Prosperity Bancshares

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

(Mark One)
È ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE

SECURITIES EXCHANGE ACT OF 1934
For The Fiscal Year Ended December 31, 2014

OR

‘ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE

SECURITIES EXCHANGE ACT OF 1934
For the transition period from

to

Commission File Number 001-35388

PROSPERITY BANCSHARES, INC.®

(Exact name of registrant as specified in its charter)

Texas
(State or other jurisdiction of
incorporation or organization)
Prosperity Bank Plaza
4295 San Felipe
Houston, Texas
(Address of principal executive offices)

74-2331986
(I.R.S. Employer
Identification No.)

77027
(Zip Code)

Registrant’s Telephone Number, Including Area Code: (713) 693-9300
Securities registered pursuant to Section 12(b) of the Act:

Common Stock, par value
$1.00 per share
(Title of each class)

New York Stock Exchange, Inc.
(Name of each exchange on which registered)

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant

Act. Yes È No ‘

is a well-known seasoned issuer, as defined in Rule 405 of the Securities

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15 (d) of the

Act. Yes ‘ No È

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 È No ‘

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and
will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference
in Part III of this Form 10-K or any amendment of this Form 10-K. ‘

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

Large Accelerated Filer È
Smaller Reporting Company ‘
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ‘ No È
The aggregate market value of the shares of common stock held by non-affiliates as of June 30, 2014, based on the closing price

Non-accelerated Filer ‘

Accelerated Filer ‘

of the common stock on the New York Stock Exchange on June 30, 2014 was approximately $4.11 billion.

As of February 18, 2015, the number of outstanding shares of common stock was 70,033,040.

Documents Incorporated by Reference:

Portions of the Company’s Proxy Statement relating to the 2015 Annual Meeting of Shareholders, which will be filed within

120 days after December 31, 2014, are incorporated by reference into Part III, Items 10-14 of this Annual Report on Form 10-K.

PROSPERITY BANCSHARES, INC.®
2014 ANNUAL REPORT ON FORM 10-K

TABLE OF CONTENTS

PART I

PART II

PART III

PART IV

Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recent Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recent Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Available Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Officers and Associates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Banking Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Business Strategies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Supervision and Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1B. Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 2.
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 4. Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer

Purchases of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selected Consolidated Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Item 6.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of

Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recent Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Critical Accounting Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial Condition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 7A. Quantitative and Qualitative Disclosures about Market Risk . . . . . . . . . . . . . . . . . . . . .
Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 8.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial

Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9A. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9B. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Item 10. Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . .
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related

Shareholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 13. Certain Relationships and Related Transactions and Director Independence . . . . . . . . .
Item 14. Principal Accountant Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Item 15. Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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1
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3
3
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48
72
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ITEM 1. BUSINESS

General

PART I

Prosperity Bancshares, Inc.®, a Texas corporation (the “Company”), was formed in 1983 as a vehicle to
acquire the former Allied Bank in Edna, Texas which was chartered in 1949 as The First National Bank of Edna and
is now known as Prosperity Bank. The Company is a registered financial holding company that derives substantially
all of its revenues and income from the operation of its bank subsidiary, Prosperity Bank® (“Prosperity Bank®” or
the “Bank”). The Bank provides a wide array of financial products and services to small and medium-sized
businesses and consumers. As of December 31, 2014, the Bank operated 245 full service banking locations; 62 in
the Houston area, including The Woodlands; 30 in the South Texas area, including Corpus Christi and Victoria; 36
in the Dallas/Fort Worth area; 22 in the East Texas area; 30 in the Central Texas area, including Austin and San
Antonio; 34 in the West Texas area, including Lubbock, Midland-Odessa and Abilene; 16 in the Bryan/College
Station area, 6 in the Central Oklahoma area and 9 in the Tulsa, Oklahoma area. The Company’s principal executive
office is 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.prosperitybankusa.com.

The Company’s market consists of the communities served by its banking centers. The diverse nature of the
economies in each local market served by the Company provides the Company with a varied customer base and
allows the Company to spread its lending risk throughout a number of different industries including professional
service firms and their principals, manufacturing, tourism, recreation, petrochemicals, farming and ranching. The
Company’s market areas outside of Houston, Dallas, Corpus Christi, San Antonio, Austin, Tulsa and Oklahoma
City are dominated by either small community banks or branches of larger regional banks. Management believes
that the Company, through its responsive customer service and community banking philosophy, combined with
the sophistication of a larger regional bank holding company, has a competitive advantage in its market areas and
excellent growth opportunities through acquisitions, new banking center locations and additional business
development.

Operating under a community banking philosophy,

the Company seeks to develop broad customer
relationships based on service and convenience while maintaining its conservative approach to lending and sound
asset quality. The Company has grown through a combination of internal growth, the acquisition of community
banks and branches of banks and the opening of new banking centers. Utilizing a low cost of funds and
employing stringent cost controls, the Company has been profitable in every year of its existence, including the
periods of adverse economic conditions in Texas.

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The Company grew through internal growth and the completion of the following acquisitions within the last

ten years:

Acquired Entity

Acquired Bank

Liberty Bancshares, Inc. . . . . . . . . . . . . . . . . . . . Liberty Bank, S.S.B.
Village Bank and Trust, s.s.b. . . . . . . . . . . . . . . . Village Bank and Trust, s.s.b.
First Capital Bankers, Inc.
Grapeland Bancshares, Inc.
SNB Bancshares, Inc. . . . . . . . . . . . . . . . . . . . . . Southern National Bank of Texas
Texas United Bancshares, Inc. . . . . . . . . . . . . . . State Bank, GNB Financial, n.a.,

. . . . . . . . . . . . . . . . . FirstCapital Bank, s.s.b.
. . . . . . . . . . . . . . . . First State Bank of Grapeland

Gateway National Bank and
Northwest Bank

1st Choice Bank

The Bank of Navasota . . . . . . . . . . . . . . . . . . . . The Bank of Navasota
Banco Popular, NA (6 branches) . . . . . . . . . . . . N/A
1st Choice Bancorp . . . . . . . . . . . . . . . . . . . . . . .
Franklin Bank (from FDIC, as receiver)(3) . . . . . N/A
U.S. Bank (3 branches) . . . . . . . . . . . . . . . . . . . . N/A
First Bank (19 branches) . . . . . . . . . . . . . . . . . . . N/A
Texas Bankers, Inc. . . . . . . . . . . . . . . . . . . . . . . . Bank of Texas
The Bank Arlington . . . . . . . . . . . . . . . . . . . . . . The Bank Arlington
American State Financial Corporation . . . . . . . . American State Bank
Community National Bank . . . . . . . . . . . . . . . . . Community National Bank
East Texas Financial Services, Inc.
Coppermark Bancshares, Inc. . . . . . . . . . . . . . . . Coppermark Bank
FVNB Corp.
F&M Bancorporation Inc.

. . . . . . . . . . . . . . . . . The F&M Bank & Trust

. . . . . . . . . . . . . . . . . . . . . . . . . . . . First Victoria National Bank

. . . . . . . . . . Firstbank

Number of
Banking Centers
As of
December 31,
2014(1)

Completion
Date

2004
2004
2005
2005
2006
2007

2007
2008
2008
2008
2010
2010
2012
2012
2012
2012
2013
2013
2013
2014

4
1
20
2
6(2)

34

1
5
1
33
3
15
2
1
37
1
4
6
20
11

Company

(1) The number of banking centers added does not include any locations of the acquired entity that were closed
and consolidated with existing banking centers of the Company upon consummation of the transaction or
closed after consummation of the transaction.
Included one banking center under construction at the time of consummation.

(2)
(3) Assumed approximately $3.6 billion of deposits and acquired certain assets, including 33 banking centers,
from the Federal Deposit Insurance Corporation (“FDIC”), acting in its capacity as receiver for Franklin
Bank.

Recent Acquisitions

Acquisition of F&M Bancorporation Inc.—On April 1, 2014, the Company completed the acquisition of
F&M Bancorporation Inc. (“FMBC”) and its wholly-owned subsidiary, The F&M Bank & Trust Company
(collectively, “F&M”) headquartered in Tulsa, Oklahoma. F&M operated 13 banking locations: 9 in Tulsa,
Oklahoma and surrounding areas; 3 in Dallas, Texas; and 1 loan production office in Oklahoma City, Oklahoma.
The Company acquired FMBC to further expand its Oklahoma and Dallas, Texas area markets.

As of March 31, 2014, FMBC, on a consolidated basis, reported total assets of $2.41 billion, total loans of
$1.74 billion and total deposits of $2.27 billion. Under the terms of the acquisition agreement, the Company
issued 3,298,022 shares of Company common stock plus $34.2 million in cash for all outstanding shares of
FMBC capital stock for total merger consideration of $252.4 million based on the Company’s closing stock price
of $66.15. As of December 31, 2014, the Company recognized goodwill of $198.2 million which does not
include subsequent fair value adjustments that are still being finalized. Additionally, the Company recognized

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$27.1 million of core deposit intangibles. For the year ended December 31, 2014, the Company incurred
approximately $2.5 million of pre-tax merger related expenses in connection with the FMBC acquisition.

Recent Developments

As of December 31, 2014, the Company had $167.5 million in junior subordinated debentures outstanding
that were issued to the Company’s unconsolidated subsidiary trusts or assumed by the Company in connection
with an acquisition. The subsidiary trusts purchased the junior subordinated debentures from the Company using
the proceeds from the sale of trust preferred securities to third party investors. As of December 31, 2014, all
$167.5 million of outstanding trust preferred securities of the Company were counted as Tier 1 capital in the
calculation of the Company’s capital ratios. Under the new Basel III Capital Rules, 75% of trust preferred
securities will be eliminated from Tier 1 capital beginning on January 1, 2015 and fully eliminated by the end of
2016.

Although the trust preferred securities are includable as Tier 2 capital under the Basel III Capital Rules,
since December 31, 2014, the Company has redeemed $41.2 million of its outstanding junior subordinated
debentures and provided irrevocable notice of its intent to redeem the remaining junior subordinated debentures
during the first quarter of 2015. Prior to notifying the trustees of the applicable trusts, the Company advised the
Federal Reserve Board of its redemption intent and timing, and the Federal Reserve Board had no objections to
the redemptions. The Company has and intends to continue to fund the redemption of the trust preferred
securities through dividends from the Bank.

Available Information

The Company’s website address is www.prosperitybankusa.com. The Company makes available free of
charge on or through its website its Annual Report on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K and all amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of
the Securities Exchange Act of 1934, as amended (“Exchange Act”), as soon as reasonably practicable after such
material is electronically filed with or furnished to the Securities and Exchange Commission. Information
contained on the Company’s website is not incorporated by reference into this Annual Report on Form 10-K and
is not part of this or any other report.

Officers and Associates

The Company’s directors and officers are important to the Company’s success and play a key role in the
Company’s business development efforts by actively participating in civic and public service activities in the
communities served by the Company.

The Company has invested heavily in its officers and associates by recruiting talented officers in its market
areas and providing them with economic incentives in the form of stock-based compensation and bonuses based
on cross-selling performance. The senior management team has substantial experience in the Houston, Dallas,
Austin, Bryan/College Station, East Texas, Corpus Christi, West Texas, Oklahoma City and Tulsa markets and
the surrounding communities in which the Company has a presence. Each banking center location is overseen by
a local president or manager with knowledge of the community and lending expertise in the specific industries
found in the community. The Company entrusts its banking center presidents and managers with authority and
flexibility within general parameters with respect to product pricing and decision making in order to minimize
the bureaucratic structure of larger banks. The Company operates each banking center as a separate profit center,
maintaining separate data with respect to each banking center’s 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. Each banking center has its own listed local business
telephone number. Customers are served by a local banker with decision making authority.

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As of December 31, 2014, the Company and the Bank had 3,096 full-time equivalent associates, 946 of
whom were officers of the Bank. The Company provides medical and hospitalization insurance to its full-time
associates. The Company considers its relations with associates to be good. Neither the Company nor the Bank is
a party to any collective bargaining agreement.

Banking Activities

The Company, through the Bank, offers a variety of traditional loan and deposit products to its customers,
which consist primarily of consumers and small and medium-sized businesses. The Bank tailors its products to
the specific needs of customers in a given market. At December 31, 2014, the Bank maintained approximately
604,500 separate deposit accounts including certificates of deposit and 59,000 separate loan accounts. At
December 31, 2014, noninterest-bearing demand deposits were 28.0% of the Bank’s total deposits. For the year
ended December 31, 2014, the Company’s average cost of funds was 0.25% and the Company’s average cost of
deposits (excluding all borrowings) was 0.23%.

The Company has been an active real estate lender, with commercial real estate and 1-4 family residential
loans comprising 32.8% and 24.3%, respectively, of the Company’s total loans as of December 31, 2014. The
Company also offers commercial loans, loans for automobiles and other consumer durables, home equity loans,
debit and credit cards, internet banking and other cash management services, mobile banking, trust and wealth
management, retail brokerage services, mortgage banking services and automated telephone banking. The
Company offers businesses a broad array of loan products including term loans, lines of credit and loans for
working capital, business expansion and the purchase of equipment and machinery; land development and
interim construction loans for builders; and owner-occupied and non-owner occupied commercial real estate
loans.

By offering certificates of deposit, interest checking accounts, savings accounts and overdraft protection at

competitive rates, the Company gives its depositors a full range of traditional deposit products.

The Company also maintains a trust department with $1.43 billion in assets under management as of
December 31, 2014, acquired in connection with the American State Bank (“ASB”) acquisition on July 1, 2012
and the First Victoria National Bank acquisition on November 1, 2013. The trust department provides trust
services in the Company’s various market areas.

Business Strategies

The Company’s main objective is to increase deposits and loans internally, as well as through additional
expansion opportunities and acquisitions, while maintaining efficiency, individualized customer service and
maximizing profitability. To achieve this objective, the Company has employed the following strategic goals:

Continue Community Banking Emphasis. Although the Company has significantly grown in the last several
years, it intends to continue operating as a community banking organization focused on meeting the specific
needs of consumers and small and medium-sized businesses in its market areas. The Company provides a high
degree of responsiveness combined with a wide variety of banking products and services. The Company staffs its
banking centers with experienced bankers with lending expertise in the specific industries found in the given
community, and gives them authority to make certain pricing and credit decisions, avoiding the bureaucratic
structure of larger banks.

Expand Market Share Through Internal Growth and a Disciplined Acquisition Strategy. The Company
intends to continue seeking opportunities, both inside and outside its existing markets, to expand either by
acquiring existing banks or branches of banks or by establishing new banking centers. All of the Company’s
acquisitions have been accretive to earnings within 12 months after acquisition date and generally have supplied
the Company with relatively low-cost deposits which have been used to fund the Company’s lending and

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investing activities. However, the Company makes no guarantee that future acquisitions, if any, will be accretive
to earnings within any particular time period. Factors used by the Company to evaluate expansion opportunities
include (1) the similarity in management and operating philosophies, (2) whether the acquisition will be accretive
to earnings and enhance shareholder value, (3) the ability to improve the efficiency ratio through economies of
scale, (4) whether the acquisition will strategically expand the Company’s geographic footprint, and (5) the
opportunity to enhance the Company’s market presence in existing market areas.

Increase Loan Volume and Diversify Loan Portfolio. While maintaining its conservative approach to
the Company has emphasized both new and existing loan products, focusing on managing its
lending,
commercial real estate and commercial loan portfolios. The Company’s loan portfolio increased $1.47 billion
during 2014, due primarily to the F&M acquisition combined with organic growth. From December 31, 2013 to
December 31, 2014, the Company’s commercial and industrial loans increased from $1.28 billion to $1.81
billion, or 41.1%, and represented 16.5% and 19.5% of the total portfolio, respectively for the same period.
Commercial real estate (including multifamily residential) increased from $2.75 billion to $3.03 billion, or
10.0%, and represented 35.2% and 32.8% of the total portfolio, as of December 31, 2013 and 2014, respectively.
In addition, the Company targets business owners, professional service firms, including legal and medical
practices, for loans secured by owner-occupied premises, working capital or equipment and personal loans to
their principals.

Maintain Sound Asset Quality. The Company continues to maintain the sound asset quality that has been
representative of its historical loan portfolio. As the Company continues to diversify and increase its lending
activities and acquire loans in acquisitions, it may face higher risks of nonpayment and increased risks in the
event of prolonged economic downturns. The Company intends to continue to employ the strict underwriting
guidelines and comprehensive loan review process that have contributed to its low incidence of nonperforming
assets and its minimal charge-offs in relation to its size.

Continue Focus on Efficiency. The Company plans to maintain its 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. For its banking centers, which the Company operates as
independent profit centers, the Company supplies complete support in the areas of loan review, internal audit,
compliance and training. Management believes that this centralized infrastructure can accommodate additional
growth while enabling the Company to minimize operational costs through economies of scale.

Enhance Cross-Selling. The Company uses incentives and friendly competition to encourage cross-selling
efforts and increase cross-selling results among its associates. Officers and associates have access to each
customer’s existing and related account relationships and are better able to inform customers of additional
products when customers visit or call the various banking centers or use their drive-in facilities. In addition, the
Company includes product information in monthly statements and other mailings.

Competition

The banking business is highly competitive, and the profitability of the Company depends principally on its
ability to compete in its market areas. The Company competes with other commercial banks, savings banks,
savings and loan associations, credit unions, finance companies, mutual funds, insurance companies, brokerage
and investment banking firms, asset-based nonbank lenders and certain other nonfinancial entities, including
retail stores which may maintain their own credit programs and certain governmental organizations which may
offer more favorable financing than the Company. The Company believes it has been able to compete effectively
with other financial institutions by emphasizing customer service, technology and responsive decision-making
with respect to loans, by establishing long-term customer relationships and building customer loyalty and by
providing products and services designed to address the specific needs of its customers.

5

Supervision and Regulation

The supervision and regulation of bank holding companies and their subsidiaries is intended primarily for
the protection of depositors, the Deposit Insurance Fund (“DIF”) of the FDIC and the banking system as a whole,
and not for the protection of the bank holding company’s shareholders or creditors. The banking agencies have
broad enforcement power over bank holding companies and banks including the power to impose substantial
fines and other penalties for violations of laws and regulations.

The following description summarizes some of the laws to which the Company and the Bank are subject.
References in this Annual Report on Form 10-K to applicable statutes and regulations are brief summaries
thereof, do not purport to be complete, and are qualified in their entirety by reference to such statutes and
regulations.

The Company

The Company is a financial holding company pursuant to the Gramm-Leach-Bliley Act and a bank holding
company registered under the Bank Holding Company Act of 1956, as amended (“BHCA”). Accordingly, the
Company is subject to supervision, regulation and examination by the Board of Governors of the Federal Reserve
System (“Federal Reserve Board”). The Gramm-Leach-Bliley Act, the BHCA and other federal laws subject
financial and bank holding companies to particular restrictions on the types of activities in which they may
engage, and to a range of supervisory requirements and activities, including regulatory enforcement actions for
violations of laws and regulations. Further, since the Company has securities registered with the Securities and
Exchange Commission and traded on the New York Stock Exchange, it is also subject to the supervision and
regulation of these organizations.

Regulatory Restrictions on Dividends. The Company is regarded as a legal entity separate and distinct from
the Bank. The principal source of the Company’s revenues is dividends received from the Bank. As described in
more detail below, federal law places limitations on the amount that state banks may pay in dividends, which the
Bank must adhere to when paying dividends to the Company. It is the policy of the Federal Reserve Board that
bank holding companies should pay cash dividends on common stock only out of income available over the past
year and only if the prospective rate of earnings retention is consistent with the organization’s expected capital
needs and financial condition. The Federal Reserve Board’s policy provides that bank holding companies should
not maintain a level of cash dividends that undermines the bank holding company’s ability to serve as a source of
strength to its banking subsidiaries. The Federal Reserve Board is authorized to limit or prohibit the payment of
dividends if, in the Federal Reserve Board’s opinion, the payment of dividends would constitute an unsafe or
unsound practice in light of a bank holding company’s financial condition. In addition, the Federal Reserve
Board has indicated that each bank holding company should carefully review its dividend policy, and has
discouraged payment ratios that are at maximum allowable levels, which is the maximum dividend amount that
may be issued and allow the company to still maintain its target Tier 1 capital ratio, unless both asset quality and
capital are very strong.

Stress Testing. Pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-
Frank Act”), in October 2012, the Federal Reserve Board published its final rules regarding company-run stress
testing. The rules require institutions with average total consolidated assets greater than $10 billion, such as the
Company and the Bank, to conduct an annual company-run stress test of capital and consolidated earnings and
losses under one base and at least two stress scenarios provided by bank regulatory agencies. Pursuant to the
rules, institutions with total consolidated assets between $10 billion and $50 billion use data as of September 30th
and scenarios released by the agencies. The results of these stress tests must be reported to the agencies by
March 31st of the following year. Public disclosure of summary stress test results under the severely adverse
scenario will begin in June 2015 for stress tests using data from September 30, 2014. The Company’s capital
ratios reflected in the stress test calculations will be an important factor considered by the Federal Reserve Board
in evaluating the capital adequacy of the Company and the Bank and determining whether proposed payments of
dividends or stock repurchases may be an unsafe or unsound practice.

6

Source of Strength. Under Federal Reserve Board policy, a bank holding company has historically been
required to act as a source of financial strength to each of its banking subsidiaries. The Dodd-Frank Act codified
this policy as a statutory requirement. Under this requirement, the Company is expected to commit resources to
support the Bank, including support at times when the Company may not be in a financial position to provide
such resources. Any capital loans by a bank holding company to any of its subsidiary banks are subordinate in
right of payment to deposits and to certain other indebtedness of such subsidiary banks. As discussed below, a
bank holding company,
in certain circumstances, could be required to guarantee the capital plan of an
undercapitalized banking subsidiary.

In the event of a bank holding company’s bankruptcy under Chapter 11 of the U.S. Bankruptcy Code, the
trustee will be deemed to have assumed and is required to cure immediately any deficit under any commitment
by the debtor holding company to any of the federal banking agencies to maintain the capital of an insured
depository institution. Any claim for breach of such obligation will generally have priority over most other
unsecured claims.

Scope of Permissible Activities. Under the BHCA, bank holding companies generally may not acquire a
direct or indirect interest in or control of more than 5% of the voting shares of any company that is not a bank or
bank holding company or from engaging in activities other than those of banking, managing or controlling banks
or furnishing services to or performing services for its subsidiaries, except that it may engage in, directly or
indirectly, certain activities that the Federal Reserve Board has determined to be so closely related to banking or
managing and controlling banks as to be a proper incident thereto. In approving acquisitions or the addition of
activities, the Federal Reserve Board considers, among other things, whether the acquisition or the additional
activities can reasonably be expected to produce benefits to the public, such as greater convenience, increased
competition, or gains in efficiency, that outweigh such possible adverse effects as undue concentration of
resources, decreased or unfair competition, conflicts of interest or unsound banking practices.

Notwithstanding the foregoing, the Gramm-Leach-Bliley Act eliminated the barriers to affiliations among
banks, securities firms, insurance companies and other financial service providers and permits bank holding
companies to become financial holding companies and thereby affiliate with securities firms and insurance
companies and engage in other activities that are financial in nature. The Gramm-Leach- Bliley Act defines
“financial in nature” to include securities underwriting, dealing and market making; sponsoring mutual funds and
investment companies; insurance underwriting and agency; merchant banking activities; and activities that the
Federal Reserve Board has determined to be closely related to banking. No regulatory approval will be required
for a financial holding company, such as the Company, to acquire a company, other than a bank or savings
association, engaged in activities that are financial in nature or incidental to activities that are financial in nature,
as determined by the Federal Reserve Board.

The Company’s financial holding company status depends upon it maintaining its status as “well
capitalized” and “well managed” under applicable Federal Reserve Board regulations. If a financial holding
company ceases to meet these requirements, the Federal Reserve Board may impose corrective capital and/or
managerial requirements on the financial holding company and place limitations on its ability to conduct the
broader financial activities permissible for financial holding companies. Until the financial holding company
returns to compliance, it may not acquire a company engaged in such financial activities without prior approval
of the Federal Reserve Board. In addition, the Federal Reserve Board may require divestiture of the holding
company’s depository institutions and/or its non-bank subsidiaries if the deficiencies persist.

While the Federal Reserve Board is the “umbrella” regulator for financial holding companies and has the
power to examine banking organizations engaged in new activities, regulation and supervision of activities which
are financial in nature or determined to be incidental to such financial activities will be handled along functional
lines. Accordingly, activities of subsidiaries of a financial holding company will be regulated by the agency or
authorities with the most experience regulating that activity as it is conducted in a financial holding company.

7

Safe and Sound Banking Practices. Bank holding companies are not permitted to engage in unsafe and
unsound banking practices. The Federal Reserve Board’s Regulation Y, for example, generally requires a holding
company to give the Federal Reserve Board prior notice of any redemption or repurchase of its own equity
securities, if the consideration to be paid, together with the consideration paid for any repurchases or redemptions
in the preceding year, is equal to 10% or more of the company’s consolidated net worth. The Federal Reserve
Board may oppose the transaction if it believes that the transaction would constitute an unsafe or unsound
practice or would violate any law or regulation. Depending upon the circumstances, the Federal Reserve Board
could take the position that paying a dividend would constitute an unsafe or unsound banking practice.

The Federal Reserve Board has broad authority to prohibit activities of bank holding companies and their
nonbanking subsidiaries which represent unsafe and unsound banking practices or which constitute violations of
laws or regulations, and can assess civil money penalties for certain activities conducted on a knowing and
reckless basis, if those activities caused a substantial loss to a depository institution. The penalties can be as high
as $1.0 million for each day the activity continues.

Anti-Tying Restrictions. Bank holding companies and their affiliates are prohibited from tying the provision

of certain services, such as extensions of credit, to other services offered by a holding company or its affiliates.

Capital Adequacy Requirements in Effect as of December 31, 2014. The federal regulatory agencies risk-
based capital guidelines in effect as of December 31, 2014 were based upon the 1998 capital accord (“Basel I”)
of the Basel Committee on Banking Supervision (“Basel Committee”). The previous system of capital adequacy
requirements of the Federal Reserve Board used risk-based capital guidelines under a two-tier capital framework
to evaluate the capital adequacy of bank holding companies. Tier 1 capital generally consisted of common
stockholders’ equity, retained earnings, a limited amount of qualifying perpetual preferred stock, qualifying trust
preferred securities and noncontrolling interests in the equity accounts of consolidated subsidiaries, less goodwill
and certain intangibles. Tier 2 capital generally consisted of certain hybrid capital instruments and perpetual debt,
mandatory convertible debt securities and a limited amount of subordinated debt, qualifying preferred stock, loan
loss allowance, and unrealized holding gains on certain equity securities.

Under the previous guidelines, specific categories of assets were assigned different risk weights, based
generally on the perceived credit risk of the asset. These risk weights were multiplied by corresponding asset
balances to determine a “risk-weighted” asset base. The guidelines required a minimum ratio of total capital to
total risk-weighted assets of 8.0% (of which at least 4.0% is required to consist of Tier 1 capital elements). Total
capital was the sum of Tier 1 and Tier 2 capital. As of December 31, 2014, the Company’s ratio of Tier 1 capital
to total risk-weighted assets was 13.80% and its ratio of total capital to total risk-weighted assets was 14.56%.
Risk-weighted assets excluded intangible assets such as goodwill and core deposit intangibles.

In addition to the risk-based capital guidelines, the Federal Reserve Board used a leverage ratio as an
additional tool to evaluate the capital adequacy of bank holding companies. The leverage ratio was a company’s
Tier 1 capital divided by its average total consolidated assets. Certain highly-rated bank holding companies could
have maintained a minimum leverage ratio of 3.0%, but other bank holding companies, especially those that were
least 4.0%. As of
active acquirors like the Company, were required to maintain a leverage ratio of at
December 31, 2014, the Company’s leverage ratio was 7.69%.

Basel III Capital Adequacy Requirements Effective January 1, 2015. In July 2013, the Federal Reserve
Board and the FDIC published the Basel III Capital Rules establishing a new comprehensive capital framework
for U.S. banking organizations. The rules implement the Basel Committee’s December 2010 framework known
as “Basel III” for strengthening international capital standards as well as certain provisions of the Dodd-Frank
Act. The Basel III Capital Rules substantially revise the risk-based capital requirements applicable to bank
holding companies and depository institutions, including the Company and the Bank, under the previous U.S.
risk-based capital rules. The Basel III Capital Rules define the components of capital and address other issues
affecting the numerator in banking institutions’ regulatory capital ratios. The Basel III Capital Rules also address

8

risk weights and other issues affecting the denominator in banking institutions’ regulatory capital ratios and
replace the existing risk-weighting approach, which was derived from the Basel I capital accords of the Basel
Committee, with a more risk-sensitive approach based, in part, on the standardized approach in the Basel
Committee’s 2004 “Basel II” capital accords. The Basel III Capital Rules also implement the requirements of
Section 939A of the Dodd-Frank Act to remove references to credit ratings from the federal banking agencies’
rules. The Basel III Capital Rules became effective for the Company and the Bank on January 1, 2015, subject to
a phase-in period for certain provisions.

The Basel III Capital Rules, among other things, (1) introduce a new capital measure called “Common
Equity Tier 1” (“CET1”), (2) specify that Tier 1 capital consists of CET1 and “Additional Tier 1 capital”
instruments meeting specified requirements, (3) define CET1 narrowly by requiring that most deductions/
adjustments to regulatory capital measures be made to CET1 and not to the other components of capital and
(4) expand the scope of the deductions/adjustments as compared to existing regulations.

The Basel III Capital Rules provide for a number of deductions from and adjustments to CET1. These
include, for example, the requirement that mortgage servicing rights, deferred tax assets arising from temporary
differences that could not be realized through net operating loss carrybacks and significant investments in non-
consolidated financial entities be deducted from CET1 to the extent that any one such category exceeds 10% of
CET1 or all such categories in the aggregate exceed 15% of CET1. Under the capital standards in effect as of
December 31, 2014, the effects of accumulated other comprehensive income items included in capital were
excluded for the purposes of determining regulatory capital ratios. Under the Basel III Capital Rules, the effects
of certain accumulated other comprehensive items are not excluded; however, non-advanced approaches banking
organizations, including the Company and the Bank, may make a one-time permanent election to continue to
exclude these items. The Company and the Bank intend to make this election in order to avoid significant
variations in the level of capital depending upon the impact of interest rate fluctuations on the fair value of the
Company’s available-for-sale securities portfolio. The Basel III Capital Rules also preclude certain hybrid
securities, such as trust preferred securities, as Tier 1 capital of bank holding companies, subject to phase-out.

The Basel III Capital Rules also provide for a “countercyclical capital buffer” that is applicable to only

certain covered institutions and does not have any current applicability to the Company or the Bank.

The aforementioned capital conservation buffer is designed to absorb losses during periods of economic
stress. Banking institutions with a ratio of CET1 to risk-weighted assets above the minimum but below the
conservation buffer (or below the combined capital conservation buffer and countercyclical capital buffer, when
the latter is applied) will face constraints on dividends, equity repurchases and compensation based on the
amount of the shortfall.

Implementation of the deductions and other adjustments to CET1 began on January 1, 2015 and will be
phased-in over a four-year period (beginning at 40% on January 1, 2015 and an additional 20% per year
thereafter). The implementation of the capital conservation buffer will begin on January 1, 2016 at the 0.625%
level and be phased in over a four-year period (increasing by that amount on each subsequent January 1, until it
reaches 2.5% on January 1, 2019).

The initial minimum capital ratios under the Basel III Capital Rules that became effective as of January 1,
2015 are (1) 4.5% CET1 to risk-weighted assets, (2) 6.0% Tier 1 capital to risk-weighted assets, (3) 8.0% Total
capital to risk-weighted assets, and (4) 4.0% Tier 1 capital to average quarterly assets. If applied at December 31,
2014, management estimates that the Company would have exceeded these initial minimum capital ratio
requirements under the Basel III Capital Rules. Although the risk-based capital ratios under the Basel III Capital
Rules are referred to with the same name as those in effect at December 31, 2014, the method of risk weighting
has changed as explained below.

9

When fully phased in on January 1, 2019, the Basel III Capital Rules will require the Company to maintain
(1) a minimum ratio of CET1 to risk-weighted assets of at least 4.5%, plus a 2.5% “capital conservation buffer”
(which is added to the 4.5% CET1 ratio as that buffer is phased in, effectively resulting in a minimum ratio of
CET1 to risk-weighted assets of at least 7.0% upon full implementation), (2) a minimum ratio of Tier 1 capital to
risk-weighted assets of at least 6.0%, plus the capital conservation buffer (which is added to the 6.0% Tier 1
capital ratio as that buffer is phased in, effectively resulting in a minimum Tier 1 capital ratio of 8.5% upon full
implementation), (3) a minimum ratio of Total capital (that is, Tier 1 plus Tier 2) to risk-weighted assets of at
least 8.0%, plus the capital conservation buffer (which is added to the 8.0% total capital ratio as that buffer is
phased in, effectively resulting in a minimum total capital ratio of 10.5% upon full implementation) and (4) a
minimum leverage ratio of 4.0%, calculated as the ratio of Tier 1 capital to average quarterly assets.

With respect to the Bank, the Basel III Capital Rules also revise the “prompt corrective action” regulations

as discussed below under “The Bank—Corrective Measures for Capital Deficiencies.”

The Basel III Capital Rules prescribe a standardized approach for risk weightings that expand the risk-
weighting categories from the previous four Basel I-derived categories (0%, 20%, 50% and 100%) to a much
larger and more risk-sensitive number of categories, depending on the nature of the assets, generally ranging
from 0% for U.S. government and agency securities, to 600% for certain equity exposures, and resulting in
higher risk weights for a variety of asset categories. In addition, the Basel III Capital Rules provide more
advantageous risk weights for derivatives and repurchase-style transactions cleared through a qualifying central
counterparty and increase the scope of eligible guarantors and eligible collateral for purposes of credit risk
mitigation.

The federal banking agencies’ risk-based and leverage capital ratios are minimum supervisory ratios
generally applicable to banking organizations that meet certain specified criteria. Banking organizations not
meeting these criteria are expected to operate with capital positions well above the minimum ratios. The federal
bank regulatory agencies may set capital requirements for a particular banking organization that are higher than
the minimum ratios when circumstances warrant. Federal Reserve Board guidelines also provide that banking
organizations experiencing internal growth or making acquisitions will be expected to maintain strong capital
positions substantially above the minimum supervisory levels, without significant reliance on intangible assets.

Liquidity Requirements. Historically, regulation and monitoring of bank and bank holding company
liquidity has been addressed as a supervisory matter, without required formulaic measures. The Basel III liquidity
framework requires banks and bank holding companies to measure their liquidity against specific liquidity tests
that, although similar in some respects to liquidity measures historically applied by banks and regulators for
management and supervisory purposes, are now required by regulation.

One test, referred to as the liquidity coverage ratio (“LCR”), is designed to ensure that a banking entity
maintains an adequate level of unencumbered high-quality liquid assets equal to the entity’s expected net cash
outflow for a 30-day time horizon (or, if greater, 25% of its expected total cash outflow) under an acute liquidity
stress scenario. The other test, referred to as the net stable funding ratio (“NSFR”), is designed to promote more
medium- and long-term funding of the assets and activities of banking entities over a one-year time horizon.
These requirements will provide banking entities with incentives to increase their holdings of U.S. Treasury
securities and other sovereign debt as a component of assets and increase the use of long-term debt as a funding
source. In September 2014, the federal banking agencies approved final rules implementing (1) the LCR for
advanced approaches banking organizations (i.e., banking organizations with $250 billion or more in total
consolidated assets or $10 billion or more in total on-balance sheet foreign exposure) and (2) a modified version
of the LCR for bank holding companies with at least $50 billion in total consolidated assets that are not advanced
approach banking organizations. Neither rule applies to the Company or the Bank. The federal banking agencies
have not yet proposed rules to implement the NSFR or addressed the scope of banking organizations to which it
will apply. The Basel Committee’s final NSFR document states that the NSFR applies to internationally active
banks, as did its final LCR document with respect to that ratio.

10

Imposition of Liability for Undercapitalized Subsidiaries. Bank regulators are required to take “prompt
corrective action” to resolve problems associated with insured depository institutions whose capital declines
below certain levels. In the event an institution becomes “undercapitalized,” it must submit a capital restoration
plan. The capital restoration plan will not be accepted by the regulators unless each company having control of
the undercapitalized institution guarantees the subsidiary’s compliance with the capital restoration plan up to a
certain specified amount. Any such guarantee from a depository institution’s holding company is entitled to a
priority of payment in bankruptcy.

The aggregate liability of the holding company of an undercapitalized bank is limited to the lesser of 5% of
the institution’s assets at the time it became undercapitalized or the amount necessary to cause the institution to
be “adequately capitalized.” The bank regulators have greater power in situations where an institution becomes
“significantly” or “critically” undercapitalized or fails to submit a capital restoration plan. For example, a bank
holding company controlling such an institution can be required to obtain prior Federal Reserve Board approval
of proposed dividends, or might be required to consent to a consolidation or to divest the troubled institution or
other affiliates.

Acquisitions by Bank Holding Companies. The BHCA requires every bank holding company to obtain the
prior approval of the Federal Reserve Board before it may acquire all or substantially all of the assets of any
bank, or ownership or control of any voting shares of any bank, if after such acquisition it would own or control,
directly or indirectly, more than 5% of the voting shares of such bank. In approving bank acquisitions by bank
holding companies, the Federal Reserve Board is required to consider, among other things, the financial and
managerial resources and future prospects of the bank holding company and the banks concerned,
the
convenience and needs of the communities to be served and various competitive factors.

Control Acquisitions. The Change in Bank Control Act (“CBCA”) prohibits a person or group of persons
from acquiring “control” of a bank holding company unless the Federal Reserve Board has been notified and has
not objected to the transaction. Under a rebuttable presumption established by the Federal Reserve Board, the
acquisition of 10% or more of a class of voting stock of a bank holding company with a class of securities
registered under Section 12 of the Exchange Act, such as the Company, would, under the circumstances set forth
in the presumption, constitute acquisition of control of the Company.

In addition, a person may not acquire 25% (5% in the case of an acquiror that is a bank holding company) or
more of a bank holding company’s or bank’s voting securities, or otherwise obtain control or a controlling
influence over a bank holding company or bank without the approval of the Federal Reserve Board. In 2008, the
Federal Reserve Board issued a policy statement on equity investments in bank holding companies and banks,
which allows the Federal Reserve Board to generally be able to conclude that an entity’s investment is not
“controlling” if the entity does not own in excess of 15% of the voting power and 33% of the total equity of the
bank holding company or bank. Depending on the nature of the overall investment and the capital structure of the
banking organization, the Federal Reserve Board will permit, based on the policy statement, noncontrolling
investments in the form of voting and nonvoting shares that represent in the aggregate (1) less than one-third of
the total equity of the banking organization (and less than one-third of any class of voting securities, assuming
conversion of all convertible nonvoting securities held by the entity) and (2) less than 15% of any class of voting
securities of the banking organization.

The Volcker Rule. The Dodd-Frank Act amends the BHCA to require the federal financial regulatory
agencies to adopt rules that prohibit banks and their affiliates from engaging in proprietary trading and investing
in and sponsoring certain hedge funds and private equity funds. The Volcker Rule became effective on July 21,
2012, and provided for a two-year “conformance period” for financial institutions to conform their proprietary
trading and covered funds activities. However, when the final rules were adopted, the Federal Reserve Board
extended the conformance period one year to July 21, 2015. While the Company is continuing to evaluate the
impact of the Volcker Rule and the final rules adopted thereunder, the Company does not currently anticipate that
the Volcker Rule will have any effect on the operations of the Company.

11

The Bank

The Bank is a Texas-chartered banking association, the deposits of which are insured by the DIF of the
FDIC. The Bank is not a member of the Federal Reserve System; therefore, the Bank is subject to supervision
and regulation by the FDIC and the Texas Department of Banking. Such supervision and regulation subject the
Bank to special restrictions, requirements, potential enforcement actions and periodic examination by the FDIC
and the Texas Department of Banking. Because the Federal Reserve Board regulates the Company, the Federal
Reserve Board also has supervisory authority which affects the Bank. Further, because the Bank had total assets
of over $10 billion as of December 31, 2014, the Bank is subject to supervision and regulation by the Consumer
Financial Protection Bureau (“CFPB”). The CFPB is responsible for implementing, examining and enforcing
compliance with federal consumer protection laws.

Equivalence to National Bank Powers. The Texas Constitution, as amended in 1986, provides that a Texas-
chartered bank has the same rights and privileges that are or may be granted to national banks domiciled in
Texas. To the extent that the Texas laws and regulations may have allowed state-chartered banks to engage in a
broader range of activities than national banks, the Federal Deposit Insurance Corporation Improvement Act
(“FDICIA”) has operated to limit this authority. FDICIA provides that no state bank or subsidiary thereof may
engage as principal in any activity not permitted for national banks, unless the institution complies with
applicable capital requirements and the FDIC determines that the activity poses no significant risk to the DIF. In
general, statutory restrictions on the activities of banks are aimed at protecting the safety and soundness of
depository institutions.

Financial Modernization. Under the Gramm-Leach-Bliley Act, a national bank may establish a financial
subsidiary and engage, subject to limitations on investment, in activities that are financial in nature, other than
insurance underwriting as principal, insurance company portfolio investment, real estate development, real estate
investment, annuity issuance and merchant banking activities. To do so, a bank must be well capitalized, well
managed and have a CRA rating of satisfactory or better. Subsidiary banks of a financial holding company or
national banks with financial subsidiaries must remain well capitalized and well managed in order to continue to
engage in activities that are financial in nature without regulatory actions or restrictions, which could include
divestiture of the financial in nature subsidiary or subsidiaries. In addition, a financial holding company or a bank
may not acquire a company that is engaged in activities that are financial in nature unless each of the subsidiary
banks of the financial holding company or the bank has a CRA rating of satisfactory or better.

Although the powers of state chartered banks are not specifically addressed in the Gramm-Leach-Bliley Act,
Texas-chartered banks such as the Bank, will have the same if not greater powers as national banks through the
parity provision contained in the Texas Constitution.

Branching. Pursuant to the Dodd-Frank Act, banks are permitted to engage in de novo interstate branching
if the laws of the state where the new branch is to be established would permit the establishment of the branch if
it were chartered by such state, subject to applicable regulatory review and approval requirements. The Dodd-
Frank Act also created certain regulatory requirements for interstate mergers and acquisitions, including that the
acquiring bank must be well capitalized and well managed. Texas law provides that a Texas-chartered bank can
establish a branch anywhere in Texas provided that the branch is approved in advance by the Texas Department
of Banking. The branch must also be approved by the FDIC, which considers a number of factors, including
financial history, capital adequacy, earnings prospects, character of management, needs of the community and
consistency with corporate powers.

Restrictions on Transactions with Affiliates and Insiders. Transactions between the Bank and its nonbanking
affiliates, including the Company, are subject to Section 23A of the Federal Reserve Act. In general, Section 23A
imposes limits on the amount of such transactions to 10% of the Bank’s capital stock and surplus and requires
that such transactions be secured by designated amounts of specified collateral. It also limits the amount of

12

advances to third parties which are collateralized by the securities or obligations of the Company or its
subsidiaries. The Dodd-Frank Act significantly expanded the coverage and scope of the limitations on affiliate
transactions within a banking organization.

Affiliate transactions are also subject to Section 23B of the Federal Reserve Act which generally requires
that certain transactions between the Bank and its affiliates be on terms substantially the same, or at least as
favorable to the Bank, as those prevailing at the time for comparable transactions with or involving other
nonaffiliated persons. The Federal Reserve Board has also issued Regulation W which codifies prior regulations
under Sections 23A and 23B of the Federal Reserve Act and interpretive guidance with respect to affiliate
transactions.

The restrictions on loans to directors, executive officers, principal shareholders and their related interests
(collectively referred to herein as “insiders”) contained in the Federal Reserve Act and Regulation O apply to all
insured institutions and their subsidiaries and holding companies. Insiders are subject to enforcement actions for
knowingly accepting loans in violation of applicable restrictions.

law,

Restrictions on Distribution of Subsidiary Bank Dividends and Assets. Dividends paid by the Bank have
provided a substantial part of the Company’s operating funds and for the foreseeable future it is anticipated that
dividends paid by the Bank to the Company will continue to be the Company’s principal source of operating
funds. Capital adequacy requirements serve to limit the amount of dividends that may be paid by the Bank.
the Bank will be
the Bank cannot pay a dividend if, after paying the dividend,
Under federal
“undercapitalized.” The FDIC may declare a dividend payment to be unsafe and unsound even though the Bank
would continue to meet its capital requirements after the dividend. Because the Company is a legal entity
separate and distinct from its subsidiaries, its right to participate in the distribution of assets of any subsidiary
upon the subsidiary’s liquidation or reorganization will be subject to the prior claims of the subsidiary’s
creditors. In the event of a liquidation or other resolution of an insured depository institution, the claims of
depositors and other general or subordinated creditors are entitled to a priority of payment over the claims of
holders of any obligation of the institution to its shareholders, including any depository institution holding
company (such as the Company) or any shareholder or creditor thereof.

Consumer Financial Protection. The Bank is subject to a number of federal and state consumer protection
laws that extensively govern its relationship with its customers. These laws include the Equal Credit Opportunity
Act, the Fair Credit Reporting Act, the Truth in Lending Act, the Truth in Savings Act, the Electronic Fund
Transfer Act, the Expedited Funds Availability Act, the Home Mortgage Disclosure Act, the Fair Housing Act,
the Real Estate Settlement Procedures Act, the Fair Debt Collection Practices Act, the Service Members Civil
Relief Act and these laws’ respective state-law counterparts, as well as state usury laws and laws regarding unfair
and deceptive acts and practices. These and other federal laws, among other things, require disclosures of the cost
of credit and terms of deposit accounts, provide substantive consumer rights, prohibit discrimination in credit
transactions, regulate the use of credit report information, provide financial privacy protections, prohibit unfair,
deceptive and abusive practices, restrict the Bank’s ability to raise interest rates and subject the Bank to
substantial regulatory oversight. Violations of applicable consumer protection laws can result in significant
potential liability from litigation brought by customers, including actual damages, restitution and attorneys’ fees.
Federal bank regulators, state attorneys general and state and local consumer protection agencies may also seek
to enforce consumer protection requirements and obtain these and other remedies, including regulatory sanctions,
customer rescission rights, action by the state and local attorneys general in each jurisdiction in which the Bank
operates and civil money penalties. Failure to comply with consumer protection requirements may also result in
the Bank’s failure to obtain any required bank regulatory approval for merger or acquisition transactions the
Bank may wish to pursue or its prohibition from engaging in such transactions even if approval is not required.

The Dodd-Frank Act established the CFPB, which has supervisory authority over depository institutions
with total assets of $10 billion or greater. The CFPB focuses its supervision and regulatory efforts on (1) risks to
consumers and compliance with the federal consumer financial laws when it evaluates the policies and practices

13

of a financial institution; (2) the markets in which firms operate and risks to consumers posed by activities in
those markets; (3) depository institutions that offer a wide variety of consumer financial products and services;
(4) certain depository institutions with a more specialized focus; and (5) non-depository companies that offer one
or more consumer financial products or services.

The CFPB has broad rulemaking authority for a wide range of consumer financial laws that apply to all
banks, including, among other things, the authority to prohibit “unfair, deceptive or abusive” acts and practices.
Abusive acts or practices are defined as those that materially interfere with a consumer’s ability to understand a
term or condition of a consumer financial product or service or take unreasonable advantage of a consumer’s
(1) lack of financial savvy, (2) inability to protect himself in the selection or use of consumer financial products
or services, or (3) reasonable reliance on a covered entity to act in the consumer’s interests. The CFPB can issue
cease-and-desist orders against banks and other entities that violate consumer financial laws. The CFPB may also
institute a civil action against an entity in violation of federal consumer financial law in order to impose a civil
penalty or injunction. The CFPB has examination and enforcement authority over all banks with more than $10
billion in assets, as well as their affiliates.

