FORM 10-Q
UNITED STATES
(Mark One) SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999

[ ] 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 (I.R.S. Employer
or organization) Identification No.)

3040 Post Oak Blvd.
Houston, Texas 77056
(Address of principal executive offices, including zip code)

(713) 993-0002
(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 [ ]

As of July 30, 1999, there were 5,195,325 shares of the registrant's Common
Stock, par value $1.00 per share, outstanding.

PROSPERITY BANCSHARES, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q

PART I - FINANCIAL INFORMATION Page

Item 1. Financial Statements....................................... 3
Consolidated Balance Sheets as of
June 30, 1999 (unaudited) and December 31,1998......... 3
Consolidated Statements of Income for the Three
and Six Months Ended June 30, 1999 and 1998
(unaudited)............................................ 4
Consolidated Statements of Shareholders' Equity
for the Year Ended December 31, 1998 and for
the Six Months Ended June 30, 1999 (unaudited)......... 5
Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 1999 and 1998 (unaudited).... 6
Notes to Consolidated Financial Statements................. 7

Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 8
Item 3. Quantitative and Qualitative
Disclosures about Market Risk..........................18

PART II - OTHER INFORMATION

Item 1. Legal Proceedings..........................................19
Item 2. Changes in Securities and Use of Proceeds..................19
Item 3. Defaults upon Senior Securities............................19
Item 4. Submission of Matters to a Vote of Security Holders........19
Item 5. Other Information..........................................19
Item 6. Exhibits and Reports on Form 8-K...........................19
Signatures..........................................................20

PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

PROSPERITY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

JUNE 30, DECEMBER 31,
1999 1998
------------ ------------
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT
SHARE DATA)
ASSETS

Cash and due from banks ....................................................... $ 12,511 $ 18,243
Interest-bearing deposits in financial institutions ........................... -- 99
------------ ------------
Total cash and cash equivalents .......................................... 12,511 18,342
Available for sale securities, at fair value (amortized cost
of $140,085 (unaudited) and $113,000, respectively) ...................... 138,170 113,828

Held to maturity securities, at cost (fair value of $83,577
(unaudited) and $115,021, respectively) ..................................... 83,511 113,916
Loans ......................................................................... 188,034 170,478
Less allowance for credit losses .............................................. (2,013) (1,850)
------------ ------------
Loans, net .......................................................... 186,021 168,628
Accrued interest receivable ................................................... 4,316 3,990
Goodwill (net of accumulated amortization of $3,400
(unaudited) and $3,077, respectively) ....................................... 9,366 9,690
Bank premises and equipment, net .............................................. 6,054 6,105
Other assets .................................................................. 2,825 1,813
------------ ------------
TOTAL ASSETS .................................................................. $ 442,774 $ 436,312
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits:
Noninterest-bearing ...................................................... $ 80,846 $ 84,976
Interest-bearing ......................................................... 317,533 305,683
------------ ------------
Total deposits ...................................................... 398,379 390,659
Other borrowings ............................................................ 570 2,437
Accrued interest payable .................................................... 978 1,081
Other liabilities ........................................................... 618 700
------------ ------------
Total liabilities ................................................... 400,546 394,877

SHAREHOLDERS' EQUITY:
Common stock, $1 par value; 50,000,000 shares authorized; 5,198,901
(unaudited) and 5,176,401, shares issued at June 30, 1999 and December 31,
1998, respectively; 5,195,325 (unaudited) and 5,172,825 shares outstanding
at June 30, 1999 and December 31, 1998, respectively ..................... 5,199 5,176
Capital surplus ............................................................. 16,909 16,477
Retained earnings ........................................................... 21,403 19,452
Accumulated other comprehensive income -- net
unrealized (losses) gains on available for sale
securities, net of tax benefit of $651 (unaudited)
and tax of $179, respectively ........................................ (1,264) 348
Less treasury stock, at cost, 3,576 shares at June 30,
1999 (unaudited) and 3,576 shares at December 31,
1998, respectively ................................................... (18) (18)
------------ ------------
Total shareholders' equity .......................................... 42,228 41,435
------------ ------------

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY .................................... $ 442,774 $ 436,312
============ ============

See notes to consolidated financial statements.

PROSPERITY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)

THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------- -----------------
1999 1998 1999 1998
-------- ------ ------- -------
(DOLLARS IN THOUSANDS, EXCEPT PER
SHARE DATA)
INTEREST INCOME:
Loans, including fees ................. $ 3,863 $2,924 $ 7,456 $ 5,568
Securities:
Taxable .............................. 3,094 2,443 6,211 4,841
Nontaxable ........................... 229 155 464 295
Federal funds sold .................... 122 55 422 127
Deposits in financial institutions .... -- 2 -- 5
-------- ------ ------- -------

Total interest income ............... 7,308 5,579 14,553 10,836
-------- ------ ------- -------

INTEREST EXPENSE:
Deposits ............................ 3,017 2,373 6,123 4,647
Other .............................. 2 42 7 69
-------- ------ ------- -------
Total interest expense ............. 3,019 2,415 6,130 4,716
-------- ------ ------- -------

NET INTEREST INCOME ................ 4,289 3,164 8,423 6,120
PROVISION FOR CREDIT LOSSES ........... 65 75 130 145
-------- ------ ------- -------
NET INTEREST INCOME AFTER PROVISION
FOR CREDIT LOSSES ................... 4,224 3,089 8,293 5,975
-------- ------ ------- -------

NONINTEREST INCOME:
Customer service fees ............... 633 546 1,241 1,074
Other ............................... 110 94 205 199
-------- ------ ------- -------
Total noninterest income ........... 743 640 1,446 1,273
-------- ------ ------- -------

