)
|                             |  |                        |         |                 |  
|Standby letters of credit    |  | $                      | 10,697  |                 | $ | 2,651           |  | $          | 196   |       | $ |        |  | $ | 13,544 
|Commitments to extend credit |  |                        | 224,899 |                 |   | 98,511          |  |            | 2,420 |       |   | 141,636 |  |   | 467,466
|                             |  |                        |         |                 |   |                 |  |            |       |       |   |         |  |   |        
|Total                        |  | $                      | 235,596 |                 | $ | 101,162         |  | $          | 2,616 |       | $ | 141,636 |  | $ | 481,010
|                             |  |                        |         |                 |   |                 |  |            |       |       |   |         |  |   |        

8. SUBSEQUENT EVENTS

On April 30, 2010, the Bank completed the previously announced acquisition of the nineteen (19) Texas retail bank branches of
First Bank. After consolidations with nearby banking centers, the Company will operate thirty-one (31) Dallas/Fort Worth area banking centers and sixty (60) Houston area banking centers. The banking centers acquired by the Company are all
in the Houston and Dallas metropolitan areas and the Company assumed approximately $495 million of deposits and purchased approximately $98 million of loans.



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##### Table of Contents

|ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- | -------------------------------------------------------------------------------------

Special Cautionary Notice Regarding Forward-Looking Statements

Statements and financial discussion and analysis contained in this quarterly report on Form 10-Q that are not historical facts are
forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on assumptions and involve a number of risks and uncertainties, many of which are
beyond the Companys control. Many possible events or factors could affect the future financial results and performance of the Company and could cause such results or performance to differ materially from those expressed in the forward-looking
statements. These possible events or factors include, without limitation:



| |  | changes in the strength of the United States economy in general and the strength of the local economies in which the Company conducts operations
resulting in, among other things, a deterioration in credit quality or reduced demand for credit, including the result and effect on the Companys loan portfolio and allowance for credit losses;
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | changes in interest rates and market prices, which could reduce the Companys net interest margins, asset valuations and expense expectations;
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------



| |  | changes in the levels of loan prepayments and the resulting effects on the value of the Companys loan portfolio;
|- |  | -----------------------------------------------------------------------------------------------------------------



| |  | changes in local economic and business conditions which adversely affect the Companys customers and their ability to transact profitable business
with the company, including the ability of the Companys borrowers to repay their loans according to their terms or a change in the value of the related collateral;
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | increased competition for deposits and loans adversely affecting rates and terms;
|- |  | ---------------------------------------------------------------------------------



| |  | the timing, impact and other uncertainties of any future acquisitions, including the Companys ability to identify suitable future acquisition
candidates, the success or failure in the integration of their operations, and the ability to enter new markets successfully and capitalize on growth opportunities;
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | the possible impairment of goodwill associated with an acquisition and possible adverse short-term effects on the results of operations;
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------



| |  | increased credit risk in the Companys assets and increased operating risk caused by a material change in commercial, consumer and/or real estate
loans as a percentage of the total loan portfolio;
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | the concentration of the Companys loan portfolio in loans collateralized by real estate;
|- |  | -----------------------------------------------------------------------------------------



| |  | the failure of assumptions underlying the establishment of and provisions made to the allowance for credit losses;
|- |  | ------------------------------------------------------------------------------------------------------------------



| |  | changes in the availability of funds resulting in increased costs or reduced liquidity;
|- |  | ---------------------------------------------------------------------------------------



| |  | a deterioration or downgrade in the credit quality and credit agency ratings of the securities in the Companys securities portfolio;
|- |  | -------------------------------------------------------------------------------------------------------------------------------------



| |  | increased asset levels and changes in the composition of assets and the resulting impact on the Companys capital levels and regulatory capital
ratios;
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | the Companys ability to acquire, operate and maintain cost effective and efficient systems without incurring unexpectedly difficult or expensive
but necessary technological changes;
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | the loss of senior management or operating personnel and the potential inability to hire qualified personnel at reasonable compensation levels;
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------



| |  | government intervention in the U.S. financial system;
|- |  | -----------------------------------------------------



| |  | changes in statutes and government regulations or their interpretations applicable to financial holding companies and the Companys present and
future banking and other subsidiaries, including changes in tax requirements and tax rates;
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

| |  | increases in FDIC deposit insurance assessments;
|- |  | ------------------------------------------------



| |  | acts of terrorism, an outbreak of hostilities or other international or domestic calamities, weather or other acts of God and other matters beyond the
Companys control; and
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | other risks and uncertainties listed from time to time in the Companys reports and documents filed with the Securities and Exchange Commission.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------

A forward-looking statement may include a statement of the assumptions or bases underlying the
forward-looking statement. The Company believes it has chosen these assumptions or bases in good faith and that they are reasonable. However, the Company cautions you that assumptions or bases almost always vary from actual results, and the
differences between assumptions or bases and actual results can be material. The Company undertakes no obligation to publicly update or otherwise revise any forward-looking statements, whether as a result of new information, future events or
otherwise.

Managements Discussion and Analysis of Financial Condition and Results of Operations analyzes the major
elements of the Companys interim consolidated financial statements and accompanying notes. This section should be read in conjunction with the Companys interim consolidated financial statements and accompanying notes included elsewhere
in this report and with the consolidated financial statements and accompanying notes and other detailed information appearing in the Companys Annual Report on Form 10-K for the year ended December 31, 2009.

SUBSEQUENT EVENT

On April 30, 2010, the Bank completed the previously announced acquisition of the nineteen (19) Texas retail bank branches of
First Bank. After consolidations with nearby banking centers, the Company will operate thirty-one (31) Dallas/Fort Worth area banking centers and sixty (60) Houston area banking centers. The banking centers acquired by the Company are all
in the Houston and Dallas metropolitan areas and the Company assumed approximately $495 million of deposits and purchased approximately $98 million of loans.

OVERVIEW

The Company, a Texas corporation, was formed in 1983 as a vehicle to acquire the former Allied First Bank in Edna,
Texas which was chartered in 1949 as The First National Bank of Edna and is now known as Prosperity Bank. The Company is a registered financial holding company that derives substantially all of its revenues and income from the operation of its bank
subsidiary, Prosperity Bank® (Prosperity
Bank® or the Bank). The Bank provides a wide array of financial products and services to small
and medium-sized businesses and consumers. As of March 31, 2010, the Bank operated one hundred sixty-one (161) full-service banking locations; with fifty-two (52) in the Houston area, twenty-seven (27) in the South Texas area
including Corpus Christi and Victoria, twenty-seven (27) in the Central Texas including Austin and San Antonio, ten (10) in the Bryan/College Station area, twenty (20) in East Texas and twenty-five (25) in the Dallas/Fort Worth
area. The Companys headquarters are located at Prosperity Bank Plaza, 4295 San Felipe in Houston, Texas and its telephone number is (281) 269-7199. The Companys website address is www.prosperitybanktx.com. Information
contained on the Companys website is not incorporated by reference into this quarterly report on Form 10-Q and is not part of this or any other report.

The Company generates the majority of its revenues from interest income on loans, service charges on customer accounts and income from
investment in securities. The revenues are partially offset by interest expense paid on deposits and other borrowings and non-interest expenses such as administrative, occupancy and general operating expenses. Net interest income is the difference
between interest income on earning assets such as loans and securities and interest expense on liabilities such as deposits and borrowings which are used to fund those earning assets. The level of interest rates and the volume and mix of earning
assets and interest-bearing liabilities impact net interest income and margin.

Three principal components of the
Companys growth strategy are internal growth, stringent cost control practices and acquisitions, including strategic merger transactions and FDIC assisted transactions. The Company focuses on continuous internal growth. Each banking center is
operated as a separate profit center, maintaining separate data with respect to its net interest income, efficiency ratio, deposit growth, loan growth and overall profitability. Banking center presidents and managers are accountable for performance
in these areas and compensated accordingly. The Company also focuses on maintaining stringent cost control practices and policies. The Company has invested significantly in the infrastructure required to centralize many of its critical operations,
such as data processing and loan processing. Management believes that this centralized infrastructure can accommodate substantial additional growth while enabling the Company to minimize operational costs through certain economies of scale. The
Company also intends to continue to seek expansion opportunities. On March 26, 2010, the Company purchased three (3) retail branches of U.S. Bank. The three banking centers acquired by the Company were 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.



15



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##### Table of Contents

Total assets were $9.22 billion at March 31, 2010 compared with $8.85 billion at
December 31, 2009, an increase of $368.3 million or 4.2%. Total loans were $3.35 billion at March 31, 2010 compared with $3.38 billion at December 31, 2009, a decrease of $28.3 million or 0.8%. Total deposits were $7.60 billion at
March 31, 2010 compared with $7.26 billion at December 31, 2009, an increase of $340.4 million or 4.7% which was primarily due to the U.S. Bank acquisition. Shareholders equity increased $26.7 million or 2.0%, to $1.38 billion at
March 31, 2010 compared with $1.35 billion at December 31, 2009.

