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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

(Mark One)

☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2025

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

 

74-2331986

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

 

Prosperity Bank Plaza

4295 San Felipe, Houston, Texas

 

77027

(Address of principal executive offices)

 

(Zip Code)

Registrant’s Telephone Number, Including Area Code: (281) 269-7199

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which registered

Common stock, par value $1.00 per share

 

PB

 

New York Stock Exchange, Inc.

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

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐

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 ☒

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 ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

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

Large Accelerated Filer

☒

Accelerated Filer

☐

 

 

 

 

Non-accelerated Filer

☐

Smaller Reporting Company

☐

 

 

 

 

 

 

 

 

 

 

 

Emerging Growth Company

 

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒

If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐

Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐

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

The aggregate market value of the shares of common stock held by non-affiliates as of June 30, 2025, based on the closing price of the common stock on the New York Stock Exchange on June 30, 2025, was approximately $6.41 billion.

As of February 23, 2026, the number of outstanding shares of common stock was 101,581,522.

Documents Incorporated by Reference:

Portions of the Company’s Proxy Statement relating to the 2026 Annual Meeting of Shareholders, which will be filed within 120 days after December 31, 2025, are incorporated by reference into Part III, Items 10-14 of this Annual Report on Form 10-K.

 

 

 

PROSPERITY BANCSHARES, INC.®

2025 ANNUAL REPORT ON FORM 10-K

TABLE OF CONTENTS

PART I

 

 

 

 

Item 1.

Business

1

 

General

 

1

 

 

Recent Acquisition

 

1

 

 

Subsequent Events

 

2

 

Available Information

 

2

 

Human Capital

 

2

 

Banking Activities

 

3

 

Business Strategies

 

4

 

Competition

 

5

 

Supervision and Regulation

 

5

Item 1A.

 

Risk Factors

 

13

Item 1B.

 

Unresolved Staff Comments

 

28

Item 1C.

 

Cybersecurity

 

28

Item 2.

 

Properties

 

29

Item 3.

 

Legal Proceedings

 

30

Item 4.

 

Mine Safety Disclosures

 

30

PART II

 

 

 

 

Item 5.

 

Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities

 

31

Item 6.

 

[Reserved]

 

33

Item 7.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

34

 

Overview

 

36

 

 

Recent Acquisition

 

36

 

 

Subsequent Events

 

37

 

Critical Accounting Estimates

 

37

 

Results of Operations

 

39

 

Financial Condition

 

45

Item 7A.

 

Quantitative and Qualitative Disclosures about Market Risk

 

69

Item 8.

 

Financial Statements and Supplementary Data

 

69

Item 9.

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

70

Item 9A.

 

Controls and Procedures

 

70

Item 9B.

 

Other Information

 

73

Item 9C.

 

Disclosure Regarding Foreign Jurisdictions that Prevent Inspections

 

73

PART III

 

 

 

 

Item 10.

 

Directors, Executive Officers and Corporate Governance

 

73

Item 11.

 

Executive Compensation

 

73

Item 12.

 

Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters

 

73

Item 13.

 

Certain Relationships and Related Transactions and Director Independence

 

73

Item 14.

 

Principal Accountant Fees and Services

 

73

PART IV

 

 

 

 

Item 15.

 

Exhibits and Financial Statement Schedules

 

74

Signatures

 

77

 

 

 

 

 

PART I

ITEM 1. BUSINESS

General

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 businesses and consumers throughout Texas and Oklahoma. As of December 31, 2025, the Bank operated 283 full-service banking locations: 62 in the Houston area, including The Woodlands; 33 in the South Texas area including Corpus Christi and Victoria; 61 in the Dallas/Fort Worth area; 22 in the East Texas area; 31 in the Central Texas area including Austin and San Antonio; 45 in the West Texas area including Lubbock, Midland-Odessa, Abilene, Amarillo and Wichita Falls; 15 in the Bryan/College Station area; 6 in the Central Oklahoma area; and 8 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 (281) 269-7199. 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, Lubbock, 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 prudent approach to lending and sound asset quality. The Company has grown through a combination of internal growth, merger and acquisition transactions and the opening of new banking centers. As a result of its stable customer relationships, the Company is able to maintain a low cost of funds. Utilizing its stable customer relationships 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 and Oklahoma.

In addition to internal growth, the Company has completed the following acquisitions since 2016 (through December 31, 2025):

Acquired Entity

 

Acquired Bank

 

Completion Date

 

Number of Banking Centers Acquired (1)

 

Tradition Bancshares, Inc.

 

Tradition Bank

 

2016

 

 

7

 

LegacyTexas Financial Group, Inc.

 

LegacyTexas Bank

 

2019

 

 

42

 

First Bancshares of Texas, Inc.

 

FirstCapital Bank of Texas

 

2023

 

 

16

 

Lone Star State Bancshares, Inc.

 

Lone Star State Bank of West Texas

 

2024

 

 

5

 

 

(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.

Recent Acquisition

Acquisition of Lone Star State Bancshares, Inc. — Effective April 1, 2024, the Company completed the merger of Lone Star State Bancshares, Inc. (“Lone Star”) into the Company and the subsequent merger of its wholly owned subsidiary Lone Star State Bank of West Texas (“Lone Star Bank”), into the Bank (collectively, the “Lone Star Merger”). Lone Star operated five full-service banking offices in the West Texas area, including its main office in Lubbock, and one banking center in each of Brownfield, Midland, Odessa and Big Spring, Texas. Pursuant to the terms of the definitive agreement, the Company issued 2,376,182 shares of its common stock plus approximately $64.1 million in cash for all outstanding shares of Lone Star. This resulted in goodwill of $106.7 million as of December 31, 2025, which reflected all final subsequent fair value adjustments. Goodwill represents the excess of the total purchase price paid over the fair value of the assets acquired, net of the fair value of liabilities assumed. Additionally, the Company recognized $17.7 million of core deposit intangibles related to the Lone Star Merger. In October 2024, the Company completed the operational conversion of Lone Star Bank.

1

 

Subsequent Events

Acquisition of American Bank Holding Corporation — On January 1, 2026, the Company completed the merger of American Bank Holding Corporation (“American”) into the Company and the subsequent merger of its wholly owned subsidiary American Bank, N.A. (“American Bank”), into the Bank (collectively, the “American Merger”). American Bank operated 18 banking offices and 2 loan production offices in South and Central Texas including its main office in Corpus Christi, and banking offices in San Antonio, Austin, Victoria and the greater Corpus Christi area including Port Aransas and Rockport and a loan production office in Houston, Texas. Pursuant to the terms of the definitive agreement, the Company issued 4,439,938 shares of its common stock for all outstanding shares of American common stock in the first quarter of 2026.

Acquisition of Southwest Bancshares, Inc. — On February 1, 2026, the Company completed the merger of Southwest Bancshares, Inc. (“Southwest”) into the Company and the subsequent merger of its wholly owned subsidiary Texas Partners Bank (“Texas Partners”), into the Bank (collectively, the “Southwest Merger”). Texas Partners operated 11 banking offices in Central Texas including its main office in San Antonio, and banking offices in the San Antonio area, Austin and the Hill Country. Pursuant to the terms of the definitive agreement, the Company issued 4,094,974 shares of its common stock for all outstanding shares of Southwest common stock in the first quarter of 2026.

Pending Acquisition of Stellar Bancorp, Inc.— On January 28, 2026, the Company and Stellar Bancorp, Inc. (“Stellar”) jointly announced the signing of a definitive merger agreement whereby Stellar, the parent company of Stellar Bank (“Stellar Bank”), will merge with and into the Company and Stellar Bank will merge with and into the Bank. Stellar Bank operates 52 banking offices in greater Houston and Beaumont, Texas and surrounding areas. Under the terms and subject to the conditions of the definitive agreement, the Company will issue 0.3803 shares of its common stock and $11.36 in cash for each outstanding share of Stellar common stock. Based on the closing price of the Company’s common stock of $72.90 on January 27, 2026, the total consideration was valued at approximately $2.00 billion. The transaction is subject to customary closing conditions, including the receipt of regulatory approvals.

 

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.

Human Capital

The Company’s culture is defined by its high standards and corporate values of soundness, profitability, service, professionalism, integrity, and citizenship. The Company’s goal is to develop highly productive associates who will contribute to the success of the Company while making better lives for themselves and their families. The Company believes in maintaining progressive employment policies, as well as a competitive wage and benefit package. The Company considers its relations with associates to be good.

As of December 31, 2025, the Company had 3,941 full-time equivalent associates, 1,147 of whom were officers of the Bank. Neither the Company nor the Bank is a party to any collective bargaining agreement. The Company is fully committed to the concept and practice of equal opportunity. In 2025, its workforce, from senior officers to tellers, was 51% minority and 75% female.

The Company’s associates bring a variety of backgrounds, perspectives, and experiences that are reflective of the communities and customers the Company serves. The unique capabilities and talents that its associates invest in their work represent a significant part of not only the Company’s culture but its reputation and achievements as well.

To further foster its relationship with its associates, the Company has implemented the following initiatives:

•
Hiring, training, and retaining associates from diverse backgrounds.
•
Encouraging associates to recruit new team members through the Company’s Referral Reward Program.
•
Participating in a variety of activities that reflect the demographics within the communities the Company serves.
•
Developing strategies to reach multicultural markets.
•
Providing training and development opportunities as noted below.

2

 

Compensation and Benefits. The Company believes in maintaining progressive employment policies, as well as a competitive wage and benefit package. The Company has invested heavily in its officers and associates by recruiting talented officers in its market areas and providing them with economic incentives. The senior management team, including area leadership, has substantial experience in the Company’s business and market areas. Most banking center locations are 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 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. The Company also has lending groups focused on specific business segments. The performance of these groups is also reviewed when setting lender compensation.

The Company offers a variety of benefits to full-time associates, including Medical Insurance, Dental Insurance, Vision Insurance, Basic Life Insurance, Voluntary Life Insurance, Spouse/Dependent Life Insurance, Short Term Disability, Long Term Disability, Worksite Supplemental Benefits, Flexible Spending Account, 401(k)/Profit Sharing Plan, Paid Time Off and Paid Holidays.

Recruiting, Training, Development and Retention. In order to provide current associates with the opportunity for advancement, the Company posts job opportunities internally for three calendar days before making them available to the public. Of the approximately 1,275 open positions filled in 2025, 255 were filled by internal associates.

The Company recognizes that employee training and development are business imperatives essential to employee retention and providing excellent service. Associates receive formal and informal position specific training on various regulatory compliance topics, person to person functional and product training, policy and procedure documentation, online webinars and videos. The Company has position-specific required training delivered annually, and as industry or bank policy and procedure changes dictate. Associates are encouraged to explore and achieve a full range of training and development opportunities to personalize career development and to prioritize their unique needs and growth opportunities. The Company fosters an environment where associates are encouraged to reach their full potential by enhancing current skills, working toward a future role, or taking steps to build new skills through hands-on learning involving common customer interaction scenarios, coaching conversations, mentor relationships, feedback, performance appraisals and working with role models.

The Company recognizes that associates play a valuable role in its overall success. The Company strives to keep associates motivated and focused as discussed above. All related programs or benefits contribute to the Company’s overall productivity and performance and play a vital role in attracting and retaining associates.

Business Culture. 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.

Banking Activities

The Company, through the Bank, offers a variety of traditional loan and deposit products to its customers, which consist primarily of individual consumers and businesses throughout Texas and Oklahoma. At December 31, 2025, the Bank maintained approximately 804,300 separate deposit accounts including certificates of deposit and 65,700 separate loan accounts. At December 31, 2025, noninterest-bearing demand deposits were 33.2% of the Bank’s total deposits. For the year ended December 31, 2025, the Company’s average cost of funds was 1.61%, and the Company’s average cost of deposits (excluding all borrowings) was 1.37%.

The Company has been an active real estate lender, with commercial real estate (including farmland and multi-family residential); 1-4 family residential (including home equity); and construction, land development and other land loans comprising 29.5%, 37.9% and 12.6%, respectively, of the Company’s total loans as of December 31, 2025. The Company is active in commercial and industrial lending, with commercial loans comprising 10.6% of the Company’s total loans as of December 31, 2025. The Company also offers agricultural loans, loans for automobiles and other consumer durables, home equity loans, debit and credit cards, digital banking solutions, trust and wealth management, retail brokerage services, mortgage services and treasury management. 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. The Company has a Warehouse Purchase Program that allows mortgage banking company customers to close one-to-four-family real estate loans in their own name and manage their cash flow needs until the loans are sold to investors.

By offering certificates of deposit, interest checking accounts, money market accounts and savings accounts at competitive rates, the Company gives its depositors a full range of traditional deposit products.

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As of December 31, 2025, the Company’s trust department maintained total assets of $2.89 billion, including managed assets of $2.40 billion. The trust department provides trust services in the Company’s various market areas.

The Company’s banking operations are considered by management to be aggregated in one reportable operating segment. For more information about the Company’s segment reporting, refer to Note 1 to the consolidated financial statements.

Business Strategies

The Company’s main objective is to increase deposits and loans through internal growth, as well as through acquisition opportunities, while maintaining efficiency, providing 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 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 who possess lending expertise to effectively serve their community and gives them authority with centralized support to make certain pricing and credit decisions, avoiding the bureaucratic structure of larger banks. Each banking center has its own listed local business telephone number. Customers are served by a local banker with decision making authority. The Company also maintains specialty commercial lending lines of business staffed by bankers with lending expertise in the various business lines—commercial middle market, energy, mortgage warehouse and insurance lending.

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 that have been used to fund the Company’s lending and investing activities. However, future acquisitions, if any, may not 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) whether the acquisition will strategically expand the Company’s geographic footprint and (4) the opportunity to enhance the Company’s market presence in existing market areas.

Increase Loan Volume and Diversify Loan Portfolio. While maintaining its prudent approach to lending, the Company has emphasized both new and existing loan products, focusing on increasing its commercial real estate, commercial and industrial, and residential real estate loan portfolios. Loans at December 31, 2025, were $21.81 billion compared with $22.15 billion at December 31, 2024, a decrease of $343.8 million or 1.6%. Commercial and industrial loans were $2.30 billion and represented 10.6% of the total loan portfolio as of December 31, 2025. Commercial real estate loans (including multifamily residential and excluding farmland) were $5.78 billion and represented 26.5% of the total portfolio as of December 31, 2025. One-to-four-family residential loans (excluding home equity) were $7.43 billion and represented 34.1% of the total loan portfolio as of December 31, 2025. Construction, land development and other land loans were $2.74 billion and represented 12.6% of the total loan portfolio as of December 31, 2025. Warehouse Purchase Program loans were $1.30 billion and represented 6.0% of the total loan portfolio as of December 31, 2025.

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 processes that have contributed to its low incidence of nonperforming assets and minimal charge-offs in relation to its size. Nonperforming assets were 0.69% of total loans and other real estate at December 31, 2025. Excluding Warehouse Purchase Program loans, nonperforming assets were 0.74% of total loans and other real estate at December 31, 2025. All Warehouse Purchase Program loans were performing loans at December 31, 2025.

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 and deposit processing. For its banking centers, which the Company operates as independent profit centers, the Company supplies complete support in the areas of loan review, appraisals, loan and deposit processing, 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

4

 

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 on its web page and 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, financial technology companies and certain other nonfinancial entities, including retail stores that may maintain their own credit programs and certain governmental organizations that may offer more favorable financing than the Company. Continued consolidation and rapid technological changes within the financial services industry will likely change the nature and intensity of competition, but should also create opportunities for the Company to demonstrate and leverage its competitive advantages. 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.

Supervision and Regulation

The Company is extensively regulated under federal and state law. In addition, proposals to change the laws and regulations governing the banking industry are frequently raised at both the state and federal levels. The likelihood and timing of any changes in these laws and regulations, and the impact such changes may have on the Company and the Bank, are difficult to predict. Regulatory agencies may issue enforcement actions, policy statements, interpretive letters, and similar written guidance applicable to the Company or to the Bank. Changes in applicable laws, regulations, or regulatory guidance, or their interpretation by regulatory agencies or courts may have a material adverse effect on the Company’s and the Bank’s business, operations, and earnings.

The Company and the Bank must undergo regular examinations by the appropriate regulatory agency, which will examine for adherence to a range of legal and regulatory compliance responsibilities. A bank regulator conducting an examination has complete access to the books and records of the examined institution. The results of the examination are confidential.

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 Federal Deposit Insurance Corporation (“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 primary 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, as a public company, the Company also files reports with the U.S. Securities and Exchange Commission (“SEC”) and is subject to its regulatory authority, including the disclosure and regulatory requirements of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, with respect to the Company’s securities, financial reporting and certain governance matters. Because the Company’s securities are listed on the New York Stock Exchange (“NYSE”) under the ticker symbol “PB,” the Company is subject to NYSE’s rules for listed companies, including rules relating to corporate governance.

Regulatory Restrictions on Dividends and Share Repurchases. 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 and state law places limitations on the amount that 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

5

 

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. Federal Reserve Board policy also provides that a bank holding company should inform the Federal Reserve Board reasonably in advance of declaring or paying a dividend that exceeds earnings for the period for which the dividend is being paid or that could result in a material adverse change to the bank holding company's capital structure.

The Federal Reserve Board generally requires prior notice of any redemption or repurchase of a bank holding company’s own equity securities if the consideration to be paid, together with the net consideration paid for any repurchases or redemptions in the preceding 12 months, is equal to 10% or more of the company’s consolidated net worth. Further, the Federal Reserve Board may oppose a dividend or repurchase transaction if it would constitute an unsafe or unsound practice or would violate any law or regulation.

In July 2019, the federal bank regulators adopted final rules that, among other things, eliminated the standalone prior approval requirement in the Basel III Capital Rules for any repurchase of common stock. In certain circumstances, the Company’s repurchases of its common stock may be subject to a prior approval or notice requirement under other regulations, policies or supervisory expectations of the Federal Reserve Board. Any redemption or repurchase of preferred stock or subordinated debt remains subject to the prior approval of the Federal Reserve Board.

In August 2022, the Inflation Reduction Act of 2022 (the “IRA”) was enacted. Among other things, the IRA imposes a new 1% excise tax on the fair market value of stock repurchased after December 31, 2022 by publicly traded U.S. corporations. With certain exceptions, the value of stock repurchased is determined net of stock issued in the year, including shares issued pursuant to compensatory arrangements.

Source of Strength. Federal Reserve Board policy and federal law require a bank holding company to act as a source of financial and managerial strength to each of its banking subsidiaries. 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. The FDIC may require reports from the Company to assess the Company’s ability to serve as a source of strength and to enforce compliance with the source of strength requirements by requiring the Company to provide financial assistance to the Bank in the event of the Bank’s financial distress.

If the Company were to enter bankruptcy or become subject to the orderly liquidation process established by the Dodd-Frank Act, any commitment by the Company to a federal bank regulatory agency to maintain the capital of the Bank would be assumed by the bankruptcy trustee or the FDIC, as appropriate, and entitled to a priority of payment.

Scope of Permissible Activities. As a financial holding company, the Company is permitted to engage directly or indirectly in a broader range of activities than those permitted for a bank holding company that has not elected to be a financial holding company. Bank holding companies are generally restricted to engaging in the business of banking, managing or controlling banks and certain other activities determined by the Federal Reserve Board to be closely related to banking. Financial holding companies may also engage in activities that are considered to be financial in nature, as well as those incidental or, if determined by the Federal Reserve Board, complementary to financial activities. If the Bank ceases to be “well capitalized” or “well managed” under applicable regulatory standards, or if the Bank receives a rating of less than satisfactory under the Community Reinvestment Act of 1977 (“CRA”), the Federal Reserve Board may, among other things, place limitations on the Company’s ability to conduct these broader financial activities or, if the deficiencies persist, require the Company to divest the banking subsidiary or the businesses engaged in activities permissible only for financial holding companies.

In addition, the Federal Reserve Board has the power to order a bank holding company or its subsidiaries to terminate any nonbanking activity or terminate its ownership or control of any nonbank subsidiary when it has reasonable cause to believe that continuation of such activity or such ownership or control constitutes a serious risk to the financial safety, soundness, or stability of any bank subsidiary of that bank holding company.

Safe and Sound Banking Practices. Bank holding companies are not permitted to engage in unsafe and unsound banking practices. Violations of laws and regulations, or other unsafe and unsound practices, may result in regulatory agencies imposing fines or penalties, cease and desist orders, or taking other enforcement actions. Under certain circumstances, these agencies may enforce these remedies directly against officers, directors, employees, and other parties participating in the affairs of a bank or bank holding company. Under federal and state laws and regulations pertaining to the safety and soundness of insured depository institutions, state

6

 

banking regulators, the Federal Reserve Board, and separately the FDIC as the insurer of bank deposits have the authority to compel or restrict certain actions by the Company if they determine that the Company has insufficient capital or other resources, or is otherwise operating in a manner that may be deemed to be inconsistent with safe and sound banking practices. Under this authority, the Company’s regulators can require the Company or its subsidiaries to enter into informal or formal supervisory agreements, including board resolutions, memoranda of understanding, confidential agreements, and consent or cease and desist orders pursuant to which the Company would be required to take identified corrective actions to address cited concerns and to refrain from taking certain actions.

If the Company is unable to comply with the terms of any then applicable regulatory actions or directives, supervisory agreements or orders, then the Company could become subject to additional, heightened supervisory actions and orders, possibly including prompt corrective action restrictions and/or other regulatory actions, including prohibitions on the payment of dividends on the Company’s common stock and preferred stock, if any. If such supervisory actions were to occur, the Company could, among other things, become subject to significant restrictions on the Company’s ability to develop any new business, as well as restrictions on the Company’s existing business, and the Company could be required to raise additional capital, dispose of certain assets and liabilities within a prescribed period of time, or both. The terms of any such action could have a material negative effect on the Company’s business, reputation, operating flexibility, financial condition, and the value of the Company’s securities.

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 in excess of $1.0 million for each day the activity continues.

Anti-Tying Restrictions. In general, a bank may not extend credit, lease, sell property, or furnish any services or fix or vary the consideration for them on the condition that (1) the client obtain or provide some additional credit, property, or services from or to the bank or bank holding company or their subsidiaries or (2) the client not obtain some other credit, property, or services from a competitor, except to the extent reasonable conditions are imposed to assure the soundness of the credit extended. A bank may, however, offer combined-balance products and may otherwise offer more favorable terms if a client obtains two or more traditional bank products. The law also expressly permits banks to engage in other forms of tying and authorizes the Federal Reserve Board to grant additional exceptions by regulation or order.

Acquisitions by Bank Holding Companies. The BHCA permits acquisitions of banks by bank holding companies, such that the Company and any other bank holding company, whether located in Texas or elsewhere, may acquire a bank located in any other state, subject to certain deposit-percentage, age of bank charter requirements, and other restrictions. The BHCA requires that a bank holding company obtain the prior approval of the Federal Reserve Board before (1) acquiring direct or indirect ownership or control of 5% or more of the voting shares of any additional bank or bank holding company, (2) taking any action that causes an additional bank or bank holding company to become a subsidiary of the bank holding company, or (3) merging or consolidating with any other bank holding company. The Federal Reserve Board may not approve any such transaction that would result in a monopoly or would be in furtherance of any combination or conspiracy to monopolize or attempt to monopolize the business of banking in any section of the United States, or the effect of which may be substantially to lessen competition or to tend to create a monopoly in any section of the country, or that in any other manner would be in restraint of trade unless the anticompetitive effects of the proposed transaction are clearly outweighed in the public interest by the probable effect of the transaction in meeting the convenience and needs of the community to be served. The Federal Reserve Board is also required to consider: (1) the financial and managerial resources of the companies involved, including pro forma capital ratios; (2) the risk to the stability of the United States banking or financial system; (3) the convenience and needs of the communities to be served, including performance under the CRA; and (4) the effectiveness of the company in combating money laundering.

 

Control Acquisitions. Federal law restricts the amount of voting stock of a bank holding company or a bank that a person may acquire without the prior approval of banking regulators. Under the Change in Bank Control Act and the regulations thereunder, a person or group must give advance notice to the Federal Reserve Board before acquiring control of any bank holding company, such as the Company, or before acquiring control of any FDIC-insured bank, such as the Bank. Upon receipt of such notice, the Federal Reserve Board may approve or disapprove the acquisition. The Change in Bank Control Act creates a rebuttable presumption of control if a person or group acquires the power to vote 10% or more of the Company’s outstanding common stock. The overall effect of such laws is to make it more difficult to acquire a bank holding company and a bank by tender offer or similar means than it might be to acquire control of another type of corporation. Consequently, shareholders of the Company may be less likely to benefit from the rapid increases in stock prices that may result from tender offers or similar efforts to acquire control of other companies. Investors should be aware of these requirements when acquiring shares of the Company’s stock.

The Volcker Rule. Section 13 of the BHCA, commonly referred to as the “Volcker Rule,” generally prohibits the Company and the Company’s subsidiaries from (1) engaging in certain proprietary trading, and (2) acquiring or retaining an ownership interest in or

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sponsoring a “covered fund,” all subject to certain exceptions. Since neither the Company nor the Bank engages in the types of trading or investing covered by the Volcker Rule, the Volcker Rule does not currently have any effect on the operations of the Company or the Bank.

Incentive Compensation. The Dodd-Frank Act required the federal banking agencies and the SEC to establish joint rules or guidelines for financial institutions with more than $1 billion in assets, such as the Company and the Bank, which prohibit incentive compensation arrangements that the agencies determine to encourage inappropriate risks by the institution. The federal banking agencies issued proposed rules in 2011 and previously issued guidance on sound incentive compensation policies. In 2016, the federal banking agencies and the SEC proposed rules that would, depending upon the assets of the institution, directly regulate incentive compensation arrangements and would require enhanced oversight and recordkeeping. As of December 31, 2025, these rules have not been implemented.

In October 2022, the SEC adopted a final rule directing national securities exchanges and associations, including the NYSE, to implement listing standards that require listed companies to adopt policies mandating the recovery or “clawback” of excess incentive-based compensation earned by a current or former executive officer during the three fiscal years preceding the date the listed company is required to prepare an accounting restatement, including to correct an error that would result in a material misstatement if the error were corrected in the current period or left uncorrected in the current period. The NYSE’s listing standards pursuant to the SEC’s rule became effective on October 2, 2023. The Company adopted a compensation recovery policy pursuant to the NYSE listing standards on November 13, 2023.

Capital Requirements

The Company and the Bank are required under federal law to maintain certain minimum capital levels based on ratios of capital to total assets and capital to risk-weighted assets. The required capital ratios are minimums, and the banking regulators may determine that a banking organization based on its size, complexity, or risk profile must maintain a higher level of capital in order to operate in a safe and sound manner. Risks such as concentration of credit risks and the risk arising from non-traditional activities, as well as the institution’s exposure to a decline in the economic value of its capital due to changes in interest rates, and an institution’s ability to manage those risks, are important factors that are to be taken into account in assessing an institution’s overall capital adequacy. The following is a brief description of the relevant provisions of these capital rules and their potential impact on the Company’s capital levels.

The Company and the Bank are subject to the following risk-based capital ratios: a common equity tier 1 (“CET1”) risk-based capital ratio, a Tier 1 risk-based capital ratio, which includes CET1 and additional Tier 1 capital, and a total risk-based capital ratio, which includes Tier 1 and Tier 2 capital. CET1 is primarily comprised of the sum of common stock instruments and related surplus net of treasury stock plus retained earnings less certain adjustments and deductions, including with respect to goodwill, intangible assets, mortgage servicing assets, and deferred tax assets subject to temporary timing differences. Additional Tier 1 capital is primarily comprised of noncumulative perpetual preferred stock. Tier 2 capital consists of instruments disqualified from Tier 1 capital, including qualifying subordinated debt and a limited amount of loan loss reserves up to a maximum of 1.25% of risk-weighted assets, subject to certain eligibility criteria. The capital rules also define the risk-weights assigned to assets and off-balance sheet items to determine the risk-weighted asset components of the risk-based capital rules, including, for example, certain “high volatility” commercial real estate, past due assets, structured securities, and equity holdings.

The leverage capital ratio, which serves as a minimum capital standard, is the ratio of Tier 1 capital to quarterly average total consolidated assets net of goodwill, certain other intangible assets, and certain required deduction items. The required minimum leverage ratio for all banks and bank holding companies is 4%.

In addition, effective January 1, 2019, the capital rules required a capital conservation buffer of 2.5% above each of the minimum risk-based capital ratio requirements (CET1, Tier 1, and total capital), which is designed to cover expected losses during periods of economic stress. These buffer requirements must be met for a bank or bank holding company to be able to pay dividends, engage in share buybacks, or make discretionary bonus payments to executive management without restriction.

The Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”), among other things, requires the federal bank regulatory agencies to take “prompt corrective action” regarding depository institutions that do not meet minimum capital requirements. FDICIA establishes five regulatory capital tiers: “well capitalized”, “adequately capitalized”, “undercapitalized”, “significantly undercapitalized”, and “critically undercapitalized”. A depository institution’s capital tier will depend upon how its capital levels compare to various relevant capital measures and certain other factors, as established by regulation. FDICIA generally prohibits a depository institution from making any capital distribution (including payment of a dividend) or paying any management fee to its holding company if the depository institution would thereafter be undercapitalized. FDICIA imposes progressively more restrictive restraints on operations, management, and capital distributions depending on the category in which an institution is

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classified. Undercapitalized depository institutions are subject to restrictions on borrowing from the Federal Reserve System. In addition, undercapitalized depository institutions may not accept brokered deposits absent a waiver from the FDIC, are subject to growth limitations, and are required to submit capital restoration plans for regulatory approval. A depository institution's holding company must guarantee any required capital restoration plan up to an amount equal to the lesser of 5% of the depository institution's assets at the time it becomes undercapitalized or the amount of the capital deficiency when the institution fails to comply with the plan. Federal banking agencies may not accept a capital plan without determining, among other things, that the plan is based on realistic assumptions and is likely to succeed in restoring the depository institution’s capital. If a depository institution fails to submit an acceptable plan, it is treated as if it is significantly undercapitalized.

To be well-capitalized, the Bank must maintain at least the following capital ratios:

•
6.5% CET1 to risk-weighted assets;
•
8.0% Tier 1 capital to risk-weighted assets;
•
10.0% Total capital to risk-weighted assets; and
•
5.0% leverage ratio.

The Federal Reserve Board has not yet revised the well-capitalized standard for bank holding companies to reflect the higher capital requirements imposed under the current capital rules applicable to banks. For purposes of the Federal Reserve Board’s Regulation Y, including determining whether a bank holding company meets the requirements to be a financial holding company, bank holding companies, such as the Company, must maintain a Tier 1 risk-based capital ratio of 6.0% or greater and a total risk-based capital ratio of 10.0% or greater to be well-capitalized. Also, the Federal Reserve Board may require bank holding companies, including the Company, to maintain capital ratios substantially in excess of mandated minimum levels depending upon general economic conditions and a bank holding company’s particular condition, risk profile, and growth plans.

Failure to be well-capitalized or to meet minimum capital requirements could result in certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have an adverse material effect on the Company’s operations or financial condition. Failure to meet minimum capital requirements could also result in restrictions on the Company’s or the Bank’s ability to pay dividends or otherwise distribute capital or to receive regulatory approval of applications or other restrictions on its growth.

In 2025, the Company’s and the Bank’s regulatory capital ratios were above the applicable well-capitalized standards and met the capital conservation buffer. As of December 31, 2025, the Company’s ratio of CET1 to risk-weighted assets was 17.55%, Tier 1 capital to risk-weighted assets was 17.55%, total capital to risk-weighted assets was 18.80% and Tier 1 capital to average quarterly assets (leverage ratio) was 11.93%.

In response to the novel strain of coronavirus disease (“COVID-19”) pandemic, in March 2020 the joint federal bank regulatory agencies issued an interim final rule that allowed banking organizations that implemented ASU 2016-13, “Financial Instruments-Credit Losses (Topic 326) – Measurement of Credit Losses on Financial Instruments” (“CECL”) in 2020 to mitigate the effects of the CECL accounting standard in their regulatory capital for two years. This two-year delay is in addition to the three-year transition period that the agencies had already made available. The Company adopted the option provided by the interim final rule, which delayed the effects of CECL on its regulatory capital through 2021, after which the effects were phased in over a three-year period from January 1, 2022 through December 31, 2024. Under the interim final rule, the amount of adjustments to regulatory capital deferred until the phase-in period include both the initial impact of the Company’s adoption of CECL on January 1, 2020 and 25% of subsequent changes in the Company’s allowance for credit losses during each quarter of the two-year period ended December 31, 2021. The cumulative amount of the transition adjustments was phased in over a three-year transition period that began on January 1, 2022, was 75% recognized in 2022, 50% recognized in 2023, and 25% recognized in 2024.

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 has total assets of over $10 billion, the Bank is also subject to supervision and regulation by the Consumer Financial Protection Bureau (“CFPB”). The CFPB regulates the offering and provision of consumer financial products and services under the federal consumer financial laws.

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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, 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.

Standards for Safety and Soundness. The Federal Deposit Insurance Act requires the federal bank regulatory agencies to prescribe, by regulation or guideline, operational and managerial standards for all insured depository institutions relating to: (1) internal controls; (2) information systems and audit systems; (3) loan documentation; (4) credit underwriting; (5) interest rate risk exposure; and (6) asset quality. The federal banking agencies have adopted regulations and Interagency Guidelines Establishing Standards for Safety and Soundness to implement these required standards. These guidelines set forth the safety and soundness standards used to identify and address problems at insured depository institutions before capital becomes impaired. Under the regulations, if a regulator determines that a bank fails to meet any standards prescribed by the guidelines, the regulator may require the bank to submit an acceptable plan to achieve compliance, consistent with deadlines for the submission and review of such safety and soundness compliance plans.

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 modified 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 or any other state, subject to federal law requirements, 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. The Bank is subject to restrictions on extensions of credit and certain other transactions between the Bank and the Company or any nonbank affiliate. Generally, these covered transactions with either the Company or any affiliate are limited to 10% of the Bank’s capital and surplus, and all such transactions between the Bank and the Company and all of its nonbank affiliates combined are limited to 20% of the Bank’s capital and surplus. Loans and other extensions of credit from the Bank to the Company or any affiliate generally are required to be secured by eligible collateral in specified amounts. In addition, any transaction between the Bank and the Company or any affiliate are required to be on an arm’s length basis. Federal banking laws also place similar restrictions on certain extensions of credit by insured banks, such as the Bank, to their directors, executive officers, and principal shareholders and their related interests.

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 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. Under federal law, the Bank cannot pay a dividend if, after paying the dividend, the Bank will be “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. The Bank is also subject to limitations on the payment of dividends under Texas law. 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, the CFPB, state attorneys general and state and local consumer protection agencies may also seek to enforce

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consumer protection requirements and obtain these and other remedies, including regulatory sanctions, customer rescission rights and civil money penalties in each jurisdiction in which the Bank operates. Failure to comply with consumer protection requirements may also result in the Bank’s failure to obtain any required regulatory approval for merger or other 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, examination and enforcement authority over depository institutions with total assets of $10 billion or greater and other providers of consumer financial products or services such as the Bank. The CFPB has broad rulemaking authority for a wide range of federal consumer financial laws, including, among other things, the authority to prohibit “unfair, deceptive or abusive” acts and practices. The CFPB can issue cease-and-desist orders against banks and other entities that violate federal consumer financial laws and may also institute a civil action against an entity in violation of federal consumer financial laws in order to impose a civil penalty or injunction.

In October 2024, the CFPB issued a final rule that requires a provider of payment accounts or products, such as a bank, to make data available to consumers free upon request regarding the products or services they obtain from the provider. Any such data provider is also required to make such data available to third parties, with the consumer’s express authorization and through an interface that satisfies formatting, performance and security standards, for the purpose of such third parties providing the consumer with financial products or services requested by the consumer. The CFPB is revisiting this rule after legal challenges and new leadership, pausing the original 2024 rule’s implementation and launching a new rulemaking process focusing on key issues like data security, fee structures for data access, consumer representation, and data privacy.

Customer Information Security. The federal banking agencies have adopted guidelines for safeguarding confidential, personal, nonpublic customer information. These guidelines require each financial institution, under the supervision and ongoing oversight of its board of directors or an appropriate committee thereof, to create, implement and maintain a comprehensive written information security program designed to ensure the security and confidentiality of customer information, protect against any anticipated threats or hazard to the security or integrity of such information and protect against unauthorized access to or use of such information that could result in substantial harm or inconvenience to any customer. The Bank has adopted a customer information security program to comply with these requirements.

 

Deposit Insurance Assessments. The deposits of the Bank are insured up to applicable limits by the DIF, and the Bank must pay deposit insurance assessments to the FDIC for such deposit insurance protection. A depository institution’s DIF assessment is calculated by multiplying its assessment rate by the assessment base, which is defined as the average consolidated total assets less the average tangible equity of the depository institution. The initial base assessment rate is based on its capital level and CAMELS ratings, certain financial measures to assess an institution’s ability to withstand asset related stress and funding related stress and, in some cases, additional discretionary adjustments by the FDIC to reflect additional risk factors.

In October 2022, the FDIC adopted a final rule to increase the initial base deposit insurance assessment rate schedules uniformly by 2 basis points beginning with the first quarterly assessment period of 2023. The increased assessment is intended to increase the likelihood that the DIF reserve ratio would reach the statutory minimum of 1.35% by the statutory deadline prescribed under the FDIC’s amended restoration plan.

In November 2023, the FDIC adopted a final rule to implement a special assessment to recover the losses to the DIF associated with several bank failures that occurred during early 2023. The assessment base for the special assessment was equal to estimated uninsured deposits reported as of December 31, 2022, adjusted to exclude the first $5 billion, to be collected at a quarterly rate of approximately 3.36 basis points for an anticipated total of eight quarterly assessment periods, beginning in the first quarter of 2024. Under the final rule, the estimated loss pursuant to the systemic risk determination will be periodically adjusted, and the FDIC has retained the ability to cease collection early, extend the special assessment collection period and impose a final shortfall special assessment on a one-time basis. The extent to which any additional future assessments will impact the Company’s future deposit insurance expense is currently uncertain.

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 at least two unaffiliated networks for routing transactions on each debit or prepaid product. On October 25, 2023, the Federal Reserve Board issued a proposal under which

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the maximum permissible interchange fee for an electronic debit transaction would be the sum of 14.4 cents per transaction and 4 basis points multiplied by the value of the transaction. Furthermore, the fraud-prevention adjustment would increase from a maximum of 1 cent to 1.3 cents per debit card transaction. The proposal would adopt an approach for future adjustments to the interchange fee cap, which would occur every other year based on issuer cost data gathered by the Federal Reserve Board from large debit card issuers. The extent to which any such proposed changes in permissible interchange fees will impact the Company’s future revenue is uncertain.

Concentrated Commercial Real Estate Lending. 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: 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 communities, 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 CRA record 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 financial holding company or a bank holding company, the CRA performance records 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.

In 2023 the OCC, FRB and FDIC issued a final rule to modernize their respective CRA regulations. The revised rules would substantially alter the methodology for assessing compliance with the CRA, with material aspects taking effect January 1, 2026 and revised data reporting requirements taking effect January 1, 2027. The revised CRA regulations have been subject to an injunction since March 29, 2024. On July 16, 2025, the OCC, FRB, and FDIC issued a joint proposal to rescind the 2023 modernization rule. The agencies continue to apply the CRA rules as they existed before the 2023 modernization, considering the injunction and pending finalization of the rescission of the modernization rule.

Anti-Money Laundering and Anti-Terrorism Legislation. A major focus of governmental policy on financial institutions has been aimed at combating money laundering and terrorist financing. The U.S. Bank Secrecy Act (“BSA”) and the USA PATRIOT Act of 2001 (the “USA Patriot Act”) require financial institutions to develop programs to prevent them from being used for, and to detect and deter, money laundering, terrorist financing, and other illegal activities. 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 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. The regulations also 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 financial, legal and reputational consequences for the institution and could block or substantially delay a merger or other acquisition transaction.

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,

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withdrawn, set off or transferred in any manner without a license from OFAC. Failure to comply with these sanctions could have serious financial, legal and reputational consequences, including substantial delay or blocking of a merger or other acquisition transaction.

Cybersecurity. The federal banking regulators regularly issue new guidance and standards, and update existing guidance and standards, regarding cybersecurity intended to enhance cyber risk management among financial institutions. Financial institutions are expected to comply with such guidance and standards and to accordingly develop appropriate security controls and risk management processes. If the Company fails to observe such regulatory guidance or standards, the Company could be subject to various regulatory sanctions, including financial penalties.

Banking organizations are required to notify their primary banking regulator within 36 hours of determining that a “computer-security incident” has materially disrupted or degraded, or is reasonably likely to materially disrupt or degrade, the banking organization’s ability to carry out banking operations or deliver banking products and services to a material portion of its customer base, its businesses and operations that would result in material loss, or its operations that would impact the stability of the United States.

State regulators have also been increasingly active in implementing privacy and cybersecurity standards and regulations. Recently, several states have adopted regulations requiring certain financial institutions to implement cybersecurity programs, and many states, including Texas, have also recently implemented or modified their data breach notification, information security and data privacy requirements. The Company expects this trend of state-level activity in those areas to continue and are continually monitoring developments in the states in which its customers are located.

Risks and exposures related to cybersecurity attacks, including litigation and enforcement risks, are expected to be elevated for the foreseeable future due to the rapidly evolving nature and sophistication of these threats, as well as due to the expanding use of Internet banking, mobile banking and other technology-based products and services by the Company and its customers.

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 all or part of an investment could be lost.

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Risks Associated with the Company’s Business

Interest Rate Risks

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.

Interest rates are highly sensitive to many factors that are beyond the Company’s control, including general economic conditions, inflationary trends, changes in government spending and debt issuances and policies of various governmental and regulatory agencies and, in particular, the Federal Open Market Committee. 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, such as decreased demand due to higher interest rates, 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. Beginning early in 2022, in response to growing signs of inflation, the Federal Reserve Board increased interest rates rapidly; however, interest rates have decreased following three cuts to the Federal Funds rate by the Federal Reserve Board in 2024, and an additional three cuts in 2025 in response to declining inflation. New appointments to the Federal Reserve Board, or increased political pressures on the Federal Reserve Board, could impact monetary policy, which will directly impact our liquidity, results of operations, financial condition and capital position. Although the inflationary outlook in the United States has improved, it remains above the Federal Reserve Board’s target and the Federal Reserve Board may take further actions to mitigate inflationary pressures. Further reductions in interest rates by the FOMC could exacerbate inflationary pressures. If heightened inflation continues, sustained higher interest rates by the FOMC may be needed, which could push down asset prices and weaken economic activity. A deterioration in economic conditions in the United States and our markets could result in a further increase in loan delinquencies and non-performing assets, decreases in loan collateral values and a decrease in demand for our products and services, all of which, could adversely affect our business, financial condition and results of operations.

Rapid changes in interest rates may make it difficult for the Company to balance its loan and deposit portfolios. 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 also could 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. Decreasing interest rates reduces the Company’s yield on its variable rate loans and on its new loans, which reduces its net interest income. In addition, lower interest rates may reduce the Company’s realized yields on investment securities which would reduce its net interest income and cause downward pressure on net interest margin in future periods. 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.

The Company is unable to predict changes in interest rates, which are affected by factors beyond its control, including inflation, deflation, recession, unemployment, money supply, and other changes in financial markets.

Credit and Lending Risks

The Company’s business depends on its ability to successfully manage credit risk.

The Company’s business depends on its ability to successfully measure and manage credit risk. As a lender, the Company is exposed to the risk that the principal of, or interest on, a loan will not be repaid timely or at all or that the value of any collateral supporting a loan will be insufficient to cover the Company’s outstanding exposure. In addition, the Company is exposed to risks with respect to the period of time over which the loan may be repaid, risks relating to proper loan underwriting, risks resulting from changes in economic and industry conditions, and risks inherent in dealing with individual loans and borrowers. The creditworthiness of a borrower is affected by many factors including local market conditions and general economic conditions. If the overall economic climate in the United States, generally, or the Company’s market areas, specifically, experiences material disruption, the Company’s borrowers may experience difficulties in repaying their loans, the collateral the Company holds may decrease in value or become illiquid, and the level of nonperforming loans, charge-offs and delinquencies could rise and require significant additional provisions for credit losses. Additional factors related to the credit quality of commercial loans include the quality of the management of the

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business and the borrower's ability to properly evaluate changes in the supply and demand characteristics affecting their market for products and services, to evaluate regulatory changes affecting their products and services, such as climate change regulation, and to effectively respond to those changes. Additional factors related to the credit quality of commercial real estate loans include tenant vacancy rates and the quality of management of the property.

In addition, financial markets and global supply chains may be adversely affected by the current or anticipated impact of military conflict, including conflicts in Ukraine and the Middle East, terrorism or other geopolitical events. Current economic conditions are significantly affected by elevated interest rates and levels of inflation. Continuing inflationary pressures in 2026 could lead to increased costs to the Company’s customers, making it more difficult for them to repay their loans or other obligations, which would increase the Company’s credit risk.

Despite recent interest rate cuts, any future need to increase rates to address persistent or renewed inflationary pressures could increase borrowing costs for customers, potentially leading to reduced loan demand, increased credit risk, and weakened asset values in the Company’s lending portfolio. Changes in trade policies by the United States or other countries, such as tariffs or retaliatory tariffs, could further adversely impact the financial markets and the global economy, and any economic countermeasures by the affected countries or others could exacerbate market and economic instability, and may cause inflation which could impact the prices of products sold by the Company’s borrowers and have the potential to reduce demand for their products impacting their profitability and making it difficult for borrowers to repay their loans. The Company’s general business strategy may be adversely affected by any such economic downturn, volatile business environment, hostile third-party action or unpredictable and unstable market conditions. Further, evolving responses from federal and state governments and other regulators, and the Company’s customers or vendors, to new challenges such as climate change have impacted and could continue to impact the economic and political conditions under which the Company operates, which could have a material adverse effect on the Company’s business, financial condition and results of operations.

The Company’s risk management practices, such as monitoring the concentration of the Company’s loans within specific industries and the Company’s credit approval, review and administrative practices, may not adequately reduce credit risk, and the Company’s credit administration personnel, policies and procedures may not adequately adapt to changes in economic or any other conditions affecting customers and the quality of the loan portfolio. Many of the Company’s loans are made to businesses that are less able to withstand competitive, economic and financial pressures than larger borrowers. Consequently, the Company may have significant exposure if any of these borrowers becomes unable to pay their loan obligations as a result of economic or market conditions, or personal circumstances, such as divorce or death. A failure to effectively measure and limit the credit risk associated with the Company’s loan portfolio may result in loan defaults, foreclosures and additional charge-offs, and may require the Company to significantly increase its allowance for credit losses, each of which could adversely affect the Company’s net income. As a result, the Company’s inability to successfully manage credit risk could have a material adverse effect on the Company’s business, financial condition and results of operations.

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 could 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, including inflation and recession, 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 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

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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. In addition, due to the large number of oil and gas companies in the Company’s market areas, the volatility 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, tariff or trade policies, inflation, an increase or decline in commodity prices, recession, weather extremes, 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 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.

Approximately 80.0% of the Company’s total loans as of December 31, 2025, consisted of loans included in the real estate loan portfolio, with 29.5% in commercial real estate (including farmland and multifamily residential), 37.9% in residential real estate (including home equity) and 12.6% in construction, 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. The market value for real estate can fluctuate significantly over a relatively short period as a result of conditions in the Company’s primary market areas, due to economic downturns, changes in the economic health of industries heavily concentrated in a particular market area, housing supply, or changes in market interest rates. 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.

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 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, 2025, commercial real estate (including farmland and multifamily residential) and commercial loans comprised approximately 40.1% of the Company’s loan portfolio. In general, commercial real estate loans and commercial loans 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 may be adversely affected by weaknesses in the commercial real estate market.

As of December 31, 2025, commercial real estate loans (including multifamily residential and excluding farmland) comprised approximately 26.5% of the Company’s loan portfolio. Commercial real estate loans generally involve a greater degree of credit risk than residential real estate loans because they typically have larger balances and are more affected by adverse conditions in the economy. Because payments on loans secured by commercial real estate often depend upon the successful operation and management of the properties and the businesses which operate from within them, repayment of such loans may be affected by factors outside the borrower’s control, such as adverse conditions in the real estate market or the economy or changes in government regulations or policies. Commercial real estate markets continue to be impacted by the economic disruptions caused by the COVID-19 pandemic. The pandemic has also been a catalyst for the evolution of various remote work options that could have an adverse effect on the long-term performance of some types of office properties within the Company’s commercial real estate portfolio. A failure by the Company to have adequate risk management policies, procedures and controls could adversely affect the Company’s ability to increase this

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portfolio going forward and could result in an increased rate of delinquencies in, and increased losses from, this portfolio, which, accordingly, could have a material adverse effect on the Company’s business, financial condition and results of operations.

The Company’s Warehouse Purchase Program balances can fluctuate widely.

Because Warehouse Purchase Program balances are contingent upon residential mortgage lending activity, changes in the residential real estate market nationwide can lead to wide fluctuations of balances in this product, materially impacting both interest and non-interest income. Additionally, Warehouse Purchase Program period-end balances are generally higher than the average balance during the period due to increased mortgage activity that occurs at the end of a month, which can significantly impact the Company’s reported capital ratios.

The Company’s loan portfolio, and specifically its energy lending portfolio, could be adversely affected by declines in the prices of oil and natural gas, as well as other factors.

As of December 31, 2025, funded commitments to oil and gas production and service companies represented 2.0% of total loans, excluding Warehouse Purchase Program loans. Further, energy production and related industries represent a large part of the economies in many of the Company’s market areas. The energy industry and market prices for oil and gas have historically been cyclical. Global wars, military conflicts, terrorism, governmental and social responses to environmental issues and climate change, or other geopolitical events as well as actions by members of the Organization of Petroleum Exporting Countries can impact global crude oil and gas production levels and lead to significant volatility in global oil and gas supplies and market prices. Prolonged periods of low oil and gas commodity prices could negatively impact the Company’s borrowers' ability to pay, particularly those that utilize higher-cost production technologies such as hydraulic fracking and horizontal drilling, as well as oilfield service providers, energy equipment manufacturers and transportation suppliers, among others. Future oil price volatility could have negative impacts on the U.S. economy, in particular, the economies of energy-dominant states such as Texas, and the Company’s borrowers and customers. Such negative impacts could result in an increased rate of loan delinquencies and credit losses which, accordingly, could have a material adverse effect on the Company’s business, financial condition and results of operations.

The economy in Texas as a whole could be negatively impacted if there are a high number of jobs lost related to a decline in oil production in the state, or if the impact of lower oil prices negatively affects other industries. A decline in the Texas economy related to oil production decline could impact the Company’s loan portfolios outside of the energy portfolio, if borrowers experience unemployment or loss of income and are unable to make payments on their loans.

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 to repurchase if it 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. The Company believes it has underwriting and operational controls in place to prevent or detect such fraud, but these controls may not be effective in detecting fraud and the Company could experience fraud losses or incur costs or other damage related to such fraud, at levels that adversely affect financial results or reputation. The Company’s lending customers may also experience fraud in their businesses, which could adversely affect their ability to repay their loans or make use of services. The Company’s and its customers’ exposure to fraud may increase the Company’s financial risk and reputation risk as it may result in unexpected loan losses that exceed those that have been provided for in the allowance for credit losses. Some level of fraud loss is unavoidable, and the risk of loss cannot be eliminated.

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, and there is a risk that hazardous or toxic substances could be found on these properties. If hazardous or toxic 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

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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.

Liquidity Risks

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

Liquidity is essential to the Company’s business, and it monitors and manages its liquidity daily. An inability to raise funds through deposits, borrowings, the sale of loans and other sources could have a substantial negative effect on the Company’s 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 and deterioration in credit markets.

The Company relies on customer deposits as a significant source of funding, and its deposits may decrease in the future.

The Company relies on customer deposits as a significant source of funding. Competition among U.S. banks for customer deposits is intense, may increase the cost of deposits or prevent new deposits, and may otherwise negatively affect the Company’s ability to grow its deposit base. The Company’s deposit accounts may decrease in the future, and any such decrease could have an adverse impact on the Company’s sources of funding, which impact could be material. Any changes the Company makes to the rates offered on its deposit products to remain competitive with other financial institutions may adversely affect its profitability and liquidity. The demand for the deposit products the Company offers may also decline due to a variety of factors such as demographic patterns, changes in customer preferences, changes in interest rates, payment of interest on demand deposits by other financial institutions, reductions in consumers’ disposable income, regulatory actions that decrease customer access to particular products or the availability of competing products, including from new financial technology competitors or competitors that provide customers with alternate investment options.

Negative developments affecting the banking industry, and resulting media coverage, have eroded customer confidence in the banking system.

Any future bank failures like those experienced in 2023 or similar events may negatively impact customer confidence in the safety and soundness of regional banks and may generate market volatility among publicly traded bank holding companies and, in particular, regional banking organizations like the Company. As a result, customers may choose to maintain deposits with larger financial institutions or invest in higher yielding short-term fixed income securities, all of which could materially adversely impact the Company’s liquidity, loan funding capacity, net interest margin, capital and results of operations. While the Department of the Treasury, the Federal Reserve Board, and the FDIC historically have taken action to ensure that depositors of failed banks had access to their deposits, including uninsured deposit accounts, there is no guarantee that regional bank failures or bank runs will not occur in the future and, if they were to occur, they may have a material and adverse impact on customer and investor confidence in regional banks negatively impacting the Company’s liquidity, capital, results of operations and stock price.

The Company may need to raise additional capital in the future and such capital may not be available when needed on acceptable terms 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. If needed, the Company’s ability to raise additional capital will depend on many things, including conditions in the capital markets at that time, which are outside its control, and its financial performance.

Such capital may not be available to the Company on acceptable terms or at all. Any occurrence that may limit the Company’s access to the capital markets, such as a decline in the confidence of investors, depositors of the 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.

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The fair value of the Company’s investment securities can fluctuate due to factors outside of its control.

Factors beyond the Company’s control can significantly influence the fair value of securities in its investment portfolio and can cause potential adverse changes to the fair value of these securities. These factors include, but are not limited to, rating agency actions in respect of the securities, defaults by the issuer or with respect to the underlying securities, and changes in market interest rates and continued instability in the capital markets. Any of these factors, among others, could cause an increase in the amount of the allowance for credit losses as it pertains to available for sale or held-to-maturity debt securities, which could have an adverse effect on the Company’s business, results of operations, financial condition and future prospects. The process for determining if a security has a credit loss often requires complex, subjective judgments about whether there has been a significant deterioration in the financial condition of the issuer, whether management has the intent or ability to hold a security for a period of time sufficient to allow for any anticipated recovery in fair value, the future financial performance and liquidity of the issuer and any collateral underlying the security, and other relevant factors.

Strategic Risks

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 in the future. 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, competition and heightened regulatory scrutiny, may impede or prohibit the opening of new banking centers and the completion of acquisitions. Further, the 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 and profitability could be negatively affected.

The Company faces a variety of risks and difficulties pursuing its growth strategy, 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;
•
managing execution risks;
•
maintaining adequate regulatory capital; and
•
scaling technology platforms.

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 is subject to risks related to the pending acquisition of Stellar and the recent acquisitions of American and Southwest.

The Company recently completed the acquisitions of American and Southwest and the acquisition of Stellar is pending. The completed and pending acquisitions involve strategic and operational risks and uncertainties, including the risk that the Stellar acquisition will not close; the diversion of management's time on issues related to the acquisitions and integration rather than ongoing business concerns; unexpected transaction costs, including the costs of integrating operations; the risk that the businesses will not be integrated successfully or that such integration may be more difficult, time-consuming or costly than expected; the potential failure to fully or timely realize expected revenues and revenue synergies; the risk of deposit and customer attrition; regulatory enforcement and litigation risk; unexpected operating and other costs; the risk of customer and employee loss and business disruptions and increased

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competitive pressures and solicitations of customers by competitors. These risks, individually or in combination, 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. Additionally, the market for bank acquisitions was significantly and adversely impacted in 2023, by a number of factors, including:

•
increased regulatory scrutiny;
•
elevated interest rates;
•
declining financial institution stock value
•
lower fair market values of investment securities portfolios; and
•
high-profile regional bank failures and the resulting effects therefrom.

Although most of these factors have either significantly subsided or no longer remain, to the extent these factors, or other factors outside of the Company’s control, return, persist, or arise, the Company’s ability to pursue and consummate acquisitions may be adversely impacted.

Acquisitions of financial institutions, such as the recent acquisitions of Southwest, American, Lone Star and First Bancshares of Texas, Inc., and the pending acquisition of Stellar, involve operational risks and uncertainties. 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 transaction. The integration process may also require significant time and attention from the Company’s management that they would otherwise direct at servicing existing business and developing new business. The Company’s inability to find suitable acquisition candidates or 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. Acquisitions may also result in potential dilution to existing shareholders of the Company’s earnings per share if the Company issues common stock in connection with an acquisition.

Regulatory approvals for acquisitions may be delayed, impeded, or prohibited.

