Edgar Filing: PROSPERITY BANCSHARES INC

Form 10-Q

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 SEPTEMBER 30, 2006

¨	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 is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer: x		Accelerated filer: ¨		Non-accelerated filer: ¨

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 November 6, 2006, there were 32,792,085 shares of the registrant’s Common Stock, par value $1.00 per share, outstanding.

PROSPERITY BANCSHARES, INC. ^® AND SUBSIDIARIES

INDEX TO FORM 10-Q


		Page
PART I - FINANCIAL INFORMATION

Item 1.	Interim Consolidated Financial Statements	3
	Consolidated Balance Sheets as of September 30, 2006 (unaudited) and December 31, 2005 (unaudited)	3
	Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2006 and 2005 (unaudited)	4
	Consolidated Statements of Shareholders’ Equity for the Year Ended December 31, 2005 (unaudited) and for the Nine Months Ended September 30, 2006 (unaudited)	5
	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2006 and 2005 (unaudited)	6
	Notes to Interim Consolidated Financial Statements (unaudited)	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	27

Item 4.	Controls and Procedures	27

PART II - OTHER INFORMATION

Item 1.	Legal Proceedings	28
Item 1A.	Risk Factors	28
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	28
Item 3.	Defaults upon Senior Securities	28
Item 4.	Submission of Matters to a Vote of Security Holders	28
Item 5.	Other Information	28
Item 6.	Exhibits	28
Signatures		29

PART I – FINANCIAL INFORMATION

ITEM 1. INTERIM CONSOLIDATED FINANCIAL STATEMENTS

PROSPERITY BANCSHARES, INC.^® AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)


	September 30, 2006			December 31, 2005
	(Dollars in thousands, except share data)
ASSETS
Cash and due from banks	$	85,106		$	91,518
Federal funds sold		31,074			5,846

Total cash and cash equivalents		116,180			97,364
Interest bearing deposits in financial institutions		397			297
Available for sale securities, at fair value (amortized cost of $383,586 and $416,425, respectively)		377,384			410,361
Held to maturity securities, at cost (fair value of $1,155,785 and $1,135,694, respectively		1,189,094			1,162,241
Loans held for investment		2,214,401			1,542,125
Less allowance for credit losses		(24,093	)		(17,203	)

Loans, net		2,190,308			1,524,922
Accrued interest receivable		20,091			16,105
Goodwill		425,073			261,964
Core deposit intangibles, net of accumulated amortization of $10,320 and $6,704, respectively		24,285			22,461
Bank premises and equipment, net		63,118			49,244
Other real estate owned		59			239
Bank Owned Life Insurance (BOLI), net		14,048			13,676
Leased assets		3,898			4,464
Other assets		31,781			22,644

TOTAL ASSETS	$	4,455,716		$	3,585,982

LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES:
Deposits:
Noninterest-bearing	$	809,836		$	674,407
Interest-bearing		2,783,309			2,245,911

Total deposits		3,593,145			2,920,318
Other borrowings		31,484			55,404
Securities sold under repurchase agreements		48,459			46,985
Accrued interest payable		9,563			6,546
Other liabilities		22,393			16,237
Junior subordinated debentures		100,519			75,775

Total liabilities		3,805,563			3,121,265

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; 32,823,873 and 27,857,887 shares issued at September 30, 2006 and December 31, 2005, respectively; 32,786,785 and 27,820,799 shares outstanding at September 30, 2006 and December 31, 2005, respectively		32,824			27,858
Capital surplus		425,300			280,525
Retained earnings		196,668			160,883
Accumulated other comprehensive loss — net unrealized loss on available for sale securities, net of tax benefit of $2,171 and $2,122, respectively		(4,032	)		(3,942	)
Less treasury stock, at cost, 37,088 shares		(607	)		(607	)

Total shareholders’ equity		650,153			464,717

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	4,455,716		$	3,585,982

See notes to interim consolidated financial statements.

PROSPERITY BANCSHARES, INC. ^® AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2006		2005		2006		2005
	(Dollars in thousands, except per share data)
INTEREST INCOME:
Loans, including fees	$	43,625	$	26,992	$	113,685	$	72,378
Securities:
Taxable		17,532		15,066		52,597		43,262
Nontaxable		513		317		1,337		982
70% nontaxable preferred dividends		257		130		664		386
Federal funds sold		220		200		554		833
Deposits in financial institutions		3		2		9		5

Total interest income		62,150		42,707		168,846		117,846

INTEREST EXPENSE:
Deposits		22,519		11,663		57,487		30,625
Junior subordinated debentures		2,106		1,337		5,497		3,499
Federal funds purchased and other borrowings		1,061		566		2,831		1,381
Securities sold under repurchase agreements		497		221		1,292		465

Total interest expense		26,183		13,787		67,107		35,970

NET INTEREST INCOME		35,967		28,920		101,739		81,876
PROVISION FOR CREDIT LOSSES		120		120		360		360

NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES		35,847		28,800		101,379		81,516

NONINTEREST INCOME:
Customer service fees		7,079		6,774		20,610		18,660
Other		1,839		1,318		5,131		3,846

Total noninterest income		8,918		8,092		25,741		22,506

NONINTEREST EXPENSE:
Salaries and employee benefits		10,268		9,653		31,195		27,704
Net occupancy expense		2,166		1,810		5,814		4,872
Data processing		928		762		2,728		2,059
Core deposit intangible amortization		1,191		1,025		3,616		2,846
Depreciation expense		1,265		1,209		3,767		3,337
Other		4,011		3,611		11,357		10,898

Total noninterest expense		19,829		18,070		58,477		51,716

INCOME BEFORE INCOME TAXES		24,936		18,822		68,643		52,306
PROVISION FOR INCOME TAXES		8,572		6,351		23,520		17,073

NET INCOME	$	16,364	$	12,471	$	45,123	$	35,233

EARNINGS PER SHARE
Basic	$	0.50	$	0.45	$	1.45	$	1.34

Diluted	$	0.49	$	0.45	$	1.43	$	1.32

See notes to interim consolidated financial statements.