CRITICAL ACCOUNTING POLICIES

The Companys accounting policies are integral to understanding the financial results reported. Accounting
policies are described in detail in Note 1 to the consolidated financial statements included in the Companys Annual Report on Form 10-K for the year ended December 31, 2009. The Company believes that of its significant accounting
policies, the following may involve a higher degree of judgment and complexity:

Allowance for Credit LossesThe
allowance for credit losses is established through charges to earnings in the form of a provision for credit losses. Management has established an allowance for credit losses which it believes is adequate for estimated losses in the Companys
loan portfolio. Based on an evaluation of the loan portfolio, management presents a monthly review of the allowance for credit losses to the Banks Board of Directors, indicating any change in the allowance since the last review and any
recommendations as to adjustments in the allowance. In making its evaluation, management considers factors such as historical loan loss experience, industry diversification of the Companys commercial loan portfolio, the amount of nonperforming
assets and related collateral, the volume, growth and composition of the Companys loan portfolio, current economic conditions that may affect the borrowers ability to pay and the value of collateral, the evaluation of the Companys
loan portfolio through its internal loan review process and other relevant factors. Portions of the allowance may be allocated for specific credits; however, the entire allowance is available for any credit that, in managements judgment,
should be charged off. Charge-offs occur when loans are deemed to be uncollectible. The allowance for credit losses includes allowance allocations calculated in accordance with FASB ASC Topic 310, Receivables, and allowance
allocations determined in accordance with FASB ASC Topic 450, Contingencies.

Goodwill and Intangible
AssetsGoodwill and intangible assets that have indefinite useful lives are subject to an impairment test at least annually, or more often, if events or circumstances indicate that it is more likely than not that the fair value of
Prosperity Bank, the Companys only reporting unit with assigned goodwill, is below the carrying value of its equity. Goodwill is tested for impairment using a two-step process that begins with an estimation of the fair value of the
Companys reporting unit compared with its carrying value. If the carrying amount exceeds the fair value of the reporting unit, a second test is completed comparing the implied fair value of the reporting units goodwill to its carrying
value to measure the amount of impairment. The Company had no intangible assets with indefinite useful lives at March 31, 2010. Other identifiable intangible assets that are subject to amortization are amortized on an accelerated basis over the
years expected to be benefited, which the Company believes is between eight and ten years. These amortizable intangible assets are reviewed for impairment if circumstances indicate their value may not be recoverable based on a comparison of
fair value to carrying value. Based on the Companys annual goodwill impairment test as of September 30, 2009, management does not believe any of its goodwill is impaired as of March 31, 2010 because the fair value of the
Companys equity exceeded its carrying value. While the Company believes no impairment existed at March 31, 2010 under accounting standards applicable at that date, different conditions or assumptions, or changes in cash flows or
profitability, if significantly negative or unfavorable, could have a material adverse effect on the outcome of the Companys impairment evaluation and financial condition or future results of operations.

Stock-Based CompensationThe Company accounts for stock-based employee compensation plans using the fair value-based method
of accounting in accordance with FASB ASC Topic 718, Stock Compensation.ASC 718 was effective for companies in 2006; however, the Company had been recognizing compensation expense since January 1, 2003. The Companys results of
operations reflect compensation expense for all employee stock-based compensation, including the unvested portion of stock options granted prior to 2003. ASC 718 requires that management make assumptions including stock price volatility and employee
turnover that are utilized to measure compensation expense. The fair value of stock options granted is estimated at the date of grant using the Black-Scholes option-pricing model. This model requires the input of subjective assumptions.

Other Than Temporarily Impaired SecuritiesThe Companys available for sale securities portfolio is reported at fair
value. When the fair value of a security is below its amortized cost, and depending on the length of time the condition exists and the extent the fair market value is below amortized cost, additional analysis is performed to determine whether an
impairment exists. Available for sale and held to maturity securities are analyzed quarterly for possible other-than-temporary impairment. The analysis considers (i) the length of time and the extent to which the fair value has been less than
cost, (ii) the financial



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##### Table of Contents

condition and near-term prospects of the issuer, (iii) whether the market decline was affected by macroeconomic conditions, and (iv) whether the entity has the intent to sell the debt
security or more likely than not will be required to sell the debt security before its anticipated recovery. Often, the information available to conduct these assessments is limited and rapidly changing, making estimates of fair value subject to
judgment. If actual information or conditions are different than estimated, the extent of the impairment of the security may be different than previously estimated, which could have a material effect on the Companys results of operations and
financial condition.

RESULTS OF OPERATIONS

Net income available to shareholders was $31.0 million ($0.66 per common share on a diluted basis) for the quarter ended March 31,
2010 compared with $25.5 million ($0.55 per common share on a diluted basis) for the quarter ended March 31, 2009, an increase of $5.5 million or 21.7%. The Company posted returns on average common equity of 9.07% and 8.02%, returns on average
assets of 1.40% and 1.15% and efficiency ratios of 43.77% and 49.47% for the quarters ended March 31, 2010 and 2009, respectively. The efficiency ratio is calculated by dividing total noninterest expense (excluding credit loss provisions) by
net interest income plus noninterest income (excluding net gains and losses on the sale of securities and assets). Additionally, taxes are not part of this calculation.

Net Interest Income

The Companys net interest income is affected by changes in the amount and mix of interest-earning assets and interest-bearing
liabilities, referred to as a volume change. It is also affected by changes in yields earned on interest-earning assets and rates paid on interest-bearing deposits and other borrowed funds, referred to as a rate change.

Net interest income before the provision for credit losses was $77.8 million for the quarter ended March 31, 2010
compared with $74.1 million for the quarter ended March 31, 2009, an increase of $3.7 million or 5.0%. The average rate paid on interest-bearing liabilities decreased 85 basis points from 2.11% for the quarter ended March 31, 2009 to 1.26%
for the quarter ended March 31, 2010, while the average yield on interest-earning assets decreased 45 basis points from 5.61% for the quarter ended March 31, 2009 compared with 5.16% for the quarter ended March 31, 2010. The average
volume of interest-bearing liabilities decreased $41.5 million and the average volume of interest-earning assets decreased $46.1 million for the same period. The net interest margin on a tax equivalent basis increased 22 basis points from 3.98% for
the quarter ended March 31, 2009 to 4.20% for the quarter ended March 31, 2010.



17



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##### Table of Contents

The following table sets forth, for each major category of interest-earning assets and
interest-bearing liabilities, the average amounts outstanding, the interest earned or paid on such amounts, and the average rate earned or paid for the quarters ended March 31, 2010 and 2009. The table also sets forth the average rate paid on
total interest-bearing liabilities, and the net interest margin on average total interest-earning assets for the same periods. Except as indicated in the footnotes, no tax-equivalent adjustments were made and all average balances are daily average
balances. Any nonaccruing loans have been included in the table as loans carrying a zero yield.