Acquisitions by financial institutions are subject to approval by a variety of federal and state regulatory agencies. If the Company fails to receive the appropriate regulatory approvals, it will not be able to consummate an acquisition that it believes is in the Company’s best interests. Among other things, the Company’s regulators consider its capital, liquidity, profitability, regulatory compliance, including with respect to anti-money laundering obligations, consumer protection laws and CRA obligations and levels of goodwill and intangibles when considering acquisition and expansion proposals.Regulatory approvals could be delayed, impeded, restrictively conditioned or denied due to existing or new regulatory issues the Company has, or may have, with regulatory agencies, including, without limitation, issues related to Bank Secrecy Act compliance, Community Reinvestment Act issues, fair lending laws, fair housing laws, consumer protection laws, unfair, deceptive, or abusive acts or practices regulations and other similar laws and regulations. The Company may fail to pursue, evaluate or complete strategic and competitively significant acquisition opportunities as a result of its inability, or perceived or anticipated inability, to obtain regulatory approvals in a timely manner, under reasonable conditions or at all. Difficulties associated with potential acquisitions that may result from these factors could have a material adverse effect on the Company’s business, financial condition and results of operations.

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.

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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, 2025, the Company’s goodwill totaled $3.50 billion. Although the Company has not recorded any such impairment charges since it initially recorded the goodwill, the Company’s future evaluations of goodwill could result in findings of impairment and related write-downs, which may have a material adverse effect on its financial condition and results of operations.

Operational Risks

The Company’s accounting estimates and risk management processes rely on analytical and forecasting models and tools that may prove to be inaccurate.

The processes the Company uses to estimate its expected 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, depend 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.

An interruption in the Company’s information systems or compromise 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 and store sensitive data, including those maintained with the Company’s service providers and vendors. Any failure, interruption or compromise in security of these systems, whether caused by physical damage, internal or external threat actors, viruses or other malware, phishing attempts, brute force attacks, exploiting software vulnerabilities (including “zero-day attacks”), ransomware, supply chain attacks, and other events 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 customer relationship management, general ledger, deposits, servicing or loan origination systems. The amount of cyber insurance coverage that the Company maintains and expects would apply in the event of various cyberattack scenarios 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. Security measures that the Company, with the help of third-party service providers, has implemented or intends to continue to implement to prevent damage from cyberattacks may not entirely mitigate these risks. In addition, increases in cyber threats and the sophistication of bad actors, advances in computer capabilities, new discoveries in the field of cryptography and/or artificial intelligence, or other developments could result in a compromise of the programs and processes that the Company and its third-party service providers use to protect client transaction data. The Company’s efforts to maintain the security and integrity of its information systems and its measures to manage the risks of a security incident or disruption may not be effective, and attempted security incidents or disruptions could be successful or damaging. Security incidents also may occur as a result of remote working arrangements.

Compromises of the Company’s or vendors’ systems, thefts of data and other incidents and criminal activity may result in significant disruptions to the Company’s operations, significant costs to respond or remediate losses, damage to the Company’s customer relationships, regulatory scrutiny and enforcement, civil litigation and possible financial liability and/or loss of future business opportunities due to reputational damage, sanctions, fines or penalties (which may not be covered by the Company’s insurance policies), negative publicity, release of sensitive and/or confidential information, diversion of the attention of management away from the operation of our business, increases in operating expenses, and lost revenues any of which could have a material adverse effect on the Company’s results of operations, financial condition and cash flows. Even the most well-protected information, networks, systems and facilities remain potentially vulnerable because attempted security incidents, particularly cyberattacks and intrusions, or disruptions will occur in the future, and because the techniques used in such attempts are rapidly and constantly evolving and generally are not recognized until launched against a target, in some cases are designed not to be detected and, in fact, may not be detected for a period of time or at all. Accordingly, the Company may be unable to anticipate or be prepared for these techniques or to implement adequate security barriers or other preventative measures, and thus it is not possible for the Company to entirely mitigate this risk. Data privacy laws also continue to evolve, with states increasingly proposing or enacting legislation that relates to data privacy and data protection. The Company may be required to incur additional expense to comply with these evolving regulations and could face penalties for violating any of these regulations.

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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. The Company also may not succeed in anticipating its future technology needs, the technology demands of its customers, or the competitive landscape for technology. 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. The Company’s programs that are intended to prevent or limit the effects of cybersecurity risk may not be sufficient to eliminate all unauthorized transactions or unauthorized access to customer information. 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, which may fail to provide adequate services.

The Company relies on certain external vendors to provide products and services necessary to maintain its day-to-day operations. 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, but the Company 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, and reputational risk. 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.

The Company’s business may be adversely affected by consolidations of technology vendors.

The Company relies on certain external vendors for core products and services. Consolidations among core vendors may have the effect of decreasing price competition that may lead to higher vendor costs and may also increase systemic risk from vendors that could affect the Company’s operations.

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 customers’ service providers, aggregators, retailers and other third parties who maintain data relating to the Company’s customers who obtain a service from the third party and that involve the theft of customer data, including the theft of customers’ account data, debit card, credit card, wire transfer and other identifying and/or access information used to obtain the services of 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. 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. If a data breach of considerable magnitude were to occur at one or more service providers, aggregators, retailers or another third party, the Company’s business, financial condition and results of operations may be adversely affected.

The Company is subject to losses due to fraudulent and negligent acts.

Financial institutions are inherently exposed to fraud risk. Fraudulent activity can take many forms and has escalated as more tools for accessing financial services emerge, such as real-time payments. Fraud schemes are broad and continuously evolving. A fraud can be perpetrated by a customer of the Company, an employee, a vendor, or members of the general public. The Company is subject to fraud risk in connection with the origination of loans, ACH transactions, wire transactions, digital payments, ATM transactions, checking and other transactions. Although the Company seeks to mitigate fraud risk and losses through continued investment in systems, resources, and controls, the Company’s efforts may not be effective in detecting fraud and the Company could experience fraud losses or incur costs or other damage related to such fraud, at levels that adversely affect its financial results or reputation.

22

 

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, which is reviewed and overseen by the Company’s Risk Committee. This framework consists 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. This risk management framework may not be effective under all circumstances, and it may not adequately identify, manage or mitigate all or 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 risk arising from the failure or circumvention of internal controls and procedures.

The Company’s internal controls, including fraud detection and controls, disclosure controls and procedures, and corporate governance procedures are based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the controls and procedures are met. Any failure or circumvention of controls and procedures; failure to comply with regulations related to controls and procedures; or failure to comply with corporate governance procedures could have a material adverse effect on the Company’s reputation, business, financial condition and results of operations, including subjecting the Company to litigation, regulatory fines, penalties or other sanctions. Furthermore, notwithstanding the proliferation of technology and technology-based risk and control systems, the Company’s business ultimately relies on people as its greatest resource, and the Company is subject to the risk that they make mistakes or engage in violations of applicable policies, laws, rules or procedures that in the past have not, and in the future may not always be prevented by the Company’s technological processes or by the controls and other procedures intended to prevent and detect such errors or violations. Human errors, malfeasance and other misconduct, even if promptly discovered and remediated, can result in reputational damage or legal risk and have a material adverse effect on the Company’s business, financial condition and results of operations.

The use of new technologies, including artificial intelligence (“AI”) and machine learning, may result in reputational harm, increased regulatory scrutiny and increased liability.

The banking industry is subject to rapid and significant technological change. To compete effectively, the Company and its third-party (or fourth party) vendors may use new and evolving technologies, including AI and machine learning, to help improve its customer service and products and to automate certain business decisions or risk management practices. The Company’s direct or indirect use of AI and machine learning is subject to risks that algorithms and datasets are flawed or may be insufficient or contain biased information. In addition, the models and processes relating to AI and machine learning are not always transparent, which could increase the risk of unintended deficiencies. These deficiencies could result in inaccurate and ineffective decisions, predictions or analysis, which could subject the Company to competitive harm, legal liability, increased regulatory scrutiny, reputational harm or other consequences that the Company may not be able to predict, any of which could negatively affect the Company’s financial condition and results of operations.

Further, the legal and regulatory environment relating to AI is uncertain and rapidly evolving, both in the U.S. and internationally, and includes regulatory schemes targeted specifically at AI as well as provisions in intellectual property, privacy, consumer protection, employment, and other laws applicable to the use of AI. These evolving laws and regulations could require changes in the Company’s implementation of AI technology and increase the Company’s compliance costs and the risk of non-compliance.

Legal, Regulatory and Compliance Risks

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, 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

23

 

implementation of such Act. Additional legislation and regulations or regulatory policies and other 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. Government authorities, including the bank regulatory agencies, are pursuing aggressive enforcement actions with respect to compliance and other legal matters involving financial activities, which heightens the risks associated with actual and perceived compliance failures. The exercise of this regulatory discretion and power could have a negative impact on the Company. Further, failure to comply with laws, regulations or policies could result in sanctions by regulatory agencies, civil money penalties and/or reputation damage. In some instances, directives issued to enforce such actions may be confidential and thus, in those instances, the Company would not be permitted to publicly disclose these actions. Any of the foregoing could have a material adverse effect on the Company’s business, financial condition and results of operations. The Company could face increased scrutiny or be viewed as higher risk by regulators or investors, which could have a material adverse effect on the Company’s business, financial condition, and results of operations.

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 their 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, 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 were found to have infringed 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’s financial condition and results of operations may be adversely affected by changes in accounting policies, standards and interpretations.

The Financial Accounting Standards Board (“FASB”) and other bodies that establish accounting standards periodically change the financial accounting and reporting standards governing the preparation of the Company’s financial statements. Additionally, those bodies that establish and interpret the accounting standards (such as the FASB, SEC and banking regulators) may change prior interpretations or positions on how these standards should be applied. Changes resulting from these new standards may result in materially different financial results and may require that the Company changes how it processes, analyzes and reports financial information and that it changes financial reporting controls.

The preparation of consolidated financial statements in conformity with generally accepted accounting principles (“GAAP”), including the accounting rules and regulations of the SEC and the FASB, requires management to make significant estimates and assumptions that impact the Company’s financial statements by affecting the value of its assets or liabilities and results of operations. Some of the Company’s accounting policies are critical because they require management to make difficult, subjective and complex judgments about matters that are inherently uncertain and because materially different amounts may be reported if different estimates or assumptions are used. If such estimates or assumptions underlying its financial statements are incorrect, the Company’s financial condition and results of operations could be adversely affected.

24

 

Environmental, Social and Governance Risks

Severe weather, natural disasters and other adverse external climate events could significantly impact the Company’s business and customers.

A significant portion of the Company’s business is generated from markets that have been, and may continue to be, damaged by hurricanes, floods, tropical storms, tornadoes and other natural disasters and adverse weather, which may grow more severe and could have a significant impact on the Company’s ability to conduct business. In addition, such events could affect the stability of the Company’s deposit base, impair the ability of borrowers to repay outstanding loans, impair the value of collateral securing loans, cause significant property damage, result in loss of revenue and/or cause the Company to incur additional expenses. Furthermore, the occurrence of any such event in the future could have a material adverse effect on the Company’s business, which, in turn, could have a material adverse effect on the Company’s financial condition and results of operations.

Climate change, including the regulatory response thereto, could have a material negative impact on the Company and its customers.

The Company’s business, as well as the operations and activities of its customers, could be negatively impacted by climate change. Climate change presents both immediate and long-term risks to the Company and its customers and these risks are expected to increase over time. These risks include (1) operational risk from the physical effects of climate events on the Company’s facilities and other assets as well as those of customers; (2) credit risk from borrowers with significant exposure to climate risk; and (3) reputational risk from stakeholder concerns about the Company’s practices related to climate change, the Company’s carbon footprint and the Company’s business relationships with customers who operate in carbon-intensive industries. The Company’s business, reputation and ability to attract and retain employees may also be harmed if its response to climate change is perceived to be ineffective or insufficient.

Climate change exposes the Company to physical risk as its effects may lead to more frequent and more extreme weather events, such as prolonged droughts or flooding, tornadoes, hurricanes, wildfires and extreme seasonal weather; and longer-term shifts, such as increasing average temperatures, ozone depletion and rising sea levels. Such events and long-term shifts may damage, destroy or otherwise impact the value or productivity of the Company’s properties and other assets; reduce the availability or increase the cost of insurance; and/or disrupt the Company’s operations and other activities through prolonged outages. Such events and long-term shifts may also have a significant impact on the Company’s customers, which could amplify credit risk by diminishing borrowers’ repayment capacity or collateral values, and other businesses counterparties of the Company, which could have a broader impact on the economy, supply chains and distribution networks.

Climate change also exposes the Company to risks associated with the transition to a less carbon-dependent economy. These transition risks may result from changes in policies, laws and regulations, technologies, and/or market preferences to address climate change. Such changes could have a material adverse effect on the Company’s business, results of operations, financial condition and/or reputation, in addition to having a similar impact on the Company’s customers. The Company has customers who operate in carbon-intensive industries, such as the oil and gas industry, that are exposed to risks related to the transition to a less carbon-dependent economy, as well as customers who operate in low-carbon industries that may be subject to risks associated with new technologies. However, under the current administration, federal policy has shifted to reduce the emphasis on climate change initiatives and environmental regulations. This includes scaling back federal participation in international agreements, and reducing regulatory pressures on businesses, including banks, to address climate-related risks. Federal legislative and regulatory proposals aimed at combating climate change have and may continue to face greater scrutiny or diminished priority. However, state and local regulations or guidance relating to climate change, as well as changes in consumers’ and businesses’ behaviors and business preferences, continue to affect our business operations.

Expectations from customers, regulators, investors, and other stakeholders with respect to the Company’s environmental, social and governance practices may impose additional costs on the Company or expose it to new or additional risks.

Banking regulators and supervisory authorities, investors and other stakeholders have increasingly viewed financial institutions as important in helping to address the risks related to climate change both directly and with respect to their customers, which may result in financial institutions coming under increased pressure regarding the disclosure and management of their climate risks and related lending and investment activities. Given that climate change could impose systemic risks upon the financial sector, either via disruptions in economic activity resulting from the physical impacts of climate change or changes in policies as the economy transitions to a less carbon-intensive environment, the Company faces regulatory risk of increasing focus on its resilience to climate-related risks, including in the context of stress testing for various climate stress scenarios. Ongoing legislative or regulatory uncertainties and changes regarding climate risk management and practices may result in higher regulatory, compliance, credit and reputational risks and costs.

25

 

Additionally, while investors and shareholder advocates continued to place emphasis on how corporations address Environmental, Social and Governance (“ESG”) issues in their business strategy when making investment decisions and when developing their proxy recommendations, the Executive Orders issued by the President of the United States in early 2025 may impact the ESG initiatives of investors and the Company’s decisions with respect to ESG. Regardless of the outcome, the Company could incur meaningful costs with respect to its ESG efforts and if such efforts are negatively perceived, the Company’s reputation and stock price may suffer.

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; and
•
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.

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.

There may be substantial fluctuations in the Company’s stock price.

The trading price for the Company’s common stock may fluctuate significantly in response to a variety of factors outside the Company’s control, including, among other things:

•
actual or anticipated variations in quarterly results of operations;
•
changes in recommendations by securities analysts;
•
failure to meet analysts’ revenue or earnings estimates;
•
changes in ratings from national rating agencies on the securities in the Company’s investment portfolio;
•
operating and stock price performance of other companies that investors deem comparable to the Company;
•
news reports relating to trends, concerns and other issues in the financial services industry;
•
perceptions in the marketplace regarding the Company and/or its competitors;

26

 

•
new technology used, or services offered, by competitors;
•
cybersecurity breaches;
•
actions by institutional shareholders;
•
significant acquisitions or business combinations, strategic partnerships, joint ventures or capital commitments by or involving the Company or its competitors;
•
failure to integrate acquisitions or realize anticipated benefits from acquisitions;
•
changes in government regulations;
•
geopolitical conditions such as acts or threats of terrorism or military conflicts;
•
general market conditions, including real or anticipated changes in the strength of the Texas and Oklahoma economies; and
•
industry factors and general economic and political conditions and events, such as economic slowdowns or recessions, presidential and congressional elections, interest rate changes, oil price volatility or credit losses.

General Risks

Negative publicity could damage the Company’s reputation and business.

Reputation risk, or the risk to earnings and capital from negative public opinion, is inherent in the Company’s business. Negative public opinion could result from the Company’s actual or alleged conduct in any number of activities, including lending practices, corporate governance, regulatory compliance, mergers and acquisitions, and public scrutiny related to environmental, social and governance issues, and disclosure, sharing or inadequate protection of customer information, and from actions taken by government regulators and community organizations in response to that conduct. Negative public opinion could also result from adverse news or publicity that impairs the reputation of the financial services industry generally. Negative public opinion could adversely affect the Company’s ability to keep and attract customers and expose it to adverse legal and regulatory consequences.

Failure to compete effectively for customers could adversely affect the Company’s growth and profitability, which could have a material adverse effect on the Company’s business, financial condition and results of operations.

The Company faces substantial competition in all areas of its operations from a variety of different competitors, many of which are larger and may have more financial resources. These competitors primarily include national, regional, and community banks within the various markets where the Company operates. The Company also faces competition from many other types of financial institutions, including savings and loans, credit unions, finance companies, brokerage firms, insurance companies, financial technology (fintech) companies and other financial intermediaries. The financial services industry could become even more competitive as a result of legislative, regulatory and technological changes and continued consolidation. Also, technology and other changes have lowered barriers to entry and made it possible for non-banks to offer products and services functionally equivalent to those provided by banks. In addition, the emergence, adoption and evolution of new technologies that do not require intermediation, including distributed ledgers such as digital assets and blockchain, as well as advances in robotic process automation, could significantly affect the competition for financial services. The process of eliminating banks as intermediaries, known as “disintermediation,” could result in the loss of fee income, as well as the loss of customer deposits and the related income generated from those deposits. Further, many of the Company’s competitors have fewer regulatory constraints and may have lower cost structures. Additionally, due to their size, many competitors may be able to achieve economies of scale and, as a result, may offer a broader range of products and services as well as better pricing for those products and services than the Company can. Failure to compete effectively for deposit, loan and other banking customers in the Company’s market areas could adversely affect the Company’s growth and profitability, which, in turn, could have a material adverse effect on the Company’s business, financial condition and results of operations.

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.

27

 

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 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.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 1C. CYBERSECURITY

Risk Management and Strategy

The Company’s risk management program is designed to identify, assess, and mitigate risks across various areas and functions, including financial, operational, technological, regulatory, reputational, and legal. Cybersecurity is a critical component of the risk management program. The Company’s information security program is designed to protect the security, availability, integrity, and confidentiality of its computer systems, networks, software and information assets, including customer and other sensitive data.

The structure of the Company’s information security program is designed around the National Institute of Standards and Technology Cybersecurity Framework, regulatory guidance, and other industry standards. In addition, the Company leverages certain industry and government associations, third-party benchmarking, audits, and threat intelligence feeds to facilitate and promote program effectiveness. The Chief Information Security Officer (“CISO”), who reports directly to the Chief Risk Officer (“CRO”), and the Chief Information Officer (“CIO”), who reports directly to the Director of Corporate Strategy, along with key members of their teams, regularly collaborate with peer banks and industry groups to discuss cybersecurity trends, issues and best practices. The information security program is periodically reviewed with the goal of addressing changing threats and conditions.

The Company employs an in-depth, layered, defensive strategy that embraces a “secure by design” philosophy when designing new products, services, and technology. The Company leverages people, processes, and technology as part of its efforts to manage and maintain cybersecurity controls and employs a variety of preventative and detective tools designed to monitor, block, and provide alerts regarding suspicious activity. The Company also actively monitors its email gateways for malicious phishing email campaigns and monitors remote connections as a portion of its workforce has the option to work remotely.

The Company has established processes and systems designed to mitigate cyber risk, including regular and on-going education and training for employees, preparedness simulations and tabletop exercises, and recovery and resilience tests. It engages in regular assessments of its infrastructure, software systems, and network architecture, using internal cybersecurity experts and third-party specialists. The Company also maintains a third-party risk management program designed to identify, assess, and manage risks, including cybersecurity risks, associated with external service providers and its supply chain. The Company leverages internal and external auditors and independent external partners to periodically review its processes, systems, and controls, including with respect to its information security program, to assess their design and operating effectiveness and make recommendations to strengthen its risk management program.

The Company maintains an Information Security Incident Response Policy (“Incident Response Policy”) and related procedures that provide a documented framework for responding to actual or potential cybersecurity incidents, including timely escalation of incidents to the Crisis Management Team, the Chief Executive Officer and/or the Company’s and Bank’s Board of Directors (as appropriate), and notification to the appropriate regulatory and governmental authorities. The Incident Response Policy and related procedures are coordinated through the CRO and key members of management, including but not limited to representatives from the information security, information technology and legal teams that are embedded into the procedures by design. The Incident Response Policy facilitates coordination across multiple parts of the organization and is evaluated at least annually.

To date, the Company has not experienced a cybersecurity incident that has materially impacted its business strategy, results of operations, or financial condition. Despite the Company’s efforts, there can be no assurance that its cybersecurity risk management processes and measures described will be fully implemented, complied with, or effective in protecting its systems and information. The Company faces risks from certain cybersecurity threats that, if realized, are reasonably likely to materially affect its business

28

 

strategy, results of operations or financial condition. See Item 1A. “Risk Factors” in this document for further discussion of the risks associated with an interruption or breach in the Company’s information systems or infrastructure.

 

Governance

The Bank’s Board of Directors is responsible for overseeing the risks associated with cybersecurity threats. The Strategic Technology Oversight Committee (“STOC”) of the Board has primary responsibility for overseeing the technology program, including management’s actions to identify, assess, mitigate, and remediate or prevent material cybersecurity issues and risks. The CISO and the CIO provide quarterly reports to the STOC regarding the information security and technology programs, key enterprise cybersecurity initiatives, and other matters relating to cybersecurity processes. The CISO also reports summaries of key issues, including significant cybersecurity and/or privacy incidents.

In addition to the STOC, the management-level Operations Committee and the Enterprise Risk Management Committee (“ERM Committee”) focus on and provide oversight of the information security program. The ERM Committee reviews and, as appropriate, approves the broad objectives, strategies and policies governing the Company’s protection of data assets and information security framework. The ERM Committee additionally assesses the adequacy of information security practices and reports on cyber risk to the Risk Committee of the Company’s Board of Directors. The Operations Committee is chaired by the Chief Operating Officer and includes the CISO, CIO and other key departmental managers from throughout the Company. This committee generally meets bi-weekly to discuss various operational strategy and issues, including information technology and information security policies, practices, controls, and mitigation and prevention efforts.

The CISO is accountable for managing the enterprise information security department and delivering the information security program. The responsibilities of the information security department include threat detection and prevention, cybersecurity risk assessment, a portion of defense operations, incident management, vulnerability assessment, threat intelligence, and security awareness training. The department also supports the Company’s Third-Party Risk Management program by providing subject-matter expertise and oversight with respect to cybersecurity risks associated with third-party service providers. The Company’s information technology department works together with information security in defense operations and is responsible for business resilience, including identity management.

The Company’s CISO has over 20 years of experience in information technology, cybersecurity, and information security for financial institutions and other businesses. The CISO is a Certified Information Systems Security Professional, a Certified Cloud Security Professional, and a Certified Information Security Manager, and serves as a member of cybersecurity advisory councils. He holds a certificate from the Chief Information Security Certificate Program, Cybersecurity at Carnegie Mellon University – Heinz College of Information Systems and Public Policy.

ITEM 2. PROPERTIES

As of December 31, 2025, the Company conducted business at 283 full-service banking centers. The Company’s principal executive office is located at Prosperity Bank Plaza, 4295 San Felipe, 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 Company also owns or leases various corporate and operations offices. The expiration dates of the leases range from 2026 to 2033 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, 2025:

Geographical Area

 

Number of
Banking Centers

 

 

Number of
Leased Banking
Centers

 

 

Deposits at
December 31, 2025

 

 

 

 

 

 

 

 

 

(dollars in thousands)

 

Bryan/College Station area

 

 

15

 

 

 

—

 

 

$

1,663,547

 

Houston area

 

 

62

 

 

 

13

 

 

 

7,168,130

 

Central Texas area

 

 

31

 

 

 

2

 

 

 

2,156,526

 

Dallas/Fort Worth area

 

 

61

 

 

 

20

 

 

 

5,963,941

 

East Texas area

 

 

22

 

 

 

—

 

 

 

1,118,280

 

West Texas area

 

 

45

 

 

 

9

 

 

 

5,150,871

 

South Texas area

 

 

33

 

 

 

3

 

 

 

3,796,799

 

Central Oklahoma area

 

 

6

 

 

 

1

 

 

 

553,115

 

Tulsa Oklahoma area

 

 

8

 

 

 

2

 

 

 

911,275

 

 

 

 

283

 

 

 

50

 

 

$

28,482,484

 

 

29

 

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

Not applicable.

30

 

PART II.

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Common Stock Information

The Company’s common stock is listed on the New York Stock Exchange under the symbol “PB.” As of February 23, 2026, there were 101,581,522 shares outstanding and 4,894 shareholders of record. The number of beneficial owners is unknown to the Company at this time.

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. Although the Company has declared dividends on its common stock since 1994, and paid quarterly dividends aggregating $2.34 per share for 2025 and $2.26 per share for 2024, the Company could discontinue payment of 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 should 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.

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:

 

 

2025

 

 

2024

 

Fourth Quarter

 

$

0.60

 

 

$

0.58

 

Third Quarter

 

 

0.58

 

 

 

0.56

 

Second Quarter

 

 

0.58

 

 

 

0.56

 

First Quarter

 

 

0.58

 

 

 

0.56

 

Recent Sales of Unregistered Securities

None.

31

 

Securities Authorized for Issuance under Equity Compensation Plans

The following table provides information as of December 31, 2025, regarding the Company’s equity compensation plan under which the Company’s equity securities are authorized for issuance. As of December 31, 2025, the Company had shares of restricted stock outstanding under its 2020 Stock Incentive Plan, which was approved by the Company’s shareholders:

 

 

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

 

 

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

 

 

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

 

 

Plan Category

 

(a)

 

 

(b)

 

 

(c)

 

 

Equity compensation plans approved by security holders

 

 

—

 

 

$

—

 

 

 

1,382,031

 

(1)

Equity compensation plans not approved by security holders

 

 

—

 

 

 

—

 

 

 

—

 

 

 

 

 

—

 

 

$

—

 

 

 

1,382,031

 

 

 

(1)
All of these awards are available under the Company’s 2020 Stock Incentive Plan.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

The following table details the Company’s repurchases of shares of its common stock during the three months ended December 31, 2025:

 

Period

 

Total Number of Shares Purchased

 

 

Weighted Average Price Paid per Share

 

 

Total Number of Shares Purchased as Part of Publicly Announced Plans or Program

 

 

Maximum Number of Shares That May Yet Be Purchased Under the Plan at the End of the Period (1)

 

October 1 - October 31, 2025

 

 

—

 

 

 

—

 

 

 

—

 

 

 

4,464,336

 

November 1 - November 30, 2025

 

 

1,819,342

 

 

$

66.75

 

 

 

1,819,342

 

 

 

2,644,994

 

December 1 - December 31, 2025

 

 

225,000

 

 

$

69.95

 

 

 

225,000

 

 

 

2,419,994

 

Total

 

 

2,044,342

 

 

$

67.10

 

 

 

2,044,342

 

 

 

 

(1) On January 21, 2025, the Company announced a stock repurchase program under which up to 5%, or approximately 4.8 million shares, of its outstanding common stock may be acquired over a one-year period expiring on January 21, 2026, at the discretion of management. On January 26, 2026, the Company announced a stock repurchase program under which up to 5%, or approximately 4.87 million shares, of its outstanding common stock may be acquired over a one-year period expiring on January 26, 2027, at the discretion of management. Under the 2026 stock repurchase program, the Company may repurchase shares from time to time at prevailing market prices, through open-market purchases or privately negotiated transactions, depending upon market conditions. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Financial Condition—Share Repurchases” for additional information.

Insider Trading Arrangements and Policies

The Company has an insider trading policy governing the purchase, sale and other dispositions of the Company’s securities that applies to all Company personnel, including directors, officers, employees and other covered persons. The Company believes that its Inside Information and Insider Trading Policy is reasonably designed to promote compliance with insider trading laws, rules and regulations and listing standards applicable to the Company.

32

 

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, 2020 to December 31, 2025, with the cumulative total return of the S&P 500 Total Return Index and the KBW Nasdaq Regional Banking Index for the same period. Dividend reinvestment has been assumed. The Performance Graph assumes $100 invested on December 31, 2020 in the Company’s common stock, the S&P 500 Total Return Index and the KBW Nasdaq Regional Banking 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.

 

img149291694_0.jpg

 

 

* $100 invested on 12/31/20 in stock or index, including reinvestment of dividends. Fiscal year ended December 31.

 

 

12/20

 

 

12/21

 

 

12/22

 

 

12/23

 

 

12/24

 

 

12/25

 

Prosperity Bancshares, Inc.

