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 incurrence and 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 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;

• 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.

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, 2008.

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. 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 Bankฎ ("Prosperity Bankฎ" or the "Bank"). The Bank provides a wide array of financial products and services to small and medium-sized businesses and consumers. As of June 30, 2009, the Bank operated one hundred fifty-eight (158) full-service banking locations; with fifty-one
(51) in the Greater Houston Consolidated Metropolitan Statistical Area ("CMSA"), twenty-seven (27) in the South Texas area including Corpus Christi and Victoria, thirty-six (36) in the Central Texas area including Austin and Bryan/College Station,, twenty (20) in East Texas and twenty-four (24) 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 (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 noninterest 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.

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 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 January 10, 2008, the Company purchased six
(6) branches of Banco Popular North America. On June 1, 2008 the Company purchased 1st Choice Bancorp, Inc. (the "1st Choice acquisition") which added one (1) banking center after consolidation. On November 7, 2008, the Bank assumed approximately $3.6 billion of deposits and acquired certain assets from the Federal Deposit Insurance Corporation ("FDIC"), acting in its capacity as

receiver for Franklin Bank (the "Franklin acquisition" or the "Franklin Bank acquisition"). The transaction added thirty-three (33) banking centers after consolidations with existing Prosperity Bank locations.

Total assets were $8.84 billion at June 30, 2009 compared with $9.07 billion at December 31, 2008, a decrease of $233.8 million or 2.6%. Total loans were $3.45 billion at June 30, 2009 compared with $3.57 billion at December 31, 2008, a decrease of $115.7 million or 3.2%. Total deposits were $7.26 billion at June 30, 2009 compared with $7.30 billion December 31, 2008, a decrease of $45.4 million or 0.6%. Shareholders' equity increased $43.6 million or 3.5%, to $1.30 billion at June 30, 2009 compared with $1.26 billion at December 31, 2008.

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, 2008. 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 inherent in the Company's loan portfolio. Based on an evaluation of the loan portfolio, management presents a quarterly 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 at least an annual impairment test 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 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 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, 2008, management does not believe any of its goodwill is impaired as of June 30, 2009. While the Company believes no impairment existed at June 30, 2009 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 SFAS No. 123R, Share-Based Payment (Revised 2004) ("SFAS 123R"). SFAS 123R 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. 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 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 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 the Company 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 $26.5 million ($0.57 per common share on a diluted basis) for the quarter ended June 30, 2009 compared with $23.4 million ($0.52 per common share on a diluted basis) for the quarter ended June 30, 2008, an increase in net income of $3.1 million or 13.1%. The Company posted returns on average common equity of 8.18% and 7.96%, returns on average assets of 1.20% and 1.43% and efficiency ratios of 48.98% and 46.50% for the quarters ended June 30, 2009 and 2008, 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 and impairment write-down on securities). Additionally, taxes are not part of this calculation.

For the six months ended June 30, 2009, net income available to common shareholders was $52.0 million ($1.13 per common share on a diluted basis) compared with $46.4 million ($1.04 per common share on a diluted basis) for the same period in 2008, an increase in net income of $5.6 million or 12.1%. The Company posted returns on average common equity of 8.12% and 7.99%, returns on average assets of 1.17% and 1.43% and efficiency ratios of 49.22% and 45.78% for the six months ended June 30, 2009 and 2008, respectively.

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 $75.5 million for the quarter ended June 30, 2009 compared with $54.0 million for the quarter ended June 30, 2008, an increase of $21.6 million, or 39.9%. Net interest income increased as a result of an increase in average interest-earning assets to $7.56 billion for the quarter ended June 30, 2009 compared with $5.37 billion for the quarter ended June 30, 2008, an increase of $2.19 billion, or 40.8%. The increase in average earning assets was primarily attributable to increases in average securities primarily attributable to the Franklin Bank acquisition.

The net interest margin on a tax equivalent basis decreased to 4.04% for the quarter ended June 30, 2009 compared with 4.10% for the quarter ended June 30, 2008. The average rate paid on interest-bearing liabilities decreased 93 basis points from 2.76% for the quarter ended June 30, 2008 compared with 1.83% for the quarter ended June 30, 2009. The average yield on earning assets decreased 69 basis points from 6.14% for the quarter ended June 30, 2008 compared with 5.45% for the quarter ended June 30, 2009. The volume of interest-bearing liabilities increased $1.87 billion and the volume of interest-earning assets increased $2.19 billion for the same periods.

Net interest income before the provision for credit losses increased $43.6 million, or 41.2%, to $149.6 million for the six months ended June 30, 2009 compared with $106.0 million for the same period in 2008. This increase was mainly attributable to higher average interest-earning assets resulting from an increase in average loans and securities due to the Franklin Bank acquisition. The net interest margin on a tax equivalent basis decreased to 4.01% compared with 4.07% for the same periods principally due to a 102 basis point decrease in the average rate paid on interest-bearing liabilities from 2.99% for the six months ended June 30, 2008 compared with 1.97% for the six months ended June 30, 2009 and a 77 basis point decrease in the average yield on earning assets from 6.30% for the six months ended June 30, 2008 compared with 5.53% for the six months ended June 30, 2009.