Examinations. The FDIC periodically examines and evaluates state non-member banks. The Texas
Department of Banking also conducts examinations of state banks, but may accept the results of a federal
examination in lieu of conducting an independent examination. In addition, the FDIC and Texas Department of
Banking may elect to conduct a joint examination. Further, because the Bank has total assets of over $10 billion
as of December 31, 2014, the CFPB has examination authority with respect to the Bank’s compliance with
federal consumer protection laws. Compliance with consumer protection laws will be considered when banking
regulators are asked to approve a proposed transaction.

Capital Adequacy Requirements. The FDIC has adopted regulations establishing minimum requirements for
the capital adequacy of insured institutions. The FDIC may establish higher minimum requirements if, for
example, a bank has previously received special attention or has a high susceptibility to interest rate risk. The
previous capital adequacy requirements recently changed as a result of the Basel III Capital Rules as described
above in “Basel III Capital Adequacy Requirements Effective as of January 1, 2015.”

The FDIC’s previous risk-based capital guidelines generally required state banks to have a minimum ratio
of Tier 1 capital to total risk-weighted assets of 4.0% and a ratio of total capital to total risk-weighted assets of
8.0%. The capital categories had the same definitions for the Bank as for the Company. As of December 31,
2014, the Bank’s ratio of Tier 1 capital to total risk-weighted assets was 13.46% and its ratio of total capital to
total risk-weighted assets was 14.22%.

The FDIC’s leverage guidelines required state banks to maintain Tier 1 capital of no less than 4.0% of
average total assets, except in the case of certain highly rated banks for which the requirement is 3.0% of average
total assets. The Texas Department of Banking has issued a policy which generally requires state chartered banks
to maintain a leverage ratio (defined in accordance with federal capital guidelines) of 5.0%. As of December 31,
2014, the Bank’s ratio of Tier 1 capital to average total assets (leverage ratio) was 7.50%.

Corrective Measures for Capital Deficiencies. The federal banking regulators are required to take “prompt
corrective action” with respect to capital-deficient institutions. Agency regulations define, for each capital
category, the levels at which institutions are “well-capitalized,” “adequately capitalized,” “under capitalized,”
“significantly under capitalized” and “critically under capitalized.”

• A bank is “well capitalized” if it has a total risk-based capital ratio of 10.0% or higher; a CET1 capital
ratio of 6.5% or higher (not applicable prior to January 1, 2015); a Tier 1 risk-based capital ratio of
8.0% or higher (6.0% prior to January 1, 2015); a leverage ratio of 5.0% or higher; and is not subject to
any written agreement, order or directive requiring it to maintain a specific capital level for any capital
measure.

14

• A bank is “adequately capitalized” if it has a total risk-based capital ratio of 8.0% or higher; a CET1
capital ratio of 4.5% or higher (not applicable prior to January 1, 2015); a Tier 1 risk-based capital ratio
of 6.0% or higher (4.0% prior to January 1, 2015); a leverage ratio of 4.0% or higher; and does not meet
the criteria for a well capitalized bank.

• A bank is “under capitalized” if it has a total risk-based capital ratio of less than 8.0%; a CET1 capital
ratio less than 4.5% (not applicable prior to January 1, 2015); a Tier 1 risk-based capital ratio of less
than 6.0% (4.0% prior to January 1, 2015) or a leverage ratio of less than 4.0%.

• A bank is “significantly under capitalized” if it has a total risk-based capital ratio of less than 6.0%; a
CET1 capital ratio less than 3.0% (not applicable prior to January 1, 2015); a Tier 1 risk-based capital
ratio of less than 4.0% (3.0% prior to January 1, 2015) or a leverage ratio of less than 3.0%.

• A bank is “critically under capitalized” if it has tangible equity equal to or less than 2.0% of average

quarterly tangible assets.

At December 31, 2014, the Bank was classified as “well-capitalized” for purposes of the FDIC’s prompt
corrective action regulations in effect as of such date. Management estimates that, as of December 31, 2014, the
Bank would be classified as “well-capitalized” under the Basel III Capital Rules for purposes of the FDIC’s
prompt corrective action regulations.

In addition to requiring undercapitalized institutions to submit a capital restoration plan, agency regulations
contain broad restrictions on certain activities of undercapitalized institutions including asset growth,
acquisitions, branch establishment and expansion into new lines of business. With certain exceptions, an insured
depository institution is prohibited from making capital distributions, including dividends, and is prohibited from
paying management fees to control persons if the institution would be undercapitalized after any such
distribution or payment.

As an institution’s capital decreases, the FDIC’s enforcement powers become more severe. A significantly
undercapitalized institution is subject to mandated capital raising activities, restrictions on interest rates paid and
transactions with affiliates, removal of management and other restrictions. The FDIC has only very limited
discretion in dealing with a critically undercapitalized institution and is virtually required to appoint a receiver or
conservator.

Banks with risk-based capital and leverage ratios below the required minimums may also be subject to
certain administrative actions, including the termination of deposit insurance upon notice and hearing, or a
temporary suspension of insurance without a hearing in the event the institution has no tangible capital.

Deposit Insurance Assessments. Substantially all of the deposits of the Bank are insured up to applicable
limits (currently $250,000) by the DIF, and the Bank must pay deposit insurance assessments to the FDIC for
such deposit insurance protection. The FDIC maintains the DIF by designating a required reserve ratio. If the
reserve ratio falls below the designated level, the FDIC must adopt a restoration plan that provides that the DIF
will return to an acceptable level generally within five years. The designated reserve ratio is currently set at
2.00%. The FDIC has the discretion to price deposit insurance according to the risk for all insured institutions
regardless of the level of the reserve ratio.

The DIF reserve ratio is maintained by assessing depository institutions an insurance premium based upon
certain statutory factors. Under its current regulations, the FDIC imposes assessments for deposit insurance
according to a depository institution’s ranking in one of four risk categories based upon supervisory and capital
evaluations. The assessment rate for an individual institution is determined according to a formula based on a
combination of weighted average CAMELS component ratings, financial ratios and, for institutions that have
long-term debt ratings, the average ratings of its long-term debt. On February 7, 2011, the FDIC approved a final
rule that amended the then-existing DIF restoration plan and implemented certain provisions of the Dodd-Frank

15

Act. As of April 1, 2011, the assessment base is determined using average consolidated total assets minus
average tangible equity rather than the prior assessment base of adjusted domestic deposits. Since the change
resulted in a much larger assessment base, the final rule also lowered the assessment rates in order to keep the
total amount collected from financial institutions relatively unchanged from the amounts previously collected.

For large institutions (generally those with total assets of $10 billion or more), such as the Bank, the initial
base assessment rate ranges from 5 to 35 basis points on an annualized basis. After the effect of potential base-
rate adjustments, the total base assessment rate could range from 2.5 to 45 basis points on an annualized basis.
Assessment rates for large institutions are calculated using a scorecard that combines CAMELS ratings and
certain forward-looking financial measures to assess the risk a large institution poses to the DIF.

Interchange Fees. Under the Durbin Amendment to the Dodd-Frank Act, the Federal Reserve Board
adopted rules establishing standards for assessing whether the interchange fees that may be charged with respect
to certain electronic debit transactions are “reasonable and proportional” to the costs incurred by issuers for
processing such transactions. Interchange fees, or “swipe” fees, are charges that merchants pay to the Bank and
other card-issuing banks for processing electronic payment transactions. Federal Reserve Board rules applicable
to financial institutions that have assets of $10 billion or more provide that the maximum permissible interchange
fee for an electronic debit transaction is the sum of 21 cents per transaction and 5 basis points multiplied by the
value of the transaction. An upward adjustment of no more than 1 cent to an issuer’s debit card interchange fee is
allowed if the card issuer develops and implements policies and procedures reasonably designed to achieve
certain fraud-prevention standards. The Federal Reserve Board also has rules governing routing and exclusivity
that require issuers to offer two unaffiliated networks for routing transactions on each debit or prepaid product.

Concentrated Commercial Real Estate Lending Regulations. The federal banking agencies, including the
FDIC, have promulgated guidance governing financial institutions with concentrations in commercial real estate
lending. The guidance provides that a bank has a concentration in commercial real estate lending if (1) total
reported loans for construction, land development and other land represent 100% or more of total capital or
(2) total reported loans secured by multifamily and non-farm residential properties and loans for construction,
land development and other land represent 300% or more of total capital and the bank’s commercial real estate
loan portfolio has increased 50% or more during the prior 36 months. Owner occupied loans are excluded from
this second category. If a concentration is present, management must employ heightened risk management
practices that address the following key elements: including board and management oversight and strategic
planning, portfolio management, development of underwriting standards, risk assessment and monitoring through
market analysis and stress testing, and maintenance of increased capital levels as needed to support the level of
commercial real estate lending.

Community Reinvestment Act. The Community Reinvestment Act of 1977 (“CRA”) and the regulations
issued thereunder are intended to encourage banks to help meet the credit needs of their service area, including
low and moderate income neighborhoods, consistent with the safe and sound operations of the banks. These
regulations also provide for regulatory assessment of a bank’s record in meeting the needs of its service area
when considering applications to establish branches, merger applications and applications to acquire the assets
and assume the liabilities of another bank. The Financial Institutions Reform, Recovery, and Enforcement Act
(“FIRREA”) requires federal banking agencies to make public a rating of a bank’s performance under the CRA.
In the case of a bank holding company, the CRA performance record of the banks involved in the transaction are
reviewed in connection with the filing of an application to acquire ownership or control of shares or assets of a
bank or to merge with any other bank holding company. An unsatisfactory record can substantially delay or
block the transaction.

Anti-Money Laundering and Anti-Terrorism Legislation. A major focus of governmental policy on financial
institutions in recent years has been aimed at combating money laundering and terrorist financing. The USA
PATRIOT Act of 2001 (the “USA Patriot Act”) substantially broadened the scope of United States anti-money
laundering laws and regulations by imposing significant new compliance and due diligence obligations, creating

16

new crimes and penalties and expanding the extra-territorial jurisdiction of the United States. The United States
Treasury Department has issued and, in some cases, proposed a number of regulations that apply various
requirements of the USA Patriot Act to financial institutions. These regulations impose obligations on financial
institutions to maintain appropriate policies, procedures and controls to detect, prevent and report money
laundering and terrorist financing and to verify the identity of their customers. Certain of those regulations
impose specific due diligence requirements on financial institutions that maintain correspondent or private
banking relationships with non-U.S. financial institutions or persons. Failure of a financial institution to maintain
and implement adequate programs to combat money laundering and terrorist financing, or to comply with all of
the relevant laws or regulations, could have serious legal and reputational consequences for the institution.

Office of Foreign Assets Control Regulation. The United States has imposed economic sanctions that affect
transactions with designated foreign countries, nationals and others. These are typically known as the “OFAC”
rules based on their administration by the U.S. Treasury Department Office of Foreign Assets Control (“OFAC”).
The OFAC-administered sanctions targeting countries take many different forms. Generally, however, they
contain one or more of the following elements: (1) restrictions on trade with or investment in a sanctioned
country, including prohibitions against direct or indirect imports from and exports to a sanctioned country and
prohibitions on “U.S. persons” engaging in financial transactions relating to making investments in, or providing
investment-related advice or assistance to, a sanctioned country; and (2) a blocking of assets in which the
government or specially designated nationals of the sanctioned country have an interest, by prohibiting transfers
of property subject to U.S. jurisdiction (including property in the possession or control of U.S. persons). Blocked
assets (e.g., property and bank deposits) cannot be paid out, withdrawn, set off or transferred in any manner
without a license from OFAC. Failure to comply with these sanctions could have serious legal and reputational
consequences.

Privacy. In addition to expanding the activities in which banks and bank holding companies may engage,
the Gramm-Leach-Bliley Act also imposed new requirements on financial institutions with respect to customer
privacy. The Gramm-Leach-Bliley Act generally prohibits disclosure of customer information to non-affiliated
third parties unless the customer has been given the opportunity to object and has not objected to such disclosure.
Financial institutions are further required to disclose their privacy policies to customers annually. Financial
institutions, however, will be required to comply with state law if it is more protective of customer privacy than
the Gramm-Leach-Bliley Act.

Incentive Compensation. In June 2010, the Federal Reserve Board, OCC and FDIC issued comprehensive
final guidance on incentive compensation policies intended to ensure that the incentive compensation policies of
banking organizations do not undermine the safety and soundness of such organizations by encouraging
excessive risk-taking. The guidance, which covers all employees that have the ability to materially affect the risk
profile of an organization, either individually or as part of a group, is based upon the key principles that a
banking organization’s incentive compensation arrangements should (1) provide incentives that do not encourage
risk-taking beyond the organization’s ability to effectively identify and manage risks, (2) be compatible with
effective internal controls and risk management, and (3) be supported by strong corporate governance, including
active and effective oversight by the organization’s board of directors. These three principles are incorporated
into proposed joint compensation regulations proposed by the federal banking agencies under the Dodd-Frank
Act. The regulations have not been finalized, but as proposed, would impose limitations on the manner in which
the Company may structure compensation for its executives.

The Federal Reserve Board will review, as part of the regular, risk-focused examination process, the
incentive compensation arrangements of banking organizations, such as the Company, that are not “large,
complex banking organizations.” These reviews will be tailored to each organization based on the scope and
complexity of the organization’s activities and the prevalence of incentive compensation arrangements. The
findings of the supervisory initiatives will be included in reports of examination. Deficiencies will be
incorporated into the organization’s supervisory ratings, which can affect the organization’s ability to make
acquisitions and take other actions. Enforcement actions may be taken against a banking organization if its

17

incentive compensation arrangements, or related risk-management control or governance processes, pose a risk
to the organization’s safety and soundness and the organization is not taking prompt and effective measures to
correct the deficiencies.

Legislative and Regulatory Initiatives

From time to time, various legislative and regulatory initiatives are introduced in Congress and state
legislatures, as well as by regulatory agencies. Such initiatives may include proposals to expand or contract the
powers of bank holding companies and depository institutions or proposals to substantially change the financial
institution regulatory system. Such legislation could change banking statutes and the operating environment of
the Company in substantial and unpredictable ways. If enacted, such legislation could increase or decrease the
cost of doing business, limit or expand permissible activities or affect the competitive balance among banks,
savings associations, credit unions, and other financial institutions. The Company cannot predict whether any
such legislation will be enacted, and, if enacted, the effect that it, or any implementing regulations, would have
on the financial condition or results of operations of the Company. A change in statutes, regulations or regulatory
policies applicable to the Company or the Bank could have a material effect on the Company’s business,
financial condition and results of operations.

Effect on Economic Environment

The policies of regulatory authorities, including the monetary policy of the Federal Reserve Board, have a
significant effect on the operating results of bank holding companies and their subsidiaries. Among the means
available to the Federal Reserve Board to affect
the money supply are open market operations in U.S.
government securities, changes in the discount rate on member bank borrowings, and changes in reserve
requirements against member bank deposits. These means are used in varying combinations to influence overall
growth and distribution of bank loans, investments and deposits, and their use may affect interest rates charged
on loans or paid for deposits.

Federal Reserve Board monetary policies have materially affected the operating results of commercial banks
in the past and are expected to continue to do so in the future. The nature of future monetary policies and the
effect of such policies on the business and earnings of the Company and its subsidiaries cannot be predicted.

ITEM 1A. RISK FACTORS

An investment in the Company’s common stock involves risks. The following is a description of the
material risks and uncertainties that the Company believes affect its business and an investment in the common
stock. Additional risks and uncertainties that the Company is unaware of, or that it currently deems immaterial,
also may become important factors that affect the Company and its business. If any of the risks described in this
Annual Report on Form 10-K were to occur, the Company’s financial condition, results of operations and cash
flows could be materially and adversely affected. If this were to happen, the value of the common stock could
decline significantly and you could lose all or part of your investment.

Risks Associated with the Company’s Business

If the Company is not able to continue its historical levels of growth, it may not be able to maintain its
historical earnings trends.

To achieve its past levels of growth, the Company has focused on both internal growth and acquisitions. The
Company may not be able to sustain its historical rate of growth or may not be able to grow at all. More
specifically, the Company may not be able to obtain the financing necessary to fund additional growth and may
not be able to find suitable acquisition candidates. Various factors, such as economic conditions and competition,
may impede or prohibit the opening of new banking centers and the completion of acquisitions. Further, the

18

Company may be unable to attract and retain experienced bankers, which could adversely affect its internal
growth. If the Company is not able to continue its historical levels of growth, it may not be able to maintain its
historical earnings trends.

If the Company is unable to manage its growth effectively, its operations could be negatively affected.

Companies that experience rapid growth face various risks and difficulties, including:

•

•

•

finding suitable markets for expansion;

finding suitable candidates for acquisition;

attracting funding to support additional growth;

• maintaining asset quality;

•

attracting and retaining qualified management; and

• maintaining adequate regulatory capital.

In addition, in order to manage its growth and maintain adequate information and reporting systems within
its organization, the Company must identify, hire and retain additional qualified associates, particularly in the
accounting and operational areas of its business.

If the Company does not manage its growth effectively,

its business, financial condition, results of
operations and future prospects could be negatively affected, and the Company may not be able to continue to
implement its business strategy and successfully conduct its operations.

The Company’s profitability depends significantly on local economic conditions.

The Company’s success depends primarily on the general economic conditions of the primary markets in
Texas and Oklahoma in which it operates and where its loans are concentrated. The local economic conditions in
Texas and Oklahoma have a significant impact on the Company’s commercial, real estate and construction, land
development and other land loans, the ability of its borrowers to repay their loans and the value of the collateral
securing these loans. Accordingly, if the population or income growth in the Company’s market areas is slower
than projected, income levels, deposits and housing starts could be adversely affected and could result in a
reduction of the Company’s expansion, growth and profitability. While Texas and Oklahoma fared well through
the Great Recession, if prolonged, the recent decline in oil prices may negatively impact economic conditions in
these areas. If the Company’s market areas experience a downturn or a recession for a prolonged period of time,
the Company could experience significant increases in nonperforming loans, which could lead to operating
losses, impaired liquidity and eroding capital. A significant decline in general economic conditions, caused by
inflation, recession, acts of terrorism, outbreaks of hostilities or other international or domestic calamities,
unemployment or other factors could impact these local economic conditions and could negatively affect the
Company’s financial condition, results of operations and cash flows.

The Company’s business is subject to interest rate risk and fluctuations in interest rates may adversely affect
its financial condition and results of operations.

The majority of the Company’s assets are monetary in nature and, as a result, the Company is subject to
significant risk from changes in interest rates. Changes in interest rates can impact the Company’s net interest
income as well as the valuation of its assets and liabilities. The Company’s earnings are significantly dependent
on its net interest income. Net interest income is the difference between the interest income earned on loans,
investments and other interest-earning assets and the interest expense paid on deposits, borrowings and other
interest-bearing liabilities.

19

Changes in monetary policy, including changes in interest rates, could influence the interest the Company
receives on loans and securities and the amount of interest it pays on deposits and borrowings, and could also
affect (1) the Company’s ability to originate loans and obtain deposits, (2) the fair value of the Company’s
financial assets and liabilities and (3) the average duration of the Company’s mortgage-backed securities
portfolio. If the interest rates paid on deposits and other borrowings increase at a faster rate than the interest rates
received on loans and other investments, the Company’s net interest income, and therefore earnings, could be
adversely affected. Earnings could also be adversely affected if the interest rates received on loans and other
investments decrease more quickly than the interest rates paid on deposits and other borrowings. Further, the
Company’s assets and liabilities may react differently to changes in overall market rates or conditions because
there may be mismatches between the repricing or maturity characteristics of the assets and liabilities. Any
substantial, unexpected, prolonged change in market interest rates could have a material adverse effect on the
Company’s business, financial condition and results of operations.

If the Company is unable to identify and acquire other financial institutions and successfully integrate its
acquired businesses, its business and earnings may be negatively affected.

The market for acquisitions remains highly competitive, and the Company may be unable to find acquisition
candidates in the future that fit its acquisition and growth strategy. To the extent that the Company is unable to
find suitable acquisition candidates, an important component of its growth strategy may be lost.

Acquisitions of financial institutions involve operational risks and uncertainties and acquired companies
may have unforeseen liabilities, exposure to asset quality problems, key employee and customer retention
problems and other problems that could negatively affect the Company’s organization. The Company may not be
able to complete future acquisitions and, if completed, the Company may not be able to successfully integrate the
operations, management, products and services of the entities that it acquires and eliminate redundancies. The
integration process could result in the loss of key employees or disruption of the combined entity’s ongoing
business or inconsistencies in standards, controls, procedures and policies that adversely affect the Company’s
ability to maintain relationships with customers and employees or achieve the anticipated benefits of the
time and attention from the Company’s
transaction. The integration process may also require significant
management that they would otherwise direct at servicing existing business and developing new business. The
Company’s inability to find suitable acquisition candidates and failure to successfully integrate the entities it
acquires into its existing operations may increase its operating costs significantly and adversely affect its
business and earnings.

The Company’s dependence on loans secured by real estate subjects it to risks relating to fluctuations in the
real estate market that could adversely affect its financial condition, results of operations and cash flows.

real estate (including home equity) and 11.1% in construction,

Approximately 75.1% of the Company’s total loans as of December 31, 2014 consisted of loans included in
the real estate loan portfolio, with 36.7% in commercial real estate (including farmland and multifamily
residential), 27.3% in residential
land
development and other land loans. The real estate collateral in each case provides an alternate source of
repayment in the event of default by the borrower and may deteriorate in value during the time the credit is
extended. A weakening of the real estate market in the Company’s primary market areas could have an adverse
effect on the demand for new loans, the ability of borrowers to repay outstanding loans, the value of real estate
and other collateral securing the loans and the value of real estate owned by the Company. If real estate values
decline, it is also more likely that the Company would be required to increase its allowance for credit losses,
which could adversely affect its financial condition, results of operations and cash flows.

20

The Company’s commercial real estate and commercial loans expose it to increased credit risks, and these
risks will increase if the Company succeeds in increasing these types of loans.

The Company, while maintaining its conservative approach to lending, has emphasized both new and
existing loan products, focusing on managing its commercial real estate (including farmland and multifamily
residential) and commercial loan portfolios, and intends to continue to increase its lending activities and acquire
loans in possible future acquisitions. As a result, commercial real estate and commercial loans as a proportion of
its portfolio could increase. As of December 31, 2014, commercial real estate (including farmland and
multifamily residential) and commercial loans totaled $5.20 billion. In general, commercial real estate loans and
commercial loans yield higher returns and often generate a deposit relationship, but also pose greater credit risks
than do owner-occupied residential real estate loans. These types of loans are also typically larger than residential
real estate loans. Accordingly, the deterioration of one or several of these loans could cause a significant increase
in nonperforming loans, which could result in a loss of earnings from these loans and an increase in the provision
for credit losses and net charge-offs.

The Company makes both secured and some unsecured commercial loans. Unsecured loans generally
involve a higher degree of risk of loss than do secured loans because, without collateral, repayment is wholly
dependent upon the success of the borrowers’ businesses. Secured commercial loans are generally collateralized
by accounts receivable, inventory, equipment or other assets owned by the borrower and include a personal
guaranty of the business owner. Compared to real estate, that type of collateral is more difficult to monitor, its
value is harder to ascertain, it may depreciate more rapidly and it may not be as readily saleable if repossessed.
Further, commercial loans generally will be serviced primarily from the operation of the business, which may not
be successful, while commercial real estate loans generally will be serviced from income on the properties
securing the loans. As the Company’s various commercial loan portfolios increase, the corresponding risks and
potential for losses from these loans will also increase.

The Company’s allowance for credit losses may not be sufficient to cover actual credit losses, which could
adversely affect its earnings.

As a lender, the Company is exposed to the risk that its loan customers may not repay their loans according
to the terms of these loans and the collateral securing the payment of these loans may be insufficient to fully
compensate the Company for the outstanding balance of the loan plus the costs to dispose of the collateral. The
Company maintains an allowance for credit losses in an attempt to cover estimated losses inherent in its loan
portfolio. Additional credit losses will likely occur in the future and may occur at a rate greater than the
Company has experienced to date. The determination of the appropriate level of the allowance inherently
involves a high degree of subjectivity and requires the Company to make significant estimates of current credit
risks, future trends and general economic conditions, all of which may undergo material changes. If the
Company’s assumptions prove to be incorrect or if it experiences significant credit losses in future periods, its
current allowance may not be sufficient to cover actual credit losses and adjustments may be necessary to allow
for different economic conditions or adverse developments in its loan portfolio. A material addition to the
allowance could cause net income, and possibly capital, to decrease.

In addition, federal and state regulators periodically review the Company’s allowance for credit losses and
may require the Company to increase its provision for credit losses or recognize further charge-offs, based on
judgments different than those of the Company’s management. An increase in the Company’s allowance for
credit losses or charge-offs as required by these regulatory agencies could have a material adverse effect on the
Company’s operating results and financial condition.

The small to medium-sized businesses that the Company lends to may have fewer resources to weather a
downturn in the economy, which could materially harm the Company’s operating results.

The Company makes loans to privately-owned businesses, many of which are considered to be small to
medium-sized businesses. Small to medium-sized businesses frequently have smaller market share than their

21

competition, may be more vulnerable to economic downturns, often need substantial additional capital to expand
or compete and may experience significant volatility in operating results. Any one or more of these factors may
impair the borrower’s ability to repay a loan. In addition, the success of a small to medium-sized business often
depends on the management talents and efforts of one or two persons or a small group of persons, and the death,
disability or resignation of one or more of these persons could have a material adverse impact on the business
and its ability to repay a loan. Economic downturns and other events that negatively impact the Company’s
market areas could cause the Company to incur substantial credit losses that could negatively affect the
Company’s results of operations and financial condition.

Liquidity risk could impair the Company’s ability to fund operations and jeopardize its financial condition.

Liquidity is essential to the Company’s business. An inability to raise funds through deposits, borrowings,
the sale of loans and other sources could have a substantial negative effect on its liquidity. The Company’s
access to funding sources in amounts adequate to finance its activities or on terms which are acceptable to it
could be impaired by factors that affect the Company specifically or the financial services industry or economy
in general. Factors that could detrimentally impact the Company’s access to liquidity sources include a decrease
in the level of its business activity as a result of a downturn in the markets in which its loans are concentrated or
adverse regulatory action against it. The Company’s ability to borrow could also be impaired by factors that are
not specific to it, such as a disruption in the financial markets or negative views and expectations about the
prospects for the financial services industry in light of the recent turmoil faced by banking organizations and the
continued deterioration in credit markets.

If the goodwill that the Company recorded in connection with a business acquisition becomes impaired, it
could require charges to earnings.

Goodwill represents the amount by which the acquisition cost exceeds the fair value of net assets the
Company acquired in the purchase of another financial
institution. The Company reviews goodwill for
impairment at least annually, or more frequently if events or changes in circumstances indicate the carrying value
of the asset might be impaired.

The Company determines impairment by comparing the implied fair value of the reporting unit goodwill
with the carrying amount of that goodwill. If the carrying amount of the reporting unit goodwill exceeds the
implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. Any such
adjustments are reflected in the Company’s results of operations in the periods in which they become known. At
December 31, 2014, the Company’s goodwill totaled $1.87 billion. While the Company has not recorded any
such impairment charges since it initially recorded the goodwill, there can be no assurance that the Company’s
future evaluations of goodwill will not result in findings of impairment and related write-downs, which may have
a material adverse effect on its financial condition and results of operations.

The Company’s accounting estimates and risk management processes rely on analytical and forecasting
models and tools.

The processes the Company uses to estimate its probable credit losses and to measure the fair value of
financial instruments, as well as the processes used to estimate the effects of changing interest rates and other
market measures on the Company’s financial condition and results of operations, depends upon the use of
analytical and forecasting models and tools. These models and tools reflect assumptions that may not be accurate,
particularly in times of market stress or other unforeseen circumstances. Even if these assumptions are accurate,
the models and tools may prove to be inadequate or inaccurate because of other flaws in their design or their
implementation. Any such failure in the Company’s analytical or forecasting models and tools could have a
material adverse effect on the Company’s business, financial condition and results of operations.

22

The Company may be adversely affected by the soundness of other financial institutions.

Financial services institutions are interrelated as a result of trading, clearing, counterparty or other
relationships. The Company has exposure to many different industries and counterparties, and routinely executes
transactions with counterparties in the financial services industry, including commercial banks, brokers and
dealers, investment banks and other institutional clients. Many of these transactions expose the Company to
credit risk in the event of a default by a counterparty or client. In addition, the Company’s credit risk may be
exacerbated when the collateral held by the Company cannot be realized upon or is liquidated at prices not
sufficient to recover the full amount of the credit or derivative exposure due to the Company. Any such losses
could have a material adverse effect on the Company’s financial condition, results of operations and cash flows.

The Company may need to raise additional capital in the future and such capital may not be available when
needed or at all.

The Company may need to raise additional capital in the future to provide it with sufficient capital resources
and liquidity to meet regulatory capital requirements or its commitments and business needs. In addition, the
Company may elect to raise additional capital to support its business or to finance acquisitions, if any. The
Company’s ability to raise additional capital, if needed, will depend on, among other things, conditions in the
capital markets at that time, which are outside of its control, and its financial performance.

The Company cannot assure you that such capital will be available to it on acceptable terms or at all. Any
occurrence that may limit its access to the capital markets, such as a decline in the confidence of investors,
depositors of Prosperity Bank or counterparties participating in the capital markets, may adversely affect the
Company’s capital costs and its ability to raise capital and, in turn, its liquidity. Moreover, if the Company needs
to raise capital in the future, it may have to do so when many other financial institutions are also seeking to raise
capital and would have to compete with those institutions for investors. An inability to raise additional capital on
acceptable terms when needed could have a material adverse effect on the Company’s business, financial
condition and results of operations.

New lines of business or new products and services may subject the Company to additional risks.

From time to time, the Company may implement or may acquire new lines of business or offer new products
and services within existing lines of business. There are substantial risks and uncertainties associated with these
efforts, particularly in instances where the markets are not fully developed. In developing and marketing new
lines of business and/or new products and services, the Company may invest significant time and resources.
Initial timetables for the introduction and development of new lines of business and/or new products or services
may not be achieved and price and profitability targets may not prove feasible. External factors, such as
compliance with regulations, competitive alternatives and shifting market preferences, may also impact the
successful implementation of a new line of business or a new product or service. Furthermore, any new line of
business and/or new product or service could have a significant impact on the effectiveness of the Company’s
system of internal controls. Failure to successfully manage these risks in the development and implementation of
new lines of business or new products or services could have a material adverse effect on the Company’s
business, financial condition and results of operations.

An interruption in or breach in security of the Company’s information systems may result in a loss of
customer business and have an adverse effect on the Company’s results of operations, financial condition and
cash flows.

The Company relies heavily on communications and information systems to conduct its business. Any
failure, interruption or breach in security of these systems, whether caused by physical damage, hackers, viruses
or other malware, could jeopardize the security of information stored in and transmitted through the Company’s
computer systems and network infrastructure as well as result in failures or disruptions in the Company’s

23

customer relationship management, general ledger, deposits, servicing or loan origination systems. While the
Company maintains specific “cyber” insurance coverage, which would apply in the event of various breach
scenarios, the amount of coverage may not be adequate in any particular case. In addition, cyber threat scenarios
are inherently difficult to predict and can take many forms, some of which may not be covered under the
Company’s cyber insurance coverage. Although the Company, with the help of third-party service providers, has
and intends to continue to implement security technology and operational procedures to prevent such damage,
there can be no assurance that these security measures will entirely mitigate these risks. In addition, advances in
computer capabilities, new discoveries in the field of cryptography or other developments could result in a
compromise or breach of the algorithms the Company and its third- party service providers use to protect client
transaction data. The occurrence of any such failures, interruptions or security breaches could damage the
Company’s reputation, result in a loss of customer business, subject the Company to additional regulatory
scrutiny or expose the Company to civil litigation and possible financial liability, any of which could have a
material adverse effect on the Company’s results of operations, financial condition and cash flows.

The Company is subject to certain risks in connection with its use of technology.

The financial services industry is undergoing rapid technological changes with frequent introductions of
new technology-driven products and services. The Company’s future success depends in part upon its ability to
address the needs of its customers by using technology to provide products and services that will satisfy customer
demands for convenience as well as create additional efficiencies in its operations. Many of the Company’s
competitors have substantially greater resources to invest in technological improvements. The Company may not
be able to effectively implement new technology-driven products and services or be successful in marketing
these products and services to its customers, which may negatively affect the Company’s results of operations,
financial condition and cash flows. Further, as technology advances, the ability to initiate transactions and access
data has become more widely distributed among mobile devices, personal computers, automated teller machines,
remote deposit capture sites and similar access points. These technological advances increase cybersecurity risk.
While the Company maintains programs intended to prevent or limit the effects of cybersecurity risk, there is no
assurance that unauthorized transactions or unauthorized access to customer information will not occur. The
financial, reputational and regulatory impact of unauthorized transactions or unauthorized access to customer
information could be significant.

The Company’s operations rely on external vendors.

The Company relies on certain external vendors to provide products and services necessary to maintain day-
to-day operations of the Company. These third parties provide key components of the Company’s business
operations such as data processing, recording and monitoring transactions, online banking interfaces and
services, Internet connections and network access. While the Company has selected these third-party vendors
carefully, it does not control their actions. Any complications caused by these third parties, including those
resulting from disruptions in communication services provided by a vendor, failure of a vendor to handle current
or higher volumes, cyber-attacks and security breaches at a vendor, failure of a vendor to provide services for any
reason or poor performance of services, could adversely affect the Company’s ability to deliver products and
services to its customers and otherwise conduct its business. Financial or operational difficulties of a third-party
vendor could also hurt the Company’s operations if those difficulties interfere with the vendor’s ability to
provide services. Furthermore, the Company’s vendors could also be sources of operational and information
security risk, including from breakdowns or failures of their own systems or capacity constraints. Replacing these
third-party vendors could also create significant delay and expense. Problems caused by external vendors could
be disruptive to the Company’s operations, which could have a material adverse impact on the Company’s
business and, in turn, the Company’s financial condition and results of operations.

24

The Company’s business may be adversely affected by security breaches at third parties.

The Company’s customers interact with their own and other third party systems, which pose operational
risks to the Company. The Company may be adversely affected by data breaches at retailers and other third
parties who maintain data relating to the Company’s customers that involve the theft of customer data, including
the theft of customers’ debit card, credit card, wire transfer and other identifying and/or access information used
to make purchases or payments at such retailers and to other third parties. Despite third-party security risks that
are beyond the Company’s control, the Company offers its customers protection against fraud and attendant
losses for unauthorized use of debit and credit cards in order to stay competitive in the marketplace. Offering
such protection to customers exposes the Company to significant expenses and potential losses related to
reimbursing the Company’s customers for fraud losses, reissuing the compromised cards and increased
monitoring for suspicious activity. In the event of a data breach at one or more retailers of considerable
magnitude, the Company’s business, financial condition and results of operations may be adversely affected.

The Company is subject to claims and litigation pertaining to intellectual property.

Banking and other financial services companies, such as the Company, rely on technology companies to
provide information technology products and services necessary to support
the Company’s day-to-day
operations. Technology companies frequently enter into litigation based on allegations of patent infringement or
other violations of intellectual property rights. In addition, patent holding companies seek to monetize patents
they have purchased or otherwise obtained. Competitors of the Company’s vendors, or other individuals or
companies, have from time to time claimed to hold intellectual property sold to the Company by its vendors.
Such claims may increase in the future as the financial services sector becomes more reliant on information
technology vendors. The plaintiffs in these actions frequently seek injunctions and substantial damages.

Regardless of the scope or validity of such patents or other intellectual property rights, or the merits of any
claims by potential or actual litigants, the Company may have to engage in protracted litigation. Such litigation is
often expensive, time-consuming, disruptive to the Company’s operations and distracting to management. If the
Company is found to infringe one or more patents or other intellectual property rights, it may be required to pay
substantial damages or royalties to a third-party. In certain cases, the Company may consider entering into
licensing agreements for disputed intellectual property, although no assurance can be given that such licenses can
be obtained on acceptable terms or that litigation will not occur. These licenses may also significantly increase
the Company’s operating expenses. If legal matters related to intellectual property claims were resolved against
the Company or settled, the Company could be required to make payments in amounts that could have a material
adverse effect on its business, financial condition and results of operations.

The Company is subject to claims and litigation pertaining to fiduciary responsibility.

From time to time, customers make claims and take legal action pertaining to the Company’s performance
of its fiduciary responsibilities. Whether customer claims and legal action related to the Company’s performance
of its fiduciary responsibilities are founded or unfounded, if such claims and legal actions are not resolved in a
manner favorable to the Company, they may result in significant financial liability, adversely affect the market
perception of the Company and its products and services and/or impact customer demand for those products and
services. Any financial liability or reputation damage could have a material adverse effect on the Company’s
business, financial condition and results of operations.

The Company operates in a highly regulated environment and, as a result, is subject to extensive regulation
and supervision.

The Company and the Bank are subject to extensive federal and state regulation and supervision. Banking
regulations are primarily intended to protect depositors’ funds, federal deposit insurance funds and the banking
system as a whole, not the Company’s shareholders. These regulations affect the Company’s lending practices,

25

capital structure, investment practices, dividend policy and growth, among other things. Congress and federal
regulatory agencies continually review banking laws, regulations and policies for possible changes. Any change
in applicable regulations or federal or state legislation could have a substantial impact on the Company, the Bank
and their respective operations.

The Dodd-Frank Act, enacted in July 2010, instituted major changes to the banking and financial institutions
regulatory regimes in light of the performance of and government intervention in the financial services sector
during the several years prior to the implementation of such Act. Additional legislation and regulations or
regulatory policies, including changes in interpretation or implementation of statutes, regulations or policies,
could significantly affect
the Company’s powers, authority and operations, or the powers, authority and
operations of the Bank in substantial and unpredictable ways. Further, regulators have significant discretion and
power to prevent or remedy unsafe or unsound practices or violations of laws by banks and bank holding
companies in the performance of their supervisory and enforcement duties. The exercise of this regulatory
discretion and power could have a negative impact on the Company. Failure to comply with laws, regulations or
policies could result in sanctions by regulatory agencies, civil money penalties and/or reputation damage, which
could have a material adverse effect on the Company’s business, financial condition and results of operations.

The Company’s risk management framework may not be effective in identifying, managing or mitigating risks
and/or losses to it.

The Company has implemented a risk management framework to identify and manage its risk exposure.
This framework is comprised of various processes, systems and strategies, and is designed to manage the types of
risk to which the Company is subject, including, among others, credit, market, liquidity, operational, financial,
interest rate, legal and regulatory, compliance, strategic, reputation, fiduciary and general economic risks. The
Company’s framework also includes financial or other modeling methodologies, which involves management
assumptions and judgment. In addition, under this framework, the Company has developed a risk appetite
statement to detail its risk tolerance levels at an enterprise-wide level. There is no assurance that this risk
management framework will be effective under all circumstances or that it will adequately identify, manage or
mitigate any risk or loss to the Company. If this framework is not effective, the Company may be subject to
potentially adverse regulatory consequences and could suffer unexpected losses and its financial condition or
results of operations could be materially adversely affected.

The Company is subject to losses resulting from fraudulent and negligent acts on the part of loan applicants,
correspondents or other third parties.

The Company relies heavily upon information supplied by third parties, including the information contained
in credit applications, property appraisals, title information, equipment pricing and valuation and employment
and income documentation, in deciding which loans the Company will originate, as well as the terms of those
loans. If any of the information upon which the Company relies is misrepresented, either fraudulently or
inadvertently, and the misrepresentation is not detected prior to asset funding, the value of the asset may be
significantly lower than expected, or the Company may fund a loan that it would not have funded or on terms it
would not have extended. Whether a misrepresentation is made by the applicant or another third party, the
Company generally bears the risk of loss associated with the misrepresentation. A loan subject to a material
misrepresentation is typically unsellable or subject
is sold prior to detection of the
misrepresentation. The sources of the misrepresentations are often difficult to locate, and it is often difficult to
recover any of the monetary losses the Company may suffer.

to repurchase if it

The Company is subject to environmental liability risk associated with lending activities.

A significant portion of the Company’s loan portfolio is secured by real property. During the ordinary
course of business, the Company may foreclose on and take title to properties securing certain loans. In doing so,
there is a risk that hazardous or toxic substances could be found on these properties. If hazardous or toxic

26

substances are found, the Company may be liable for remediation costs, as well as for personal injury and
property damage. Environmental
laws may require the Company to incur substantial expenses and may
materially reduce the affected property’s value or limit the Company’s ability to use or sell the affected property.
In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws
may increase the Company’s exposure to environmental liability. Although the Company has policies and
procedures to perform an environmental review before initiating any foreclosure action on real property, these
reviews may not be sufficient to detect all potential environmental hazards. The remediation costs and any other
financial
liabilities associated with an environmental hazard could have a material adverse effect on the
Company’s financial condition and results of operations.

Risks Associated with the Company’s Common Stock

The Company’s corporate organizational documents and the provisions of Texas law to which it is subject
may delay or prevent a change in control of the Company that a shareholder may favor.

The Company’s amended and restated articles of incorporation and amended and restated bylaws contain
various provisions which may delay, discourage or prevent an attempted acquisition or change of control of the
Company. These provisions include:

•

•

•

•

a board of directors classified into three classes of directors with the directors of each class having
staggered three-year terms;

a provision that any special meeting of the Company’s shareholders may be called only by the chairman
of the board and chief executive officer, the president, a majority of the board of directors or the holders
of at least 50% of the Company’s shares entitled to vote at the meeting;

a provision establishing certain advance notice procedures for nomination of candidates for election as
directors and for shareholder proposals to be considered at an annual or special meeting of shareholders;
and

a provision that denies shareholders the right to amend the Company’s bylaws.

The Company’s articles of incorporation provide for noncumulative voting for directors and authorize the
board of directors to issue shares of its preferred stock without shareholder approval and upon such terms as the
board of directors may determine. The issuance of the Company’s preferred stock could have the effect of
making it more difficult for a third party to acquire, or of discouraging a third party from acquiring, a controlling
interest in the Company. In addition, certain provisions of Texas law, including a provision which restricts
certain business combinations between a Texas corporation and certain affiliated shareholders, may delay,
discourage or prevent an attempted acquisition or change in control of the Company.

There are restrictions on the Company’s ability to pay dividends.

Holders of the Company’s common stock are only entitled to receive such dividends as the Company’s
Board of Directors may declare out of funds legally available for such payments. Although the Company has
historically declared cash dividends on its common stock, it is not required to do so and there can be no
assurance that the Company will pay dividends in the future. Any declaration and payment of dividends on
common stock will depend upon the Company’s earnings and financial condition,
liquidity and capital
requirements, the general economic and regulatory climate, the Company’s ability to service any equity or debt
obligations senior to the common stock and other factors deemed relevant by the Board of Directors.

The Company’s principal source of funds to pay dividends on the shares of common stock is cash dividends
that the Company receives from the Bank. Various banking laws applicable to the Bank limit the payment of
dividends and other distributions by the Bank to the Company, and may therefore limit the Company’s ability to
pay dividends on its common stock. Further, if required payments on the Company’s outstanding junior

27

subordinated debentures held by its unconsolidated subsidiary trusts are not made or are suspended, the Company
will be prohibited from paying dividends on its common stock.

The holders of the Company’s junior subordinated debentures have rights that are senior to those of the
Company’s shareholders.

As of December 31, 2014, the Company had $167.5 million in junior subordinated debentures outstanding
that were issued to the Company’s unconsolidated subsidiary trusts or assumed by the Company in connection
with an acquisition. Since that date, the Company has redeemed $41.2 million of the junior subordinated
debentures and provided irrevocable notice of its intent to redeem the remaining junior subordinated debentures.
The subsidiary trusts purchased the junior subordinated debentures from the Company using the proceeds from
the sale of trust preferred securities to third party investors. Payments of the principal and interest on the trust
preferred securities are conditionally guaranteed by the Company to the extent not paid or made by each trust,
provided the trust has funds available for such obligations.

The junior subordinated debentures are senior to the Company’s shares of common stock. As a result, the
Company must make interest payments on the junior subordinated debentures (and the related trust preferred
securities) before any dividends can be paid on its common stock; and, in the event of the Company’s
bankruptcy, dissolution or liquidation, the holders of the debentures must be satisfied before any distributions can
be made to the holders of the common stock. Additionally, the Company has the right to defer periodic
distributions on the junior subordinated debentures (and the related trust preferred securities) for up to five years,
during which time the Company would be prohibited from paying dividends on its common stock. The
Company’s ability to pay the future distributions depends upon the earnings of the Bank and dividends from the
Bank to the Company, which may be inadequate to service the obligations.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

As of December 31, 2014, the Company conducted business at 245 full-service banking centers. The
Company’s principal executive office is located at Prosperity Bank Plaza, 4295 San Felipe, in the Galleria area in
Houston, Texas. The Company also owns or leases other facilities in which its banking centers are located as
listed below by geographical market area. The expiration dates of the leases range from 2015 to 2040 and do not
include renewal periods which may be available at the Company’s option.

The following table sets forth specific information regarding the banking centers located in each of the

Company’s geographical market areas at December 31, 2014:

Geographical Area

Bryan/College Station area . . . . . . . . . . . . . . . . . . . . . .
Houston area . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Central Texas area . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dallas/Fort Worth area . . . . . . . . . . . . . . . . . . . . . . . . .
East Texas area . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
West Texas area . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
South Texas area . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Central Oklahoma area . . . . . . . . . . . . . . . . . . . . . . . . .
Tulsa Oklahoma area . . . . . . . . . . . . . . . . . . . . . . . . . .

Number of
Banking Centers

Number of
Leased Banking Centers

Deposits at
December 31, 2014

(dollars in thousands)

16
62
30
36
22
34
30
6
9

245

28

—
14
4
9

—

6
4
2
2

41

$ 1,141,000
5,017,217
1,393,366
1,608,777
740,650
2,396,717
2,630,551
859,890
1,904,990

$17,693,158

ITEM 3. LEGAL PROCEEDINGS

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

ITEM 4. MINE SAFETY DISCLOSURES

None.

29

PART II.

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER

MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Common Stock Market Prices

The Company’s common stock is listed on the New York Stock Exchange under the symbol “PB.” As of
February 18, 2015, there were 70,033,040 shares outstanding and 3,394 shareholders of record. The number of
beneficial owners is unknown to the Company at this time.

The following table presents the high and low intra-day sales prices for the common stock as reported by the

New York Stock Exchange:

2014

High

Low

Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
First Quarter

$61.15
63.73
67.49
67.68

$52.62
55.99
56.04
59.75

2013

Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
First Quarter

High

Low

$65.49
62.00
52.40
47.56

$61.18
51.85
44.33
42.38

Dividends

Holders of common stock are entitled to receive dividends when, as and if declared by the Company’s
Board of Directors out of funds legally available therefor. While the Company has declared dividends on its
common stock since 1994, and paid quarterly dividends aggregating $0.9925 per share for 2014 and $0.8850 per
share for 2013, there is no assurance that the Company will continue to pay dividends in the future. Future
dividends on the common stock will depend upon the Company’s earnings and financial condition, liquidity and
capital requirements, the general economic and regulatory climate, the Company’s ability to service any equity or
debt obligations senior to the common stock and other factors deemed relevant by the Board of Directors of the
Company.

As a holding company, the Company is ultimately dependent upon its subsidiaries to provide funding for its
operating expenses, debt service and dividends. Various banking laws applicable to the Bank limit the payment
of dividends and other distributions by the Bank to the Company, and may therefore limit the Company’s ability
to pay dividends on its common stock. Regulatory authorities could impose administratively stricter limitations
on the ability of the Bank to pay dividends to the Company if such limits were deemed appropriate to preserve
certain capital adequacy requirements.