NONINTEREST EXPENSE:
Salaries and employee benefits ...... 1,397 1,087 2,820 2,115
Net occupancy expense ............... 247 196 437 367
Data processing ..................... 217 181 417 369
Goodwill amortization ............... 162 119 323 235
Depreciation expense ................ 87 69 175 136
Other ............................... 651 493 1,265 1,030
-------- ------ ------- -------
Total noninterest expense .......... 2,761 2,145 5,435 4,252
-------- ------ ------- -------

INCOME BEFORE INCOME TAXES ............ 2,206 1,584 4,304 2,996
PROVISION FOR INCOME TAXES ............ 703 498 1,367 939
-------- ------ ------- -------

NET INCOME ............................ $ 1,503 $1,086 $ 2,937 $ 2,057
======== ====== ======= =======

EARNINGS PER SHARE
Basic ................................. $ 0.29 $ 0.27 $ 0.57 $ 0.52
======== ====== ======= =======

Diluted ............................... $ 0.28 $ 0.27 $ 0.55 $ 0.50
======== ====== ======= =======

See notes to consolidated financial statements.

PROSPERITY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

ACCUMULATED
OTHER
COMPREHENSIVE
INCOME -- NET
UNREALIZED GAIN
COMMON STOCK (LOSS) ON AVAIL- TOTAL
CAPITAL RETAINED ABLE FOR SALE TREASURY SHAREHOLDERS'
SHARES AMOUNT SURPLUS EARNINGS SECURITIES STOCK EQUITY
---------- -------- ------- -------- -------------- ------ -------------
(Amounts in thousands, except share data)

BALANCE AT JANUARY 1, 1998 ......................... 3,993,884 $ 3,993 $ 4,818 $16,049 $(24) $(18) $24,818
Net income ................................... 4,460 4,460
Net change in unrealized gain (loss)
on available for sale securities ........... 372 372
-------------
Total comprehensive income ................... 4,832
-------------
Sale of common stock ....................... 1,182,517 1,183 11,659 12,841
Cash dividends declared, $0.20
per share .................................. (1,057) (1,057)
---------- -------- ------- -------- -------------- ------ -------------

BALANCE AT DECEMBER 31, 1998 ....................... 5,176,401 $ 5,176 $16,477 $19,452 $ 348 $(18) $41,435

Net income (unaudited) ....................... 2,937 2,937
Net change in unrealized gain (loss) on
available for sale securities (unaudited) . (1,612) (1,612)
-------------
Total comprehensive income (unaudited) ....... 1,325
-------------
Sale of common stock (unaudited) ............. 22,500 23 76 99
Stock issuance cost (unaudited) .............. (112) (112)
Cash dividends declared, $.10
per share (unaudited) ...................... (519) (519)
---------- -------- ------- -------- -------------- ------ -------------
BALANCE AT JUNE 30, 1999
(unaudited) ................................ 5,198,901 $5,199 $16,553 $21,758 $(1,264) $(18) $42,228
========== ======== ======= ======== ============== ====== =============

See notes to consolidated financial statements.

PROSPERITY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
---------------------
1999 1998
-------- --------
(DOLLARS IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ......................................... $ 2,937 $ 2,057
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization ..................... 628 488
Provision for credit losses ....................... 130 145
Net amortization of premium/discount
on investments ................................. 153 79
Loss on sale of real estate acquired
By foreclosure .................................. 2
Increase in accrued interest receivable ........... (326) (502)
Increase in other assets .......................... (361) (162)
(Decrease) increase in accrued interest payable
and other liabilities ........................... (7) 93
-------- --------
Total adjustments ............................... 217 143
-------- --------
Net cash provided by operating activities ....... 3,154 2,200
-------- --------

CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities and principal
paydowns of held to maturity securities ........... 30,653 26,924
Purchase of held to maturity securities ............ (282) (11,814)
Proceeds from maturities and principal
paydowns of available for sale securities ......... 9,548 17,584
Purchase of available for sale securities .......... (36,352) (23,586)
Net increase in loans .............................. (17,523) (20,486)
Purchase of bank premises and equipment ............ (253) (176)
Proceeds from sale of bank premises and
equipment ......................................... 40
Net decrease in interest-bearing
deposits in financial institutions ................ 99 99
Premium paid for West Columbia branch .............. -- (250)
Net liabilities acquired in purchase of West
Columbia branch (net of acquired cash of
$5,548) ........................................... -- 5,799
-------- --------
Net cash (used in) investing activities ........ (14,308) (5,866)
-------- --------

CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in noninterest-bearing
deposits .......................................... (4,130) 6,892
Net increase in interest-bearing deposits ......... 11,850 3,530
Repayments of line of credit ....................... (1,865) --
Repayments of other borrowings, net ................ -- (2,800)
Stock issuance costs ............................. (112) --
Payments of cash dividends ......................... (519) (399)
Sale of Common Stock ............................... 99 --
-------- --------
Net cash provided by
financing activities .......................... 5,323 7,223
-------- --------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS ................................... $ (5,831) $ 3,557
CASH AND CASH EQUIVALENTS, BEGINNING
OF PERIOD .......................................... 18,342 17,372
-------- --------
CASH AND CASH EQUIVALENTS, END OF
PERIOD ............................................. $ 12,511 $ 20,929
======== ========

NONCASH INVESTING ACTIVITIES:
The Company incurred a net change in unrealized
gain (loss) on securities available for sale
of $1,612.

See notes to consolidated financial statements.

PROSPERITY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)

1. BASIS OF PRESENTATION

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

The accompanying unaudited 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 Form 10-K
filed on March 24, 1999. Operating results for the six month period ended June
30, 1999 are not necessarily indicative of the results that may be expected for
the year ending December 31, 1999.