PROSPERITY BANCSHARES, INC. ^® AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(UNAUDITED)


	Common Stock			Capital Surplus		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Treasury Stock			Total Shareholders’ Equity
	Shares	Amount		Capital Surplus		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Treasury Stock			Total Shareholders’ Equity
	(Dollars in thousands, except share data)
BALANCE AT JANUARY 1, 2005	22,418,128	$	22,418	$	134,288	$	122,647		$	(3,099	)	$	(607	)	$	275,647
Comprehensive Income:
Net income							47,860									47,860
Net change in unrealized loss on available for sale securities										(894	)					(894	)
Add: Reclassification adjustment for net losses included in net income, net of tax benefit of $28										51						51

Total comprehensive income																47,017

Issuance of common stock in connection with the exercise of stock options and restricted stock	128,015		128		1,089											1,217
Common stock issued in connection with the First Capital acquisition	5,078,856		5,079		137,439											142,518
Common stock issued in connection with the Grapeland acquisition	232,888		233		6,894											7,127
Stock-based compensation expense					619											619
Cash dividends declared, $0.35 per share							(9,624	)								(9,624	)
Other					196											196

BALANCE AT DECEMBER 31, 2005	27,857,887	$	27,858	$	280,525	$	160,883		$	(3,942	)	$	(607	)	$	464,717
Comprehensive income:
Net income							45,123									45,123
Net change in unrealized loss on available for sale securities										(90	)					(90	)

Total comprehensive income																45,033

Issuance of common stock in connection with the exercise of stock options and restricted stock	517,761		518		7,255											7,773
Common stock issued in connection with the SNB acquisition	4,448,225		4,448		136,914											141,362
Stock-based compensation expense					606											606
Cash dividends declared, $0.30 per share							(9,338	)								(9,338	)

BALANCE AT SEPTEMBER 30, 2006	32,823,873	$	32,824	$	425,300	$	196,668		$	(4,032	)	$	(607	)	$	650,153

See notes to interim consolidated financial statements.

PROSPERITY BANCSHARES, INC. ^® AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)


	Nine Months Ended September 30,
	2006			2005
	(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	45,123		$	35,233
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		7,383			6,183
Provision for credit losses		360			360
Net (accretion) amortization of discount/ premium on investments		(257	)		2,278
Net gain on sale of other real estate		(37	)		(46	)
Net gain on sale of premises and equipment		(540	)		(17	)
Net gain on held for sale loans		—			(177	)
Fundings of held for sale loans		—			(14,744	)
Proceeds from held for sale loans		—			14,921
Stock-based compensation expense		606			481
(Increase) decrease in other assets and accrued interest receivable		(1,133	)		9,767
Increase (decrease) in accrued interest payable and other liabilities		7,787			(3,723	)

Total adjustments		14,169			15,283

Net cash provided by operating activities		59,292			50,516

CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities and principal paydowns of held to maturity securities		239,372			197,401
Purchase of held to maturity securities		(54,662	)		(161,396	)
Proceeds from maturities and principal paydowns of available for sale securities		46,700			56,463
Purchase of available for sale securities		31			(141,000	)
Net increase in loans		(74,079	)		(12,964	)
Purchase of bank premises and equipment		(3,375	)		(1,000	)
Net decrease in interest-bearing deposits in financial institutions		(100	)		—
Proceeds from sale of bank premises, equipment, and other real estate		3,148			1,399
Purchase of First Capital Bankers, Inc.		—			(2,367	)
Cash and cash equivalents acquired in the purchase of First Capital Bankers, Inc.		—			58,972
Purchase of SNB Bancshares, Inc.		(93,849	)		—
Cash and cash equivalents acquired in the purchase of SNB Bancshares, Inc.		18,020			—
Purchase of Grapeland Bancshares, Inc.		(77	)		—

Net cash provided by (used in) investing activities		81,129			(4,492	)

(Table continued on following page)


	Nine Months Ended September 30,
	2006			2005
	(Dollars in thousands)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in noninterest-bearing deposits	$	5,612		$	34,074
Net decrease in interest-bearing deposits		(76,706	)		(88,985	)
Net repayments of other borrowings		(44,420	)		(753	)
Net increase in securities sold under repurchase agreements		1,474			12,050
Redemption of Paradigm Capital Trust II		(6,000	)		—
Proceeds from exercise of stock options		7,773			735
Payments of cash dividends		(9,338	)		(6,845	)

Net cash used in financing activities		(121,605	)		(49,724	)

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS	$	18,816		$	(3,700	)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		97,364			137,910

CASH AND CASH EQUIVALENTS, END OF PERIOD	$	116,180		$	134,210

NONCASH ACTIVITIES:
Stock issued in connection with the acquisition of SNB Bancshares, Inc.	$	141,362		$	—
Stock issued in connection with the acquisition of First Capital Bankers, Inc.	$	—		$	142,518

See notes to interim consolidated financial statements.

PROSPERITY BANCSHARES, INC. ^® AND SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2006

(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, L.L.C. 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, 2005. Operating results for the nine month period ended September 30, 2006 are not necessarily indicative of the results that may be expected for the year ending December 31, 2006.

2. EARNINGS PER SHARE

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


	Three Months Ended September 30,				Nine Months Ended September 30,
	2006		2005		2006		2005
	(In thousands, except per share amounts)
Net income available to common shareholders	$	16,364	$	12,471	$	45,123	$	35,233

Weighted average common shares outstanding		32,771		27,546		31,053		26,389
Potential dilutive common shares		411		353		399		312

Weighted average common shares and equivalents outstanding		33,182		27,899		31,452		26,701

Basic earnings per common share	$	0.50	$	0.45	$	1.45	$	1.34

Diluted earnings per common share	$	0.49	$	0.45	$	1.43	$	1.32

Basic earnings per share is computed by dividing net income by the weighted-average number of shares outstanding during the applicable period. Diluted earnings per share is computed using the weighted-average number of shares determined for the basic computation plus the dilutive effect of stock options and non-vested stock granted using the treasury stock method. There were no stock options exercisable at September 30, 2006 and 2005 that would have had an anti-dilutive effect on the above computation.

3. NEW ACCOUNTING STANDARDS

SFAS No. 157, “Fair Value Measurement”. In 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Statement No. 157 (“SFAS 157”). SFAS 157 provides a single definition of fair value, together with a framework for measuring it, and requires additional disclosure about the use of fair value to measure assets and liabilities. SFAS 157 also emphasizes that fair value is a market-based measurement, not an entity-specific measurement, and sets out a fair value hierarchy with the highest priority being quoted prices in active markets. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. The Company is currently evaluating the impact of the adoption of this accounting standard on its financial statements.

PROSPERITY BANCSHARES, INC.^® AND SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2006

(UNAUDITED)

In June 2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”) Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109 (“FAS 109”), Accounting for Income Taxes. FIN 48 clarifies the application of FAS 109 by defining a criterion that an individual tax position must meet for any part of the benefit of that position to be recognized in an enterprise’s financial statements. Additionally, FIN 48 provides guidance on measurement, derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company is currently evaluating the impact of the adoption of this accounting standard on its financial statements.

SFAS No. 123(R), “Share-Based Payment (Revised 2004).” SFAS 123(R) establishes standards for the accounting for transactions in which an entity (i) exchanges its equity instruments for goods or services, or (ii) incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of the equity instruments. SFAS 123(R) eliminates the ability to account for stock-based compensation using Accounting Pronouncements Board (“APB”) 25 and requires that such transactions be recognized as compensation cost in the income statement based on their fair values on the date of the grant. SFAS 123(R) applies to new awards, modified awards and to awards cancelled after January 1, 2006. SFAS 123(R) was effective on January 1, 2006 and its adoption did not have a material impact on the Company’s financial statements. The Company had previously adopted SFAS No. 123 on January 1, 2003. The Company recorded $606,000 in stock based compensation expense for the nine months ended September 30, 2006. There was no income tax benefit recorded for the stock-based compensation expense.