In addition, the Federal Reserve Board has indicated that bank holding companies should carefully review
their dividend policy in relation to the organization’s overall asset quality, level of current and prospective
earnings and level, composition and quality of capital. The guidance provides that the Company inform and
consult with the Federal Reserve Board prior to declaring and paying a dividend that exceeds earnings for the
period for which the dividend is being paid or that could result in an adverse change to the Company’s capital
structure, including interest on the subordinated debentures underlying the Company’s trust preferred securities.
If required payments on the Company’s outstanding junior subordinated debentures held by its unconsolidated
subsidiary trusts are not made or suspended, the Company will be prohibited from paying dividends on its
common stock.

30

The cash dividends declared per share by quarter (and paid on the first business day of the subsequent

quarter) for the Company’s last two fiscal years were as follows:

Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
First Quarter

$0.2725
0.2400
0.2400
0.2400

$0.2400
0.2150
0.2150
0.2150

2014

2013

Recent Sales of Unregistered Securities

None.

Securities Authorized for Issuance under Equity Compensation Plans

As of December 31, 2014, the Company had outstanding stock options granted under its 1998 and 2004
stock award plans and restricted stock issued under its 2004 and 2012 stock award plans, all of which were
approved by the Company’s shareholders. The following table provides information as of December 31, 2014
regarding the Company’s equity compensation plans under which the Company’s equity securities are authorized
for issuance:

Plan Category

Equity compensation plans approved by security
holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Equity compensation plans not approved by

security holders . . . . . . . . . . . . . . . . . . . . . . . .

Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights
(a)

Weighted-average
exercise price of
outstanding options,
warrants and rights
(b)

Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in
column (a))
(c)

53,205

—

53,205

$27.68

—

$27.68

1,239,957(1)

—

1,239,957

(1) All of these awards are available under the Company’s 2012 Stock Incentive Plan. The Company’s other

stock award plans have expired, and no new awards may be issued thereunder.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

None.

31

Performance Graph

The following Performance Graph compares the cumulative total shareholder return on the Company’s
common stock for the period beginning at the close of trading on December 31, 2009 to December 31, 2014, with
the cumulative total return of the S&P 500 Total Return Index and the Nasdaq Bank Index for the same period.
Dividend reinvestment has been assumed. The Performance Graph assumes $100 invested on December 31, 2009
in the Company’s common stock, the S&P 500 Total Return Index and the Nasdaq Bank Index. The historical
stock price performance for the Company’s common stock shown on the graph below is not necessarily
indicative of future stock performance.

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Prosperity Bancshares, Inc., the S&P 500 Index, and the NASDAQ Bank Index

$220

$200

$180

$160

$140

$120

$100

$80

$60

$40

$20

$0

Prosperity Bancshares, Inc.

S&P 500

NASDAQ Bank

12/09

12/10

12/11

12/12

12/13

12/14

*$100 invested on 12/31/09 in stock or index, including reinvestment of dividends. Fiscal year ending December 31.

Prosperity Bancshares, Inc.
S&P 500
NASDAQ Bank

12/09

12/10

12/11

12/12

12/13

12/14

$100.00
100.00
100.00

$ 98.79
115.06
115.72

$103.38
117.49
104.50

$109.61
136.30
122.51

$168.16
180.44
173.89

$149.31
205.14
182.21

Copyright© 2015 Standard & Poor’s, a division of The McGraw-Hill Companies Inc. All rights reserved.
(www.researchdatagroup.com/S&P.htm)

32

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

The following selected consolidated financial data of the Company for, and as of the end of, each of the
years in the five-year period ended December 31, 2014, is derived from and should be read in conjunction with
the Company’s consolidated financial statements and the notes thereto appearing elsewhere in this Annual Report
on Form 10-K.

As of and for the Years Ended December 31,

2014(1)

2013(1)

2012(1)

2011

2010(1)

(In thousands, except per share data)

Income Statement Data:
Interest income . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . .

$

Net interest income . . . . . . . . . . . . .
Provision for credit losses . . . . . . . . . . . .

Net interest income after provision

for credit losses . . . . . . . . . . . . . .
Noninterest income . . . . . . . . . . . . . . . . .
Noninterest expense . . . . . . . . . . . . . . . .

Income before taxes . . . . . . . . . . . .
Provision for income taxes . . . . . . . . . . .

$

714,795
43,641

671,154
18,275

652,879
122,872
330,002

445,749
148,308

$

539,297
40,471

498,826
17,240

481,586
95,427
247,196

329,817
108,419

419,842
39,136

380,706
6,100

374,606
75,535
198,457

251,684
83,783

$ 371,908
45,240

$ 384,537
66,389

326,668
5,200

318,148
13,585

321,468
56,043
163,745

213,766
72,017

304,563
53,833
166,594

191,802
64,094

Net income . . . . . . . . . . . . . . . . . . . . . . .

$

297,441

$

221,398

$

167,901

$ 141,749

$ 127,708

Per Share Data:
Basic earnings per share . . . . . . . . . . . . .
Diluted earnings per share . . . . . . . . . . . .
Book value per share . . . . . . . . . . . . . . . .
Cash dividends declared per share . . . . .
Dividend payout ratio . . . . . . . . . . . . . . .
Weighted average shares outstanding

$

$

4.32
4.32
46.50
0.9925
22.99%

$

3.66
3.65
42.19
0.8850
24.41%

$

3.24
3.23
37.02
0.8000
24.74%

$

3.03
3.01
33.41
0.7200
23.80%

2.74
2.73
31.11
0.6400
23.37%

(basic) . . . . . . . . . . . . . . . . . . . . . . . . .

68,855

60,421

51,794

46,846

46,621

Weighted average shares outstanding

(diluted) . . . . . . . . . . . . . . . . . . . . . . . .
Shares outstanding at end of period . . . .

Balance Sheet Data (at period end):
Total assets . . . . . . . . . . . . . . . . . . . . . . .
Securities . . . . . . . . . . . . . . . . . . . . . . . . .
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for credit losses . . . . . . . . . . .
Total goodwill and intangibles . . . . . . . .
Other real estate owned . . . . . . . . . . . . . .
Total deposits . . . . . . . . . . . . . . . . . . . . .
Federal funds purchased and other

borrowings . . . . . . . . . . . . . . . . . . . . . .
Junior subordinated debentures . . . . . . . .
Total shareholders’ equity . . . . . . . . . . . .

68,911
69,780

60,578
66,048

51,941
56,447

47,017
46,910

46,832
46,684

$21,507,733
9,045,776
9,244,183
80,762
1,933,138
3,237
17,693,158

$18,642,028
8,224,448
7,775,221
67,282
1,713,569
7,299
15,291,271

$14,583,573
7,442,065
5,179,940
52,564
1,243,321
7,234
11,641,844

$9,822,671
4,658,936
3,765,906
51,594
945,533
8,328
8,060,254

$9,476,572
4,617,116
3,485,023
51,584
953,034
11,053
7,454,920

8,724
167,531(2)

3,244,826

10,689
124,231
2,786,818

256,753
85,055
2,089,389

12,790
85,055
1,567,265

374,433
92,265
1,452,339

(Table continued on next page)

33

Average Balance Sheet Data:
Total assets . . . . . . . . . . . . . . . . . . . . . . .
Securities . . . . . . . . . . . . . . . . . . . . . . . . .
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for credit losses . . . . . . . . . . .
Total goodwill and intangibles . . . . . . . .
Total deposits . . . . . . . . . . . . . . . . . . . . .
Junior subordinated debentures . . . . . . . .
Total shareholders’ equity . . . . . . . . . . . .

Performance Ratios:
Return on average assets . . . . . . . . . . . . .
Return on average common equity . . . . .
Net interest margin (tax equivalent) . . . .
. . . . . . . . . . . . . . . . . .
Efficiency ratio(3)

Asset Quality Ratios(4):
Nonperforming assets to total loans and

other real estate . . . . . . . . . . . . . . . . . .
Net charge-offs to average loans . . . . . . .
Allowance for credit losses to total

As of and for the Years Ended December 31,

2014(1)

2013(1)

2012(1)

2011

2010(1)

(In thousands, except per share data)

$20,596,929
8,723,011
8,988,069
72,714
1,853,350
16,690,344
154,902
3,080,324

$16,255,914
7,932,782
6,202,897
57,001
1,395,323
12,764,302
91,584
2,378,234

$12,432,666
6,364,917
4,514,171
51,770
1,078,804
9,748,843
85,055
1,844,334

$9,628,884
4,625,833
3,648,701
51,871
949,273
7,751,196
86,557
1,513,749

$9,278,380
4,508,918
3,394,502
52,151
940,080
7,532,739
92,265
1,406,159

1.44%
9.66%
3.80%
41.81%

1.36%
9.31%
3.58%
41.60%

1.35%
9.10%
3.53%
43.48%

1.47%
9.36%
3.98%
42.76%

1.38%
9.08%
4.04%
44.83%

0.40%
0.05%

0.29%
0.04%

0.25%
0.11%

0.32%
0.14%

0.45%
0.41%

loans . . . . . . . . . . . . . . . . . . . . . . . . . .

0.87%

0.87%

1.01%

1.37%

1.48%

Allowance for credit losses to
nonperforming loans(5)

. . . . . . . . . . . .

Capital Ratios(4):
Leverage ratio . . . . . . . . . . . . . . . . . . . . .
Average shareholders’ equity to average
total assets . . . . . . . . . . . . . . . . . . . . . .
Tier 1 risk-based capital ratio . . . . . . . . .
Total risk-based capital ratio . . . . . . . . . .

240.3%

443.3%

920.1%

1442.0%

1114.6%

7.69%

7.42%

7.10%

7.89%

6.87%

14.96%
13.80%
14.56%

14.63%
13.27%
14.02%

14.83%
14.40%
15.22%

15.72%
15.90%
17.09%

15.16%
13.64%
14.87%

(1) The Company completed the acquisition of F&M on April 1, 2014. The Company completed three
acquisitions during the twelve month period ended December 31, 2013 and four acquisitions during the
twelve month period ended December 31, 2012. The Company completed the acquisition of three branches
of U.S Bank on March 29, 2010 and the acquisition of nineteen branches of First Bank on April 30, 2010.
(2) Consists of $15.5 million of junior subordinated debentures of Prosperity Statutory Trust II due July 31,
2031, $12.9 million of junior subordinated debentures of Prosperity Statutory Trust III due September 17,
2033, $12.9 million of junior subordinated debentures of Prosperity Statutory Trust IV due December 30,
2033, $10.3 million of junior subordinated debentures of SNB Capital Trust IV due September 25, 2033
(assumed by the Company on April 1, 2006), $5.2 million of junior subordinated debentures of TXUI
Statutory Trust II due December 19, 2033 (assumed by the Company on January 3l, 2007), $16.0 million of
junior subordinated debentures of TXUI Statutory Trust III due December 15, 2035 (assumed by the
Company on January 3l, 2007), $12.4 million of junior subordinated debentures of TXUI Statutory Trust IV
due June 30, 2036 (assumed by the Company on January 3l, 2007), $18.6 million of junior subordinated
debentures of FVNB Capital Trust II due June 15, 2035 (assumed by the Company on November 1, 2013),
$20.6 million of junior subordinated debentures of FVNB Capital Trust III due July 7, 2036 (assumed by the
Company on November 1, 2013), $15.5 million of junior subordinated debentures of F&M Bancorporation
Statutory Trust I due March 26, 2033 (assumed by the Company on April 1, 2014), $12.4 million of junior
subordinated debentures of F&M Bancorporation Statutory Trust II due March 17, 2034 (assumed by the

34

Company on April 1, 2014) and $15.5 million of junior subordinated debentures of F&M Bancorporation
Statutory Trust III due December 15, 2035 (assumed by the Company of April 1, 2014).

(3) Calculated by dividing total noninterest expense, excluding credit loss provisions, by net interest income
plus noninterest income, excluding net gains and losses on the sale of securities and assets. Additionally,
taxes are not part of this calculation.

(4) At period end, except for net charge-offs to average loans and average shareholders’ equity to average total

assets, which is for periods ended at such dates.

(5) Nonperforming loans consist of nonaccrual loans, loans contractually past due 90 days or more and any

other loan management deems to be nonperforming.

35

ITEM 7. 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 Annual Report on Form 10-K that are not
statements of historical fact constitute forward-looking statements made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. These 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, but are not limited to:

•

•

•

•

•

•

•

•

•

•

•

•

•

•

•

•

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

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

changes in the levels of loan prepayments and the resulting effects on the value of the Company’s loan
portfolio;

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

increased competition for deposits and loans adversely affecting rates and terms;

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

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

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

the concentration of the Company’s loan portfolio in loans collateralized by real estate;

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

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

a deterioration or downgrade in the credit quality and credit agency ratings of the securities in the
Company’s securities portfolio;

increased asset levels and changes in the composition of assets and the resulting impact on the
Company’s capital levels and regulatory capital ratios;

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

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

government intervention in the U.S. financial system;

36

•

•

•

•

•

•

•

•

•

•

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;

poor performance by external vendors;

the failure of analytical and forecasting models and tools used by the Company to estimate probable
credit losses and to measure the fair value of financial instruments;

additional risks from new lines of businesses or new products and services;

claims or litigation related to intellectual property or fiduciary responsibilities;

the failure of the Company’s enterprise risk management framework to identify or address risks
adequately;

a failure in or breach of operational or security systems of the Company’s infrastructure, or those of its
third-party vendors and other service providers, including as a result of cyber attacks;

potential risk of environmental liability associated with lending activities;

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. Therefore, the
Company cautions you not to place undue reliance on its forward-looking statements. The forward-looking
statements speak only as of the date the statements are made. 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 balance sheets and statements of income. This section should be read in
conjunction with the Company’s consolidated financial statements and accompanying notes and other detailed
information appearing elsewhere in this Annual Report on Form 10-K.

Overview

The Company generates the majority of its revenues from interest income on loans, service charges on
customer accounts and income from investment in securities. In 2014, the Company continued to benefit from
additional products and services that were added in 2012 and 2013, including trust services, brokerage, mortgage
lending, credit card and independent sales organization (ISO) sponsorship operations. 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. Net interest income is the Company’s largest source of revenue. 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 due primarily to an increase in the volume of interest-
earning assets.

37

Three principal components of the Company’s growth strategy are internal growth, stringent cost control
practices and acquisitions, including 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 centralized
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. During 2014, the Company completed the acquisition of F&M Bancorporation Inc. This
acquisition added 11 banking centers after consolidation. During 2013,
the Company completed three
acquisitions including East Texas Financial Services Inc., Coppermark Bancshares, Inc. and FVNB Corp.
Combined, these acquisitions added 30 banking centers after consolidation with nearby Prosperity Bank banking
centers. During 2012, the Company completed four acquisitions including Texas Bankers, Inc., The Bank
Arlington, ASB and Community National Bank. Combined, these acquisitions added 41 banking centers.

Net income was $297.4 million, $221.4 million and $167.9 million for the years ended December 31, 2014,
2013 and 2012, respectively, and diluted earnings per share were $4.32, $3.65 and $3.23, respectively, for these
same periods. The change in net income during both 2014 and 2013 was principally due to an increase in net
interest income resulting from balance sheet growth from acquisitions. The Company posted returns on average
assets of 1.44%, 1.36% and 1.35% and returns on average common equity of 9.66%, 9.31% and 9.10% for the
years ended December 31, 2014, 2013 and 2012, respectively. The Company’s efficiency ratio was 41.81% in
2014, 41.60% in 2013 and 43.48% in 2012. The efficiency ratio is calculated by dividing total noninterest
expense (excluding credit loss provisions) by net interest income plus noninterest income (excluding net gains
and losses on the sale of securities and assets). Additionally, taxes are not part of this calculation.

Total assets at December 31, 2014 and 2013 were $21.51 billion and $18.64 billion, respectively. Total
deposits at December 31, 2014 and 2013 were $17.69 billion and $15.29 billion, respectively. Total loans were
$9.24 billion at December 31, 2014, an increase of $1.47 billion or 18.9% compared with $7.78 billion at
December 31, 2013. At December 31, 2014, the Company had $33.6 million in nonperforming loans and its
allowance for credit losses was $80.8 million compared with $15.2 million in nonperforming loans and an
allowance for credit losses of $67.3 million at December 31, 2013. Shareholders’ equity was $3.24 billion and
$2.79 billion at December 31, 2014 and 2013, respectively.

Recent Developments

On April 1, 2014, the Company completed the acquisition of F&M Bancorporation Inc. (“FMBC”) and its
wholly-owned subsidiary The F&M Bank & Trust Company (collectively, “F&M”) headquartered in Tulsa,
Oklahoma. F&M operated 13 banking locations: 9 in Tulsa, Oklahoma and surrounding areas; 1 (a loan
production office) in Oklahoma City, Oklahoma; and 3 in Dallas, Texas.

As of March 31, 2014, FMBC, on a consolidated basis, reported total assets of $2.41 billion, total loans of
$1.74 billion and total deposits of $2.27 billion. Under the terms of the definitive agreement, the Company issued
3,298,022 shares of Company common stock plus $34.2 million in cash for all outstanding shares of FMBC
capital stock for total merger consideration of $252.4 million based on the Company’s closing stock price of
$66.15. As of December 31, 2014, the Company recognized goodwill of $198.2 million, which does not include
subsequent fair value adjustments that are still being finalized. Additionally, the Company recognized $27.1
million of core deposit intangibles. For the year ended December 31, 2014, the Company incurred approximately
$2.5 million of pre-tax merger related expenses in connection with the FMBC acquisition.

38

Critical Accounting Policies

The Company’s significant accounting policies are integral to understanding the results reported. The
Company’s accounting policies are described in detail in Note 1 to the consolidated financial statements,
appearing elsewhere is this Annual Report on Form 10-K. 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
losses. The determination of the allowance for credit losses has two
the form of a provision for credit
components, the allowance for legacy credit losses, which includes the allowance for acquired legacy loans, and
the allowance for acquired credit losses for fair-valued acquired loans. The allowance for acquired credit losses is
calculated as described under the heading “Accounting for Acquired Loans and the Allowance for Acquired
Credit Losses” below. 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 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, the amount of
nonperforming assets and related collateral, the volume, growth and composition of the portfolio, current
economic conditions that may affect the borrower’s ability to pay and the value of collateral, the evaluation of
the 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. For further
discussion of the methodology used in the determination of the allowance for credit losses, refer to the “Financial
Condition—Allowance for Credit Losses” section below and Note 1 to the consolidated financial statements.

Accounting for Acquired Loans and the Allowance for Acquired Credit Losses—The Company accounts for
its acquisitions using the acquisition method of accounting. Accordingly, the assets, including loans, and
liabilities of the acquired entity were recorded at their fair values at the acquisition date. No allowance for credit
losses related to the acquired loans is recorded on the acquisition date, as the fair value of the acquired loans
incorporates assumptions regarding credit risk. These fair value estimates associated with acquired loans, and
based on a discounted cash flow model, include estimates related to market interest rates and undiscounted
projections of future cash flows that incorporate expectations of prepayments and the amount and timing of
principal, interest and other cash flows, as well as any shortfalls thereof.

At period-end after acquisition, the fair-valued acquired loans from each acquisition are reassessed to
determine whether an addition to the allowance for credit losses is appropriate due to further credit quality
deterioration. For further discussion of the methodology used in the determination of the allowance for credit
losses for acquired loans, see “Financial Condition – Allowance for Credit Losses” section below.

For further discussion of the Company’s acquisition and loan accounting, see Note 1 to the consolidated

financial statements.

Goodwill and Intangible Assets—Goodwill and intangible assets that have indefinite useful lives are subject
to an impairment test at least annually, or more often, if events or circumstances indicate that it is more likely
than not that the fair value of the Company’s reporting unit is below the carrying value of its equity. On
January 1, 2012, the Company adopted Accounting Standard Update No. 2011-08, “Intangibles—Goodwill and
Other (Topic 350): Testing Goodwill for Impairment,” (ASU 2011-08), which allows companies to use a
qualitative approach to assess goodwill for impairment. The provisions of ASU 2011-08 give companies the
option to first assess qualitative factors to determine whether it is more likely than not that the fair value of a
reporting unit is less than its carrying amount as a basis for determining the need to perform step one of the
annual test for goodwill impairment. An entity has an unconditional option to bypass the qualitative assessment

39

described in the preceding paragraph for any reporting unit in any period and proceed directly to performing the
first step of the goodwill impairment test. An entity may resume performing the qualitative assessment in any
subsequent period.

If the Company bypasses the qualitative assessment, a two-step goodwill impairment test is performed. The
two-step process begins with an estimation of the fair value of the Company’s reporting unit compared with its
carrying value. If the carrying amount exceeds the fair value of the reporting unit, a second test is completed
comparing the implied fair value of the reporting unit’s goodwill to its carrying value to measure the amount of
impairment.

Estimating the fair value of the Company’s reporting unit is a subjective process involving the use of
estimates and judgments, particularly related to future cash flows of the reporting unit, discount rates (including
market risk premiums) and market multiples. Material assumptions used in the valuation tools include the
comparable public company price multiples used in the terminal value, future cash flows and the market risk
premium component of the discount rate. The estimated fair values of the reporting unit is determined using a
blend of two commonly used valuation techniques: the market approach and the income approach. The Company
gives consideration to both valuation techniques, as either technique can be an indicator of value. For the market
approach, valuations of the reporting unit were based on an analysis of relevant price multiples in market trades
in companies with similar characteristics. For the income approach, estimated future cash flows (derived from
internal forecasts and economic expectations) and terminal value (value at the end of the cash flow period, based
on price multiples) were discounted. The discount rate was based on the imputed cost of equity capital.

The Company had no intangible assets with indefinite useful lives at December 31, 2014. Other identifiable
intangible assets that are subject to amortization are being amortized on a non-pro rata basis over the years
expected to be benefited, which the Company believes is between ten and fifteen 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, 2014, management does not believe any of its goodwill is impaired as of December 31, 2014,
because the fair value of the Company’s equity exceeded its carrying value. While the Company believes no
impairment existed at December 31, 2014, 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. The Company’s results of operations reflect compensation expense
for all employee stock-based compensation. 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
including stock price volatility and employee turnover that are utilized to measure compensation expense.

Other-Than-Temporarily Impaired Securities—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
(1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition
and near-term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions,
and (4) whether the entity has the intent to sell the debt security or more likely than not will be required to sell
the debt security before its anticipated recovery. Often, the information available to conduct these assessments is
limited and rapidly changing, making estimates of fair value subject to judgment. If actual information or
conditions are different than estimated, the extent of the impairment of the security may be different than
previously estimated, which could have a material effect on the Company’s results of operations and financial
condition.

40

Fair Values of Financial Instruments. The Company determines the fair market values of financial
instruments based on the fair value hierarchy established which requires an entity to maximize the use of
observable inputs and minimize the use of unobservable inputs when measuring fair value. There are three levels
of inputs that may be used to measure fair value. Level 1 inputs include quoted market prices, where available. If
such quoted market prices are not available, Level 2 inputs are used. These inputs are based upon internally
developed analytical
tools that primarily use observable market-based parameters. Level 3 inputs are
unobservable inputs which are typically based on an entity’s own assumptions, as there is little, if any, related
market activity. The Company’s assessment of the significance of a particular input
to the fair value
measurement in its entirety requires judgment and considers factors specific to the asset or liability.

Results of Operations

Net Interest Income

The Company’s operating results depend primarily on its net interest income, which is the difference
between interest income on interest-earning assets, including securities and loans, and interest expense incurred
on interest-bearing liabilities, including deposits and other borrowed funds. Interest rate fluctuations, as well as
changes in the amount and type of earning assets and liabilities, combine to affect 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.”

2014 versus 2013. Net interest income before the provision for credit losses for 2014 was $671.2 million
compared with $498.8 million for 2013, an increase of $172.3 million or 34.5%. The increase in net interest
income was primarily due to a $3.67 billion or 25.9% increase in average earning assets during 2014 and a 5
basis point decrease in the average rate paid on interest-bearing liabilities. The increase in average earning assets
was due to the full year effect of the acquisition of FVNB Corp. and its wholly owned subsidiary, First Victoria
National Bank (collectively, “FVNB”) completed in November 2013 and the F&M acquisition completed on
April 1, 2014. Interest income was $714.8 million in 2014, an increase of $175.5 million or 32.5% compared
with 2013. Interest income on loans was $525.7 million for 2014, an increase of $149.6 million or 39.8%
compared with 2013 due primarily to a $2.79 billion increase in average loans outstanding. Additionally, during
2014 and 2013, interest income on loans benefited from purchase accounting loan discount accretion of $95.9
million and $62.7 million, respectively, which partially offset the decrease in interest rates on the loan portfolio.
The Company had $161.4 million of total outstanding discounts on purchased loans, of which $99.0 million was
accretable at December 31, 2014. Interest income on securities was $188.7 million during 2014, an increase of
$25.8 million or 15.8% compared with 2013 due primarily to an increase in average securities of $790.2 million.
Average interest-bearing liabilities increased $2.24 billion or 21.5% for 2014 compared with 2013 and the
average rate paid decreased from 0.39% to 0.34% for the same time period, resulting in an overall increase in
interest expense of $3.2 million. During 2014, average noninterest-bearing deposits increased $1.34 billion or
40.1% from $3.35 billion during 2013 to $4.69 billion during 2014. This increase in noninterest-bearing funds
contributed to a decrease in total cost of funds to 0.25% during 2014 from 0.29% during 2013.

Net interest margin, defined as net interest income divided by average interest-earning assets, on a tax

equivalent basis, was 3.80% for 2014, an increase of 22 basis points compared with 3.58% for 2013.

2013 versus 2012. Net interest income before the provision for credit losses for 2013, was $498.8 million
compared with $380.7 million for 2012, an increase of $118.1 million or 31.0%. The increase in net interest
income was primarily due to an increase in average interest-earning assets of $3.24 billion or 29.6% during 2013,
and a decrease in the average rate paid on interest-bearing liabilities of 9 basis points. The increase in average
earning assets was due to the three acquisitions completed during 2013. Interest income was $539.3 million in
2013, an increase of $119.5 million or 28.5% over 2012. Interest income on loans was $376.1 million for 2013,

41

an increase of $104.8 million or 38.6% compared with 2012 due in part to an increase in average loans
outstanding of $1.69 billion. Additionally, during 2013 and 2012, interest income on loans benefited from
purchase accounting loan discount accretion of $62.7 million and $26.4 million, respectively, which partially
offset the decrease in interest rates on the loan portfolio. The Company had $133.3 million of total outstanding
discounts on purchased loans, of which $97.7 million was accretable at December 31, 2013. Interest income on
securities was $163.0 million during 2013, an increase of $14.6 million or 9.9% over 2012 due in part to an
increase in average securities of $1.57 billion. Average interest-bearing liabilities increased $2.35 billion or
29.1% for 2013 compared to 2012 and average rate paid decreased from 0.48% to 0.39% for the same time
period resulting in an overall increase in interest expense of $1.3 million. During 2013, average noninterest
bearing deposits increased $902.7 million or 37.0% from $2.44 billion during 2012 to $3.35 billion during 2013.
This increase in noninterest-bearing funds contributed to a decrease in total cost of funds to 0.29% during 2013
from 0.37% during 2012.

Net interest margin, on a tax equivalent basis, was 3.58% for 2013, an increase of 5 basis points compared

with 3.53% for 2012.

42

The following table presents, for the periods indicated, the total dollar amount of average balances, interest
income from average interest-earning assets and the resultant yields, as well as the interest expense on average
interest-bearing liabilities, expressed both in dollars and rates. 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.

Years Ended December 31,

2014

Interest
Earned/
Interest
Paid

Average
Outstanding
Balance

Average
Yield/
Rate

Average
Outstanding
Balance

2013

Interest
Earned/
Interest
Paid

Average
Yield/
Rate

Average
Outstanding
Balance

2012

Interest
Earned/
Interest
Paid

Average
Yield/
Rate

(Dollars in thousands)

Assets
Interest-Earning Assets:

Loans . . . . . . . . . . . . . . . . . . . . . . $ 8,988,069 $525,716
Investment securities . . . . . . . . . .
188,744
Federal funds sold and other

8,723,011

5.85% $ 6,202,897 $376,117
162,993
7,932,782
2.16%

6.06% $ 4,514,171 $271,324
148,374
6,364,917
2.05%

6.01%
2.33%

earning assets . . . . . . . . . . . . . .

143,754

335

0.23%

50,318

187

0.37%

68,900

144

0.21%

Total interest-earning

assets . . . . . . . . . . . . . . . .

17,854,834 $714,795

4.00% 14,185,997 $539,297

3.80% 10,947,988 $419,842

3.83%

Allowance for credit losses . . . . . . .
Noninterest-earning assets . . . . . . . .

(72,714)
2,814,809

Total assets . . . . . . . . . . . . . $20,596,929

(57,001)
2,126,918

$16,255,914

(51,770)
1,536,448

$12,432,666

Liabilities and Shareholders’

Equity

Interest-Bearing Liabilities:
Interest-bearing demand

deposits . . . . . . . . . . . . . . . . . . $ 3,516,987 $

8,561

0.24% $ 2,651,320 $

7,917

0.30% $ 1,979,345 $

8,228

0.42%

Savings and money market

deposits . . . . . . . . . . . . . . . . . .

5,355,967

13,406

0.25%

4,237,323

11,961

0.28%

3,174,256

10,600

0.33%

Certificates and other time

deposits . . . . . . . . . . . . . . . . . .

3,129,710

15,904

0.51%

2,530,065

15,344

0.61%

2,152,382

15,658

0.73%

Federal funds purchased and

other borrowings . . . . . . . . . . .

144,570

772

0.53%

470,854

1,497

0.32%

416,925

1,352

0.32%

Securities sold under repurchase

agreements . . . . . . . . . . . . . . . .

361,025

938

0.26%

443,231

1,201

0.27%

263,689

705

0.27%

Junior subordinated

debentures . . . . . . . . . . . . . . . .

154,902

4,060

2.62%

91,584

2,551

2.79%

85,055

2,593

3.05%

Total interest-bearing

liabilities . . . . . . . . . . . . .

12,663,161

43,641

0.34% 10,424,377

40,471

0.39%

8,071,652

39,136

0.48%

Noninterest-Bearing Liabilities:
Noninterest-bearing demand

deposits . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . .

4,687,680
165,764

Total liabilities . . . . . . . . . . .

17,516,605

Shareholders’ equity . . . . . . . . . .

3,080,324

Total liabilities and

3,345,594
107,709

13,877,680

2,378,234

2,442,860
73,820

10,588,332

1,844,334

shareholders’ equity . . . . $20,596,929

$16,255,914

$12,432,666

Net interest rate spread . . . . . . . . . .
. .
Net interest income and margin(1)

Net interest income and margin (tax
. . . . . . . . . . . . . . . .

equivalent)(2)

$671,154

3.66%
3.76%

$498,826

3.41%
3.52%

$380,706

3.35%
3.48%

$679,122

3.80%

$507,194

3.58%

$386,671

3.53%

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

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% for the years ended December 31, 2014,
2013 and 2012 and other applicable effective tax rates.

43

The following table presents information regarding the dollar amount of changes in interest income and
interest expense for the periods indicated for each major component of interest-earning assets and interest-
bearing liabilities and distinguishes between the changes attributable to changes in volume and changes in
interest rates. For purposes of this table, changes attributable to both rate and volume which cannot be segregated
have been allocated to rate.

Years Ended December 31,

2014 vs. 2013

2013 vs. 2012

Increase
(Decrease)
Due to Change in

Increase
(Decrease)
Due to Change in

Volume

Rate

Total

Volume

Rate

Total

(Dollars in thousands)

$168,881
16,237

$(19,282) $149,599
25,751

9,514

$101,500
36,549

$ 3,293
(21,930)

$104,793
14,619

Interest-Earning assets:

Loans . . . . . . . . . . . . . . . . . . . . . . . . .
Securities . . . . . . . . . . . . . . . . . . . . . .
Federal funds sold and other

temporary investments . . . . . . . . . .

348

(200)

148

(39)

82

43

Total increase (decrease) in

interest income . . . . . . . . . . . .

185,466

(9,968)

175,498

138,010

(18,555)

119,455

Interest-Bearing liabilities:

Interest-bearing demand deposits . . . .
Savings and money market

accounts . . . . . . . . . . . . . . . . . . . . .
Certificates of deposit . . . . . . . . . . . . .
Other borrowings . . . . . . . . . . . . . . . .
Securities sold under repurchase

agreements . . . . . . . . . . . . . . . . . . .
Junior subordinated debentures . . . . .

Total increase (decrease) in

2,585

(1,941)

644

2,793

(3,104)

(311)

3,158
3,637
(1,037)

(223)
1,764

(1,713)
(3,077)
312

(40)
(255)

1,445
560
(725)

(263)
1,509

3,550
2,748
175

480
199

(2,189)
(3,062)
(30)

16
(241)

1,361
(314)
145

496
(42)

interest expense . . . . . . . . . . . .

9,884

(6,714)

3,170

9,945

(8,610)

1,335

Increase (decrease) in net interest

income . . . . . . . . . . . . . . . . . . . . . . . . . .

$175,582

$ (3,254) $172,328

$128,065

$ (9,945) $118,120

Provision for Credit Losses

The Company’s provision for credit losses is established through charges to income in the form of the
provision in order to bring the Company’s allowance for credit losses to a level deemed appropriate by
management based on the factors discussed under “Financial Condition—Allowance for Credit Losses.” The
allowance for credit losses at December 31, 2014 was $80.8 million, representing 0.87% of total loans as of such
date. Acquired loans were recorded at fair value based on a discounted cash flow valuation methodology that
considers, among other things, interest rates, projected default rates, loss given default and recovery rates with no
carryover of any existing allowance for credit losses. The provision for credit losses for the year ended
December 31, 2014 was $18.3 million compared with $17.2 million for the year ended December 31, 2013 and
$6.1 million for the year ended December 31, 2012. As further discussed below under “Financial Condition—
Allowance for Credit Losses,” $15.6 million of the provision for credit losses at December 31, 2014 was
attributable to acquired loans. Net charge-offs for the years ended December 31, 2014, 2013 and 2012 were $4.8
million, $2.5 million and 5.1 million, respectively.

44

Noninterest Income

The Company’s primary sources of recurring noninterest income are NSF fees, credit, debit and ATM card
income, and service charges on deposit accounts. The Company added to its brokerage and trust lines of business
with the acquisition of FVNB on November 1, 2013. 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. For the
year ended December 31, 2014, noninterest income totaled $122.9 million, an increase of $27.4 million or 28.8%
compared with 2013. This increase was primarily due to the increased service charges on the deposit accounts
acquired in the F&M acquisition and the full year effect of the FVNB acquisition, including the additional
brokerage and trust business. In addition, gain on the sale of assets increased $4.7 million during the year ended
December 31, 2014 compared with the same period in 2013, primarily due to a $2.2 million gain that was
recorded during the first quarter of 2014 on the sale of the agent bank credit card and agent bank merchant
processing business of Bankers Credit Card Services, Inc., a subsidiary acquired as part of the acquisition of
Coppermark and gains on the sale of real property.

For the year ended December 31, 2013, noninterest income totaled $95.4 million, an increase of $19.9
million or 26.3% compared with $75.5 million in 2012. The increase was primarily due to the full year effect of
the acquisition of ASB, including their trust department and Home Loan Center, in addition to the three
acquisitions completed during 2013. The increase was partially offset by a decrease in debit card income as a
result of the Durbin Amendment that became effective on July 1, 2013. This Federal Rule is applicable to
financial institutions that have assets of $10 billion or more and imposes limits on the amount of interchange, or
swipe, fees that can be collected.

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

Years Ended December 31,

2014

2013

2012

Nonsufficient funds (NSF) fees . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Credit card, debit card and ATM card income . . . . . . . . . . . . . . . . .
Service charges on deposit accounts . . . . . . . . . . . . . . . . . . . . . . . .
Trust income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Brokerage income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bank owned life insurance income . . . . . . . . . . . . . . . . . . . . . . . . .
Net gain (loss) on sale of assets . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(Dollars in thousands)
$35,173
22,463
12,864
4,356
4,038
1,518
3,635
(13)
11,393

$ 37,048
22,889
16,452
8,108
4,264
5,868
5,189
4,658
18,396

$29,113
21,057
11,112
1,746
2,681
648
2,673
(231)
6,736

Total noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$122,872

$95,427

$75,535

Noninterest Expense

For the year ended December 31, 2014, noninterest expense totaled $330.0 million, an increase of $82.8
million or 33.5% compared with 2013. This increase was mainly due to the full year effect of the FVNB
acquisition and the F&M acquisition completed during 2014. Additionally, the Company incurred $3.1 million of
pre-tax merger related expenses during 2014. The merger related expenses are reflected on the Company’s
income statement for the applicable periods and are reported primarily in the categories of salaries and benefits,
data processing and professional and legal fees. For the year ended December 31, 2013, noninterest expense
totaled $247.2 million, an increase of $48.7 million or 24.6% compared with $198.5 million for the same period
in 2012. This increase was primarily related to the three acquisitions completed during 2013. The Company
incurred $3.2 million of pre-tax merger related expenses during 2013. These items and other changes in the
various components of noninterest expense are discussed in more detail below.

45

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

Years Ended December 31,

2014

2013

2012

Salaries and employee benefits(1) . . . . . . . . . . . . . . . . . . . . . . . . .
Non-staff expenses:

Net occupancy and equipment . . . . . . . . . . . . . . . . . . . . . . .
Credit and debit card, data processing and software

amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Regulatory assessments and FDIC insurance . . . . . . . . . . .
Property taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Core deposit intangibles amortization . . . . . . . . . . . . . . . . .
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Communications(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other real estate expense . . . . . . . . . . . . . . . . . . . . . . . . . . .
Professional and legal fees . . . . . . . . . . . . . . . . . . . . . . . . . .
Printing and supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$199,270

(Dollars in thousands)
$148,494

$115,505

24,756

18,934

16,475

15,790
15,017
7,410
9,940
13,730
11,609
1,019
5,636
2,427
23,398

11,908
10,261
5,827
6,145
10,593
9,471
711
3,573
2,616
18,663

9,445
7,679
4,623
7,229
8,923
8,158
1,810
4,118
2,586
11,906

Total noninterest expense . . . . . . . . . . . . . . . . . . . . . . .

$330,002

$247,196

$198,457

(1) Total salaries and employee benefits includes $8.2 million, $4.2 million and $3.6 million in 2014, 2013 and

2012, respectively, in stock based compensation expense.

(2) Communications expense includes telephone, data circuits, postage, and courier expenses.

Salaries and Employee Benefits. Salaries and employee benefits were $199.3 million for the year ended
December 31, 2014, an increase of $50.8 million or 34.2% compared with 2013. This increase was primarily due
to the full year effect of the FVNB acquisition and the F&M acquisition completed during 2014. Salaries and
employee benefits increased $33.0 million or 28.6% to $148.5 million at December 31, 2013, compared with
$115.5 million at December 31, 2012, primarily due to the three acquisitions completed during 2013. The
number of FTE’s employed by the Company were 3,096, 2,995 and 2,266 at December 31, 2014, 2013 and 2012,
respectively. Total salaries and benefits for the year ended December 31, 2014 includes $8.2 million in stock
based compensation expense compared with $4.2 million and $3.6 million recorded for the years ended
December 31, 2013 and 2012, respectively. This increase was primarily due to the stock awards granted as part
of the FVNB and F&M acquisitions.

Debit Card, Data Processing and Software Amortization. Debit card, data processing and software
amortization expenses were $15.8 million, $11.9 million and $9.4 million for the years ended December 31,
2014, 2013 and 2012, respectively. The increase of $3.9 million or 32.6% for 2014 compared with 2013 was due
primarily to the addition of F&M on April 1, 2014 and the full year effect of the FVNB acquisition that occurred
on November 1, 2013.

Regulatory Assessments and FDIC Insurance. Regulatory assessments and FDIC insurance assessments
were $15.0 million compared with $10.3 million for the years ended December 31, 2014 and 2013, respectively.
This increase was primarily due to the increase in deposits as a result of the FVNB and F&M acquisitions.
Assessments for the year ended December 31, 2013 increased $2.6 million to $10.3 million compared to $7.7
million for the year ended December 31, 2012. This increase was primarily due to growth as a result of the three
acquisitions completed during 2013.

46

Property Taxes. Property taxes were $7.4 million for the year ended December 31, 2014, an increase of $1.6
million or 27.2% compared with 2013. This increase was primarily due to the additional property acquired from
F&M and FVNB. Property taxes increased $1.2 million or 26.0% to $5.8 million at December 31, 2013,
compared with $4.6 million at December 31, 2012.

Core Deposit Intangibles Amortization. Core deposit intangibles (“CDI”) amortization was $9.9 million for
the year ended December 31, 2014, an increase of $3.8 million or 61.8% compared with $6.1 million for the year
ended December 31, 2013. This increase was primarily due to the full year effect of the FVNB acquisition and
the F&M acquisition completed during 2014. CDI amortization decreased $1.1 million or 15.0% to $6.1 million
at December 31, 2013, compared with $7.2 million for the year ended December 31, 2012. The decrease in CDI
for 2013 compared to 2012 was primarily attributable to certain CDI that fully amortized in 2012. CDI are being
amortized on a non-pro rata basis over an estimated life of 10 to 15 years.

Other Real Estate. Other real estate expense was $1.0 million for the year ended December 31, 2014, an
increase of $308 thousand or 43.3%, compared with $711 thousand for the year ended December 31, 2013. The
increase in other real estate expenses was due primarily to an increase in other real estate carrying costs as a
result of the F&M acquisition. Other real estate expense decreased $1.1 million or 60.7% to $711 thousand for
the year ended December 31, 2013 compared with $1.8 million for the year ended December 31, 2012. The
decrease was primarily due to a decrease in other real estate carrying costs.

Professional and Legal Fees. Professional and legal fees were $5.6 million for the year ended December 31,
2014, an increase of $2.1 million or 57.7% compared with $3.6 million for the year ended December 31, 2013.
This increase was primarily due to an increase in consulting and professional fees related to additional regulatory
requirements. Professional and legal fees decreased $545 thousand or 13.2% for the year ended December 31,
2013, compared with $4.1 million for the year ended December 31, 2012.

Efficiency Ratio. The efficiency ratio is a supplemental financial measure utilized in management’s internal
evaluation of the Company and is not defined under generally accepted accounting principles. 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 on the sale of assets. Taxes
are not part of this calculation. An increase in the efficiency ratio indicates that more resources are being utilized
to generate the same volume of income, while a decrease would indicate a more efficient allocation of resources.
The Company’s efficiency ratio was 41.81% for the year ended December 31, 2014, compared with 41.60% for
the year ended December 31, 2013. The efficiency ratios for 2014, 2013, and 2012 were impacted by pre-tax
merger-related expenses of $3.1 million, $3.2 million, and $7.0 million, respectively. The Company’s efficiency
ratio was 43.48% for the year ended December 31, 2012.

Income Taxes

The amount of federal and state income tax expense is influenced by the amount of pre-tax income, the
amount of tax-exempt income and the amount of other nondeductible expenses. For the year ended December 31,
2014, income tax expense was $148.3 million, compared with $108.4 million for the year ended December 31,
2013, and $83.8 million for the year ended December 31, 2012. The increases were primarily attributable to
higher pre-tax net earnings. The effective tax rate for the years ended December 31, 2014, 2013 and 2012 was
33.3%, 32.9% and 33.3%, respectively. The effective income tax rates differed from the U.S. statutory rate of
35% during the comparable periods primarily due to the effect of tax-exempt income from loans and securities.

Impact of Inflation

The Company’s consolidated financial statements and related notes included in this Annual Report on
Form 10-K have been prepared in accordance with generally accepted accounting principles. These require the
measurement of financial position and operating results in terms of historical dollars, without considering
changes in the relative value of money over time due to inflation or recession.

47

Unlike many industrial companies, substantially all of the Company’s assets and liabilities are monetary in
nature. As a result, interest rates have a more significant impact on the Company’s performance than the effects
of general levels of inflation. Interest rates may not necessarily move in the same direction or in the same
magnitude as the prices of goods and services. However, other operating expenses do reflect general levels of
inflation.

Financial Condition

Loan Portfolio

At December 31, 2014, total loans were $9.24 billion, an increase of $1.47 billion or 18.9% compared with
$7.78 billion at December 31, 2013. Loans at December 31, 2014 included $8.6 million of loans held for sale.
Loan growth was impacted by the acquisition of F&M. As of March 31, 2014 (the day prior to acquisition), F&M
reported, on a consolidated basis, total loans of $1.74 billion. At December 31, 2014, total loans were 52.2% of
deposits and 43.0% of total assets.

At December 31, 2013, total loans were $7.78 billion, an increase of $2.60 billion or 50.1% compared with
$5.18 billion at December 31, 2012. Loans at December 31, 2013 included $2.2 million of loans held for sale.
Loan growth was impacted by the acquisition of East Texas Financial Services, Inc., Coppermark Bancshares,
Inc., and FVNB. As of December 31, 2012 (the day prior to acquisition), East Texas Financial Services, Inc.
reported, on a consolidated basis, total loans of $129.3 million. As of March 31, 2013 (the day prior to
acquisition), Coppermark Bancshares, Inc. reported, on a consolidated basis, total loans of $847.6 million. As of
September 30, 2013 (one month and one day prior to acquisition), FVNB, on a consolidated basis, reported total
loans of $1.65 billion. At December 31, 2013, total loans were 50.8% of deposits and 41.7% of total assets.

The following table summarizes the Company’s total loan portfolio by type of loan as of the dates indicated:

2014

2013

December 31,

2012

2011

2010

Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent

. . . . $1,806,267

19.5% $1,279,777

16.5% $ 771,114

14.9% $ 406,433

10.8% $ 409,426

11.7%

(Dollars in thousands)

Commercial and industrial
Real estate:

Construction, land

development and other land
loans . . . . . . . . . . . . . . . . . .
1-4 family residential(1)
. . . . .
Home equity . . . . . . . . . . . . .
Commercial real estate

(including multifamily
residential)(2)

. . . . . . . . . . .
Farmland . . . . . . . . . . . . . . . .
Agriculture . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . .

1,026,475
2,250,251
271,930

11.1% 865,511
24.3% 1,870,365
3.0% 261,355

11.1% 550,768
24.1% 1,255,765
3.4% 186,801

10.6% 482,140
24.2% 1,007,266
3.6% 146,999

12.8% 502,327
26.7% 824,057
3.9% 118,781

14.4%
23.7%
3.4%

3,030,340
361,943
189,703
160,595
146,679

32.8% 2,753,797
3.9% 332,648
2.1% 198,610
1.7% 146,942
66,216
1.6%

35.2% 1,990,642
4.3% 211,156
2.6%
74,481
1.9% 103,725
35,488
0.9%

38.5% 1,441,226
4.1% 136,008
34,226
1.4%
78,187
2.0%
33,421
0.7%

38.3% 1,370,649
98,871
3.6%
41,881
0.9%
87,977
2.1%
31,054
0.9%

39.4%
2.8%
1.2%
2.5%
0.9%

Total loans(3)

. . . . . . . . . . . $9,244,183

100.0% $7,775,221

100.0% $5,179,940

100.0% $3,765,906

100.0% $3,485,023

100.0%

(1)

Includes loans held for sale of $8.6 million, $2.2 million, and $10.4 million at December 31, 2014, 2013 and 2012, respectively. There
were no loans held for sale at December 31, 2011 or 2010.