2. INCOME PER COMMON SHARE

The following table illustrates the computation of basic and diluted
earnings per share (in thousands, except per share data):

THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30
--------------- ----------------
1999 1998 1999 1998
------ ------ ----- ------
Net income available to common shareholders $1,503 $1,086 $2.937 $2,057
Weighted average common
shares outstanding ................. 5,182 3,990 5,177 3,990
Potential dilutive common shares ........ 201 91 200 90
------ ------ ------ ------
Weighted average common shares and
equivalents outstanding ............ 5,383 4,081 5,377 4,080
------ ------ ------ ------
Basic earnings per common share ......... $ 0.29 $ 0.27 $0.57 $ 0.52
====== ====== ====== ======
Diluted earnings per common share ....... $ 0.28 $ 0.27 $0.55 $ 0.50
====== ====== ====== ======

PROSPERITY BANCSHARES, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
JUNE 30, 1999
(DOLLARS IN THOUSANDS)
(UNAUDITED)
3. RECENT ACCOUNTING STANDARDS

Effective January 1, 1998, the Company adopted Financial Accounting
Standards No. 130, "Reporting Comprehensive Income", which requires that all
components of comprehensive income and total comprehensive income be reported on
one of the following: (1) the statement of operations, (2) the statement of
shareholders' equity, or (3) a separate statement of comprehensive income.
Comprehensive income is comprised of net income and all changes to shareholders'
equity, except those due to investments by owners (changes in capital surplus)
and distributions to owners (dividends). The Company is reporting comprehensive
income on its statement of changes in shareholders' equity.

SFAS No. 131, "Disclosure about Segments of an Enterprise and Related
Information," establishes new standards for public companies to report
information about their operating segments, products and services, geographic
areas and major customers. The statement is effective for financial statements
issued for periods beginning after December 15, 1997. The Company has adopted
SFAS No. 131 effective January 1, 1998. Adoption had no material effect on the
Consolidated Financial Statements.

SFAS No. 133, "Accounting for Derivative Instruments and for Hedging
Activities," establishes accounting and reporting standards for derivative
instruments and requires that an entity recognize all derivatives as either
assets or liabilities in the balance sheet and measure those instruments at fair
value. This statement is effective for periods beginning after June 15, 2000.
Management believes the implementation of this pronouncement will not have a
material effect on the Company's financial statements.

4. SUBSEQUENT EVENTS

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

Prosperity Bancshares, Inc. (the "Company") is a registered bank holding
Company that derives substantially all of its revenues and income from the
operation of First Prosperity Bank (the "Bank"). The Bank is a full-service bank
that provides a broad line of financial products and services to small and
medium-sized businesses and consumers through 12 full-service banking locations,
three of which are located in the greater Houston metropolitan area. The
following Management's Discussion and Analysis of Financial Condition and
Results of Operations may contain certain forward-looking statements regarding
future financial conditions, results of operations and the Company's business
operations. Such statements involve risks, uncertainties and assumptions,
including, but not limited to, monetary policy and general economic conditions
in Texas and the Houston metropolitan area, the risks of changes in interest
rates on the level and composition of deposits, loan demand and the values of
loan collateral securities and interest rate protection agreements, the actions
of competitors and customers, the success of the Company in implementing its
strategic plan, the failure of the assumptions underlying the reserves for loan
losses and the estimations of values of collateral and various financial assets
and liabilities, that the costs of technological changes, including "Year 2000"
data systems and compliance issues, are more difficult or expensive than
anticipated, the effects of regulatory restrictions imposed on banks and bank
holding companies generally, any changes in fiscal, monetary or regulatory
policies and other uncertainties as set forth in the Company's other public
reports and filings and public statements. Should one or more of these risks or

uncertainties materialize, or should these underlying assumptions prove
incorrect, actual outcomes may vary materially from outcomes expected or
anticipated by the Company.

OVERVIEW

The Company showed positive earnings growth for the six month period ended
June 30, 1999 due to the increase in loan volume and the acquisition of Union
State Bank in East Bernard, Texas (the "Union Acquisition") in the fourth
quarter of 1998, accounted for under the purchase method. Net income available
to common shareholders was $1.5 million ($0.28 per common share on a diluted
basis) for the quarter ended June 30, 1999 compared with $1.1 million ($0.27 per
common share on a diluted basis) for the quarter ended June 30, 1998, an
increase of $417,000, or 38.4%. The Company posted returns on average common
equity of 14.20% and 16.88% and returns on average assets of 1.33% and 1.30% for
the quarters ended June 30, 1999 and 1998, respectively. For the six months
ended June 30, 1999 net income available to common shareholders was $2.9 million
($0.55 per common share on a diluted basis) compared with $2.1 million ($0.50
per common share on a diluted basis) for the same period in 1998, an increase of
$880,000 or 42.8%.

Total assets were $442.8 million at June 30, 1999 compared with $436.3
million at December 31, 1998. Total loans increased to $188.0 million at June
30, 1999 from $170.5 million at December 31, 1998, an increase of $17.5 million,
or 10.3%. Total deposits were $398.4 million at June 30, 1999 compared with
$390.7 million at December 31, 1998, an increase of $7.7 million, or 2.0%.
Shareholders' equity increased $793,000 or 1.9%, to $42.2 million at June 30,
1999 compared with $41.4 million at December 31, 1998.