 

$

100.00

 

 

$

107.13

 

 

$

111.01

 

 

$

107.23

 

 

$

123.40

 

 

$

117.06

 

S&P 500

 

 

100.00

 

 

 

128.71

 

 

 

105.40

 

 

 

133.10

 

 

 

166.40

 

 

 

196.16

 

KBW NASDAQ Regional Banking

 

 

100.00

 

 

 

136.64

 

 

 

127.17

 

 

 

126.66

 

 

 

143.38

 

 

 

152.71

 

Copyright© 2026 Standard & Poor's, a division of S&P Global. All rights reserved.

ITEM 6. [RESERVED]

 

33

 

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. Forward-looking statements can be identified by words such as “believes,” “intends,” “expects,” “plans,” “will” and similar references to future periods. 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;
•
adverse developments in the banking industry highlighted by high-profile bank failures and the potential impact of such developments on customer confidence, the Company’s stock price, liquidity and regulatory responses to these developments (including increases in the cost of the Company’s deposit insurance assessments);
•
the Company’s ability to effectively manage its liquidity risk and the availability of capital and funding;
•
volatility in interest rates and market prices, which could reduce the Company’s net interest margins, asset valuations and expense expectations;
•
prolonged periods of high inflation and their effects on the Company’s business, profitability and stock price;
•
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, including fluctuations in the price of oil, natural gas and other commodities, 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;
•
the potential impacts of climate change;
•
increased competition for deposits and loans adversely affecting balances, rates and terms;
•
the risks relating to the pending acquisition of Stellar Bancorp, Inc. and the recent acquisitions of American and Southwest including, without limitation: the risk that the Stellar acquisition will not close; the diversion of management's time on issues related to the acquisitions and integration; unexpected transaction costs, including the costs of integrating operations; the risk that the businesses will not be integrated successfully or that such integration may be more difficult, time-consuming or costly than expected; the potential failure to fully or timely realize expected revenues and revenue synergies; the risk of deposit and customer attrition; regulatory enforcement and litigation risk; unexpected operating and other costs; the risk of customer and employee loss and business disruptions; increased competitive pressures and solicitations of customers by competitors;
•
the timing, impact and other uncertainties of any future acquisitions, including the pending acquisition of Stellar, and 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 risk that the regulatory environment may not be conducive to or may prohibit the consummation of future mergers and/or business combinations, may increase the length of time and amount of resources required to consummate such transactions, and the potential to reduce anticipated benefits from such mergers or combinations;
•
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 residential and commercial real estate;
•
the failure of assumptions underlying the establishment of and provisions made to the allowance for credit losses, including such assumptions related to potential or recent acquisitions;

34

 

•
changes in the availability of funds resulting in increased costs or reduced liquidity;
•
a deterioration or downgrade in the credit quality and credit agency ratings of the securities in the Company’s securities portfolio;
•
increased asset levels and changes in the composition of assets and the resulting impact on the Company’s capital levels and regulatory capital ratios;
•
the Company’s ability to acquire, operate and maintain cost effective and efficient systems without incurring unexpectedly difficult or expensive but necessary technological changes;
•
the loss of senior management or operating personnel and the potential inability to hire qualified personnel at reasonable compensation levels;
•
government intervention in the U.S. financial system;
•
changes in statutes and government regulations or their interpretations applicable to financial holding companies and the Company’s present and future banking and other subsidiaries, including changes in tax requirements and tax rates;
•
the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board and other accounting standard setters;
•
the Company’s ability to identify and address cybersecurity risks such as data security breaches, malware, “denial of service” attacks, “hacking”, and identity theft, a failure of which could disrupt business and result in significant losses or adverse effects to the Company’s reputation;
•
poor performance by, or breach of the operational or security systems of, third-party vendors and other service providers;
•
risks related to the use of new technologies, including artificial intelligence and machine learning;
•
exposure to potential losses in the event of fraud and/or theft, or in the event that a third-party vendor, obligor, or business partner fails to pay amounts due to the Company under that relationship or under any other arrangement;
•
the failure of analytical and forecasting models and tools used by the Company to estimate expected credit losses and to measure the fair value of financial instruments;
•
additional risks from new lines of businesses or new products and services;
•
risks related to potential claims, damages, penalties, fines and reputational damage resulting from pending or future litigation, regulatory proceedings or enforcement actions, including those related to cybersecurity breaches, intellectual property or fiduciary responsibilities;
•
the failure of the Company’s enterprise risk management framework to identify or address risks adequately;
•
potential risk of environmental liability associated with lending activities;
•
changes in trade policies by the United States or other countries, such as the imposition of tariffs or retaliatory tariffs or other trade barriers;
•
acts of terrorism, an outbreak of hostilities, or other international or domestic calamities, civil unrest, insurrections, other political, economic or diplomatic developments, including those caused by public health issues, outbreaks of diseases and pandemics, weather or other acts of God and other matters beyond the Company’s control; and
•
other risks and uncertainties described in this Annual Report on Form 10-K or in the Company’s other 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 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 against placing 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

35

 

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 and fees on customer accounts and income from investment in securities. The Company also earns revenues from various additional products and services it provides, including trust services, mortgage lending, brokerage, credit card and independent sales organization sponsorship operations. The Company’s 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.

Three principal components of the Company’s growth strategy are internal growth, efficient operations 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. The Company also focuses on maintaining efficiency and stringent cost control practices and policies. The Company has centralized many of its critical operations, such as data processing and loan and deposit 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. The Company’s banking operations are considered by management to be aggregated in one reportable operating segment. For more information about the Company’s segment reporting, refer to Note 1 to the consolidated financial statements.

Net income was $542.8 million, $479.4 million and $419.3 million for the years ended December 31, 2025, 2024 and 2023, respectively, and diluted earnings per share were $5.72, $5.05 and $4.51, respectively, for these same periods. Net income and net income per diluted common share for the year ended December 31, 2025, were impacted by an increase in net interest income, lower merger related provision and expenses, and lower regulatory assessments and FDIC insurance, partially offset by a decrease in net gain on sale or write-up of securities. Net income and net income per diluted common share for the year ended December 31, 2024 were impacted by an increase in net interest income, a decrease in the FDIC special assessment of $16.3 million, a gain on Visa Class B-1 stock exchange net of investment securities sales of $11.2 million, a decrease in merger related provision for credit losses of $9.5 million, a decrease in merger related expenses of $10.7 million, and increases in noninterest income and noninterest expense related to nine months of Lone Star Bank operations.

The Company posted returns on average assets of 1.42%, 1.21% and 1.08% and returns on average common equity of 7.14%, 6.56% and 6.03% for the years ended December 31, 2025, 2024 and 2023, respectively. The Company’s efficiency ratio was 44.55% in 2025, 48.43% in 2024 and 50.26% in 2023. The efficiency ratio is calculated by dividing total noninterest expense (excluding net gains and losses on the sale, write-down or write-up of assets and securities) by the sum of net interest income and noninterest income. Because the ratio is a measure of revenues and expenses resulting from the Company’s lending activities and fee-based banking services, net gains and losses on the sale of assets and securities are not included. Additionally, taxes are not part of this calculation.

Total assets were $38.46 billion at December 31, 2025 , a decrease of $1.10 billion or 2.8% compared with $39.57 billion at December 31, 2024. Total deposits were $28.48 billion at December 31, 2025, an increase of $101.1 million or 0.4% compared with $28.38 billion at December 31, 2024. Total loans were $21.81 billion at December 31, 2025, a decrease of $343.8 million or 1.6% compared with $22.15 billion at December 31, 2024. At December 31, 2025, the Company had $137.5 million in nonperforming loans, and its allowance for credit losses on loans was $333.7 million compared with $75.8 million in nonperforming loans and an allowance for credit losses on loans of $351.8 million at December 31, 2024. Shareholders’ equity was $7.62 billion and $7.44 billion at December 31, 2025 and 2024, respectively.

Recent Acquisition

Acquisition of Lone Star State Bancshares, Inc. — Effective April 1, 2024, the Company completed the merger of Lone Star State Bancshares, Inc. (“Lone Star”) into the Company and the subsequent merger of its wholly owned subsidiary, Lone Star State Bank of West Texas (“Lone Star Bank”), into the Bank (collectively, the “Lone Star Merger”). Lone Star operated five full-service banking offices in the West Texas area, including its main office in Lubbock, and one banking center in each of Brownfield, Midland, Odessa and Big Spring, Texas. Pursuant to the terms of the definitive agreement, the Company issued 2,376,182 shares of its common stock plus approximately $64.1 million in cash for all outstanding shares of Lone Star. This resulted in goodwill of $106.7 million as of December 31, 2025, which reflected all final subsequent fair value adjustments. Goodwill represents the excess of the total

36

 

purchase price paid over the fair value of the assets acquired, net of the fair value of liabilities assumed. Additionally, the Company recognized $17.7 million of core deposit intangibles related to the Lone Star Merger. In October 2024, the Company completed the operational conversion of Lone Star Bank.

Subsequent Events

Acquisition of American Bank Holding Corporation — On January 1, 2026, the Company completed the merger of American Bank Holding Corporation (“American”) into the Company and the subsequent merger of its wholly owned subsidiary American Bank, N.A. (“American Bank”), into the Bank (collectively, the “American Merger”). American Bank operated 18 banking offices and 2 loan production offices in South and Central Texas including its main office in Corpus Christi, and banking offices in San Antonio, Austin, Victoria and the greater Corpus Christi area including Port Aransas and Rockport and a loan production office in Houston, Texas. Pursuant to the terms of the definitive agreement, the Company issued 4,439,938 shares of its common stock for all outstanding shares of American common stock in the first quarter of 2026.

Acquisition of Southwest Bancshares, Inc. — On February 1, 2026, the Company completed the merger of Southwest Bancshares, Inc. (“Southwest”) into the Company and the subsequent merger of its wholly owned subsidiary Texas Partners Bank (“Texas Partners”), into the Bank (collectively, the “Southwest Merger”). Texas Partners operated 11 banking offices in Central Texas including its main office in San Antonio, and banking offices in the San Antonio area, Austin and the Hill Country. Pursuant to the terms of the definitive agreement, the Company issued 4,094,974 shares of its common stock for all outstanding shares of Southwest common stock in the first quarter of 2026.

Pending Acquisition of Stellar Bancorp, Inc.— On January 28, 2026, the Company and Stellar Bancorp, Inc. (“Stellar”) jointly announced the signing of a definitive merger agreement whereby Stellar, the parent company of Stellar Bank (“Stellar Bank”), will merge with and into the Company and Stellar Bank will merge with and into the Bank. Stellar Bank operates 52 banking offices in greater Houston and Beaumont, Texas and surrounding areas. Under the terms and subject to the conditions of the definitive agreement, the Company will issue 0.3803 shares of its common stock and $11.36 in cash for each outstanding share of Stellar common stock. Based on the closing price of the Company’s common stock of $72.90 on January 27, 2026, the total consideration was valued at approximately $2.00 billion. The transaction is subject to customary closing conditions, including the receipt of regulatory approvals.

 

Critical Accounting Estimates

The preparation of financial statements in conformity with GAAP requires the Company to establish accounting policies and make estimates that affect amounts reported in the consolidated financial statements. An accounting estimate requires assumptions and judgments about uncertain matters that could have a material effect on the consolidated financial statements. Estimates are made using facts and circumstances known at a point in time. Changes in those facts and circumstances could produce results substantially different from those estimates. The Company’s accounting policies are described in detail in Note 1 to the consolidated financial statements, appearing elsewhere in 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:

Business Combinations—Generally, acquisitions are accounted for under the acquisition method of accounting in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 805, “Business Combinations.” A business combination occurs when the Company acquires net assets that constitute a business and obtains control over that business. Business combinations are effected through the transfer of consideration consisting of cash and/or common stock and are accounted for using the acquisition method. Accordingly, the assets and liabilities of the acquired business are recorded at their respective fair values at the acquisition date. Determining the fair value of assets and liabilities, especially the loan portfolio, is a process involving significant judgment regarding methods and assumptions used to calculate estimated fair values. Fair values are subject to refinement for up to one year after the closing date of the acquisition as information relative to closing date fair values becomes available. The results of operations of an acquired entity are included in the Company’s consolidated results from the acquisition date, and prior periods are not restated.

Allowance for Credit Losses— The allowance for credit losses is accounted for in accordance with FASB ASC Topic 326, “Financial Instruments-Credit Losses” (“CECL”), which uses an expected loss methodology that is referred to as the current expected credit loss methodology. CECL requires a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses is an allowance available for losses on loans and held-to-maturity securities that is deducted from the amortized cost basis to estimate the net amount expected to be collected. The allowance for credit losses is adjusted through charges to earnings in the form of a provision for credit losses. All losses are charged to the allowance when the loss actually occurs or when a determination is made that such a loss is likely and can be reasonably estimated. Recoveries are credited to the allowance at the time of recovery.

37

 

The Company’s allowance for credit losses consists of two elements: (1) specific valuation allowances based on expected losses on impaired loans and certain purchased credit-deteriorated loans (“PCD”); and (2) a general valuation allowance based on historical lifetime loan loss experience, current economic conditions, reasonable and supportable forecasted economic conditions and other qualitative risk factors both internal and external to the Company. 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 lifetime loan loss experience, the amount of nonperforming assets and related collateral, the volume, growth and composition of the portfolio, current economic conditions and reasonable and supportable forecasted economic conditions that may affect borrower 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. Based on this evaluation, management has established an allowance for credit losses that it believes is management’s best estimate of current expected credit losses in the Company’s loan portfolio.

 

The Company evaluates all restructurings, including restructurings for borrowers experiencing financial difficulty, to determine whether they result in a new loan or a continuation of an existing loan. In accordance with ASC 326, the Company only establishes a specific reserve for modifications to borrowers experiencing financial difficulty when the loan is identified as impaired. The effect of most modifications of loans made to borrowers who are experiencing financial difficulty is already included in the allowance for credit losses because of the measurement methodologies used to estimate the allowance. The Company adjusts the terms of loans for certain borrowers when it believes such changes will help its customers manage their loan obligations and increase the collectability of the loans. Modifications to borrowers experiencing financial difficulty may include but are not limited to changes in committed loan amount, interest rate, amortization, note maturity, borrower, guarantor, collateral, forbearance, forgiveness of principal or interest, and other actions intended to minimize economic loss and to avoid foreclosure or repossession of collateral. The approval of modifications of loans for borrowers experiencing financial difficulty are handled on a case-by-case basis. For further discussion of the methodology used in the determination of the allowance for credit losses, see “Accounting for Acquired Loans and the Allowance for Acquired Credit Losses”, “Financial Condition—Allowance for Credit Losses” sections below and Note 1 and Note 5 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. 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. For further discussion of the methodology used in the determination of the allowance for credit losses for acquired loans, see “Accounting for Acquired Loans and the Allowance for Acquired Credit Losses” in Note 1 to the consolidated financial statements and “Financial Condition—Allowance for Credit Losses on Loans” below.

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. Under FASB ASC Topic 350-20, “Intangibles—Goodwill and Other—Goodwill,” companies have 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 following 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 estimated fair value of the reporting unit exceeds its carrying value, goodwill of the reporting unit is not impaired.

The Company had no intangible assets with indefinite useful lives at December 31, 2025. Core deposit 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 core deposit 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. The Company performs an evaluation annually, and more frequently if a triggering event occurs, of whether any impairment of the goodwill and other intangibles has occurred. Based on the Company’s annual goodwill impairment test as of October 1, 2025, management does not believe any of its goodwill is impaired as of December 31, 2025, because the fair value of the Company’s equity exceeded its carrying value. While the Company believes no impairment existed at December 31, 2025, 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.

38

 

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.”

 

2025 versus 2024. Net interest income before the provision for credit losses for 2025 was $1.08 billion compared with $1.03 billion for 2024, an increase of $55.0 million or 5.4%. The change was primarily due to a decrease in the average balances and average rates on other borrowings and a decrease in the average rates on interest-bearing deposits, partially offset by a decrease in the average balances and average rates on federal funds sold and other earning assets, a decrease in the average balances on investment securities, a decrease in the average rates on loans and a decrease in loan discount accretion of $5.1 million. Interest income was $1.57 billion in 2025, a decrease of $53.4 million or 3.3% compared with 2024. Interest income on loans was $1.30 billion for 2025, a decrease of $17.7 million or 1.3% compared with 2024, primarily due to a decrease in the average rates on loans and a decrease in loan discount accretion of $5.1 million. The Company had $22.7 million of total outstanding net accretable discounts on Non-PCD loans and PCD loans at December 31, 2025. Interest income on securities was $230.7 million during 2025, a decrease of $16.0 million or 6.5% compared with 2024, primarily due to a decrease in the average balances on investment securities. Average interest-bearing liabilities decreased $1.32 billion or 5.9% during 2025 compared with 2024. The average rate on interest-bearing liabilities decreased from 2.69% to 2.34% during the same time period, resulting in a decrease in interest expense of $108.4 million. The total cost of funds decreased to 1.61% during 2025 compared to 1.87% during 2024.

Net interest margin, defined as net interest income divided by average interest-earning assets, was 3.22% on a tax equivalent basis for 2025, an increase of 29 basis points compared with 2.93% for 2024.

 

2024 versus 2023. Net interest income before the provision for credit losses for 2024 was $1.03 billion compared with $956.4 million for 2023, an increase of $70.1 million or 7.3%. The change was primarily due to an increase in the average balances and average rates on loans and on federal funds sold and other earning assets, an increase in loan discount accretion of $9.4 million and a decrease in the average balance and rates on other borrowings, partially offset by a decrease in the average balances on investment securities and an increase in the average balances and rates on interest-bearing deposits. Interest income was $1.62 billion in 2024, an increase of $179.2 million or 12.4% compared with 2023. Interest income on loans was $1.31 billion for 2024, an increase of $164.2 million or 14.3% compared with 2023, primarily due to an increase in the average balances and average rates on loans. The Company had $35.2 million of total outstanding net accretable discounts on Non-PCD loans and PCD loans at December 31, 2024. Interest income on securities was $246.7 million during 2024, a decrease of $36.6 million or 12.9% compared with 2023, primarily due to a decrease in the average balances on investment securities. Average interest-bearing liabilities increased $699.4 million or 3.3% during 2024 compared with 2023. The average rate on interest-bearing liabilities increased from 2.27% to 2.69% during the same time period, resulting in an increase in interest expense of $109.1 million. The total cost of funds increased to 1.87% during 2024 compared to 1.54% during 2023.

Net interest margin, defined as net interest income divided by average interest-earning assets, was 2.93% on a tax equivalent basis for 2024, an increase of 15 basis points compared with 2.78% for 2023.

 

39

 

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,

 

 

2025

 

 

2024

 

 

2023

 

 

Average
Outstanding
Balance

 

 

Interest
Earned/
Paid

 

 

Average
Yield/
Rate

 

 

Average
Outstanding
Balance

 

 

Interest
Earned/
Paid

 

 

Average
Yield/
Rate

 

 

Average
Outstanding
Balance(1)

 

 

Interest
Earned/
Paid

 

 

Average
Yield/
Rate

 

 

(Dollars in thousands)

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans held for sale

 

$

9,215

 

 

$

608

 

 

6.60%

 

 

$

7,603

 

 

$

522

 

 

6.87%

 

 

$

6,508

 

 

$

452

 

 

6.95%

Loans held for investment

 

 

20,829,523

 

 

 

1,224,368

 

 

5.88%

 

 

 

20,973,042

 

 

 

1,242,836

 

 

5.93%

 

 

 

19,754,541

 

 

 

1,089,743

 

 

5.52%

Loans held for investment - Warehouse Purchase Program

 

 

1,134,031

 

 

 

70,498

 

 

6.22%

 

 

 

973,206

 

 

 

69,804

 

 

7.17%

 

 

 

815,853

 

 

 

58,801

 

 

7.21%

Total loans

 

 

21,972,769

 

 

 

1,295,474

 

 

5.90%

 

 

 

21,953,851

 

 

 

1,313,162

 

 

5.98%

 

 

 

20,576,902

 

 

 

1,148,996

 

 

5.58%

Investment securities

 

 

10,696,480

 

 

 

230,696

 

 

2.16%

 

 

 

11,934,793

 

 

 

246,726

 

 

2.07%

 

 

 

13,719,899

 

 

 

283,302

 

 

2.06%

Federal funds sold and other earning assets

 

 

1,010,707

 

 

 

44,153

 

 

4.37%

 

 

 

1,216,728

 

 

 

63,825

 

 

5.25%

 

 

 

248,691

 

 

 

12,245

 

 

4.92%

Total interest-earning assets

 

 

33,679,956

 

 

 

1,570,323

 

 

4.66%

 

 

 

35,105,372

 

 

 

1,623,713

 

 

4.63%

 

 

 

34,545,492

 

 

 

1,444,543

 

 

4.18%

Allowance for credit losses on loans

 

 

(345,158

)

 

 

 

 

 

 

 

 

(344,167

)

 

 

 

 

 

 

 

 

(314,350

)

 

 

 

 

 

Noninterest-earning assets

 

 

4,946,200

 

 

 

 

 

 

 

 

 

4,839,630

 

 

 

 

 

 

 

 

 

4,741,815

 

 

 

 

 

 

Total assets

 

$

38,280,998

 

 

 

 

 

 

 

 

$

39,600,835

 

 

 

 

 

 

 

 

$

38,972,957

 

 

 

 

 

 

Liabilities and Shareholders' Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing demand deposits

 

$

4,873,634

 

 

$

35,917

 

 

0.74%

 

 

$

4,900,189

 

 

$

35,342

 

 

0.72%

 

 

$

5,150,049

 

 

$

19,554

 

 

0.38%

Savings and money market deposits

 

 

8,996,090

 

 

 

183,146

 

 

2.04%

 

 

 

8,949,010

 

 

 

194,317

 

 

2.17%

 

 

 

9,129,845

 

 

 

168,184

 

 

1.84%

Certificates and other time deposits

 

 

4,434,168

 

 

 

160,914

 

 

3.63%

 

 

 

4,301,763

 

 

 

178,965

 

 

4.16%

 

 

 

2,832,754

 

 

 

84,607

 

 

2.99%

Federal funds purchased and other borrowings

 

 

2,389,589

 

 

 

104,234

 

 

4.36%

 

 

 

3,802,910

 

 

 

181,640

 

 

4.78%

 

 

 

4,008,616

 

 

 

206,323

 

 

5.15%

Securities sold under repurchase agreements

 

 

196,205

 

 

 

4,620

 

 

2.35%

 

 

 

257,171

 

 

 

6,954

 

 

2.70%

 

 

 

389,313

 

 

 

9,404

 

 

2.42%

Subordinated debentures

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

1,031

 

 

 

38

 

 

3.69%

Total interest-bearing liabilities

 

 

20,889,686

 

 

 

488,831

 

 

2.34%

 

 

 

22,211,043

 

 

 

597,218

 

 

2.69%

 

 

 

21,511,608

 

 

 

488,110

 

 

2.27%

Noninterest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-bearing demand deposits

 

 

9,501,997

 

 

 

 

 

 

 

 

 

9,683,980

 

 

 

 

 

 

 

 

 

10,224,241

 

 

 

 

 

 

Allowance for credit losses on off-balance sheet credit exposures

 

 

37,646

 

 

 

 

 

 

 

 

 

37,134

 

 

 

 

 

 

 

 

 

33,271

 

 

 

 

 

 

Other liabilities

 

 

246,359

 

 

 

 

 

 

 

 

 

363,607

 

 

 

 

 

 

 

 

 

253,047

 

 

 

 

 

 

Total liabilities

 

 

30,675,688

 

 

 

 

 

 

 

 

 

32,295,764

 

 

 

 

 

 

 

 

 

32,022,167

 

 

 

 

 

 

Shareholders' equity

 

 

7,605,310

 

 

 

 

 

 

 

 

 

7,305,071

 

 

 

 

 

 

 

 

 

6,950,790

 

 

 

 

 

 

Total liabilities and shareholders' equity

 

$

38,280,998

 

 

 

 

 

 

 

 

$

39,600,835

 

 

 

 

 

 

 

 

$

38,972,957

 

 

 

 

 

 

Net interest rate spread

 

 

 

 

 

 

 

2.32%

 

 

 

 

 

 

 

 

1.94%

 

 

 

 

 

 

 

 

1.91%

Net interest income and margin(1)

 

 

 

 

$

1,081,492

 

 

3.21%

 

 

 

 

 

$

1,026,495

 

 

2.92%

 

 

 

 

 

$

956,433

 

 

2.77%

Net interest income and margin (tax equivalent)(2)

 

 

 

 

$

1,083,677

 

 

3.22%

 

 

 

 

 

$

1,029,678

 

 

2.93%

 

 

 

 

 

$

960,073

 

 

2.78%

 

(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 21% and other applicable effective tax rates for the years ended December 31, 2025, 2024 and 2023.

40

 

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 in interest income and interest expense related to purchase accounting adjustments and changes attributable to both rate and volume which cannot be segregated have been allocated to rate.

 

 

Years Ended December 31,

 

 

 

2025 vs. 2024

 

 

2024 vs. 2023

 

 

 

Increase
(Decrease)
Due to Change in

 

 

 

 

 

Increase
(Decrease)
Due to Change in

 

 

 

 

 

 

Volume

 

 

Rate

 

 

Total

 

 

Volume

 

 

Rate

 

 

Total

 

 

 

(Dollars in thousands)

 

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans held for sale

 

$

111

 

 

$

(25

)

 

$

86

 

 

$

76

 

 

$

(6

)

 

$

70

 

Loans held for investment

 

 

(8,505

)

 

 

(9,963

)

 

 

(18,468

)

 

 

67,218

 

 

 

85,875

 

 

 

153,093

 

Loans held for investment - Warehouse Purchase Program

 

 

11,535

 

 

 

(10,841

)

 

 

694

 

 

 

11,341

 

 

 

(338

)

 

 

11,003

 

Securities

 

 

(25,599

)

 

 

9,569

 

 

 

(16,030

)

 

 

(36,861

)

 

 

285

 

 

 

(36,576

)

Federal funds sold and other temporary investments

 

 

(10,807

)

 

 

(8,865

)

 

 

(19,672

)

 

 

47,664

 

 

 

3,916

 

 

 

51,580

 

Total (decrease) increase in interest income

 

 

(33,265

)

 

 

(20,125

)

 

 

(53,390

)

 

 

89,438

 

 

 

89,732

 

 

 

179,170

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing demand deposits

 

 

(192

)

 

 

767

 

 

 

575

 

 

 

(949

)

 

 

16,737

 

 

 

15,788

 

Savings and money market accounts

 

 

1,022

 

 

 

(12,193

)

 

 

(11,171

)

 

 

(3,331

)

 

 

29,464

 

 

 

26,133

 

Certificates of deposit

 

 

5,508

 

 

 

(23,559

)

 

 

(18,051

)

 

 

43,875

 

 

 

50,483

 

 

 

94,358

 

Other borrowings

 

 

(67,505

)

 

 

(9,901

)

 

 

(77,406

)

 

 

(10,588

)

 

 

(14,095

)

 

 

(24,683

)

Securities sold under repurchase agreements

 

 

(1,649

)

 

 

(685

)

 

 

(2,334

)

 

 

(3,192

)

 

 

742

 

 

 

(2,450

)

Subordinated debentures

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(38

)

 

 

—

 

 

 

(38

)

Total (decrease) increase in interest expense

 

 

(62,816

)

 

 

(45,571

)

 

 

(108,387

)

 

 

25,777

 

 

 

83,331

 

 

 

109,108

 

Increase in net interest income

 

$

29,551

 

 

$

25,446

 

 

$

54,997

 

 

$

63,661

 

 

$

6,401

 

 

$

70,062

 

Provision for Credit Losses

The Company’s provision for credit losses is established through charges to income to bring the Company’s allowance for credit losses on loans and off-balance sheets credit exposures to a level deemed appropriate by management based on the factors discussed under “Financial Condition—Allowance for Credit Losses” and “Financial Condition—Allowance for Credit Losses on Off-Balance Sheet Credit Exposures”. The allowance for credit losses on loans at December 31, 2025, was $333.7 million, or 1.53% of total loans and 1.63% of total loans excluding Warehouse Purchase Program loans. The allowance for credit losses on loans at December 31, 2024, was $351.8 million, or 1.59% of total loans and 1.67% of total loans excluding Warehouse Purchase Program loans. 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 defaults and recovery rates, with no carryover of any existing allowance for credit losses. The allowance for credit losses on off-balance sheet credit exposures was $37.6 million at December 31, 2025 and 2024. There was no provision for credit losses for the year ended December 31, 2025, compared with $9.1 million for the year ended December 31, 2024, and $18.5 million for the year ended December 31, 2023. The $9.1 million provision was due to loans acquired in the Lone Star Merger and consisted of a $7.9 million provision for credit losses on loans and a $1.2 million provision for credit losses on off-balance sheet credit exposures. The $18.5 million provision was made as a result of the loans acquired in the merger of First Bancshares of Texas, Inc., and consisted of a $12.0 million provision for credit losses on loans and a $6.5 million provision for credit losses on off-balance sheet credit exposures.