(2) Commercial real estate loans include approximately $1.51 billion, $1.49 billion, $1.05 billion, $727 thousand and $705 thousand of

(3)

owner-occupied loans for the years ended December 31, 2014, 2013, 2012, 2011 and 2010, respectively.
Includes net of accretable fair value discounts on acquired loans of $99.0 million, $97.7 million, $63.6 million, $109 thousand and $442
thousand at December 31, 2014, 2013, 2012, 2011 and 2010, respectively.

48

The following tables summarize the Company’s legacy and acquired loan portfolios broken out into legacy
loans, acquired legacy loans, Non-PCI loans and PCI loans as of the dates indicated. The Company separates its
loan portfolio into two general categories of loans: (1) loans originated by Prosperity Bank and made pursuant to
the Company’s loan policy and procedures in effect at the time the loan was made are referred to as “legacy
loans” and (2) “acquired loans”, which are loans acquired in a business combination. Those acquired loans that
are renewed or substantially modified after the date of the business combination, which therefore causes them to
become subject to the Company’s allowance for credit losses methodology, are referred to as “acquired legacy
loans.” If a renewal or substantial modification of an acquired loan is underwritten by the Company with a new
credit analysis, the loan will no longer be categorized as an acquired loan. For example, acquired loans to one
borrower may be combined into a new loan with a new loan number and categorized as a legacy loan. Acquired
loans with a fair value discount or premium at the date of the business combination that remained at the reporting
date are referred to as “fair-valued acquired loans.” All fair-valued acquired loans are further categorized into
“Non-PCI loans” and “PCI loans” (purchased credit impaired loans). Acquired loans with evidence of credit
quality deterioration at acquisition for which it is probable that the Company would not be able to collect all
contractual amounts due are PCI loans.

December 31, 2014

Acquired Loans

Legacy
Loans

Acquired
Legacy
Loans

Non-PCI
Loans

PCI
Loans

Total Loans

Residential mortgage loans held for sale . . . . . .

$

8,602

$

(dollars in thousands)
— $

— $ — $

8,602

Commercial and industrial . . . . . . . . . . . . . . . . .
Real estate:

Construction, land development and other

846,665

518,855

414,647

26,100

1,806,267

land loans . . . . . . . . . . . . . . . . . . . . . . . .

801,321

114,066

109,946

1,142

1,026,475

1-4 family residential (including home

equity) . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,877,843

94,331

535,479

5,926

2,513,579

Commercial real estate (including

multi-family residential) . . . . . . . . . . . . .
Farmland . . . . . . . . . . . . . . . . . . . . . . . . . . .
Agriculture . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer and other . . . . . . . . . . . . . . . . . . . . . .

1,883,267
244,162
105,448
189,161

263,904
13,520
72,051
56,839

859,702
103,809
12,149
61,274

23,467
452
55
—

3,030,340
361,943
189,703
307,274

Total loans held for investment

. . . . . . . . . . . . .

5,947,867

1,133,566

2,097,006

57,142

9,235,581

Total . . . . . . . . . . . . . . . . . . . . . . . . . .

$5,956,469

$1,133,566

$2,097,006

$57,142

$9,244,183

49

December 31, 2013

Acquired Loans

Legacy
Loans

Acquired
Legacy
Loans

Non-PCI
Loans

PCI
Loans

Total Loans

(dollars in thousands)

Residential mortgage loans held for sale . . . . . . .

$

2,210

$ — $

— $ — $

2,210

Commercial and industrial
Real estate:

. . . . . . . . . . . . . . . . . .

695,199

216,530

361,822

6,226

1,279,777

Construction, land development and other

land loans . . . . . . . . . . . . . . . . . . . . . . . . . .

602,535

80,011

179,202

3,765

865,513

1-4 family residential (including home

equity) . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,519,143

53,455

552,834

4,078

2,129,510

Commercial real estate (including

multi-family residential) . . . . . . . . . . . . . .
Farmland . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Agriculture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . .
Consumer and other

1,650,910
193,757
60,514
99,339

124,291
11,873
36,503
16,291

951,678
126,515
101,489
97,528

26,916
503
104
—

2,753,795
332,648
198,610
213,158

Total loans held for investment . . . . . . . . . . . . . . .

4,821,397

538,954

2,371,068

41,592

7,773,011

Total

. . . . . . . . . . . . . . . . . . . . . . . . . . .

$4,823,607

$538,954

$2,371,068

$41,592

$7,775,221

The Company’s commercial real estate loans (including multifamily residential) increased $276.5 million or
10.0% to $3.03 billion at December 31, 2014 from $2.75 billion at December 31, 2013. This increase was
primarily related to legacy loan growth. The Company’s commercial real estate loans increased $763.2 million or
38.3% to $2.75 billion at December 31, 2013 from $1.99 billion at December 31, 2012.

The Company offers a broad range of short to medium-term commercial loans, primarily collateralized, to
businesses for working capital (including inventory and receivables), business expansion (including acquisitions
of real estate and improvements) and the purchase of equipment and machinery. Historically, the Company has
originated loans for its own account, including all loans in the 1-4 family residential category, and has not
securitized its loans. Additionally,
through its Home Loan Center, originates longer-term
residential mortgage loans for sale into the secondary market. The purpose of a particular loan generally
determines its structure.

the Company,

Loans to borrowers with aggregate debt relationships over $1.0 million and below $3.5 million are evaluated
and acted upon on a daily basis by two of the company-wide loan concurrence officers. Loans to borrowers with
aggregate debt relationships above $3.5 million are evaluated and acted upon by an officers’ loan committee
which meets weekly. In addition to the officers’ loan committee evaluation, loans to borrowers with aggregate
debt relationships from $25.0 million to $50.0 million are evaluated and acted upon by the directors’ loan
committee which consists of three directors of the Bank and meets as necessary. Loans to borrowers with
aggregate debt relationships over $50.0 million are evaluated and acted upon by the Bank’s Board of Directors
either at a regularly scheduled monthly board meeting or by teleconference or written consent.

Commercial and Industrial Loans. In nearly all cases, the Company’s commercial loans are made in the
Company’s market areas and are underwritten on the basis of the borrower’s ability to service the debt from
income. As a general practice, the Company takes as collateral a lien on any available real estate, equipment or
other assets owned by the borrower and obtains a personal guaranty of the borrower or principal. Working capital
loans are primarily collateralized by short-term assets whereas term loans are primarily collateralized by long-
term assets. In general, commercial
loans involve more credit risk than residential mortgage loans and
commercial mortgage loans and, therefore, usually yield a higher return. The increased risk in commercial loans
is due to the type of collateral securing these loans as well as the expectation that commercial loans generally
will be serviced principally from the operations of the business, and those operations may not be successful.

50

Historical trends have shown these types of loans to have higher delinquencies than mortgage loans. As a result
of these additional complexities, variables and risks, commercial loans require more thorough underwriting and
servicing than other types of loans.

Commercial Real Estate. The Company makes commercial real estate loans collateralized by owner-
occupied and nonowner-occupied real estate to finance the purchase of real estate. The Company’s commercial
real estate loans are collateralized by first liens on real estate, typically have variable interest rates (or five year
or less fixed rates) and amortize over a 15 to 20 year period. Payments on loans secured by nonowner-occupied
properties are often dependent on the successful operation or management of the properties. Accordingly,
repayment of these loans may be subject to adverse conditions in the real estate market or the economy to a
greater extent than other types of loans. The Company seeks to minimize these risks in a variety of ways,
including giving careful consideration to the property’s operating history, future operating projections, current
and projected occupancy, location and physical condition in connection with underwriting these loans. The
underwriting analysis also includes credit verification, analysis of global cash flow, appraisals and a review of
the financial condition of the borrower.

1-4 Family Residential Loans. The Company’s lending activities also include the origination of 1-4 family
residential mortgage loans (including home equity loans) collateralized by owner-occupied residential properties
located in the Company’s market areas. The Company offers a variety of mortgage loan portfolio products which
generally are amortized over five to 25 years. Loans collateralized by 1-4 family residential real estate generally
have been originated in amounts of no more than 89% of appraised value or have mortgage insurance. The
Company requires mortgage title insurance and hazard insurance. The Company retains these portfolio loans for
its own account rather than selling them into the secondary market. By doing so, the Company incurs interest rate
risk as well as the risks associated with nonpayments on such loans. The Company’s Home Loan Center offers a
variety of mortgage loan products which are generally amortized over 30 years, including FHA and VA loans.
The Company sells the loans originated by the Home Loan Center into the secondary market.

Construction, Land Development and Other Land Loans. The Company makes loans to finance the
construction of residential and, to a lesser extent, nonresidential properties. Construction loans generally are
collateralized by first liens on real estate and have floating interest rates. The Company conducts periodic
inspections, either directly or through an agent, prior to approval of periodic draws on these loans. Underwriting
guidelines similar to those described above are also used in the Company’s construction lending activities.
Construction loans involve additional risks attributable to the fact that loan funds are advanced upon the security
of a project under construction, and the project is of uncertain value prior to its completion. Because of
uncertainties inherent in estimating construction costs, the market value of the completed project and the effects
of governmental regulation on real property, it can be difficult to accurately evaluate the total funds required to
complete a project and the related loan to value ratio. As a result of these uncertainties, construction lending
often involves the disbursement of substantial funds with repayment dependent, in part, on the success of the
ultimate project rather than the ability of a borrower or guarantor to repay the loan. If the Company is forced to
foreclose on a project prior to completion, there is no assurance that the Company will be able to recover all of
the unpaid portion of the loan. In addition, the Company may be required to fund additional amounts to complete
a project and may have to hold the property for an indeterminate period of time. While the Company has
underwriting procedures designed to identify what it believes to be acceptable levels of risks in construction
lending, no assurance can be given that these procedures will prevent losses from the risks described above.

Agriculture Loans. The Company provides agriculture loans for short-term crop production, including rice,
cotton, milo and corn, farm equipment financing and agriculture real estate financing. The Company evaluates
agriculture borrowers primarily based on their historical profitability, level of experience in their particular
agriculture industry, overall financial capacity and the availability of secondary collateral to withstand economic
and natural variations common to the industry. Because agriculture loans present a higher level of risk associated
with events caused by nature, the Company routinely makes on-site visits and inspections in order to identify and
monitor such risks.

51

loans, personal

loans, home improvement

Consumer Loans. Consumer loans made by the Company include direct “A”-credit automobile loans,
recreational vehicle loans, boat
(collateralized and
uncollateralized) and deposit account collateralized loans. The terms of these loans typically range from 12 to
180 months and vary based upon the nature of collateral and size of loan. Generally, consumer loans entail
greater risk than do real estate secured loans, particularly in the case of consumer loans that are unsecured or
collateralized by rapidly depreciating assets such as automobiles. In such cases, any repossessed collateral for a
defaulted consumer loan may not provide an adequate source of repayment for the outstanding loan balance. The
remaining deficiency often does not warrant further substantial collection efforts against the borrower beyond
obtaining a deficiency judgment. In addition, consumer loan collections are dependent on the borrower’s
continuing financial stability, and thus are more likely to be adversely affected by job loss, divorce, illness or
personal bankruptcy. Furthermore, the application of various federal and state laws may limit the amount which
can be recovered on such loans.

loans

The contractual maturity ranges of the Company’s loan portfolio by type of loan and the amount of such
loans with predetermined interest rates and floating rates in each maturity range as of December 31, 2014 are
summarized in the following table. Contractual maturities are based on contractual amounts outstanding and do
not include loan purchase discounts of $161.4 million or loans held for sale of $8.6 million at December 31,
2014:

One Year
or Less

Through
Five Years

After Five
Years

Total

(Dollars in thousands)

Commercial and industrial
Real estate:

. . . . . . . . . . . . . . . . . . . . . . . . .

$ 774,040

$ 702,492

$ 404,256

$1,880,788

Construction, land development and other land

loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1-4 family residential (includes home equity)
. . . . . .
Commercial (includes multi-family residential) . . . . .
Agriculture (includes farmland) . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer and other

348,560
31,922
135,957
168,736
123,433

203,759
196,281
600,426
61,549
89,933

478,605
2,302,661
2,351,382
326,940
96,024

1,030,924
2,530,864
3,087,765
557,225
309,390

Total

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$1,582,648

$1,854,440

$5,959,868

$9,396,956

Loans with a predetermined interest rate . . . . . . . . . . . . . .
Loans with a floating interest rate . . . . . . . . . . . . . . . . . . . .

$ 487,134
1,095,514

$ 916,728
937,712

$2,616,963
3,342,905

$4,020,825
5,376,131

Total

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$1,582,648

$1,854,440

$5,959,868

$9,396,956

Nonperforming Assets

Nonperforming assets include loans on nonaccrual status, accruing loans 90 days past due or more, and real
estate which has been acquired through foreclosure and is awaiting disposition. Nonperforming assets do not
include PCI loans unless the timing and amount of projected cash flows can no longer be reasonably estimated.
PCI loans become subject to the Company’s allowance for credit losses methodology when a deterioration in
projected cash flows is identified.

The Company has several procedures in place to assist it in maintaining the overall quality of its loan
portfolio. The Company has established underwriting guidelines to be followed by its officers, and the Company
also monitors its delinquency levels for any negative or adverse trends. There can be no assurance, however, that
the Company’s loan portfolio will not become subject to increasing pressures from deteriorating borrower credit
due to general economic conditions.

As part of the on-going monitoring of the Company’s loan portfolio and the methodology for calculating the
allowance for credit losses, management grades each legacy loan and acquired legacy loan from 1 to 9.

52

Depending on the grade, loans in the same grade are aggregated and a loss factor is applied to the total loans in
the group to determine the allowance for credit losses. For certain loans in risk grades 7 to 9, a specific reserve
may be taken.

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 requires appraisals on loans collateralized by real estate. With respect to potential problem
loans, an evaluation of the borrower’s overall financial condition is made to determine the need, if any, for
possible write-downs or appropriate additions to the allowance for credit losses.

The following table presents information regarding past due loans and nonperforming assets at the dates

indicated:

December 31,

2014

2013

2012

2011

2010

Nonaccrual loans(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accruing loans 90 or more days past due . . . . . . . . . . . . . . .

$31,422
2,193

(Dollars in thousands)
$ 5,382
331

$10,231
4,947

$ 3,578
—

Total nonperforming loans . . . . . . . . . . . . . . . . . . . . . . .
Repossessed assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

33,615
67
3,237

15,178
27
7,299

5,713
68
7,234

3,578
146
8,328

$ 4,439
189

4,628
161
11,053

Total nonperforming assets . . . . . . . . . . . . . . . . . . . . . .

$36,919

$22,504

$13,015

$12,052

$15,842

Nonperforming assets to total loans and other real estate . . .

0.40%

0.29%

0.25%

0.32%

0.45%

(1)

Includes troubled debt restructurings of $911 thousand, $1.4 million, $3.6 million, $5.3 million and $2.6
million for the years ended December 31, 2014, 2013, 2012, 2011 and 2010, respectively.

The following tables present information regarding past due loans and nonperforming assets differentiated

among legacy loans, acquired legacy loans, Non-PCI loans and PCI loans at the dates indicated:

December 31, 2014

Acquired Loans

Legacy Loans

Acquired
Legacy Loans

Non-PCI
Loans

PCI
Loans

Total Loans

Nonaccrual loans . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accruing loans 90 or more days past due . . . . . . . .

Total nonperforming loans . . . . . . . . . . . . . . .
Repossessed assets . . . . . . . . . . . . . . . . . . . . . . . . . .
Other real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$4,197
377

4,574
12
1,608

(Dollars in thousands)

$11,194
1,816

13,010
—

23

$2,947
—

$13,084
—

$31,422
2,193

2,947
55
1,556

13,084
—

50

33,615
67
3,237

Total nonperforming assets . . . . . . . . . . . . . . .

$6,194

$13,033

$4,558

$13,134

$36,919

Nonperforming assets to total loans and other real

estate by category . . . . . . . . . . . . . . . . . . . . . . . .

0.10%

1.15%

0.22% 22.96%

0.40%

53

December 31, 2013

Acquired Loans

Legacy Loans

Acquired
Legacy Loans

Non-PCI
Loans

PCI
Loans

Total Loans

Nonaccrual loans . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accruing loans 90 or more days past due . . . . . . . . .

$ 5,387
1,407

Total nonperforming loans . . . . . . . . . . . . . . . .
Repossessed assets . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

6,794
17
7,071

(Dollars in thousands)

$2,992
1,716

4,708
—
—

$ 890
1,385

$ 962
439

$10,231
4,947

2,275
10
228

1,401
—
—

15,178
27
7,299

Total nonperforming assets . . . . . . . . . . . . . . . .

$13,882

$4,708

$2,513

$1,401

$22,504

Nonperforming assets to total loans and other real

estate by category . . . . . . . . . . . . . . . . . . . . . . . . .

0.29%

0.87%

0.11% 3.37%

0.29%

The Company had $36.9 million in nonperforming assets at December 31, 2014 compared with $22.5
million at December 31, 2013 and $13.0 million at December 31, 2012. The nonperforming assets at
December 31, 2014 consisted of 19 separate credits or ORE properties, while the nonperforming assets at
December 31, 2013 consisted of 40 separate credits or ORE properties. If interest on nonaccrual loans had been
accrued under the original loan terms, approximately $2.7 million, $440 thousand, and $270 thousand would
have been recorded as income for the years ended December 31, 2014, 2013 and 2012, respectively.

At December 31, 2014, $6.2 million of nonperforming assets resulted from legacy loans, $13.0 million of
nonperforming assets resulted from acquired legacy loans, $4.6 million of nonperforming assets resulted from
Non-PCI loans and $13.1 million of nonperforming assets resulted from PCI loans. At December 31, 2013, $13.9
million of nonperforming assets resulted from legacy loans, $4.7 million of nonperforming assets resulted from
acquired legacy loans, $2.5 million of nonperforming assets resulted from Non-PCI loans and $1.4 million of
nonperforming assets resulted from PCI loans. A PCI loan becomes impaired when there is a deterioration in
projected cash flows after acquisition.

Nonperforming assets were 0.40% of total loans and other real estate at December 31, 2014 compared with
0.29% of total loans and other real estate at December 31, 2013. Nonperforming assets were 0.10% of total
legacy loans and other real estate at December 31, 2014 compared with 0.29% of total legacy loans and other real
estate at December 31, 2013. Nonperforming assets were 1.15% of total acquired legacy loans and other real
estate at December 31, 2014 compared with 0.87% of total acquired legacy loans and other real estate at
December 31, 2013. Nonperforming assets were 0.22% of total Non-PCI loans and other real estate and 22.96%
of total PCI loans and other real estate at December 31, 2014 compared with 0.11% of total Non-PCI loans and
other real estate and 3.37% of total PCI loans and other real estate at December 31, 2013. The allowance for
credit losses as a percentage of total nonperforming loans was 240.3% at December 31, 2014 and 443.3% at
December 31, 2013.

The Company had three loans modified in troubled debt restructurings for the year ended December 31,
2014 with a recorded year end investment of $68 thousand and a balance of $69 thousand at date of restructure.
Total TDRs outstanding totaled $911 thousand at December 31, 2014.

54

Allowance for Credit Losses

The following table presents, as of and for the periods indicated, an analysis of the allowance for credit

losses and other related data:

Average loans outstanding . . . . . . . . . . . . . .

$8,988,069

$6,202,897

(Dollars in thousands)
$4,514,171

$3,648,701

2014

Years Ended December 31,
2012

2011

2013

2010

$3,394,502

Gross loans outstanding at end of period . . .

$9,244,183

$7,775,221

$5,179,940

$3,765,906

$3,485,023

Allowance for credit losses at beginning of

period . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for credit losses . . . . . . . . . . . . . . .
Charge-offs:

Commercial and industrial
. . . . . . . . . .
Real estate and agriculture . . . . . . . . . .
. . . . . . . . . . . . . . .
Consumer and other

Recoveries:

Commercial and industrial
. . . . . . . . . .
Real estate and agriculture . . . . . . . . . .
. . . . . . . . . . . . . . .
Consumer and other

$

67,282
18,275

$

52,564
17,240

$

51,594
6,100

$

51,584
5,200

$

51,863
13,585

(818)
(3,458)
(5,674)

466
1,561
3,128

(672)
(1,423)
(3,398)

348
1,330
1,293

(674)
(4,337)
(2,885)

815
342
1,609

(1,694)
(3,927)
(1,229)

(2,863)
(10,549)
(2,071)

481
472
707

346
444
829

Net charge-offs . . . . . . . . . . . . . . . . . . . . . . .

(4,795)

(2,522)

(5,130)

(5,190)

(13,864)

Allowance for credit losses at end of

period . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

80,762

$

67,282

$

52,564

$

51,594

$

51,584

Ratio of allowance to end of period loans . . .
Ratio of net charge-offs to average loans . . .
Ratio of allowance to end of period

0.87%
0.05%

0.87%
0.04%

1.01%
0.11%

1.37%
0.14%

1.48%
0.41%

nonperforming loans . . . . . . . . . . . . . . . . .

240.3%

443.3%

920.1%

1442.0%

1114.6%

The allowance for credit losses is a valuation 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. The amount of the allowance for credit losses is
affected by the following: (1) charge-offs of loans that occur when loans are deemed uncollectible and decrease
the allowance, (2) recoveries on loans previously charged off that increase the allowance and (3) provisions for
credit losses charged to earnings that increase the allowance. Based on an evaluation of the loan portfolio and
consideration of the factors listed below, 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. Although management believes it uses the best information
available to make determinations with respect to the allowance for credit losses, further adjustments may be
necessary if economic conditions differ from the assumptions used in making the initial determinations.

The Company’s allowance for credit losses consists of two components: a specific valuation allowance
based on probable losses on specifically identified loans and a general valuation allowance based on historical
loan loss experience, general economic conditions and other qualitative risk factors both internal and external to
the Company.

In setting the specific valuation allowance, the Company follows a loan review program to evaluate the
credit risk in the total loan portfolio and assigns risk grades to each loan. Through this loan review process, the
Company maintains an internal list of impaired loans which, along with the delinquency list of loans, helps
management assess the overall quality of the loan portfolio and the adequacy of the allowance for credit losses.

55

All loans that have been identified as impaired are reviewed on a quarterly basis in order to determine whether a
specific reserve is required. For certain impaired loans, the Company allocates a specific loan loss reserve
primarily based on the value of the collateral securing the impaired loan. The specific reserves are determined on
an individual loan basis. Loans for which specific reserves are provided are excluded from the general valuation
allowance described below.

In connection with this review of the loan portfolio, the Company considers risk elements attributable to
particular loan types or categories in assessing the quality of individual loans. Some of the risk elements include:

•

•

•

•

•

•

for 1-4 family residential mortgage loans, the borrower’s ability to repay the loan, including a
consideration of the debt to income ratio and employment and income stability, the loan to value ratio,
and the age, condition and marketability of collateral;

for commercial mortgage loans and multifamily residential loans, the debt service coverage ratio
(income from the property in excess of operating expenses compared to loan payment requirements),
operating results of the owner in the case of owner-occupied properties, the loan to value ratio, the age
and condition of the collateral and the volatility of income, property value and future operating results
typical of properties of that type;

for construction, land development and other land loans, the perceived feasibility of the project
including the ability to sell developed lots or improvements constructed for resale or the ability to lease
property constructed for lease, the quality and nature of contracts for presale or prelease, if any,
experience and ability of the developer and loan to value ratio;

for commercial and industrial loans, the operating results of the commercial, industrial or professional
enterprise, the borrower’s business, professional and financial ability and expertise, the specific risks
and volatility of income and operating results typical for businesses in that category and the value,
nature and marketability of collateral;

for agricultural real estate loans, the experience and financial capability of the borrower, projected debt
service coverage of the operations of the borrower and loan to value ratio; and

for non-real estate agricultural loans, the operating results, experience and financial capability of the
borrower, historical and expected market conditions and the value, nature and marketability of
collateral.

In addition, for each category, the Company considers secondary sources of income and the financial

strength and credit history of the borrower and any guarantors.

In determining the amount of the general valuation allowance, management considers factors such as
historical loan loss experience, concentration risk of specific loan types, the volume, growth and composition of
the Company’s loan portfolio, current economic conditions that may affect the borrower’s ability to pay and the
value of collateral, the evaluation of the Company’s loan portfolio through its internal loan review process,
general economic conditions and other qualitative risk factors both internal and external to the Company and
other relevant factors. Based on a review of these factors for each loan type, the Company applies an estimated
percentage to the outstanding balance of each loan type, excluding any loan that has a specific reserve allocated
to it. The Company uses this information to establish the amount of the general valuation allowance.

A change in the allowance for credit losses can be attributable to several factors, most notably (1) specific
reserves identified for impaired loans, (2) historical credit loss information, (3) changes in environmental factors
and (4) growth in the balance of legacy loans and the re-categorization of fair-valued acquired loans to acquired
legacy loans, which subjects such loans to the allowance methodology.

Changes in the Company’s asset quality are reflected in the allowance in several ways. Specific reserves that
are calculated on a loan-by-loan basis and the qualitative assessment of all other loans reflect current changes in

56

the credit quality of the loan portfolio. Historical credit losses, on the other hand, are based on a three-year look
back period, which are then applied to estimate current credit losses inherent in the loan portfolio. A deterioration
in the credit quality of the loan portfolio in the current period would increase the historical credit loss factor to be
applied in future periods, just as an improvement in credit quality would decrease the historical credit loss factor.

The allowance for credit losses is further determined by the size of the loan portfolio subject to the
allowance methodology and environmental factors that include Company-specific risk indicators and general
economic conditions, both of which are constantly changing. The Company evaluates the economic and
portfolio-specific factors on a quarterly basis to determine a qualitative component of the general valuation
allowance. The factors include economic metrics, business conditions, delinquency trends, credit concentrations,
nature and volume of the portfolio and other adjustments for items not covered by specific reserves and historical
loss experience. Management’s assessment of qualitative factors is a statistically based approach to determine the
loan loss
inherent probable loss associated with such factors. Based on the Company’s actual historical
experience relative to economic and loan portfolio-specific factors at the time the losses occurred, management is
able to identify the probabilities of default and loss severity based on current economic conditions. The
correlation of historical loss experience with current economic conditions provides an estimate of inherent and
probable losses that has not been previously factored into the general valuation allowance by the determination of
specific reserves and recent historical losses. Additionally, through back-testing, the Company is able to adjust
the outputs of the analysis for imprecision.

Utilizing the aggregation of specific reserves, historical loss experience and a qualitative component,

management is able to determine the valuation allowance to reflect the full inherent probable loss.

In determining the allowance for credit losses, management also considers the type of loan (legacy or
acquired) and the credit quality of the loan. The Company delineates between legacy loans and acquired legacy
loans, which are accounted for under the contractual yield method, and fair-valued acquired loans consisting of
Non-PCI loans and PCI loans, which are accounted for as purchased loans.

Loans acquired in business combinations are initially recorded at fair value, which includes an estimate of
inherent credit
losses expected to be realized over the remaining lives of the loans, and therefore no
corresponding allowance for credit losses is recorded for these loans at acquisition. When a fair-valued acquired
loan is renewed at its maturity date, the loan is re-categorized as an acquired legacy loan. When a fair-valued
acquired loan is modified after acquisition, the loan is independently evaluated subsequent to the modification
decision to determine whether the modification was substantial, and therefore, requires that the loan be re-
categorized as an acquired legacy loan. This determination is based on a discounted cash-flow analysis.
Generally, when a change in discounted cash-flow of greater than 10% is identified, the fair-valued acquired loan
becomes categorized as an acquired legacy loan. If and when a fair-valued acquired loan becomes an acquired
legacy loan, the acquired legacy loan is evaluated at the time of renewal or modification in accordance with the
Company’s allowance for credit losses methodology described above.

Non-PCI loans which were not deemed impaired subsequent to the acquisition date are considered non-
impaired and are evaluated as part of the general valuation allowance. Non-PCI loans that have not become
impaired subsequent to acquisition are segregated into a pool for each acquisition for allowance calculation
purposes. For each pool, the Company estimates a hypothetical allowance for credit losses also referred to as an
“indicated reserve” that is calculated in accordance with GAAP requirements. The Company uses the acquired
bank’s past loss history adjusted for qualitative factors to establish the indicated reserve. The indicated reserve
for each pool of Non-PCI loans is compared with the remaining discount for the respective pool to test for credit
quality deterioration and the possible need for a loan loss provision. To the extent the remaining discount of the
pool is greater than the indicated reserve, no additional allowance is necessary. In the event that the remaining
discount of the pool is less than the indicated reserve, the difference results in an increase to the allowance
recorded through a provision for credit losses.

57

Non-PCI loans that have deteriorated to an impaired status subsequent to acquisition are evaluated for a
specific reserve on a quarterly basis which, when identified, is added to the allowance for credit losses. The
Company reviews impaired Non-PCI loans on a loan-by-loan basis and determines the specific reserve based on
the difference between the recorded investment in the loan and one of three factors: expected future cash flows,
observable market price or fair value of the collateral. Because essentially all of the Company’s impaired Non-
PCI loans have been collateral-dependent, the amount of the specific reserve historically has been determined by
comparing the fair value of the collateral securing the Non-PCI loan with the recorded investment in such loan.
In the future, the Company will continue to analyze impaired Non-PCI loans on a loan-by-loan basis and may use
an alternative measurement method to determine the specific reserve, as appropriate and in accordance with
applicable accounting standards.

PCI loans are individually monitored on a quarterly basis to assess for deterioration subsequent
to
acquisition and are only subject to the Company’s allowance methodology when a deterioration in projected cash
flows is identified. In the event that a deterioration in cash flows is identified, an additional provision for credit
losses is made. PCI loans were recorded at their acquisition date fair values, which were based on expected cash
flows and included estimates of expected future credit losses. The Company’s estimates of loan fair values at the
acquisition date may be adjusted for a period of up to one year as the Company continues to evaluate its estimate
of expected future cash flows at the acquisition date. If the Company determines that losses arose after the
acquisition date, the additional losses will be reflected as a provision for credit losses. An allowance for credit
losses is not calculated for PCI loans that have not experienced deterioration subsequent to the acquisition date.
See “Critical Accounting Policies” above for more information.

As described in the section captioned “Critical Accounting Policies” above, the Company’s determination of
the allowance for credit losses involves a high degree of judgment and complexity. The Company’s analysis of
qualitative, or environmental, factors on pools of loans with common risk characteristics, in combination with the
quantitative historical loss information and specific reserves, provides the Company with an estimate of inherent
losses. The allowance must reflect changes in the balance of loans subject to the allowance methodology, as well
as the estimated imminent losses associated with those loans. In the Company’s case, due to minimal specific
reserves and the improved historical loss factors, partially offset by a slight deterioration in environmental
factors, the $13.5 million increase in the allowance for credit losses for the year ended December 31, 2014 was
primarily attributable to the growth in the acquired legacy loan portfolio.

The following table shows the allocation of the allowance for credit losses among various categories of
loans and certain other information as of the dates indicated. The allocation is made for analytical purposes and is
not necessarily indicative of the categories in which future losses may occur. The total allowance is available to
absorb losses from any loan category.

2014

Percent of
Loans to

2013

Percent of
Loans to

December 31,

2012

Percent of
Loans to

2011

Percent of
Loans to

Amount

Total Loans Amount

Total Loans Amount

Total Loans Amount

Total Loans Amount

2010

Percent of
Loans to
Total Loans

(Dollars in thousands)

Balance of allowance for

credit losses
applicable to:
Commercial and

industrial . . . . . . . . $30,002
44,946
3,722

Real estate . . . . . . . . .
Agriculture . . . . . . . .
Consumer and

other . . . . . . . . . . . .

2,092

Total allowance for

19.5% $ 8,167
71.2% 56,234
1,229
6.0%

16.5% $ 5,777
73.9% 45,458
764
6.8%

14.9% $ 3,826
76.9% 46,587
123
5.5%

10.8% $ 3,891
85.3% 46,446
92
0.9%

11.6%
83.4%
1.3%

3.3%

1,652

2.8%

565

2.7%

1,058

3.0%

1,155

3.7%

credit losses . . . . $80,762

100.0% $67,282

100.0% $52,564

100.0% $51,594

100.0% $51,584

100.0%

58

Beginning in 2013, the Company began to further disaggregate its allowance for credit losses to distinguish

between the portion of the allowance attributed to legacy loans and the portion attributed to acquired loans.

The following table presents, as of and for the period indicated, information regarding the allowance for
credit losses differentiated between legacy loans and acquired loans. The charge-offs and recoveries with respect
to the acquired loans shown below are primarily from acquired legacy loans. Reported net charge-offs may
include those from Non-PCI loans and PCI loans, but only if the total charge-off required is greater than the
remaining discount.

Average loans outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

As of and for the Year Ended December 31, 2014

Legacy Loans Acquired Loans

Total

$5,495,000

(Dollars in thousands)
$3,493,069

$8,988,069

Gross loans outstanding at end of period . . . . . . . . . . . . . . . . . . . . . . .

$5,956,469

$3,287,714

$9,244,183

Allowance for credit losses at beginning of period . . . . . . . . . . . . . . .
Provision for credit losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Charge-offs:

Commercial and industrial . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate and agriculture . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Recoveries:

Commercial and industrial . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate and agriculture . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

60,115
2,715

$

7,167
15,560

$

67,282
18,275

(310)
(471)
(5,276)

359
1,557
3,056

(508)
(2,987)
(398)

107
4
72

(818)
(3,458)
(5,674)

466
1,561
3,128

Net charge-offs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(1,085)

(3,710)

(4,795)

Allowance for credit losses at end of period . . . . . . . . . . . . . . . . . . . .

$

61,745

$

19,017

$

80,762

Ratio of allowance to end of period loans . . . . . . . . . . . . . . . . . . . . . .
Ratio of net charge-offs to average loans . . . . . . . . . . . . . . . . . . . . . . .
Ratio of allowance to end of period nonperforming loans . . . . . . . . . .

1.04%
0.02%
1349.9%

0.58%
0.11%
65.5%

0.87%
0.05%
240.3%

The Company had gross charge-offs on legacy loans of $6.1 million during the year ended December 31,
2014. Partially offsetting these charge-offs were recoveries on legacy loans of $5.0 million. Total charge-offs for
the year ended December 31, 2014 were $10.0 million, partially offset by total recoveries of $5.2 million.

59

The following tables show the allocation of the allowance for credit losses among various categories of
loans disaggregated between legacy loans, acquired legacy loans, Non-PCI loans and PCI loans at the dates
indicated. The allocation is made for analytical purposes and is not necessarily indicative of the categories in
which future losses may occur. The total allowance is available to absorb losses from any loan category,
regardless of whether allocated to a legacy loan or an acquired loan.

December 31, 2014

Acquired Loans

Legacy
Loans

Acquired
Legacy Loans

Non-PCI
Loans

PCI
Loans

Total
Allowance

(Dollars in thousands)

Balance of allowance for credit losses

applicable to:

Commercial and industrial . . . . . . . . . . . .
Real estate . . . . . . . . . . . . . . . . . . . . . . . .
Agriculture and agriculture real estate . . .
Consumer and other . . . . . . . . . . . . . . . . .

$17,511
40,138
2,278
1,818

$11,818
4,580
1,440
123

$ 673

$— $30,002
44,946
3,722
2,092

228 —
4 —
151 —

Percent of
Loans to
Total Loans

19.5%
71.2%
6.0%
3.3%

Total allowance for credit losses . . . . . . . . . . .

$61,745

$17,961

$1,056

$— $80,762

100.0%

December 31, 2013

Acquired Loans

Legacy
Loans

Acquired
Legacy Loans

Non-PCI
Loans

PCI
Loans

Total
Allowance

(Dollars in thousands)

Percent of
Loans to
Total Loans

Balance of allowance for credit losses

applicable to:

Commercial and industrial . . . . . . . . . . . .
Real estate . . . . . . . . . . . . . . . . . . . . . . . .
Agriculture and agriculture real estate . . .
Consumer and other . . . . . . . . . . . . . . . . .

$ 6,139
51,235
1,174
1,567

Total allowance for credit losses . . . . . . . . . . .

$60,115

$1,831
4,889
55
71

$6,846

$197
110
—
14

$321

$— $ 8,167
56,234
—
1,229
—
1,652
—

16.5%
73.9%
6.8%
2.8%

$— $67,282

100.0%

At December 31, 2014, the allowance for credit losses totaled $80.8 million or 0.87% of total loans. At
December 31, 2013, the allowance for credit losses totaled $67.3 million or 0.87% of total loans, and at
December 31, 2012, the allowance aggregated $52.6 million or 1.01% of total loans. The allowance for credit
losses totaled $80.8 million at December 31, 2014 compared with $67.3 million at December 31, 2013, an
increase of $13.5 million or 20.0%.

At December 31, 2014, $61.7 million of the allowance was attributable to legacy loans, an increase of $1.6
million or 2.7% compared with the allowance of $60.1 million attributable to legacy loans at December 31, 2013.
Although the legacy loan balance increased over this period, the increase did not impact the allowance because
the Company’s historical loss factor improved as a number of historical losses fell out of the look-back period.

At December 31, 2014, $1.1 million of the allowance was attributable to Non-PCI loans compared with
$321 thousand of the allowance at December 31, 2013, an increase of $735 thousand or 229.0%. The increase
was primarily attributable to a specific reserve identified for a commercial real estate loan that became impaired.

The remaining $18.0 million of the allowance for credit losses at December 31, 2014 was attributable to
acquired legacy loans compared with $6.8 million of the allowance at December 31, 2013, an increase of $11.1

60

million or 162.4%. The increase was primarily due to the increase in the acquired legacy loan balance as a result
of the recategorization of fair-valued acquired loans to acquired legacy loans, partially offset by the improved
historical loss factors.

At December 31, 2014, the Company had $161.4 million of total outstanding discounts on Non-PCI and PCI

loans, of which $99.0 million was accretable.

The Company believes that the allowance for credit losses at December 31, 2014 is adequate to cover
estimated losses in the loan portfolio as of such date. There can be no assurance, however, that the Company will
not sustain losses in future periods, which could be substantial in relation to the size of the allowance at
December 31, 2014.

Securities

The Company uses its securities portfolio to manage interest rate risk and as a source of income and
liquidity for cash requirements. At December 31, 2014, the carrying amount of investment securities totaled
$9.05 billion, an increase of $821.3 million or 10.0% compared with $8.22 billion at December 31, 2013. The
increase in the securities portfolio during 2014 was primarily due to the purchase of securities funded with cash
proceeds obtained from the F&M acquisition. At December 31, 2014, securities represented 42.1% of total assets
compared with 44.1% of total assets at December 31, 2013.

At the date of purchase, the Company is required to classify debt and equity securities into one of three
categories: held to maturity, trading or available for sale. At each reporting date, the appropriateness of the
classification is reassessed. Investments in debt securities are classified as held to maturity and measured at
amortized cost in the financial statements only if management has the positive intent and ability to hold those
securities to maturity. Securities that are bought and held principally for the purpose of selling them in the near
term are classified as trading and measured at fair value in the financial statements with unrealized gains and
losses included in earnings. Investments not classified as either held to maturity or trading are classified as
available for sale and measured at fair value in the financial statements with unrealized gains and losses reported,
net of tax, in a separate component of shareholders’ equity until realized.

The following table summarizes the carrying value by classification of securities as of the dates shown:

2014

December 31,

2013

2012

Amortized
Cost

Fair
Value

Amortized
Cost

Fair
Value

Amortized
Cost

Fair
Value

(Dollars in thousands)

Available for Sale
States and political subdivisions . . . . . . . . $
Collateralized mortgage obligations . . . . .
Mortgage-backed securities . . . . . . . . . . . .
Other securities . . . . . . . . . . . . . . . . . . . . .

14,402 $
33,519
79,153
12,588

14,585 $
33,573
84,483
12,758

28,578 $
483
108,316
12,589

29,375 $
489
115,137
12,477

34,743 $
616
168,701
8,786

36,434
604
180,416
9,216

Total . . . . . . . . . . . . . . . . . . . . . . . . . . $ 139,662 $ 145,399 $ 149,966 $ 157,478 $ 212,846 $ 226,670

Held to Maturity
U.S. Treasury securities and obligations of

U.S. Government agencies . . . . . . . . . . $

52,353 $

States and political subdivisions . . . . . . . .
Corporate debt securities . . . . . . . . . . . . . .
Collateralized mortgage obligations . . . . .
Mortgage-backed securities . . . . . . . . . . . .

404,356
—
19,585
8,424,083

52,639 $
409,081
—
19,792
8,467,180

62,931 $
439,235
513
50,034
7,514,257

62,042 $
441,345
518
50,993
7,432,444

7,061 $

404,410
1,500
125,912
6,676,512

7,221
413,579
1,528
128,166
6,868,201

Total . . . . . . . . . . . . . . . . . . . . . . . . . . $8,900,377 $8,948,692 $8,066,970 $7,987,342 $7,215,395 $7,418,695

61

Certain investment securities are valued at less than their historical cost. Management evaluates securities
for other-than-temporary impairment (“OTTI”) at least on a quarterly basis, and more frequently when economic
or market conditions warrant such an evaluation.

In determining OTTI, management considers many factors, including: (1) the length of time and the extent
to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer,
(3) whether the market decline was affected by macroeconomic conditions and (4) whether the entity has the
intent to sell the debt security or more likely than not will be required to sell the debt security before its
anticipated recovery. The assessment of whether an other-than-temporary decline exists involves a high degree of
subjectivity and judgment and is based on the information available to management at a point in time.

As of December 31, 2014, management does not have the intent to sell any of the securities classified as
available for sale and believes that it is more likely than not that the Company will not have to sell any such
securities before a recovery of cost. As of December 31, 2014, management believes any impairment in the
Company’s securities is temporary and no impairment loss has been realized in the Company’s consolidated
statement of income. The Company recorded no other-than-temporary impairment charges in 2012, 2013 or
2014.

The following table summarizes the contractual maturity of securities and their weighted average yields as
of December 31, 2014. The contractual maturity of a mortgage-backed security is the date at which the last
underlying mortgage matures. Available for sale securities are shown at fair value and held to maturity securities
are shown at amortized cost. Other securities are included in the corporate debt securities category. For purposes
of the table below, tax-exempt states and political subdivisions are calculated on a tax equivalent basis.

December 31, 2014

Within One
Year

After One Year
but
Within Five Years

After Five Years
but
Within Ten Years

After Ten
Years

Total

Amount Yield Amount

Yield

Amount

Yield

Amount

Yield

Total

Yield

(Dollars in thousands)

U.S. Treasury securities and

obligations of U.S.
government agencies . . . $ 2,020

0.41% $ 34,071

0.81%$

16,262

2.45% $

— — $

52,353

1.31%

States and political

subdivisions . . . . . . . . . .
Other securities . . . . . . . . . .
Collateralized mortgage

obligations . . . . . . . . . . .

Mortgage-backed

30,987
12,758

2.31% 146,607
3.63%

— —

1.70% 176,352

2.44%

64,995

— —

3.32% 418,941
12,758

— —

2.31%
3.63%

— —

— —

18,569

3.42%

34,589

0.44%

53,158

1.48%

securities . . . . . . . . . . . . .

1,066

4.21% 241,015

4.38% 1,456,272

2.80% 6,810,213

2.17% 8,508,566

2.34%

Total . . . . . . . . . . . . . . $46,831

2.63% $421,693

3.16%$1,667,455

2.77% $6,909,797

2.17% $9,045,776

2.33%

The contractual maturity of mortgage-backed securities and collateralized mortgage obligations is not a
reliable indicator of their expected life because borrowers have the right to prepay their obligations at any time.
Mortgage-backed securities monthly pay downs cause the average lives of the securities to be much different
than their stated lives. During a period of increasing interest rates, fixed rate mortgage-backed securities do not
tend to experience heavy prepayments of principal and consequently, the average life of this security will be
lengthened. If interest rates begin to fall, prepayments may increase, thereby shortening the estimated life of this
security. The weighted average life of the Company’s complete portfolio is 4.11 years with a modified duration
of 3.80 years at December 31, 2014.

At December 31, 2014 and 2013, the Company did not own securities of any one issuer (other than the U.S.
government and its agencies) for which aggregate adjusted cost exceeded 10% of the consolidated shareholders’
equity at such respective dates.

62

The average tax equivalent yield of the securities portfolio was 2.33% as of December 31, 2014 compared
with 2.39% as of December 31, 2013 and 2.45% as of December 31, 2012. The average yield excluding the tax
equivalent adjustment was 2.16% for the year ended December 31, 2014. Both decreases in yields were primarily
due to the Company reinvesting funds at lower rates in 2014 and 2013 compared with 2013 and 2012,
respectively. The overall non-acquisition growth in the average securities portfolio over the comparable periods
was primarily funded by deposit growth.

Mortgage-backed securities are securities that have been developed by pooling a number of real estate
mortgages and which are principally issued by federal agencies such as Government National Mortgage
Association (Ginnie Mae), Fannie Mae and Freddie Mac. These securities are deemed to have high credit ratings,
and minimum regular monthly cash flows of principal and interest are guaranteed by the issuing agencies.

Unlike U.S. Treasury and U.S. government agency securities, which have a lump sum payment at maturity,
mortgage-backed securities provide cash flows from regular principal and interest payments and principal
prepayments throughout the lives of the securities. Premiums and discounts on mortgage-backed securities are
amortized over the expected life of the security and may be impacted by prepayments. As such, mortgage-backed
securities which are purchased at a premium will generally suffer decreasing net yields as interest rates drop
because home owners tend to refinance their mortgages resulting in prepayments and an acceleration of premium
amortization. Securities purchased at a discount will obtain higher net yields in a decreasing interest rate
environment as prepayments result in a acceleration of discount accretion. At December 31, 2014, 80.0% of the
mortgage-backed securities held by the Company had contractual final maturities of more than ten years with a
weighted average life of 4.27 years.

Collateralized mortgage obligations (“CMOs”) are bonds that are backed by pools of mortgages. The pools
can be Ginnie Mae, Fannie Mae or Freddie Mac pools or they can be private-label pools. CMOs are designed so
that the mortgage collateral will generate a cash flow sufficient to provide for the timely repayment of the bonds.
The mortgage collateral pool can be structured to accommodate various desired bond repayment schedules,
provided that the collateral cash flow is adequate to meet scheduled bond payments. This is accomplished by
dividing the bonds into classes to which payments on the underlying mortgage pools are allocated in different
order. The bond’s cash flow, for example, can be dedicated to one class of bondholders at a time, thereby
increasing call protection to bondholders. In private-label CMOs, losses on underlying mortgages are directed to
the most junior of all classes and then to the classes above in order of increasing seniority, which means that the
senior classes have enough credit protection to be given the highest credit rating by the rating agencies.

Deposits

The Company’s lending and investing activities are primarily funded by deposits. The Company offers a
variety of deposit accounts having a wide range of interest rates and terms including demand, savings, money
market and time accounts. The Company relies primarily on competitive pricing policies and customer service to
attract and retain these deposits.

Total deposits at December 31, 2014, were $17.69 billion, an increase of $2.40 billion or 15.7% compared
with $15.29 billion at December 31, 2013 due primarily to the F&M acquisition completed during 2014 which
added approximately $2.27 billion in deposits at acquisition date. Excluding deposits from this acquisition at
December 31, 2014, deposits increased 2.2% for the year ended December 31, 2014, compared with their level at
December 31, 2013. Total deposits at December 31, 2013 were $15.29 billion, an increase of $3.65 billion or
31.3% compared with $11.64 billion at December 31, 2012 due to the three acquisitions completed in 2013.
Noninterest-bearing deposits at December 31, 2014 were $4.94 billion compared with $4.11 billion at
December 31, 2013, an increase of $827.6 million or 20.1%. Noninterest-bearing deposits at December 31, 2013
were $4.11 billion compared with $3.02 billion at December 31, 2012, an increase of $1.09 billion or 36.2%.
Interest-bearing deposits at December 31, 2014 were $12.76 billion, an increase of $1.58 billion or 14.1%
compared with $11.18 billion at December 31, 2013. Interest-bearing deposits at December 31, 2013, were
$11.18 billion, an increase of $2.56 billion or 29.6% compared with $8.63 billion at December 31, 2012.