On June 17, 1999, the Company entered into an Agreement and Plan of
Reorganization ("Merger Agreement") with South Texas Bancshares, Inc. ("South
Texas") whereby South Texas will merge with and into the Company and The
Commercial National Bank of Beeville ("CNB"), a subsidiary of South Texas, will
merge with and into the Bank (collectively, the "Mergers"). The Mergers will be
accounted for under the purchase method. CNB's banking locations in Beeville
(2), Mathis and Goliad, Texas will be operated as branches of the Bank following
consummation of the Mergers. The Merger Agreement, which is subject to the
approval of the shareholders of South Texas and various regulatory authorities,
provides that each issued and outstanding share of the common stock of South
Texas ("South Texas Stock") will be converted into the right to receive $93.40
and each outstading option to acquire a share of South Texas Stock will be
converted into the right to receive $93.40 less the exercise price to acquire a
share of South Texas Stock pursuant to the option, for aggregate consideration
of approximately $23.4 million. At June 30, 1999, South Texas had total assets
of $135.6 million, total deposits of $119.1 million and total loans (net of
unearned discount and allowance for loan losses) of $34.5 million. The Company
expects the Mergers to be consummated during the fourth quarter of 1999.

RESULTS OF OPERATIONS

NET INTEREST INCOME

Net interest income was $4.3 million for the quarter ended June 30, 1999
compared with $3.2 million for the quarter ended June 30, 1998, an increase of
$1.1 million, or 35.6%. Net interest income increased as a result of an increase
in average interest-earning assets to $421.9 million for the quarter ended June
30, 1999 from $310.0 million for the quarter ended June 30, 1998, an increase of
$111.9 million, or 36.1%. The net interest margin on a tax equivalent basis
decreased to 4.16% from 4.18% for the same periods, principally due to a 27
basis point decrease in the yield on interest-earning assets and a 31 basis
point decrease in the yield on interest-bearing liabilities. Net interest income
increased $2.3 million, or 37.6%, to $8.4 million for the six months ended June
30, 1999 from $6.1 million for the same period in 1998. This increase is mainly
attributable to higher average interest-earning assets and higher average loans.

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 June 30, 1999 and
1998 and the six months ended June 30, 1999 and 1998. 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.

THREE MONTHS ENDED JUNE 30,
--------------------------------------------------------------------
1999 1998
--------------------------------- --------------------------------
AVERAGE INTEREST AVERAGE AVERAGE INTEREST AVERAGE
OUTSTANDING EARNED/ YIELD/ OUTSTANDING EARNED/ YIELD/
BALANCE PAID RATE (4) BALANCE PAID RATE (4)
----------- -------- ------- ----------- -------- --------
(DOLLARS IN THOUSANDS)

ASSETS
Interest-earning assets:
Loans ................................................... $ 183,924 $3,863 8.42% $ 135,022 $2,924 8.68%
Securities(1) ........................................... 227,676 3,323 5.84 170,858 2,598 6.08
Federal funds sold and other temporary
investments ............................................ 10,289 122 4.69 4,153 57 5.43
----------- -------- ----------- --------
Total interest-earning assets ......................... 421,889 7,308 6.94% 310,033 5,579 7.21%
-------- ------- -------- --------
Less allowance for credit losses ........................ (1,942) (1,072)
----------- -----------
Total interest-earning assets, net
of allowance ......................................... 419,947 308,961
Noninterest-earning assets ........................... 33,149 27,185
----------- -----------

Total assets .......................................... $ 453,096 $ 336,146
=========== ===========

LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing demand deposits ........................ $ 46,814 $ 176 1.51% $ 38,637 $ 154 1.60%
Savings and money market accounts ....................... 121,359 1,002 3.31 80,474 708 3.53
Certificates of deposit ................................. 157,545 1,839 4.68 118,730 1,512 5.11
Federal funds purchased and other
borrowings ............................................. 188 2 4.21 2,770 41 5.86
----------- -------- ----------- --------
Total interest-bearing
liabilities .......................................... 325,906 3,019 3.72% 240,611 2,415 4.03%
----------- -------- ------- ----------- -------- --------
Noninterest-bearing liabilities:
Noninterest-bearing demand deposits ..................... 82,907 68,307
Other liabilities ....................................... 1,825 1,430
----------- -----------
Total liabilities ..................................... 410,638 310,348
----------- -----------

Shareholders' equity ....................................... 42,458 25,798
----------- -----------

Total liabilities and shareholders' equity ............ $ 453,096 $ 336,146
=========== ===========

Net interest rate spread ................................... 3.22% 3.18%
======= ========

Net interest income and margin(2) .......................... $4,289 4.08% $3,164 4.09%
======== ======= ======== ========
Net interest income and margin
(tax-equivalent basis)(3) ................................ $4,375 4.16% $3,227 4.18%
======== ======= ======== ========

- ------------------------------------------
(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 34%.

(4) Annualized.

SIX MONTHS ENDED JUNE 30,
--------------------------------------------------------------------------
1999 1998
------------------------------------ ----------------------------------
AVERAGE INTEREST AVERAGE AVERAGE INTEREST AVERAGE
OUTSTANDING EARNED/ YIELD/ OUTSTANDING EARNED/ YIELD/
BALANCE PAID RATE (4) BALANCE PAID RATE (4)
----------- --------- ------ ----------- -------- --------
(DOLLARS IN THOUSANDS)

ASSETS
Interest-earning assets:
Loans ............................................. $ 178,861 $ 7,456 8.41% $ 129,228 $ 5,568 8.69%
Securities(1) ..................................... 227,710 6,675 5.86 170,005 5,136 6.04
Federal funds sold and other temporary
investments ...................................... 17,421 422 4.82 4,789 132 5.48
----------- --------- ----------- --------
Total interest-earning assets ................... 423,992 14,553 6.89% 304,022 10,836 7.16%
--------- ------ -------- --------
Less allowance for credit losses .................. (1,915) (1,047)
----------- -----------
Total interest-earning assets, net
of allowance ................................... 422,077 302,975
Noninterest-earning assets ..................... 34,412 27,122
----------- -----------