4. GOODWILL AND CORE DEPOSIT INTANGIBLES

Changes in the carrying amount of the Company’s goodwill and core deposit intangibles (CDI) for nine months ended September 30, 2006 were as follows:


	Goodwill		Core Deposit Intangibles
	(In thousands)
Balance as of December 31, 2005	$	261,964	$	22,461
Amortization		—		(3,616	)
Acquisition of SNB Bancshares, Inc.		161,655		5,734
Acquisition of Grapeland Bancshares, Inc.		667		(294	)
Acquisition of First Capital Bankers, Inc.		371		—
Acquisitions prior to December 31, 2004 (deferred taxes)		416		—

Balance as of September 30, 2006	$	425,073	$	24,285

Gross core deposit intangibles outstanding were $34.6 million at September 30, 2006 and $29.2 million at December 31, 2005. 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 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 a third party valuation, core deposit intangibles are identified and reclassified from goodwill to core deposit intangibles on the balance sheet. This reclassification had no effect on total assets, liabilities, shareholders’ equity, net income or cash flows. Management performs an annual evaluation 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 September 30, 2006, there were no impairments recorded on goodwill.

PROSPERITY BANCSHARES, INC. ^® AND SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2006

(UNAUDITED)

5. STOCK BASED COMPENSATION

At September 30, 2006, the Company had two stock-based employee compensation plans and four stock option plans assumed in connection with acquisitions under which no additional options will be granted. Prior to 2003, the Company accounted for those plans under the recognition and measurement provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. Effective January 1, 2003, the Company adopted the fair value recognition provisions of SFAS No. 123, Accounting for Stack-Based Compensation, as provided by SFAS No. 148 for stock-based employee compensation. The Company adopted SFAS 123(R) on January 1, 2006. The Company recognized $606,000 and $481,000 in stock-based compensation expense for the nine months ended September 30, 2006 and 2005 and $223,000 and $177,000 in stock-based compensation expense for the three months ended September 30, 2006 and 2005, respectively. There was no income tax benefit recorded for the stock-based compensation expense for the same periods.

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 have contractual terms as established in the original option grant agreements entered into prior to acquisition. 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:


	September 30,
	2006		2005
Expected life in years	4.64		4.63
Risk free interest rate	4.18	%	4.19	%
Volatility	21.29	%	21.40	%
Dividend yield	1.27	%	1.30	%

A summary of changes in outstanding vested and unvested options during the nine months ended September 30, 2006 is set forth below:


	Number of Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value
	(In thousands)					(In thousands)
Options outstanding, beginning of period	1,169		$	21.58
Options granted (1)	507			16.47
Options forfeited	(20	)		26.43
Options exercised	(513	)		15.16

Options outstanding, end of period	1,143		$	21.68	7.70	$	14,131

Options exercisable, end of period	360		$	14.94	7.51	$	6,873

(1)	Consists of options to acquire 467,578 shares of Common Stock assumed in connection with the SNB acquisition.

The weighted-average grant date fair value of the options assumed in connection with the acquisition of SNB Bancshares, Inc. (“SNB”) in April 2006 was $14.93. The total intrinsic value of the options exercised during the nine month periods ended September 30, 2006 and 2005 was $9.7 million and $2.2 million, respectively. The total fair value of shares vested and forfeited during the nine month period ended September 30, 2006 was $248,308 and $105,452, respectively.

PROSPERITY BANCSHARES, INC. ^® AND SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2006

(UNAUDITED)

A summary of changes in unvested options is set forth below:


	Nine Months Ended September 30,
	2006				2005
	Number of Options		Weighted Average Grant Date Fair Value		Number of Options		Weighted Average Grant Date Fair Value
	(In thousands)				(In thousands)
Unvested options outstanding, beginning of period	849		$	5.52	833		$	4.95
Options granted	39			7.48	174			5.48
Unvested options forfeited	(20	)		5.44	(16	)		5.46
Options vested	(85	)		2.90	(124	)		2.18

Unvested options outstanding, end of period	783		$	5.92	867		$	5.46

The Company received $7.8 million and $735,000 in cash from the exercise of stock options during the nine month periods ended September 30, 2006 and 2005, respectively. The increase in cash received for the exercise of stock options was primarily due to the exercise of options assumed in connection with the SNB acquisition. The Company assumed 467,578 options with a weighted average exercise price of $15.10, of which 392,406 were exercised by September 30, 2006. There was no tax benefit realized from exercises of the stock-based compensation arrangements during the nine month periods ended September 30, 2006 and 2005.

As of September 30, 2006, there was $2.1 million of total unrecognized compensation expense related to unvested stock-based compensation arrangements. That cost is expected to be recognized over a weighted average period of 2.79 years.

6. RECENT ACQUISITION

On April 1, 2006, the Company completed its acquisition of SNB, Sugar Land, Texas. Under the terms of the merger agreement, SNB was merged into the Company and subsequently, SNB’s wholly owned subsidiary, Southern National Bank of Texas, was merged into the Bank. The Company issued 4.448 million shares of its common stock and $93.8 million in cash for all of the issued and outstanding capital stock of SNB. In addition, options to acquire 762,950 shares of SNB common stock were converted into options to acquire 467,578 shares of Company common stock. All remaining options to acquire SNB common stock were cancelled and redeemed for cash prior to the merger. In connection with the merger, the Company assumed $30.9 million in junior subordinated debentures issued to three subsidiary trusts of SNB. SNB was publicly traded and operated five (5) banking offices in Fort Bend County, Houston and Katy, Texas and two (2) stand alone motor banks in Houston, Texas. At the time of acquisition, SNB had an additional banking office under construction in Katy, Texas, which became a full-service banking center of the Company upon completion in July 2006. As of December 31, 2005, SNB had, on a consolidated basis, total assets of $1.025 billion, loans (including loans held for sale) of $652.8 million, deposits of $892.0 million and shareholders’ equity of $82.5 million.

The table below summarizes select pro forma data for the two combined companies for the periods indicated:


	For the nine months ended September 30,
	2006		2005
	(In thousands, except per share amounts)
Net interest income	$	109,803	$	98,371
Net income		47,268		41,668
Earnings per share (diluted)		1.44		1.34

PROSPERITY BANCSHARES, INC. ^® AND SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2006

(UNAUDITED)

7. PENDING ACQUISITION

On July 19, 2006, the Company announced its proposed acquisition of Texas United Bancshares, Inc., La Grange, Texas (“TXUI”). Under the terms of the merger agreement, TXUI will merge into the Company and subsequently, TXUI’s wholly owned subsidiary banks, State Bank, GNB Financial, n.a., Gateway National Bank and Northwest Bank, will merge with the Bank. The Company expects to issue approximately 10.875 million shares of its common stock for all of the issued and outstanding capital stock of TXUI, subject to adjustment as provided in the merger agreement. TXUI is publicly traded and operates forty-three (43) banking offices in Texas. As of September 30, 2006, TXUI had, on a consolidated basis, total assets of $1.855 billion, loans of $1.269 billion, deposits of $1.350 billion and shareholders’ equity of $174.7 million.