63

The daily average balances and weighted average rates paid on deposits for each of the years ended

December 31, 2014, 2013 and 2012 are presented below:

Years Ended December 31,

2014

2013

2012

Average
Balance

Average
Rate

Average
Balance

Average
Rate

Average
Balance

Average
Rate

(Dollars in thousands)

Interest-bearing checking . . . . . . . . . . . .
Regular savings . . . . . . . . . . . . . . . . . . . .
Money market savings . . . . . . . . . . . . . .
Time deposits . . . . . . . . . . . . . . . . . . . . .

$ 3,516,987
1,688,541
3,667,426
3,129,710

0.24% $ 2,651,320
1,398,274
0.20
2,839,049
0.27
2,530,065
0.51

0.30% $1,979,345
0.21
907,766
2,266,490
0.32
2,152,382
0.61

0.42%
0.22
0.38
0.73

Total interest-bearing deposits . . . .
Noninterest-bearing deposits . . . . . . . . . .

12,002,664
4,687,680 —

0.32

0.37
9,418,708
3,345,594 —

0.47
7,305,983
2,442,860 —

Total deposits . . . . . . . . . . . . . . . . .

$16,690,344

0.23% $12,764,302

0.28% $9,748,843

0.35%

The Company’s ratio of average noninterest-bearing deposits to average total deposits for the years ended

December 31, 2014, 2013 and 2012 was 28.1%, 26.2%, and 25.1%, respectively.

The following table sets forth the amount of the Company’s certificates of deposit that are $100,000 or

greater by time remaining until maturity at December 31, 2014 (dollars in thousands):

Three months or less . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Over three through six months . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Over six through 12 months . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Over 12 months . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 625,392
828,372
287,079
116,415

33.7%
44.6
15.4
6.3

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$1,857,258

100.0%

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 securities sold under repurchase
agreements.

The following table presents the Company’s borrowings at December 31, 2014 and 2013:

December 31, 2014

FHLB
Advances

FHLB
Long-Term
Notes Payable

Securities
Sold Under
Repurchase
Agreements

(Dollars in thousands)

Amount outstanding at year-end . . . . . . . . . . . . . . . . $ — $ 8,724
Weighted average interest rate at year-end . . . . . . .
—
Maximum month-end balance during the year . . . . . $910,000
Average balance outstanding during the year . . . . . . $134,370
Weighted average interest rate during the year . . . .

$10,689
$10,200

0.17%

5.35%

5.43%

December 31, 2013

Amount outstanding at year-end . . . . . . . . . . . . . . . . $ — $10,689
Weighted average interest rate at year-end . . . . . . .
—
Maximum month-end balance during the year . . . . . $855,000
Average balance outstanding during the year . . . . . . $449,350
Weighted average interest rate during the year . . . .

$51,768
$21,275

0.09%

5.24%

5.21%

64

$315,523

0.26%

$432,640
$361,025

0.26%

$364,357

0.27%

$520,276
$443,231

0.27%

FHLB advances and long-term notes payable—The Company has an available line of credit with the FHLB
of Dallas, which allows the Company to borrow on a collateralized basis. The Company’s FHLB advances are
typically considered short-term, overnight borrowings used to manage liquidity as needed. Maturing advances
are replaced by drawing on available cash, making additional borrowings or through increased customer deposits.
At December 31, 2014, the Company had total funds of $5.91 billion available under this agreement of which a
total amount of $8.7 million was outstanding. At December 31, 2014, there were no short-term overnight FHLB
advances outstanding. Long-term notes payable were $8.7 million at December 31, 2014, with an average interest
rate of 5.43%. The maturity dates on the FHLB notes payable range from the years 2015 to 2027 and have
interest rates ranging from 4.23% to 6.10%.

Securities sold under repurchase agreements with Company customers—At December 31, 2014, the
Company had $315.5 million in securities sold under repurchase agreements compared with $364.4 million at
December 31, 2013 with weighted average rates paid of 0.26% and 0.27% for the years ended December 31,
2014 and 2013, respectively. Repurchase agreements are generally settled on the following business day;
however, approximately $22.0 million of repurchase agreements outstanding at December 31, 2014 have
maturity dates ranging from 3 to 24 months. All securities sold under agreements to repurchase are collateralized
by certain pledged securities.

Junior Subordinated Debentures

At December 31, 2014 and 2013, the Company had outstanding $167.5 million and $124.2 million,
respectively, in junior subordinated debentures issued to the Company’s unconsolidated subsidiary trusts. On
April 1, 2014, the Company acquired FMBC and assumed the obligations related to the junior subordinated
debentures issued to F&M Bancorporation Statutory Trust I, F&M Bancorporation Statutory Trust II and F&M
Bancorporation Statutory Trust III. In late 2014, the Company gave irrevocable notice of its intent to redeem
three of the twelve outstanding issuances of junior subordinated debentures, which total $41.2 million, in January
2015. Since December 31, 2014, the Company has provided irrevocable notice of its intent to redeem the
remaining junior subordinated debentures during the first quarter of 2015.

65

A summary of pertinent

information related to the Company’s twelve issues of junior subordinated

debentures outstanding at December 31, 2014 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(3)

. . . . .

July 31, 2001

$15,000

(Dollars in thousands)
3 month LIBOR
+3.58%, not to
exceed 2.50%

$ 15,464

July 31, 2031

Prosperity Statutory Trust III . . . . . . August 15, 2003

12,500

Prosperity Statutory Trust IV . . . . . . December 30, 2003

12,500

SNB Capital Trust IV . . . . . . . . . . . . September 25, 2003

10,000

TXUI Statutory Trust II(3) . . . . . . . . . December 19, 2003

5,000

TXUI Statutory Trust III . . . . . . . . . . November 30, 2005

15,500

TXUI Statutory Trust IV . . . . . . . . . March 31, 2006

12,000

FVNB Capital Trust II . . . . . . . . . . .

June 14, 2005

18,000

FVNB Capital Trust III(3) . . . . . . . . .

June 23, 2006

20,000

F&M Bancorporation Statutory

Trust I(4)

. . . . . . . . . . . . . . . . . . . . March 26, 2003

15,000

F&M Bancorporation Statutory

Trust II(4) . . . . . . . . . . . . . . . . . . . . March 17, 2004

12,000

F&M Bancorporation Statutory

Trust III(4)

. . . . . . . . . . . . . . . . . . . December 15, 2005

15,000

3 month LIBOR
+3.00%

3 month LIBOR
+2.85%

3 month LIBOR
+3.00%

3 month LIBOR
+2.85%

3 month LIBOR
+1.39%

3 month LIBOR
+1.39%

3 month LIBOR
+1.68%

3 month LIBOR
+1.60%

3 month LIBOR
+3.15%

3 month LIBOR
+2.79%

3 month LIBOR
+1.80%

12,887

September 17, 2033

12,887

December 30, 2033

10,310

September 25, 2033

5,155

December 19, 2033

15,980

December 15, 2035

12,372

June 30, 2036

18,557

June 15, 2035

20,619

July 7, 2036

15,464

March 26, 2033

12,372

March 17, 2034

15,464

December 15, 2035

$167,531

(1) The 3-month LIBOR in effect as of December 31, 2014 was 0.246%.
(2) All debentures are callable five years from issuance date.
(3) During the fourth quarter of 2014, the Company gave irrevocable notice of its intent to fully redeem these

junior subordinated debentures in January 2015.

(4) Assumed in connection with the F&M acquisition on April 1, 2014.

Each of the trusts is a capital or statutory business trust organized for the sole purpose of issuing trust
securities and investing the proceeds in the Company’s junior subordinated debentures. The preferred trust
securities of each trust represent preferred beneficial interests in the assets of the respective trusts and are subject
to mandatory redemption upon payment of the junior subordinated debentures held by the trust. The common
securities of each trust are wholly owned by the Company. Each trust’s ability to pay amounts due on the trust
preferred securities is solely dependent upon the Company making payment on the related junior subordinated
debentures. The debentures, which are the only assets of each trust, are subordinate and junior in right of
payment
to all of the Company’s present and future senior indebtedness. The Company has fully and
unconditionally guaranteed each trust’s obligations under the trust securities issued by such trust to the extent not
paid or made by each trust, provided such trust has funds available for such obligations.

66

Under the provisions of each issue of the debentures, the Company has the right to defer payment of interest
on the debentures at any time, or from time to time, for periods not exceeding five years. If interest payments on
either issue of the debentures are deferred, the distributions on the applicable trust preferred securities and
common securities will also be deferred.

Interest Rate Sensitivity and Market Risk

The Company’s asset liability and funds management policy provides management with the guidelines for
effective funds management, and the Company has established a measurement system for monitoring its net
interest rate sensitivity position. The Company manages its sensitivity position within established guidelines.

As a financial institution, the Company’s primary component of market risk is interest rate volatility.
Fluctuations in interest rates will ultimately impact both the level of income and expense recorded on most of the
Company’s assets and liabilities, and the market value of all
interest-earning assets and interest-bearing
liabilities, other than those which have a short term to maturity. Interest rate risk is the potential of economic
losses due to future interest rate changes. These economic losses can be reflected as a loss of future net interest
income and/or a loss of current fair market values. The objective is to measure the effect on net interest income
and to adjust the balance sheet to minimize the inherent risk while at the same time maximizing income.

The Company manages its exposure to interest rates by structuring its balance sheet in the ordinary course
of business. The Company does not enter into instruments such as leveraged derivatives, interest rate swaps,
financial options, financial future contracts or forward delivery contracts for the purpose of reducing interest rate
risk. Based upon the nature of the Company’s operations, the Company is not subject to foreign exchange or
commodity price risk. The Company does not own any trading assets.

The Company’s exposure to interest rate risk is managed by the Asset Liability Committee (“ALCO”),
which is composed of senior officers of the Company, in accordance with policies approved by the Company’s
Board of Directors. The ALCO formulates strategies based on appropriate levels of interest rate risk. In
determining the appropriate level of interest rate risk, the ALCO considers the impact on earnings and capital of
the current outlook on interest rates, potential changes in interest rates, regional economies, liquidity, business
strategies and other factors. The ALCO meets regularly to review, among other things, the sensitivity of assets
and liabilities to interest rate changes, the book and market values of assets and liabilities, unrealized gains and
losses, purchase and sale activities, commitments to originate loans and the maturities of investments and
borrowings. Additionally, the ALCO reviews liquidity, cash flow flexibility, maturities of deposits and consumer
and commercial deposit activity. Management uses two methodologies to manage interest rate risk: (1) an
analysis of relationships between interest-earning assets and interest-bearing liabilities; and (2) an interest rate
shock simulation model. The Company has traditionally managed its business to reduce its overall exposure to
changes in interest rates.

The Company uses an interest rate risk simulation model and shock analysis to test the interest rate
sensitivity of net interest income and the balance sheet, respectively. Contractual maturities and repricing
opportunities of loans are incorporated in the model as are prepayment assumptions, maturity data and call
options within the investment portfolio. Assumptions based on past experience are incorporated into the model
for nonmaturity deposit accounts. The assumptions used are inherently uncertain and, as a result, the model
cannot precisely measure future net interest income or precisely predict the impact of fluctuations in market
interest rates on net interest income. Actual results will differ from the model’s simulated results due to timing,
magnitude and frequency of interest rate changes as well as changes in market conditions and the application and
timing of various management strategies.

The Company utilizes static balance sheet rate shocks to estimate the potential impact on net interest income
of changes in interest rates under various rate scenarios. This analysis estimates a percentage of change in the
metric from the stable rate base scenario versus alternative scenarios of rising and falling market interest rates by

67

instantaneously shocking a static balance sheet. The following table summarizes the simulated change in net
interest income over a 12-month horizon as of December 31, 2014.

Change in Interest
Rates (Basis Points)

Percent Change in
Net Interest Income

+200 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
+100 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Base . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
-100 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(2.7)%
(1.7)%
0.0%
(3.5)%

The results are primarily due to behavior of demand, money market and savings deposits during such rate
fluctuations. The Company has found that historically, interest rates on these deposits change more slowly than
changes in the discount and federal funds rates. This assumption is incorporated into the simulation model and is
generally not fully reflected in a GAP analysis. The assumptions incorporated into the model are inherently
uncertain and, as a result, the model cannot precisely measure future net interest income or precisely predict the
impact of fluctuations in market interest rates on net interest income. Actual results will differ from the model’s
simulated results due to timing, magnitude and frequency of interest rate changes as well as changes in market
conditions and the application and timing of various strategies.

Liquidity

Liquidity involves the Company’s ability to raise funds to support asset growth and acquisitions 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 and manage unexpected events. During 2013 and 2014,
the Company’s liquidity needs have primarily been met by growth in core deposits, security and loan maturities
and amortizing investment and loan portfolios. Although access to purchased funds from correspondent banks
and overnight advances from the FHLB of Dallas are available and have been utilized on occasion to take
advantage of investment opportunities, the Company does not generally rely on these external funding sources.

68

The following table illustrates, during the years presented, the mix of the Company’s funding sources and
the average assets in which those funds are invested as a percentage of the Company’s average total assets for the
periods indicated. Average assets totaled $20.60 billion for 2014 compared with $16.26 billion for 2013.

2014

2013

Source of Funds:
Deposits:

Noninterest-bearing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest-bearing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Junior subordinated debentures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities sold under repurchase agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other noninterest-bearing liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

22.76% 20.58%
58.27
0.75
1.75
0.70
0.81
14.96

57.94
0.56
2.73
2.90
0.66
14.63

Total

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

100.00% 100.00%

Uses of Funds:

Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal funds sold and other interest-earning assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other noninterest-earning assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

43.64% 38.16%
42.35
0.70
13.31

48.80
0.31
12.73

Total

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

100.00% 100.00%

Average noninterest-bearing deposits to average deposits . . . . . . . . . . . . . . . . . . . . . .
Average loans to average deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

28.09% 26.21%
53.85% 48.60%

The Company’s largest source of funds is deposits and its largest uses of funds are securities and loans. The
Company does not expect a change in the source or use of its funds in the foreseeable future. The Company’s
average loans increased 44.9% for the year ended December 31, 2014 compared with the year ended
December 31, 2013. The Company predominantly invests excess deposits in government backed securities until
the funds are needed to fund loan growth. The Company’s securities portfolio has a weighted average life of 4.11
years and a modified duration of 3.80 years at December 31, 2014.

As of December 31, 2014, the Company had outstanding $2.00 billion in commitments to extend credit and
$112.5 million in commitments associated with outstanding standby letters of credit. Since commitments
associated with letters of credit and commitments to extend credit may expire unused, the total outstanding may
not necessarily reflect the actual future cash funding requirements.

As of December 31, 2014, the Company had no exposure to future cash requirements associated with known

uncertainties or capital expenditures of a material nature.

As of December 31, 2014, the Company had cash and cash equivalents of $677.9 million compared with
$381.4 million at December 31, 2013. The increase was primarily due to the F&M acquisition completed
during 2014.

Contractual Obligations

The following table summarizes the Company’s contractual obligations and other commitments to make
future payments as of December 31, 2014 (other than deposit obligations and securities sold under repurchase
agreements). 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 December 31, 2014 are
summarized below. Payments for junior subordinated debentures include interest of $61.2 million that will be

69

paid over the future periods. The future interest payments were calculated using the current rate in effect at
December 31, 2014. In late 2014, the Company gave irrevocable notice of its intent to redeem three of the twelve
outstanding issuances of junior subordinated debentures in January 2015. For those three issuances, the principal
balance of $41.2 million and all of the accrued interest payable upon redemption is included in the “1 year or
less” column below. The principal balance of the junior subordinated debentures at December 31, 2014 was
$167.5 million. Payments for FHLB notes payable include interest of $2.7 million that will be paid over the
future periods. Payments related to leases are based on actual payments specified in underlying contracts.

1 year or less

More than 1
year but less
than 3 years

3 years or
more but less
than 5 years

(Dollars in thousands)

5 years
or more

Total

Junior subordinated debentures . . . . . . . . . . . . . .
Federal Home Loan Bank notes payable . . . . . . .
Operating leases . . . . . . . . . . . . . . . . . . . . . . . . . .

$44,422
2,247
6,927

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$53,596

$ 6,186
2,313
9,468

$17,967

$ 6,186
5,251
4,401

$171,975
1,648
7,792

$228,769
11,459
28,588

$15,838

$181,415

$268,816

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 expiring by period as of December 31, 2014 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.

1 year or less

More than 1
year but less
than 3 years

3 years or
more but less
than 5 years

5 years
or more

Total

(Dollars in thousands)

Standby letters of credit
Commitments to extend credit

. . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . .

$

93,094
1,149,704

$ 18,833
368,189

$

589
72,356

$ — $ 112,516
1,998,365

408,116

Total

. . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$1,242,798

$387,022

$72,945

$408,116

$2,110,881

Standby Letters of Credit. Standby letters of credit are written conditional commitments issued by the
Company to guarantee the payment by or performance of a customer to a third party. In the event the customer
does not perform in accordance with the terms of the agreement with the third party, the Company would be
required to fund the commitment. The maximum potential amount of future payments the Company could be
required to make is represented by the contractual amount of the commitment. If the commitment is funded, the
Company would be entitled to seek recovery from the customer. The Company’s policies generally require that
standby letter of credit arrangements contain security and debt covenants similar to those contained in loan
agreements.

Commitments to Extend Credit. The Company enters into contractual commitments to extend credit, normally
with fixed expiration dates or termination clauses, at specified rates and for specific purposes. Substantially all of
the Company’s commitments to extend credit are contingent upon customers maintaining specific credit standards
at the time of loan funding. The Company minimizes its exposure to loss under these commitments by subjecting
them to credit approval and monitoring procedures. Management assesses the credit risk associated with certain
commitments to extend credit in determining the level of the allowance for credit losses.

70

Capital Resources

Capital management consists of providing equity to support the Company’s current and future operations.
The Company is subject to capital adequacy requirements imposed by the Federal Reserve Board and the Bank is
subject to capital adequacy requirements imposed by the FDIC. Both the Federal Reserve Board and the FDIC
have adopted risk-based capital requirements for assessing bank holding company and bank capital adequacy.
These standards define capital and establish minimum capital requirements in relation to assets and off-balance
sheet exposure, adjusted for credit risk.

Capital Adequacy Requirements in Effect as of December 31, 2014. The risk-based capital standards issued
by the Federal Reserve Board required all bank holding companies to have “Tier 1 capital” of at least 4.0% and
“total risk-based” capital (Tier 1 and Tier 2) of at least 8.0% of total risk-weighted assets. “Tier 1 capital”
generally included common shareholders’ equity and qualifying perpetual preferred stock together with related
surpluses and retained earnings, less deductions for goodwill and various other intangibles. “Tier 2 capital” could
have consisted of a limited amount of intermediate-term preferred stock, a limited amount of term subordinated
debt, certain hybrid capital instruments and other debt securities, perpetual preferred stock not qualifying as Tier
1 capital and a limited amount of the general valuation allowance for loan losses. The sum of Tier 1 capital and
Tier 2 capital was “total risk-based capital.”

The Federal Reserve Board had also adopted guidelines which supplemented the risk-based capital
guidelines with a minimum ratio of Tier 1 capital to average total consolidated tangible assets, or “leverage
ratio,” of 4.0%, unless certain criteria were met. These rules further provided that banking organizations
experiencing internal growth or making acquisitions, like the Company, would be expected to maintain capital
positions substantially above the minimum supervisory levels and comparable to peer group averages, without
significant reliance on intangible assets.

Pursuant to FDICIA, each federal banking agency revised its risk-based capital standards to ensure that
those standards took adequate account of interest rate risk, concentration of credit risk and the risks of
nontraditional activities, as well as reflected the actual performance and expected risk of loss on multifamily
mortgages. The Bank is subject to capital adequacy guidelines of the FDIC that are substantially similar to the
Federal Reserve Board’s guidelines. Also pursuant to FDICIA, the FDIC has promulgated regulations setting the
levels at which an insured institution such as the Bank would be considered “well-capitalized,” “adequately
capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized.” Under the
FDIC’s regulations, the Bank is classified “well-capitalized” for purposes of prompt corrective action.

Total shareholders’ equity increased to $3.24 billion at December 31, 2014, compared with $2.79 billion at
December 31, 2013, an increase of $458 million or 16.4%. This increase was primarily the result of net income
of $297.4 million and common stock issued in connection with the F&M acquisition of $218.2 million, partially
offset by dividends paid on the common stock of $68.4 million.

71

The following table provides a comparison of the Company’s and the Bank’s leverage and risk-weighted

capital ratios as of December 31, 2014 to the minimum and well-capitalized regulatory standards:

Minimum Required
For Capital
Adequacy Purposes

To Be Categorized As
Well Capitalized Under Prompt
Corrective Action
Provisions

Actual Ratio at
December 31, 2014

The Company

Leverage ratio . . . . . . . . . . . . . . . . . . . . .
Tier 1 risk-based capital ratio . . . . . . . . .
Total risk-based capital ratio . . . . . . . . .

The Bank

Leverage ratio . . . . . . . . . . . . . . . . . . . . .
Tier 1 risk-based capital ratio . . . . . . . . .
Total risk-based capital ratio . . . . . . . . .

4.00%(1)
4.00%
8.00%

4.00%(2)
4.00%
8.00%

N/A
N/A
N/A

5.00%
6.00%
10.00%

7.69%
13.80%
14.56%

7.50%
13.46%
14.22%

(1) The Federal Reserve Board may require the Company to maintain a leverage ratio above the required

minimum.

(2) The FDIC may require the Bank to maintain a leverage ratio above the required minimum.

Basel III Capital Adequacy Requirements Effective January 1, 2015. In July 2013, the Federal Reserve
Board and FDIC published the Basel III Capital Rules establishing a new comprehensive capital framework for
U.S. banking organizations. For more information, see Item 1. Business—Supervision and Regulation—The
Company—Basel III Capital Adequacy Requirements Effective January 1, 2015.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

For

information regarding the market

instruments, see Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operation—Financial Condition—
Interest Rate Sensitivity and Market Risk. The Company’s principal market risk exposure is to changes in
interest rates.

the Company’s financial

risk of

72

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements, the report thereon, the notes thereto and supplementary data commence at page 81

of this Annual Report on Form 10-K.

The following table presents certain unaudited consolidated quarterly financial information concerning the
Company’s results of operations for each of the two years indicated below. The information should be read in
conjunction with the historical consolidated financial statements of the Company and the notes thereto appearing
elsewhere in this Annual Report on Form 10-K.

CONSOLIDATED QUARTERLY FINANCIAL DATA OF THE COMPANY
Quarter Ended 2014

December 31

September 30

June 30

March 31

(Dollars in thousands, except per share data)
(unaudited)

Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$186,578
8,827

$187,466
11,809

$186,503
12,448

$154,248
10,557

Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for credit losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Net interest income after provision . . . . . . . . . . . . . . . . .
Noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noninterest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Income before income taxes . . . . . . . . . . . . . . . . . . . . . . .
Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . .

177,751
6,350

171,401
30,106
84,762

116,745
38,517

175,657
5,000

170,657
30,161
85,510

115,308
38,738

174,055
6,325

167,730
34,001
88,696

113,035
37,529

143,691
600

143,091
28,604
71,034

100,661
33,524

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 78,228

$ 76,570

$ 75,506

$ 67,137

Earnings per share(1):

Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

$

1.12

1.12

$

$

1.10

1.10

$

$

1.08

1.08

$

$

1.01

1.01

Quarter Ended 2013

December 31

September 30

June 30

March 31

(Dollars in thousands, except per share data)
(unaudited)

Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$155,751
10,282

$136,213
9,680

$129,302
10,560

$118,031
9,949

Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for credit losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Net interest income after provision . . . . . . . . . . . . . . . . .
Noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noninterest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Income before income taxes . . . . . . . . . . . . . . . . . . . . . . .
Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . .

145,469
7,865

137,604
25,158
68,592

94,170
31,199

126,533
4,025

122,508
21,554
61,537

82,525
27,247

118,742
2,550

116,192
25,274
61,300

80,166
26,322

108,082
2,800

105,282
23,441
55,767

72,956
23,651

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 62,971

$ 55,278

$ 53,844

$ 49,305

Earnings per share(1):

Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

$

0.98

0.98

$

$

0.92

0.91

$

$

0.89

0.89

$

$

0.87

0.86

(1) Earnings per share are computed independently for each of the quarters presented and therefore may not

total earnings per share for the year.

73

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND

FINANCIAL DISCLOSURE

None.

ITEM 9A. 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 Exchange Act), were effective as of the end of the period
covered by this report.

Changes in internal control over financial reporting. There were no changes in the Company’s internal
control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that
occurred during the quarter ended December 31, 2014, that have materially affected, or are reasonably likely to
materially affect, the Company’s internal control over financial reporting.

74

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The management of the Company is responsible for establishing and maintaining adequate internal control
over financial reporting. The Company’s internal control over financial reporting is a process designed under the
supervision of the Company’s Chief Executive Officer and Chief Financial Officer to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of the Company’s financial
statements for external purposes in accordance with generally accepted accounting principles.

As of December 31, 2014, management assessed the effectiveness of the Company’s internal control over
financial reporting based on the criteria for effective internal control over financial reporting established in
“Internal Control—Integrated Framework,” issued by the Committee of Sponsoring Organizations (“COSO”) of
the Treadway Commission (“2013 Framework”). This assessment included controls over the preparation of the
schedules equivalent to the basic financial statements in accordance with the instructions for the Consolidated
Financial Statements for Bank Holding Companies (Form FR Y-9C) to meet the reporting requirements of
Section 112 of the Federal Deposit Insurance Corporation Improvement Act. Based on the assessment,
management determined that the Company maintained effective internal control over financial reporting as of
December 31, 2014.

Deloitte & Touche LLP the independent registered public accounting firm that audited the consolidated
financial statements of the Company included in this Annual Report on Form 10-K, has issued an attestation
report on the Company’s internal control over financial reporting as of December 31, 2014. The report is
included in this Item under the heading “Report of Independent Registered Public Accounting Firm.”

Compliance with Designated Laws and Regulations

Management is also responsible for ensuring compliance with the federal laws and regulations concerning
loans to insiders and the federal and state laws and regulations concerning dividend restrictions, both of which
are designated by the FDIC as safety and soundness laws and regulations.

Management assessed its compliance with the designated safety and soundness laws and regulations and has
maintained records of its determinations and assessments as required by the FDIC. Based on this assessment,
management believes that the Company has complied with the designated safety and soundness laws and
regulations for the year ended December 31, 2014.

75

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of
Prosperity Bancshares, Inc.
Houston, Texas

We have audited the internal control over financial reporting of Prosperity Bancshares, Inc. and subsidiaries
(the “Company”) as of December 31, 2014, based on criteria established in Internal Control—Integrated
Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Because
management’s assessment and our audit were conducted to meet the reporting requirements of Section 112 of the
Federal Deposit Insurance Corporation Improvement Act (FDICIA), management’s assessment and our audit of
the Company’s internal control over financial reporting included controls over the preparation of the schedules
equivalent to the basic financial statements in accordance with the instructions for the Consolidated Financial
Statements for Bank Holding Companies (Form FR Y-9C). The Company’s management is responsible for
maintaining effective internal control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting, included in the accompanying Management’s Report. Our responsibility
is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether effective internal control over financial reporting was maintained in all material respects. Our
audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a
material weakness exists, testing and evaluating the design and operating effectiveness of internal control based
on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed by, or under the supervision of,
the company’s principal executive and principal financial officers, or persons performing similar functions, and
effected by the company’s board of directors, management, and other personnel to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company’s internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of
collusion or improper management override of controls, material misstatements due to error or fraud may not be
prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal
control over financial reporting to future periods are subject to the risk that the controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.

In our opinion, the Company maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2014, based on the criteria established in Internal Control—Integrated Framework
(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have not examined and, accordingly, we do not express an opinion or any other form of assurance on

management’s statement referring to compliance with laws and regulations.

76

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), the consolidated financial statements as of and for the year ended December 31, 2014 of the
Company and our report dated March 2, 2015 expressed an unqualified opinion on those consolidated financial
statements.

/s/ Deloitte & Touche LLP

Houston, Texas
March 2, 2015

ITEM 9B. OTHER INFORMATION

None.

PART III.

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information required by this Item is incorporated herein by reference to the information under the
captions “Election of Directors,” “Continuing Directors and Executive Officers,” “Section 16(a) Beneficial
Ownership Reporting Compliance,” “Corporate Governance—Committees of the Board—Audit Committee,”
“Corporate Governance—Director Nomination Process” and “Corporate Governance—Code of Ethics” in the
Company’s definitive Proxy Statement for its 2015 Annual Meeting of Shareholders (the “2015 Proxy
Statement”) to be filed with the Commission pursuant to Regulation 14A under the Exchange Act within 120
days of the Company’s fiscal year end.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this Item is incorporated herein by reference to the information under the
captions “Executive Compensation and Other Matters” and “Director Compensation” in the 2015 Proxy
Statement.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

AND RELATED SHAREHOLDER MATTERS

Certain information required by this Item 12 is included under “Securities Authorized for Issuance under
Equity Compensation Plans” in Part II, Item 5 of this Annual Report on Form 10-K. The other information
required by this Item is incorporated herein by reference to the information under the caption “Beneficial
Ownership of Common Stock by Management of the Company and Principal Shareholders” in the 2015 Proxy
Statement.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR

INDEPENDENCE

The information required by this Item is incorporated herein by reference to the information under the
captions “Corporate Governance—Director Independence” and “Certain Relationships and Related Transactions”
in the 2015 Proxy Statement.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by this Item is incorporated herein by reference to the information under the

caption “Fees and Services of Independent Registered Public Accounting Firm” in the 2015 Proxy Statement.

77

PART IV.

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) The following documents are filed as part of this Annual Report on Form 10-K:

1. Consolidated Financial Statements. Reference is made to the Consolidated Financial Statements, the
report thereon and the notes thereto commencing at page 81 of this Annual Report on Form 10-K. Set forth
below is a list of such Consolidated Financial Statements:

Report of Independent Registered Public Accounting Firm

Consolidated Balance Sheets as of December 31, 2014 and 2013

Consolidated Statements of Income for the Years Ended December 31, 2014, 2013, and 2012

Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2014, 2013 and
2012

Consolidated Statements of Changes in Shareholders’ Equity for the Years Ended December 31, 2014,
2013 and 2012

Consolidated Statements of Cash Flows for the Years Ended December 31, 2014, 2013 and 2012

Notes to Consolidated Financial Statements

2. Financial Statement Schedules. All supplemental schedules are omitted as inapplicable or because

the required information is included in the Consolidated Financial Statements or notes thereto.

3. The exhibits to this Annual Report on Form 10-K listed below have been included only with the
copy of this report filed with the Securities and Exchange Commission. The Company will furnish a copy of
any exhibit to shareholders upon written request to the Company and payment of a reasonable fee not to
exceed the Company’s reasonable expense.

Each exhibit marked with an asterisk is filed or furnished with this Annual Report on Form 10-K as noted

below.

Exhibit
Number(1)

Description

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

3.2 — Articles of Amendment

to Amended and Restated Articles of Incorporation of Prosperity
Bancshares, Inc. (incorporated herein by reference to Exhibit 3.2 to the Company’s Quarterly
Report on Form 10-Q for the quarter ended March 31, 2006)

3.3 — Amended and Restated Bylaws of Prosperity Bancshares, Inc. (incorporated herein by reference to

Exhibit 3.1 to the Company’s Current Report on Form 8-K filed October 19, 2007)

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

10.1† — Prosperity Bancshares, Inc. 1998 Stock Incentive Plan (incorporated herein by reference to

Exhibit 10.2 to the Company’s Registration Statement on Form S-1 (Registration No. 333-63267))

10.2† — Prosperity Bancshares, Inc. 2004 Stock Incentive Plan (incorporated herein by reference to
Exhibit 10.3 to the Company’s Registration Statement on Form S-4 (Registration No. 333-121767))

10.3† — Second Amended and Restated Employment Agreement effective January 1, 2009 by and among
Prosperity Bancshares, Inc., Prosperity Bank and David Zalman (incorporated herein by reference
to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed January 7, 2009)

78

Exhibit
Number(1)

Description

10.4† — First Amendment

to the Second Amended and Restated Employment Agreement effective
February 22, 2012 by and among Prosperity Bancshares, Inc., Prosperity Bank and H. E. Timanus,
Jr. (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K
filed February 24, 2012)

10.5† — Second Amended and Restated Employment Agreement effective January 1, 2009 by and among
Prosperity Bancshares, Inc., Prosperity Bank and H. E. Timanus, Jr. (incorporated herein by
reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed January 7, 2009)

10.6† — Amended and Restated Employment Agreement effective January 1, 2009 by and among Prosperity
Bancshares, Inc., Prosperity Bank and David Hollaway (incorporated herein by reference to Exhibit
10.2 to the Company’s Current Report on Form 8-K filed on January 7, 2009)

10.7† — Prosperity Bancshares, Inc. 2012 Stock Incentive Plan (incorporated herein by reference to Exhibit

10.1 to the Company’s Current Report on Form 8-K filed on April 23, 2012)

10.8 — Agreement and Plan of Reorganization by and between Prosperity Bancshares, Inc. and American
State Financial Corporation dated February 26, 2012 (incorporated herein by reference to Exhibit
2.1 to the Company’s Current Report on Form 8-K filed on February 27, 2012)

10.9† — Amended and Restated Employment Agreement dated October 20, 2014 by and between W.R.
Collier and Prosperity Bank (incorporated herein by reference to Exhibit 10.1 to the Company’s
Quarterly Report on Form 10-Q for the quarter ended September 30, 2014)

10.10†*— Employment Agreement dated February 26, 2012 by and between Michael F. Epps and Prosperity

Bank

10.11†*— Management Security Plan Agreement of American State Bank, amended and restated effective as

of January 1, 2005, as assumed by Prosperity Bank

21.1* — Subsidiaries of Prosperity Bancshares, Inc.

23.1* — Consent of Deloitte & Touche LLP

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

101** — Interactive financial data

† Management contract or compensatory plan or arrangement.
*
Filed with this Annual Report on Form 10-K.
** Furnished with this Annual Report on Form 10-K.
(1) The Company has other

long-term debt

forth in
Section 601(b)(4)(iii)(A) of Regulation S-K. The Company hereby agrees to furnish a copy of such
agreements to the Commission upon request.

exclusion set

agreements

that meet

the

(b) Exhibits. See the exhibit list included in Item 15(a)3 of this Annual Report on Form 10-K.

(c) Financial Statement Schedules. See Item 15(a)2 of this Annual Report on Form 10-K.

79

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as
amended, the registrant, has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.

Date: March 2, 2015

PROSPERITY BANCSHARES, INC.®
(Registrant)

By:

/s/ DAVID ZALMAN
David Zalman
Chairman of the Board and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has
been signed below by the following persons on behalf of the registrant and in the capacities and on the date
indicated.

Signature

Positions

Date

/s/ DAVID ZALMAN
David Zalman

/s/ DAVID HOLLAWAY
David Hollaway

Chairman of the Board and Chief
Executive Officer (principal
executive officer); Director

Chief Financial Officer (principal
financial officer and principal
accounting officer)

/s/

JAMES A. BOULIGNY
James A. Bouligny

/s/ W. R. COLLIER
W. R. Collier

/s/ WILLIAM H. FAGAN, M.D.
William Fagan, M.D.

/s/

LEAH HENDERSON
Leah Henderson

/s/ NED S. HOLMES
Ned S. Holmes

/s/ WILLIAM T. LUEDKE IV
William T. Luedke IV

/s/

PERRY MUELLER, JR., D.D.S.
Perry Mueller, Jr., D.D.S.

/s/ HARRISON STAFFORD II
Harrison Stafford II

/s/ ROBERT STEELHAMMER
Robert Steelhammer

/s/ H.E. TIMANUS, JR.
H.E. Timanus, Jr.

Director

Director

Director

Director

Director

Director

Director

Director

Director

Director

80

March 2, 2015

March 2, 2015

March 2, 2015

March 2, 2015

March 2, 2015

March 2, 2015

March 2, 2015

March 2, 2015

March 2, 2015

March 2, 2015

March 2, 2015

March 2, 2015

TABLE OF CONTENTS TO CONSOLIDATED FINANCIAL STATEMENTS

Prosperity Bancshares, Inc.®

Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Consolidated Balance Sheets as of December 31, 2014 and 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Consolidated Statements of Income for the Years Ended December 31, 2014, 2013 and 2012 . . . . . . .

Page

82

83

84

Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2014, 2013

and 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

85

Consolidated Statements of Changes in Shareholders’ Equity for the Years Ended December 31,

2014, 2013 and 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Consolidated Statements of Cash Flows for the Years Ended December 31, 2014, 2013 and 2012 . . .

Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

86

87

88

81

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of
Prosperity Bancshares, Inc.
Houston, Texas

We have audited the accompanying consolidated balance sheets of Prosperity Bancshares, Inc. and
subsidiaries (the “Company”) as of December 31, 2014 and 2013, and the related consolidated statements of
income, comprehensive income, changes in shareholders’ equity, and cash flows for each of the three years in the
period ended December 31, 2014. These financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, such financial statements present fairly, in all material respects, the financial position of
Prosperity Bancshares, Inc. and subsidiaries as of December 31, 2014 and 2013, and the results of its operations
and its cash flows for each of the three years in the period ended December 31, 2014, in conformity with
accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), the Company’s internal control over financial reporting as of December 31, 2014, based on the
criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated March 2, 2015 expressed an unqualified
opinion on the Company’s internal control over financial reporting.

/s/ Deloitte & Touche LLP

Houston, Texas
March 2, 2015

82

PROSPERITY BANCSHARES, INC.® AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

ASSETS
Cash and due from banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal funds sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Available for sale securities, at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Held to maturity securities, at cost (fair value of $8,948,692 and $7,987,342 respectively) . . . . .

Total securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans held for investment

December 31,

2014

2013

(Dollars in thousands)

$

677,285
569

$

380,990
400

677,854
145,399
8,900,377

9,045,776
8,602
9,235,581

381,390
157,478
8,066,970

8,224,448
2,210
7,773,011

Total loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: allowance for credit losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

9,244,183
(80,762)

7,775,221
(67,282)

Loans, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Core deposit intangibles, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bank premises and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other real estate owned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bank owned life insurance (BOLI) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal Home Loan Bank of Dallas stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

9,163,421
51,941
1,874,191
58,947
281,549
3,237
230,095
15,432
105,290

7,707,939
49,246
1,671,520
42,049
282,925
7,299
160,056
24,499
90,657

TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$21,507,733

$18,642,028

LIABILITIES AND SHAREHOLDERS’ EQUITY

LIABILITIES:
Deposits:

Noninterest-bearing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest-bearing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 4,936,420
12,756,738

$ 4,108,835
11,182,436

Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fed funds purchased and other borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities sold under repurchase agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Junior subordinated debentures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued interest payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

17,693,158
8,724
315,523
167,531
3,190
74,781

15,291,271
10,689
364,357
124,231
2,500
62,162

Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
COMMITMENTS AND CONTINGENCIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
SHAREHOLDERS’ EQUITY:
Preferred stock, $1 par value; 20,000,000 shares authorized; none issued or outstanding . . . . . .
Common stock, $1 par value; 200,000,000 shares authorized; 69,816,653 and 66,085,179

shares issued at December 31, 2014 and December 31, 2013, respectively; 69,779,565 and
66,048,091 shares outstanding at December 31, 2014 and December 31, 2013,
respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital surplus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive income—net unrealized gain on available for sale securities,
net of tax of $2,008 and $2,630, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less treasury stock, at cost, 37,088 shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

18,262,907

15,855,210

—

—

—

—

69,817
2,025,235
1,146,652

66,085
1,798,862
917,595

3,729
(607)

4,883
(607)

Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3,244,826

2,786,818

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$21,507,733

$18,642,028

See notes to consolidated financial statements.

83

PROSPERITY BANCSHARES, INC.® AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

For the Years Ended December 31,

2014

2013
(Dollars in thousands, except
per share data)

2012

INTEREST INCOME:

Loans, including fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal funds sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$525,716
188,744
335

$376,117
162,993
187

$271,324
148,374
144

Total interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

714,795

539,297

419,842

INTEREST EXPENSE:

Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities sold under repurchase agreements . . . . . . . . . . . . . . . . . . . . . . . . . . .
Junior subordinated debentures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

37,871
772
938
4,060

43,641

35,222
1,497
1,201
2,551

40,471

34,486
1,352
705
2,593

39,136

NET INTEREST INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PROVISION FOR CREDIT LOSSES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

671,154
18,275

498,826
17,240

380,706
6,100

NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES . . . . . . .

652,879

481,586

374,606

NONINTEREST INCOME:

Nonsufficient funds (NSF) fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Credit card, debit card and ATM card income . . . . . . . . . . . . . . . . . . . . . . . . . .
Service charges on deposit accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trust income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Brokerage income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net gain (loss) on sale of assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

37,048
22,889
16,452
8,108
4,264
5,868
4,658
23,585

35,173
22,463
12,864
4,356
4,038
1,518
(13)
15,028

29,113
21,057
11,112
1,746
2,681
648
(231)
9,409

Total noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

122,872

95,427

75,535

NONINTEREST EXPENSE:

Salaries and employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net occupancy and equipment
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Credit and debit card, data processing and software amortization . . . . . . . . . . .
Regulatory assessments and FDIC insurance . . . . . . . . . . . . . . . . . . . . . . . . . . .
Core deposit intangibles amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Communications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other real estate expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

199,270
24,756
15,790
15,017
9,940
13,730
11,609
1,019
38,871

148,494
18,934
11,908
10,261
6,145
10,593
9,471
711
30,679

115,505
16,475
9,445
7,679
7,229
8,923
8,158
1,810
23,233

Total noninterest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

330,002

247,196

198,457

INCOME BEFORE INCOME TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

445,749

329,817

251,684

PROVISION FOR INCOME TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

148,308

108,419

83,783

NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$297,441

$221,398

$167,901

EARNINGS PER SHARE:

Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

$

4.32

4.32

$

$

3.66

3.65

$

$

3.24

3.23

See notes to consolidated financial statements.

84

PROSPERITY BANCSHARES, INC. ® AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

For the Years Ended December 31,

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive loss, before tax:
Securities available for sale:

Change in unrealized gain during period . . . . . . . . . . . . . . . . . . . . . .

Total other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax benefit related to other comprehensive income . . . . . . . . . . . . . .

Other comprehensive loss, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2014

2013
(Dollars in thousands)
$221,398

$297,441

2012

$167,901

(1,776)

(1,776)
622

(1,154)

(6,312)

(6,312)
2,209

(4,103)

(6,903)

(6,903)
2,417

(4,486)

Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$296,287

$217,295

$163,415

See notes to consolidated financial statements.

85

PROSPERITY BANCSHARES, INC.® AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

Common Stock
Shares

Amount

Capital
Surplus

Retained
Earnings

Accumulated
Other
Comprehensive
Income

Treasury
Stock

Total
Shareholders’
Equity

(In thousands, except share and per share data)

BALANCE AT DECEMBER 31, 2011 . . . 46,947,415 $46,947 $ 883,575 $ 623,878
167,901

$13,472

$(607)

(4,486)

$1,567,265
167,901
(4,486)

Net income . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive loss . . . . . . . . . .
Common stock issued in connection
with the exercise of stock options
and restricted stock awards . . . . . . .

Common stock issued in connection
with the acquisition of Texas
Bankers, Inc.

. . . . . . . . . . . . . . . . . .

Common stock issued in connection
with the acquisition of The Bank
Arlington . . . . . . . . . . . . . . . . . . . . .

Common stock issued in connection
with the acquisition of American
State Financial Corporation . . . . . . .

Common stock issued in connection

with the acquisition of Community
National Bank . . . . . . . . . . . . . . . . .
Stock based compensation expense . . .
Cash dividends declared, $0.8000 per

share . . . . . . . . . . . . . . . . . . . . . . . . .

189,402

190

3,383

314,953

315

12,393

135,347

135

6,064

8,524,835

8,525

349,774

372,282

372

15,494
3,607

BALANCE AT DECEMBER 31, 2012 . . . 56,484,234 56,484 1,274,290

Net income . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive loss . . . . . . . . . .
Common stock issued in connection
with the exercise of stock options
and restricted stock awards . . . . . . .

Common stock issued in connection
with the acquisition of East Texas
Financial Services, Inc.

. . . . . . . . . .

Common stock issued in connection

with the acquisition of Coppermark
Bancshares, Inc. . . . . . . . . . . . . . . . .

Common stock issued in connection
with the acquisition of FVNB
Corp.

. . . . . . . . . . . . . . . . . . . . . . . .
Stock based compensation expense . . .
Cash dividends declared, $0.8850 per

share . . . . . . . . . . . . . . . . . . . . . . . . .

240,620

240

5,139

530,940

531

21,769

3,258,718

3,259

151,172

5,570,667

5,571

342,317
4,175

BALANCE AT DECEMBER 31, 2013 . . . 66,085,179 66,085 1,798,862

(41,543)

750,236
221,398

8,986

(607)

(4,103)

(54,039)

917,595
297,441

4,883

(607)

(1,154)

Net income . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive loss . . . . . . . . . .
Common stock issued in connection
with the exercise of stock options
and restricted stock awards . . . . . . .

Common stock issued in connection

with the acquisition of F&M
Bancorporation Inc. . . . . . . . . . . . . .
Stock based compensation expense . . .
Cash dividends declared, $0.9925 per

share . . . . . . . . . . . . . . . . . . . . . . . . .

433,452

434

3,271

3,298,022

3,298

214,866
8,236

(68,384)

BALANCE AT DECEMBER 31, 2014 . . . 69,816,653 $69,817 $2,025,235 $1,146,652

$ 3,729

$(607)

$3,244,826

See notes to consolidated financial statements.

86

3,573

12,708

6,199

358,299

15,866
3,607

(41,543)

2,089,389
221,398
(4,103)

5,379

22,300

154,431

347,888
4,175

(54,039)

2,786,818
297,441
(1,154)

3,705

218,164
8,236

(68,384)

PROSPERITY BANCSHARES, INC.® AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Years Ended December 31,

2014

2013

2012

(Dollars in thousands)

CASH FLOWS FROM OPERATING ACTIVITIES:

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $

297,441 $

221,398 $

167,901

Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and core deposit intangibles amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for credit losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net amortization of premium on investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Gain) loss on sale or write down of premises, equipment and other real estate . . . . . . . . . . .
Net amortization of premium on deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net accretion of discount on loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sale of loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Originations of loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock based compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Decrease (increase) in accrued interest receivable and other assets . . . . . . . . . . . . . . . . . . . . .
Increase (decrease) in accrued interest payable and other liabilities . . . . . . . . . . . . . . . . . . . .

23,670
18,275
45,713
51,680
(3,974)
(2,556)
(95,876)
182,138
(188,530)
8,236
9,786
2,258

16,738
17,240
19,884
68,703
549
(388)
(62,723)
168,784
(163,072)
4,175
24,793
(8,424)

16,152
6,100
9,615
66,893
688
(109)
(26,413)
91,798
(88,461)
3,607
(38,095)
138

Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

348,261

307,657

209,814

CASH FLOWS FROM INVESTING ACTIVITIES:

Proceeds from maturities and principal paydowns of held to maturity securities . . . . . . . . . . . . . .
Purchase of held to maturity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from maturities, sales and principal paydowns of available for sale securities . . . . . . . . .
Purchase of available for sale securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net decrease (increase) in loans held for investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase of bank premises and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from the sale of Bankers Credit Card Services, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sale of bank premises, equipment and other real estate . . . . . . . . . . . . . . . . . . . . . .
Net cash and cash equivalents acquired in the purchase of Texas Bankers, Inc.
. . . . . . . . . . . . . . .
Net cash and cash equivalents acquired in the purchase of The Bank Arlington . . . . . . . . . . . . . . .
Net cash and cash equivalents acquired in the purchase of American State Financial

Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash and cash equivalents acquired in the purchase of Community National Bank . . . . . . . . .
Net cash and cash equivalents acquired in the purchase of East Texas Financial Services, Inc. . . .
Net cash and cash equivalents acquired in the purchase of Coppermark Banchares, Inc.
. . . . . . . .
Net cash and cash equivalents acquired in the purchase of FVNB Corp. . . . . . . . . . . . . . . . . . . . . .
Net cash and cash equivalents acquired in the purchase of F&M Bancorporation, Inc. . . . . . . . . . .