Net charge-offs for the years ended December 31, 2025, 2024 and 2023 were $18.1 million, $14.6 million and $38.0 million, respectively. For the year ended December 31, 2025, $18.9 million of reserves on resolved PCD loans without any related charge-offs were released to the general reserve.

41

 

Noninterest Income

The Company’s primary sources of recurring noninterest income are credit, debit and ATM card income, nonsufficient funds (“NSF”) fees, and service charges on deposit accounts. Additionally, the Company generates recurring noninterest income from its various additional products and services, including trust services, mortgage lending and brokerage. 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, 2025, noninterest income totaled $168.3 million, an increase of $2.5 million or 1.5%, compared with 2024. This increase was primarily due to increases in other noninterest income and service charges on deposit accounts, partially offset by a decrease in net gain on sale or write-up of securities.

For the year ended December 31, 2024, noninterest income totaled $165.8 million, an increase of $12.5 million or 8.2%, compared with 2023. This increase was primarily due to a gain on Visa Class B-1 stock exchange net of investment securities sales of $11.2 million and increases in service charges on deposit accounts, partially offset by a decrease in other noninterest income.

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

 

 

Years Ended December 31,

 

 

 

2025

 

 

2024

 

 

2023

 

 

 

(Dollars in thousands)

 

Nonsufficient funds (NSF) fees

 

$

37,552

 

 

$

35,417

 

 

$

33,691

 

Credit card, debit card and ATM card income

 

 

37,408

 

 

 

37,308

 

 

 

36,471

 

Service charges on deposit accounts

 

 

29,988

 

 

 

26,498

 

 

 

24,582

 

Trust income

 

 

14,648

 

 

 

14,750

 

 

 

13,269

 

Mortgage income

 

 

3,859

 

 

 

3,096

 

 

 

2,298

 

Brokerage income

 

 

5,385

 

 

 

4,742

 

 

 

4,275

 

Bank owned life insurance income

 

 

8,328

 

 

 

7,980

 

 

 

6,653

 

Net gain on sale or write-down of assets

 

 

1,217

 

 

 

2,824

 

 

 

1,986

 

Net gain on sale or write-up of securities

 

 

—

 

 

 

11,245

 

 

 

—

 

Other

 

 

29,916

 

 

 

21,949

 

 

 

30,040

 

Total noninterest income

 

$

168,301

 

 

$

165,809

 

 

$

153,265

 

Noninterest Expense

For the year ended December 31, 2025, noninterest expense totaled $556.2 million, a decrease of $14.4 million or 2.5% compared with 2024. The change was primarily due to lower regulatory assessments and FDIC insurance, a reversal of the 2024 FDIC special assessment, a decrease in other noninterest expense and a decrease in merger related expenses.

For the year ended December 31, 2024, noninterest expense totaled $570.6 million, an increase of $13.9 million or 2.5% compared with 2023. The change was primarily due to an increase in salaries and benefits, an increase in credit and debit card, data processing and software amortization and additional expenses related to the Lone Star Merger, partially offset by a decrease in the FDIC special assessment of $16.3 million and a decrease in merger related expenses of $10.7 million.

42

 

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

 

 

Years Ended December 31,

 

 

 

2025

 

 

2024

 

 

2023

 

 

 

(Dollars in thousands)

 

Salaries and employee benefits(1)

 

$

353,105

 

 

$

352,353

 

 

$

328,430

 

Non-staff expenses:

 

 

 

 

 

 

 

 

 

Net occupancy and equipment

 

 

37,088

 

 

 

35,786

 

 

 

35,517

 

Credit and debit card, data processing and software amortization

 

 

48,614

 

 

 

47,300

 

 

 

41,570

 

Regulatory assessments and FDIC insurance

 

 

18,095

 

 

 

27,370

 

 

 

40,165

 

Core deposit intangibles amortization

 

 

14,442

 

 

 

15,670

 

 

 

12,676

 

Depreciation

 

 

19,674

 

 

 

19,054

 

 

 

18,283

 

Communications(2)

 

 

13,988

 

 

 

13,697

 

 

 

14,413

 

Net other real estate expense (income)(3)

 

 

653

 

 

 

(291

)

 

 

(834

)

Merger related expenses

 

 

330

 

 

 

4,444

 

 

 

15,133

 

Other

 

 

50,224

 

 

 

55,190

 

 

 

51,345

 

Total noninterest expense

 

$

556,213

 

 

$

570,573

 

 

$

556,698

 

 

(1)
Total salaries and employee benefits include $12.1 million, $12.8 million and $12.2 million in 2025, 2024 and 2023, respectively, in stock-based compensation expense.
(2)
Communications expense includes telephone, data circuits, postage, and courier expenses.
(3)
Net other real estate expense consists of rental expense, rental income and gains and losses on sales of real estate.

Salaries and Employee Benefits. Salaries and employee benefits were $353.1 million for the year ended December 31, 2025, compared with $352.4 million for the year ended December 31, 2024. Salaries and employee benefits were $352.4 million for the year ended December 31, 2024, an increase of $23.9 million or 7.3% compared with 2023, primarily as a result of the Lone Star Merger. The number of full-time equivalent associates employed by the Company was 3,941, 3,916 and 3,850 at December 31, 2025, 2024 and 2023, respectively. Total salaries and benefits for the year ended December 31, 2025, included $12.1 million in stock‑based compensation expense compared with $12.8 million and $12.2 million recorded for the years ended December 31, 2024 and 2023, respectively.

Net Occupancy and Equipment. Net occupancy and equipment expense was $37.1 million for the year ended December 31, 2025, an increase of $1.3 million compared with $35.8 million for the year ended December 31, 2024. Net occupancy and equipment expense was $35.8 million for the year ended December 31, 2024, compared with $35.5 million for the year ended December 31, 2023.

Credit and Debit Card, Data Processing and Software Amortization. Credit and debit card, data processing and software amortization expenses were $48.6 million for the year ended December 31, 2025, an increase of $1.3 million or 2.8% compared with 2024. Credit and debit card, data processing and software amortization expenses were $47.3 million for the year ended December 31, 2024, an increase of $5.7 million or 13.8% compared with 2023, primarily due to an increase in software maintenance expense, data processing costs and the Lone Star Merger.

Regulatory Assessments and FDIC Insurance. Regulatory assessments and FDIC insurance assessments were $18.1 million for the year ended December 31, 2025, a decrease of $9.3 million or 33.9% compared with the year ended December 31, 2024, due to a decrease in the FDIC special assessment and a reversal of the 2024 FDIC special assessment. Regulatory assessments and FDIC insurance assessments were $27.4 million for the year ended December 31, 2024, a decrease of $12.8 million or 31.9% compared with the year ended December 31, 2023, due to a decrease in the FDIC special assessment.

Core Deposit Intangibles Amortization. Core deposit intangibles (“CDI”) amortization was $14.4 million for the year ended December 31, 2025, a decrease of $1.2 million or 7.8% compared with the year ended December 31, 2024. CDI amortization was $15.7 million for the year ended December 31, 2024, an increase of $3.0 million or 23.6% compared with the year ended December 31, 2023, primarily due to the Lone Star Merger.

Merger Related Expenses. Merger related expenses were $330 thousand for the year ended December 31, 2025, a decrease of $4.1 million compared with the year ended December 31, 2024. Merger related expenses were $4.4 million for the year ended December 31, 2024, a decrease of $10.7 million, primarily due to lower merger related expenses for the Lone Star Merger.

Efficiency Ratio

43

 

The Company’s efficiency ratio is a supplemental financial measure utilized in management’s internal evaluation of the Company and is not calculated based on GAAP. A GAAP-based efficiency ratio is calculated by dividing total noninterest expense, excluding credit loss provisions, by net interest income plus total noninterest income, as shown in the Consolidated Statements of Income. The Company’s efficiency ratio, as calculated and used by the Company, excludes from noninterest income the net gains and losses on the sale of securities and assets, which can vary widely from period to period. Taxes are not included in either calculation. The Company believes this non-GAAP financial measure provides information useful to investors by excluding certain items that may not be indicative of its core net operating earnings and business outlook. This non-GAAP financial measure should not be considered a substitute for, nor of greater importance than, the GAAP basis financial measure. Because a non-GAAP financial measure is not standardized, it may not be possible to compare this financial measure with other companies’ non-GAAP financial measures having the same or a similar name. 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 calculated pursuant to GAAP was 44.50% for the year ended December 31, 2025, compared with 47.85% for the year ended December 31, 2024 and 50.17% for the year ended December 31, 2023. The efficiency ratio, as used by the Company, excluding net gains and losses on the sale, write-down or write-up of assets and securities, was 44.55% for the year ended December 31, 2025, compared with 48.43% for the year ended December 31, 2024 and 50.26% for the year ended December 31, 2023.

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 nondeductible expenses. Income tax expense was $150.7 million for the year ended December 31, 2025, an increase of $17.5 million or 13.1% compared with $133.3 million for the year ended December 31, 2024. Income tax expense was $133.3 million for the year ended December 31, 2024, an increase of $18.1 million or 15.7% compared with $115.1 million for the year ended December 31, 2023. The effective tax rate for the years ended December 31, 2025, 2024 and 2023 was 21.7%, 21.8% and 21.5%, respectively. The effective income tax rates differed from the U.S. statutory rate of 21% during 2025, 2024 and 2023 primarily due to the effect of tax-exempt income from loans, securities and bank owned life insurance (“BOLI”) offset by the effect of state taxes.

 

Enactment of the One Big Beautiful Bill Act — On July 4, 2025, the One Big Beautiful Bill Act (the “OBBB Act”), which included certain modifications to U.S. tax law, was enacted. The Company has completed its initial evaluation of the provisions of the OBBB Act and has concluded that it did not have a material impact on the Company's income tax provision for the year ended December 31, 2025.

 

 

 

44

 

Financial Condition

Loan Portfolio

At December 31, 2025, total loans were $21.81 billion, a decrease of $343.8 million or 1.6% compared with $22.15 billion at December 31, 2024. Loans at December 31, 2025, included $14.2 million of loans held for sale and $1.30 billion of Warehouse Purchase Program loans. At December 31, 2025, total loans were 76.6% of deposits and 56.7% of total assets. At December 31, 2024, total loans were $22.15 billion, an increase of $968.7 million or 4.6% compared with $21.18 billion at December 31, 2023. Loans at December 31, 2024 included $10.7 million of loans held for sale and $1.08 billion of Warehouse Purchase Program loans. At December 31, 2024, total loans were 78.0% of deposits and 56.0% of total assets.

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

 

 

 

December 31,

 

 

 

2025

 

 

2024

 

 

 

Amount

 

 

Percent

 

 

Amount

 

 

Percent

 

 

 

(Dollars in thousands)

 

Commercial and industrial

 

$

2,303,936

 

 

 

10.6

%

 

$

2,508,088

 

 

 

11.3

%

Warehouse purchase program

 

 

1,304,798

 

 

 

6.0

%

 

 

1,080,903

 

 

 

4.9

%

Real estate:

 

 

 

 

 

 

 

 

 

 

 

 

Construction, land development and other land loans

 

 

2,741,455

 

 

 

12.6

%

 

 

2,859,281

 

 

 

12.9

%

1-4 family residential (1)

 

 

7,430,929

 

 

 

34.1

%

 

 

7,581,450

 

 

 

34.2

%

Home equity

 

 

843,708

 

 

 

3.8

%

 

 

906,139

 

 

 

4.1

%

Commercial real estate (including multi-family residential) (2)

 

 

5,776,397

 

 

 

26.5

%

 

 

5,800,985

 

 

 

26.2

%

Farmland

 

 

662,031

 

 

 

3.0

%

 

 

681,883

 

 

 

3.1

%

Agriculture

 

 

365,873

 

 

 

1.7

%

 

 

351,663

 

 

 

1.6

%

Consumer

 

 

106,193

 

 

 

0.5

%

 

 

122,923

 

 

 

0.5

%

Other

 

 

270,048

 

 

 

1.2

%

 

 

255,894

 

 

 

1.2

%

Total loans (3)

 

$

21,805,368

 

 

 

100.0

%

 

$

22,149,209

 

 

 

100.0

%

 

(1)
Includes loans held for sale of $14.2 million and $10.7 million at December 31, 2025, and 2024, respectively.
(2)
Commercial real estate loans include approximately $1.95 billion and $2.06 billion of owner-occupied loans for the years ended December 31, 2025 and 2024 respectively.
(3)
Includes net fair value discounts on acquired loans of $22.7 million and $35.2 million at December 31, 2025 and 2024, respectively.

The Company separates its loan portfolio into two general categories of loans: (1) “originated loans,” which are loans originated by the Company and made pursuant to the Company’s loan policy and procedures in effect at the time the loan was made, and (2) “acquired loans,” which are loans acquired in a business combination and recorded at fair value at the acquisition date. Those acquired loans that are renewed or substantially modified after the date of the business combination are referred to as “re-underwritten acquired loans.” If a renewal or substantial modification of an acquired loan is underwritten by the Company with a new credit analysis, the loan may 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 an originated 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 “PCD Loans” and “Non-PCD loans.” Acquired loans with evidence of more than insignificant credit quality deterioration as of the acquisition date when compared to the origination date are classified as PCD loans.

45

 

The following tables summarize the Company’s originated and acquired loan portfolios broken out into originated loans, re-underwritten acquired loans, Non-PCD loans and PCD loans as of the dates indicated.

 

 

December 31, 2025

 

 

 

 

 

 

Acquired Loans

 

 

 

 

 

 

Originated Loans

 

 

Re-Underwritten Acquired Loans

 

 

Non-PCD Loans

 

 

PCD Loans

 

 

Total Loans

 

 

 

(Dollars in thousands)

 

Residential mortgage loans held for sale

 

$

14,155

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

14,155

 

Commercial and industrial

 

 

1,640,519

 

 

 

529,002

 

 

 

101,750

 

 

 

32,665

 

 

 

2,303,936

 

Warehouse purchase program

 

 

1,304,798

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

1,304,798

 

Real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction, land development and other land loans

 

 

2,468,830

 

 

 

181,271

 

 

 

46,132

 

 

 

45,222

 

 

 

2,741,455

 

1-4 family residential (including home equity)

 

 

7,513,090

 

 

 

185,707

 

 

 

555,827

 

 

 

5,858

 

 

 

8,260,482

 

Commercial real estate (including multi-family residential)

 

 

4,483,549

 

 

 

405,063

 

 

 

705,206

 

 

 

182,579

 

 

 

5,776,397

 

Farmland

 

 

558,958

 

 

 

19,240

 

 

 

62,081

 

 

 

21,752

 

 

 

662,031

 

Agriculture

 

 

273,192

 

 

 

81,208

 

 

 

4,821

 

 

 

6,652

 

 

 

365,873

 

Consumer and other

 

 

320,003

 

 

 

50,788

 

 

 

5,435

 

 

 

15

 

 

 

376,241

 

Total loans held for investment

 

 

18,562,939

 

 

 

1,452,279

 

 

 

1,481,252

 

 

 

294,743

 

 

 

21,791,213

 

Total

 

$

18,577,094

 

 

$

1,452,279

 

 

$

1,481,252

 

 

$

294,743

 

 

$

21,805,368

 

 

 

December 31, 2024

 

 

 

 

 

 

Acquired Loans

 

 

 

 

 

 

Originated Loans

 

 

Re-Underwritten Acquired Loans

 

 

Non-PCD Loans

 

 

PCD Loans

 

 

Total Loans

 

 

 

(Dollars in thousands)

 

Residential mortgage loans held for sale

 

$

10,690

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

10,690

 

Commercial and industrial

 

 

1,676,205

 

 

 

573,129

 

 

 

228,320

 

 

 

30,434

 

 

 

2,508,088

 

Warehouse purchase program

 

 

1,080,903

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

1,080,903

 

Real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction, land development and other land loans

 

 

2,451,888

 

 

 

203,098

 

 

 

95,402

 

 

 

108,893

 

 

 

2,859,281

 

1-4 family residential (including home equity)

 

 

7,588,289

 

 

 

204,846

 

 

 

676,339

 

 

 

7,425

 

 

 

8,476,899

 

Commercial real estate (including multi-family residential)

 

 

4,255,559

 

 

 

368,320

 

 

 

942,962

 

 

 

234,144

 

 

 

5,800,985

 

Farmland

 

 

550,760

 

 

 

18,000

 

 

 

89,725

 

 

 

23,398

 

 

 

681,883

 

Agriculture

 

 

206,457

 

 

 

97,481

 

 

 

19,426

 

 

 

28,299

 

 

 

351,663

 

Consumer and other

 

 

359,186

 

 

 

9,980

 

 

 

9,610

 

 

 

41

 

 

 

378,817

 

Total loans held for investment

 

 

18,169,247

 

 

 

1,474,854

 

 

 

2,061,784

 

 

 

432,634

 

 

 

22,138,519

 

Total

 

$

18,179,937

 

 

$

1,474,854

 

 

$

2,061,784

 

 

$

432,634

 

 

$

22,149,209

 

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 loans in the 1-4 family residential category, and has not securitized its loans. However, the Company does originate longer-term residential mortgage loans for sale into the secondary market. The purpose of a particular loan generally determines its structure.

Loans to borrowers with aggregate debt relationships over $1.0 million and below $5.0 million are evaluated and acted upon on a daily basis by two of the company-wide designated senior credit officers. Loans to borrowers with aggregate debt relationships above $5.0 million are evaluated and acted upon by an officers’ loan committee that meets weekly.

 

46

 

Commercial and Industrial Loans. In nearly all cases, the Company’s commercial loans are made in the Company’s market areas and are underwritten based on the borrower’s ability to service the debt from income. Working capital loans are primarily collateralized by short-term assets whereas term loans are primarily collateralized by long-term assets. As a general practice, term loans are secured by any available real estate, equipment or other assets owned by the borrower. Both working capital and term loans are typically supported by a personal guaranty of a principal. 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.

Included in commercial loans are (1) commitments to oil and gas producers largely secured by proven, developed and producing reserves and (2) commitments to service, equipment and midstream companies secured mainly by accounts receivable, inventory and equipment. Mineral reserve values supporting commitments to producers are normally re-determined semi-annually using reserve studies prepared by a third-party and verified by the Company’s oil and gas engineer. Accounts receivable and inventory borrowing bases for service companies are typically re-determined monthly. Funding requests by both producers and service companies are monitored relative to the most recently determined borrowing base. As of December 31, 2025, the Company had $111.0 million in funded commitments outstanding to oil and gas production companies and $151.7 million in unfunded commitments, for a total of $262.7 million. This compares with funded commitments to oil and gas production companies of $280.3 million and $163.8 million in unfunded commitments, for a total of $444.2 million as of December 31, 2024. Total unfunded commitments to producers include letters of credit issued in lieu of oil well plugging bonds. As of December 31, 2025, the Company had $328.6 million in funded commitments outstanding to service companies and $137.8 million in unfunded commitments, for a total of $466.4 million. This compares with funded commitments to service companies of $265.7 million and $138.7 million in unfunded commitments, for a total of $404.4 million as of December 31, 2024.

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 25-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 and guarantor. Loans to hotels and restaurants are primarily included in commercial real estate loans.

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 and nonowner-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 30 years. Loans collateralized by 1-4 family residential real estate generally have been originated in amounts of no more than 89% of appraised value. The Company requires mortgage title insurance, as well as hazard, wind and/or flood insurance as appropriate. The Company prefers to retain residential mortgage 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 non-payments on such loans. The Company’s mortgage department also offers a variety of mortgage loan products which are generally amortized over 30 years, including FHA and VA loans, which are sold to secondary market investors.

Construction, Land Development and Other Land Loans. The Company makes loans to finance the construction of residential and nonresidential properties. Construction loans generally are collateralized by first liens on real estate and have variable 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, with heightened analysis of construction and/or development costs. 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, the Company may not 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. Although the Company has underwriting procedures designed to

47

 

identify what it believes to be acceptable levels of risks in construction lending, these procedures may not prevent losses from the risks described above.

Warehouse Purchase Program. The Warehouse Purchase Program allows unaffiliated mortgage originators (“Clients”) to close 1-4 family real estate loans in their own name and manage their cash flow needs until the loans are sold to investors. The Company’s Clients are strategically targeted for their experienced management teams and analyzed for the expected profitability of each Client’s business model over the long term. The Clients are located across the U.S. and originate mortgage loans primarily through traditional retail and/or wholesale business models using underwriting standards as required by United States government-sponsored enterprise agencies, “Agencies” such as Federal National Mortgage Association (“Fannie Mae”), private investors to which the mortgage loans are ultimately sold and/or mortgage insurers.

At December 31, 2025, the Company had 29 mortgage banking company customers with aggregate uncommitted facilities (“Facilities”) of $2.15 billion and an actual aggregate outstanding balance of $1.30 billion; and the Clients’ individual Facilities ranged in size from $3.0 million to $250.0 million. A Facility is often supported by a payment guaranty of the Client’s owners holding significant ownership positions, along with non-interest-bearing compensating balance deposits in line with the Facility amount. Typical covenants include minimum tangible net worth, maximum leverage and minimum liquidity. As loans age, the Company requires loan curtailments to reduce the Company’s risk if an individual mortgage loan is not timely purchased by an investor. The average mortgage loan being purchased by the Company reflects a blend of Agency and private investor underwriting guidelines. At December 31, 2025, the Company’s mortgage warehouse portfolio had an average loan-to-value ratio (LTV) of 75%, an average credit score of 677 and an average loan size of $339 thousand. The Company’s purchases under these Facilities are priced using a combined base rate and a risk premium set for both product type (Prime, Jumbo, etc.) and age of the loan.

Although not subject to any legally binding commitment, when the Company makes a purchase decision, it acquires a 100% participation interest in the mortgage loans originated by its Clients. Individual mortgage loans are warehoused in the Company’s portfolio only for a short duration, averaging less than 30 days. When instructed by a Client that a warehoused loan has been sold to an investor, the Company delivers the note to the investor that pays the Company, which in turn remits the net sales proceeds to the Client.

Agriculture Loans. The Company provides agriculture loans for short-term livestock and 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 industry segment, 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.

Consumer Loans. Consumer loans made by the Company include direct “A”-credit automobile loans, recreational vehicle loans, boat loans, home improvement loans, personal loans (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, personal bankruptcy or death. Furthermore, the application of various federal and state laws may limit the amount which can be recovered on such loans.

48

 

Loan Maturities. The contractual maturity ranges of the Company’s loan portfolio, excluding loans held for sale of $14.2 million and Warehouse Purchase Program loans of $1.30 billion, by type of loan and the amount of such loans with predetermined interest rates and variable rates in each maturity range as of December 31, 2025, are summarized in the following table. Contractual maturities are based on contractual amounts outstanding and do not include net loan purchase discounts of $22.7 million.

 

 

 

One Year or Less

 

 

After One Year
Through Five Years

 

 

After Five Years
Through Fifteen
Years

 

 

After Fifteen Years

 

 

Total

 

 

 

(Dollars in thousands)

 

Commercial and industrial

 

$

859,054

 

 

$

1,006,972

 

 

$

337,407

 

 

$

102,598

 

 

$

2,306,031

 

Real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction, land development and other land loans

 

 

415,594

 

 

 

684,370

 

 

 

520,508

 

 

 

1,121,878

 

 

 

2,742,350

 

1-4 family residential (includes home equity)

 

 

52,963

 

 

 

191,857

 

 

 

1,721,423

 

 

 

6,293,179

 

 

 

8,259,422

 

Commercial (includes multi-family residential)

 

 

376,117

 

 

 

1,060,274

 

 

 

2,154,266

 

 

 

2,205,267

 

 

 

5,795,924

 

Agriculture (includes farmland)

 

 

341,380

 

 

 

122,069

 

 

 

229,333

 

 

 

336,163

 

 

 

1,028,945

 

Consumer and other

 

 

77,806

 

 

 

97,761

 

 

 

119,048

 

 

 

81,874

 

 

 

376,489

 

Total

 

$

2,122,914

 

 

$

3,163,303

 

 

$

5,081,985

 

 

$

10,140,959

 

 

$

20,509,161

 

Loans with a predetermined interest rate

 

$

522,339

 

 

$

1,229,440

 

 

$

2,757,221

 

 

$

3,299,005

 

 

$

7,808,005

 

Loans with a variable interest rate

 

 

1,600,575

 

 

 

1,933,863

 

 

 

2,324,764

 

 

 

6,841,954

 

 

 

12,701,156

 

Total

 

$

2,122,914

 

 

$

3,163,303

 

 

$

5,081,985

 

 

$

10,140,959

 

 

$

20,509,161

 

The following table presents information regarding loans with contractual maturities of one year or more with a predetermined interest rate or a variable interest rate by type of loan at December 31, 2025.

 

 

Loans with a
predetermined
interest rate

 

 

Loans with a
variable
interest rate

 

 

Total

 

 

 

(Dollars in thousands)

 

Commercial and industrial

 

$

444,039

 

 

$

1,002,938

 

 

$

1,446,977

 

Real estate:

 

 

 

 

 

 

 

 

 

Construction, land development and other land loans

 

 

156,123

 

 

 

2,170,632

 

 

 

2,326,755

 

1-4 family residential (includes home equity)

 

 

4,837,288

 

 

 

3,369,172

 

 

 

8,206,460

 

Commercial (includes multi-family residential)

 

 

1,536,721

 

 

 

3,883,086

 

 

 

5,419,807

 

Agriculture (includes farmland)

 

 

243,427

 

 

 

444,138

 

 

 

687,565

 

Consumer and other

 

 

68,068

 

 

 

230,615

 

 

 

298,683

 

Total

 

$

7,285,666

 

 

$

11,100,581

 

 

$

18,386,247

 

Nonperforming Assets

Nonperforming assets include loans on nonaccrual status, accruing loans 90 days or more past due, repossessed assets and real estate which has been acquired through foreclosure and is awaiting disposition.

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. Nevertheless, the Company’s loan portfolio could 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 on loans, management grades each loan from 1 to 9. For certain loans in risk grades 7 to 9, a specific reserve may be required when calculating the allowance for credit losses on loans.

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. A loan may be returned to accrual status when all the principal and interest amounts contractually due are brought current and future principal and interest amounts contractually due are reasonably assured, which is typically evidenced by a sustained period (at least six months) of repayment performance by the borrower.

49

 

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

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

 

 

December 31,

 

 

 

2025

 

 

2024

 

 

2023

 

 

 

(Dollars in thousands)

 

Nonaccrual loans (1)(2)

 

$

137,217

 

 

$

73,647

 

 

$

68,688

 

Accruing loans 90 or more days past due

 

 

317

 

 

 

2,189

 

 

 

2,195

 

Total nonperforming loans

 

 

137,534

 

 

 

75,836

 

 

 

70,883

 

Repossessed assets

 

 

12

 

 

 

4

 

 

 

76

 

Other real estate

 

 

13,296

 

 

 

5,701

 

 

 

1,708

 

Total nonperforming assets

 

$

150,842

 

 

$

81,541

 

 

$

72,667

 

Nonperforming assets to total loans and other real estate

 

 

0.69

%

 

 

0.37

%

 

 

0.34

%

Nonperforming assets to total loans, excluding Warehouse Purchase Program loans, and other real estate

 

 

0.74

%

 

 

0.39

%

 

 

0.36

%

Nonaccrual loans to total loans

 

 

0.63

%

 

 

0.33

%

 

 

0.32

%

Nonaccrual loans to total loans, excluding Warehouse Purchase Program loans

 

 

0.67

%

 

 

0.35

%

 

 

0.34

%

 

(1)
ASU 2022-02 became effective for the Company on January 1, 2023.
(2)
There were no nonperforming Warehouse Purchase Program loans or Warehouse Purchase Program lines of credit for the periods presented.