|                                                          |  |                              |           |   |                     |   |                       |  |      |                           |  |   |                     |   |                       |   |         |  |      |  
|--------------------------------------------------------- |  | ---------------------------- | --------- | - | ------------------- | - | --------------------- |  | ---- | ------------------------- |  | - | ------------------- | - | --------------------- | - | ------- |  | ---- | -
|                                                          |  | Three Months Ended March 31, |          
|                                                          |  | 2010                         |           |   | 2009                |  
|                                                          |  | AverageOutstandingBalance    |           |   | InterestEarned/Paid |   | AverageYield/Rate (4) |  |      | AverageOutstandingBalance |  |   | InterestEarned/Paid |   | AverageYield/Rate (4) |  
|                                                          |  | (Dollars in thousands)       |          
|Assets                                                    |  |                              |           |   |                     |   |                       |  |      |                           |  |   |                     |   |                       |   |         |  |      |  
|Interest-earning assets:                                  |  |                              |           |   |                     |   |                       |  |      |                           |  |   |                     |   |                       |   |         |  |      |  
|Loans                                                     |  | $                            | 3,342,842 |   |                     | $ | 51,453                |  | 6.24 | %                         |  | $ | 3,530,230           |   |                       | $ | 55,802  |  | 6.41 | %
|Securities (1)                                            |  |                              | 4,177,540 |   |                     |   | 45,014                |  | 4.31 |                           |  |   | 4,030,151           |   |                       |   | 49,726  |  | 4.94 |  
|Federal funds sold and other temporary investments        |  |                              | 60,536    |   |                     |   | 29                    |  | 0.19 |                           |  |   | 66,597              |   |                       |   | 38      |  | 0.23 |  
|                                                          |  |                              |           |   |                     |   |                       |  |      |                           |  |   |                     |   |                       |   |         |  |      |  
|Total interest-earning assets                             |  |                              | 7,580,918 |   |                     |   | 96,496                |  | 5.16 | %                         |  |   | 7,626,978           |   |                       |   | 105,566 |  | 5.61 | %
|                                                          |  |                              |           |   |                     |   |                       |  |      |                           |  |   |                     |   |                       |   |         |  |      |  
|Less allowance for credit losses                          |  |                              | (51,750   | ) |                     |   |                       |  |      |                           |  |   | (37,220             | ) |                       |   |         |  |      |  
|                                                          |  |                              |           |   |                     |   |                       |  |      |                           |  |   |                     |   |                       |   |         |  |      |  
|Total interest-earning assets, net of allowance           |  |                              | 7,529,168 |   |                     |   |                       |  |      |                           |  |   | 7,589,758           |   |                       |   |         |  |      |  
|Noninterest-earning assets                                |  |                              | 1,351,056 |   |                     |   |                       |  |      |                           |  |   | 1,308,108           |   |                       |   |         |  |      |  
|                                                          |  |                              |           |   |                     |   |                       |  |      |                           |  |   |                     |   |                       |   |         |  |      |  
|                                                          |  |                              |           |   |                     |  
|Total assets                                              |  | $                            | 8,880,224 |   |                     |   |                       |  |      |                           |  | $ | 8,897,866           |   |                       |   |         |  |      |  
|                                                          |  |                              |           |   |                     |   |                       |  |      |                           |  |   |                     |   |                       |   |         |  |      |  
|                                                          |  |                              |           |   |                     |  
|Liabilities and shareholders equity                      |  |                              |           |   |                     |   |                       |  |      |                           |  |   |                     |   |                       |   |         |  |      |  
|Interest-bearing liabilities:                             |  |                              |           |   |                     |   |                       |  |      |                           |  |   |                     |   |                       |   |         |  |      |  
|Interest-bearing demand deposits                          |  | $                            | 1,384,304 |   |                     | $ | 2,738                 |  | 0.80 | %                         |  | $ | 1,068,685           |   |                       | $ | 2,122   |  | 0.81 | %
|Savings and money market accounts                         |  |                              | 2,037,235 |   |                     |   | 4,020                 |  | 0.80 |                           |  |   | 1,803,137           |   |                       |   | 6,057   |  | 1.36 |  
|Certificates of deposit                                   |  |                              | 2,385,804 |   |                     |   | 10,727                |  | 1.82 |                           |  |   | 2,913,566           |   |                       |   | 21,278  |  | 2.96 |  
|Junior subordinated debentures                            |  |                              | 92,265    |   |                     |   | 791                   |  | 3.48 |                           |  |   | 92,265              |   |                       |   | 1,119   |  | 4.92 |  
|Federal funds purchased and other borrowings              |  |                              | 32,080    |   |                     |   | 300                   |  | 3.79 |                           |  |   | 83,091              |   |                       |   | 564     |  | 2.75 |  
|Securities sold under repurchase agreements               |  |                              | 71,250    |   |                     |   | 148                   |  | 0.84 |                           |  |   | 83,734              |   |                       |   | 348     |  | 1.69 |  
|                                                          |  |                              |           |   |                     |   |                       |  |      |                           |  |   |                     |   |                       |   |         |  |      |  
|Total interest-bearing liabilities                        |  |                              | 6,002,938 |   |                     |   | 18,724                |  | 1.26 | %                         |  |   | 6,044,478           |   |                       |   | 31,488  |  | 2.11 | %
|                                                          |  |                              |           |   |                     |   |                       |  |      |                           |  |   |                     |   |                       |   |         |  |      |  
|Noninterest-bearing liabilities:                          |  |                              |           |   |                     |   |                       |  |      |                           |  |   |                     |   |                       |   |         |  |      |  
|Noninterest-bearing demand deposits                       |  |                              | 1,445,859 |   |                     |   |                       |  |      |                           |  |   | 1,492,026           |   |                       |   |         |  |      |  
|Other liabilities                                         |  |                              | 63,916    |   |                     |   |                       |  |      |                           |  |   | 90,982              |   |                       |   |         |  |      |  
|                                                          |  |                              |           |   |                     |   |                       |  |      |                           |  |   |                     |   |                       |   |         |  |      |  
|                                                          |  |                              |           |   |                     |  
|Total liabilities                                         |  |                              | 7,512,713 |   |                     |   |                       |  |      |                           |  |   | 7,627,486           |   |                       |   |         |  |      |  
|                                                          |  |                              |           |   |                     |   |                       |  |      |                           |  |   |                     |   |                       |   |         |  |      |  
|                                                          |  |                              |           |   |                     |  
|Shareholders equity                                      |  |                              | 1,367,511 |   |                     |   |                       |  |      |                           |  |   | 1,270,380           |   |                       |   |         |  |      |  
|                                                          |  |                              |           |   |                     |   |                       |  |      |                           |  |   |                     |   |                       |   |         |  |      |  
|                                                          |  |                              |           |   |                     |  
|Total liabilities and shareholders equity                |  | $                            | 8,880,224 |   |                     |   |                       |  |      |                           |  | $ | 8,897,866           |   |                       |   |         |  |      |  
|                                                          |  |                              |           |   |                     |   |                       |  |      |                           |  |   |                     |   |                       |   |         |  |      |  
|                                                          |  |                              |           |   |                     |  
|Net interest rate spread                                  |  |                              |           |   |                     |   |                       |  | 3.90 | %                         |  |   |                     |   |                       |   |         |  | 3.50 | %
|                                                          |  |                              |           |   |                     |  
|Net interest income and margin (2)                        |  |                              |           |   |                     | $ | 77,772                |  | 4.16 | %                         |  |   |                     |   |                       | $ | 74,078  |  | 3.94 | %
|                                                          |  |                              |           |   |                     |   |                       |  |      |                           |  |   |                     |   |                       |   |         |  |      |  
|Net interest income and margin (tax-equivalent basis) (3) |  |                              |           |   |                     | $ | 78,465                |  | 4.20 | %                         |  |   |                     |   |                       | $ | 74,759  |  | 3.98 | %
|                                                          |  |                              |           |   |                     |   |                       |  |      |                           |  |   |                     |   |                       |   |         |  |      |  



|(1) | Yield is based on amortized cost and does not include any component of unrealized gains or losses.
|--- | --------------------------------------------------------------------------------------------------

|(2) | The net interest margin is equal to net interest income divided by average interest-earning assets.
|--- | ---------------------------------------------------------------------------------------------------

|(3) | In order to make pretax income and resultant yields on tax-exempt investments and loans comparable to those on taxable investments and loans, a tax-equivalent
adjustment has been computed using a federal income tax rate of 35%.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Annualized and based on an actual/365 basis.
|--- | --------------------------------------------



18



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##### Table of Contents

The following table presents the dollar amount of changes in interest income and interest
expense for the major components of interest-earning assets and interest-bearing liabilities and distinguishes between the increase (decrease) attributable to changes in volume and changes in interest rates. For purposes of this table, changes
attributable to both rate and volume that cannot be segregated have been allocated to rate.



|                                                   |  |                              |        |   |       |   |        |   |  |   |         |  
|-------------------------------------------------- |  | ---------------------------- | ------ | - | ----- | - | ------ | - |  | - | ------- | -
|                                                   |  | Three Months Ended March 31, |       
|                                                   |  | 2010 vs. 2009                |       
|                                                   |  | Increase (Decrease)Due to    |        |   | Total |  
|                                                   |  | Volume                       |        |   | Rate  |   |       
|                                                   |  | (Dollars in thousands)       |       
|Interest-earning assets:                           |  |                              |        |   |       |   |        |   |  |   |         |  
|Loans                                              |  | $                            | (2,962 | ) |       | $ | (1,387 | ) |  | $ | (4,349  | )
|Securities                                         |  |                              | 1,819  |   |       |   | (6,531 | ) |  |   | (4,712  | )
|Federal funds sold and other temporary investments |  |                              | (3     | ) |       |   | (6     | ) |  |   | (9      | )
|                                                   |  |                              |        |   |       |   |        |   |  |   |         |  
|Total decrease in interest income                  |  |                              | (1,146 | ) |       |   | (7,924 | ) |  |   | (9,070  | )
|                                                   |  |                              |        |   |       |   |        |   |  |   |         |  
|Interest-bearing liabilities:                      |  |                              |        |   |       |   |        |   |  |   |         |  
|Interest-bearing demand deposits                   |  |                              | 627    |   |       |   | (11    | ) |  |   | 616     |  
|Savings and money market accounts                  |  |                              | 786    |   |       |   | (2,823 | ) |  |   | (2,037  | )
|Certificates of deposit                            |  |                              | (3,854 | ) |       |   | (6,697 | ) |  |   | (10,551 | )
|Junior subordinated debentures                     |  |                              |       |   |       |   | (328   | ) |  |   | (328    | )
|Federal funds purchased and other borrowings       |  |                              | (346   | ) |       |   | 82     |   |  |   | (264    | )
|Securities sold under repurchase agreements        |  |                              | (52    | ) |       |   | (148   | ) |  |   | (200    | )
|                                                   |  |                              |        |   |       |   |        |   |  |   |         |  
|Total decrease in interest expense                 |  |                              | (2,839 | ) |       |   | (9,925 | ) |  |   | (12,764 | )
|                                                   |  |                              |        |   |       |   |        |   |  |   |         |  
|Increase in net interest income                    |  | $                            | 1,693  |   |       | $ | 2,001  |   |  | $ | 3,694   |  
|                                                   |  |                              |        |   |       |   |        |   |  |   |         |  