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 three and the six month periods ended June 30, 2009 and 2008. 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 June 30,
                                                      2009                                        2008
                                       Average         Interest    Average         Average         Interest    Average
                                     Outstanding        Earned/     Yield/       Outstanding        Earned/     Yield/
                                       Balance           Paid      Rate (2)        Balance           Paid      Rate (2)
                                                                   (Dollars in thousands)
Assets
Interest-earning assets:
Loans                                $  3,472,449      $  55,248       6.38 %    $  3,203,305      $  55,948       7.02 %
Securities (1)                          3,964,766         47,450       4.79         2,131,370         25,856       4.85
Federal funds sold and other
temporary investments                     122,358             70       0.23            33,803            175       2.08

Total interest-earning assets           7,559,573        102,768       5.45 %       5,368,478         81,979       6.14 %

Less allowance for credit losses          (39,249 )                                   (32,813 )

Total interest-earning assets, net
of allowance                            7,520,324                                   5,335,665
Noninterest-earning assets              1,313,661                                   1,203,599

Total assets                         $  8,833,985                                $  6,539,264


Liabilities and shareholders'
equity
Interest-bearing liabilities:
Interest-bearing demand deposits     $  1,047,363      $   2,182       0.84 %    $    745,413      $   1,652       0.89 %
Savings and money market accounts       1,878,238          4,619       0.99         1,370,964          6,678       1.96
Certificates of deposit                 2,820,910         18,820       2.68         1,708,251         16,880       3.97
Junior subordinated debentures             92,265            959       4.17           102,575          1,558       6.11
Federal funds purchased and other
borrowings                                 28,937            387       5.36            76,132            666       3.52
Securities sold under repurchase
agreements                                 92,466            280       1.21            82,408            574       2.80

Total interest-bearing liabilities      5,960,179         27,247       1.83 %       4,085,743         28,008       2.76 %

Noninterest-bearing liabilities:
Noninterest-bearing demand
deposits                                1,499,888                                   1,215,176
Other liabilities                          78,181                                      61,187

Total liabilities                       7,538,248                                   5,362,106


Shareholders' equity                    1,295,737                                   1,177,158

Total liabilities and
shareholders' equity                 $  8,833,985                                $  6,539,264

Net interest rate spread                                               3.62 %                                      3.38 %
Net interest income and margin (3)                     $  75,521       4.01 %                      $  53,971       4.04 %

Net interest income and margin
(tax-equivalent basis) (4)                             $  76,226       4.04 %                      $  54,692       4.10 %

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

(2) Annualized.

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

(4) 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%.

                                                                   Six Months Ended June 30,
                                                        2009                                        2008
                                         Average         Interest    Average         Average         Interest    Average
                                       Outstanding        Earned/     Yield/       Outstanding        Earned/     Yield/
                                         Balance           Paid      Rate (2)        Balance           Paid      Rate (2)
                                                                     (Dollars in thousands)
Assets
Interest-earning assets:
Loans                                  $  3,501,488      $ 111,050       6.40 %    $  3,173,240      $ 114,468       7.25 %
Securities (1)                            3,997,278         97,178       4.86         2,054,440         50,639       4.93
Federal funds sold and other
temporary investments                        94,631            106       0.23            82,702          1,337       3.25

Total interest-earning assets             7,593,397        208,334       5.53 %       5,310,382        166,444       6.30 %

Less allowance for credit losses            (38,240 )                                   (32,381 )

Total interest-earning assets, net
of allowance                              7,555,157                                   5,278,001
Noninterest-earning assets                1,307,993                                   1,199,982

Total assets                           $  8,863,150                                $  6,477,983


Liabilities and shareholders' equity
Interest-bearing liabilities:
Interest-bearing demand deposits       $  1,058,122      $   4,304       0.82 %    $    807,570      $   4,773       1.19 %
Savings and money market accounts         1,841,147         10,676       1.17         1,311,655         14,092       2.16
Certificates of deposit                   2,868,186         40,098       2.82         1,684,444         35,290       4.21
Junior subordinated debentures               92,265          2,078       4.54           106,012          3,577       6.79
Federal funds purchased and other
borrowings                                   55,865            951       3.43            86,554          1,568       3.64
Securities sold under repurchase
agreements                                   88,128            628       1.44            74,241          1,178       3.19

Total interest-bearing liabilities        6,003,713         58,735       1.97 %       4,070,476         60,478       2.99 %

Noninterest-bearing liabilities:
Noninterest-bearing demand deposits       1,498,136                                   1,184,121
Other liabilities                            80,101                                      63,032

Total liabilities                         7,581,950                                   5,317,629

Shareholders' equity                      1,281,200                                   1,160,354

Total liabilities and shareholders'
equity                                 $  8,863,150                                $  6,477,983


Net interest rate spread                                                 3.56 %                                      3.31 %

Net interest income and margin (3)                       $ 149,599       3.97 %                      $ 105,966       4.01 %

Net interest income and margin
(tax-equivalent basis) (4)                               $ 150,985       4.01 %                      $ 107,524       4.07 %

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

(2) Annualized.

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

(4) In order to make pretax income and resultant yields on tax-exempt investments and loans comparable to those on taxable investments and loans, a . . .