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 within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and are including this statement for purposes of invoking these safe harbor provisions. These forward-looking statements include information about possible or assumed future results of the Company’s operations or performance. By using any of the words “believe,” “expect”, “anticipate”, “estimate”, “continue”, “intend”, “may”, “will”, “should”, or similar expressions, the Company identifies these forward-looking statements. Many possible factors or events could affect the future financial results and performance of the Company and could cause those financial results or performance to differ materially from those expressed in the forward-looking statement. These possible events or factors include, without limitation:

•

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 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;

•

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 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;

•

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;

•

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;

•

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.

RECENT ACQUISITION

On April 1, 2006, the Company completed its acquisition of SNB Bancshares, Inc., Sugar Land, Texas (“SNB”). Under the terms of the merger agreement, SNB was merged into the Company and subsequently, SNB’s wholly owned subsidiary, Southern National Bank of Texas, was merged into Prosperity Bank^® (“Prosperity Bank^®” or the “Bank”) . The Company issued 4.448 million shares of its common stock and $93.8 million in cash for all of the issued and outstanding capital stock of SNB. In addition, options to acquire 762,950 shares of SNB common stock were converted into options to acquire 467,578 shares of Company common stock. All remaining options to acquire SNB common stock were cancelled and redeemed for cash prior to the merger. In connection with the merger, the Company assumed $30.9 million in junior subordinated debentures issued to three subsidiary trusts. SNB was publicly traded and operated five (5) banking offices in Fort Bend County, Houston and Katy, Texas and two (2) stand alone motor banks in Houston, Texas. At the time of acquisition, SNB had an additional banking office under construction in Katy, Texas, which became a full-service banking center of the Company upon completion in July 2006. As of December 31, 2005, SNB had, on a consolidated basis, total assets of $1.025 billion, loans (including loans held for sale) of $652.8 million, deposits of $892.0 million and shareholders’ equity of $82.5 million.

PENDING ACQUISITION

OVERVIEW

The Company 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. 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^®. The Bank provides a wide array of financial products and services to small and medium-sized businesses and consumers. The Bank operates eighty-eight (88) full-service banking locations; with thirty-eight (38) in the Greater Houston Consolidated Metropolitan Statistical Area (“CMSA”), seventeen (17) in fifteen contiguous counties situated south and southwest of Houston and extending into South Texas, five (5) in the Austin, Texas area, fifteen (15) in the Corpus Christi, Texas area, two (2) in East Texas and eleven (11) in the Dallas/Fort Worth, Texas area. The Greater Houston CMSA includes Austin, Brazoria, Chambers, Fort Bend, Galveston, Harris, Liberty, Montgomery, San Jacinto and Waller counties. The Company’s headquarters are located at Prosperity Bank Plaza, 4295 San Felipe in Houston, Texas and its telephone number is (713) 693-9300. 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 and occupancy 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 assets. The level of interest rates and the volume and mix of earning assets and interest-bearing liabilities impact net interest income and margin. The Company has recognized increased net interest income primarily due to an increase in the volume of interest-earning assets.

Three principal components of the Company’s growth strategy are internal growth, stringent cost control practices and strategic merger transactions. The Company focuses on continual 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 application 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 1, 2005, the Company acquired First Capital Bankers, Inc. (the “First Capital acquisition”) which added an additional twenty seven (27) banking centers, and on December 1, 2005, the Company acquired Grapeland Bancshares, Inc. (the “Grapeland acquisition”) which added two banking centers. On April 1, 2006, the Company acquired SNB which added five banking centers.

Total assets were $4.46 billion at September 30, 2006 compared with $3.59 billion at December 31, 2005, an increase of $869.7 million or 24.3%. Total loans were $2.21 billion at September 30, 2006 compared with $1.54 billion at December 31, 2005, an increase of $672.3 million or 43.6%. Total deposits were $3.59 billion at September 30, 2006 compared with $2.92 billion at December 31, 2005, an increase of $672.8 million, or 23.0%. Shareholders’ equity increased $185.4 million or 39.9%, to $650.2 million at September 30, 2006 compared with $464.7 million at December 31, 2005. These increases were primarily the result of the SNB acquisition in April 2006.

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, 2005. 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 a reserve 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 changes 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 Statement of Financial Accounting Standards (SFAS) No. 114, “Accounting by Creditors for Impairment of a Loan,” as amended by SFAS 118, and allowance allocations determined in accordance with SFAS No. 5, “Accounting for Contingencies.”

Goodwill—Goodwill and intangible assets that have indefinite useful lives are subject to an annual impairment test at least annually and more frequently if circumstances indicate their value may not be recoverable. Goodwill is tested for impairment using a two-step process that begins with an estimation of the fair value of each of the Company’s reporting units compared with its carrying value. If the carrying amount exceeds the fair value of a reporting unit, a second step test is completed comparing the implied fair value of the reporting unit’s goodwill to its carrying value to measure the amount of impairment. Intangible assets that are not amortized will be tested for impairment at least annually by comparing the fair values of those assets to their carrying values. 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 eight 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, 2006, management does not believe any of its goodwill is impaired as of September 30, 2006. While the Company believes no impairment existed at September 30, 2006 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 adopted the provisions of SFAS No. 123R “Share-Based Payment (Revised 2004),” on January 1, 2006 and its adoption did not have a material impact on the Company’s financial statements. The Company had previously adopted SFAS No. 123 on January 1, 2003. Among other things, SFAS No. 123R eliminates the ability to account for stock-based compensation using the intrinsic value based method of accounting and requires that such transactions be recognized as compensation expense in the income statement based on their fair values on the date of the grant. SFAS No. 123R 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 highly subjective assumptions.

Valuation of 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 the financial condition and near-term prospects of the issuer, as well as the value of any security we may have in the investment. 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 common shareholders was $16.4 million ($0.49 per common share on a diluted basis) for the quarter ended September 30, 2006 compared with $12.5 million ($0.45 per common share on a diluted basis) for the quarter ended September 30, 2005, an increase in net income of $3.9 million, or 31.2%. The Company posted returns on average common equity of 10.17% and 11.28%, returns on average assets of 1.46% and 1.43% and efficiency ratios of 44.31% and 48.84% for the quarters ended September 30, 2006 and 2005, respectively. The efficiency ratio is calculated by dividing total non-interest expense (excluding credit loss provisions) by net interest income plus non-interest income (excluding net gains and losses on the sale of securities and on the sale assets). Additionally, taxes are not part of this calculation.

For the nine months ended September 30, 2006, net income available to common shareholders was $45.1 million ($1.43 per common share on a diluted basis) compared with $35.2 million ($1.32 per common share on a diluted basis) for the same period in 2005, an increase in net income of $9.9 million or 28.1%. The Company posted returns on average common equity of 10.32% and 11.73%, returns on average assets of 1.43% and 1.42% and efficiency ratios of 46.08% and 49.54% for the nine months ended September 30, 2006 and 2005, respectively.