Provision for Credit Losses

Management actively monitors the Companys asset quality and provides specific loss provisions when necessary. Provisions for credit
losses are charged to income to bring the total allowance for credit losses to a level deemed appropriate by management of the Company based on such factors as historical credit loss experience, industry diversification of the commercial loan
portfolio, the amount of nonperforming loans and related collateral, the volume growth and composition of the loan portfolio, current economic conditions that may affect the borrowers ability to pay and the value of collateral, the evaluation
of the loan portfolio through the internal loan review function and other relevant factors.

Loans are charged-off against the
allowance for credit losses when appropriate. Although management believes it uses the best information available to make determinations with respect to the provision for credit losses, future adjustments may be necessary if economic conditions
differ from the assumptions used in making the initial determinations.

The Company made a $4.4 million and $6.1 million
provision for credit losses for the quarters ended March 31, 2010 and 2009, respectively. For the quarter ended March 31, 2010, net charge-offs were $4.4 million compared with net charge-offs of $3.9 million for the quarter ended
March 31, 2009.

Noninterest Income

The Companys primary sources of recurring noninterest income are service charges on deposit accounts and other banking service
related fees. Noninterest income does not include loan origination fees which are recognized over the life of the related loan as an adjustment to yield using the interest method. Banking related service fees include check cashing fees, official
check fees, safe deposit box rent and currency handling fees. Noninterest income totaled $13.0 million for the three months ended March 31, 2010 compared with $15.0 million for the same period in 2009, a decrease of $2.0 million or 13.6%. The
decrease was primarily due to a decrease in insufficient funds charges and a decrease in other noninterest income. Other noninterest income for the three months ended March 31, 2009 included approximately $750,000 in income paid to the Company
by the FDIC for services performed as part of the Franklin transaction.



19



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##### Table of Contents

The following table presents, for the periods indicated, the major categories of noninterest
income:



|                                              |  |                             |        |   |      |   |       
|--------------------------------------------- |  | --------------------------- | ------ | - | ---- | - | ------
|                                              |  | Three months endedMarch 31,
|                                              |  | 2010                        |        |   | 2009
|                                              |  | (Dollars in thousands)     
|Service charges on deposit accounts           |  | $                           | 11,589 |   |      | $ | 12,372
|Banking related service fees                  |  |                             | 469    |   |      |   | 491   
|Brokered mortgage income                      |  |                             | 13     |   |      |   | 70    
|Trust and investment income                   |  |                             | 214    |   |      |   | 253   
|Income from leased assets                     |  |                             | 74     |   |      |   | 86    
|Bank owned life insurance income (BOLI)       |  |                             | 327    |   |      |   | 329   
|Gain on sale of assets, net                   |  |                             |       |   |      |   | 97    
|(Loss) gain on sale of other real estate, net |  |                             | (294   | ) |      |   | 22    
|Other noninterest income                      |  |                             | 586    |   |      |   | 1,297 
|                                              |  |                             |        |   |      |   |       
|Total noninterest income                      |  | $                           | 12,978 |   |      | $ | 15,017
|                                              |  |                             |        |   |      |   |       

Noninterest Expense

Noninterest expense totaled $39.7 million for the quarter ended March 31, 2010 compared with $44.0 million for the quarter ended
March 31, 2009, a decrease of $4.3 million or 9.8%. This decrease was principally due to cost savings associated with the operational integration of Franklin Bank which occurred in late February 2009.

The following table presents, for the periods indicated, the major categories of noninterest expense:



|                                          |  |                             |        |      |   |       
|----------------------------------------- |  | --------------------------- | ------ | ---- | - | ------
|                                          |  | Three Months EndedMarch 31,
|                                          |  | 2010                        |        | 2009
|                                          |  | (Dollars in thousands)     
|                                          |  |                            
|Salaries and employee benefits (1)        |  | $                           | 21,113 |      | $ | 22,648
|                                          |  |                             |        |      |   |       
|Non-staff expenses:                       |  |                             |        |      |   |       
|Net occupancy expense                     |  |                             | 3,434  |      |   | 3,978 
|Depreciation expense                      |  |                             | 2,006  |      |   | 2,001 
|Data processing                           |  |                             | 1,415  |      |   | 2,055 
|Communications expense                    |  |                             | 2,019  |      |   | 2,217 
|Printing and supplies                     |  |                             | 478    |      |   | 593   
|Regulatory assessments and FDIC insurance |  |                             | 2,609  |      |   | 2,981 
|Ad valorem and franchise taxes            |  |                             | 936    |      |   | 943   
|Core deposit intangibles amortization     |  |                             | 2,290  |      |   | 2,664 
|Other                                     |  |                             | 3,425  |      |   | 3,943 
|                                          |  |                             |        |      |   |       
|Total non-staff expenses                  |  |                             | 18,612 |      |   | 21,375
|                                          |  |                             |        |      |   |       
|                                          |  |                            
|Total noninterest expense                 |  | $                           | 39,725 |      | $ | 44,023
|                                          |  |                             |        |      |   |       



|(1) | Includes stock-based compensation expense of $791,000 and $326,000 for the three months ended March 31, 2010 and 2009, respectively.
|--- | ------------------------------------------------------------------------------------------------------------------------------------

Salaries and employee benefit expenses were $21.1 million for the quarter ended March 31, 2010 compared with $22.6 million for the
quarter ended March 31, 2009, a decrease of $1.5 million or 6.8%. The decrease was principally due to a reduction in staff from the Franklin acquisition which resulted from the Company no longer performing loan servicing for the FDIC. The
number of full-time equivalent (FTE) associates employed by the Company decreased from 1,684 at March 31, 2009 compared to 1,651 at March 31, 2010. Included in the 1,651 associate count are 60 associates added as a result of
the U.S. Bank acquisition on March 26, 2010.

Income Taxes

Income tax expense increased $2.1 million to $15.6 million for the quarter ended March 31, 2010 compared with $13.5 million for the
same period in 2009. The increase was primarily attributable to higher pretax net earnings for the quarter ended March 31, 2010 compared with the same period in 2009. The Companys effective tax rate for the three months ended
March 31, 2010 was 33.5% compared with 34.6% for the same period in 2009.



20



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##### Table of Contents

FINANCIAL CONDITION

Loan Portfolio

Total loans were $3.35 billion at March 31, 2010, a decrease of $28.3 million or 0.8% compared with $3.38 billion at
December 31, 2008. Outstanding loans at March 31, 2010 comprised 44.2% of average earning assets for the quarter ended March 31, 2010.

The following table summarizes the loan portfolio of the Company by type of loan as of March 31, 2010 and December 31, 2009:



|                                    |  |                        |           |         |                  |   |        |   |           |  |       |  
|----------------------------------- |  | ---------------------- | --------- | ------- | ---------------- | - | ------ | - | --------- |  | ----- | -
|                                    |  | March 31,2010          |           |         | December 31,2009 |  
|                                    |  | Amount                 |           | Percent |                  |   | Amount |   | Percent   | 
|                                    |  | (Dollars in thousands) |          
|Commercial and industrial           |  | $                      | 387,518   |         | 11.6             | % |        | $ | 392,975   |  | 11.6  | %
|Real estate:                        |  |                        |           |         |                  |   |        |   |           |  |       |  
|Construction and land development   |  |                        | 539,430   |         | 16.1             |   |        |   | 557,245   |  | 16.5  |  
|1-4 family residential              |  |                        | 729,015   |         | 21.8             |   |        |   | 709,101   |  | 21.0  |  
|Home equity                         |  |                        | 119,754   |         | 3.6              |   |        |   | 117,661   |  | 3.5   |  
|Commercial mortgages                |  |                        | 1,232,972 |         | 36.8             |   |        |   | 1,261,267 |  | 37.4  |  
|Farmland                            |  |                        | 97,155    |         | 2.9              |   |        |   | 93,288    |  | 2.8   |  
|Multifamily residential             |  |                        | 69,385    |         | 2.1              |   |        |   | 77,952    |  | 2.3   |  
|Agriculture                         |  |                        | 43,263    |         | 1.3              |   |        |   | 42,241    |  | 1.3   |  
|Consumer (net of unearned discount) |  |                        | 104,807   |         | 3.1              |   |        |   | 102,436   |  | 3.0   |  
|Other                               |  |                        | 25,084    |         | 0.7              |   |        |   | 22,537    |  | 0.6   |  
|                                    |  |                        |           |         |                  |   |        |   |           |  |       |  
|Total loans                         |  | $                      | 3,348,383 |         | 100.0            | % |        | $ | 3,376,703 |  | 100.0 | %
|                                    |  |                        |           |         |                  |   |        |   |           |  |       |  

Nonperforming Assets

The Company had $19.9 million in nonperforming assets at March 31, 2010 and $16.4 million in nonperforming assets at
December 31, 2009, an increase of $3.5 million or 21.5%. The ratio of nonperforming assets to loans and other real estate was 0.59% at March 31, 2010 compared with 0.48% at December 31, 2009.