1,365,005
1,796,741
2,125,086
(2,218,105) (2,702,521) (3,659,045)
7,050,232
1,724,322
3,523,871
(6,999,997) (3,454,998) (1,109,999)
(148,083)
(12,441)
—
16,855
44,550
12,037

219,952
(12,075)
6,440
28,765
—
—

(47,889)
(24,007)
—
12,359
—
—

—
—
—
—
—
487,599

—
—
3,471
288,795
284,683

123,023
10,305
—
—
—

Net cash (used in) provided by investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(72,184)

8,850

(1,201,735)

CASH FLOWS FROM FINANCING ACTIVITIES:

Net increase in noninterest-bearing deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net (decrease) increase in interest-bearing deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net (repayments of) proceeds from other short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayments of other long-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net (decrease) increase in securities sold under repurchase agreements . . . . . . . . . . . . . . . . . . . . .
Proceeds from stock option exercises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments of cash dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

176,477
(40,612)
—
(1,965)
(48,834)
3,705
(68,384)

177,362
(10,221)
(245,000)
(41,357)
(93,545)
5,379
(54,039)

336,997
480,866
245,000
(1,037)
80,927
3,573
(41,543)

Net cash provided by (used in) financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

20,387

(261,421) 1,104,783

NET INCREASE IN CASH AND CASH EQUIVALENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD . . . . . . . . . . . . . . . . . . . . . . . . . . . .

296,464
381,390

55,086
326,304

112,862
213,442

CASH AND CASH EQUIVALENTS, END OF PERIOD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $

677,854 $

381,390 $

326,304

NONCASH ACTIVITIES:
Stock issued in connection with the Texas Bankers, Inc. acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Stock issued in connection with the The Bank Arlington acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock issued in connection with the American State Financial Corporation acquisition . . . . . . . . . . . . .
Stock issued in connection with the Community National Bank acquisition . . . . . . . . . . . . . . . . . . . . . .
Stock issued in connection with the East Texas Financial Services, Inc. acquisition . . . . . . . . . . . . . . .
Stock issued in connection with the Coppermark Bancshares, Inc. acquisition . . . . . . . . . . . . . . . . . . . .
Stock issued in connection with the FVNB Corp. acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock issued in connection with the F&M Bancorporation, Inc. acquisition . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition of real estate through foreclosure of collateral

— $
—
—
—
—
—
—

218,164
6,914

— $
—
—
—
22,300
154,431
347,888
—
3,119

12,708
6,199
358,299
15,866
—
—
—
—
12,049

SUPPLEMENTAL INFORMATION:
Income taxes paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

105,852 $
43,209

92,226 $
39,687

75,743
40,034

See notes to consolidated financial statements.

87

PROSPERITY BANCSHARES, INC.® AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING AND

REPORTING POLICIES

Nature of Operations—Prosperity Bancshares, Inc.® (“Bancshares”) and its subsidiary, Prosperity Bank®
(the “Bank”, collectively referred to as the “Company”) provide retail and commercial banking services. The
Company operates its business as one domestic segment.

As of December 31, 2014, the Bank operated 245 full-service banking locations; with 62 in the Houston
area, including The Woodlands; 30 in the South Texas area including Corpus Christi and Victoria; 36 in the
Dallas/Fort Worth, Texas area; 22 in the East Texas area; 30 in the Central Texas area, including Austin and San
Antonio; 34 in the West Texas area including Lubbock, Midland-Odessa and Abilene; 16 in the Bryan/College
Station area; 6 in the Central Oklahoma area and 9 in the Tulsa, Oklahoma area.

Summary of Significant Accounting and Reporting Policies—The accounting and reporting policies of
the Company conform to accounting principles generally accepted in the United States of America (“GAAP”)
and the prevailing practices within the financial services industry. A summary of significant accounting and
reporting policies are as follows:

Basis of Presentation—The consolidated financial statements include the accounts of Bancshares and its
subsidiaries. Intercompany transactions have been eliminated in consolidation. Operations are managed and
financial performance is evaluated on a company-wide basis. Accordingly, all of the Company’s banking
operations are considered by management to be aggregated in one reportable operating segment. Because the
overall banking operations comprise the vast majority of the consolidated operations, no separate segment
disclosures are presented.

Use of Estimates—The preparation of financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Such estimates include, but are not limited to certain fair value measures
including the calculation of stock-based compensation, the valuation of goodwill and available for sale securities
and the calculation of allowance for credit losses. Actual results could differ from these estimates.

Securities—Securities held to maturity are carried at cost, adjusted for the amortization of premiums and
the accretion of discounts. Management has the positive intent and the Company has the ability to hold these
assets until their estimated maturities.

Securities available for sale are carried at fair value. Unrealized gains and losses are excluded from earnings
and reported, net of tax, as a separate component of shareholders’ equity until realized. Securities within the
available for sale portfolio may be used as part of the Company’s asset/liability strategy and may be sold in
response to changes in interest rate risk, prepayment risk or other similar economic factors.

For debt securities, when other-than-temporary impairment (“OTTI”) occurs, the amount of the other-than-
temporary impairment recognized in earnings depends on whether an entity intends to sell the security or more
likely than not will be required to sell the security before recovery of its amortized cost basis less any current-
period credit loss. If an entity intends to sell or more likely than not will be required to sell the security before
recovery of its amortized cost basis less any current-period credit loss, the OTTI shall be recognized in earnings
equal to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet
date. If an entity does not intend to sell the security and it is not more likely than not that the entity will be

88

required to sell the security before recovery of its amortized cost basis less any current-period loss, the OTTI
shall be separated into the amount representing the credit-related portion of the impairment loss (“credit loss”)
and the noncredit portion of the impairment loss (“noncredit portion”). The amount of the total OTTI related to
the credit loss is determined based on the difference between the present value of cash flows expected to be
collected and the amortized cost basis and such difference is recognized in earnings. The amount of the total
OTTI related to the noncredit portion is recognized in other comprehensive income, net of applicable taxes. The
previous amortized cost basis less the OTTI recognized in earnings shall become the new amortized cost basis of
the investment.

Premiums and discounts are amortized and accreted to operations using the level-yield method of
accounting, adjusted for prepayments as applicable. The specific identification method of accounting is used to
compute gains or losses on the sales of these assets. Interest earned on these assets is included in interest income.

Loans Held for Sale—Loans held for sale are carried at the lower of aggregate cost or market value.
Premiums, discounts and loan fees (net of certain direct loan origination costs) on loans held for sale are deferred
until the related loans are sold or repaid. Gains or losses on loan sales are recognized at the time of sale and
determined using the specific identification method.

Loans Held for Investment—Loans originated and held for investment are stated at the principal amount
outstanding, net of unearned fees. The related interest income for multipayment loans is recognized principally by
the simple interest method; for single payment loans, such income is recognized using the straight-line method.

The Company has two general categories of loans in its portfolio. Loans originated by the Bank and made
pursuant to the Company’s loan policy and procedures in effect at the time the loan was made are referred to as
“legacy loans” and loans acquired in a business combination are referred to as “acquired loans.” Acquired loans
are initially recorded at fair value based on a discounted cash flow valuation methodology that considers, among
other things, interest rates, projected default rates, loss given default, and recovery rates with no carryover of any
existing allowance for credit losses. Those acquired loans that are renewed or substantially modified after the
date of the business combination, which therefore causes them to become subject to the Company’s allowance
for credit losses methodology, are referred to as “acquired legacy loans.” Modifications are reviewed for
determination of troubled debt restructuring status independently of this process. In certain instances, acquired
loans to one borrower may be combined or otherwise re-originated such that they are re-categorized as legacy
loans. Acquired loans with a fair value discount or premium at the date of the business combination that
remained at the reporting date are referred to as “fair-valued acquired loans.” All fair-valued acquired loans are
further categorized into “Non-PCI loans” and “PCI loans” (purchased credit impaired loans). Acquired loans with
evidence of credit quality deterioration at acquisition are reviewed to determine if it is probable that the
Company will not be able to collect all contractual amounts due, including both principal and interest. When both
conditions exist, such loans are accounted for as PCI loans.

The Company estimates the total cash flows expected to be collected from the PCI loans, which include
undiscounted expected principal and interest, using credit risk, interest rate and prepayment risk assessments that
incorporate management’s best estimate of current key assumptions such as default rates, loss severity and
payment speeds. The excess of the undiscounted total cash flows expected to be collected over the fair value of
the related PCI loans represents the accretable yield, which is recognized as interest income on a level-yield basis
over the life of the related loan. The difference between the undiscounted contractual principal and interest and
the undiscounted total cash flows expected to be collected is the nonaccretable difference, which reflects the
impact of estimated credit losses and other factors. Subsequent increases in expected cash flows will result in a
recovery of any previously recorded allowance for credit losses, to the extent applicable, and a reclassification
from nonaccretable difference to accretable yield, which is recognized prospectively over the then remaining life
of the loan. Subsequent decreases in expected cash flows will result in an impairment charge to the provision for
credit losses, resulting in an addition to the allowance for credit losses, and a reclassification from accretable
yield to nonaccretable difference.

89

A loan disposal, which may include a loan sale, receipt of payment in full from the borrower or foreclosure,
results in removal of the loan from the balance sheet at its allocated carrying amount and accretion of any
remaining fair value discount to income.

Nonrefundable Fees and Costs Associated with Lending Activities—Loan origination fees in excess of
the associated costs are recognized over the life of the related loan as an adjustment to yield using the interest
method.

Loan commitment fees and loan origination costs are deferred and recognized as an adjustment of yield by
the interest method over the related loan life or, if the commitment expires unexercised, recognized in income
upon expiration of the commitment.

Nonperforming and Past Due Loans—Included in the nonperforming loan category are loans which have
been categorized by management as nonaccrual because collection of interest is doubtful and loans which have
been restructured to provide a reduction in the interest rate or a deferral of interest or principal payments. When
the payment of principal or interest on a loan is delinquent for 90 days, or earlier in some cases, the loan is placed
on nonaccrual status unless the loan is in the process of collection and the underlying collateral fully supports the
carrying value of the loan. If the decision is made to continue accruing interest on the loan, periodic reviews are
made to confirm the accruing status of the loan. When a loan is placed on nonaccrual status, interest accrued but
not yet collected prior to the determination of uncollectibility is charged to operations. Interest accrued during
prior periods is charged to the allowance for credit losses. Any payments received on nonaccrual loans are
applied first to outstanding principal of the loan amount, next to the recovery of charged-off loan amounts and
finally, any excess is treated as recovery of lost interest.

Restructured loans are those loans on which concessions in terms have been granted because of a borrower’s

financial difficulty. Interest is generally not accrued on such loans in accordance with the new terms.

Allowance for Credit Losses—The allowance for credit losses is a valuation allowance available for losses
incurred on loans. All losses are charged to the allowance when the loss actually occurs or when a determination
is made that such a loss is probable. Recoveries are credited to the allowance at the time of recovery.

Throughout the year, management estimates the probable level of losses to determine whether the allowance
for credit losses is adequate to absorb losses inherent in the loan portfolio. Based on these estimates, an amount is
charged to the provision for credit losses and credited to the allowance for credit losses in order to adjust the
allowance to a level determined to be adequate to absorb losses.

In making its evaluation of the adequacy of the allowance for credit losses, management considers factors
such as historical loan loss experience, the amount of nonperforming assets and related collateral, the volume,
growth and composition of the Company’s loan portfolio, current economic conditions that may affect the
borrower’s ability to pay and the value of collateral, the evaluation of the Company’s loan portfolio through its
internal loan review process and other relevant factors.

Estimates of credit losses involve an exercise of judgment. While it is possible that in the short term the
Company may sustain losses which are substantial in relation to the allowance for credit losses, it is the judgment
of management that the allowance for credit losses reflected in the consolidated balance sheets is adequate to
absorb probable losses that exist in the current loan portfolio.

The Company’s allowance for legacy credit

losses consists of two elements: (1) specific valuation
allowances based on probable losses on impaired loans; and (2) a general valuation allowance based on historical
loan loss experience, general economic conditions and other qualitative risk factors both internal and external to
the Company. A loan is defined as impaired if, based on current information and events, it is probable that a
creditor will be unable to collect all amounts due, both interest and principal, according to the contractual terms

90

of the loan agreement. The allowance for credit losses related to impaired loans is determined based on the
difference of carrying value of loans and the present value of expected cash flows discounted at the loan’s
effective interest rate or, as a practical expedient, the loan’s observable market price or the fair value of the
collateral if the loan is collateral dependent.

Loans acquired in business combinations are initially recorded at fair value, which includes an estimate of
credit losses expected to be realized over the remaining lives of the loans, and therefore no corresponding
allowance for credit losses is recorded for these loans at acquisition. These fair value estimates associated with
acquired loans, based on a discounted cash flow model, include estimates related to market interest rates and
undiscounted projections of future cash flows that incorporate expectations of prepayments and the amount and
timing of principal,
interest and other cash flows, as well as any shortfalls thereof. At period-end after
acquisition, the fair-valued acquired loans from each acquisition are reassessed to determine whether an addition
to the allowance for credit losses is appropriate due to further credit quality deterioration. Methods utilized to
estimate any subsequently required allowance for credit losses for acquired loans not deemed credit-impaired at
acquisition are similar to originated loans; however, the estimate of loss is based on the unpaid principal balance
and then compared to any remaining unaccreted purchase discount. To the extent that the calculated loss is
greater than the remaining unaccreted purchase discount, an allowance is recorded for such difference.

Premises and Equipment—Premises and equipment are carried at cost less accumulated depreciation.
Depreciation expense is computed principally using the straight-line method over the estimated useful lives of
the assets which range from three to 39 years. Leasehold improvements are amortized using the straight-line
method over the periods of the leases or the estimated useful lives, whichever is shorter.

Derivative Financial Instruments—The Company inherited interest rate swaps with certain commercial
customers of acquired institutions who wished to obtain a loan at a fixed rate. In these transactions, the acquired
institution entered into an interest rate swap with the customer while at the same time entering into an offsetting
interest rate swap with another financial institution. In connection with each swap transaction, the Company
agrees to pay interest to the borrowing customer on a notional amount at a variable interest rate and receives
interest from the customer on the same notional amount at a fixed interest rate. At the same time, the acquired
institution agreed to pay another financial institution the same fixed interest rate on the same notional amount
and receive the same variable interest rate on the same notional amount. The transaction allows the customer to
effectively convert a variable-rate loan to a fixed-rate. Because the Company acts solely as an intermediary for its
customer, changes in the fair value of the underlying derivative contracts offset each other and do not
significantly impact the Company’s results of operations.

Goodwill—Goodwill is annually assessed for impairment or when events or changes in circumstances

indicate that the carrying amount of the asset may not be recoverable.

On January 1, 2012, the Company adopted Accounting Standard Update No. 2011-08, “Intangibles—
Goodwill and Other (Topic 350): Testing Goodwill for Impairment,” (ASU 2011-08), which allows companies in
certain circumstances to use a qualitative approach to assess goodwill for impairment. The provisions of ASU
2011-08 give companies the option to first assess qualitative factors to determine whether it is more likely than
not that the fair value of a reporting unit is less than its carrying amount as a basis for determining the need to
perform step one of the annual test for goodwill impairment. An entity has an unconditional option to bypass the
qualitative assessment described in the preceding paragraph for any reporting unit in any period and proceed
directly to performing the first step of the goodwill impairment test. An entity may resume performing the
qualitative assessment in any subsequent period.

If the Company bypasses the qualitative assessment, a two-step goodwill impairment test is performed. The
first step of the goodwill impairment test compares the estimated fair value of the Company’s reporting unit to its
carrying value. If the estimated fair value of the reporting unit exceeds its carrying value, goodwill of the

91

reporting unit is not impaired. If the estimated fair value of the reporting unit is less than the carrying value, the
second step must be performed to determine the implied fair value of the reporting unit’s goodwill and the
amount of goodwill impairment, if any.

Estimating the fair value of the Company’s reporting unit is a subjective process involving the use of
estimates and judgments, particularly related to future cash flows of the reporting units, discount rates (including
market risk premiums) and market multiples. Material assumptions used in the valuation tools included the
comparable public company price multiples used in the terminal value, future cash flows and the market risk
premium component of the discount rate. The estimated fair value of the reporting unit is determined using a
blend of two commonly used valuation techniques: the market approach and the income approach. The Company
gives consideration to both valuation techniques, as either technique can be an indicator of value. For the market
approach, valuation is based on an analysis of relevant price multiples in market trades in companies with similar
characteristics. For the income approach, estimated future cash flows (derived from internal forecasts and
economic expectations) and terminal value (value at the end of the cash flow period, based on price multiples)
are discounted. The discount rate was based on the imputed cost of equity capital.

Amortization of Core Deposit Intangibles—Core deposit intangibles are being amortized on a non-pro

rata basis over an estimated life of 10 to 15 years.

Income Taxes—The Company files a consolidated federal income tax return and a consolidated Oklahoma

state income tax return.

Deferred tax assets and liabilities are recognized for the estimated tax consequences attributable to
differences between the financial statement carrying amounts of existing assets and liabilities and their respective
tax bases and are recorded in other assets on the Company’s consolidated balance sheets. The Company records
uncertain tax positions in accordance with Accounting Standards Codification (“ASC”) 740 on the basis of a
two-step process whereby (1) the Company determines whether it is more likely than not that the tax positions
will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the
more-likely-than-not recognition threshold, the Company recognizes the largest amount of tax benefit that is
more than 50 percent likely to be realized upon ultimate settlement with the related tax authority.

Realization of net deferred tax assets is based upon the level of historical income and on estimates of future
taxable income. Although realization is not assured, management believes it is more likely than not that all of the
net deferred tax assets will be realized.

Stock-Based Compensation—The Company accounts for stock-based employee compensation plans using
the fair value-based method of accounting. The expense associated with stock-based compensation is recognized
over the vesting period of each individual arrangement. 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. The fair value of restricted stock awards is based on the current market price on the date of grant.

Cash and Cash Equivalents—For purposes of reporting cash flows, cash and cash equivalents include cash

and due from banks as well as federal funds sold that mature in three days or less.

Earnings Per Common Share—Basic earnings per common share are calculated using the two-class
method. The two-class method provides that unvested share-based payment awards that contain nonforfeitable
rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be
included in the computation of basic earnings per share.

Diluted earnings per common share is computed using the weighted-average number of shares determined
for the basic earnings per common share computation plus the potential dilution that could occur if securities or

92

other contracts to issue common stock were exercised or converted into common stock using the treasury stock
method. Outstanding stock options issued by the Company represent the only dilutive effect reflected in diluted
weighted average shares.

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

Year Ended December 31,

2014

2013

2012

Amount

Per Share
Amount

Amount

Per Share
Amount

Amount

Per Share
Amount

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $297,441

(Amounts in thousands, except per share data)
$167,901

$221,399

Basic:

Weighted average shares outstanding . . . . . . . . . .

68,855

$4.32

60,421

$3.66

51,794

$3.24

Diluted:

Add incremental shares for:

Effect of dilutive securities—options . . . . . .

56

157

147

Total

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

68,911

$4.32

60,578

$3.65

51,941

$3.23

There were no stock options exercisable at December 31, 2014, 2013 and 2012 that would have had an anti-

dilutive effect on the above computation.

New Accounting Standards

Accounting Standards Updates (“ASU”)

ASU 2015-01, “Income Statement—Extraordinary and Unusual Items (Subtopic 225-20)—Simplifying
Income Statement Presentation by Eliminating the Concept of Extraordinary Items.” ASU 2015-01 eliminates
from U.S. GAAP the concept of extraordinary items, which, among other things, required an entity to segregate
extraordinary items considered to be unusual and infrequent from the results of ordinary operations and show the
item separately in the income statement, net of tax, after income from continuing operations. ASU 2015-01 is
effective for the Company beginning January 1, 2016, though early adoption is permitted. ASU 2015-01 is not
expected to have a significant impact on the Company’s financial statements.

ASU 2014-12 “Compensation-Stock Compensation (Topic 718)—Accounting for Share-Based Payments
When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service
Period.” ASU 2014-12 requires that a performance target that affects vesting and that could be achieved after the
requisite service period be treated as a performance condition. The performance target should not be reflected in
estimating the grant-date fair value of the award. Compensation cost should be recognized in the period in which
it becomes probable that the performance target will be achieved and should represent the compensation cost
attributable to the period(s) for which the requisite service has already been rendered. If the performance target
becomes probable of being achieved before the end of the requisite service period, the remaining unrecognized
compensation cost should be recognized prospectively over the remaining requisite service period. The total
amount of compensation cost recognized during and after the requisite service period should reflect the number
of awards that are expected to vest and should be adjusted to reflect those awards that ultimately vest. The
requisite service period ends when the employee can cease rendering service and still be eligible to vest in the
award if the performance target is achieved. ASU 2014-12 is effective for the Company beginning after
January 1, 2016 and is not expected to have a significant impact on the Company’s financial statements.

ASU 2014-11 “Transfers and Servicing (Topic 860)—Repurchase-to-Maturity Transactions, Repurchase
Financings, and Disclosure.” ASU 2014-11 changes the accounting for repurchase-to-maturity transactions to
secured borrowing accounting. It also requires separate accounting for a transfer of a financial asset executed

93

contemporaneously with a repurchase agreement with the same counterparty, which will result in secured
borrowing accounting and disclosure for the repurchase agreement. ASU 2014-11 is effective for the Company
beginning after January 1, 2016 and is not expected to have a significant impact on the Company’s financial
statements.

ASU 2014-09 “Revenue from Contract with Customers (Topic 606).” ASU 2014-09 supersedes the revenue
recognition requirements in Revenue Recognition (Topic 605), and most industry-specific guidance throughout
the Industry Topics of the Codification. Additionally, ASU 2014-09 supersedes some cost guidance included in
Revenue Recognition—Construction-Type and Production-Type Contracts (Subtopic 605-35). In addition, the
existing requirements for the recognition of a gain or loss on the transfer of nonfinancial assets that are not in a
contract with a customer are amended to be consistent with the guidance on recognition and measurement. The
core principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods
or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in
exchange for those goods or services. ASU 2014-09 is effective for the Company beginning after January 1,
2017, with retrospective application to each prior reporting period presented, and the Company is still evaluating
the potential impact on the Company’s financial statements.

ASU 2014-04 “Receivables—Troubled Debt Restructurings

310-40)—
Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure.” ASU
2014-04 intends to reduce diversity by clarifying when an in substance repossession or foreclosure occurs, that is,
when a creditor should be considered to have received physical possession of residential real estate property
collateralizing a consumer mortgage loan such that the loan receivable should be derecognized and the real estate
property recognized. ASU 2014-04 is effective for the Company on January 1, 2015 and is not expected to have a
significant impact on the Company’s financial statements.

by Creditors

(Subtopic

2. ACQUISITIONS

Acquisitions are an integral part of the Company’s growth strategy. All acquisitions were accounted for
using the acquisition method of accounting. Accordingly, the assets and liabilities of the acquired entities were
recorded at their fair values at the acquisition date. The excess of the purchase price over the estimated fair value
of the net assets for tax-free acquisitions was recorded as goodwill, none of which is deductible for tax purposes.
The excess of the purchase price over the estimated fair value of the net assets for taxable acquisitions was also
recorded as goodwill, and is deductible for tax purposes. The identified core deposit intangibles for each
acquisition are being amortized using a non-pro rata basis over an estimated life of ten to fifteen years. The
results of operations for each acquisition have been included in the Company’s consolidated financial results
beginning on the respective acquisition date.

The measurement period for the Company to determine the fair values of acquired identifiable assets and
assumed liabilities will end at the earlier of (1) twelve months from the date of the acquisition or (2) as soon as
the Company receives the information it was seeking about facts and circumstances that existed as of the
acquisition date or learns that more information is not obtainable. The Company is currently in the process of
obtaining fair values for certain acquired assets and assumed liabilities and therefore the following estimates for
the 2014 acquisition are preliminary. The following acquisitions were completed on the dates indicated:

2014 Acquisition

Acquisition of F&M Bancorporation Inc.—On April 1, 2014, the Company completed the acquisition of
F&M Bancorporation Inc. (“FMBC”) and its wholly-owned subsidiary The F&M Bank & Trust Company
(collectively, “F&M”) headquartered in Tulsa, Oklahoma. F&M operated 13 banking locations: 9 in Tulsa,
Oklahoma and surrounding areas; 1 (a loan production office) in Oklahoma City, Oklahoma; and 3 in Dallas,
Texas. The Company acquired FMBC to further expand its Oklahoma and Dallas, Texas area markets. The
acquisition is not considered significant to the Company’s financial statements and therefore pro forma financial
data is not included.

94

The Company acquired loans and deposits with fair values of $1.60 billion and $2.27 billion, respectively, at
acquisition date. Under the terms of the definitive agreement, the Company issued 3,298,022 shares of Company
common stock plus $34.2 million in cash for all outstanding shares of FMBC capital stock for total merger
consideration of $252.4 million based on the Company’s closing stock price of $66.15. As of December 31,
2014, the Company recognized goodwill of $198.2 million, which does not include subsequent fair value
adjustments that are still being finalized. Goodwill is calculated as the excess of both the consideration
exchanged and liabilities assumed as compared to the fair value of identifiable assets acquired, none of which is
expected to be deductible for tax purposes. Additionally, the Company recognized $27.1 million of core deposit
intangibles. For the year ended December 31, 2014, the Company incurred approximately $2.5 million of pre-tax
merger related expenses in connection with the FMBC acquisition.

Merger Related Expenses: The Company incurred $3.1 million of pre-tax merger related expenses during
2014. The merger expenses are reflected on the Company’s income statement for the applicable periods and are
reported primarily in the categories of salaries and benefits, data processing and professional and legal fees.
Merger related costs incurred during 2014 are presented in the table below by acquisition (dollars in thousands).

FVNB Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
F&M Bancorporation Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
All other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 604
2,476
34

$3,114

2013 Acquisitions

Acquisition of East Texas Financial Services, Inc.—On January 1, 2013, the Company completed the
acquisition of East Texas Financial Services, Inc. (OTC BB: FFBT) and its wholly-owned subsidiary, First
Federal Bank Texas (collectively, “East Texas Financial Services”). East Texas Financial Services operated 4
banking offices in the Tyler MSA, including 3 locations in Tyler, Texas and 1 location in Gilmer, Texas. The
Company acquired East Texas Financial Services to increase its market share in the East Texas area. The
acquisition is not considered significant to the Company’s financial statements and therefore pro forma financial
data is not included.

The Company acquired loans and deposits with fair values of $122.1 million and $112.4 million,
respectively, at acquisition date. Under the terms of the acquisition agreement, the Company issued 530,940
shares of the Company common stock for all outstanding shares of East Texas Financial Services capital stock,
for total merger consideration of $22.3 million based on the Company’s closing stock price of $42.00. During
2013, the Company recognized goodwill of $15.0 million, to which no adjustments were made.

Acquisition of Coppermark Bancshares Inc.—On April 1, 2013, the Company completed the acquisition of
Coppermark Bancshares, Inc. and its wholly-owned subsidiary, Coppermark Bank (collectively, “Coppermark”).
Coppermark operated 9 full-service banking offices: 6 in Oklahoma City, Oklahoma and surrounding areas and 3
in the Dallas, Texas area. The Company acquired Coppermark to expand its market into Oklahoma. The
acquisition is not considered significant to the Company’s financial statements and therefore pro forma financial
data is not included.

The Company acquired loans and deposits with fair values of $801.9 million and $1.12 billion, respectively,
at acquisition date. Under the terms of the acquisition agreement, the Company issued 3,258,718 shares of
Company common stock plus $60.0 million in cash for all outstanding shares of Coppermark Bancshares, Inc.
capital stock, for total merger consideration of $214.4 million based on the Company’s closing stock price of
$47.39. During 2013, the Company recognized goodwill of $117.5 million. As of December 31, 2014, total
recording a $109 thousand
goodwill
measurement period adjustment during the first quarter of 2014. Additionally, the Company recognized $1.5
million of core deposit intangibles.

related to the Coppermark acquisition was $117.7 million, after

95

Acquisition of FVNB Corp.—On November 1, 2013, the Company completed the acquisition of FVNB
Corp. and its wholly owned subsidiary, First Victoria National Bank (collectively, “FVNB”) headquartered in
Victoria, Texas. FVNB operated 33 banking locations: 4 in Victoria, Texas; 7 in the South Texas area including
Corpus Christi; 6 in the Bryan/College Station area; 5 in the Central Texas area including New Braunfels; and 11
in the Houston area including The Woodlands. The Company acquired FVNB to expand its Central and South
Texas markets. The acquisition is not considered significant to the Company’s financial statements and therefore
pro forma financial data is not included.

The Company acquired loans and deposits with fair values of $1.57 billion and $2.26 billion, respectively, at
acquisition date. Under the terms of the acquisition agreement, the Company issued 5,570,667 shares of
Company common stock plus $91.3 million in cash for all outstanding shares of FVNB Corp. capital stock for
total merger consideration of $439.2 million based on the Company’s closing stock price of $62.45. During 2013,
the Company recognized goodwill of $323.0 million. As of December 31, 2014, total goodwill related to the
FVNB acquisition was $327.3 million, after recording a $4.3 million measurement period adjustment during
2014. Additionally, the Company recognized $18.4 million of core deposit intangibles.

Merger Related Expenses: The Company incurred $3.2 million of pre-tax merger related expenses during
2013. The merger expenses are reflected on the Company’s income statement for the applicable periods and are
reported primarily in the categories of salaries and benefits, data processing and professional and legal fees.
Merger related costs incurred during 2013 are presented in the table below by acquisition (dollars in thousands).

East Texas Financial Services, Inc.
. . . . . . . . . . . . . . . . . . . . . .
Coppermark Bancshares, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . .
FVNB Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
All other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

84
853
2,000
266

$3,203

2012 Acquisitions

Acquisition of Texas Bankers, Inc.—On January 1, 2012, the Company completed the acquisition of Texas
Bankers, Inc. and its wholly-owned subsidiary, Bank of Texas, Austin, Texas. The three (3) Bank of Texas
banking offices in the Austin, Texas CMSA consisted of a location in Rollingwood, which was consolidated with
the Company’s Westlake location and remains in Bank of Texas’ Rollingwood banking office; one banking
center in downtown Austin, which was consolidated into the Company’s downtown Austin location; and another
banking center in Thorndale. The Company acquired Texas Bankers, Inc. to increase is its market share in the
Central Texas area. The acquisition is not considered significant to the Company’s financial statements and
therefore pro forma financial data and related disclosures are not included.

The Company acquired loans and deposits with fair values of $26.1 million and $70.4 million, respectively,
at acquisition date. Under the terms of the acquisition agreement, the Company issued 314,953 shares of
Company common stock for all outstanding shares of Texas Bankers capital stock, resulting in an acquisition
date fair value of $12.7 million, based on the Company’s closing stock price of $40.35. During 2012, the
Company recognized goodwill of $6.1 million, to which no adjustments were made.

Acquisition of The Bank Arlington—On April 1, 2012, the Company completed the acquisition of The Bank
Arlington. The Bank Arlington operated one banking office in Arlington, Texas, in the Dallas/Fort Worth
CMSA. The Company acquired The Bank Arlington to increase its market share in the Dallas/Fort Worth area.
The acquisition is not considered significant to the Company’s financial statements and therefore pro forma
financial data and related disclosures are not included.

96

The Company acquired loans and deposits with fair values of $22.0 million and $33.1 million, respectively,
at acquisition date. Under the terms of the agreement, the Company issued 135,347 shares of Company common
stock for all outstanding shares of The Bank Arlington capital stock, resulting in an acquisition date fair value of
$6.2 million, based on the Company’s closing stock price of $45.80. During 2012, the Company recognized
goodwill of $2.1 million. As of December 31, 2014, total goodwill related to The Bank Arlington was $2.0
million after a $130 thousand measurement period adjustment recorded during 2013.

Acquisition of American State Financial Corporation—On July 1, 2012, the Company completed the
acquisition of American State Financial Corporation and its wholly owned subsidiary American State Bank
(collectively referred to as “ASB”). ASB operated thirty-seven (37) full service banking offices in eighteen
(18) counties across West Texas.

Under the terms of the acquisition agreement, the Company issued 8,524,835 shares of Company common
stock plus $178.5 million in cash for all outstanding shares of American State Financial Corporation capital
stock, for total merger consideration of $536.8 million based on the Company’s closing stock price of $42.03.

The assets and liabilities of ASB were recorded on the consolidated balance sheet at estimated fair value on
the acquisition date. As of December 31, 2012, the following table presents the amounts recorded on the
consolidated balance sheet on the acquisition date (dollars in thousands).

Fair value of consideration paid:

Common stock issued (8,524,835 shares) . . . . . . . . . .
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 358,299
178,507

Total consideration paid . . . . . . . . . . . . . . . . . . .

$ 536,806

Fair value of assets acquired:

Cash and due from banks . . . . . . . . . . . . . . . . . . . . . .
Federal funds sold . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

98,720
202,810

Total cash and cash equivalents . . . . . . . . .
Securities available for sale . . . . . . . . . . . . . . . . . . . . .
Securities held to maturity . . . . . . . . . . . . . . . . . . . . .
Loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans held for investment . . . . . . . . . . . . . . . . . . . . . .
Bank premises and equipment . . . . . . . . . . . . . . . . . . .
Other real estate owned . . . . . . . . . . . . . . . . . . . . . . . .
Core deposit intangibles . . . . . . . . . . . . . . . . . . . . . . .
Federal Home Loan Bank stock . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

301,530
524,959
994,873
13,770
1,133,867
36,502
1,232
12,392
2,355
83,803

Total assets acquired . . . . . . . . . . . . . . . . . .

3,105,283

Fair value of liabilities assumed:

Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2,495,652
318,692
28,252

Total liabilities assumed . . . . . . . . . . . . . . .

2,842,596

Fair value of net assets acquired . . . . . . . . . . . . . . . . . . . . .

$ 262,687

Goodwill resulting from acquisition . . . . . . . . . . . . . . . . . .

$ 274,119

During 2012,

the Company recognized goodwill on the ASB transaction of $274.1 million. As of
December 31, 2014, total goodwill related to ASB was $271.0 million after a $3.1 million measurement period
adjustment recorded during 2013. Additionally, as of December 31, 2014, total core deposit intangibles related to
ASB were $14.5 million as the Company recorded a $2.1 million measurement period adjustment during 2013.

97

Pro Forma Information: Operations of ASB have been included in the consolidated financial statements
since July 1, 2012. The Company does not consider ASB a separate reporting segment and does not track the
amount of revenue and net income attributable to ASB since acquisition. As such, it is impracticable to determine
such amounts for the period from July 1, 2012 through December 31, 2012.

The following pro forma information presents the results of operations for the year ended December 31,
2012, as if the ASB acquisition had occurred on January 1, 2011. The acquisitions of Texas Bankers, Inc., The
Bank Arlington, and Community National Bank are not deemed material individually or in the aggregate and are
therefore excluded from the pro forma information in the table below (dollars in thousands, except per share
amounts).

Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Basic earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted earnings per share . . . . . . . . . . . . . . . . . . . . . . . . .

$447,471
213,830
3.81
3.80

$454,408
200,964
3.63
3.62

2012

2011

The above pro forma results are presented for illustrative purposes and are not intended to represent or be
indicative of the actual results of operations of the merged companies that would have been achieved had the
acquisition occurred at January 1, 2011, nor are they intended to represent or be indicative of future results of
operations. The pro forma results do not include expected operating cost savings as a result of the acquisition.
These pro forma results require significant estimates and judgments particularly as it relates to valuation and
accretion of income associated with acquired loans. Pro forma adjustments principally included:

• Reversing interest income and interest expense as previously recorded by ASB and recording interest
income and interest expense based on impact of estimated fair values of the acquired interest-earning
assets and assumed interest-bearing liabilities.

• Reversing depreciation and amortization expense recorded by ASB and reporting depreciation and
amortization based on estimated fair values and remaining lives of acquired premises, equipment, and
leasehold improvements.

• Reversing core deposit

intangible amortization as previously recorded by ASB and recording

amortization expense as it relates to the core deposit intangible recognized from the acquisition.

• Reporting acquisition-related charges and professional fees related to the acquisition as if they were

incurred in 2011.

Acquisition of Community National Bank—On October 1, 2012, the Company completed the acquisition of
Community National Bank, Bellaire, Texas. Community National Bank operated one (1) banking office in
Bellaire, Texas, in the Houston Metropolitan Area. The Company acquired Community National Bank to
increase its market share in the Bellaire area of Houston. The acquisition is not considered significant to the
Company’s financial statements and therefore pro forma financial data is not included.

The Company acquired loans and deposits with fair values of $62.7 million and $164.6 million,
respectively, at acquisition date. Under the terms of the acquisition agreement, the Company issued 372,282
shares of Company common stock plus $11.4 million in cash for all outstanding shares of Community National
Bank capital stock, for total merger consideration of $27.3 million, based on the Company’s closing stock price
of $42.62. During 2012, the Company recognized goodwill of $10.3 million. As of December 31, 2014, total
goodwill related to Community National Bank was $12.3 million after a $2.0 million measurement period
adjustment recorded during 2013.

Merger Related Expenses: The Company incurred $7.0 million of pre-tax merger related expenses during
2012. The merger expenses are reflected on the Company’s income statement for the applicable periods and are

98

reported primarily in the categories of salaries and benefits, data processing and professional and legal fees.
Merger related costs incurred during 2012 are presented in the table below by acquisition (dollars in thousands).

Texas Bankers, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The Bank Arlington . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Community National Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
American State Financial Corp . . . . . . . . . . . . . . . . . . . . . . . . .
All other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 392
168
250
5,889
321

$7,020

Acquired Loans

Acquired loans were preliminarily recorded at fair value based on a discounted cash flow valuation
methodology that considers, among other things, interest rates, projected default rates, loss given default, and
recovery rates (no allowance for credit losses was carried over from acquisitions completed during 2014 or 2013).
During the valuation process, the Company identified PCI and Non-PCI loans in the acquired loan portfolios. PCI
loan identification considers the following factors: payment history and past due status, debt service coverage,
loan grading, collateral values and other factors that may indicate deterioration of credit quality since origination.
Non-PCI loan identification considers the following factors: account types, remaining terms, annual interest rates
or coupons, current market rates, interest types, past delinquencies, timing of principal and interest payments, loan
to value ratios, loss exposures and remaining balances. Accretion of purchased discounts on PCI loans will be
based on estimated future cash flows, regardless of contractual maturities. Accretion of purchased discounts on
Non-PCI loans will be recognized on a level-yield basis based on contractual maturity of individual loans.

PCI Loans. The carrying amount of PCI loans included in the consolidated balance sheets and the related
outstanding balances at December 31, 2014 and 2013 are presented in the table below. The outstanding balance
represents the total amount owed as of December 31, 2014 and 2013, including accrued but unpaid interest and
any amounts previously charged off.

December 31,
2014

December 31,
2013

(Dollars in thousands)

PCI loans:
Outstanding balance . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: discount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$129,412
72,270

Recorded investment . . . . . . . . . . . . . . . . . . . . .

$ 57,142

$86,980
45,497

$41,483

Changes in the accretable yield for PCI loans for the years ended December 31, 2014 and 2013 were as

follows:

Balance at beginning of period . . . . . . . . . . . . . . . . . . . . . .
Additions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reclassifications from nonaccretable . . . . . . . . . . . . . . . . .
Accretion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Year Ended December 31,

2014

2013

(Dollars in thousands)

$ 9,855
7,158
24,074
(31,220)

$ 7,459
9,998
8,440
(16,042)

Balance at December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 9,867

$ 9,855

Income recognition on PCI loans is subject to the Company’s ability to reasonably estimate both the timing
and amount of future cash flows. PCI loans for which the Company is accruing interest income are not
considered non-performing or impaired. The non-accretable difference represents contractual principal and
interest the Company does not expect to collect.

99

Non-PCI Loans. The carrying amount of Non-PCI loans included in the consolidated balance sheets and the
related outstanding balances at December 31, 2014 and 2013 are presented in the table below. The outstanding
balance represents the total amount owed as of December 31, 2014 and 2013, including accrued but unpaid
interest and any amounts previously charged off.

December 31,
2014

December 31,
2013

(Dollars in thousands)

Non-PCI loans:

Outstanding balance . . . . . . . . . . . . . . . . . . . . . .
Less: discount . . . . . . . . . . . . . . . . . . . . . . . . . . .

$2,186,111
89,105

$2,458,975
87,798

Recorded investment . . . . . . . . . . . . . . . . .

$2,097,006

$2,371,177

Changes in the discount accretion for Non-PCI loans for the years ended December 31, 2014 and 2013 were

as follows:

Year Ended December 31,

2014

2013

(Dollars in thousands)

Balance at beginning of period . . . . . . . . . . . . . . . . . . . . . .
Additions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accretion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 87,798
65,962
(64,655)

$ 56,190
78,299
(46,691)

Balance at December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 89,105

$ 87,798

At December 31, 2014, the Company had $161.4 million of total outstanding discounts on Non-PCI and PCI

loans, of which $99.0 million was accretable.

3. GOODWILL AND CORE DEPOSIT INTANGIBLES

Changes in the carrying amount of the Company’s goodwill and core deposit intangibles for fiscal years

2014 and 2013 were as follows:

Balance as of December 31, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less:

Goodwill

Core Deposit
Intangibles

(Dollars in thousands)

$1,217,162

$26,159

Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

—

(6,145)

Add:

Measurement period adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition of East Texas Financial Services, Inc. . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . .
Acquisition of Coppermark Bancshares, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition of FVNB Corp.

(1,225)
15,007
117,544
323,032

Balance as of December 31, 2013 . . . . . . . . . . . . . . . . . . . . . . . .

1,671,520

2,110
—
1,514
18,411

42,049

Less:

Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

—

(9,940)

Add:

Measurement period adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition of F&M Bancorporation Inc. . . . . . . . . . . . . . . . . . . . . . .

4,426
198,245

(302)
27,140

Balance as of December 31, 2014 . . . . . . . . . . . . . . . . . . . . . . . .

$1,874,191

$58,947

100

Management performs an evaluation annually and more frequently if a triggering event occurs, of whether
any impairment of the goodwill and other intangibles has occurred. If any such impairment is determined, a write
down is recorded. As of December 31, 2014, there was no impairment recorded on goodwill and other
intangibles.

Core deposit intangibles are being amortized on a non-pro rata basis over their estimated lives, which the
Company believes is between 10 and 15 years. The estimated aggregate future amortization expense for core
deposit intangibles remaining as of December 31, 2014 is as follows (dollars in thousands):

2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

9,530
8,519
6,327
5,400
4,546
24,625

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$58,947

4. CASH AND DUE FROM BANKS

The Federal Reserve Bank requires banks to maintain minimum average reserve balances. The amount of
the required reserve balance for the Bank was $167.5 million and $132.0 million at December 31, 2014 and
2013, respectively.

5.

SECURITIES

The amortized cost and fair value of investment securities were as follows:

Amortized
Cost

December 31, 2014

Gross
Unrealized
Gains

Gross
Unrealized
Losses

(Dollars in thousands)

Fair Value

Available for Sale
States and political subdivisions . . . . . . . . . . . . . . . . . . . . . . . .
Collateralized mortgage obligations . . . . . . . . . . . . . . . . . . . . .
Mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

14,402
33,519
79,153
12,588

$

183
91
5,344
201

$ — $

(37)
(14)
(31)

14,585
33,573
84,483
12,758

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 139,662

$

5,819

$

(82) $ 145,399

Held to Maturity
U.S. Treasury securities and obligations of U.S. Government

agencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
States and political subdivisions . . . . . . . . . . . . . . . . . . . . . . . .
Corporate debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Collateralized mortgage obligations . . . . . . . . . . . . . . . . . . . . .
Mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

52,353
404,356
—
19,585
8,424,083

$

360
6,147
—
215
96,650

$

(74) $

(1,422)
—

(8)
(53,553)

52,639
409,081
—
19,792
8,467,180

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$8,900,377

$103,372

$(55,057) $8,948,692

101

Amortized
Cost

December 31, 2013

Gross
Unrealized
Gains

Gross
Unrealized
Losses

(Dollars in thousands)

Fair Value

Available for Sale
States and political subdivisions . . . . . . . . . . . . . . . . . . . . . . .
Collateralized mortgage obligations . . . . . . . . . . . . . . . . . . . .
Mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

$

28,578
483
108,316
12,589

$

797
7
6,843
14

— $
(1)
(22)
(126)

29,375
489
115,137
12,477

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 149,966

$ 7,661

$

(149) $ 157,478

Held to Maturity
U.S. Treasury securities and obligations of U.S. Government
agencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
States and political subdivisions . . . . . . . . . . . . . . . . . . . . . . .
Corporate debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Collateralized mortgage obligations . . . . . . . . . . . . . . . . . . . .
Mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

62,931
439,235
513
50,034
7,514,257

$

46
4,317
5
1,017
84,166

$

(935) $

(2,207)
—
(58)
(165,979)

62,042
441,345
518
50,993
7,432,444

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$8,066,970

$89,551

$(169,179) $7,987,342

Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and
more frequently when economic or market conditions warrant such an evaluation. The investment securities
portfolio is evaluated for OTTI by segregating the portfolio into two general segments and applying the
appropriate OTTI analysis. Investment securities classified as available for sale or held to maturity are evaluated
for OTTI under Financial Accounting Standards Board (“FASB”): ASC Topic 320, “Investments—Debt and
Equity Securities.”

In determining OTTI, management considers many factors, including: (1) the length of time and the extent
to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer,
(3) whether the market decline was affected by macroeconomic conditions, and (4) whether the entity has the
intent to sell the debt security or more likely than not will be required to sell the debt security before its
anticipated recovery. The assessment of whether an other-than-temporary decline exists involves a high degree of
subjectivity and judgment and is based on the information available to management at a point in time.

When OTTI occurs, the amount of the other-than-temporary impairment recognized in earnings depends on
whether an entity intends to sell the security or more likely than not will be required to sell the security before
recovery of its amortized cost basis less any current-period credit loss.

As of December 31, 2014, management does not have the intent to sell any of its securities and believes that
it is more likely than not that the Company will not have to sell any such securities before a recovery of cost. The
unrealized losses are largely due to increases in market interest rates over the yields available at the time the
underlying securities were purchased. The fair value is expected to recover as the securities approach their
maturity date or repricing date or if market yields for such investments decline. Management does not believe
any of the securities are impaired due to reasons of credit quality. Accordingly, as of December 31, 2014,
management believes any impairment in the Company’s securities is temporary and no impairment loss has been
realized in the Company’s consolidated statements of income.

102

Securities with unrealized losses segregated by length of time such securities have been in a continuous loss

position were as follows:

December 31, 2014

Less than 12 Months
Estimated
Fair Value

Unrealized
Losses

More than 12 Months
Estimated
Fair Value

Unrealized
Losses

Total

Estimated
Fair Value

Unrealized
Losses

(Dollars in thousands)

Available for Sale
Collateralized mortgage obligations . . . . $
Mortgage-backed securities . . . . . . . . . .
Other securities . . . . . . . . . . . . . . . . . . . .