Total assets .................................... $ 456,489 $ 330,097
=========== ===========

LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing demand deposits .................. $ 49,454 $ 372 1.52% $ 41,064 $ 330 1.62%
Savings and money market accounts ................. 122,230 2,014 3.32 78,704 1,376 3.53
Certificates of deposit ........................... 158,573 3,737 4.75 115,918 2,942 5.12
Federal funds purchased and other
borrowings ....................................... 322 7 4.32 2,345 68 5.77
----------- --------- ----------- -------- --------
Total interest-bearing
liabilities .................................... 330,579 6,130 3.74% 238,031 4,716 4.00%
----------- --------- ------ ----------- -------- --------
Noninterest-bearing liabilities:
Noninterest-bearing demand deposits ............... 81,807 65,057
Other liabilities ................................. 1,955 1,426
----------- -----------
Total liabilities ............................... 414,341 304,514
----------- -----------

Shareholders' equity ................................. 42,148 25,583
----------- -----------

Total liabilities and shareholders' equity ...... $ 456,489 $ 330,097
=========== ===========

Net interest rate spread ............................. 3.15% 3.16%
====== ========

Net interest income and margin(2) .................... $ 8,423 4.01% $ 6,120 4.06%
=========== ====== ======== ========
Net interest income and margin
(tax-equivalent basis)(3) .......................... $ 8,597 4.09% $ 6,242 4.14%
=========== ====== ======== ========

- ------------------------------------------

(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.

(4) Annualized.

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 distinguishes between the increase
(decrease) related to outstanding balances and the volatility of interest rates
for the periods indicated. For purposes of these tables, changes attributable to
both rate and volume which cannot be segregated have been allocated to rate.

THREE MONTHS ENDED JUNE 30,
---------------------------
1999 VS. 1998
---------------------------
INCREASE
(DECREASE)
DUE TO
----------------
VOLUME RATE TOTAL
------- ----- -------
(DOLLARS IN THOUSANDS)
Interest-earning assets:
Loans ........................................ $ 1,059 $(119) $ 940
Securities ................................... 864 (140) 724
Federal funds sold and other temporary
investments ................................. 83 (18) 65
------- ----- -------
Total increase (decrease) in interest income 2,006 (277) 1,729
------- ----- -------
Interest-bearing liabilities:
Interest-bearing demand deposits .............. 33 (11) 22
Savings and money market accounts ............. 360 (66) 294
Certificates of deposit ....................... 494 (167) 327
Federal funds purchased and other borrowings .. (38) (1) (39)
------- ----- -------
Total increase (decrease) in interest expense 849 (245) 604
------- ----- -------
Increase (decrease) in net interest income ..... $ 1,157 $ (32) $ 1,125
======= ===== =======

SIX MONTHS ENDED JUNE 30,
---------------------------
1999 VS. 1998
---------------------------
INCREASE
(DECREASE)
DUE TO
----------------
VOLUME RATE TOTAL
------- ----- -------
(DOLLARS IN THOUSANDS)
Interest-earning assets:
Loans ......................................... $ 2,139 $(251) $ 1,888
Securities .................................... 1,743 (204) 1,539
Federal funds sold and other temporary
investments ................................. 348 (58) 290
------- ----- -------
Total increase (decrease) in interest income 4,230 (513) 3,717
------- ----- -------
Interest-bearing liabilities:
Interest-bearing demand deposits .............. 67 (25) 42
Savings and money market accounts ............. 761 (123) 638
Certificates of deposit ....................... 1,083 (288) 795
Federal funds purchased and other borrowings .. (59) (2) (61)
------- ----- -------
Total increase (decrease) in interest expense 1,852 (438) 1,414
------- ----- -------
Increase (decrease) in net interest income ..... $ 2,378 $ (75) $ 2,303
======= ===== =======
PROVISION FOR CREDIT LOSSES

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 experience, the volume and

type of policies, general economic conditions and other factors related to the
collectibility of loans in the Company's portfolio.

The provision for credit losses for the six months ended June 30, 1999
decreased $15,000 to $130,000 from $145,000 in the corresponding period last
year. The provision for credit losses for the three months ended June 30, 1999
was $65,000, a decrease of $10,000 from $75,000 for the same period in 1998.

NONINTEREST INCOME

The Company's primary sources of noninterest income are service charges on
deposit accounts and other banking service related fees. The following table
presents, for the periods indicated, the major categories of noninterest income:

THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- ----------------
1999 1998 1999 1998
------- ------- ------- -------
(DOLLARS IN THOUSANDS)

Service charges on deposit accounts .... $ 633 $ 546 $ 1,241 $ 1,074

Other noninterest income ............... 110 94 205 199
------- ------- ------- -------
Total noninterest income ............... $ 743 $ 640 $ 1,446 $ 1,273
======= ======= ======= =======

Noninterest income totaled $743,000 for the three months ended June 30,
1999 compared with $640,000 for the same period in 1998, an increase of
$103,000, or 16.1%. Noninterest income increased $173,000, or 13.6%, to $1.4
million for the six month period ending June 30, 1999 from $1.3 million for the
same period in 1998. The increase in service charges on deposit accounts was
principally due to the Union Acquisition.