Net Interest Income

Net interest income on a tax equivalent basis was $36.5 million for the quarter ended September 30, 2006 compared with $29.3 million for the quarter ended September 30, 2005, an increase of $7.2 million, or 24.6%. Net interest income increased as a result of an increase in average interest-earning assets to $3.83 billion for the quarter ended September 30, 2006 compared with $3.05 billion for the quarter ended September 30, 2005, an increase of $783.1 million, or 25.7%. The increase in average interest-earning assets is primarily attributable to increases in average loans and securities in the quarter ended September 30, 2006 compared to the quarter ended September 30, 2005 resulting from the SNB acquisition.

The net interest margin on a tax equivalent basis decreased to 3.77% for the quarter ended September 30, 2006 compared with 3.81% for the quarter ended September 30, 2005. The average rate paid on interest-bearing liabilities increased 119 basis points from 2.28% for the quarter ended September 30, 2005 compared with 3.47% for the quarter ended September 30, 2006, while the average yield on earning assets increased 88 basis points from 5.55% for the quarter ended September 30, 2005 compared with 6.43% for the quarter ended September 30, 2006. Average interest-bearing liabilities increased $593.9 million and average interest-earning assets increased $783.1 million for the same periods.

Net interest income on a tax equivalent basis increased $20.2 million, or 24.3%, to $103.1 million for the nine months ended September 30, 2006 compared with $82.9 million for the same period in 2005. This increase is mainly attributable to higher average interest-earning assets resulting from an increase in average loans and securities. The net interest margin on a tax equivalent basis for the nine months ended September 30, 2006 remained flat at 3.81% when compared to the same period in 2005. The average rate paid on interest-bearing liabilities increased 109 basis points from 2.09% for the nine months ended September 30, 2005 compared with 3.18% for the same period in 2006 and the average yield on earning assets increased 81 basis points from 5.42% for the nine months ended September 30, 2005 compared with 6.23% for the nine months ended September 30, 2006.

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.”

The following tables set forth, for each 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 September 30, 2006 and 2005 and the nine months ended September 30, 2006 and 2005. The tables also set 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 September 30,
	2006							2005
	Average Outstanding Balance			Interest Earned/ Paid		Average Yield/ Rate (4)		Average Outstanding Balance			Interest Earned/ Paid		Average Yield/ Rate (4)
	(Dollars in thousands)
Assets
Interest-earning assets:
Loans	$	2,211,306		$	43,625	7.83	%	$	1,516,228		$	26,992	7.06	%
Securities(1)		1,605,597			18,302	4.56			1,509,318			15,513	4.11
Federal funds sold and other temporary investments		16,488			223	5.37			24,768			202	3.24

Total interest-earning assets		3,833,391			62,150	6.43	%		3,050,314			42,707	5.55	%

Less allowance for credit losses		(24,228	)						(16,989	)

Total interest-earning assets, net of allowance		3,809,163							3,033,325
Noninterest-earning assets		668,095							443,670

Total assets	$	4,477,258						$	3,476,995


Liabilities and shareholders’ equity
Interest-bearing liabilities:
Interest-bearing demand deposits	$	618,606		$	3,252	2.09	%	$	457,584		$	1,072	0.93	%
Savings and money market accounts		942,692			6,832	2.88			733,801			2,922	1.58
Certificates of deposit		1,202,038			12,435	4.10			1,049,031			7,669	2.90
Junior subordinated debentures		100,519			2,106	8.31			75,775			1,337	7.00
Securities sold under repurchase agreements		44,733			497	4.41			30,639			221	2.86
Federal funds purchased and other borrowings		81,415			1,061	5.17			49,267			566	4.56

Total interest-bearing liabilities		2,990,003			26,183	3.47	%		2,396,097			13,787	2.28	%

Noninterest-bearing liabilities:
Noninterest-bearing demand deposits		806,110							627,144
Other liabilities		37,661							11,606

Total liabilities		3,833,774							3,034,847

Shareholders’ equity		643,484							442,148

Total liabilities and shareholders’ equity	$	4,477,258						$	3,476,995

Net interest rate spread						2.96	%						3.27	%

Net interest income and margin (2)				$	35,967	3.72	%				$	28,920	3.76	%

Net interest income and margin (tax-equivalent basis) (3)				$	36,469	3.77	%				$	29,262	3.81	%

(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. Average yield and average rate are calculated on an actual/365 day basis except for the average yield on securities which is calculated on a 30/360 day basis.


	Nine Months Ended September 30,
	2006							2005
	Average Outstanding Balance			Interest Earned/ Paid		Average Yield/ Rate (4)		Average Outstanding Balance			Interest Earned/ Paid		Average Yield/ Rate (4)
	(Dollars in thousands)
Assets
Interest-earning assets:
Loans	$	1,981,411		$	113,685	7.67	%	$	1,411,210		$	72,378	6.86	%
Securities (1)		1,624,270			54,598	4.48			1,455,365			44,630	4.09
Federal funds sold and other temporary investments		15,185			563	4.96			41,975			838	2.67

Total interest-earning assets		3,620,866			168,846	6.23	%		2,908,550			117,846	5.42	%

Less allowance for credit losses		(21,951	)						(16,108	)

Total interest-earning assets, net of allowance		3,598,915							2,892,442
Noninterest-earning assets		610,038							412,581

Total assets	$	4,208,953						$	3,305,023

Liabilities and shareholders’ equity
Interest-bearing liabilities:
Interest-bearing demand deposits	$	588,097		$	7,950	1.81	%	$	485,427		$	3,531	0.97	%
Savings and money market accounts		866,724			16,391	2.53			678,729			7,108	1.40
Certificates of deposit		1,160,893			33,146	3.82			1,000,224			19,986	2.67
Junior subordinated debentures		89,522			5,497	8.21			67,900			3,499	6.89
Securities sold under repurchase agreements		44,857			1,292	3.85			27,320			465	2.28
Federal funds purchased and other borrowings		75,174			2,831	5.04			39,138			1,381	4.72

Total interest-bearing liabilities		2,825,267			67,107	3.18	%		2,298,738			35,970	2.09	%

Noninterest-bearing liabilities:
Noninterest-bearing demand deposits		769,021							589,972
Other liabilities		31,563							15,722

Total liabilities		3,625,851							2,904,432

Shareholders’ equity		583,102							400,591

Total liabilities and shareholders’ equity	$	4,208,953						$	3,305,023

Net interest rate spread						3.05	%						3.33	%
Net interest income and margin(2)				$	101,739	3.76	%				$	81,876	3.76	%

Net interest income and margin (tax-equivalent basis)(3)				$	103,070	3.81	%				$	82,909	3.81	%

(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. Average yield and average rate are calculated on an actual/365 day basis except for the average yield on securities which is calculated on a 30/360 day basis.

The following tables present the dollar amount of changes in interest income and interest expense for the major components of interest-earning assets and interest-bearing liabilities and distinguish between the increase (decrease) related to outstanding balances and the volatility of interest rates. For purposes of these tables, changes attributable to both rate and volume which cannot be segregated have been allocated to rate.