The Company generally places a loan on nonaccrual status and ceases accruing interest when the payment of principal or interest is
delinquent for 90 days, or earlier in some cases, unless the loan is in the process of collection and the underlying collateral fully supports the carrying value of the loan. The Company generally charges off loans before attaining nonaccrual
status.

The following table presents information regarding past due loans and nonperforming assets as of the dates indicated:



|                                                          |  |                        |        |   |                  |   |        |  
|--------------------------------------------------------- |  | ---------------------- | ------ | - | ---------------- | - | ------ | -
|                                                          |  | March 31,2010          |        |   | December 31,2009 |  
|                                                          |  | (Dollars in thousands) |       
|                                                          |  |                       
|Nonaccrual loans                                          |  | $                      | 3,853  |   |                  | $ | 6,079  |  
|Restructured loans                                        |  |                        |       |   |                  |   |       |  
|Accruing loans 90 or more days past due                   |  |                        | 2,794  |   |                  |   | 2,332  |  
|                                                          |  |                        |        |   |                  |   |        |  
|Total nonperforming loans                                 |  |                        | 6,647  |   |                  |   | 8,411  |  
|Repossessed assets                                        |  |                        | 230    |   |                  |   | 116    |  
|Other real estate                                         |  |                        | 12,991 |   |                  |   | 7,829  |  
|                                                          |  |                        |        |   |                  |   |        |  
|Total nonperforming assets                                |  | $                      | 19,868 |   |                  | $ | 16,356 |  
|                                                          |  |                        |        |   |                  |   |        |  
|Nonperforming assets to total loans and other real estate |  |                        | 0.59   | % |                  |   | 0.48   | %
|Nonperforming assets to average earning assets            |  |                        | 0.26   | % |                  |   | 0.22   | %



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##### Table of Contents

Allowance for Credit Losses

Management actively monitors the Companys asset quality and provides specific loss allowances when necessary. The allowance for
credit losses is a reserve established through charges to earnings in the form of a provision for credit losses. Loans are charged off against the allowance for credit losses when appropriate. Although management believes it uses the best
information available to make determinations with respect to the allowance for credit losses, future adjustments may be necessary if economic conditions differ from the assumptions used in making the initial determinations. As of March 31,
2010, the allowance for credit losses amounted to $51.9 million or 1.55% of total loans compared with $51.9 million or 1.54% of total loans at December 31, 2009.

Set forth below is an analysis of the allowance for credit losses for the three months ended March 31, 2010 and the year ended
December 31, 2009:



|                                                        |  |                                  |           |   |                             |   |           |  
|------------------------------------------------------- |  | -------------------------------- | --------- | - | --------------------------- | - | --------- | -
|                                                        |  | Three Months EndedMarch 31, 2010 |           |   | Year EndedDecember 31, 2009 |  
|                                                        |  | (Dollars in thousands)           |          
|                                                        |  |                                 
|Average loans outstanding                               |  | $                                | 3,342,842 |   |                             | $ | 3,455,761 |  
|                                                        |  |                                  |           |   |                             |   |           |  
|                                                        |  |                                 
|Gross loans outstanding at end of period                |  | $                                | 3,348,383 |   |                             | $ | 3,376,703 |  
|                                                        |  |                                  |           |   |                             |   |           |  
|                                                        |  |                                 
|Allowance for credit losses at beginning of period      |  | $                                | 51,863    |   |                             | $ | 36,970    |  
|Provision for credit losses                             |  |                                  | 4,410     |   |                             |   | 28,775    |  
|Charge-offs:                                            |  |                                  |           |   |                             |   |           |  
|Commercial and industrial                               |  |                                  | (641      | ) |                             |   | (3,816    | )
|Real estate and agriculture                             |  |                                  | (3,687    | ) |                             |   | (8,585    | )
|Consumer                                                |  |                                  | (454      | ) |                             |   | (2,998    | )
|Recoveries:                                             |  |                                  |           |   |                             |   |           |  
|Commercial and industrial                               |  |                                  | 46        |   |                             |   | 275       |  
|Real estate and agriculture                             |  |                                  | 45        |   |                             |   | 236       |  
|Consumer                                                |  |                                  | 311       |   |                             |   | 1,006     |  
|                                                        |  |                                  |           |   |                             |   |           |  
|Net charge-offs                                         |  |                                  | (4,380    | ) |                             |   | (13,882   | )
|                                                        |  |                                  |           |   |                             |   |           |  
|Allowance for credit losses at end of period            |  | $                                | 51,893    |   |                             | $ | 51,863    |  
|                                                        |  |                                  |           |   |                             |   |           |  
|Ratio of allowance to end of period loans               |  |                                  | 1.55      | % |                             |   | 1.54      | %
|Ratio of net charge-offs to average loans (annualized)  |  |                                  | 0.52      | % |                             |   | 0.40      | %
|Ratio of allowance to end of period nonperforming loans |  |                                  | 780.7     | % |                             |   | 616.6     | %

Securities

The following table summarizes the amortized cost of securities as of the dates shown (available for sale securities are
not adjusted for unrealized gains or losses):



|                                                                                   |  |                |           |                  |   |          
|---------------------------------------------------------------------------------- |  | -------------- | --------- | ---------------- | - | ---------
|                                                                                   |  | March 31,2010  |           | December 31,2009
|                                                                                   |  | (In thousands)
|U.S. Treasury securities and obligations of U.S. government agencies               |  | $              | 38,883    |                  | $ | 41,715   
|States and political subdivisions                                                  |  |                | 79,743    |                  |   | 82,174   
|Corporate debt securities                                                          |  |                | 3,229     |                  |   | 3,227    
|Collateralized mortgage obligations                                                |  |                | 574,147   |                  |   | 296,923  
|Mortgage-backed securities                                                         |  |                | 3,773,606 |                  |   | 3,640,208
|Qualified Zone Academy Bond (QZAB) and Qualified School Constructions Bonds (QSCB) |  |                | 20,900    |                  |   | 20,900   
|Equity securities                                                                  |  |                | 7,288     |                  |   | 7,288    
|                                                                                   |  |                |           |                  |   |          
|Total amortized cost                                                               |  | $              | 4,497,796 |                  | $ | 4,092,435
|                                                                                   |  |                |           |                  |   |          
|Total fair value                                                                   |  | $              | 4,662,683 |                  | $ | 4,233,256
|                                                                                   |  |                |           |                  |   |          



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Management evaluates securities for other-than-temporary impairment (OTTI) at
least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. The investment securities portfolio is evaluated for OTTI by segregating the portfolio into two general segments and applying the
appropriate OTTI model. Investment securities classified as available for sale or held to maturity are generally evaluated for OTTI under FASB ASC Topic 320, InvestmentsDebt and Equity Securities. Certain purchased beneficial interests,
including non-agency mortgage-backed securities, asset-backed securities, and collateralized debt obligations, that had credit ratings at the time of purchase of below AA are evaluated using the model outlined in ASC Topic 325,
Investments-Other. The Company currently does not own any securities that are accounted for under ASC Topic 325.

In
determining OTTI under ASC Topic 320, management considers many factors, including: (i) the length of time and the extent to which the fair value has been less than cost, (ii) the financial condition and near-term prospects of the issuer,
(iii) whether the market decline was affected by macroeconomic conditions, and (iv) whether the entity has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated
recovery. The assessment of whether an other-than-temporary decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time. If applicable, the second segment of the
portfolio uses the OTTI guidance provided by ASC Topic 325 that is specific to purchased beneficial interests that, on the purchase date, were rated below AA. Under the ASC Topic 325 model, the Company compares the present value of the remaining
cash flows as estimated at the preceding evaluation date to the current expected remaining cash flows. An OTTI is deemed to have occurred if there has been an adverse change in the remaining expected future cash flows.