The following tables present information regarding past due loans and nonperforming assets differentiated among originated loans, re-underwritten acquired loans, Non-PCD loans and PCD loans at the dates indicated:

 

 

December 31, 2025

 

 

 

 

 

 

Acquired Loans

 

 

 

 

 

 

Originated Loans

 

 

Re-Underwritten Acquired Loans

 

 

Non-PCD Loans

 

 

PCD Loans

 

 

Total Loans

 

 

 

(Dollars in thousands)

 

Nonaccrual loans

 

$

95,816

 

 

$

19,208

 

 

$

6,016

 

 

$

16,177

 

 

$

137,217

 

Accruing loans 90 or more days past due

 

 

317

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

317

 

Total nonperforming loans

 

 

96,133

 

 

 

19,208

 

 

 

6,016

 

 

 

16,177

 

 

 

137,534

 

Repossessed assets

 

 

—

 

 

 

—

 

 

 

12

 

 

 

—

 

 

 

12

 

Other real estate

 

 

8,845

 

 

 

—

 

 

 

395

 

 

 

4,056

 

 

 

13,296

 

Total nonperforming assets

 

$

104,978

 

 

$

19,208

 

 

$

6,423

 

 

$

20,233

 

 

$

150,842

 

Nonperforming assets to total loans and other real estate by category

 

 

0.56

%

 

 

1.32

%

 

 

0.43

%

 

 

6.77

%

 

 

0.69

%

Nonperforming assets to total loans, excluding Warehouse Purchase Program loans, and other real estate by category

 

 

0.61

%

 

 

1.32

%

 

 

0.43

%

 

 

6.77

%

 

 

0.74

%

Nonaccrual loans to total loans

 

 

0.52

%

 

 

1.32

%

 

 

0.41

%

 

 

5.49

%

 

 

0.63

%

Nonaccrual loans to total loans, excluding Warehouse Purchase Program loans

 

 

0.55

%

 

 

1.32

%

 

 

0.41

%

 

 

5.49

%

 

 

0.67

%

 

50

 

 

 

December 31, 2024

 

 

 

 

 

 

Acquired Loans

 

 

 

 

 

 

Originated Loans

 

 

Re-Underwritten Acquired Loans

 

 

Non-PCD
Loans

 

 

PCD Loans

 

 

Total Loans

 

 

 

(Dollars in thousands)

 

Nonaccrual loans

 

$

46,280

 

 

$

4,216

 

 

$

7,138

 

 

$

16,013

 

 

$

73,647

 

Accruing loans 90 or more days past due

 

 

2,189

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

2,189

 

Total nonperforming loans

 

 

48,469

 

 

 

4,216

 

 

 

7,138

 

 

 

16,013

 

 

 

75,836

 

Repossessed assets

 

 

—

 

 

 

—

 

 

 

4

 

 

 

—

 

 

 

4

 

Other real estate

 

 

3,174

 

 

 

—

 

 

 

854

 

 

 

1,673

 

 

 

5,701

 

Total nonperforming assets

 

$

51,643

 

 

$

4,216

 

 

$

7,996

 

 

$

17,686

 

 

$

81,541

 

Nonperforming assets to total loans and other real estate by category

 

 

0.28

%

 

 

0.29

%

 

 

0.39

%

 

 

4.07

%

 

 

0.37

%

Nonperforming assets to total loans, excluding Warehouse Purchase Program loans, and other real estate by category

 

 

0.30

%

 

 

0.29

%

 

 

0.39

%

 

 

4.07

%

 

 

0.39

%

Nonaccrual loans to total loans

 

 

0.25

%

 

 

0.29

%

 

 

0.35

%

 

 

3.70

%

 

 

0.33

%

Nonaccrual loans to total loans, excluding Warehouse Purchase Program loans

 

 

0.27

%

 

 

0.29

%

 

 

0.35

%

 

 

3.70

%

 

 

0.35

%

The Company had $150.8 million in nonperforming assets at December 31, 2025, compared with $81.5 million at December 31, 2024 and $72.7 million at December 31, 2023. The nonperforming assets consisted of 449 separate credits or other real estate properties at December 31, 2025, compared with 368 at December 31, 2024 and 292 at December 31, 2023. The Company had $137.2 million, $73.6 million and $68.7 million in nonaccrual loans at December 31, 2025, 2024 and 2023, respectively.

At December 31, 2025, of the total nonperforming assets, $105.0 million resulted from originated loans, $19.2 million resulted from re-underwritten acquired loans, $6.4 million resulted from Non-PCD loans and $20.2 million resulted from PCD loans. At December 31, 2024, of the total nonperforming assets, $51.6 million resulted from originated loans, $4.2 million resulted from re-underwritten acquired loans, $8.0 million resulted from Non-PCD loans and $17.7 million resulted from PCD loans.

 

Nonperforming assets were 0.69% and 0.37% of total loans and other real estate at December 31, 2025 and 2024, respectively. The allowance for credit losses on loans as a percentage of total nonperforming loans was 242.7% at December 31, 2025 and 463.9% at December 31, 2024.

51

 

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:

 

 

 

Years Ended December 31,

 

 

 

2025

 

 

2024

 

 

2023

 

 

 

(Dollars in thousands)

 

Average loans outstanding

 

$

21,972,769

 

 

$

21,953,851

 

 

$

20,576,902

 

Gross loans outstanding at end of period

 

$

21,805,368

 

 

$

22,149,209

 

 

$

21,180,538

 

Allowance for credit losses on loans at beginning of period

 

$

351,805

 

 

$

332,362

 

 

$

281,576

 

Initial allowance on loans purchased with credit deterioration

 

 

—

 

 

 

26,078

 

 

 

76,793

 

Provision for credit losses

 

 

—

 

 

 

7,923

 

 

 

11,984

 

Charge-offs:

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

 

(13,162

)

 

 

(9,706

)

 

 

(19,603

)

Real estate and agriculture

 

 

(4,848

)

 

 

(4,262

)

 

 

(17,493

)

Consumer and other

 

 

(6,480

)

 

 

(6,271

)

 

 

(5,688

)

Recoveries:

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

 

3,059

 

 

 

2,932

 

 

 

3,198

 

Real estate and agriculture

 

 

2,182

 

 

 

1,664

 

 

 

702

 

Consumer and other

 

 

1,186

 

 

 

1,085

 

 

 

893

 

Net charge-offs(1)

 

 

(18,063

)

 

 

(14,558

)

 

 

(37,991

)

Allowance for credit losses on loans at end of period

 

$

333,742

 

 

$

351,805

 

 

$

332,362

 

Ratio of allowance to end of period loans

 

 

1.53

%

 

 

1.59

%

 

 

1.57

%

Ratio of allowance to end of period loans, excluding Warehouse Purchase Program loans

 

 

1.63

%

 

 

1.67

%

 

 

1.63

%

Ratio of net charge-offs to average loans

 

 

0.08

%

 

 

0.07

%

 

 

0.18

%

Ratio of allowance to end of period nonperforming loans

 

 

242.7

%

 

 

463.9

%

 

 

468.9

%

Ratio of allowance to end of period nonaccrual loans

 

 

243.2

%

 

 

477.7

%

 

 

483.9

%

 

(1)
There was no net charge-off activity on Warehouse Purchase Program loans during the periods presented.

 

The allowance for credit losses is adjusted through charges to earnings in the form of a provision for credit losses. Management has established an allowance for credit losses that it believes is management’s best estimate of current expected credit losses on the Company’s loan portfolio as of December 31, 2025. The amount of the allowance for credit losses on loans 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, (3) provisions for credit losses charged to earnings that increase the allowance, and (4) provision releases returned to earnings that decrease 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, future adjustments may be necessary if economic conditions or borrower performance differ from the assumptions used in making the initial determinations.

The Company’s allowance for credit losses on loans consists of two components: (1) a specific valuation allowance based on expected lifetime losses on specifically identified loans and (2) a general valuation allowance based on historical lifetime loan loss experience, current economic conditions, reasonable and supportable forecasted 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. 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.

52

 

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, 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 the Warehouse Purchase Program, the capitalization and liquidity of the mortgage banking client, the operating experience, the Client’s satisfactory underwriting of purchased loans and the consistent timeliness by the Client of loan resale to investors;
•
for agriculture 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 agriculture 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 lifetime loan loss experience, concentration risk of specific loan types, the volume, growth and composition of the Company’s loan portfolio, current economic conditions and reasonable and supportable forecasted economic conditions that may affect borrower ability to pay and the value of collateral, the evaluation of the Company’s loan portfolio through its internal loan review process, other qualitative risk factors both internal and external to the Company and other relevant factors. Historical lifetime loan loss experience is determined by utilizing an open-pool (“cumulative loss rate”) methodology. Adjustments to the historical lifetime loan loss experience are made for differences in current loan pool risk characteristics such as portfolio concentrations, delinquency, non-accrual, and watch list levels, as well as changes in current and forecasted economic conditions such as unemployment rates, property and collateral values, and other indices relating to economic activity. The utilization of reasonable and supportable forecasts includes an immediate reversion to lifetime historical loss rates. 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. Allocation of a portion of the allowance to one category of loans does not preclude its availability to cover expected losses in other categories.

A change in the allowance for credit losses can be attributable to several factors, most notably (1) specific reserves identified for impaired loans and PCD loans, (2) historical lifetime credit loss information, (3) changes in current and forecasted environmental factors and (4) growth in the balance of loans.

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 lifetime credit losses, on the other hand, are based on an open-pool (“cumulative loss rate”) methodology, which is then applied to estimate lifetime credit losses in the loan portfolio. A deterioration in the credit quality of the loan portfolio in the current period would increase the historical lifetime loss rate to be applied in future periods, just as an improvement in credit quality would decrease the historical lifetime loss rate.

53

 

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 current economic metrics, reasonable and supportable forecasted 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 lifetime loss experience. Management’s assessment of qualitative factors is a statistically based approach to determine the loss rate adjustment associated with such factors. Based on the Company’s actual historical lifetime loan loss experience relative to economic and loan portfolio-specific factors at the time the losses occurred, management is able to identify the expected level of lifetime losses as of the date of measurement. The correlation of historical loss experience with current and forecasted economic conditions provides an estimate of lifetime losses that has not been previously factored into the general valuation allowance by the determination of specific reserves and lifetime historical losses. Additionally, the Company considers qualitative factors not easily quantified and the possibility of model 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 lifetime loss.

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. 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.

Non-PCD loans that were not deemed impaired subsequent to the acquisition date are considered non-impaired and are evaluated as part of the general valuation allowance. Non-PCD 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-PCD 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-PCD 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-PCD loan with the recorded investment in such loan. In the future, the Company will continue to analyze impaired Non-PCD 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.

PCD loans are monitored individually or on a pooled basis quarterly to assess for changes in expected cash flows subsequent to acquisition. If a deterioration in cash flows is identified, an increase to the PCD reserves for that individual loan or pool of loans may be required. PCD loans were recorded at their acquisition date fair values based on expected cash flows with a reserve established for the estimate of expected future cash flows. 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.

As described in the section captioned “Critical Accounting Estimates” 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 lifetime loss information and specific reserves, provides the Company with an estimate of lifetime losses. The allowance must reflect changes in the balance of loans subject to the allowance methodology, as well as the estimated lifetime losses associated with those loans.

54

 

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 cover expected losses from any loan category.

 

 

December 31,

 

 

 

2025

 

 

2024

 

 

2023

 

 

 

Amount

 

 

Percent of Loans to Total Loans(1)

 

 

Amount

 

 

Percent of Loans to Total Loans(1)

 

 

Amount

 

 

Percent of Loans to Total Loans(1)

 

 

 

(Dollars in thousands)

 

Balance of allowance for credit losses on loans applicable to:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

77,939

 

 

 

11.2

%

 

$

65,500

 

 

 

11.9

%

 

$

59,832

 

 

 

11.3

%

Real estate

 

 

223,664

 

 

 

81.9

%

 

 

250,866

 

 

 

81.4

%

 

 

254,091

 

 

 

83.1

%

Agriculture and agriculture real estate

 

 

23,438

 

 

 

5.0

%

 

 

27,693

 

 

 

4.9

%

 

 

11,380

 

 

 

4.0

%

Consumer and other

 

 

8,701

 

 

 

1.9

%

 

 

7,746

 

 

 

1.8

%

 

 

7,059

 

 

 

1.6

%

Total allowance for credit losses on loans

 

$

333,742

 

 

 

100.0

%

 

$

351,805

 

 

 

100.0

%

 

$

332,362

 

 

 

100.0

%

 

(1)
Loans outstanding as a percentage of total loans, excluding Warehouse Purchase Program loans.

The Company further disaggregates its allowance for credit losses to distinguish between the portion of the allowance attributed to originated loans and the portion attributed to acquired loans.

The following tables present, as of and for the periods indicated, information regarding the allowance for credit losses on loans differentiated between originated loans and acquired loans, which includes re-underwritten acquired loans, Non-PCD loans and PCD loans. Reported net charge-offs may include those from Non-PCD loans and PCD loans, but only if the total charge-off required is greater than the remaining discount.

 

 

As of and for the Year Ended December 31, 2025

 

 

 

Originated Loans

 

 

Acquired Loans

 

 

Total

 

 

 

(Dollars in thousands)

 

Average loans outstanding

 

$

18,309,842

 

 

$

3,662,927

 

 

$

21,972,769

 

Gross loans outstanding at end of period

 

$

18,577,094

 

 

$

3,228,274

 

 

$

21,805,368

 

Allowance for credit losses on loans at beginning of period

 

$

227,238

 

 

$

124,567

 

 

$

351,805

 

Provision for credit losses

 

 

21,943

 

 

 

(21,943

)

 

 

—

 

Charge-offs:

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

 

(12,321

)

 

 

(841

)

 

 

(13,162

)

Real estate and agriculture

 

 

(2,871

)

 

 

(1,977

)

 

 

(4,848

)

Consumer and other

 

 

(6,159

)

 

 

(321

)

 

 

(6,480

)

Recoveries:

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

 

1,513

 

 

 

1,546

 

 

 

3,059

 

Real estate and agriculture

 

 

900

 

 

 

1,282

 

 

 

2,182

 

Consumer and other

 

 

1,039

 

 

 

147

 

 

 

1,186

 

Net charge-offs(1)

 

 

(17,899

)

 

 

(164

)

 

 

(18,063

)

Allowance for credit losses on loans at end of period

 

$

231,282

 

 

$

102,460

 

 

$

333,742

 

Ratio of allowance to end of period loans

 

 

1.24

%

 

 

3.17

%

 

 

1.53

%

Ratio of allowance to end of period loans, excluding Warehouse Purchase Program loans

 

 

1.34

%

 

 

3.17

%

 

 

1.63

%

Ratio of net charge-offs to average loans

 

 

0.10

%

 

 

0.00

%

 

 

0.08

%

Ratio of allowance to end of period nonperforming loans

 

 

240.6

%

 

 

247.5

%

 

 

242.7

%

Ratio of allowance to end of period nonaccrual loans

 

 

241.4

%

 

 

247.5

%

 

 

243.2

%

 

55

 

 

 

 

As of and for the Year Ended December 31, 2024

 

 

 

Originated Loans

 

 

Acquired Loans

 

 

Total

 

 

 

(Dollars in thousands)

 

Average loans outstanding

 

$

18,080,054

 

 

$

3,873,797

 

 

$

21,953,851

 

Gross loans outstanding at end of period

 

$

18,179,937

 

 

$

3,969,272

 

 

$

22,149,209

 

Allowance for credit losses on loans at beginning of period

 

$

222,413

 

 

$

109,949

 

 

$

332,362

 

Initial allowance on loans purchased with credit deterioration

 

 

—

 

 

 

26,078

 

 

 

26,078

 

Provision for credit losses

 

 

13,026

 

 

 

(5,103

)

 

 

7,923

 

Charge-offs:

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

 

(2,521

)

 

 

(7,185

)

 

 

(9,706

)

Real estate and agriculture

 

 

(1,641

)

 

 

(2,621

)

 

 

(4,262

)

Consumer and other

 

 

(5,881

)

 

 

(390

)

 

 

(6,271

)

Recoveries:

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

 

839

 

 

 

2,093

 

 

 

2,932

 

Real estate and agriculture

 

 

41

 

 

 

1,623

 

 

 

1,664

 

Consumer and other

 

 

962

 

 

 

123

 

 

 

1,085

 

Net charge-offs(1)

 

 

(8,201

)

 

 

(6,357

)

 

 

(14,558

)

Allowance for credit losses on loans at end of period

 

$

227,238

 

 

$

124,567

 

 

$

351,805

 

Ratio of allowance to end of period loans

 

 

1.25

%

 

 

3.14

%

 

 

1.59

%

Ratio of allowance to end of period loans, excluding Warehouse Purchase Program loans

 

 

1.33

%

 

 

3.14

%

 

 

1.67

%

Ratio of net charge-offs to average loans

 

 

0.05

%

 

 

0.16

%

 

 

0.07

%

Ratio of allowance to end of period nonperforming loans

 

 

468.8

%

 

 

455.2

%

 

 

463.9

%

Ratio of allowance to end of period nonaccrual loans

 

 

491.0

%

 

 

455.2

%

 

 

477.7

%

 

(1)
There was no net charge-off activity on Warehouse Purchase Program loans during the periods presented.

The Company had gross charge-offs on originated loans of $21.4 million during the year ended December 31, 2025, compared with $10.0 million during the year ended December 31, 2024. Partially offsetting these charge-offs were recoveries on originated loans of $3.5 million for the year ended December 31, 2025, compared with $1.8 million for the year ended December 31, 2024. Total charge-offs for the year ended December 31, 2025, were $24.5 million, partially offset by total recoveries of $6.4 million. Total charge-offs for the year ended December 31, 2024, were $20.2 million, partially offset by total recoveries of $5.7 million.

The following table shows the allocation of the net charge-offs and net recoveries among various categories of loans as of the dates indicated.

 

 

 

December 31,

 

 

 

2025

 

 

2024

 

 

 

Amount

 

 

Percent of Net Charge-offs to Average Loans

 

 

Amount

 

 

Percent of Net Charge-offs to Average Loans

 

 

 

(Dollars in thousands)

 

Balance of net (charge-offs) recoveries applicable to:

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

(10,103

)

 

 

0.05

%

 

$

(6,774

)

 

 

0.03

%

Real estate:

 

 

 

 

 

 

 

 

 

 

 

 

Construction, land development and other land loans

 

 

279

 

 

 

0.00

%

 

 

(779

)

 

 

0.00

%

1-4 family residential (including home equity)

 

 

(2,421

)

 

 

0.01

%

 

 

(1,471

)

 

 

0.01

%

Commercial real estate (including multi-family residential)

 

 

(583

)

 

 

0.00

%

 

 

(222

)

 

 

0.00

%

Agriculture (includes farmland)

 

 

59

 

 

 

0.00

%

 

 

(126

)

 

 

0.00

%

Consumer and other

 

 

(5,294

)

 

 

0.02

%

 

 

(5,186

)

 

 

0.02

%

Total net charge-offs

 

$

(18,063

)

 

 

0.08

%

 

$

(14,558

)

 

 

0.07

%

 

56

 

The following tables show the allocation of the allowance for credit losses among various categories of loans disaggregated between originated loans, re-underwritten acquired loans, Non-PCD loans and PCD 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 cover expected losses from any loan category, regardless of whether allocated to an originated loan or an acquired loan.

 

 

December 31, 2025

 

 

 

 

 

 

Acquired Loans

 

 

 

 

 

 

 

 

 

Originated Loans

 

 

Re-Underwritten Acquired Loans

 

 

Non-PCD Loans

 

 

PCD Loans

 

 

Total Allowance

 

 

Percent of Loans to Total Loans(1)

 

 

 

(Dollars in thousands)

 

Balance of allowance for credit losses on loans applicable to:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

45,778

 

 

$

24,461

 

 

$

2,267

 

 

$

5,433

 

 

$

77,939

 

 

 

11.2

%

Real estate

 

 

168,799

 

 

 

10,279

 

 

 

12,813

 

 

 

31,773

 

 

 

223,664

 

 

 

81.9

%

Agriculture and agriculture real estate

 

 

9,724

 

 

 

2,005

 

 

 

543

 

 

 

11,166

 

 

 

23,438

 

 

 

5.0

%

Consumer and other

 

 

6,981

 

 

 

1,636

 

 

 

81

 

 

 

3

 

 

 

8,701

 

 

 

1.9

%

Total allowance for credit losses on loans

 

$

231,282

 

 

$

38,381

 

 

$

15,704

 

 

$

48,375

 

 

$

333,742

 

 

 

100.0

%

 

 

 

December 31, 2024

 

 

 

 

 

 

Acquired Loans

 

 

 

 

 

 

 

 

 

Originated Loans

 

 

Re-Underwritten Acquired Loans

 

 

Non-PCD Loans

 

 

PCD Loans

 

 

Total Allowance

 

 

Percent of Loans to Total Loans(1)

 

 

 

(Dollars in thousands)

 

Balance of allowance for credit losses on loans applicable to:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

34,528

 

 

$

18,003

 

 

$

5,159

 

 

$

7,810

 

 

$

65,500

 

 

 

11.9

%

Real estate

 

 

176,668

 

 

 

11,676

 

 

 

18,514

 

 

 

44,008

 

 

 

250,866

 

 

 

81.4

%

Agriculture and agriculture real estate

 

 

8,646

 

 

 

2,385

 

 

 

1,143

 

 

 

15,519

 

 

 

27,693

 

 

 

4.9

%

Consumer and other

 

 

7,396

 

 

 

199

 

 

 

137

 

 

 

14

 

 

 

7,746

 

 

 

1.8

%

Total allowance for credit losses on loans

 

$

227,238

 

 

$

32,263

 

 

$

24,953

 

 

$

67,351

 

 

$

351,805

 

 

 

100.0

%

 

(1)
Loans outstanding as a percentage of total loans, excluding Warehouse Purchase Program loans.

At December 31, 2025, the allowance for credit losses on loans totaled $333.7 million or 1.53% of total loans, including acquired loans with discounts, a decrease of $18.1 million or 5.1% compared to the allowance for credit losses on loans totaling $351.8 million or 1.59% of total loans, including acquired loans with discounts, at December 31, 2024. Net charge-offs were $18.1 million for the year ended December 31, 2025. For the year ended December 31, 2025, $18.9 million of reserves on resolved PCD loans without any related charge-offs were released to the general reserve.

At December 31, 2024, the allowance for credit losses on loans totaled $351.8 million or 1.59% of total loans, including acquired loans with discounts, an increase of $19.4 million or 5.8% compared to the allowance for credit losses on loans totaling $332.4 million or 1.57% of total loans, including acquired loans with discounts, at December 31, 2023, primarily due to the Lone Star Merger. Net charge-offs were $14.6 million for the year ended December 31, 2024. Net charge-offs for the year ended December 31, 2024 included $3.4 million related to resolved PCD loans, which had specific reserves that were allocated to the charge-offs. Additionally, reserves on PCD loans increased by $26.1 million due to Day One accounting for PCD loans at the time of the Lone Star Merger. Further, $15.4 million of reserves on resolved PCD loans were released to the general reserve.

At December 31, 2025, $231.3 million of the allowance for credit losses on loans was attributable to originated loans compared with $227.2 million of the allowance at December 31, 2024, an increase of $4.0 million or 1.8%. At December 31, 2025, $38.4 million of the allowance for credit losses on loans was attributable to re-underwritten acquired loans compared with $32.3 million of the allowance at December 31, 2024, an increase of $6.1 million or 19.0%. At December 31, 2025, $15.7 million of the allowance for credit losses on loans was attributable to Non-PCD loans compared with $25.0 million of the allowance at December 31, 2024, a decrease of $9.2 million or 37.1%. At December 31, 2025, $48.4 million of the allowance for credit losses on loans attributable to PCD loans compared with $67.4 million of the allowance at December 31, 2024, a decrease of $19.0 million or 28.2%.

 

57

 

At December 31, 2025 and 2024, the Company had $22.7 million and $35.2 million, respectively, of total outstanding net accretable discounts on Non-PCD and PCD loans.

The Company believes that the allowance for credit losses on loans represent management’s best estimate of current expected credit losses on the Company’s loan portfolio at December 31, 2025. Nevertheless, the Company could sustain losses in future periods that could be substantial in relation to the size of the allowance at December 31, 2025.

Allowance for Credit Losses on Off-Balance Sheet Credit Exposures

The allowance for credit losses on off-balance sheet credit exposures estimates expected credit losses over the contractual period in which there is exposure to credit risk via a contractual obligation to extend credit, except when an obligation is unconditionally cancelable by the Company. The allowance is adjusted by provisions for credit losses charged to earnings that increase the allowance, or by provision releases returned to earnings that decrease the allowance. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on the commitments expected to fund. The estimate of commitments expected to fund is affected by historical analysis of utilization rates. The expected credit loss rates applied to the commitments expected to fund are affected by the general valuation allowance utilized for outstanding balances with the same underlying assumptions and drivers. As of December 31, 2025 and 2024, the Company had $37.6 million in allowance for credit losses on off-balance sheet credit exposures. The allowance for credit losses on off-balance sheet credit exposures is a separate line item on the Company’s consolidated balance sheet.

The following table represents a rollforward of the allowance for credit losses on off-balance sheet credit exposures as of the dates indicated.

 

 

 

Year Ended December 31,

 

 

 

2025

 

 

2024

 

 

 

(Dollars in thousands)

 

Balance at beginning of period

 

$

37,646

 

 

$

36,503

 

Provision for credit losses on off-balance sheet credit exposures

 

 

—

 

 

 

1,143

 

Balance at end of period

 

$

37,646

 

 

$

37,646

 

 

58

 

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, 2025, the carrying amount of investment securities totaled $10.61 billion, a decrease of $481.0 million or 4.3% compared with $11.09 billion at December 31, 2024. At December 31, 2025, securities represented 27.6% of total assets compared with 28.0% of total assets at December 31, 2024.

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:

 

 

 

December 31,

 

 

 

2025

 

 

2024

 

 

2023

 

 

 

Amortized Cost

 

 

Fair Value

 

 

Amortized Cost

 

 

Fair Value

 

 

Amortized Cost

 

 

Fair Value

 

 

 

(Dollars in thousands)

 

Available for Sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate debt securities

 

$

7,935

 

 

$

10,453

 

 

$

14,350

 

 

$

16,325

 

 

$

20,698

 

 

$

21,787

 

Collateralized mortgage obligations

 

 

209,689

 

 

 

207,444

 

 

 

216,142

 

 

 

212,990

 

 

 

321,881

 

 

 

320,044

 

Mortgage-backed securities

 

 

120,948

 

 

 

120,300

 

 

 

108,524

 

 

 

107,645

 

 

 

97,779

 

 

 

96,757

 

Total

 

$

338,572

 

 

$

338,197

 

 

$

339,016

 

 

$

336,960

 

 

$

440,358

 

 

$

438,588

 

Held to Maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agencies

 

 

6,032

 

 

$

6,040

 

 

$

5,861

 

 

$

5,817

 

 

$

7,631

 

 

$

7,579

 

States and political subdivisions

 

 

69,221

 

 

 

68,123

 

 

 

98,125

 

 

 

95,835

 

 

 

116,497

 

 

 

116,055

 

Corporate debt securities

 

 

12,000

 

 

 

10,980

 

 

 

12,000

 

 

 

8,160

 

 

 

12,000

 

 

 

7,800

 

Collateralized mortgage obligations

 

 

223,675

 

 

 

212,508

 

 

 

232,345

 

 

 

208,217

 

 

 

263,250

 

 

 

242,386

 

Mortgage-backed securities

 

 

9,964,300

 

 

 

9,135,714

 

 

 

10,409,133

 

 

 

9,064,450

 

 

 

11,965,930

 

 

 

10,610,778

 

Total

 

$

10,275,228

 

 

$

9,433,365

 

 

$

10,757,464

 

 

$

9,382,479

 

 

$

12,365,308

 

 

$

10,984,598

 

The investment securities portfolio is measured for expected credit losses by segregating the portfolio into two general classifications and applying the appropriate expected credit losses methodology. Investment securities classified as available for sale or held to maturity are evaluated for expected credit losses under CECL.

Available for sale securities. For available for sale securities in an unrealized loss position, the amount of the expected credit losses 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 expected credit losses will be recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date. If an entity does not intend to sell the security and it is not more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis less any current-period loss, the expected credit losses will 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 expected credit losses 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 expected credit losses related to the noncredit portion is recognized in other comprehensive income, net of applicable taxes. The previous amortized cost basis less the expected credit losses recognized in earnings will become the new amortized cost basis of the investment.

As of December 31, 2025, management does not have the intent to sell any of the securities classified as available for sale before a recovery of cost. In addition, management believes it is more likely than not that the Company will not be required to sell any of its investment securities before a recovery of cost. The unrealized losses are largely due to changes in market interest rates and spread relationships since 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

59

 

the securities are impaired due to reasons of credit quality. Accordingly, as of December 31, 2025, management believes that there is no potential for credit losses on available for sale securities.

 

Held to maturity securities. The Company’s held to maturity investments include mortgage-related bonds issued by either the Government National Mortgage Corporation (“Ginnie Mae”), Fannie Mae or Federal Home Loan Mortgage Corporation (“Freddie Mac”). Ginnie Mae issued securities are explicitly guaranteed by the U.S. government, while Fannie Mae and Freddie Mac issued securities are fully guaranteed by those respective United States government-sponsored agencies, and conditionally guaranteed by the full faith and credit of the United States. The Company’s held to maturity securities also include taxable and tax-exempt municipal securities issued primarily by school districts, utility districts and municipalities located in Texas. The Company’s investment in municipal securities is exposed to credit risk. The securities are highly rated by major rating agencies and regularly reviewed by management. A significant portion are guaranteed or insured by either the Texas Permanent School Fund, Assured Guaranty or Build America Mutual. As of December 31, 2025, the Company’s municipal securities represent 0.7% of the securities portfolio. Management has the ability and intent to hold the securities classified as held to maturity until they mature, at which time the Company will receive full value for the securities. Accordingly, as of December 31, 2025, management believes that there is no potential for material credit losses on held to maturity securities.