	Three Months Ended September 30, 2006 vs. 2005
	Increase (Decrease) Due to
	Volume			Rate			Total
	(Dollars in thousands)
Interest-earning assets:
Loans	$	12,374		$	4,259		$	16,633
Securities		990			1,799			2,789
Federal funds sold and other temporary investments		(68	)		89			21

Total increase in interest income		13,296			6,147			19,443

Interest-bearing liabilities:
Interest-bearing demand deposits		377			1,803			2,180
Savings and money market accounts		832			3,078			3,910
Certificates of deposit		1,119			3,647			4,766
Junior subordinated debentures		437			332			769
Securities sold under repurchase agreements		102			174			276
Federal funds purchased and other borrowings		369			126			495

Total increase in interest expense		3,236			9,160			12,396

Increase (decrease) in net interest income	$	10,060		$	(3,013	)	$	7,047


	Nine Months Ended September 30, 2006 vs. 2005
	Increase (Decrease) Due to
	Volume			Rate			Total
	(Dollars in thousands)
Interest-earning assets:
Loans	$	29,244		$	12,063		$	41,307
Securities		5,180			4,788			9,968
Federal funds sold and other temporary investments		(535	)		260			(275	)

Total increase in interest income		33,889			17,111			51,000

Interest-bearing liabilities:
Interest-bearing demand deposits		747			3,672			4,419
Savings and money market accounts		1,969			7,314			9,283
Certificates of deposit		3,210			9,950			13,160
Junior subordinated debentures		1,114			884			1,998
Securities sold under repurchase agreements		298			529			827
Federal funds purchased and other borrowings		1,236			214			1,450

Total increase in interest expense		8,574			22,563			31,137

Increase (decrease) in net interest income	$	25,315		$	(5,452	)	$	19,863

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 $120,000 provision for credit losses for the quarter ended September 30, 2006 and 2005. The Company made a $360,000 provision for credit losses for the nine months ended September 30, 2006 and 2005. The ratio of the allowance for credit losses to end of period nonperforming loans was 2,038.3% for the nine months ended September 30, 2006 compared with 1,505.1% for the year ended December 31, 2005. The ratio of allowance for credit losses to total loans was 1.09% at September 30, 2006 compared with 1.12% at December 31, 2005. For the quarter ended September 30, 2006, net charge-offs were $307,000 compared with net charge-offs of $89,000 for the quarter ended September 30, 2005. Net charge-offs were $524,000 for the nine months ended September 30, 2006 compared with $98,000 for the nine months ended September 30, 2005.

Noninterest Income

The Company’s primary sources of noninterest income are service charges on deposit accounts, which include insufficient funds charges and other banking-related service 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 $8.9 million for the three months ended September 30, 2006 compared with $8.1 million for the same period in 2005, an increase of $826,000, or 10.2%. Noninterest income increased $3.2 million, or 14.4%, to $25.7 million for the nine months ended September 30, 2006 compared with $22.5 million for the same period in 2005. The increases during both periods were primarily due to an increase in insufficient funds charges and customer service charges which mainly resulted from an increase in the number of accounts due to the SNB acquisition and the acquisition of Grapeland Bancshares, Inc. in December 2005. At September 30, 2006, the two acquisitions added approximately 14,800 deposit accounts and over 4,400 debit cards.

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


	Three Months Ended September 30,				Nine Months Ended September 30,
	2006		2005		2006		2005
	(Dollars in thousands)
Service charges on deposit accounts	$	7,079	$	6,774	$	20,610	$	18,660
Banking-related service fees		353		284		998		839
Brokered mortgage income		233		193		661		511
Trust and investment income		45		47		158		203
Income from leased assets		269		269		806		627
Bank owned life insurance income (BOLI)		122		131		372		281
Net gain on sale of assets		132		12		578		63
Net gain on sale of securities		—		—		—		—
Net gain on held for sale loans		—		56		—		177
Other noninterest income		685		326		1,558		1,145

Total noninterest income	$	8,918	$	8,092	$	25,741	$	22,506

Noninterest Expense

Noninterest expense totaled $19.8 million for the quarter ended September 30, 2006 compared with $18.1 million for the quarter ended September 30, 2005, an increase of $1.8 million, or 9.7%. This increase occurred primarily in salaries and employee benefits, core deposit intangibles amortization and occupancy and equipment expense. Noninterest expense totaled $58.5 million for the nine months ended September 30, 2006 compared with $51.7 million for the nine months ended September 30, 2005, an increase of $6.8 million, or 13.1%. The increases during both periods were primarily due to the SNB and Grapeland acquisitions. The following table presents, for the periods indicated, the major categories of noninterest expense:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2006		2005		2006		2005
	(Dollars in thousands)
Salaries and employee benefits (1)	$	10,268	$	9,653	$	31,195	$	27,704

Non-staff expenses:
Occupancy and equipment expense		2,166		1,810		5,814		4,872
Depreciation		1,265		1,209		3,767		3,337
Data processing		928		762		2,728		2,059
Communications expense		1,107		1,037		3,268		2,811
Professional fees		345		335		1,044		875
Regulatory assessments and FDIC insurance		201		137		532		386
Ad valorem and franchise taxes		554		426		1,625		1,200
Core deposit intangibles amortization		1,191		1,025		3,616		2,846
Other		1,804		1,676		4,888		5,626

Total non-staff expenses		9,561		8,417		27,282		24,012

Total noninterest expense	$	19,829	$	18,070	$	58,477	$	51,716

(1)	Includes stock based compensation expense of $223 and $177 for the three months ended September 30, 2006 and 2005, respectively, and $606 and $481 for the nine months ended September 30, 2006 and 2005, respectively.

Salaries and employee benefit expenses were $10.3 million for the quarter ended September 30, 2006 compared with $9.7 million for the quarter ended September 30, 2005, an increase of $615,000, or 6.4%. For the nine months ended September 30, 2006, salaries and employee benefit expenses were $31.2 million, an increase of $3.5 million or 12.6% compared with $27.7 million for the nine months ended September 30, 2005. The increases during both periods were principally due to additional staff associated with the SNB acquisition and routine annual salary increases. The number of full-time equivalent (FTE) associates employed by the Company increased from 857 at September 30, 2005 to 914 at September 30, 2006.

Non-staff expenses increased $1.1 million, or 13.6%, to $9.6 million for the quarter ended September 30, 2006 compared with $8.4 million during the same period in 2005. Non-staff expenses increased $3.3 million, or 13.6%, to $27.3 million for the nine months ended September 30, 2006 compared to $24.0 million during the same period in 2005. The increases during both periods were principally due to additional expenses associated with SNB and Grapeland acquisitions, increases in core deposit intangibles amortization related to the 2005 and 2006 acquisitions and increases in occupancy and equipment expense due to the additional banking centers acquired in 2005 and 2006.