When OTTI occurs under either model, the amount of the OTTI recognized in earnings depends on whether an entity intends to sell the
security or more likely than not will be required to sell the security before recovery of its amortized cost basis less any current period credit loss. If an entity intends to sell or more likely than not will be required to sell the security before
recovery of its amortized cost basis less any current period credit loss, the OTTI shall be recognized in earnings equal to the entire difference between the investments amortized cost basis and its fair value at the balance sheet date. If an
entity does not intend to sell the security and it is not more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis less any current period loss, the OTTI shall be separated into the
amount representing the credit loss and the amount related to all other factors. The amount of the total OTTI related to the credit loss is determined based on the present value of cash flows expected to be collected and is recognized in earnings.
The amount of the total OTTI related to other factors shall be recognized in other comprehensive income, net of applicable taxes. The previous amortized cost basis less the OTTI recognized in earnings shall become the new amortized cost basis of the
investment.

Management does not intend to sell any debt securities or more likely than not will not be required to sell any
debt securities before their anticipated recovery, at which time the Company will receive full value for the securities. Furthermore, management has the intent to hold the securities classified as available for sale that were in a loss position as
of March 31, 2010 for a period of time sufficient for an entire recovery of the cost basis of the securities. The unrealized losses are largely due to increases in market interest rates over the yields available at the time the underlying
securities were purchased. The fair value is expected to recover as the securities approach their maturity date or repricing date or if market yields for such investments decline. Management does not believe any of the securities are impaired due to
reasons of credit quality. Accordingly, as of March 31, 2010, management believes any impairment in the Companys securities are temporary and no impairment loss has been realized in the Companys consolidated income statement.



23



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##### Table of Contents

The following table presents the amortized cost and fair value of securities classified as
available for sale at March 31, 2010:



|                                                                      |  |                        |         |                      |   |                       |  |   |           |   |  |   |        
|--------------------------------------------------------------------- |  | ---------------------- | ------- | -------------------- | - | --------------------- |  | - | --------- | - |  | - | -------
|                                                                      |  | March 31, 2010        
|                                                                      |  | AmortizedCost          |         | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | FairValue
|                                                                      |  | (Dollars in thousands)
|                                                                      |  |                        |         |                     
|U.S. Treasury securities and obligations of U.S. government agencies. |  | $                      | 1,010   |                      | $ | 20                    |  | $ |          |   |  | $ | 1,030  
|                                                                      |  |                        |         |                     
|States and political subdivisions (including QZAB)                    |  |                        | 54,958  |                      |   | 2,449                 |  |   | (105      | ) |  |   | 57,302 
|                                                                      |  |                        |         |                     
|Corporate debt securities and other                                   |  |                        | 9,017   |                      |   | 208                   |  |   |          |   |  |   | 9,225  
|                                                                      |  |                        |         |                     
|Collateralized mortgage obligations                                   |  |                        | 1,125   |                      |   |                      |  |   | (22       | ) |  |   | 1,103  
|                                                                      |  |                        |         |                     
|Mortgage-backed securities                                            |  |                        | 471,577 |                      |   | 25,277                |  |   | (117      | ) |  |   | 496,737
|                                                                      |  |                        |         |                      |   |                       |  |   |           |   |  |   |        
|Total                                                                 |  | $                      | 537,687 |                      | $ | 27,954                |  | $ | (244      | ) |  | $ | 565,397
|                                                                      |  |                        |         |                      |   |                       |  |   |           |   |  |   |        

The following table presents the amortized cost and
fair value of securities classified as held to maturity at March 31, 2010:



|                                                                      |  |                        |           |                      |   |                       |  |   |           |   |  |   |          
|--------------------------------------------------------------------- |  | ---------------------- | --------- | -------------------- | - | --------------------- |  | - | --------- | - |  | - | ---------
|                                                                      |  | March 31, 2010        
|                                                                      |  | AmortizedCost          |           | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | FairValue
|                                                                      |  | (Dollars in thousands)
|                                                                      |  |                        |           |                     
|U.S. Treasury securities and obligations of U.S. government agencies. |  | $                      | 37,874    |                      | $ | 1,368                 |  | $ |          |   |  | $ | 39,242   
|                                                                      |  |                        |           |                     
|States and political subdivisions (including QSCB)                    |  |                        | 45,685    |                      |   | 922                   |  |   | (541      | ) |  |   | 46,066   
|                                                                      |  |                        |           |                     
|Corporate debt securities                                             |  |                        | 1,500     |                      |   | 186                   |  |   |          |   |  |   | 1,686    
|                                                                      |  |                        |           |                     
|Collateralized mortgage obligations                                   |  |                        | 573,020   |                      |   | 3,616                 |  |   | (847      | ) |  |   | 575,789  
|                                                                      |  |                        |           |                     
|Mortgage-backed securities                                            |  |                        | 3,302,030 |                      |   | 132,663               |  |   | (190      | ) |  |   | 3,434,503
|                                                                      |  |                        |           |                      |   |                       |  |   |           |   |  |   |          
|Total                                                                 |  | $                      | 3,960,109 |                      | $ | 138,755               |  | $ | (1,578    | ) |  | $ | 4,097,286
|                                                                      |  |                        |           |                      |   |                       |  |   |           |   |  |   |          

Premises and Equipment

Premises and equipment, net of accumulated depreciation, totaled $152.9 million and $148.9 million at March 31, 2010 and
December 31, 2009, respectively, an increase of $4.0 million or 2.7%. The increase was primarily due to the purchase of the U.S. Bank branches.

Deposits

Total deposits were $7.60 billion at March 31, 2010 compared with $7.26 billion at December 31, 2009, an increase of $340.4
million or 4.7%. At March 31, 2010, noninterest-bearing deposits accounted for approximately 20.1% of total deposits compared with 20.6% of total deposits at December 31, 2009. Interest-bearing demand deposits totaled $6.07 billion or
79.9% of total deposits at March 31, 2010 compared with $5.77 billion or 79.4% of total deposits at December 31, 2009.



24



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##### Table of Contents

The following table summarizes the daily average balances and weighted average rates paid on
deposits for the periods indicated below:



|                                |  |                                 |           |             |                            |   |                |   |             |  |      |  
|------------------------------- |  | ------------------------------- | --------- | ----------- | -------------------------- | - | -------------- | - | ----------- |  | ---- | -
|                                |  | Three Months
EndedMarch 31,2010 |           |             | Year EndedDecember 31,2009 |  
|                                |  | AverageBalance                  |           | AverageRate |                            |   | AverageBalance |   | AverageRate | 
|                                |  | (Dollars in thousands)          |          
|                                |  |                                 |           |            
|Interest-bearing demand         |  | $                               | 1,384,304 |             | 0.80                       | % |                | $ | 1,082,332   |  | 0.79 | %
|Regular savings                 |  |                                 | 325,962   |             | 0.50                       |   |                |   | 320,530     |  | 0.56 |  
|Money market savings            |  |                                 | 1,711,273 |             | 0.86                       |   |                |   | 1,590,191   |  | 1.11 |  
|Time deposits                   |  |                                 | 2,385,804 |             | 1.82                       |   |                |   | 2,730,263   |  | 2.48 |  
|                                |  |                                 |           |             |                            |   |                |   |             |  |      |  
|Total interest-bearing deposits |  |                                 | 5,807,343 |             | 1.22                       |   |                |   | 5,723,316   |  | 1.67 |  
|Noninterest-bearing deposits    |  |                                 | 1,445,859 |             |                           |   |                |   | 1,488,699   |  |     |  
|                                |  |                                 |           |             |                            |   |                |   |             |  |      |  
|Total deposits                  |  | $                               | 7,253,202 |             | 0.98                       | % |                | $ | 7,212,015   |  | 1.33 | %
|                                |  |                                 |           |             |                            |   |                |   |             |  |      |  

Other Borrowings

The Company utilizes borrowings to supplement deposits to fund its lending and investment activities. Borrowings consist of funds from the
Federal Home Loan Bank (FHLB) and correspondent banks. FHLB advances are considered short-term, overnight borrowings. At March 31, 2010, the Company had no FHLB advances and $15.9 million in FHLB long-term notes payable
compared with no FHLB advances and $26.1 million in FHLB long-term notes payable at December 31, 2009. FHLB advances are available to the Company under a security and pledge agreement. At March 31, 2010, the Company had total funds of
$2.95 billion available under this agreement of which $15.9 million was outstanding. The weighted average interest rate paid on the FHLB notes payable at period end was 5.2%. The maturity dates on the FHLB notes payable range from the years 2010 to
2028 and have interest rates ranging from 3.08% to 6.10%. The highest outstanding balance of FHLB advances during the first quarter of 2010 was $100.0 million compared with $231.0 million for the year ended December 31, 2009. The average rate
paid on FHLB advances for the quarter ended March 31, 2010 was 0.05%.