6,675 $
358
1,706

(36) $
—
(31)

45 $

2,837
—

(1) $
(14)
—

6,720 $
3,195
1,706

Total

. . . . . . . . . . . . . . . . . . . . . . . . $

8,739 $

(67) $

2,882 $

(15) $

11,621 $

Held to Maturity
U.S. Treasury securities and obligations

of U.S. government agencies . . . . . . . . $

States and political subdivisions . . . . . . .
Collateralized mortgage obligations . . . .
Mortgage-backed securities . . . . . . . . . .

17,098 $
45,680
670
1,149,380

(74) $
(425)
(5)
(2,600)

— $ — $

17,098 $
90,440
992
(50,953) 3,498,523

(997)
(3)

44,760
322
2,349,143

(37)
(14)
(31)

(82)

(74)
(1,422)
(8)
(53,553)

Total

. . . . . . . . . . . . . . . . . . . . . . . . $1,212,828 $(3,104) $2,394,225 $(51,953) $3,607,053 $(55,057)

December 31, 2013

Less than 12 Months

More than 12 Months

Total

Estimated
Fair Value

Unrealized
Losses

Estimated
Fair Value

Unrealized
Losses

Estimated
Fair Value

Unrealized
Losses

(Dollars in thousands)

Available for Sale
Collateralized mortgage obligations . . . . $
Mortgage-backed securities . . . . . . . . . .
Other securities . . . . . . . . . . . . . . . . . . . .

5 $

651
6,911

— $
(1)
(126)

50 $

3,313
—

(1) $
(21)
—

55 $

3,964
6,911

Total

. . . . . . . . . . . . . . . . . . . . . . . . $

7,567 $

(127) $

3,363 $

(22) $

10,930 $

(1)
(22)
(126)

(149)

Held to Maturity
U.S. Treasury securities and obligations

of U.S. government agencies . . . . . . . . $

States and political subdivisions . . . . . . .
Collateralized mortgage obligations . . . .
Mortgage-backed securities . . . . . . . . . .

48,389 $
113,063
2,109
3,702,569

(935) $

— $ — $

48,389 $

(1,581)
(32)
(106,816)

28,639
433
998,380

(626)
(26)

141,702
2,542
(59,163) 4,700,949

(935)
(2,207)
(58)
(165,979)

Total

. . . . . . . . . . . . . . . . . . . . . . . . $3,866,130 $(109,364) $1,027,452 $(59,815) $4,893,582 $(169,179)

At December 31, 2014, there were 501 securities in an unrealized loss position for more than 12 months.

103

The amortized cost and fair value of investment securities at December 31, 2014, by contractual maturity,
are shown below. Actual maturities will differ from contractual maturities because borrowers may have the right
to call or prepay obligations at any time with or without call or prepayment penalties.

Held to Maturity

Available for Sale

Amortized
Cost

Fair Value

Amortized
Cost

Fair Value

Due in one year or less . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due after one year through five years . . . . . . . . . . . . . . . . . . . .
Due after five years through ten years . . . . . . . . . . . . . . . . . . .
Due after ten years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage-backed securities and collateralized mortgage

32,904
175,844
183,608
64,353

456,709

(Dollars in thousands)
$

32,972
177,023
186,894
64,831

$ 12,688
4,776
8,895
631

$ 12,861
4,834
9,006
642

461,720

26,990

27,343

obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

8,443,668

8,486,972

112,672

118,056

Total

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$8,900,377

$8,948,692

$139,662

$145,399

The Company recorded a net gain on the sale of securities of $7 thousand for the year ended December 31,
2014. The net gain was the result of a loss of $41 thousand on the sale of eight non-agency collateralized
mortgage obligations (“CMO’s”) with a total book value of $1.2 million offset by a gain of $48 thousand on the
sale of an available for sale mortgage-backed security with a total book value of $490 thousand. The Company
recorded no gain or loss on the sale of securities for the year ended December 31, 2013 and 2012.

At December 31, 2014 and 2013, the Company did not own securities of any one issuer (other than the U.S.
government and its agencies) for which aggregate adjusted cost exceeded 10% of the consolidated shareholders’
equity at such respective dates.

Securities with an amortized cost of $5.08 billion and $4.46 billion and a fair value of $5.10 billion and
$4.47 billion at December 31, 2014 and 2013, respectively, were pledged to collateralize public deposits and for
other purposes required or permitted by law.

6. LOANS AND ALLOWANCE FOR CREDIT LOSSES

The loan portfolio consists of various types of loans made principally to borrowers located within the states

of Texas and Oklahoma and is classified by major type as follows:

December 31,

2014

2013

(Dollars in thousands)

Residential mortgage loans held for sale . . . . . . . . . . . . . . . . . .

$

8,602

$

2,210

Commercial and industrial
Real estate:

. . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,806,267

1,279,777

Construction, land development and other land loans . . . .
1-4 family residential (including home equity) . . . . . . . . . .
Commercial real estate (including multi-family

1,026,475
2,513,579

865,511
2,129,510

residential) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Farmland . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Agriculture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer and other

3,030,340
361,943
189,703
307,274

2,753,797
332,648
198,610
213,158

Total loans held for investment . . . . . . . . . . . . . . . . . . . . . . . . . .

9,235,581

7,773,011

Total

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$9,244,183

$7,775,221

104

Loan Origination/Risk Management. The Company has certain lending policies and procedures in place that
are designed to maximize loan income within an acceptable level of risk. Management reviews and approves
these policies and procedures on a regular basis. A reporting system supplements the review process by providing
management with frequent reports related to loan production, loan quality, concentrations of credit, loan
delinquencies and non-performing and potential problem loans. Diversification in the loan portfolio is a means of
managing risk associated with fluctuations in economic conditions. Loans to borrowers with aggregate debt
relationships over $1.0 million and below $3.5 million are evaluated and acted upon on a daily basis by two of
the company-wide loan concurrence officers. Loans to borrowers with aggregate debt relationships above $3.5
million are evaluated and acted upon by an officers’ loan committee which meets weekly. In addition to the
officers’ loan committee evaluation, loans to borrowers with aggregate debt relationships from $25.0 million to
$50.0 million are evaluated and acted upon by the directors’ loan committee which consists of three directors of
the Bank and meets as necessary. Loans to borrowers with aggregate debt relationships over $50.0 million are
evaluated and acted upon by the Bank’s board of directors either at a regularly scheduled monthly board meeting
or by teleconference or written consent.

The Company maintains an independent loan review department that reviews and validates the credit risk
program on a periodic basis. Results of these reviews are presented to management. The loan review process
complements and reinforces the risk identification and assessment decisions made by lenders and credit
personnel, as well as the Company’s policies and procedures.

(i) Commercial and Industrial Loans. In nearly all cases, the Company’s commercial loans are made in the
Company’s market areas and are underwritten on the basis of the borrower’s ability to service the debt from
income. As a general practice, the Company takes as collateral a lien on any available real estate, equipment or
other assets owned by the borrower and obtains a personal guaranty of the borrower or principal. Working capital
loans are primarily collateralized by short-term assets whereas term loans are primarily collateralized by long-
term assets. In general, commercial
loans involve more credit risk than residential mortgage loans and
commercial mortgage loans and, therefore, usually yield a higher return. The increased risk in commercial loans
is due to the type of collateral securing these loans as well as the expectation that commercial loans generally
will be serviced principally from the operations of the business, and those operations may not be successful.
Historical trends have shown these types of loans to have higher delinquencies than mortgage loans. As a result
of these additional complexities, variables and risks, commercial loans require more thorough underwriting and
servicing than other types of loans.

(ii) Commercial Real Estate. The Company makes commercial real estate loans collateralized by owner-
occupied and nonowner-occupied real estate to finance the purchase of real estate. The Company’s commercial
real estate loans are collateralized by first liens on real estate, typically have variable interest rates (or five year
or less fixed rates) and amortize over a 15 to 20 year period. Payments on loans secured by nonowner-occupied
properties are often dependent on the successful operation or management of the properties. Accordingly,
repayment of these loans may be subject to adverse conditions in the real estate market or the economy to a
greater extent than other types of loans. The Company seeks to minimize these risks in a variety of ways,
including giving careful consideration to the property’s operating history, future operating projections, current
and projected occupancy, location and physical condition in connection with underwriting these loans. The
underwriting analysis also includes credit verification, analysis of global cash flow, appraisals and a review of
the financial condition of the borrower. At December 31, 2014, the Company had total commercial real estate
loans totaling $4.06 billion which include the categories of construction, land development and other land loans,
commercial real estate loans and multi-family residential loans. At December 31, 2014, approximately 37.1% of
the outstanding principal balance of the Company’s commercial real estate loans were secured by owner-
occupied properties.

(iii) 1-4 Family Residential Loans. The Company’s lending activities also include the origination of 1-4
family residential mortgage loans (including home equity loans) collateralized by owner-occupied residential
properties located in the Company’s market areas. The Company offers a variety of mortgage loan portfolio

105

products which generally are amortized over five to 25 years. Loans collateralized by 1-4 family residential real
estate generally have been originated in amounts of no more than 89% of appraised value or have mortgage
insurance. The Company requires mortgage title insurance and hazard insurance. The Company retains these
portfolio loans for its own account rather than selling them into the secondary market. By doing so, the Company
incurs interest rate risk as well as the risks associated with nonpayments on such loans. The Company’s Home
Loan Center offers a variety of mortgage loan products which are generally amortized over 30 years, including
FHA and VA loans. The Company sells the loans originated by the Home Loan Center into the secondary
market.

(iv) Construction, Land Development and Other Land Loans. The Company makes loans to finance the
construction of residential and, to a lesser extent, nonresidential properties. Construction loans generally are
collateralized by first liens on real estate and have floating interest rates. The Company conducts periodic
inspections, either directly or through an agent, prior to approval of periodic draws on these loans. Underwriting
guidelines similar to those described above are also used in the Company’s construction lending activities.
Construction loans involve additional risks attributable to the fact that loan funds are advanced upon the security
of a project under construction, and the project is of uncertain value prior to its completion. Because of
uncertainties inherent in estimating construction costs, the market value of the completed project and the effects
of governmental regulation on real property, it can be difficult to accurately evaluate the total funds required to
complete a project and the related loan to value ratio. As a result of these uncertainties, construction lending
often involves the disbursement of substantial funds with repayment dependent, in part, on the success of the
ultimate project rather than the ability of a borrower or guarantor to repay the loan. If the Company is forced to
foreclose on a project prior to completion, there is no assurance that the Company will be able to recover all of
the unpaid portion of the loan. In addition, the Company may be required to fund additional amounts to complete
a project and may have to hold the property for an indeterminate period of time. While the Company has
underwriting procedures designed to identify what it believes to be acceptable levels of risks in construction
lending, no assurance can be given that these procedures will prevent losses from the risks described above.

(v) Agriculture Loans. The Company provides agriculture loans for short-term crop production, including
rice, cotton, milo and corn, farm equipment financing and agriculture real estate financing. The Company
evaluates agriculture borrowers primarily based on their historical profitability, level of experience in their
particular agriculture industry, overall financial capacity and the availability of secondary collateral to withstand
economic and natural variations common to the industry. Because agriculture loans present a higher level of risk
associated with events caused by nature, the Company routinely makes on-site visits and inspections in order to
identify and monitor such risks.

loans, personal

loans, home improvement

(vi) Consumer Loans. Consumer loans made by the Company include direct “A”-credit automobile loans,
recreational vehicle loans, boat
(collateralized and
uncollateralized), credit cards and deposit account collateralized loans. The terms of these loans typically range
from 12 to 180 months and vary based upon the nature of collateral and size of loan. Generally, consumer loans
entail greater risk than do real estate secured loans, particularly in the case of consumer loans that are unsecured
or collateralized by rapidly depreciating assets such as automobiles. In such cases, any repossessed collateral for
a defaulted consumer loan may not provide an adequate source of repayment for the outstanding loan balance.
The remaining deficiency often does not warrant further substantial collection efforts against the borrower
beyond obtaining a deficiency judgment. In addition, consumer loan collections are dependent on the borrower’s
continuing financial stability, and thus are more likely to be adversely affected by job loss, divorce, illness or
personal bankruptcy. Furthermore, the application of various federal and state laws may limit the amount which
can be recovered on such loans.

loans

The contractual maturity ranges of the Company’s loan portfolio by type of loan and the amount of such
loans with predetermined interest rates and floating rates in each maturity range as of December 31, 2014 are

106

summarized in the following table. Contractual maturities are based on contractual amounts outstanding and do
not include loan purchase discounts of $161.4 million or loans held for sale of $8.6 million at December 31,
2014:

One Year
or Less

Through
Five Years

After Five
Years

Total

(Dollars in thousands)

Commercial and industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 774,040 $ 702,492 $ 404,256 $1,880,788
Real estate:

Construction, land development and other land loans . . .
1-4 family residential (includes home equity) . . . . . . . . .
Commercial (includes multi-family residential) . . . . . . .
Agriculture (includes farmland) . . . . . . . . . . . . . . . . . . . .
Consumer and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

348,560
31,922
135,957
168,736
123,433

203,759
196,281
600,426
61,549
89,933

478,605
2,302,661
2,351,382
326,940
96,024

1,030,924
2,530,864
3,087,765
557,225
309,390

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,582,648 $1,854,440 $5,959,868 $9,396,956

Loans with a predetermined interest rate . . . . . . . . . . . . . . . . . $ 487,134 $ 916,728 $2,616,963 $4,020,825
5,376,131
Loans with a floating interest rate . . . . . . . . . . . . . . . . . . . . . .

1,095,514

3,342,905

937,712

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,582,648 $1,854,440 $5,959,868 $9,396,956

Concentrations of Credit. Most of the Company’s lending activity occurs within the states of Texas and
Oklahoma. The majority of the Company’s loan portfolio consists of commercial and industrial, commercial real
estate and 1-4 family residential loans. As of December 31, 2014 and 2013, there were no concentrations of loans
related to any single industry in excess of 10% of total loans.

Foreign Loans. The Company has U.S. dollar denominated loans and commitments to borrowers in Mexico.
The outstanding balance of these loans and the unfunded amounts available under these commitments was not
significant at December 31, 2014 or 2013.

Related Party Loans. As of December 31, 2014 and 2013, loans outstanding to directors, officers and their
affiliates totaled $4.9 million and $6.2 million, respectively. All transactions entered into between the Company
and such related parties are done in the ordinary course of business and made on the same terms and conditions
as similar transactions with unaffiliated persons.

An analysis of activity with respect to these related-party loans is as follows:

Beginning balance on January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New loans and reclassified related loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

December 31,

2014

2013

(Dollars in thousands)
$6,682
$ 6,187
306
4,943
(801)
(6,190)

Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 4,940

$6,187

Nonperforming Assets and Non-Accrual and Past Due Loans. The Company has several procedures in place
to assist it in maintaining the overall quality of its loan portfolio. The Company has established underwriting
guidelines to be followed by its officers, and the Company also monitors its delinquency levels for any negative
or adverse trends. There can be no assurance, however, that the Company’s loan portfolio will not become
subject to increasing pressures from deteriorating borrower credit due to general economic conditions.

107

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 requires appraisals on loans collateralized by real estate. With respect to potential problem
loans, an evaluation of the borrower’s overall financial condition is made to determine the need, if any, for
possible writedowns or appropriate additions to the allowance for credit losses.

An aging analysis of past due loans, segregated by class of loans, was as follows:

Loans Past Due and Still Accruing

December 31, 2014

30-89 Days

90 or More
Days

Total Past
Due Loans

Nonaccrual
Loans

Current
Loans

Total Loans

(Dollars in thousands)

Construction, land development and

other land loans . . . . . . . . . . . . . . . . . .

$ 7,667

$ —

$ 7,667

$

526

$1,018,282 $1,026,475

Agriculture and agriculture real estate

(includes farmland) . . . . . . . . . . . . . . .
1-4 family (includes home equity)(1) . . . .
Commercial real estate (includes multi-

family residential) . . . . . . . . . . . . . . . .
. . . . . . . . . . .
. . . . . . . . . . . . . . . .

Commercial and industrial
Consumer and other

2,995
2,261

12,679
18,305
612

377
82

65
869
800

3,372
2,343

12,744
19,174
1,412

96
3,570

548,178
2,516,268

551,646
2,522,181

6,340
20,537
353

3,011,256
1,766,556
305,509

3,030,340
1,806,267
307,274

Total

. . . . . . . . . . . . . . . . . . . . . . . .

$44,519

$2,193

$46,712

$31,422

$9,166,049 $9,244,183

Loans Past Due and Still Accruing

December 31, 2013

30-89 Days

90 or More
Days

Total Past
Due Loans

Nonaccrual
Loans

Current
Loans

Total Loans

(Dollars in thousands)

Construction, land development and

other land loans . . . . . . . . . . . . . . . . . .

$ 6,258

$

2

$ 6,260

$

386

$ 858,865 $ 865,511

Agriculture and agriculture real estate

(includes farmland) . . . . . . . . . . . . . . .
1-4 family (includes home equity)(1) . . . .
Commercial real estate (includes

multi-family residential) . . . . . . . . . . .
. . . . . . . . . . .
. . . . . . . . . . . . . . . .

Commercial and industrial
Consumer and other

5,634
8,684

8,163
9,552
1,344

218
2,012

1,752
933
30

5,852
10,696

9,915
10,485
1,374

62
3,086

4,333
2,208
156

525,344
2,117,938

531,258
2,131,720

2,739,549
1,267,084
211,628

2,753,797
1,279,777
213,158

Total

. . . . . . . . . . . . . . . . . . . . . . . .

$39,635

$4,947

$44,582

$10,231

$7,720,408 $7,775,221

(1)

Includes $8,602 and $2,210 of residential mortgage loans held for sale at December 31, 2014 and
December 31, 2013, respectively.

108

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

December 31,

2014

2013

2012

2011

2010

Nonaccrual loans(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accruing loans 90 or more days past due . . . . . . . . . . . . . . .

$31,422
2,193

(Dollars in thousands)
$ 5,382
331

$10,231
4,947

$ 3,578
—

Total nonperforming loans . . . . . . . . . . . . . . . . . . . . . . .
Repossessed assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

33,615
67
3,237

15,178
27
7,299

5,713
68
7,234

3,578
146
8,328

$ 4,439
189

4,628
161
11,053

Total nonperforming assets . . . . . . . . . . . . . . . . . . . . . .

$36,919

$22,504

$13,015

$12,052

$15,842

Nonperforming assets to total loans and other real estate . . .

0.40%

0.29%

0.25%

0.32%

0.45%

(1)

Includes troubled debt restructurings of $911 thousand, $1.4 million, $3.6 million, 5.3 million and
$2.6 million for the years ended December 31, 2014, 2013, 2012, 2011 and 2010, respectively.

The Company had $36.9 million in nonperforming assets at December 31, 2014 compared with $22.5
million at December 31, 2013 and $13.0 million at December 31, 2012. The nonperforming assets at
December 31, 2014 consisted of 19 separate credits or ORE properties, while the nonperforming assets at
December 31, 2013 consisted of 40 separate credits or ORE properties. These results are reflective of the
Company’s conservative lending approach.

If interest on nonaccrual loans had been accrued under the original loan terms, approximately $2.7 million,
$440 thousand, and $270 thousand would have been recorded as income for the years ended December 31, 2014,
2013 and 2012, respectively.

Impaired Loans. Loans are considered impaired when, based on current information and events, it is
probable the Company will be unable to collect all amounts due in accordance with the original contractual terms
of the loan agreement, including scheduled principal and interest payments. Impairment is evaluated in total for
smaller-balance loans of a similar nature and on an individual loan basis for other loans. If a loan is impaired, a
specific valuation allowance is allocated, if necessary, so that the loan is reported net, at the present value of
estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected
solely from the collateral. Interest payments on impaired loans are typically applied to principal unless
collectability of the principal amount is reasonably assured, in which case interest is recognized on a cash basis.
Impaired loans, or portions thereof, are charged off when deemed uncollectible.

109

Year-end impaired loans are set forth in the following tables. No interest income was recognized on
impaired loans subsequent to their classification as impaired. The average recorded investment presented in the
tables below is reported on a year-to-date basis.

December 31, 2014

Recorded Investment

Unpaid Principal
Balance

Related
Allowance

Average Recorded
Investment

(Dollars in thousands)

With no related allowance recorded:

Construction, land development and other

land loans . . . . . . . . . . . . . . . . . . . . . . . . . .

$

250

$

256

$ —

$

264

Agriculture and agriculture real estate

(includes farmland) . . . . . . . . . . . . . . . . . . .
1-4 family (includes home equity) . . . . . . . . .
Commercial real estate (includes multi-family
residential) . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . .
Commercial and industrial
Consumer and other . . . . . . . . . . . . . . . . . . . .

—
1,710

5,093
9,485
8,144

—
1,831

5,126
9,678
8,161

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . .

24,682

25,052

—
—

—
—
—

—

225

24
418

24
1,597
205

2,493

225

24
418

24
1,597
205

7
1,147

3,792
4,794
4,080

14,084

138

34
1,973

838
1,783
164

4,930

402

41
3,120

4,630
6,577
4,244

276

55
1,473

63
4,182
251

6,300

532

55
3,304

5,189
13,860
8,412

$31,352

$2,493

$19,014

With an allowance recorded:

Construction, land development and other

land loans . . . . . . . . . . . . . . . . . . . . . . . . . .

Agriculture and agriculture real estate

(includes farmland) . . . . . . . . . . . . . . . . . . .
1-4 family (includes home equity) . . . . . . . . .
Commercial real estate (includes multi-family
residential) . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . .
Commercial and industrial
Consumer and other . . . . . . . . . . . . . . . . . . . .

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total:

Construction, land development and other

land loans . . . . . . . . . . . . . . . . . . . . . . . . . .

Agriculture and agriculture real estate

(includes farmland) . . . . . . . . . . . . . . . . . . .
1-4 family (includes home equity) . . . . . . . . .
Commercial real estate (includes multi-family
residential) . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial and industrial
. . . . . . . . . . . . . . .
Consumer and other . . . . . . . . . . . . . . . . . . . .

276

46
1,426

62
2,454
234

4,498

526

46
3,136

5,155
11,939
8,378

$29,180

110

December 31, 2013

Recorded Investment

Unpaid Principal
Balance

Related
Allowance

Average Recorded
Investment

(Dollars in thousands)

With no related allowance recorded:

Construction, land development and other

land loans . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 277

$

289

$ —

$ 711

Agriculture and agriculture real estate

(includes farmland) . . . . . . . . . . . . . . . . . . .
1-4 family (includes home equity) . . . . . . . . .
Commercial real estate (includes multi-family
residential) . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . .
Commercial and industrial
Consumer and other . . . . . . . . . . . . . . . . . . . .

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . .

With an allowance recorded:

Construction, land development and other

land loans . . . . . . . . . . . . . . . . . . . . . . . . . .

Agriculture and agriculture real estate

(includes farmland) . . . . . . . . . . . . . . . . . . .
1-4 family (includes home equity) . . . . . . . . .
Commercial real estate (includes multi-family
residential) . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial and industrial
. . . . . . . . . . . . . . .
Consumer and other . . . . . . . . . . . . . . . . . . . .

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total:

Construction, land development and other

land loans . . . . . . . . . . . . . . . . . . . . . . . . . .

Agriculture and agriculture real estate

(includes farmland) . . . . . . . . . . . . . . . . . . .
1-4 family (includes home equity) . . . . . . . . .
Commercial real estate (includes multi-family
residential) . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial and industrial
. . . . . . . . . . . . . . .
Consumer and other . . . . . . . . . . . . . . . . . . . .

14
584

2,490
103
15

3,483

—

21
2,519

1,613
1,111
95

5,359

277

35
3,103

4,103
1,214
110

57
664

3,798
122
16

4,946

—

27
2,548

1,615
1,192
113

5,495

289

84
3,212

5,413
1,314
129

—
—

—
—
—

—

—

18
890

445
1,029
77

2,459

—

18
890

445
1,029
77

46
538

1,470
95
13

2,873

—

28
1,759

2,032
1,077
81

4,977

711

74
2,297

3,502
1,172
94

$8,842

$10,441

$2,459

$7,850

Credit Quality Indicators. As part of the on-going monitoring of the credit quality of the Company’s loan
portfolio and methodology for calculating the allowance for credit losses, management assigns and tracks loan
grades to be used as credit quality indicators.

In 2013, the Company adopted a new loan review policy whereby two new loan grade credit classifications
were created. The Company added a new “Pass-High Quality” loan grade classification, Grade 2, which
represents high quality non-cash secured loans. In addition, a new “Pass/Watch” classification, Grade 4, was
added. These credits have primary and secondary sources of repayment that are currently of sufficient quantity,
quality, and liquidity to protect the Bank against loss of principal and interest. The loan grade classifications in
prior financial statements have not been reclassified to conform to the current presentation.

111

The following is a general description of the loan grades used:

Grade 1—Credits in this category have risk potential that is virtually nonexistent. These loans may be
secured by insured certificates of deposit, insured savings accounts, U.S. Government securities and highly rated
municipal bonds.

Grade 2—Credits in this category are of the highest quality. These borrowers represent top rated companies
and individuals with unquestionable financial standing with excellent global cash flow coverage, net worth,
liquidity and collateral coverage.

Grade 3 (Prior to 2013, these credits were classified as Grade 2)—Credits in this category are not immune
from risk but are well protected by the collateral and paying capacity of the borrower. These loans may exhibit a
minor unfavorable credit factor, but the overall credit is sufficiently strong to minimize the possibility of loss.

Grade 4—Credits in this category are considered “pass/watch.” Loans in this category have sources of
repayment that remain sufficient to preclude a larger than normal probability of default and secondary sources
are likewise currently of sufficient quantity, quality, and liquidity to protect the Company against loss of
principal and interest. These borrowers have specific risk factors, but the overall strength of the credit is
acceptable based on other mitigating credit and/or collateral factors and can repay the debt in the normal course
of business.

Grade 5 (Prior to 2013, these credits were classified as Grade 3)—Credits in this category constitute an
undue and unwarranted credit risk; however the factors do not rise to a level of substandard. These credits have
potential weaknesses and/or declining trends that, if not corrected, could expose the Bank to risk at a future date.
These loans are monitored on the Bank’s internally-generated watch list and evaluated on a quarterly basis.

Grade 6 (Prior to 2013, these credits were classified as Grade 4)—Credits in this category are considered
“substandard” but “non-impaired” loans in accordance with regulatory guidelines. Loans in this category have
well-defined weakness that, if not corrected, could make default of principal and interest possible. Loans in this
category are still accruing interest and may be dependent upon secondary sources of repayment and/or collateral
liquidation.

Grade 7 (Prior to 2013, these credits were classified as Grade 5)—Credits in this category are deemed
“substandard” and “impaired” pursuant to regulatory guidelines. As such, the Bank has determined that it is
probable that less than 100% of the contractual principal and interest will be collected. These loans are
individually evaluated for a specific reserve and will typically have the accrual of interest stopped.

Grade 8 (Prior to 2013, these credits were classified as Grade 6)—Credits in this category include
“doubtful” loans in accordance with regulatory guidance. Such loans are no longer accruing interest and factors
indicate a loss is imminent. These loans are also deemed “impaired.” While a specific reserve may be in place
while the loan and collateral is being evaluated these loans are typically charged down to an amount the Bank
estimates is collectible.

Grade 9 (Prior to 2013, these credits were classified as Grade 7)—Credits in this category are deemed a
“loss” in accordance with regulatory guidelines and have been charged off or charged down. The Bank may
continue collection efforts and may have partial recovery in the future.

112

The following table presents risk grades and classified loans by class of loan at December 31, 2014.

Impaired loans include loans in risk grades 7, 8 and 9.

Construction,
Land
Development
and Other
Land Loans

Agriculture and
Agriculture
Real Estate
(includes
Farmland)

1-4 Family
(includes
Home Equity)(1)

Commercial
Real Estate
(includes Multi-
Family
Residential)

Commercial
and Industrial

Consumer and
Other

Total

Grade 1 . . . . . . $
Grade 2 . . . . . .
Grade 3 . . . . . .
Grade 4 . . . . . .
Grade 5 . . . . . .
Grade 6 . . . . . .
Grade 7 . . . . . .
Grade 8 . . . . . .
Grade 9 . . . . . .
. .
PCI Loans(2)

528,400

— $ 13,507
—
—
1,022,002
—
497
2,308
526
—
—
1,142

—
4,265
4,921
46
—
—
507

(Dollars in thousands)

$

— $
—

— $
—

61,697
—

2,503,679

2,965,455

1,698,558

$ 41,240
—

257,588

$ 116,444
—

8,975,682

—
1,174
8,266
3,136
—
—
5,926

—
10,424
25,839
5,155
—
—
23,467

—
3,266
4,707
11,834
105
—
26,100

—
18
50
8,378
—
—
—

—
19,644
46,091
29,075
105
—
57,142

Total

. . . . $1,026,475

$551,646

$2,522,181

$3,030,340

$1,806,267

$307,274

$9,244,183

Includes $8.6 million of residential mortgage loans held for sale at December 31, 2014.
(1)
(2) Of the total PCI loans, $32.0 million were classified as substandard at December 31, 2014.

The following table presents risk grades and classified loans by class of loan at December 31, 2013.

Impaired loans include loans in risk grades 7, 8 and 9.

Construction,
Land
Development
and Other
Land Loans

Agriculture and
Agriculture
Real Estate
(includes
Farmland)

1-4 Family
(includes
Home Equity)(1)

Commercial
Real Estate
(includes Multi-
Family
Residential)

(Dollars in thousands)

Commercial
and Industrial

Consumer and
Other

Total

Grade 1 . . . . . . $ —
Grade 2 . . . . . .
—
858,712
Grade 3 . . . . . .
—
Grade 4 . . . . . .
1,141
Grade 5 . . . . . .
1,616
Grade 6 . . . . . .
277
Grade 7 . . . . . .
—
Grade 8 . . . . . .
—
Grade 9 . . . . . .
3,765
. .
PCI Loans(2)

$

5,225
—
520,921
—
3,427
1,043
35
—
—
607

$

— $
—

2,113,698

—
6,337
4,504
3,093
10
—
4,078

— $
—
2,697,664
—
10,798
14,316
4,103
—
—
26,916

50,131
—

1,202,604

$ 31,362
—

181,406

$

86,718
—

7,575,005

—
17,179
2,423
1,214
—
—
6,226

—
146
134
110
—
—
—

—
39,028
24,036
8,832
10
—
41,592

Total

. . . . $865,511

$531,258

$2,131,720

$2,753,797

$1,279,777

$213,158

$7,775,221

(1)
Includes $2.2 million of residential mortgage loans held for sale at December 31, 2013.
(2) Of the total PCI loans, $17.6 million were classified as substandard at December 31, 2013.

Allowance for Credit Losses. The allowance for credit losses is established through charges to earnings in
the form of a provision for credit losses. Management has established an allowance for credit losses which it
believes is adequate for estimated losses in the Company’s loan portfolio. The amount of the allowance for credit
losses is affected by the following: (1) charge-offs of loans that occur when loans are deemed uncollectible and
increase the allowance and
decrease the allowance, (2) recoveries on loans previously charged off that
(3) provisions for credit losses charged to earnings that increase the allowance. Based on an evaluation of the

113

loan portfolio and consideration of the factors listed below, 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. 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.

The Company’s allowance for credit losses consists of two components: a specific valuation allowance
based on probable losses on specifically identified loans and a general valuation allowance based on historical
loan loss experience, general economic conditions and other qualitative risk factors both internal and external to
the Company.

In setting the specific valuation allowance, the Company follows a loan review program to evaluate the
credit risk in the total loan portfolio and assigns risk grades to each loan. Through this loan review process, the
Company maintains an internal list of impaired loans which, along with the delinquency list of loans, helps
management assess the overall quality of the loan portfolio and the adequacy of the allowance for credit losses.
All loans that have been identified as impaired are reviewed on a quarterly basis in order to determine whether a
specific reserve is required. For certain impaired loans, the Company allocates a specific loan loss reserve
primarily based on the value of the collateral securing the impaired loan in accordance with ASC Topic 310-10,
“Receivables.” The specific reserves are determined on an individual loan basis. Loans for which specific
reserves are provided are excluded from the general valuation allowance described below.

In connection with this review of the loan portfolio, the Company considers risk elements attributable to
particular loan types or categories in assessing the quality of individual loans. Some of the risk elements include:

•

•

•

•

•

•

including a
for 1-4 family residential mortgage loans,
consideration of the debt to income ratio and employment and income stability, the loan to value ratio,
and the age, condition and marketability of collateral;

the borrower’s ability to repay the loan,

for commercial real estate loans and multifamily residential loans, the debt service coverage ratio
(income from the property in excess of operating expenses compared to loan payment requirements),
operating results of the owner in the case of owner-occupied properties, the loan to value ratio, the age
and condition of the collateral and the volatility of income, property value and future operating results
typical of properties of that type;

for construction,
land development and other land loans, the perceived feasibility of the project
including the ability to sell developed lots or improvements constructed for resale or the ability to lease
property constructed for lease, the quality and nature of contracts for presale or prelease, if any,
experience and ability of the developer and loan to value ratio;

for commercial and industrial loans, the operating results of the commercial, industrial or professional
enterprise, the borrower’s business, professional and financial ability and expertise, the specific risks
and volatility of income and operating results typical for businesses in that category and the value,
nature and marketability of collateral;

for agricultural real estate loans, the experience and financial capability of the borrower, projected debt
service coverage of the operations of the borrower and loan to value ratio; and

for non-real estate agricultural loans, the operating results, experience and financial capability of the
borrower, historical and expected market conditions and the value, nature and marketability of
collateral.

In determining the amount of the general valuation allowance, management considers factors such as
historical loan loss experience, concentration risk of specific loan types, the volume, growth and composition of
the Company’s loan portfolio, current economic conditions that may affect the borrower’s ability to pay and the

114

value of collateral, the evaluation of the Company’s loan portfolio through its internal loan review process,
general economic conditions and other qualitative risk factors both internal and external to the Company and
other relevant factors in accordance with ASC Topic 450, “Contingencies.” Based on a review of these factors
for each loan type, the Company applies an estimated percentage to the outstanding balance of each loan type,
excluding any loan that has a specific reserve allocated to it. The Company uses this information to establish the
amount of the general valuation allowance.

In addition, for each category, the Company considers secondary sources of income and the financial

strength and credit history of the borrower and any guarantors.

A change in the allowance for credit losses can be attributable to several factors, most notably (1) specific
reserves identified for impaired loans, (2) historical credit loss information, (3) changes in environmental factors
and (4) growth in the balance of legacy loans and the renewal or substantial modification of acquired loans (Non-
PCI and PCI loans as discussed in Note 2) into the loan portfolio subject to the allowance methodology.

Changes in the Company’s asset quality are reflected in the allowance in several ways. Specific reserves that
are calculated on a loan-by-loan basis and the qualitative assessment of all other loans reflect current changes in
the credit quality of the loan portfolio. Historical credit losses, on the other hand, are based on a three-year look
back period, which are then applied to estimate current credit losses inherent in the loan portfolio. A deterioration
in the credit quality of the loan portfolio in the current period would increase the historical credit loss factor to be
applied in future periods, just as an improvement in credit quality would decrease the historical credit loss factor.

The allowance for credit losses is further determined by the size of the loan portfolio subject to the
allowance methodology and environmental factors that include Company-specific risk indicators and general
economic conditions, both of which are constantly changing. The Company evaluates the economic and
portfolio-specific factors on a quarterly basis to determine a qualitative component of the general valuation
allowance. The factors include economic metrics, business conditions, delinquency trends, credit concentrations,
nature and volume of the portfolio and other adjustments for items not covered by specific reserves and historical
loss experience. Management’s assessment of qualitative factors is a statistically based approach to determine the
inherent probable loss associated with such factors. Based on the Company’s actual historical
loan loss
experience relative to economic and loan portfolio-specific factors at the time the losses occurred, management is
able to identify the probabilities of default and loss severity based on current economic conditions. The
correlation of historical loss experience with current economic conditions provides an estimate of inherent and
probable losses that has not been previously factored into the general valuation allowance by the determination of
specific reserves and recent historical losses. Additionally, through back-testing, the Company is able to adjust
the outputs of the analysis for imprecision.

Utilizing the aggregation of specific reserves, historical loss experience and a qualitative component,

management is able to determine the valuation allowance to reflect the full inherent probable loss.

Loans acquired in business combinations are initially recorded at fair value, which includes an estimate of
losses expected to be realized over the remaining lives of the loans, and therefore no
inherent credit
corresponding allowance for credit losses is recorded for these loans at acquisition. When a fair-valued acquired
loan is renewed at its maturity date, the loan is re-categorized and is subject to the allowance methodology. When
a fair-valued acquired loan is modified after acquisition, the loan is independently evaluated subsequent to the
modification decision to determine whether the modification was, substantial, and therefore, requires that the
loan be re-categorized as an acquired legacy loan. The determination is based on a discounted cash-flow analysis.
Generally, when a change in discounted cash-flow of greater than 10% is identified, the fair-valued acquired loan
becomes re-categorized and is evaluated at
the time of renewal or modification in accordance with the
Company’s allowance for credit losses methodology described above.

115

Non-PCI loans which were not deemed impaired subsequent to the acquisition date are considered non-
impaired and are evaluated as part of the general valuation allowance. Non-PCI loans that have not become
impaired subsequent to acquisition are segregated into a pool for each acquisition for allowance calculation
purposes. For each pool, the Company estimates a hypothetical allowance for credit losses also referred to as an
“indicated reserve” that is calculated in accordance with GAAP requirements. The Company uses the acquired
bank’s past loss history adjusted for qualitative factors to establish the indicated reserve. The indicated reserve
for each pool of Non-PCI loans is compared with the remaining discount for the respective pool to test for credit
quality deterioration and the possible need for a loan loss provision. To the extent the remaining discount of the
pool is greater than the indicated reserve, no additional allowance is necessary. In the event that the remaining
discount of the pool is less than the indicated reserve, the difference results in an increase to the allowance
recorded through a provision for credit losses.

Non-PCI loans that have deteriorated to an impaired status subsequent to acquisition are evaluated for a
specific reserve on a quarterly basis which, when identified, is added to the allowance for credit losses. The
Company reviews impaired Non-PCI loans on a loan-by-loan basis and determines the specific reserve based on
the difference between the recorded investment in the loan and one of three factors: expected future cash flows,
observable market price or fair value of the collateral. Because essentially all of the Company’s impaired Non-
PCI loans have been collateral-dependent, the amount of the specific reserve historically has been determined by
comparing the fair value of the collateral securing the Non-PCI loan with the recorded investment in such loan.
In the future, the Company will continue to analyze impaired Non-PCI loans on a loan-by-loan basis and may use
an alternative measurement method to determine the specific reserve, as appropriate and in accordance with
applicable accounting standards.

PCI loans are individually monitored on a quarterly basis to assess for deterioration subsequent
to
acquisition and are only subject to the Company’s allowance methodology when a deterioration in projected cash
flows is identified. In the event that a deterioration in cash flows is identified, an additional provision for credit
losses is made. PCI loans were recorded at their acquisition date fair values, which were based on expected cash
flows and included estimates of expected future credit losses. The Company’s estimates of loan fair values at the
acquisition date may be adjusted for a period of up to one year as the Company continues to evaluate its estimate
of expected future cash flows at the acquisition date. If the Company determines that losses arose after the
acquisition date, the additional losses will be reflected as a provision for credit losses. An allowance for credit
losses is not calculated for PCI loans that have not experienced deterioration subsequent to the acquisition date.

At December 31, 2014, the allowance for credit losses totaled $80.8 million or 0.87% of total loans. At
December 31, 2013, the allowance for credit losses totaled $67.3 million or 0.87% of total loans, and at
December 31, 2012, the allowance aggregated $52.6 million or 1.01% of total loans. The allowance for credit
losses totaled $80.8 million at December 31, 2014 compared with $67.3 million at December 31, 2013, an
increase of $13.5 million or 20.0%.

The following table details the recorded investment in loans, excluding $8.6 million and $2.2 million of
residential mortgage loans held for sale, and activity in the allowance for credit losses by portfolio segment for
the years ended December 31, 2014 and 2013, respectively. During the fourth quarter of 2014, the Company
enhanced its allowance for credit
the enhanced methodology, qualitative
environmental factors have been more precisely aligned to portfolio segments based on a statistical analysis
which was undertaken by management. Such enhancement captures inherent probable loss in the portfolio
associated with qualitative factors based on empirical data which includes various economic indicators, loss
history, and levels of concentration. The portfolio segmentation of the allowance for credit losses noted below

losses methodology. Under

116

incorporates the effect of the enhancement at December 31, 2014. Allocation of a portion of the allowance to one
category of loans does not preclude its availability to absorb losses in other categories.

Construction,
Land
Development
and Other
Land Loans

Agriculture
and
Agriculture
Real Estate
(includes
Farmland)

1-4 Family
(includes Home
Equity)

Commercial
Real Estate
(includes
Multi-Family
Residential)

Commercial and
Industrial

Consumer and
Other

Total

Allowance for credit losses:
Balance January 1, 2014 . . . . . . . . . . . . .
Provision for credit losses . . . . . . . . . . . .
Charge-offs . . . . . . . . . . . . . . . . . . . . . . . .
Recoveries . . . . . . . . . . . . . . . . . . . . . . . .

$

Net charge-offs . . . . . . . . . . . . . . . . .

14,353
1,541
(155)
86

(69)

$

1,229
1,503
(71)
1,061

990

$

17,046
358
(1,223)
196

(1,027)

$

24,835
(10,300)
(2,009)
218

(1,791)

$

8,167
22,187
(818)
466

(352)

$

1,652
2,986
(5,674)
3,128

(2,546)

$

67,282
18,275
(9,950)
5,155

(4,795)

Balance December 31, 2014 . . . . . . . . . .

$

15,825

$

3,722

$

16,377

$

12,744

$

30,002

$

2,092

$

80,762

(Dollars in thousands)

Allowance for credit losses related to:
December 31, 2014
Individually evaluated for impairment . . .
Collectively evaluated for impairment
. .
PCI loans . . . . . . . . . . . . . . . . . . . . . . . . .

$

225
15,600
—

$

24
3,698
—

$

418
15,959
—

$

24
12,720
—

$

1,597
28,405
—

$

205
1,887
—

$

2,493
78,269
—

Total allowance for credit losses . . . . . . .

$

15,825

$

3,722

$

16,377

$

12,744

$

30,002

$

2,092

$

80,762

Recorded investment in loans:
December 31, 2014
Individually evaluated for impairment . . .
Collectively evaluated for impairment
. .
PCI loans . . . . . . . . . . . . . . . . . . . . . . . . .

$

526
1,024,807
1,142

$

46
551,093
507

$

3,136
2,504,517
5,926

$

5,155
3,001,718
23,467

$

11,939
1,768,228
26,100

$

8,378
298,896
—

$

29,180
9,149,259
57,142

Total loans evaluated for impairment

. . .

$1,026,475

$551,646

$2,513,579

$3,030,340

$1,806,267

$307,274

$9,235,581

Construction,
Land
Development
and Other
Land Loans

Agriculture
and
Agriculture
Real Estate
(includes
Farmland)

1-4 Family
(includes Home
Equity)

Commercial
Real Estate
(includes
Multi-Family
Residential)

Commercial and
Industrial

Consumer and
Other

Total

(Dollars in thousands)

Allowance for credit losses:
Balance January 1, 2013 . . . . . . . . . . . . .
Provision for credit losses . . . . . . . . . . . .
Charge-offs . . . . . . . . . . . . . . . . . . . . . . . .
Recoveries . . . . . . . . . . . . . . . . . . . . . . . .

$

$ 11,909
2,470
(271)
245

Net charge-offs . . . . . . . . . . . . . . . . .

(26)

764
399
(48)
114

66

$

13,942
3,277
(211)
38

(173)

$

19,607
5,189
(894)
933

39

Balance December 31, 2013 . . . . . . . . . .

$ 14,353

$

1,229

$

17,046

$

24,835

Allowance for credit losses related to:
December 31, 2013
Individually evaluated for impairment . . .
Collectively evaluated for impairment
. .
PCI loans . . . . . . . . . . . . . . . . . . . . . . . . .

$ —
14,353
—

$

18
1,211
—

$

890
16,156
—

$

445
24,390
—

Total allowance for credit losses . . . . . . .

$ 14,353

$

1,229

$

17,046

$

24,835

$

$

$

$

5,777
2,714
(672)
348

(324)

8,167

1,029
7,138
—

8,167

$

565
3,191
(3,397)
1,293

(2,104)

$

52,564
17,240
(5,493)
2,971

(2,522)

$

1,652

$

67,282

$

77
1,575
—

$

2,459
64,823
—

$

1,652

$

67,282

Recorded investment in loans:
December 31, 2013
Individually evaluated for impairment . . .
Collectively evaluated for impairment
. .
PCI loans . . . . . . . . . . . . . . . . . . . . . . . . .

$

277
861,469
3,765

$

35
530,616
607

$

3,103
2,122,329
4,078

$

4,103
2,722,778
26,916

$

1,214
1,272,337
6,226

$

110
213,048
—

$

8,842
7,722,577
41,592

Total loans evaluated for impairment

. . .

$865,511

$531,258

$2,129,510

$2,753,797

$1,279,777

$213,158

$7,773,011

117

An analysis of activity in the allowance for credit losses for the year ended December 31, 2012 is as follows

(dollars in thousands):

Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Addition—provision charged to operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Charge-offs and recoveries:
Loans charged-off
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loan recoveries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net charge-offs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$51,594
6,100

(7,896)
2,766
(5,130)

Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$52,564

Troubled Debt Restructurings. The restructuring of a loan is considered a “troubled debt restructuring” if
both (1) the borrower is experiencing financial difficulties and (2) the creditor has granted a concession.
Concessions may include interest rate reductions or below market
interest rates, principal forgiveness,
restructuring amortization schedules and other actions intended to minimize potential losses. Effective July 1,
2011, the Company adopted the provisions of ASU No. 2011-02, “Receivables (Topic 310)—A Creditor’s
Determination of Whether a Restructuring Is a Troubled Debt Restructuring.” As such, the Company reassessed
all loan modifications occurring since January 1, 2011 for identification as troubled debt restructurings. The
following table presents information regarding the recorded investment at December 31, 2014 and 2013 of loans
modified in a troubled debt restructuring during the years ended December 31, 2014 and 2013:

Years Ended of December 31,

2014

Recorded
Investment
at Date of
Restructure

Number of
Loans

Recorded
Investment
at Year-End

Number of
Loans

(Dollars in thousands)

2013

Recorded
Investment
at Date of
Restructure

Recorded
Investment
at Year-End

Troubled Debt Restructurings

Construction, land development and other

land loans . . . . . . . . . . . . . . . . . . . . . . . . —
Agriculture and agriculture real estate . . . —
1-4 Family (includes home equity) . . . . . . —
Commercial real estate (commercial

mortgage and multi-family)

1
Commercial and industrial
2
Consumer and other . . . . . . . . . . . . . . . . . . —
3
Total . . . . . . . . . . . . . . . . . . . . . . . . . .

. . . . . . . . .
. . . . . . . . . . . .

$—
—
—

35
34
—
$ 69

$—
—
—

35
33
—
$ 68

1
—
—

1
1

—
3

$251
—
—

450
15
—
$716

$236
—
—

450
14
—
$700

As of December 31, 2014, there have been no defaults on any loans that were modified as troubled debt
restructurings during the preceding twelve months. Default is determined at 90 or more days past due. The
modifications primarily related to extending the amortization periods of the loans, which includes loans modified
during bankruptcy. The Company did not grant principal reductions on any restructured loans. At December 31,
2014 and 2013, the Company had $911 thousand and $1.4 million, respectively, in outstanding troubled debt
restructurings. For the year ended December 31, 2014, the Company added 3 loans totaling $69 thousand as new
troubled debt restructurings, of which $68 thousand was still outstanding on December 31, 2014. These
modifications did not have a material impact on the Company’s determination of the allowance for credit losses.