NONINTEREST EXPENSE

Noninterest expense totaled $2.8 million for the quarter ended June 30,
1999 compared with $2.1 million for the quarter ended June 30, 1998, an increase
of $616,000, or 28.7%. Noninterest expense totaled $5.4 million for the six
months ended June 30, an increase of $1.1 million, or 27.8%, from $4.3 million
for the same period in 1998. The increase was primarily due to the Union
Acquisition. The following table presents, for the periods indicated, the major
categories of noninterest expense:

THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------- ----------------
1999 1998 1999 1998
-------- ------ ------ ------
(DOLLARS IN THOUSANDS)

Salaries and employee benefits ............. $1,397 $1,087 $2,820 $2,115
Non-staff expenses:
Net occupancy expense ................... 247 196 437 367
Equipment depreciation .................. 87 69 173 136
Data processing ......................... 217 181 417 369
Professional fees ....................... 59 27 98 46
Regulatory assessments and FDIC insurance 21 17 42 35
Ad valorem and franchise taxes .......... 51 58 99 101
Goodwill amortization ................... 162 119 323 235
Other ................................... 520 391 1,026 848
-------- ------ ------ ------
Total non-staff expenses ................... 1,364 1,058 2,615 2,137

Total noninterest expense .................. $2,761 $2,145 $5,435 $4,252
======== ====== ====== ======
13

Salaries and employee benefit expenses were $1.4 million for the quarter
ended June 30, 1999 compared with $1.1 million for the quarter ended June 30,
1998, an increase of $310,000, or 28.5%, For the six month period ended June 30,
1999, salaries and employee benefits totaled $2.8 million, an increase of
$705,000, or 33.3%, from $2.1 million for the six month period ending June 30,
1998. The change was due primarily to an increase in the number of employees due
to the Union Acquisition and annual employee salary increases.

Non-staff expenses increased $306,000, or 28.9%, to $1.4 million for the
quarter ended June 30, 1999 compared with the same period in 1998. For the six
month period ended June 30, 1999, non-staff expenses increased $478,000, or
22.4%, to $2.6 million from $2.1 million for the same period in 1998. The
increase was principally due to the Union Acquisition.

INCOME TAXES

Income tax expense increased $428,000, or 45.6%, to $1.4 million for the
six months ended June 30, 1999 from $939,000 for the same period in 1998. For
the three month period ended June 30, 1999, income tax expense increased
$205,000, or 41.2%, to $703,000 from $498,000 for the same period in 1998. Both
increases were primarily attributable to higher pretax net earnings.

FINANCIAL CONDITION

LOAN PORTFOLIO

Total loans were $188.0 million at June 30, 1999, an increase of $17.5
million, or 10.3% from $170.5 million at December 31, 1998. Loan growth occurred
primarily in 1-4 family residential and agricultural loans. Period end loans
comprised 44.4% of average earning assets at June 30, 1999 compared with 51.9%
at December 31, 1998.

The following table summarizes the loan portfolio of the Company by type of
loan as of June 30, 1999 and December 31, 1998:

JUNE 30, DECEMBER 31,
1999 1998
----------------- ----------------
AMOUNT PERCENT AMOUNT PERCENT
-------- ------- -------- -------
(DOLLARS IN THOUSANDS)

Commercial and industrial ................ $ 18,699 9.9% $16,972 10.0%
Real estate:
Construction and land
development ....................... 2,012 1.1 1,727 1.0
1-4 family residential ................. 86,945 46.2 80,062 46.9
Home equity ............................ 9,908 5.3 8,077 4.7
Commercial mortgages ................... 25,238 13.4 22,240 13.1
Farmland ............................... 5,917 3.2 6,148 3.6
Multifamily residential ................ 1,405 0.8 1,090 0.6
Agriculture .............................. 18,578 9.9 14,107 8.3
Consumer ................................. 19,332 10.2 20,055 11.8
-------- ------- -------- -------
Total loans ......................... $188,034 100.0% $170,478 100.0%
======== ======= ======== =======

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 loan 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 June 30, 1999, the allowance for credit losses amounted to
$2.0 million, or 1.07% of total loans compared with $1.9 million, or 1.09% of
total loans at December 31, 1998.

Set forth below is an analysis of the allowance for credit losses for the
periods indicated:

AS OF AS OF
JUNE 30, DECEMBER 31,
------------ ------------
1999 1998
------------ ------------
(DOLLARS IN THOUSANDS)

Average loans outstanding ...................... $ 178,861 $ 143,196
============ ============

Gross loans outstanding at end of period ....... $ 188,034 $ 170,478
============ ============

Allowance for credit losses at
beginning of period .......................... $ 1,850 $ 1,016
Balance acquired with Union Acquisition ........ -- 661
Provision for credit losses .................... 130 239
Charge-offs:
Real estate and agriculture .................. (4) (14)
Consumer ..................................... (15) (67)
Recoveries:
Commercial and industrial .................... 5 5
Real estate and agriculture .................. 44 --
Consumer ..................................... 3 10
------------ ------------
Net recoveries (charge-offs) ................... 33 (66)
------------ ------------
Allowance for credit losses at end of period ... $ 2,013 $ 1,850
============ ============
Ratio of allowance to end of period
loans ........................................ 1.07% 1.09%
Ratio of net (recoveries) charge-offs to average
loans ........................................ (0.02) 0.05
Ratio of allowance to end of period
nonperforming loans .......................... -- --

NONPERFORMING ASSETS

The Company had $128,000 and $140,000 in nonperforming assets for the
periods ended June 30, 1999 and December 31, 1998, respectively. The Company
generally places a loan on nonaccrual status and ceases accruing interest when
the payment of principal or interest is delinquent for 90 days, or earlier in
some cases, unless the loan is in the process of collection and the underlying
collateral fully supports the carrying value of the loan. The Company generally
charges off all loans before attaining nonaccrual status. The following table
presents information regarding nonperforming assets as of the dates indicated:

JUNE 30, DECEMBER 31,
1999 1998
------------ ------------
(DOLLARS IN THOUSANDS)

Nonaccrual loans ................................. $ -- $ 5
Accruing loans 90 or more days past due .......... -- --
------------ ------------
Total nonperforming loans ........................ -- 5
Other real estate ................................ 128 135
------------ ------------
Total nonperforming assets ....................... $ 128 $ 140
============ ============

SECURITIES

Securities totaled $221.7 million at June 30, 1999 compared with $227.7
million at December 31, 1998, a decrease of $6.0 million, or 2.7%. At June 30,
1999, securities represented 50.1% of total assets compared with 52.2% of total
assets at December 31, 1998.