At March 31, 2010, the Company had $68.4
million in overnight securities sold under repurchase agreements compared with $72.6 million at December 31, 2009, a decrease of $4.2 million or 5.7% with average rates paid of 0.84% and 1.25%, respectively.

The following table presents the Companys borrowings at March 31, 2010 and December 31, 2009:



|                                            |  |                        |        |                  |   |       
|------------------------------------------- |  | ---------------------- | ------ | ---------------- | - | ------
|                                            |  | March 31,2010          |        | December 31,2009
|                                            |  | (Dollars in thousands)
|                                            |  |                       
|FHLB advances                               |  | $                      |       |                  | $ |      
|FHLB long-term notes payable                |  |                        | 15,879 |                  |   | 26,140
|Total other borrowings                      |  |                        | 15,879 |                  |   | 26,140
|Securities sold under repurchase agreements |  |                        | 68,441 |                  |   | 72,596
|                                            |  |                        |        |                  |   |       
|Total                                       |  | $                      | 84,320 |                  | $ | 98,736
|                                            |  |                        |        |                  |   |       

Junior Subordinated Debentures

At March 31, 2010 and December 31, 2009, the Company had outstanding $92.3 million in junior subordinated debentures issued to
the Companys unconsolidated subsidiary trusts.



25



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##### Table of Contents

A summary of pertinent information related to the Companys eight issues of junior
subordinated debentures outstanding at March 31, 2010 is set forth in the table below:



|                               |  |                |  |                                     |            |                  |                                           |                                      |   |                 |  |               
|------------------------------ |  | -------------- |  | ----------------------------------- | ---------- | ---------------- | ----------------------------------------- | ------------------------------------ | - | --------------- |  | --------------
|Description                    |  | Issuance Date  |  | TrustPreferredSecuritiesOutstanding |            | Interest Rate(1) |                                           | JuniorSubordinatedDebt Owed toTrusts |   | MaturityDate(2)
|Prosperity Statutory Trust II  |  | July 31, 2001  |  | $                                   | 15,000,000 |                  | 3 month LIBOR+ 3.58%,
not to exceed12.50% |                                      | $ | 15,464,000      |  | July 31, 2031 
|                               |  |                |  |                                     |           
|Prosperity Statutory Trust III |  | Aug. 15, 2003  |  |                                     | 12,500,000 |                  | 3 month LIBOR + 
3.00%(3)                 |                                      |   | 12,887,000      |  | Sept. 17, 2033
|                               |  |                |  |                                     |           
|Prosperity Statutory Trust IV  |  | Dec. 30, 2003  |  |                                     | 12,500,000 |                  | 3 month LIBOR
+ 2.85%(4)                  |                                      |   | 12,887,000      |  | Dec. 30, 2033 
|                               |  |                |  |                                     |           
|SNB Capital Trust
IV(5)        |  | Sept. 25, 2003 |  |                                     | 10,000,000 |                  | 3 month LIBOR+ 3.00%                      |                                      |   | 10,310,000      |  | Sept. 25, 2033
|                               |  |                |  |                                     |           
|TXUI Statutory Trust
I(6)      |  | Sept. 07, 2000 |  |                                     | 7,000,000  |                  | 10.60%                                    |                                      |   | 7,210,000       |  | Sept. 07, 2030
|                               |  |                |  |                                     |           
|TXUI Statutory Trust
II(6)     |  | Dec. 19, 2003  |  |                                     | 5,000,000  |                  | 3 month LIBOR
+ 2.85%(7)                  |                                      |   | 5,155,000       |  | Dec. 19, 2033 
|                               |  |                |  |                                     |           
|TXUI Statutory Trust
III(6)    |  | Nov. 30, 2005  |  |                                     | 15,500,000 |                  | 3 month LIBOR+ 1.39%                      |                                      |   | 15,980,000      |  | Dec. 15, 2035 
|                               |  |                |  |                                     |           
|TXUI Statutory Trust
IV(6)     |  | Mar. 31, 2006  |  |                                     | 12,000,000 |                  | 3 month LIBOR+ 1.39%                      |                                      |   | 12,372,000      |  | June 30, 2036 



|(1) | The 3-month LIBOR in effect as of March 31, 2010 was 0.29%.
|--- | -----------------------------------------------------------

|(2) | All debentures are callable five years from issuance date except for TXUI Statutory Trust I which is callable ten years from issuance date.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------

|(3) | The debentures bore a fixed interest rate of 6.50% until September 17, 2008, when the rate began to float on a quarterly basis based on the 3-month LIBOR plus
3.00%.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | The debentures bore a fixed interest rate of 6.50% until December 30, 2008, when the rate began to float on a quarterly basis based on the 3-month LIBOR plus
2.85%.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | Assumed in connection with the SNB acquisition on April 1, 2006.
|--- | ----------------------------------------------------------------

|(6) | Assumed in connection with the TXUI acquisition on January 31, 2007.
|--- | --------------------------------------------------------------------

|(7) | The debentures bore a fixed interest rate of 6.45% until January 23, 2009, when the rate began to float on a quarterly basis based on the 3-month LIBOR plus 2.85%.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

Liquidity

Liquidity involves the Companys ability to raise funds to support asset growth or reduce assets to meet deposit withdrawals and
other payment obligations, to maintain reserve requirements and otherwise to operate the Company on an ongoing basis. The Companys largest source of funds is deposits and its largest use of funds is loans. The Company does not expect a change
in the source or use of its funds in the future. Although access to purchased funds from correspondent banks is available and has been utilized on occasion to take advantage of investment opportunities, the Company does not generally rely on these
external funding sources. The cash and federal funds sold position, supplemented by amortizing investment and loan portfolios, has generally created an adequate liquidity position.

As of March 31, 2010, the Company had outstanding $467.5 million in commitments to extend credit and $13.5 million in commitments
associated with outstanding standby letters of credit. Since commitments associated with letters of credit and commitments to extend credit may expire unused, the total outstanding may not necessarily reflect the actual future cash funding
requirements.

The Company has no exposure to future cash restrictions associated with known uncertainties or capital
expenditures of a material nature.

Asset liquidity is provided by cash and assets which are readily marketable or which will
mature in the near future. As of March 31, 2010, the Company had cash and cash equivalents of $170.1 million compared with $195.3 million at



26



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##### Table of Contents

December 31, 2009, a decrease of $25.2 million. The decrease is primarily due to net repayments of other borrowings of $10.3 million, a decrease in deposits of $35.5 million, purchases of
securities of $1.19 billion, an increase in other liabilities of $14.0 million, premium paid on U.S. Bank deposits of $13.1 million and purchases of premises and equipment of $6.3 million offset by proceeds from the maturities and repayments of
securities of $781.5 million, cash received from the U.S. Bank transaction of $344.7 million, a decrease in loans of $41.3 million and net earnings of $31.0 million.

Contractual Obligations

The following table summarizes the Companys contractual obligations and other commitments to make future payments as of
March 31, 2010 (other than deposit obligations). The payments do not include pre-payment options that may be available to the Company. The Companys future cash payments associated with its contractual obligations pursuant to its junior
subordinated debentures, FHLB notes payable and operating leases as of March 31, 2010 are summarized below. Payments for junior subordinated debentures include interest of $69.5 million that will be paid over the future periods. The future
interest payments were calculated using the current rate in effect at March 31, 2010. With respect to floating interest rates, the payments were determined based on the 3-month LIBOR in effect at March 31, 2010. The current principal
balance of the junior subordinated debentures at March 31, 2010 was $92.3 million. Payments for FHLB notes payable include interest of $4.8 million that will be paid over the future periods. Payments related to leases are based on actual
payments specified in underlying contracts.



|                                     |  |                        |       |                 |   |                 |  |            |        |       |   |         |  |   |        
|------------------------------------ |  | ---------------------- | ----- | --------------- | - | --------------- |  | ---------- | ------ | ----- | - | ------- |  | - | -------
|                                     |  | Payments due in:      
|                                     |  | RemainingFiscal 2010   |       | Fiscal2011-2012 |   | Fiscal2013-2014 |  | Thereafter |        | Total
|                                     |  | (Dollars in thousands)
|                                     |  |                        |       |                 |  
|Junior subordinated debentures       |  | $                      | 2,289 |                 | $ | 6,103           |  | $          | 6,103  |       | $ | 147,258 |  | $ | 161,753
|Federal Home Loan Bank notes payable |  |                        | 1,884 |                 |   | 4,062           |  |            | 3,258  |       |   | 11,458  |  |   | 20,662 
|Operating leases                     |  |                        | 3,202 |                 |   | 6,709           |  |            | 4,103  |       |   | 833     |  |   | 14,847 
|                                     |  |                        |       |                 |   |                 |  |            |        |       |   |         |  |   |        
|Total                                |  | $                      | 7,375 |                 | $ | 16,874          |  | $          | 13,464 |       | $ | 159,549 |  | $ | 197,262
|                                     |  |                        |       |                 |   |                 |  |            |        |       |   |         |  |   |        

Off-Balance Sheet Items

In the normal course of business, the Company enters into various transactions, which, in accordance with accounting principles generally
accepted in the United States, are not included in its consolidated balance sheets. The Company enters into these transactions to meet the financing needs of its customers. These transactions include commitments to extend credit and standby letters
of credit, which involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amounts recognized in the consolidated balance sheets.