7. FAIR VALUE

The Company uses fair value measurements to record fair value adjustments to certain assets and to
determine fair value disclosures. Fair values represent the estimated price that would be received from selling an
asset or paid to transfer a liability, otherwise known as an “exit price.” Securities available for sale are recorded

118

at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair
value other assets on a nonrecurring basis. These nonrecurring fair value adjustments typically involve
application of lower-of-cost-or-market accounting or write downs of individual assets. ASC Topic 820, “Fair
Value Measurements and Disclosures” establishes a fair value hierarchy for valuation inputs that gives the
highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to
unobservable inputs. The fair value hierarchy is as follows:

Fair Value Hierarchy

The Company groups financial assets and financial liabilities measured at fair value in three levels, based on
the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine
fair value. These levels are:

•

•

•

Level 1—Quoted prices in active markets for identical assets or liabilities.

Level 2—Other significant observable inputs (including quoted prices in active markets for similar
assets or liabilities) or other inputs that are observable or can be corroborated by observable market data
for substantially the full term of the assets or liabilities.

Level 3—Unobservable inputs that are supported by little or no market activity and that are significant
to the fair value of the assets or liabilities.

The fair value of an asset or liability is the price that would be received to sell that asset or paid to transfer
that liability in an orderly transaction occurring in the principal market (or most advantageous market in the
absence of a principal market) for such asset or liability. In estimating fair value, the Company utilizes valuation
techniques that are consistent with the market approach, the income approach and/or the cost approach. Such
valuation techniques are consistently applied. Inputs to valuation techniques include the assumptions that market
participants would use in pricing an asset or liability.

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

The following tables present fair values for assets measured at fair value on a recurring basis:

As of December 31, 2014

Level 1

Level 2

Level 3

Total

(Dollars in thousands)

Available for sale securities:

States and political subdivisions . . . . . . . . . . . . . . . .
Collateralized mortgage obligations . . . . . . . . . . . . .
Mortgage-backed securities . . . . . . . . . . . . . . . . . . . .
Other securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-hedging interest rate swap . . . . . . . . . . . . . . . . . . .

$ —
—
—
12,758
—

$14,585
33,573
84,483
—
303

$ —
—
—
—
—

$14,585
33,573
84,483
12,758
303

119

As of December 31, 2013

Level 1

Level 2

Level 3

Total

(Dollars in thousands)

Available for sale securities:

States and political subdivisions . . . . . . . . . . . . . .
Collateralized mortgage obligations . . . . . . . . . . .
Mortgage-backed securities . . . . . . . . . . . . . . . . . .
Other securities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-hedging interest rate swap . . . . . . . . . . . . . . . . .

$ —
—
—
12,477
—

$ 29,375
489
115,137
—
38

$ —
—
—
—
—

$ 29,375
489
115,137
12,477
38

Certain assets and liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are
not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances
(for example, when there is evidence of impairment). These instruments include other real estate owned,
repossessed assets, held to maturity debt securities, loans held for sale, and impaired loans. For the year ended
December 31, 2014, the Company had additions to other real estate owned of $8.1 million of which $1.7 million
were outstanding as of December 31, 2014. For the year ended December 31, 2014, the Company had additions
to impaired loans of $30.6 million, of which $24.5 million were outstanding as of December 31, 2014. The
remaining financial assets and liabilities measured at fair value on a non-recurring basis that were recorded in
2014 and remained outstanding at December 31, 2014 were not significant. During the reported periods, all fair
value measurements for assets remeasured at fair value on a non-recurring basis utilized Level 2 inputs.

The following tables summarize the carrying values and estimated fair values of certain financial

instruments not recorded at fair value on a recurring basis:

Carrying
Amount

As of December 31, 2014

Estimated Fair Value

Level 1

Level 2

Level 3

Total

(Dollars in thousands)

Assets

Cash and due from banks . . . . . . . . . . . . . . $
Federal funds sold . . . . . . . . . . . . . . . . . . .
Held to maturity securities . . . . . . . . . . . . .
Loans held for sale . . . . . . . . . . . . . . . . . . .
Loans held for investment, net of

569
8,900,377
8,602

allowance . . . . . . . . . . . . . . . . . . . . . . . .
Other real estate owned . . . . . . . . . . . . . . .

9,154,819
3,237

Liabilities

Deposits:

677,285 $677,285 $

— $
—

8,948,692
8,602

— $
—
—
—

677,285
569
8,948,692
8,602

— 9,192,231

3,237

—

9,192,231
3,237

569
—
—

—
—

Noninterest-bearing . . . . . . . . . . . . . . $ 4,936,420 $ — $ 4,936,420 $
Interest-bearing . . . . . . . . . . . . . . . . . .
Other borrowings . . . . . . . . . . . . . . . . . . . .
Securities sold under repurchase

— 12,767,961
10,000
—

12,756,738
8,724

— $ 4,936,420
— 12,767,961
10,000
—

agreements . . . . . . . . . . . . . . . . . . . . . . .
Junior subordinated debentures . . . . . . . . .

315,523
167,531

—
—

315,543
159,740

—
—

315,543
159,740

120

Assets

Cash and due from banks . . . . . . . . . .
Federal funds sold . . . . . . . . . . . . . . .
Held to maturity securities . . . . . . . . .
Loans held for sale . . . . . . . . . . . . . . .
Loans held for investment, net of

allowance . . . . . . . . . . . . . . . . . . . .
Other real estate owned . . . . . . . . . . .

Liabilities

Deposits:

Noninterest-bearing . . . . . . . . . .
Interest-bearing . . . . . . . . . . . . . .
Other borrowings . . . . . . . . . . . . . . . .
Securities sold under repurchase

agreements . . . . . . . . . . . . . . . . . . .
Junior subordinated debentures . . . . .

Carrying
Amount

As of December 31, 2013

Estimated Fair Value

Level 1

Level 2

Level 3

Total

(Dollars in thousands)

$

$

380,990
400
8,066,970
2,210

$380,990
400
—
2,210

— $
—

7,987,342

—

— $
—
—
—

380,990
400
7,987,342
2,210

7,705,729
7,299

—
—

—
7,299

7,749,786

—

7,749,786
7,299

$ 4,108,835
11,182,436
10,689

$ — $ 4,108,835
11,196,241
12,014

—
—

$

— $ 4,108,835
11,196,241
—
12,014
—

364,357
124,231

—
—

364,477
119,325

—
—

364,477
119,325

Entities may choose to measure eligible financial instruments at fair value at specified election dates. The
fair value measurement option (1) may be applied instrument by instrument, with certain exceptions, (2) is
generally irrevocable and (3) is applied only to entire instruments and not to portions of instruments. Unrealized
gains and losses on items for which the fair value measurement option has been elected must be reported in
the Company had no financial
earnings at each subsequent reporting date. During the reported periods,
instruments measured at fair value under the fair value measurement option.

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

The following is a description of valuation methodologies used for assets and liabilities recorded at fair
value, non-financial assets and non-financial liabilities, and for estimating fair value for financial instruments not
recorded at fair value:

Cash and due from banks—For these short-term instruments, the carrying amount is a reasonable estimate

of fair value. The Company classifies the estimated fair value of these instruments as Level 1.

Federal funds sold—For these short-term instruments, the carrying amount is a reasonable estimate of fair

value. The Company classifies the estimated fair value of these instruments as Level 1.

Securities—Fair value measurements based upon quoted prices are considered Level 1 inputs. Level 1
securities consist of U.S. Treasury securities and certain equity securities which are included in the available for
sale portfolio. For all other available for sale and held to maturity securities, if quoted prices are not available,
fair values are measured using Level 2 inputs. For these securities, the Company generally obtains fair value
measurements from an independent pricing service. The fair value measurements consider observable data that
may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade
execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions,
among other things. The Company reviews the prices supplied by the independent pricing service, as well as their
underlying pricing methodologies, for reasonableness.

121

Securities available for sale are recorded at fair value on a recurring basis.

Loans held for investment—The Company does not record loans at fair value on a recurring basis. As
such, valuation techniques discussed herein for loans are primarily for estimating fair value disclosures.
However, from time to time, the Company records nonrecurring fair value adjustments to impaired loans to
reflect (1) partial write downs that are based on the observable market price or current appraised value of the
collateral, or (2) the full charge-off of the loan carrying value. Where appraisals are not available, estimated cash
flows are discounted using a rate commensurate with the credit risk associated with those cash flows.
Assumptions regarding credit risk, cash flows and discount rates are judgmentally determined using available
market information and specific borrower information.

The estimated fair value approximates carrying value for variable-rate loans that reprice frequently and with
no significant change in credit risk. The fair value of fixed-rate loans and variable-rate loans which reprice on an
infrequent basis is estimated by discounting future cash flows using the current interest rates at which similar
loans with similar terms would be made to borrowers of similar credit quality. An overall valuation adjustment is
made for specific credit risks as well as general portfolio credit risk. The Company classifies the estimated fair
value of loans held for investment as Level 3.

Loans held for sale—Loans held for sale are carried at the lower of cost or estimated fair value. Fair value
for consumer mortgages held for sale is based on commitments on hand from investors or prevailing market
prices. As such, the Company classifies loans subjected to nonrecurring fair value adjustments as Level 2.

Other real estate owned—Other real estate owned is primarily foreclosed properties securing residential
loans and commercial real estate. Foreclosed assets are adjusted to fair value less estimated costs to sell upon
transfer of the loans to other real estate owned. Subsequently, these assets are carried at the lower of carrying
value or fair value less estimated costs to sell. Other real estate carried at fair value based on an observable
market price or a current appraised value is classified by the Company as Level 2. When management determines
that the fair value of other real estate requires additional adjustments, either as a result of a non-current appraisal
or when there is no observable market price, the Company classifies the other real estate as Level 3.

Deposits—The fair value of demand deposits, savings accounts and certain money market deposits is the
amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is
estimated using the rates currently offered for deposits of similar remaining maturities. Deposits fair value
measurements utilize Level 2 inputs.

Junior subordinated debentures—The fair value of the junior subordinated debentures was calculated
using the quoted market prices, if available. If quoted market prices are not available, fair value is estimated
using quoted market prices for similar subordinated debentures. Junior subordinated debentures fair value
measurements utilize Level 2 inputs.

Other borrowings—Rates currently available to the Company for debt with similar terms and remaining
maturities are used to estimate the fair value of other borrowings using a discounted cash flows methodology and
are measured utilizing Level 2 inputs.

Securities sold under repurchase agreements—The fair value of securities sold under repurchase

agreements is the amount payable on demand at the reporting date and are measured utilizing Level 2 inputs.

Derivative financial instruments—The fair value of the underlying non-hedging derivative contracts offset

each other and are measured utilizing Level 2 inputs.

Off-balance sheet financial instruments—The fair value of commitments to extend credit and standby
letters of credit is estimated using the fees currently charged to enter into similar agreements, taking into account

122

the remaining terms of the agreement and the present creditworthiness of the counterparties. The Company has
reviewed the unfunded portion of commitments to extend credit as well as standby and other letters of credit, and
has determined that the fair value of such financial instruments is not material. The Company classifies the
estimated fair value of credit-related financial instruments as Level 3.

8. PREMISES AND EQUIPMENT

Premises and equipment are summarized as follows:

December 31,

2014

2013

(Dollars in thousands)

Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Furniture, fixtures and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction in progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 91,491
204,904
60,296
2,409

$ 97,000
193,817
51,418
5,600

Total

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

359,100
(77,551)

347,835
(64,910)

Premises and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . .

$281,549

$282,925

Depreciation expense was $13.7 million, $10.6 million and $8.9 million for the years ended December 31,

2014, 2013 and 2012, respectively.

9. DEPOSITS

Included in interest-bearing deposits are certificates of deposit in amounts of $100,000 or more. These

certificates and their remaining maturities at December 31, 2014 were as follows (dollars in thousands):

Three months or less . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Over three through six months . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Over six through 12 months . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Over 12 months . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 625,392
828,372
287,079
116,415

33.7%
44.6
15.4
6.3

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$1,857,258

100.0%

Interest expense for certificates of deposit in excess of $100,000 was $11.6 million, $9.4 million and

$8.9 million, for the years ended December 31, 2014, 2013 and 2012, respectively.

As of December 31, 2014, the Company had $270.7 million of deposits classified as brokered deposits for

regulatory purposes, and there are no major concentrations of deposits with any one depositor.

10. OTHER BORROWINGS AND SECURITIES SOLD UNDER REPURCHASE AGREEMENTS

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 securities sold under repurchase
agreements.

123

The following table presents the Company’s borrowings at December 31, 2014 and 2013:

FHLB advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FHLB long-term notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

December 31,

2014

2013

(Dollars in thousands)
$ —
10,689

$ —
8,724

Total other borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities sold under repurchase agreements . . . . . . . . . . . . . . . . . . . . . . . . . .

8,724
315,523

10,689
364,357

Total

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$324,247

$375,046

FHLB advances and long-term notes payable—The Company has an available line of credit with the FHLB
of Dallas, which allows the Company to borrow on a collateralized basis. FHLB advances are considered short-
term, overnight borrowings and used to manage liquidity as needed. Maturing advances are replaced by drawing
on available cash, making additional borrowings or through increased customer deposits. At December 31, 2014,
the Company had total funds of $5.91 billion available under this agreement of which a total amount of $8.7
million was outstanding at December 31, 2014. At December 31, 2014, there were no short-term overnight
FHLB advances outstanding. Long-term notes payable were $8.7 million at December 31, 2014, with a weighted
average interest rate of 5.43%. The maturity dates on the FHLB notes payable range from the years 2015 to 2027
and have interest rates ranging from 4.23% to 6.10%.

Securities sold under repurchase agreements with Company customers—At December 31, 2014, the
Company had $315.5 million in securities sold under repurchase agreements compared with $364.4 million at
December 31, 2013 with average rates paid of 0.26% and 0.27% for the years ended December 31, 2014 and
2013, respectively. Repurchase agreements are generally settled on the following business day; however,
approximately $22.0 million of repurchase agreements outstanding at December 31, 2014 have maturity dates
ranging from 3 to 24 months. All securities sold under agreements to repurchase are collateralized by certain
pledged securities.

11. INCOME TAXES

The components of the provision for federal income taxes are as follows:

Year Ended December 31,

2014

2013

2012

Current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(Dollars in thousands)
$ 88,535
19,884

$102,595
45,713

$74,168
9,615

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$148,308

$108,419

$83,783

124

The provision for federal income taxes differs from the amount computed by applying the federal income

tax statutory rate of 35% to income before income taxes as follows:

Year Ended December 31,

Taxes calculated at statutory rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Decrease) increase resulting from:

2014

2013
(Dollars in thousands)
$115,436

$156,012

2012

$88,089

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax-exempt interest
Qualified School Construction Bond credit . . . . . . . . . . . . . . . . . . . . . . . . .
Non taxable death benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
BOLI income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Qualified stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Merger related expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State tax, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other, net

(7,102)
(794)
(677)
(1,788)
6
86
1,898
667

(6,360)
(530)
—
(1,244)
12
185
864
56

(3,836)
(504)
—
(936)
22
538
195
215

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$148,308

$108,419

$83,783

Deferred tax assets and liabilities are as follows:

December 31,

2014

2013

(Dollars in thousands)

Deferred tax assets:

Loan purchase discounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for credit losses . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Certificates of Deposit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net operating losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Self insurance reserve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ORE write-downs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investments in partnerships . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 56,553
27,324
8,704
6,620
3,755
613
5,055
—
1,418
95
1,428

$ 46,653
22,565
6,294
4,242
5,075
42
8,818
1,075
5,826
30
300

Total deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

111,565

100,920

Deferred tax liabilities:

Goodwill and core deposit intangibles . . . . . . . . . . . . . . . . . . .
Bank premises and equipment . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized gain on available for sale securities . . . . . . . . . . . .
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred loan fees and costs . . . . . . . . . . . . . . . . . . . . . . . . . . .

(31,868)
(9,325)
(4,405)
(2,008)
(1,260)
(1,299)

(20,801)
(13,020)
(6,823)
(2,629)
(1,430)
(1,283)

Total deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . .

(50,165)

(45,986)

Net deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 61,400

$ 54,934

125

The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income
during the periods in which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in
making this assessment. Based upon the level of historical taxable income and estimates of future taxable income
over the periods for which the deferred tax assets are deductible, management believes it is more likely than not
the Company will realize the benefits of these deductible differences at December 31, 2014.

Net operating loss carryforwards expire on various dates beginning in 2027 through 2033.

Benefits from tax positions are recognized in the financial statements only when it is more likely than not
that the tax position will be sustained upon examination by the appropriate taxing authority that would have full
knowledge of all relevant information. A tax position that meets the more-likely-than-not recognition threshold is
measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate
settlement. Tax positions that previously failed to meet the more-likely-than-not recognition threshold are
recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized
tax positions that no longer meet the more-likely-than-not recognition threshold are derecognized in the first
subsequent financial reporting period in which that threshold is no longer met. The Company had no tax
positions at December 31, 2014 or December 31, 2013 that did not meet the more-likely-than not recognition
threshold. ASC Topic 740 also provides guidance on the accounting for and disclosure of unrecognized tax
benefits, interest and penalties. The Company’s policy for recording interest and penalties associated with audits
is to record such items as a component of income before taxes. Penalties are recorded in other (gains) losses and
interest paid or received is recorded in interest expense or interest income, respectively, in the consolidated
statement of income. As of December 31, 2014 and 2013, the Company has not accrued any interest and
penalties related to unrecognized tax benefits. The Company has identified its federal tax return and its state tax
returns in Texas and Oklahoma as “major” tax jurisdictions, as defined. The periods subject to examination for
the Company’s federal return are the 2011 through 2014 tax years. The Company has assumed to net operating
loss carryforwards, “acquired NOLs”, through its acquisitions. The tax periods of the acquired entities from
which these acquired NOLs originated are considered open years for purposes of adjusting the amount of the
acquired NOLs used in the Company’s open years.

12. STOCK INCENTIVE PROGRAMS

At December 31, 2014, the Company had three stock-based employee compensation plans. Two of the three
plans adopted by the Company have expired and therefore no additional awards may be issued under those plans.
The Company accounts for stock-based employee compensation plans using the fair value-based method of
accounting. The Company recognized stock-based compensation expense of $8.2 million, $4.2 million and $3.6
million for the years ended December 31, 2014, 2013 and 2012, respectively. There was approximately $2.9
million, $1.5 million and $1.2 million of income tax benefit recorded for the stock-based compensation expense
for the same periods, respectively.

During 1998, the Company’s Board of Directors and shareholders approved the Prosperity Bancshares, Inc.
1998 Stock Incentive Plan (the “1998 Plan”) which authorized the issuance of up to 920,000 (after two-for-one
stock split) shares of the common stock of Bancshares under both non-qualified and incentive stock options to
employees and non-qualified stock options to directors who are not employees. The 1998 Plan also provided for
the granting of restricted stock awards, stock appreciation rights, phantom stock awards and performance awards
on substantially similar terms. A total of 819,500 options were granted under the 1998 Plan. Options to purchase
a total of 17,230 shares of common stock of Bancshares granted under the 1998 Plan were outstanding and
exercisable at December 31, 2014. The 1998 Plan has expired and therefore no additional options may be issued
from the 1998 Plan.

In December 2004, the Company’s Board of Directors established the Prosperity Bancshares, Inc. 2004
Stock Incentive Plan (the “2004 Plan”), which was approved by the Company’s shareholders on February 23,

126

2005. The 2004 Plan authorized the issuance of up to 1,250,000 shares of common stock upon the exercise of
options granted under the 2004 Plan or upon the grant or exercise, as the case may be, of other awards granted
under the 2004 Plan. The 2004 Plan provided for the granting of incentive and nonqualified stock options to
employees and nonqualified stock options to directors who are not employees. The 2004 Plan also provided for
the granting of shares of restricted stock, stock appreciation rights, phantom stock awards and performance
awards on substantially similar terms. A total of 191,625 options and 904,076 shares of restricted stock have
been granted under the 2004 Plan as of December 31, 2014. Options to purchase a total of 35,975 shares of
common stock of Bancshares granted under the 2004 Plan were outstanding at December 31, 2014, of which
20,475 were exercisable. The 2004 Plan has expired and therefore no additional shares may be issued from the
2004 Plan.

On February 22, 2012, the Company’s Board of Directors adopted the Prosperity Bancshares, Inc. 2012
Stock Incentive Plan (the “2012 Plan”), which was approved by the Company’s shareholders on April 17,
2012. The 2012 Plan authorizes the issuance of up to 1,250,000 shares of common stock upon the exercise of
options granted under the 2012 Plan or pursuant to the grant or exercise, as the case may be, of other awards
granted under the 2012 Plan, including restricted stock, stock appreciation rights, phantom stock awards and
performance awards. A total of 10,043 shares have been granted under the 2012 Plan as of December 31, 2014.

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. The
Black-Scholes pricing model utilizes certain assumptions including expected life of the option, risk free interest
rate, volatility and dividend yield. Stock-based compensation expense is recognized ratably over the requisite
service period for all awards. There were no options issued for the years ended December 31, 2014, 2013
and 2012.

A summary of changes in outstanding vested and unvested options during the three year period ended

December 31, 2014 is set forth below:

Weighted
Average
Exercise
Price

Weighted
Average
Remaining
Contractual
Term

Aggregate
Intrinsic
Value

$28.18
—
30.93
27.36

$28.39
—
30.97
27.69

$28.88
—
23.88
28.46

$27.68

$27.68

$29.85

(In years)
3.88

(In thousands)
$6,391

3.20

5,247

3.70

6,500

2.69

2.67

2.01

$1,473

$1,429

$ 962

Number of
Options

(In thousands)
525
—

(8)
(131)

386
—

(4)
(194)

188
—

(5)
(130)

53

52

38

Options outstanding, January 1, 2012 . . . . . . . . . . . . . . . . . .
Options granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Options outstanding, December 31, 2012 . . . . . . . . . . . . . . .
Options granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Options outstanding, December 31, 2013 . . . . . . . . . . . . . . .
Options granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Options outstanding, December 31, 2014 . . . . . . . . . . . . . . .

Shares vested or expected to vest, December 31, 2014 . . . . .

Shares exercisable, December 31, 2014 . . . . . . . . . . . . . . . .

127

The total intrinsic value of the options exercised during the year ended December 31, 2014 and 2013 was
$3.5 million and $6.9 million, respectively. The total fair value of options vested during the year ended
December 31, 2014 was $97 thousand. There were no unvested options forfeited during the year ended
December 31, 2014. The total fair value of unvested options forfeited during the year ended December 31, 2013
and 2012 were $26 thousand and $39 thousand, respectively.

The Company received $3.7 million, $5.4 million and $3.6 million in cash from the exercise of stock
options during the years ended December 31, 2014, 2013 and 2012, respectively. There was no tax benefit
realized from exercises of the stock-based compensation arrangements during the years ended December 31,
2014, 2013 and 2012.

Share Awards

The Company also grants shares of restricted stock pursuant to the 2004 and 2012 Plans. These shares of
restricted stock generally vest over a period of one to five years. The Company accounts for restricted stock
grants by recording the fair value of the grant as compensation expense over the vesting period. Compensation
expense related to restricted stock was $8.2 million, $4.2 million and $3.6 million for the years ended
December 31, 2014, 2013 and 2012.

A summary of the status of nonvested shares of restricted stock as of December 31, 2014, and changes

during the year then ended is as follows:

Nonvested share awards outstanding, December 31, 2013 . . . . . . . . . . . . . . . . . . . . . . .
Share awards granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unvested share awards forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Share awards vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Weighted
Average Grant
Date Fair
Value

Number of
Shares

(Shares in thousands)
$39.08
452
61.83
354
49.75
(51)
37.69
(309)

Nonvested shares outstanding, December 31, 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . .

446

$57.97

The total fair value of restricted stock awards that fully vested during the year ended December 31, 2014

was $17.5 million.

As of December 31, 2014, there was $17.5 million of total unrecognized compensation expense related to
stock-based compensation arrangements. That cost is expected to be recognized over a weighted average period
of 1.96 years.

128

13. OTHER NONINTEREST INCOME AND EXPENSE

Other noninterest

income and expense totals are more fully detailed in the following tables. Any
components of these totals exceeding 1% of the aggregate of total net interest income and total noninterest
income for any of the years presented and as well as amounts the Company elected to present are stated
separately.

Years Ended December 31,

2014

2013

2012

(Dollars in thousands)

Other noninterest income

Banking related service fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bank Owned Life Insurance (BOLI) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rental income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 4,796
5,189
2,378
11,222

$ 3,502
3,635
1,990
5,901

$ 2,650
2,673
1,667
2,419

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$23,585

$15,028

$ 9,409

Other noninterest expense

Advertising . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Printing and supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Professional and legal fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Travel and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 3,016
4,143
2,427
5,636
7,410
4,848
11,391

$ 2,642
2,138
2,616
3,573
5,827
3,629
10,254

$ 1,670
1,314
2,586
4,118
4,623
2,179
6,743

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$38,871

$30,679

$23,233

14. PROFIT SHARING PLAN

The Company has adopted a profit sharing plan pursuant to Section 401(k) of the Internal Revenue
Code whereby the participants may contribute a percentage of their compensation as permitted under the
Code. Matching contributions are made at the discretion of the Company. Presently, the Company matches 50%
of an employee’s contributions, up to 15% of such employee’s compensation, not to exceed the maximum
allowable pursuant
to the Internal Revenue Code and excluding catch-up contributions. Such matching
contributions were approximately $4.6 million, $3.3 million and $2.4 million for the years ended December 31,
2014, 2013 and 2012, respectively.

15. OFF-BALANCE SHEET ARRANGEMENTS, COMMITMENTS AND CONTINGENCIES

The following table summarizes the Company’s contractual obligations and other commitments to make
future payments as of December 31, 2014 (other than deposit obligations and securities sold under repurchase
agreements). 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 December 31, 2014 are
summarized below. Payments for junior subordinated debentures include interest of $61.2 million that will be
paid over the future periods. The future interest payments were calculated using the current rate in effect at
December 31, 2014. In late 2014, the Company gave irrevocable notice of its intent to redeem three of the twelve
outstanding issuances of junior subordinated debentures in January 2015. For those three issuances, the principal
balance of $41.2 million and all of the accrued interest payable upon redemption is included in the “1 year or
less” column below. For further details refer to Note 19 “Junior Subordinated Debentures” and Note 21
“Subsequent Events.” The principal balance of the junior subordinated debentures at December 31, 2014 was

129

$167.5 million. Payments for FHLB notes payable include interest of $2.7 million that will be paid over the
future periods. Payments related to leases are based on actual payments specified in underlying contracts.

1 year or less

More than 1
year but less
than 3 years

3 years or
more but less
than 5 years

5 years or
more

Total

Junior subordinated debentures . . . . . . . . . . . . . .
Federal Home Loan Bank notes payable . . . . . . .
Operating leases . . . . . . . . . . . . . . . . . . . . . . . . . .

$44,422
2,247
6,927

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$53,596

(Dollars in thousands)

$ 6,186
2,313
9,468

$17,967

$ 6,186
5,251
4,401

$171,975
1,648
7,792

$228,769
11,459
28,588

$15,838

$181,415

$268,816

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 expiring by period as of December 31, 2014 are summarized below.

1 year or less

More than 1
year but less
than 3 years

3 years or
more but less
than 5 years

5 years or
more

Total

(Dollars in thousands)

Standby letters of credit
Commitments to extend credit

. . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . .

$

93,094
1,149,704

$ 18,833
368,189

$

589
72,356

$ — $ 112,516
1,998,365

408,116

Total

. . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$1,242,798

$387,022

$72,945

$408,116

$2,110,881

Standby Letters of Credit. Standby letters of credit are written conditional commitments issued by the
Company to guarantee the payment by or performance of a customer to a third party. In the event the customer
does not perform in accordance with the terms of the agreement with the third party, the Company would be
required to fund the commitment. The maximum potential amount of future payments the Company could be
required to make is represented by the contractual amount of the commitment. If the commitment is funded, the
Company would be entitled to seek recovery from the customer. The Company’s policies generally require that
standby letter of credit arrangements contain security and debt covenants similar to those contained in loan
agreements.

Commitments to Extend Credit. The Company enters into contractual commitments to extend credit,
normally with fixed expiration dates or termination clauses, at specified rates and for specific purposes.
Substantially all of the Company’s commitments to extend credit are contingent upon customers maintaining
specific credit standards at the time of loan funding. The Company minimizes its exposure to loss under these
commitments by subjecting them to credit approval and monitoring procedures. Management assesses the credit
risk associated with certain commitments to extend credit in determining the level of the allowance for credit
losses. Since many of the commitments are expected to expire without being fully drawn upon, the total
commitment amounts disclosed above do not necessarily represent future cash funding requirements. At
December 31, 2014, $331.0 million of commitments to extend credit have fixed rates ranging from 1.4%
to 21.0%.

130

The Company evaluates customer creditworthiness on a case-by-case basis. The amount of collateral
obtained, if considered necessary by the Company upon extension of credit, is based on management’s credit
evaluation of the customer.

Leases—The following table presents a summary of non-cancelable future operating lease commitments as

of December 31, 2014 (dollars in thousands):

2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 6,927
5,644
3,824
2,590
1,810
7,793

$28,588

It is expected that in the normal course of business, expiring leases will be renewed or replaced by leases on

other property or equipment.

Rent expense under all noncancelable operating lease obligations aggregated approximately $7.5 million for
the year ended December 31, 2014, $5.8 million for the year ended December 31, 2013 and $5.4 million for the
year ended December 31, 2012.

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

16. OTHER COMPREHENSIVE (LOSS) INCOME

For the Years Ended December 31,

2014

2013

2012

Before Tax
Amount

Tax
Benefit

Net of Tax
Amount

Before Tax
Amount

Tax
Benefit

Net of Tax
Amount

Before Tax
Amount

Tax
Benefit

Net of Tax
Amount

(Dollars in thousands)

Other comprehensive loss:
Securities available for sale:
Change in unrealized gain

during period . . . . . . . . . . . .

$(1,776)

$622

$(1,154)

$(6,312) $2,209 $(4,103)

$(6,903) $2,417 $(4,486)

Total securities available for
sale . . . . . . . . . . . . . . . . . .

Total other comprehensive

(1,776)

622

(1,154)

(6,312)

2,209

(4,103)

(6,903)

2,417

(4,486)

loss . . . . . . . . . . . . . . . . . . . . . .

$(1,776)

$622

$(1,154)

$(6,312) $2,209 $(4,103)

$(6,903) $2,417 $(4,486)

131

Activity in accumulated other comprehensive income, net of tax, was as follows:

Accumulated
Other
Comprehensive
Income

Securities
Available for
Sale
(Dollars in thousands)

Balance at January 1, 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 4,883
(1,154)

Balance at December 31, 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 3,729

Balance at January 1, 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 8,986
(4,103)

Balance at December 31, 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 4,883

Balance at January 1, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$13,472
(4,486)

Balance at December 31, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 8,986

$ 4,883
(1,154)

$ 3,729

$ 8,986
(4,103)

$ 4,883

$13,472
(4,486)

$ 8,986

17. DERIVATIVE FINANCIAL INSTRUMENTS

During 2013, the Company acquired FVNB and assumed the following derivative contracts relating to loans
made to certain of its commercial customers. The interest rate derivative contracts outstanding at December 31,
2014 are presented in the following table:

Current
Notional
Amount

Estimated
Fair Value

Maturity Date

Fixed Pay
Rate

Variable Rate
Received

(Dollars in thousands)

Commercial Loan Interest Rate Swap . . . $4,281

$160

August 1, 2020

4.30% 1-Month USD—

Commercial Loan Interest Rate Swap . . .

1,596

Commercial Loan Interest Rate Swap . . .

1,421

Commercial Loan Interest Rate Swap . . .

1,830

LIBOR BBA+2.05

68

44

31

August 15, 2020

5.49% 1-Month USD—

LIBOR BBA+3.00

August 15, 2020

4.30% 1-Month USD—

May 1, 2022

5.60% 1-Month USD—

LIBOR BBA+2.05

LIBOR BBA+3.50

$9,128

$303

In these transactions, the Company entered into an interest rate swap with a customer while at the same time
entering into an offsetting interest rate swap with another financial institution. In connection with each swap
transaction, the Company pays interest to the borrowing customer on a notional amount at a variable interest rate
and receives interest from the customer on the same notional amount at a fixed interest rate. At the same time, the
Company agreed to pay another financial institution the same fixed interest rate on the same notional amount and
receive the same variable interest rate on the same notional amount. The transaction allows the Company’s
customer to effectively convert a variable-rate loan to a fixed-rate. Because the Company acts solely as an
intermediary for its customer, changes in the fair value of the underlying derivative contracts offset each other

132

and do not significantly impact the Company’s results of operations. The notional amounts and estimated fair
values of interest rate derivative contracts outstanding at December 31, 2014 are presented in the following table:

Financial Institution Counterparties:
Swaps—liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Current
Notional
Amount

Estimated
Fair Value

(Dollars in thousands)

$9,128

$(303)

Bank Customer Counterparties:
Swaps—assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$9,128

$ 303

18. REGULATORY MATTERS

The Company and the Bank are subject to various regulatory capital requirements administered by the
federal banking agencies. Any institution that fails to meet its minimum capital requirements is subject to actions
by regulators that could have a direct material effect on the Company’s financial statements. Under the capital
adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines based on the Bank’s assets, liabilities and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Company’s and the Bank’s capital amounts and the Bank’s classification
under the regulatory framework for prompt corrective action are also subject to qualitative judgments by the
regulators about the components, risk weightings and other factors.

To meet the capital adequacy requirements, the Company and the Bank must maintain minimum capital
amounts and ratios of Total and Tier 1 capital to risk weighted assets, and of Tier 1 capital to adjusted quarterly
average assets as defined in the regulations. As of December 31, 2014, the Company and the Bank met all capital
adequacy requirements to which they were subject.

The Tier 1 and total capital ratios are calculated by dividing the respective capital amounts by risk weighted
assets. Risk weighted assets include total assets, excluding goodwill and other intangible assets, allocated by risk
weight category, and certain off-balance-sheet items. The leverage ratio is calculated by dividing Tier 1 capital
by adjusted quarterly average total assets, excluding goodwill and other intangible assets.

As of December 31, 2014, the most recent notification from the FDIC categorized the Bank as “well
capitalized” under the regulatory framework for prompt corrective action. There have been no conditions or
events since that notification which management believes have changed the Bank’s category. To be categorized
as well capitalized the Bank must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios
as set forth in the table below.

133

The following is a summary of the Company’s and the Bank’s capital ratios at December 31, 2014 and

2013:

Actual

For Capital
Adequacy Purposes

To Be Categorized As
Well Capitalized Under
Prompt Corrective
Action Provisions

Amount

Ratio

Amount

Ratio

Amount

Ratio

(Dollars in thousands)

CONSOLIDATED:
As of December 31, 2014

Total Capital

(to Risk Weighted Assets) . . . . . . . . . . . . .

$1,556,083

14.56% $855,091

8.00%

N/A

N/A

Tier I Capital

(to Risk Weighted Assets) . . . . . . . . . . . . .

1,475,321

13.80% 427,545

4.00%

N/A

N/A

Tier I Capital

(to Average Tangible Assets) . . . . . . . . . .

1,475,321

7.69% 767,086

4.00%

N/A

N/A

As of December 31, 2013

Total Capital

(to Risk Weighted Assets) . . . . . . . . . . . . .

$1,259,768

14.02% $719,005

8.00%

N/A

N/A

Tier I Capital

(to Risk Weighted Assets) . . . . . . . . . . . . .

1,192,486

13.27% 359,502

4.00%

N/A

N/A

Tier I Capital

(to Average Tangible Assets) . . . . . . . . . .

1,192,486

7.42% 642,522

4.00%

N/A

N/A

PROSPERITY BANK® ONLY:
As of December 31, 2014

Total Capital

(to Risk Weighted Assets) . . . . . . . . . . . . .

$1,517,903

14.22% $854,237

8.00% $1,067,797

10.00%

Tier I Capital

(to Risk Weighted Assets) . . . . . . . . . . . . .

1,437,141

13.46% 427,119

4.00% 640,678

6.00%

Tier I Capital

(to Average Tangible Assets) . . . . . . . . . .

1,437,141

7.50% 766,664

4.00% 958,329

5.00%

As of December 31, 2013

Total Capital

(to Risk Weighted Assets) . . . . . . . . . . . . .

$1,229,752

13.70% $718,334

8.00% $ 897,917

10.00%

Tier I Capital

(to Risk Weighted Assets) . . . . . . . . . . . . .

1,162,470

12.95% 359,167

4.00% 538,750

6.00%

Tier I Capital

(to Average Tangible Assets) . . . . . . . . . .

1,162,470

7.24% 642,186

4.00% 802,733

5.00%

Dividends paid by Bancshares and the Bank are subject to restrictions by certain regulatory agencies.
Dividends paid by Bancshares during the years ended December 31, 2014, 2013 and 2012 were $68.4 million,
$54.0 million and $41.5 million, respectively. Dividends paid by the Bank to Bancshares during the years ended
December 31, 2014, 2013 and 2012 were $103.1 million, $203.5 million and $228.5 million, respectively.

134

19. JUNIOR SUBORDINATED DEBENTURES

At December 31, 2014 and 2013, respectively, the Company had outstanding $167.5 million and $124.2
million in junior subordinated debentures issued to the Company’s unconsolidated subsidiary trusts, respectively.
On April 1, 2014, the Company acquired FMBC and assumed the obligations related to the junior subordinated
debentures issued to F&M Bancorporation Statutory Trust I, F&M Bancorporation Statutory Trust II and F&M
Bancorporation Statutory Trust III. In late 2014, the Company gave irrevocable notice of its intent to redeem
three of the twelve outstanding issuances of junior subordinated debentures, which total $41.2 million, in January
2015. Since December 31, 2014, the Company has provided irrevocable notice of its intent to redeem the
remaining junior subordinated debentures during the first quarter of 2015. For further details refer to Note 21
“Subsequent Events.”

A summary of pertinent

information related to the Company’s twelve issues of junior subordinated

debentures outstanding at December 31, 2014 is set forth in the table below:

Description

Issuance Date

Trust
Preferred
Securities
Outstanding

Interest Rate(1)

(Dollars in thousands)

Junior
Subordinated
Debt Owed
to Trusts

Maturity Date(2)

Prosperity Statutory Trust II(3)

. .

July 31, 2001

$15,000 3 month LIBOR + 3.58%,

$ 15,464

July 31, 2031

Prosperity Statutory Trust III . . . August 15, 2003
Prosperity Statutory Trust IV . . . December 30, 2003
SNB Capital Trust IV . . . . . . . . . September 25, 2003
TXUI Statutory Trust II(3) . . . . . . December 19, 2003
TXUI Statutory Trust III
. . . . . . November 30, 2005
TXUI Statutory Trust IV . . . . . . March 31, 2006
June 14, 2005
FVNB Capital Trust II . . . . . . . .
FVNB Capital Trust III(3) . . . . . .
June 23, 2006
F&M Bancorporation Statutory
March 26, 2003

Trust I(4)

. . . . . . . . . . . . . . . . .

12,500
12,500
10,000
5,000
15,500
12,000
18,000
20,000
15,000

not to exceed 12.50%
3 month LIBOR + 3.00%
3 month LIBOR + 2.85%
3 month LIBOR + 3.00%
3 month LIBOR + 2.85%
3 month LIBOR + 1.39%
3 month LIBOR + 1.39%
3 month LIBOR + 1.68%
3 month LIBOR + 1.60%
3 month LIBOR + 3.15%

12,887 September 17, 2033
12,887 December 30, 2033
10,310 September 25, 2033
5,155 December 19, 2033
15,980 December 15, 2035
12,372
18,557
20,619
15,464

June 30, 2036
June 15, 2035
July 7, 2036
March 26, 2033

F&M Bancorporation Statutory

March 17, 2004

12,000

3 month LIBOR + 2.79%

12,372

March 17, 2034

Trust II(4) . . . . . . . . . . . . . . . . .

F&M Bancorporation Statutory

December 15, 2005

15,000

3 month LIBOR + 1.80%

15,464 December 15, 2035

Trust III(4)

. . . . . . . . . . . . . . . .

$167,531

(1) The 3-month LIBOR in effect as of December 31, 2014 was 0.246%.
(2) All debentures are callable five years from issuance date.
(3) During the fourth quarter of 2014, the Company gave irrevocable notice of its intent to fully redeem these

junior subordinated debentures in January 2015.

(4) Assumed in connection with the F&M acquisition on April 1, 2014.

Each of the trusts is a capital or statutory business trust organized for the sole purpose of issuing trust
securities and investing the proceeds in the Company’s junior subordinated debentures. The preferred trust
securities of each trust represent preferred beneficial interests in the assets of the respective trusts and are subject
to mandatory redemption upon payment of the junior subordinated debentures held by the trust. The common
securities of each trust are wholly owned by the Company. Each trust’s ability to pay amounts due on the trust
preferred securities is solely dependent upon the Company making payment on the related junior subordinated
debentures. The debentures, which are the only assets of each trust, are subordinate and junior in right of
payment
to all of the Company’s present and future senior indebtedness. The Company has fully and
unconditionally guaranteed each trust’s obligations under the trust securities issued by such trust to the extent not
paid or made by each trust, provided such trust has funds available for such obligations.

135

Under the provisions of each issue of the debentures, the Company has the right to defer payment of interest
on the debentures at any time, or from time to time, for periods not exceeding five years. If interest payments on
either issue of the debentures are deferred, the distributions on the applicable trust preferred securities and
common securities will also be deferred.

20. PARENT COMPANY ONLY FINANCIAL STATEMENTS

PROSPERITY BANCSHARES, INC.
(Parent Company Only)

CONDENSED BALANCE SHEETS

December 31,

2014

2013

(Dollars in thousands)

ASSETS

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment in subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment in capital and statutory trusts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

21,334
3,370,227
5,031
3,982
12,092

$

10,597
2,877,089
3,731
3,982
16,927

TOTAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$3,412,666

$2,912,326

LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES:

Accrued interest payable and other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Junior subordinated debentures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

309
167,531

167,840

$

1,277
124,231

125,508

SHAREHOLDERS’ EQUITY:

Common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital surplus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized gain on available for sale securities, net of tax benefit . . . . . . . . . . . . .
Less treasury stock, at cost, 37,088 shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

69,817
2,025,235
1,146,652
3,729
(607)

66,085
1,798,862
917,595
4,883
(607)

Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3,244,826

2,786,818

TOTAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$3,412,666

$2,912,326

136

PROSPERITY BANCSHARES, INC.
(Parent Company Only)

CONDENSED STATEMENTS OF INCOME

For the Years Ended December 31,
2013

2012

2014

(Dollars in thousands)

OPERATING INCOME:

Dividends from subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$103,100
159

$203,500
115

$228,450
131

Total income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

103,259

203,615

228,581

OPERATING EXPENSE:

Junior subordinated debentures interest expense . . . . . . . . . . . . . . . . . . . .
Stock based compensation expense (includes restricted stock) . . . . . . . . .
Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4,060
8,236
608

Total operating expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

12,904

INCOME BEFORE INCOME TAX BENEFIT AND EQUITY IN

2,551
4,175
515

7,241

2,593
3,607
593

6,793

UNDISTRIBUTED EARNINGS OF SUBSIDIARIES . . . . . . . . . . . . . . . . .
FEDERAL INCOME TAX BENEFIT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

90,355
4,468

196,374
2,495

221,788
2,325

INCOME BEFORE EQUITY IN UNDISTRIBUTED EARNINGS OF

SUBSIDIARIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
EQUITY IN UNDISTRIBUTED EARNINGS OF SUBSIDIARIES . . . . . . . .

94,823
202,618

198,869
22,529

224,113
(56,212)

NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$297,441

$221,398

$167,901

137

PROSPERITY BANCSHARES, INC.
(Parent Company Only)

CONDENSED STATEMENTS OF COMPREHENSIVE INCOME

For the Years Ended December 31,
2013

2014

2012

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive loss, before tax:
Securities available for sale:

Change in unrealized gain during period . . . . . . . . . . . . . . . . . . . . . .

Total other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax benefit related to other comprehensive income . . . . . . . . . . . . . .

Other comprehensive loss, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(Dollars in thousands)
$221,398

$297,441

$167,901

(1,776)

(1,776)
622

(1,154)

(6,312)

(6,312)
2,209

(4,103)

(6,903)

(6,903)
2,417

(4,486)

Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$296,287

$217,295

$163,415

138

PROSPERITY BANCSHARES, INC.
(Parent Company Only)

CONDENSED STATEMENTS OF CASH FLOWS

For the Years Ended December 31,
2012
2013
2014

(Dollars in thousands)

CASH FLOWS FROM OPERATING ACTIVITIES:

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net income to net cash provided by operating

$ 297,441

$ 221,398

$ 167,901

activities:

Equity in undistributed earnings of subsidiaries . . . . . . . . . . . . . .
Stock based compensation expense (includes restricted stock) . . .
Decrease (increase) in other assets . . . . . . . . . . . . . . . . . . . . . . . . .
(Decrease) increase in accrued interest payable and other

(202,618)
8,236
4,838

(22,529)
4,175
(2,382)

56,212
3,607
3,727

liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(968)

3,135

(5,266)

Net cash provided by operating activities . . . . . . . . . . . . . . .

106,929

203,797

226,181

CASH FLOWS FROM INVESTING ACTIVITIES:

Cash paid for acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash acquired from acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(34,246)
2,733

(152,807)
7,441

(189,966)
1,372

Net cash used in investing activities . . . . . . . . . . . . . . . . . . .

(31,513)

(145,366)

(188,594)

CASH FLOWS FROM FINANCING ACTIVITIES:

Proceeds from stock option exercises . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments of cash dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3,705
(68,384)

5,379
(54,039)

3,573
(41,543)

Net cash used in financing activities . . . . . . . . . . . . . . . . . . .

(64,679)

(48,660)

(37,970)

NET INCREASE (DECREASE) IN CASH AND CASH

EQUIVALENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD . . . . . . .

10,737
10,597

9,771
826

(383)
1,209

CASH AND CASH EQUIVALENTS, END OF PERIOD . . . . . . . . . . . . . .

$ 21,334

$ 10,597

$

826

21. SUBSEQUENT EVENTS

As of December 31, 2014, the Company had $167.5 million in junior subordinated debentures outstanding
that were issued to the Company’s unconsolidated subsidiary trusts or assumed by the Company in connection
with an acquisition. The subsidiary trusts purchased the junior subordinated debentures from the Company using
the proceeds from the sale of trust preferred securities to third party investors. As of December 31, 2014, all
$167.5 million of outstanding trust preferred securities of the Company were counted as Tier 1 capital in the
calculation of the Company’s capital ratios. Under the new Basel III Capital Rules, 75% of trust preferred
securities will be eliminated from Tier 1 capital beginning on January 1, 2015 and fully eliminated by the end of
2016.

Although the trust preferred securities are includable as Tier 2 capital under the Basel III Capital Rules,
since December 31, 2014, the Company has redeemed $41.2 million of its outstanding junior subordinated
debentures and provided irrevocable notice of its intent to redeem the remaining junior subordinated debentures
during the first quarter of 2015. Prior to notifying the trustees of the applicable trusts, the Company advised the
Federal Reserve Board of its redemption intent and timing, and the Federal Reserve Board had no objections to
the redemptions. The Company has and intends to continue to fund the redemption of the trust preferred
securities through dividends from the Bank.

139