PREMISES AND EQUIPMENT

Premises and equipment, net of accumulated depreciation, totaled $6.1
million at June 30, 1999 and December 31, 1998, respectively.

DEPOSITS

Total deposits were $398.4 million at June 30, 1999 compared with $390.7
million at December 31, 1998, an increase of $7.7 million. At June 30, 1999,
noninterest-bearing deposits accounted for approximately 20.3% of total deposits
compared with 21.8% of total deposits at December 31, 1998. Interest-bearing
deposits totaled $317.5 million, or 79.7%, of total deposits at June 30, 1999
compared with $305.7 million, or 78.3%, of total deposits at December 31, 1998.

BORROWINGS

The Company had $570,000 in Federal Home Loan Bank ("FHLB") advances at
June 30, 1999, compared with $2.4 million in FHLB advances at December 31, 1998.

LIQUIDITY

Effective management of balance sheet liquidity is necessary to fund growth
in earning assets and to pay liability maturities, depository customers'
withdrawal requirements and shareholders' dividends. Thc Company has numerous
sources of liquidity including a significant portfolio of shorter-term assets,
marketable investment securities (excluding those presently classified as
"held-to-maturity"), increases in customers' deposits, and access to borrowing
arrangements. Available borrowing arrangements maintained by the Company include
federal funds lines with other commercial banks and an advancement arrangement
with the FHLB.

Asset liquidity is provided by cash and assets which are readily marketable
or which will mature in the near future. As of June 30, 1999, the Company had
cash and cash equivalents of $12.5 million, down from $18.3 million at December
31, 1998. The decline was due primarily to an increase in loans.

CAPITAL RESOURCES

Total shareholders' equity was $42.2 million at June 30, 1999 compared with
$41.4 million at December 31, 1998, an increase of $793,000, or 1.9%. The
increase was primarily due to net earnings of $2.9 million, cash dividends paid
of $519,000, and a loss on available for sale securities of $1.3 million for the
six months ended June 30, 1999.

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. As
of June 30, 1999, the Company's risk-based capital ratios were above the levels
required for the Company to be designated as "well capitalized", with Tier 1
capital, total risk-based capital and leverage capital ratios of 18.09%, 19.16%
and 7.69%, respectively. As of June 30, 1999, the Bank's risk-based capital
ratios were above the levels required for the Bank

to be designated as "well capitalized" by the FDIC, with Tier-1 capital, total
risk-based capital and leverage capital ratios of 13.74%, 14.81% and 5.91%,
respectively.

YEAR 2000 COMPLIANCE

GENERAL. The Year 2000 risk involves computer programs and computer
software that are not able to perform without interruption into the Year 2000.
If computer systems do not correctly recognize the date change from December 31,
1999 to January 1, 2000, computer applications that rely on the date field could
fail or create erroneous results. Such erroneous results could affect interest,
payment or due dates or cause the temporary inability to process transactions,
send invoices or engage in similar normal business activities. If these issues
are not addressed by the Company, its suppliers and its borrowers, there could
be a material adverse impact on the Company's financial condition or results of
operations.

STATE OF READINESS. The Company formally initiated its Year 2000 project
and plan in November 1997 to insure that its operational and financial systems
will not be adversely affected by year problems. The Company has formed a Year
2000 project team and the Board of Directors and management are supporting all
compliance efforts and allocating the necessary resources to ensure completion.
An inventory of all systems and products (including both information technology
("IT") and non-informational technology ("non-IT") systems) that could be
affected by the Year 2000 date change has been developed, verified and
categorized as to its importance to the Company and an assessment of all major
IT and critical non-IT systems has been completed. This assessment involved
inputting test data which simulates the Year 2000 date change into such IT
systems and reviewing the system output for accuracy. The Company's assessment
of critical non-IT systems involved reviewing such systems to determine whether
they were date dependent. Based on such assessment, the Company believes that
none of its critical non-IT systems are date dependent. The software for the
Company's systems is provided through service bureaus and software vendors. The
Company has contacted all of its third party vendors and software providers and
is requiring them to demonstrate and represent that the products provided are or
will be Year 2000 compliant and has planned a program of testing compliance. The
Company's service bureau, which performs substantially all of the Company's data
processing functions, has warranted in writing that its software is Year 2000
compliant and pursuant to applicable regulatory guidelines the Company has
reviewed the results of user group tests performed by the service provider to
verify this assertion. The Company believes it would have recourse against the
service provider for actual damages incurred by the Company in the event the
service provider breaches this warranty. In addition, the FDIC has reviewed the
Company's compliance with Year 2000 issues.

The Company has completed the following phases of its Year 2000 plan: (i)
recognizing Year 2000 issues, (ii) assessing the impact of Year 2000 issues on
the Company's critical systems and (iii) upgrading systems as necessary to
resolve those Year 2000 issues which have been identified. The Company has
implemented and tested all of its mission critical systems.