The Companys commitments associated with outstanding standby letters of credit and commitments to extend credit as of
March 31, 2010 are summarized below. Since commitments associated with letters of credit and commitments to extend credit may expire unused, the amounts shown do not necessarily reflect the actual future cash funding requirements:



|                             |  |                        |         |                 |   |                 |  |            |       |       |   |         |  |   |        
|---------------------------- |  | ---------------------- | ------- | --------------- | - | --------------- |  | ---------- | ----- | ----- | - | ------- |  | - | -------
|                             |  | RemainingFiscal 2010   |         | Fiscal2011-2012 |   | Fiscal2013-2014 |  | Thereafter |       | Total
|                             |  | (Dollars in thousands)
|                             |  |                        |         |                 |  
|Standby letters of credit    |  | $                      | 10,697  |                 | $ | 2,651           |  | $          | 196   |       | $ |        |  | $ | 13,544 
|Commitments to extend credit |  |                        | 224,899 |                 |   | 98,511          |  |            | 2,420 |       |   | 141,636 |  |   | 467,466
|                             |  |                        |         |                 |   |                 |  |            |       |       |   |         |  |   |        
|Total                        |  | $                      | 235,596 |                 | $ | 101,162         |  | $          | 2,616 |       | $ | 141,636 |  | $ | 481,010
|                             |  |                        |         |                 |   |                 |  |            |       |       |   |         |  |   |        

Capital Resources

Total shareholders equity was $1.38 billion at March 31, 2010 compared with $1.35 billion at December 31, 2009, an
increase of $26.7 million or 2.0%. The increase was due primarily to net earnings of $31.0 million and an increase in the change in unrealized gain on available for sale securities of $1.2 million which was partially offset by dividends paid of $7.2
million for the three months ended March 31, 2010.



27



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##### Table of Contents

Both the Board of Governors of the Federal Reserve System with respect to the Company, and
the Federal Deposit Insurance Corporation (FDIC) with respect to the Bank, have established certain minimum risk-based capital standards that apply to bank holding companies and federally insured banks. The following table sets forth the
Companys total risk-based capital, Tier 1 risk-based capital, and Tier 1 to average assets (leverage) ratios as of March 31, 2010:



|                                         |  |       |  
|---------------------------------------- |  | ----- | -
|Consolidated Capital Ratios:             |  |       |  
|Total capital (to risk weighted assets)  |  | 14.07 | %
|Tier 1 capital (to risk weighted assets) |  | 12.82 | %
|Tier 1 capital (to average assets)       |  | 6.61  | %

As of
March 31, 2010, the Banks risk-based capital ratios were above the levels required for the Bank to be designated as well capitalized by the FDIC. To be designated as well capitalized, the minimum ratio requirements
for the Banks total risk-based capital, Tier 1 risk-based capital, and Tier 1 to average assets (leverage) capital ratios must be 10.0%, 6.0% and 5.0%, respectively. The following table sets forth the Banks total risk-based capital, Tier
1 risk-based capital, and Tier 1 to average assets (leverage) capital ratios as of March 31, 2010:



|                                         |  |       |  
|---------------------------------------- |  | ----- | -
|Capital Ratios (Bank Only):              |  |       |  
|Total capital (to risk weighted assets)  |  | 13.84 | %
|Tier 1 capital (to risk weighted assets) |  | 12.59 | %
|Tier 1 capital (to average assets)       |  | 6.49  | %

The Bank is
participating in the deposit insurance component of the FDIC Temporary Liquidity Guarantee Program (TLGP), which increases deposit insurance on noninterest-bearing transaction account deposits on balances up to $250,000 through
December 31, 2013. The Company and the Bank elected to not participate in the U.S. Department of Treasury Capital Purchase Program, which is a part of the Troubled Asset Relief Program.



|ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|------- | ----------------------------------------------------------

The Company manages market risk, which for the Company is primarily interest rate risk, through its Asset Liability Committee which is
composed of senior officers of the Company, in accordance with policies approved by the Companys Board of Directors.

The Company uses simulation analysis to examine the potential effects of market changes on net interest income and market value. The
Company considers macroeconomic variables, Company strategy, liquidity and other factors as it quantifies market risk. See the Companys Annual Report on Form 10-K, Item 7 Managements Discussion and Analysis of Financial
Condition and Results of Operations-Interest Rate Sensitivity and Liquidity which was filed with the Securities and Exchange Commission on March 1, 2010 for further discussion.



|ITEM 4. | CONTROLS AND PROCEDURES
|------- | -----------------------

Evaluation of disclosure controls and procedures.As of the end of the period covered by this report, the Company carried out an
evaluation, under the supervision and with the participation of its management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures. In
designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and
management was required to apply judgment in evaluating its controls and procedures. Based on this evaluation, the Companys Chief Executive Officer and Chief Financial Officer concluded that the Companys disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) were effective as of the end of the period covered by this report.

Changes in internal control over financial reporting. There were no changes in the Companys internal control over financial
reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended March 31, 2010 that have materially affected, or are reasonably likely to materially affect, the Companys internal
control over financial reporting.



28



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##### Table of Contents

PART IIOTHER INFORMATION



|ITEM 1. | LEGAL PROCEEDINGS
|------- | -----------------

The
Company and the Bank are defendants, from time to time, in legal actions arising from transactions conducted in the ordinary course of business. The Company and Bank believe, after consultations with legal counsel, that the ultimate liability, if
any, arising from such actions will not have a material adverse effect on their financial statements.



|ITEM 1A. | RISK FACTORS
|-------- | ------------

There have
been no material changes in the Companys risk factors from those disclosed in the Companys Annual Report on Form 10-K for the year ended December 31, 2009.



|ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
|------- | -----------------------------------------------------------

a. Not applicable

b. Not applicable

c. Not applicable



|ITEM 3. | DEFAULTS UPON SENIOR SECURITIES
|------- | -------------------------------

Not applicable



|ITEM 4. | RESERVED
|------- | --------



|ITEM 5. | OTHER INFORMATION
|------- | -----------------

Not
applicable



|ITEM 6. | EXHIBITS
|------- | --------



|              |  |                                                                                                                                                                                                                                                
|------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description of Exhibit                                                                                                                                                                                                                         
|              | 
|3.1           |  | Amended and Restated Articles of Incorporation of Prosperity Bancshares, Inc. (incorporated herein by reference to Exhibit 3.1 to the Companys Registration Statement on Form
S-1 (Registration No. 333-63267) (the Registration Statement))
|              | 
|3.2           |  | Articles of Amendment to Amended and Restated Articles of Incorporation of Prosperity Bancshares, Inc. (incorporated herein by reference to Exhibit 3.2 to the Companys
Quarterly Report on Form 10-Q for the quarter ended March 31, 2006)   
|              | 
|3.3           |  | Amended and Restated Bylaws of Prosperity Bancshares, Inc. (incorporated herein by reference to Exhibit 3.1 to the Companys Current Report on Form 8-K filed on
October 19, 2007)                                                             
|              | 
|4.1           |  | Form of certificate representing shares of the Companys common stock (incorporated by reference to Exhibit 4 to the Registration Statement)                                                                                                   
|              | 
|31.1*         |  | Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended                                                                                                                     
|              | 
|31.2*         |  | Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended                                                                                                                     
|              | 
|32.1**        |  | Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                             
|              | 
|32.2**        |  | Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                             



|* | Filed with this Quarterly Report on Form 10-Q.
|- | ----------------------------------------------

|** | Furnished with this Quarterly Report on Form 10-Q.
|-- | --------------------------------------------------



29



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##### Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.



|               |  |                                           
|-------------- |  | ------------------------------------------
|               |  | PROSPERITY BANCSHARES, INC.
®
(Registrant)
|               | 
|Date: 05/10/10 |  | /S/    DAVID
ZALMAN                       
|               |  | David Zalman                              
|               |  | Chief Executive Officer                   
|               | 
|Date: 05/10/10 |  | /S/    DAVID
HOLLAWAY                     
|               |  | David Hollaway                            
|               |  | Chief Financial Officer                   



30