The following table summarizes the contractual maturity of securities and their weighted average yields as of December 31, 2025. The contractual maturity of a mortgage-backed security is the date at which the last underlying mortgage matures. The weighted average life of the Company’s securities portfolio was 4.31 years, with a modified duration of 3.68 years at December 31, 2025. Available for sale securities are shown at fair value and held to maturity securities are shown at amortized cost. For purposes of the table below, tax-exempt states and political subdivisions are calculated on a tax equivalent basis.

 

 

December 31, 2025

 

 

 

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. Government agencies

 

$

3,610

 

 

 

3.93

%

 

$

2,422

 

 

 

3.79

%

 

$

—

 

 

 

—

 

 

$

—

 

 

 

—

 

 

$

6,032

 

 

 

3.88

%

States and political subdivisions

 

 

13,000

 

 

 

3.95

%

 

 

38,044

 

 

 

3.85

%

 

 

18,177

 

 

 

1.55

%

 

 

—

 

 

 

—

 

 

 

69,221

 

 

 

3.27

%

Corporate debt securities

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

22,453

 

 

 

4.55

%

 

 

—

 

 

 

—

 

 

 

22,453

 

 

 

4.55

%

Collateralized mortgage obligations

 

 

5

 

 

 

3.19

%

 

 

145,581

 

 

 

4.48

%

 

 

39,412

 

 

 

4.35

%

 

 

246,121

 

 

 

3.21

%

 

 

431,119

 

 

 

3.78

%

Mortgage-backed securities

 

 

2,280

 

 

 

2.45

%

 

 

605,901

 

 

 

2.75

%

 

 

1,166,787

 

 

 

2.37

%

 

 

8,309,632

 

 

 

2.12

%

 

 

10,084,600

 

 

 

2.18

%

Total

 

$

18,895

 

 

 

3.77

%

 

$

791,948

 

 

 

3.13

%

 

$

1,246,829

 

 

 

2.46

%

 

$

8,555,753

 

 

 

2.15

%

 

$

10,613,425

 

 

 

2.26

%

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 with or without call or prepayment penalties. 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.

At December 31, 2025 and 2024, 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.

The average tax equivalent yield of the securities portfolio was 2.26% as of December 31, 2025, compared with 2.05% and 2.07% as of December 31, 2024 and 2023, respectively. The average tax equivalent yield on the securities portfolio is based upon expected prepayment speeds, other industry standard projections and on a 21% tax rate in 2025, 2024 and 2023.

The average yield excluding the tax equivalent adjustment was 2.16% for the year ended December 31, 2025, compared with 2.07% for the year ended December 31, 2024, and 2.06% for the year ended December 31, 2023. The overall change in the average securities portfolio over the comparable periods was primarily due to maturities, principal amortization, prepayments and sales of investment securities during the year ended December 31, 2025.

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 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.

60

 

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 homeowners 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 an acceleration of discount accretion. At December 31, 2025, 82.4% of the mortgage-backed securities held by the Company had contractual final maturities of more than ten years with a weighted average life of 4.67 years. As noted above, contractual maturities are not a reliable indicator of expected life because of borrower prepayment rights.

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. So long as the collateral cash flow is adequate to meet scheduled bond payments, the mortgage collateral pool can be structured to accommodate various desired bond repayment schedules. 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.

Visa Class B-1 Stock Exchange. During the second quarter of 2024, the Bank tendered all of its shares of Visa Class B-1 common stock in exchange for a combination of Visa Class B-2 common stock and Visa Class C common stock, pursuant to the terms and subject to the conditions of the public offering of Visa to exchange its Class B-1 common stock for a combination of shares of its Class B-2 common stock and Class C common stock, which expired on May 3, 2024. The Company recorded a gain of $20.6 million during the second quarter of 2024 based on the conversion privilege of the Class C common stock and the closing price of Visa Class A common stock. In the exchange, the Bank received 48,492 shares of Class B-2 stock, recorded at zero cost basis, and 19,245 shares of Class C common stock and has subsequently sold all shares of Class C stock.

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, 2025, were $28.48 billion, an increase of $101.1 million compared with $28.38 billion at December 31, 2024. Total deposits at December 31, 2024, were $28.38 billion, an increase of $1.20 billion or 4.4% compared with $27.18 billion at December 31, 2023, primarily due to the Lone Star Merger acquired deposits. Noninterest-bearing deposits at December 31, 2025, were $9.47 billion compared with $9.80 billion at December 31, 2024, a decrease of $330.5 million. Noninterest-bearing deposits at December 31, 2024 were $9.80 billion compared with $9.78 billion at December 31, 2023, an increase of $21.9 million. Interest-bearing deposits at December 31, 2025, were $19.01 billion, an increase of $431.7 million or 2.3% compared with $18.58 billion at December 31, 2024. Interest-bearing deposits at December 31, 2024, were $18.58 billion, an increase of $1.18 billion or 6.8% compared with $17.40 billion at December 31, 2023.

The daily average balances and weighted average rates paid on deposits for each of the years ended December 31, 2025, 2024 and 2023 are presented below:

 

 

Years Ended December 31,

 

 

 

2025

 

 

2024

 

 

2023

 

 

 

Average Balance

 

 

Average Rate

 

 

Average Balance

 

 

Average Rate

 

 

Average Balance

 

 

Average Rate

 

 

 

(Dollars in thousands)

 

Interest-bearing checking

 

$

4,873,634

 

 

 

0.74

%

 

$

4,900,189

 

 

 

0.72

%

 

$

5,150,049

 

 

 

0.38

%

Regular savings

 

 

2,647,516

 

 

 

0.69

 

 

 

2,765,978

 

 

 

0.71

 

 

 

3,164,512

 

 

 

0.70

 

Money market savings

 

 

6,348,574

 

 

 

2.60

 

 

 

6,183,032

 

 

 

2.83

 

 

 

5,965,333

 

 

 

2.45

 

Time deposits

 

 

4,434,168

 

 

 

3.63

 

 

 

4,301,763

 

 

 

4.16

 

 

 

2,832,754

 

 

 

2.99

 

Total interest-bearing deposits

 

 

18,303,892

 

 

 

2.08

 

 

 

18,150,962

 

 

 

2.25

 

 

 

17,112,648

 

 

 

1.59

 

Noninterest-bearing deposits

 

 

9,501,997

 

 

 

—

 

 

 

9,683,980

 

 

 

—

 

 

 

10,224,241

 

 

 

—

 

Total deposits

 

$

27,805,889

 

 

 

1.37

%

 

$

27,834,942

 

 

 

1.47

%

 

$

27,336,889

 

 

 

1.00

%

 

61

 

The Company’s ratio of average noninterest-bearing deposits to average total deposits for the years ended December 31, 2025, 2024 and 2023 was 34.2%, 34.8% and 37.4%, respectively.

The following table sets forth the amount of the Company’s certificates of deposit that are $250,000 or greater by time remaining until maturity at December 31, 2025 (dollars in thousands):

Three months or less

 

$

1,149,657

 

 

 

59.2

%

Over three through six months

 

 

437,468

 

 

 

22.6

 

Over six through 12 months

 

 

258,548

 

 

 

13.3

 

Over 12 months

 

 

94,164

 

 

 

4.9

 

Total

 

$

1,939,837

 

 

 

100.0

%

Total uninsured deposits, including certificates of deposits, were $12.45 billion and $11.88 billion at December 31, 2025 and 2024, respectively.

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 of Dallas (“FHLB”), securities sold under repurchase agreements and in 2024, the Federal Reserve Board Bank Term Funding Program (“BTFP”).

The following table presents the Company’s borrowings at December 31, 2025 and 2024:

 

 

FHLB Advances

 

 

Securities Sold Under Repurchase Agreements

 

 

Bank Term Funding Program

 

 

 

(Dollars in thousands)

 

December 31, 2025

 

 

 

 

 

 

 

 

 

Amount outstanding at year-end

 

$

1,950,000

 

 

$

201,216

 

 

$

—

 

Weighted average interest rate at year-end

 

 

3.63

%

 

 

1.98

%

 

 

—

 

Maximum month-end balance during the year

 

$

3,200,000

 

 

$

220,812

 

 

$

—

 

Average balance outstanding during the year

 

$

2,389,589

 

 

$

196,205

 

 

$

—

 

Weighted average interest rate during the year

 

 

4.36

%

 

 

2.35

%

 

 

—

 

December 31, 2024

 

 

 

 

 

 

 

 

 

Amount outstanding at year-end

 

$

3,200,000

 

 

$

221,913

 

 

$

—

 

Weighted average interest rate at year-end

 

 

4.38

%

 

 

2.44

%

 

 

—

 

Maximum month-end balance during the year

 

$

3,200,000

 

 

$

297,629

 

 

$

3,900,000

 

Average balance outstanding during the year

 

$

125,956

 

 

$

257,171

 

 

$

3,676,954

 

Weighted average interest rate during the year

 

 

4.58

%

 

 

2.70

%

 

 

4.78

%

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 borrowings and are 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, 2025, the Company had total borrowing capacity of $7.58 billion under this line. FHLB advances of $1.95 billion were outstanding at December 31, 2025, with a weighted average interest rate of 3.63%. At December 31, 2025, the Company had no FHLB long-term notes payable balance outstanding.

Securities sold under repurchase agreements with Company customers—At December 31, 2025, the Company had $201.2 million in securities sold under repurchase agreements compared with $221.9 million at December 31, 2024, a decrease of $20.7 million or 9.3%, with weighted average interest rates paid of 2.35% and 2.70% for the years ended December 31, 2025 and 2024, respectively. Repurchase agreements are generally settled on the following business day. All securities sold under repurchase agreements are collateralized by certain pledged securities.

Bank Term Funding Program— During the second quarter of 2023, the Bank began participating in the BTFP, which ceased extending new loans as of March 11, 2024. Under the BTFP program, eligible depository institutions could obtain loans of up to one year in length by pledging U.S. Treasuries, agency debt and mortgage-backed securities, and other qualifying assets as collateral. At December 31, 2025 and 2024, the Company had no BTFP balance outstanding.

62

 

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 ultimately will impact both (1) the level of income and expense recorded on most of the Company’s assets and liabilities and (2) 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, a loss of current fair market values, or both. The objective is to measure the effect on net interest income and to adjust the balance sheet to minimize the inherent risk while maximizing income.

The Company primarily manages its exposure to interest rates by structuring its balance sheet in the ordinary course of business. The Company does not employ material amounts of 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, with the exception of how commodity prices may impact the Company’s borrowers’ ability to repay loans, the Company is not subject to foreign exchange or commodity price risk. The Company is not involved in trading assets for its own account.

The Company’s exposure to interest rate risk is managed by the Asset Liability Committee (“ALCO”), which consists 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 minimize its overall exposure to changes in interest rates.

 

The Company primarily uses an interest rate risk simulation model to evaluate the interest rate sensitivity of net interest income and the balance sheet. 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. Interest rate shocks are applied to a static balance sheet to estimate the potential impact on net interest income and the aggregated market value of the balance sheet. As of December 31, 2025, these interest rate shocks consisted of instantaneous and parallel shifts in the yield curve moving from – 400 basis points to + 400 basis points, in 100 basis-point increments. The forecasted net interest income assuming no change in interest rates is compared to the forecasted net interest income in the shocks to measure the sensitivity of the Company’s earnings to changes in interest rates. Other simulations are run on a regular basis that include the gradual and rapid ramping of interest rates, yield curve twists and changes in the balance sheet composition.

The following table summarizes the simulated change in net interest income at the 12-month horizon, considering the balance sheet composition as of December 31, 2025 and 2024:

 

 

Percent Change in Net Interest Income

Change in Interest Rates (Basis Points)

 

December 31, 2025

 

December 31, 2024

+200

 

3.5%

 

1.0%

+100

 

2.2%

 

0.9%

Base

 

0.0%

 

0.0%

-100

 

(3.5)%

 

(2.3)%

-200

 

(7.0)%

 

(5.0)%

The Company continues to manage its asset sensitivity within the scope of its risk tolerances and changing market conditions. At December 31, 2025, a projected 200 basis point increase in rates resulted in a projected increase in net interest income of 3.5% compared with a projected 1.0% increase in net interest income at December 31, 2024. During 2025, the Company continued to reduce the size of its fixed-rate investment portfolio. The Company was also able to gradually decrease the volume of its short-term

63

 

borrowings during the year. With market interest rates generally falling during 2025, these balance sheet shifts were the primary factors causing the Company’s increased asset sensitivity as of December 31, 2025.

The results are significantly influenced by the behavior of demand, money market and savings deposits and the overall balance sheet composition 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 management 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 2025 and 2024, the Company’s liquidity needs were primarily met by core deposits, security and loan maturities and amortizing investment and loan portfolios. Additionally, the Company utilized advances from the FHLB of Dallas.

The Company has an available line of credit with the FHLB, which allows the Company to borrow on a collateralized basis. The Company’s FHLB advances are typically considered short-term borrowings and are 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, 2025, the Company had total borrowing capacity of $7.6 billion under this line. FHLB advances of $2.0 billion were outstanding at December 31, 2025, with a weighted average interest rate of 3.63%. At December 31, 2025, the Company had no FHLB long-term notes payable balance outstanding.

The Company has the ability to borrow on a collateralized basis from the Federal Reserve Discount Window. The discount window allows depository institutions to manage liquidity on a short-term basis and borrowings are usually no longer than 90 days. As of December 31, 2025, the Company had $7.8 billion available in borrowings with no borrowings outstanding.

The Company has available access to purchase funds from correspondent banks, and has been utilized on occasion to take advantage of investment opportunities, however, the Company does not generally rely on this external funding source.

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 $38.28 billion for 2025 compared with $39.60 billion for 2024.

 

 

2025

 

 

2024

 

Source of Funds:

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

Noninterest-bearing

 

 

24.82

%

 

 

24.45

%

Interest-bearing

 

 

47.82

 

 

 

45.84

 

Securities sold under repurchase agreements

 

 

0.51

 

 

 

0.65

 

Other borrowings

 

 

6.24

 

 

 

9.60

 

Other noninterest-bearing liabilities

 

 

0.74

 

 

 

1.01

 

Shareholders’ equity

 

 

19.87

 

 

 

18.45

 

Total

 

 

100.00

%

 

 

100.00

%

 

 

 

 

 

 

 

Uses of Funds:

 

 

 

 

 

 

Loans

 

 

57.40

%

 

 

55.44

%

Securities

 

 

27.94

 

 

 

30.14

 

Federal funds sold and other interest-earning assets

 

 

2.64

 

 

 

3.07

 

Other noninterest-earning assets

 

 

12.02

 

 

 

11.35

 

Total

 

 

100.00

%

 

 

100.00

%

Average noninterest-bearing deposits to average deposits

 

 

34.17

%

 

 

34.79

%

Average loans to average deposits

 

 

79.02

%

 

 

78.87

%

64

 

The Company’s largest source of funds is deposits, and the Company’s principal uses of funds are loans and securities. The Company does not expect a change in the source or use of its funds in the foreseeable future. The Company’s average deposits decreased 0.1% for the year ended December 31, 2025, compared with the year ended December 31, 2024. The Company’s average loans increased 0.1% for the year ended December 31, 2025, compared with the year ended December 31, 2024. 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 4.31 years and a modified duration of 3.68 years at December 31, 2025.

As of December 31, 2025, the Company had outstanding $3.52 billion in commitments to extend credit, $95.3 million in commitments associated with outstanding standby letters of credit and $808.2 million in commitments associated with unused capacity on Warehouse Purchase Program loans. 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, 2025, the Company had no exposure to future cash requirements associated with known uncertainties or capital expenditures of a material nature.

As of December 31, 2025, the Company had cash and cash equivalents of $1.75 billion compared with $1.97 billion at December 31, 2024, a decrease of $224.7 million or 11.4%. The decrease was primarily due to net repayments of other short-term borrowings of $1.25 billion, payments of cash dividends of $221.4 million, repurchase of common stock of $157.2 million and a net decrease in securities sold under repurchase agreements of $20.7 million, partially offset by net cash provided by operating activities of $550.0 million, net proceeds from maturities, sales and principal paydowns of investment securities of $465.2 million, net proceeds from the repayment of loans of $324.1 million and cash provided by an increase in deposits of $101.2 million.

Share Repurchases

On January 26, 2026, the Company announced a stock repurchase program under which the Company could repurchase up to 5%, or approximately 4.87 million shares, of its outstanding common stock over a one-year period expiring on January 26, 2027, at the discretion of management. Under the stock repurchase program, the Company may repurchase shares from time to time at prevailing market prices, through open-market purchases or privately negotiated transactions, depending upon market conditions. Repurchases under this program may also be made in transactions outside the safe harbor during a pending merger, acquisition or similar transaction. The timing and actual number of shares repurchased will depend on a variety of factors including price, corporate and regulatory requirements, market conditions, and other corporate liquidity requirements and priorities. Shares of stock repurchased are held as authorized but unissued shares. The Company is not obligated to purchase any particular number of shares, and the Company may suspend, modify or terminate the program at any time and for any reason without prior notice.

On January 21, 2025, the Company announced a stock repurchase program under which the Company could repurchase up to 5%, or approximately 4.8 million shares, of its outstanding common stock over a one-year period expiring on January 21, 2026, at the discretion of management. The Company repurchased approximately 2.3 million shares of its common stock at an average weighted price of $67.04 per share during the year ended December 31, 2025.

On January 16, 2024, the Company announced a stock repurchase program under which the Company could repurchase up to 5%, or approximately 4.7 million shares, of its outstanding common stock over a one-year period expiring on January 16, 2025, at the discretion of management. The Company repurchased approximately 1.2 million shares of its common stock at an average weighted price of $60.35 per share during the year ended December 31, 2024.

Contractual Obligations

The Company’s contractual obligations and other commitments to make future payments (other than deposit obligations and securities sold under repurchase agreements) as of December 31, 2025, are summarized below.

Federal Home Loan Bank Borrowings

The Company’s future cash payments associated with its contractual obligations pursuant to its FHLB advances as of December 31, 2025, is 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)

 

FHLB advances

 

$

1,950,000

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

1,950,000

 

 

65

 

Off-Balance Sheet Items

In the normal course of business, the Company enters into various transactions that, in accordance with GAAP, 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, unused capacity on Warehouse Purchase Program loans and commitments to extend credit expiring by period as of December 31, 2025, are summarized below. Since commitments associated with letters of credit, unused capacity on Warehouse Purchase Program loans and commitments to extend credit may expire unused, the amounts shown may 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

 

$

83,230

 

 

$

10,995

 

 

$

1,063

 

 

$

26

 

 

$

95,314

 

Unused capacity on Warehouse Purchase Program loans

 

 

808,202

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

808,202

 

Commitments to extend credit

 

 

1,480,685

 

 

 

907,638

 

 

 

181,211

 

 

 

946,127

 

 

 

3,515,661

 

Total

 

$

2,372,117

 

 

$

918,633

 

 

$

182,274

 

 

$

946,153

 

 

$

4,419,177

 

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. If 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.

Unused Capacity on Warehouse Purchase Program Loans. For Warehouse Purchase Program loans, the Company has established a maximum purchase facility amount, but reserves the right, at any time, to refuse to buy any mortgage loans offered for sale by its mortgage originator clients for any reason.

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.

Allowance for Credit Losses on Off-balance Sheet Credit Exposures. The Company records an allowance for credit losses on off-balance sheet credit exposure that is adjusted through an entry to provision for credit losses on the Company’s consolidated statement of income. At December 31, 2025 and 2024, this allowance, reported as a separate line item on the Company’s consolidated balance sheet, totaled $37.6 million.

Leases

The Company’s leases relate primarily to operating leases for office space and banking centers. The Company determines if an arrangement is a lease or contains a lease at inception. The Company’s leases have remaining lease terms of 1 to 15 years, which may include the option to extend the lease when it is reasonably certain for the Company to exercise that option. Operating lease right-of-use (“ROU”) assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. The Company uses its incremental collateralized borrowing rate to determine the present value of lease payments. Short-term leases and leases with variable lease costs are immaterial and the Company has one sublease arrangement. Sublease income for the years ended December 31, 2025, 2024 and 2023 was $3.3 million, $3.4 million and $3.1 million, respectively. As of December 31, 2025, operating lease ROU assets and lease liabilities were approximately $28.1 million. ROU assets and lease liabilities were classified as other assets and other liabilities, respectively.

66

 

As of December 31, 2025, the weighted average remaining lease terms of the Company’s operating leases were 5.9 years. The weighted average discount rate used to determine the lease liabilities as of December 31, 2025, for the Company’s operating leases was 3.2%. Cash paid for the Company’s operating leases for the years ended December 31, 2025, 2024 and 2023 was $11.6 million, $11.5 million and $12.0 million, respectively. During the year ended December 31, 2025, the Company obtained $3.5 million in ROU assets in exchange for lease liabilities for nine operating leases.

The Company’s future undiscounted cash payments associated with its operating leases as of December 31, 2025, are summarized below (dollars in thousands).

 

2026

 

$

10,066

 

2027

 

 

7,075

 

2028

 

 

4,107

 

2029

 

 

2,768

 

2030

 

 

2,266

 

Thereafter

 

 

9,663

 

Total undiscounted lease payments

 

$

35,945

 

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 operating lease obligations aggregated approximately $11.6 million, $11.5 million, and $12.1 million for the years ended December 31, 2025, 2024 and 2023, respectively.

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.

The Company is subject to the Basel III Capital Rules, which require the Company to maintain a capital conservation buffer, composed entirely of common equity tier 1 capital (“CET1”), of 2.5%, effectively resulting in minimum ratios of (1) CET1 to risk-weighted assets of 7.0%, (2) Tier 1 capital to risk-weighted assets of 8.5%, (3) total capital (that is, Tier 1 plus Tier 2) to risk-weighted assets of 10.5% and (4) Tier 1 capital to average quarterly assets as reported on consolidated financial statements (known as the “leverage ratio”) of 4.0%. 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.

The CET1, 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. Banking institutions that fail to meet the effective minimum ratios will be subject to constraints on capital distributions, including dividends and share repurchases, and certain discretionary executive compensation. The severity of the constraints depends on the amount of the shortfall and the institution’s “eligible retained income” (that is, four-quarter trailing net income, net of distributions and tax effects not reflected in net income).

As of December 31, 2025, the Company’s ratio of CET1 to risk-weighted assets was 17.55%, Tier 1 capital to risk-weighted assets was 17.55%, total capital to risk-weighted assets was 18.80% and Tier 1 capital to average quarterly assets (leverage ratio) was 11.93%.

67

 

It is important to note that Warehouse Purchase Program loan volumes can increase significantly on the last day of the month, potentially leading to a significant difference between the ending and average balance of Warehouse Purchase Program loans for a given period. At December 31, 2025, Warehouse Purchase Program loans totaled $1.30 billion, compared to an average balance of $1.13 billion. Because the capital ratios above are calculated using ending risk-weighted assets and Warehouse Purchase Program loans are risk-weighted at 100%, the end-of-period increase in these balances can significantly impact the Company’s reported capital ratios.

Total shareholders’ equity increased to $7.62 billion at December 31, 2025, compared with $7.44 billion at December 31, 2024, an increase of $177.6 million or 2.4%. The increase was primarily the result of net income of $542.8 million, partially offset by dividend payments of $221.4 million and common stock repurchases of $157.2 million.

The following table provides a comparison of the Company’s and the Bank’s leverage and risk-weighted capital ratios as of December 31, 2025, to the minimum and well-capitalized regulatory standards:

 

 

Minimum Required For Capital Adequacy Purposes

 

 

 

Minimum Required Plus Capital Conservation Buffer

 

 

To Be Categorized As Well Capitalized Under Prompt Corrective Action Provisions

 

 

Actual Ratio at December 31, 2025

 

The Company

 

 

 

 

 

 

 

 

 

 

 

 

 

CET1 capital ratio

 

 

4.50

%

 

 

 

7.00

%

 

N/A

 

 

 

17.55

%

Tier 1 risk-based capital ratio

 

 

6.00

%

 

 

 

8.50

%

 

N/A

 

 

 

17.55

%

Total risk-based capital ratio

 

 

8.00

%

 

 

 

10.50

%

 

N/A

 

 

 

18.80

%

Leverage ratio

 

 

4.00

%

(1)

 

 

4.00

%

 

N/A

 

 

 

11.93

%

The Bank

 

 

 

 

 

 

 

 

 

 

 

 

 

CET1 capital ratio

 

 

4.50

%

 

 

 

7.00

%

 

 

6.50

%

 

 

16.51

%

Tier 1 risk-based capital ratio

 

 

6.00

%

 

 

 

8.50

%

 

 

8.00

%

 

 

16.51

%

Total risk-based capital ratio

 

 

8.00

%

 

 

 

10.50

%

 

 

10.00

%

 

 

17.76

%

Leverage ratio

 

 

4.00

%

(2)

 

 

4.00

%

 

 

5.00

%

 

 

11.22

%

 

(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.

68

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements, the report thereon, the notes thereto and supplementary data commence at page 77 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 2025

 

 

 

December 31

 

 

September 30

 

 

June 30

 

 

March 31

 

 

 

(Dollars in thousands, except per share data)

 

 

 

(unaudited)

 

Interest income

 

$

386,647

 

 

$

398,107

 

 

$

392,764

 

 

$

392,805

 

Interest expense

 

 

111,694

 

 

 

124,672

 

 

 

125,042

 

 

 

127,423

 

Net interest income

 

 

274,953

 

 

 

273,435

 

 

 

267,722

 

 

 

265,382

 

Provision for credit losses

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Net interest income after provision

 

 

274,953

 

 

 

273,435

 

 

 

267,722

 

 

 

265,382

 

Noninterest income

 

 

42,780

 

 

 

41,238

 

 

 

42,982

 

 

 

41,301

 

Noninterest expense

 

 

138,712

 

 

 

138,635

 

 

 

138,565

 

 

 

140,301

 

Income before income taxes

 

 

179,021

 

 

 

176,038

 

 

 

172,139

 

 

 

166,382

 

Provision for income taxes

 

 

39,114

 

 

 

38,482

 

 

 

36,984

 

 

 

36,157

 

Net income

 

$

139,907

 

 

$

137,556

 

 

$

135,155

 

 

$

130,225

 

Earnings per share(1):

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

1.49

 

 

$

1.45

 

 

$

1.42

 

 

$

1.37

 

Diluted

 

$

1.49

 

 

$

1.45

 

 

$

1.42

 

 

$

1.37

 

 

 

Quarter Ended 2024

 

 

 

December 31

 

 

September 30

 

 

June 30

 

 

March 31

 

 

 

(Dollars in thousands, except per share data)

 

 

 

(unaudited)

 

Interest income

 

$

410,945

 

 

$

417,903

 

 

$

412,951

 

 

$

381,914

 

Interest expense

 

 

143,171

 

 

 

156,212

 

 

 

154,165

 

 

 

143,670

 

Net interest income

 

 

267,774

 

 

 

261,691

 

 

 

258,786

 

 

 

238,244

 

Provision for credit losses

 

 

—

 

 

 

—

 

 

 

9,066

 

 

 

—

 

Net interest income after provision

 

 

267,774

 

 

 

261,691

 

 

 

249,720

 

 

 

238,244

 

Noninterest income

 

 

39,837

 

 

 

41,099

 

 

 

46,003

 

 

 

38,870

 

Noninterest expense

 

 

141,545

 

 

 

140,338

 

 

 

152,842

 

 

 

135,848

 

Income before income taxes

 

 

166,066

 

 

 

162,452

 

 

 

142,881

 

 

 

141,266

 

Provision for income taxes

 

 

35,990

 

 

 

35,170

 

 

 

31,279

 

 

 

30,840

 

Net income

 

$

130,076

 

 

$

127,282

 

 

$

111,602

 

 

$

110,426

 

Earnings per share(1):

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

1.37

 

 

$

1.34

 

 

$

1.17

 

 

$

1.18

 

Diluted

 

$

1.37

 

 

$

1.34

 

 

$

1.17

 

 

$

1.18

 

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

69

 

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, 2025, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

70

 

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, 2025, 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”). Based on the assessment, management determined that the Company maintained effective internal control over financial reporting as of December 31, 2025.

Deloitte and 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, 2025. The report is included in this Item under the heading “Report of Independent Registered Public Accounting Firm.”