Income Taxes

Income tax expense increased $2.2 million or 35.0% to $8.6 million for the quarter ended September 30, 2006 compared with $6.4 million for the same period in 2005. For the nine months ended September 30, 2006, income tax expense totaled $23.5 million, an increase of $6.4 million or 37.8% compared with $17.1 million for the same period in 2005. Both increases were primarily attributable to higher pretax net earnings for the quarter and nine months ended September 30, 2006 when compared to the same respective periods in 2005. The effective tax rates for the three months ended September 30, 2006 and 2005 and the nine months ended September 30, 2006 and 2005 were 34.4%, 33.7%, 34.3% and 32.6%, respectively.

FINANCIAL CONDITION

Loan Portfolio

Total loans were $2.21 billion at September 30, 2006, an increase of $672.3 million, or 43.6% compared with $1.54 billion at December 31, 2005. At September 30, 2006, loans acquired in the SNB acquisition totaled $562.7 million. The Company had no held for sale loans at September 30, 2006 or December 31, 2005. Period end loans comprised 57.8% of average earning assets for the quarter ended September 30, 2006 compared with 49.9% of average earning assets for the quarter ended December 31, 2005.

The following table summarizes the loan portfolio of the Company by type of loan as of September 30, 2006 and December 31, 2005:


	September 30, 2006				December 31, 2005
	Amount		Percent		Amount		Percent
	(Dollars in thousands)
Commercial and industrial	$	295,745	13.4	%	$	222,773	14.4	%
Real estate:
Construction and land development		432,424	19.5			206,653	13.4
1-4 family residential		378,846	17.1			313,184	20.3
Home equity		63,694	2.9			58,729	3.8
Commercial mortgages		814,913	36.7			566,356	36.7
Farmland		33,879	1.5			30,920	2.0
Multifamily residential		78,025	3.5			32,039	2.1
Agriculture		32,266	1.5			25,429	1.6
Other		17,040	0.8			20,859	1.4
Consumer (net of unearned discount)		67,569	3.1			65,183	4.3

Total loans	$	2,214,401	100.0	%	$	1,542,125	100.0	%

Nonperforming Assets

The Company had $1.3 million in nonperforming assets at September 30, 2006 and $1.4 million in nonperforming assets at December 31, 2005, a decrease of $138,000 or 9.8%.

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 if the collection of the principal is deemed unlikely, 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 all loans before attaining nonaccrual status.

The following table presents information regarding nonperforming assets as of the dates indicated:


	September 30, 2006			December 31, 2005
	(Dollars in thousands)
Nonaccrual loans	$	187		$	355
Restructured loans		—			—
Accruing loans 90 or more days past due		995			788

Total nonperforming loans		1,182			1,143
Repossessed assets		29			26
Other real estate		59			239

Total nonperforming assets	$	1,270		$	1,408

Nonperforming assets to total loans and other real estate		0.06	%		0.09	%

Allowance for Credit Losses

Management actively monitors the Company’s asset quality and provides specific loss allowances when necessary. 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 September 30, 2006, the allowance for credit losses amounted to $24.1 million, or 1.09% of total loans, compared with $17.2 million, or 1.12% of total loans at December 31, 2005.

Set forth below is an analysis of the allowance for credit losses for the nine months ended September 30, 2006 and the year ended December 31, 2006:


	As of and for the Nine Months Ended September 30, 2006			As of and for the Year Ended December 31, 2005
	(Dollars in thousands)
Average loans outstanding	$	1,981,411		$	1,435,376

Gross loans outstanding at end of period	$	2,214,401		$	1,542,125

Allowance for credit losses at beginning of period	$	17,203		$	13,105
Balance acquired with the SNB acquisition in 2006 and the First Capital and Grapeland acquisitions in 2005, respectively		7,054			4,028
Provision for credit losses		360			480
Charge-offs:
Commercial and industrial		(318	)		(410	)
Real estate and agriculture		(26	)		(242	)
Consumer		(374	)		(240	)
Recoveries:
Commercial and industrial		66			188
Real estate and agriculture		51			184
Consumer		77			110

Net charge-offs		(524	)		(410	)

Allowance for credit losses at end of period	$	24,093		$	17,203

Ratio of allowance to end of period loans		1.09	%		1.12	%
Ratio of net charge-offs to average loans		0.03	%		0.03	%
Ratio of allowance to end of period nonperforming loans		2,038.3	%		1,505.1	%

Securities

The amortized cost of securities totaled $1.57 billion at September 30, 2006 compared with $1.58 billion at December 31 2005. At September 30, 2006, securities represented 35.2% of total assets compared with 43.9% of total assets at December 31, 2005.

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):


	September 30, 2006		December 31, 2005
	(Dollars in thousands)
U.S. Treasury securities and obligations of U.S. government agencies	$	314,207	$	296,349
70% non-taxable preferred stock		24,000		24,000
States and political subdivisions		45,263		31,250
Corporate debt securities		6,229		8,550
Collateralized mortgage obligations		291,618		222,615
Mortgage-backed securities		879,311		987,088
Qualified Zone Academy Bond (QZAB)		8,000		8,000
Other		4,052		814

Total amortized cost	$	1,572,680	$	1,578,666

Total fair value	$	1,533,169	$	1,546,055

Bank Premises and Equipment

Premises and equipment, net of accumulated depreciation, totaled $63.1 million and $49.2 million at September 30, 2006 and December 31, 2005, respectively, an increase of $13.9 million or 28.2%. The increase was primarily due to the SNB acquisition.

Deposits

Total deposits were $3.59 billion at September 30, 2006 compared with $2.92 billion at December 31, 2005, an increase of $672.8 million or 23.0%. The increase was primarily due to the SNB acquisition in April 2006. At September 30, 2006 and December 31, 2005, noninterest-bearing deposits accounted for approximately 22.5% and 23.1% of total deposits, respectively. Interest-bearing demand deposits totaled $2.78 billion, or 77.5%, of total deposits at September 30, 2006 compared with $2.25 billion, or 76.9%, of total deposits at December 31, 2005.

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


	For the Nine Months Ended September 30, 2006				For the Year Ended December 31, 2005
	Amount		Rate		Amount		Rate
	(Dollars in thousands)
Interest-bearing checking	$	588,097	1.81	%	$	477,199	0.98	%
Regular savings		164,937	1.15			150,577	0.83
Money market savings		701,787	2.85			545,660	1.73
Time deposits		1,160,893	3.82			1,009,147	2.80

Total interest-bearing deposits		2,615,714	2.94			2,182,583	2.00
Noninterest-bearing deposits		769,021	—			609,230	—

Total deposits	$	3,384,735	2.27	%	$	2,791,813	1.56	%

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 and can be short-term advances or long-term notes payable. At September 30, 2006, the Company had $31.5 million in FHLB borrowings of which all consisted of long-term FHLB notes payable compared with $55.4 million in FHLB borrowings at December 31, 2005, which consisted of $38.4 million in long-term FHLB notes payable and $17.0 million in FHLB advances. The maturity dates on the FHLB notes payable range from the years 2006 to 2028 and have interest rates ranging from 2.79% to 6.48%. The highest outstanding balance of FHLB advances during the nine months ended September 30, 2006 was $116.0 million compared with $39.0 million during the year ended December 31, 2005. The Company had no federal funds purchased at September 30, 2006 or December 31, 2005.