COSTS OF COMPLIANCE. Management does not expect the costs of bringing the
Company's systems into Year 2000 compliance will have a material adverse effect
on the Company's financial condition, results of operations or liquidity. The
Company has budgeted $10,000 to address Year 2000 issues. As of June 30, 1999,
the Company has incurred $6,000 in relation to Year 2000. The largest potential
risk to the Company concerning Year 2000 is the malfunction of its data
processing system. In the event its data processing system does not function
properly, the Company is prepared to perform functions manually. The Company
believes it is in compliance with regulatory guidelines regarding Year 2000
compliance, including the timetable for achieving compliance.

RISKS RELATED TO THIRD PARTIES. The impact of Year 2000 noncompliance by
third parties with which the Company transacts business cannot be accurately
gauged. The Company identified its largest dollar deposit (aggregate deposits
over $500,000) and loan ($250,000 or more) customers and, based on information
available to the Company, conducted an evaluation to determine which of those
customers are likely to be affected by Year 2000 issues. The Company then
surveyed those customers deemed at risk to determine their readiness with
respect to Year 2000 issues, including their awareness of Year 2000 issues,
plans to address such issues and progress with respect to such plans. As of the
date hereof, the responses show that the customers are aware of Year 2000
issues, are in the process of updating their systems and have informed the
Company that they believe they will be ready for

the Year 2000 date change by the end of 1999. The Company will continue to
monitor its customers deemed at risk and will encourage customers to resolve any
identified problems. To the extent a problem is identified, the Company intends
to monitor the customer's progress in resolving such problem. In the event that
Year 2000 noncompliance adversely affects a borrower, the Company may be
required to charge-off the loan to that borrower. For a discussion of possible
effects of such charge-offs, see "--Contingency Plans" below. In the event that
Year 2000 noncompliance causes a depositor to withdraw funds, the Company plans
to maintain additional cash on hand. The Company also has access to the FHLB and
Federal Reserve Discount Windows to address any additional liquidity needs. With
respect to its borrowers, the Company includes in its loan documents a Year 2000
disclosure form and an addendum to the loan agreement in which the borrower
represents and warrants its Year 2000 compliance to the Company.

CUSTOMER AWARENESS. The Company has implemented a series of notifications
to its customers via statement inserts, statement messages and community forums.
Future plans for increasing customer awareness will include advertising and
signs regarding the Year 2000 issue located in the lobby of each banking
location.

CONTINGENCY PLANS. The Company has finalized its contingency planning with
respect to the Year 2000 date change and believes that if its own systems should
fail, the Company could convert to a manual entry system for a period of up to
six months without significant losses. The Company believes that any mission
critical systems could be recovered and operating within seven days. In the
event that the Federal Reserve is unable to handle-electronic funds transfers
and check clearing, the Company does not expect the impact to be material to its
financial condition or results of operations as long as the Company is able to
utilize an alternative electronic funds transfer and clearing source. As part of
its contingency planning, the Company has reviewed its loan customer base and
the potential impact on capital of Year 2000 noncompliance. Based upon such
review, using what it considers to be a reasonable worst case scenario, the
Company has assumed that certain of its commercial borrowers whose businesses
are most likely to be affected by Year 2000 noncompliance would be unable to
repay their loans, resulting in charge-offs of loan amounts in excess of
collateral values. If such were the case, the Company believes that it is
unlikely that its exposure would exceed $100,000, although there are no
assurances that this amount will not be substantially higher. The Company does
not believe that this amount is material enough for the Company to adjust it
current methodology for making provisions to the allowance for credit losses. In
addition, the Company plans to maintain additional cash on hand to meet any
unusual deposit withdrawal activity.

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. It considers
macroeconomic variables, Company strategy, liquidity and other factors as it
quantifies market risk. There have been no material changes of this nature since
the Company's Form 10-K filing on March 24, 1999. See Form 10-K, Item 7
"Management's Discussion and Analysis and Results of Operations-Interest Rate
Sensitivity and Liquidity".

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Not Applicable

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

a. Not applicable

b. Not applicable

c. Not applicable

d. Not applicable

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

On May 4, 1999, the Company held the Annual Meeting of Shareholders to
consider and act upon the following items:

1. J.T. Herin, Charles M. Slavik and Harrison Stafford were elected as
Class I directors to serve on the Board of Directors of the Company
until the Company's 2002 Annual Meeting of Shareholders and until
their successors are duly elected and qualified. A total of 3,452,615
shares were voted in favor of the election of each Class I director
and 187,286 shares were withheld from voting for each director.

The other directors whose term of office as a director continued after
the meeting include: Tracy T. Rudolph, David Zalman, Robert
Steelhammer, Harry Bayne, and James A. Bouligny.

2. The shareholders ratified the appointment of Deloitte & Touche LLP as
the the independent auditors of the books and accounts of the Company
for the year ending December 31, 1999. A total of 3,440,207 shares
were voted in favor of the appointment, 182,314 shares were voted
against the appointment and 17,380 shares abstained from voting.

ITEM 5. OTHER INFORMATION

Not applicable

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

a. Exhibits:

Exhibit 2.1 Agreement and Plan of Reorganization by and between
Prosperity Bancshares, Inc. and South Texas Bancshares,
Inc. dated June 17, 1999.

Exhibit 27 Financial Data Schedule

b. No reports on Form 8-K were filed by the Company during the three
months ended June 30, 1999.

SIGNATURES

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

PROSPERITY BANCSHARES, INC.
(Registrant)

Date: August 11, 1999 /s/ DAVID ZALMAN
David Zalman
Vice President/Secretary

Date: August 11, 1999 /s/ DAVID HOLLAWAY
David Hollaway
Chief Financial Officer