At September 30, 2006, the Company had $48.5 million in securities sold under repurchase agreements compared with $47.0 million at December 31, 2005.

Junior Subordinated Debentures

At September 30, 2006 and December 31, 2005, the Company had outstanding $100.5 million and $75.8 million, respectively, in junior subordinated debentures issued to the Company’s subsidiary trusts. The increase of $24.7 million was due to the Company’s assumption of $30.9 million in junior subordinated debentures issued by SNB to its three subsidiary trusts, partially offset by the redemption of $6.2 million junior subordinated debentures held by Paradigm Capital Trust II on February 28, 2006.

A summary of pertinent information related to the Company’s eight issues of junior subordinated debentures outstanding at September 30, 2006 is set forth in the table below:


Description	Issuance Date	Trust Preferred Securities Outstanding	Interest Rate (1)	Junior Subordinated Debt Owed to Trusts	Maturity Date (2)

Prosperity Statutory Trust II	July 31, 2001	$15,000,000	3-month LIBOR + 3.58%, not to exceed 12.50%	$15,464,000	July 31, 2031
Prosperity Statutory Trust III	Aug. 15, 2003	12,500,000	6.50%(3)	12,887,000	Sept. 17, 2033
Prosperity Statutory Trust IV	Dec. 30, 2003	12,500,000	6.50%(4)	12,887,000	Dec. 30, 2033
First Capital Statutory Trust I (5)	Mar. 26, 2002	20,000,000	3-month LIBOR + 3.60%	20,619,000	Mar. 26, 2032
First Capital Statutory Trust II (5)	Sept. 26, 2002	7,500,000	3-month LIBOR + 3.40%	7,732,000	Sept. 26, 2032
SNB Statutory Trust II (6)	Mar. 26, 2003	10,000,000	3-month LIBOR + 3.15%	10,310,000	Mar. 26, 2033
SNB Capital Trust III (6)	Mar. 27, 2003	10,000,000	3-month LIBOR + 3.15%	10,310,000	Mar. 27, 2033
SNB Capital Trust IV (6)	Sept. 25, 2003	10,000,000	3-month LIBOR + 3.00%	10,310,000	Sept. 25, 2033

(1)	The 3-month LIBOR in effect as of September 30, 2006 was 5.37%.

(2)	The debentures are callable five years from issuance date.

(3)	The debentures bear a fixed interest rate until September 17, 2008, when the rate begins to float on a quarterly basis based on the three-month LIBOR plus 3.00%.

(4)	The debentures bear a fixed interest rate until December 30, 2008, when the rate begins to float on a quarterly basis based on the three-month LIBOR plus 2.85%.

(5)	Assumed in connection with the First Capital acquisition on March 1, 2005.

(6)	Assumed in connection with the SNB acquisition on April 1, 2006.

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 liquidity needs have primarily been met by growth in core deposits and the issuance of junior subordinated debentures. 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, have generally created an adequate liquidity position.

Asset liquidity is provided by cash and assets which are readily marketable or which will mature in the near future. As of September 30, 2006, the Company had cash and cash equivalents of $116.2 million compared with $97.4 million at December 31, 2005.

Contractual Obligations

The following table summarizes the Company’s contractual obligations and other commitments to make future payments as of September 30, 2006 (other than deposit obligations). 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 September 30, 2006 are summarized below. Payments for FHLB notes payable do not include interest of $7.0 million that will be paid over the future periods presented. Payments related to leases are based on actual payments specified in underlying contracts.


	Payments due in:
	Remaining Fiscal 2006		Fiscal 2007-2008		Fiscal 2009-2010		Thereafter		Total
	(Dollars in thousands)
Junior subordinated debentures	$	—	$	—	$	—	$	100,519	$	100,519
Federal Home Loan Bank notes payable		5,076		8,863		10,527		7,018		31,484
Operating leases		834		5,181		3,222		3,231		12,468

Total	$	5,910	$	14,044	$	13,749	$	110,768	$	144,471

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 September 30, 2006 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.


	Remaining Fiscal 2006		Fiscal 2007-2008		Fiscal 2009-2010		Thereafter		Total
	(Dollars in thousands)
Standby letters of credit	$	2,388	$	7,421	$	87	$	82	$	9,978
Commitments to extend credit		89,290		351,627		6,175		113,349		560,441

Total	$	91,678	$	359,048	$	6,262	$	113,431	$	570,419

Capital Resources

Total shareholders’ equity was $650.2 million at September 30, 2006 compared with $464.7 million at December 31, 2005, an increase of $185.4 million, or 39.9%. The increase was due primarily to net earnings of $45.1 million, common stock issued in connection with the SNB acquisition of $141.4 million and common stock issued in connection with the exercise of stock options and restricted stock of $7.8 million, partially offset by dividends paid of $9.3 million for the nine months ended September 30, 2006.

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 I risk-based capital, and Tier I to average assets (leverage) ratios as of September 30, 2006:


Consolidated Risk Based Capital Ratios:
Total capital (to risk weighted assets)	14.16	%
Tier I capital (to risk weighted assets)	13.11	%
Tier I capital (to average assets)	7.44	%

As of September 30, 2006, the Bank’s risk-based capital ratios were above the levels required for the Bank to be designated as “well capitalized” by the FDIC. The following table sets forth the Bank’s total risk-based capital, Tier I risk-based capital, and Tier I to average assets (leverage) capital ratios as of September 30, 2006:


Risk Based Capital Ratios (Bank Only):
Total capital (to risk weighted assets)	13.69	%
Tier I capital (to risk weighted assets)	12.63	%
Tier I capital (to average assets)	7.16	%

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 on March 15, 2006 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 (the “Exchange Act”)) are effective.

Changes in internal control over financial reporting. During the quarter ended September 30, 2006, there were no changes in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Not Applicable

ITEM 1A. RISK FACTORS

There have been no material changes from the risk factors disclosed under the heading “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005 or under Part II, Item 1A, Risk Factors in the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2006.

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. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable

ITEM 5. OTHER INFORMATION

Not applicable

ITEM 6. EXHIBITS


Exhibit Number		Description of Exhibit

3.1		Amended and Restated Articles of Incorporation of the Company (incorporated herein by reference to Exhibit 3.1 to the Company’s Registration Statement on Form S-1 (Registration No. 333-63267))

3.2		Articles of Amendment to Amended and Restated Articles of Incorporation of the Company (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 the Company (incorporated herein by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K filed April 20, 2006)

4.1		Form of certificate representing shares of Company common stock (incorporated herein by reference to Exhibit 4 to the Company’s Registration Statement on Form S-1 (Registration No. 333-63267))

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.

This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section, and shall not be deemed incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934.

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.^SM
		(Registrant)

Date: 11/09/06		/s/ David Zalman
		David Zalman
		Chairman and Chief Executive Officer

Date: 11/09/06		/s/ David Hollaway
		David Hollaway
		Chief Financial Officer

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