71

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the shareholders and the Board of Directors of Prosperity Bancshares, Inc. and subsidiaries

Opinion on Internal Control over Financial Reporting

We have audited the internal control over financial reporting of Prosperity Bancshares, Inc. (the “Company”) as of December 31, 2025, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2025, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2025 , of the Company and our report dated February 26, 2026, expressed an unqualified opinion on those financial statements.

Basis for Opinion

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 are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. 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.

Definition and Limitations of Internal Control over Financial Reporting

A company's internal control over financial reporting is a process designed 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 its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ Deloitte and Touche LLP

 

Houston, Texas

February 26, 2026

 

72

 

ITEM 9B. OTHER INFORMATION

 

b. Insider Trading Arrangements and Policies.

During the three months ended December 31, 2025, no director or officer of the Company adopted or terminated any “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement” (as each term is defined in Item 408(a) of Regulation S-K) with respect to Bancshares common stock.

 

ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS

Not applicable.

 

PART III.

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Certain information required by this Item is included under “Insider Trading Arrangements and Policies” in Part II, Item 5 of this Annual Report on Form 10-K.

The remaining information required by this Item is incorporated herein by reference to the information under the captions “Election of Directors,” “Continuing Directors and Executive Officers,” “Delinquent Section 16(a) Reports,” “Corporate Governance—Committees of the Board—Audit Committee,” “Corporate Governance—Director Nominations Process” and “Corporate Governance—Code of Ethics” in the Company’s definitive Proxy Statement for its 2026 Annual Meeting of Shareholders (the “2026 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 2026 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 2026 Proxy Statement.

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 2026 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 2026 Proxy Statement.

73

 

PART IV.

ITEM 15. EXHIBIT 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 77 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 (PCAOB ID No. 34)

 

79

Consolidated Balance Sheets as of December 31, 2025 and 2024

81

Consolidated Statements of Income for the Years Ended December 31, 2025, 2024 and 2023

 

82

Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2025, 2024 and 2023

 

83

Consolidated Statements of Changes in Shareholders’ Equity for the Years Ended December 31, 2025, 2024 and 2023

 

84

Consolidated Statements of Cash Flows for the Years Ended December 31, 2025, 2024 and 2023

 

85

Notes to Consolidated Financial Statements

 

86

 

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) (the “Registration Statement”))

 

 

 

 

3.2

—

 

Articles of Amendment to Amended and Restated Articles of Incorporation of Prosperity Bancshares, Inc. (incorporated herein by reference to Exhibit 3.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2006 (File No. 001-35388))

 

 

 

 

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 June 20, 2019 (File No. 001-35388))

 

 

 

 

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))

 

 

 

 

4.2

—

 

Description of Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934 (incorporated herein by reference to Exhibit 4.1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2019)

 

 

 

 

10.1†

—

 

Prosperity Bancshares, Inc. 2020 Stock Incentive Plan (incorporated herein by reference to Appendix A to the Company’s Schedule 14A filed on March 18, 2020)

 

 

 

 

10.2*†

—

 

Form of Prosperity Bancshares, Inc. Restricted Stock Award Agreement for Employees

 

 

 

 

10.3†

—

 

Fourth Amended and Restated Employment Agreement effective October 15, 2024 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 October 15, 2024)

 

 

 

 

74

 

Exhibit

Number (1)

 

 

Description

 

 

 

 

10.4†

—

 

Third Amended and Restated Employment Agreement effective January 21, 2025 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 January 22, 2025)

 

 

 

 

10.5†

—

 

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)

 

 

 

 

10.6†

—

 

Management Security Plan Agreement of American State Bank, amended and restated effective as of January 1, 2005, as assumed by Prosperity Bank (incorporated herein by reference to Exhibit 10.11 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2014)

 

 

 

 

10.7†

—

 

Executive Employment Agreement, dated as of March 10, 2021, by and among Prosperity Bancshares, Inc., Prosperity Bank and Edward Z. Safady (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on March 11, 2021)

 

 

 

 

10.8*†

—

 

Prosperity Bancshares, Inc. 401(k) Profit Sharing Plan

 

 

 

 

10.9†

—

 

Executive Employment Agreement, dated as of April 15, 2025, by and among Prosperity Bancshares, Inc., Prosperity Bank and Kevin J. Hanigan (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8‑K filed on April 16, 2025)

 

 

 

 

10.10†

—

 

Executive Employment Agreement, dated as of June 16, 2019, by and among Prosperity Bank, LegacyTexas Bank and J. Mays Davenport (incorporated herein by reference to Exhibit 10.2 the Company’s Current Report on Form 8‑K filed on June 20, 2019)

 

 

 

 

19.1

 

—

 

Prosperity Bancshares, Inc. Inside Information and Insider Trading Policy (incorporated herein by reference to Exhibit 19.1 to the Company’s Annual Report on Form 10-K filed on February 27, 2024)

 

 

 

 

21.1*

—

 

Subsidiaries of Prosperity Bancshares, Inc.

 

 

 

 

23.1*

—

 

Consent of Deloitte and 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

 

 

 

 

97.1†

—

 

Clawback Policy (incorporated by reference to Exhibit 97.1 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2023)

 

 

 

 

101.INS*

—

 

Inline XBRL Instance Document – The instance document does not appear in the interactive data file because its XBRL tags are embedded within the Inline XBRL document

 

 

 

 

101.SCH*

—

 

Inline XBRL Taxonomy Extension Schema

 

 

 

 

101.CAL*

—

 

Inline XBRL Taxonomy Extension Calculation Linkbase Document

 

 

 

 

101.LAB*

—

 

Inline XBRL Taxonomy Extension Label Linkbase Document

 

 

 

 

75

 

Exhibit

Number (1)

 

 

Description

 

 

 

 

101.PRE*

—

 

Inline XBRL Taxonomy Extension Presentation Linkbase Document

 

 

 

 

101.DEF*

—

 

Inline XBRL Taxonomy Extension Definition Linkbase Document

 

 

 

 

104

—

 

The cover page from the Company’s Annual Report on Form 10-K for the year ended December 31, 2025 (formatted as Inline XBRL and contained in Exhibits 101)

 

 

 

 

† 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 agreements that meet the exclusion set 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.
(a)
Exhibits. See the exhibit list included in Item 15(a)3 of this Annual Report on Form 10-K.
(b)
Financial Statement Schedules. See Item 15(a)2 of this Annual Report on Form 10-K.

ITEM 16. FORM 10-K SUMMARY

None.

76

 

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: February 26, 2026

 

 

PROSPERITY BANCSHARES, INC.®
(Registrant)

 

 

 

BY:

 

/S/ DAVID ZALMAN

 

 

David Zalman

Senior 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

 

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

 

February 26, 2026

David Zalman

 

 

 

 

 

 

 

/s/ ASYLBEK OSMONOV

 

Chief Financial Officer (principal financial officer

and principal accounting officer)

 

February 26, 2026

Asylbek Osmonov

 

 

 

 

 

 

 

/s/ ILEANA BLANCO

 

Director

 

February 26, 2026

Ileana Blanco

 

 

 

 

 

 

 

/s/ JAMES A. BOULIGNY

 

Director

 

February 26, 2026

James A. Bouligny

 

 

 

 

 

 

 

/s/ W. R. COLLIER

 

Director

 

February 26, 2026

W. R. Collier

 

 

 

 

 

 

 

/s/ KEVIN J. HANIGAN

 

President and Chief Operating Officer; Director

 

February 26, 2026

Kevin J. Hanigan

 

 

 

 

 

 

 

/s/ LEAH HENDERSON

 

Director

 

February 26, 2026

Leah Henderson

 

 

 

 

 

 

 

/s/ NED S. HOLMES

 

Director

 

February 26, 2026

Ned S. Holmes

 

 

 

 

 

 

 

/s/ JACK LORD

 

Director

 

February 26, 2026

Jack Lord

 

 

 

 

 

 

 

/s/ WILLIAM T. LUEDKE IV

 

Director

 

February 26, 2026

William T. Luedke IV

 

 

 

 

 

 

 

/s/ PERRY MUELLER, JR., D.D.S.

 

Director

 

February 26, 2026

Perry Mueller, Jr., D.D.S.

 

 

 

 

 

 

 

/s/ LAURA MURILLO

 

Director

 

February 26, 2026

Laura Murillo

 

 

 

 

 

 

 

/s/ HARRISON STAFFORD II

 

Director

 

February 26, 2026

Harrison Stafford II

 

 

 

 

 

 

 

/s/ ROBERT STEELHAMMER

 

Director

 

February 26, 2026

Robert Steelhammer

 

 

 

 

 

 

 

/s/ H.E. TIMANUS, JR.

 

Chairman; Director

 

February 26, 2026

H.E. Timanus, Jr.

 

 

 

77

 

TABLE OF CONTENTS TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Page

Prosperity Bancshares, Inc.®

 

Report of Independent Accounting Firm Registered Public (PCAOB ID No. 34)

 

79

Consolidated Balance Sheets as of December 31, 2025 and 2024

 

81

Consolidated Statements of Income for the Years Ended December 31, 2025, 2024 and 2023

 

82

Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2025, 2024 and 2023

 

83

Consolidated Statements of Changes in Shareholders’ Equity for the Years Ended December 31, 2025, 2024 and 2023

 

84

Consolidated Statements of Cash Flows for the Years Ended December 31, 2025, 2024 and 2023

 

85

Notes to Consolidated Financial Statements

 

86

 

78

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the shareholders and the Board of Directors of Prosperity Bancshares, Inc. and subsidiaries

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Prosperity Bancshares, Inc. and subsidiaries (the “Company”) as of December 31, 2025 and 2024, the related consolidated statements of income, comprehensive income, shareholders' equity, and cash flows, for each of the three years in the period ended December 31, 2025, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2025 and 2024, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2025, 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) (PCAOB), the Company's internal control over financial reporting as of December 31, 2025, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 26, 2026, expressed an unqualified opinion on the Company's internal control over financial reporting.

Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Allowance for Credit Losses on Loans - Refer to Note 5 to the financial statements

Critical Audit Matter Description

The allowance for credit losses (“ACL”) on loans is a valuation allowance of expected credit losses on loans held for investment. All losses are charged to the allowance when the loss actually occurs or when a determination is made that such a loss is expected and reasonably estimable. Recoveries are credited to the allowance at the time of recovery.

The Company’s allowance for credit losses on loans consists of two elements: (1) specific valuation allowances based on expected losses on impaired loans and purchased credit-deteriorated loans (“PCD Loans”); and (2) a general valuation allowance based on historical lifetime loan loss experience, current economic conditions, reasonable and supportable forecasted economic conditions and other qualitative risk factors both internal and external to the Company. In making its evaluation, management considers factors such as historical lifetime loan loss experience, the amount of nonperforming assets and related collateral, the volume, growth and composition of the portfolio, current economic conditions and reasonable and supportable forecasted 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.

79

 

We identified the allowance for credit losses on loans as a critical audit matter because of the significant amount of judgment required by management when determining the weighting of internal and external risk factors utilized in establishing the qualitative component of the allowance. This required a high degree of auditor judgment and an increased extent of effort, including the need to involve our credit specialists.

How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures related to the allowance for credit losses on loans included the following, among others:

•
We tested the effectiveness of controls over the (i) written policy in place for the calculation of the allowance, (ii) data input to the qualitative calculation and (iii) management’s review of the reasonableness of the qualitative calculation, including the weighting of the assumptions used in the calculation.
•
With the assistance of our credit specialists, we evaluated the qualitative scenarios calculated by management and the model's performance under the various scenarios.
•
We evaluated the appropriateness and relevance of the qualitative risk factors by comparing the results to external sources.
•
We tested the accuracy and evaluated the relevance of the historical loss data.
•
With the assistance of our credit specialists, we tested the arithmetic accuracy of the allowance calculation.

 

/s/ Deloitte and Touche LLP

 

Houston, Texas

February 26, 2026

 

We have served as the Company’s auditor since 1993.

80

 

PROSPERITY BANCSHARES, INC.® AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

 

December 31,

 

 

 

2025

 

 

2024

 

 

 

(Dollars in thousands)

 

ASSETS

 

 

 

 

 

 

Cash and due from banks

 

$

1,747,511

 

 

$

1,972,175

 

Federal funds sold

 

 

217

 

 

 

292

 

Total cash and cash equivalents

 

 

1,747,728

 

 

 

1,972,467

 

Available for sale securities, at fair value

 

 

338,197

 

 

 

336,960

 

Held to maturity securities, at cost (fair value of $9,433,365 and $9,382,479 respectively)

 

 

10,275,228

 

 

 

10,757,464

 

Total securities

 

 

10,613,425

 

 

 

11,094,424

 

Loans held for sale

 

 

14,155

 

 

 

10,690

 

Loans held for investment

 

 

20,486,415

 

 

 

21,057,616

 

Loans held for investment - Warehouse Purchase Program

 

 

1,304,798

 

 

 

1,080,903

 

Total loans

 

 

21,805,368

 

 

 

22,149,209

 

Less: allowance for credit losses on loans

 

 

(333,742

)

 

 

(351,805

)

Loans, net

 

 

21,471,626

 

 

 

21,797,404

 

Accrued interest receivable

 

 

99,297

 

 

 

104,367

 

Goodwill

 

 

3,503,127

 

 

 

3,503,129

 

Core deposit intangibles, net

 

 

51,605

 

 

 

66,047

 

Bank premises and equipment, net

 

 

383,449

 

 

 

371,238

 

Other real estate owned

 

 

13,296

 

 

 

5,701

 

Bank owned life insurance (BOLI)

 

 

392,756

 

 

 

386,247

 

Federal Home Loan Bank of Dallas stock

 

 

86,950

 

 

 

138,200

 

Other assets

 

 

100,166

 

 

 

127,514

 

TOTAL ASSETS

 

$

38,463,425

 

 

$

39,566,738

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

LIABILITIES:

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

Noninterest-bearing

 

$

9,467,911

 

 

$

9,798,438

 

Interest-bearing

 

 

19,014,573

 

 

 

18,582,900

 

Total deposits

 

 

28,482,484

 

 

 

28,381,338

 

Other borrowings

 

 

1,950,000

 

 

 

3,200,000

 

Securities sold under repurchase agreements

 

 

201,216

 

 

 

221,913

 

Accrued interest payable

 

 

30,913

 

 

 

41,910

 

Allowance for credit losses on off-balance sheet credit exposures

 

 

37,646

 

 

 

37,646

 

Other liabilities

 

 

145,026

 

 

 

245,436

 

Total liabilities

 

 

30,847,285

 

 

 

32,128,243

 

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; 93,058,171 shares issued and outstanding at December 31, 2025; 95,275,279 shares issued and outstanding at December 31, 2024

 

 

93,058

 

 

 

95,276

 

Capital surplus

 

 

3,653,751

 

 

 

3,796,622

 

Retained earnings

 

 

3,869,627

 

 

 

3,548,221

 

Accumulated other comprehensive loss —net unrealized gain on available for sale securities, net of tax benefit of $(79) and $(432), respectively

 

 

(296

)

 

 

(1,624

)

Total shareholders’ equity

 

 

7,616,140

 

 

 

7,438,495

 

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

 

$

38,463,425

 

 

$

39,566,738

 

See notes to consolidated financial statements.

81

 

PROSPERITY BANCSHARES, INC.® AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

 

 

For the Years Ended December 31,

 

 

 

2025

 

 

2024

 

 

2023

 

 

 

(Dollars in thousands, except per share data)

 

INTEREST INCOME:

 

 

 

 

 

 

 

 

 

Loans, including fees

 

$

1,295,474

 

 

$

1,313,162

 

 

$

1,148,996

 

Securities

 

 

230,696

 

 

 

246,726

 

 

 

283,302

 

Federal funds sold and other earning assets

 

 

44,153

 

 

 

63,825

 

 

 

12,245

 

Total interest income

 

 

1,570,323

 

 

 

1,623,713

 

 

 

1,444,543

 

INTEREST EXPENSE:

 

 

 

 

 

 

 

 

 

Deposits

 

 

379,977

 

 

 

408,624

 

 

 

272,345

 

Other borrowings

 

 

104,234

 

 

 

181,640

 

 

 

206,323

 

Securities sold under repurchase agreements

 

 

4,620

 

 

 

6,954

 

 

 

9,404

 

Subordinated notes

 

 

—

 

 

 

—

 

 

 

38

 

Total interest expense

 

 

488,831

 

 

 

597,218

 

 

 

488,110

 

NET INTEREST INCOME

 

 

1,081,492

 

 

 

1,026,495

 

 

 

956,433

 

PROVISION FOR CREDIT LOSSES

 

 

—

 

 

 

9,066

 

 

 

18,540

 

NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES

 

 

1,081,492

 

 

 

1,017,429

 

 

 

937,893

 

NONINTEREST INCOME:

 

 

 

 

 

 

 

 

 

Nonsufficient funds (NSF) fees

 

 

37,552

 

 

 

35,417

 

 

 

33,691

 

Credit card, debit card and ATM card income

 

 

37,408

 

 

 

37,308

 

 

 

36,471

 

Service charges on deposit accounts

 

 

29,988

 

 

 

26,498

 

 

 

24,582

 

Trust income

 

 

14,648

 

 

 

14,750

 

 

 

13,269

 

Mortgage income

 

 

3,859

 

 

 

3,096

 

 

 

2,298

 

Brokerage income

 

 

5,385

 

 

 

4,742

 

 

 

4,275

 

Net gain on sale or write-down of assets

 

 

1,217

 

 

 

2,824

 

 

 

1,986

 

Net gain on sale or write-up of securities

 

 

—

 

 

 

11,245

 

 

 

—

 

Other

 

 

38,244

 

 

 

29,929

 

 

 

36,693

 

Total noninterest income

 

 

168,301

 

 

 

165,809

 

 

 

153,265

 

NONINTEREST EXPENSE:

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

353,105

 

 

 

352,353

 

 

 

328,430

 

Net occupancy and equipment

 

 

37,088

 

 

 

35,786

 

 

 

35,517

 

Credit and debit card, data processing and software amortization

 

 

48,614

 

 

 

47,300

 

 

 

41,570

 

Regulatory assessments and FDIC insurance

 

 

18,095

 

 

 

27,370

 

 

 

40,165

 

Core deposit intangibles amortization

 

 

14,442

 

 

 

15,670

 

 

 

12,676

 

Depreciation

 

 

19,674

 

 

 

19,054

 

 

 

18,283

 

Communications

 

 

13,988

 

 

 

13,697

 

 

 

14,413

 

Net other real estate expense (income)

 

 

653

 

 

 

(291

)

 

 

(834

)

Merger related expenses

 

 

330

 

 

 

4,444

 

 

 

15,133

 

Other

 

 

50,224

 

 

 

55,190

 

 

 

51,345

 

Total noninterest expense

 

 

556,213

 

 

 

570,573

 

 

 

556,698

 

INCOME BEFORE INCOME TAXES

 

 

693,580

 

 

 

612,665

 

 

 

534,460

 

PROVISION FOR INCOME TAXES

 

 

150,737

 

 

 

133,279

 

 

 

115,144

 

NET INCOME

 

$

542,843

 

 

$

479,386

 

 

$

419,316

 

EARNINGS PER SHARE:

 

 

 

 

 

 

 

 

 

Basic

 

$

5.72

 

 

$

5.05

 

 

$

4.51

 

Diluted

 

$

5.72

 

 

$

5.05

 

 

$

4.51

 

See notes to consolidated financial statements.

82

 

PROSPERITY BANCSHARES, INC. ® AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

 

For the Years Ended December 31,

 

 

 

2025

 

 

2024

 

 

2023

 

 

 

(Dollars in thousands)

 

Net income

 

$

542,843

 

 

$

479,386

 

 

$

419,316

 

Other comprehensive income (loss), before tax:

 

 

 

 

 

 

 

 

 

Securities available for sale:

 

 

 

 

 

 

 

 

 

Change in unrealized income (loss) during the period

 

 

1,681

 

 

 

(286

)

 

 

2,626

 

Total other comprehensive income (loss)

 

 

1,681

 

 

 

(286

)

 

 

2,626

 

Deferred tax (expense) benefit related to other comprehensive income (loss)

 

 

(353

)

 

 

60

 

 

 

(551

)

Other comprehensive income (loss), net of tax

 

 

1,328

 

 

 

(226

)

 

 

2,075

 

Comprehensive income

 

$

544,171

 

 

$

479,160

 

 

$

421,391

 

See notes to consolidated financial statements.

83

 

PROSPERITY BANCSHARES, INC.® AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

Common Stock

 

 

Capital

 

 

Retained

 

 

Other Comprehensive

 

 

Total Shareholders’

 

 

 

Shares

 

 

Amount

 

 

Surplus

 

 

Earnings

 

 

Income (Loss)

 

 

Equity

 

 

 

(In thousands, except share and per share data)

 

BALANCE AT DECEMBER 31, 2022

 

 

91,313,615

 

 

$

91,314

 

 

$

3,541,924

 

 

$

3,069,609

 

 

$

(3,473

)

 

$

6,699,374

 

Net income

 

 

 

 

 

 

 

 

 

 

 

419,316

 

 

 

 

 

 

419,316

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,075

 

 

 

2,075

 

Common stock issued in connection with the granting of restricted stock awards, net

 

 

32,129

 

 

 

32

 

 

 

(32

)

 

 

 

 

 

 

 

 

—

 

Common stock issued in connection with the acquisition of First Bancshares of Texas, Inc.

 

 

3,582,675

 

 

 

3,583

 

 

 

220,764

 

 

 

 

 

 

 

 

 

224,347

 

Common stock repurchase

 

 

(1,206,036

)

 

 

(1,206

)

 

 

(71,042

)

 

 

 

 

 

 

 

 

(72,248

)

Stock based compensation expense

 

 

 

 

 

 

 

 

12,181

 

 

 

 

 

 

 

 

 

12,181

 

Cash dividends declared, $2.21 per share

 

 

 

 

 

 

 

 

 

 

 

(205,715

)

 

 

 

 

 

(205,715

)

BALANCE AT DECEMBER 31, 2023

 

 

93,722,383

 

 

 

93,723

 

 

 

3,703,795

 

 

 

3,283,210

 

 

 

(1,398

)

 

 

7,079,330

 

Net income

 

 

 

 

 

 

 

 

 

 

 

479,386

 

 

 

 

 

 

479,386

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(226

)

 

 

(226

)

Common stock issued in connection with the granting of restricted stock awards, net

 

 

414,963

 

 

 

415

 

 

 

(415

)

 

 

 

 

 

 

 

 

—

 

Common stock issued in connection with the acquisition of Lone Star State Bancshares, Inc.

 

 

2,376,143

 

 

 

2,376

 

 

 

153,927

 

 

 

 

 

 

 

 

 

156,303

 

Common stock repurchase

 

 

(1,238,210

)

 

 

(1,238

)

 

 

(73,528

)

 

 

 

 

 

 

 

 

(74,766

)

Stock based compensation expense

 

 

 

 

 

 

 

 

12,843

 

 

 

 

 

 

 

 

 

12,843

 

Cash dividends declared, $2.26 per share

 

 

 

 

 

 

 

 

 

 

 

(214,375

)

 

 

 

 

 

(214,375

)

BALANCE AT DECEMBER 31, 2024

 

 

95,275,279

 

 

 

95,276

 

 

 

3,796,622

 

 

 

3,548,221

 

 

 

(1,624

)

 

 

7,438,495

 

Net income

 

 

 

 

 

 

 

 

 

 

 

542,843

 

 

 

 

 

 

542,843

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,328

 

 

 

1,328

 

Common stock issued in connection with the granting of restricted stock awards, net

 

 

126,552

 

 

 

126

 

 

 

(126

)

 

 

 

 

 

 

 

 

—

 

Common stock repurchase

 

 

(2,343,660

)

 

 

(2,344

)

 

 

(154,847

)

 

 

 

 

 

 

 

 

(157,191

)

Stock based compensation expense

 

 

 

 

 

 

 

 

12,102

 

 

 

 

 

 

 

 

 

12,102

 

Cash dividends declared, $2.34 per share

 

 

 

 

 

 

 

 

 

 

 

(221,437

)

 

 

 

 

 

(221,437

)

BALANCE AT DECEMBER 31, 2025

 

 

93,058,171

 

 

$

93,058

 

 

$

3,653,751

 

 

$

3,869,627

 

 

$

(296

)

 

$

7,616,140

 

 

 

See notes to consolidated financial statements.

84

 

PROSPERITY BANCSHARES, INC.® AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

For the Years Ended December 31,

 

 

 

2025

 

 

2024

 

 

2023

 

 

 

(Dollars in thousands)

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

 

Net income

 

$

542,843

 

 

$

479,386

 

 

$

419,316

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

 

Depreciation and core deposit intangibles amortization

 

 

34,116

 

 

 

34,724

 

 

 

30,959

 

Provision for credit losses

 

 

—

 

 

 

9,066

 

 

 

18,540

 

Deferred income tax (benefit) expense

 

 

(3,738

)

 

 

2,616

 

 

 

7,321

 

Net amortization of premium on investments

 

 

17,498

 

 

 

22,836

 

 

 

27,840

 

Net gain on sale or write-up of securities

 

 

—

 

 

 

(11,245

)

 

 

—

 

Gain on sale or write down of premises, equipment, other assets and other real estate

 

 

(1,441

)

 

 

(3,639

)

 

 

(2,732

)

Net amortization of premium on deposits

 

 

(13

)

 

 

(154

)

 

 

(600

)

Net accretion of discount on loans

 

 

(12,402

)

 

 

(17,490

)

 

 

(8,046

)

Proceeds from sale of loans held for sale

 

 

152,684

 

 

 

136,747

 

 

 

111,058

 

Originations of loans held for sale

 

 

(157,786

)

 

 

(141,782

)

 

 

(117,231

)

Stock based compensation expense

 

 

12,102

 

 

 

12,843

 

 

 

12,181

 

Decrease (increase) in accrued interest receivable and other assets

 

 

82,468

 

 

 

(106,525

)

 

 

100,790

 

Increase (decrease) in accrued interest payable and other liabilities

 

 

(116,818

)

 

 

55,311

 

 

 

46,959

 

Net cash provided by operating activities

 

 

549,513

 

 

 

472,694

 

 

 

646,355

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

 

Proceeds from maturities, sales and principal paydowns of held to maturity securities

 

 

1,521,380

 

 

 

1,786,621

 

 

 

1,704,866

 

Purchase of held to maturity securities

 

 

(1,061,415

)

 

 

(211,391

)

 

 

(24,886

)

Proceeds from maturities, sales and principal paydowns of available for sale securities

 

 

24,549,456

 

 

 

23,215,456

 

 

 

15,728,743

 

Purchase of available for sale securities

 

 

(24,544,242

)

 

 

(23,053,385

)

 

 

(15,525,924

)

Originations of Warehouse Purchase Program loans

 

 

(16,328,398

)

 

 

(15,036,906

)

 

 

(13,022,395

)

Proceeds from pay-offs of Warehouse Purchase Program loans

 

 

16,104,503

 

 

 

14,778,248

 

 

 

12,940,770

 

Net decrease (increase) in loans held for investment

 

 

547,946

 

 

 

338,834

 

 

 

(677,363

)

Purchase of bank premises and equipment

 

 

(32,529

)

 

 

(21,140

)

 

 

(34,153

)

Proceeds from sale of bank premises, equipment and other real estate

 

 

14,145

 

 

 

13,479

 

 

 

15,375

 

Proceeds from insurance claims

 

 

3,068

 

 

 

1,904

 

 

 

13,604

 

Net cash used in the purchase of First Bancshares of Texas, Inc.

 

 

—

 

 

 

—

 

 

 

(24,365

)

Net cash provided by the purchase of Lone Star State Bancshares, Inc.

 

 

—

 

 

 

169,855

 

 

 

—

 

Net cash provided by investing activities

 

 

773,914

 

 

 

1,981,575

 

 

 

1,094,272

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

 

Net decrease in noninterest-bearing deposits

 

 

(330,527

)

 

 

(383,877

)

 

 

(1,831,122

)

Net increase (decrease) in interest-bearing deposits

 

 

431,686

 

 

 

345,167

 

 

 

(1,099,987

)

Net (repayments of) proceeds from other short-term borrowings

 

 

(1,250,000

)

 

 

(525,000

)

 

 

1,674,614

 

Net decrease in securities sold under repurchase agreements

 

 

(20,697

)

 

 

(87,364

)

 

 

(168,731

)

Redemption of subordinated notes

 

 

—

 

 

 

—

 

 

 

(3,158

)

Repurchase of common stock

 

 

(157,191

)

 

 

(74,766

)

 

 

(72,248

)

Payments of cash dividends

 

 

(221,437

)

 

 

(214,375

)

 

 

(205,715

)

Net cash used in financing activities

 

 

(1,548,166

)

 

 

(940,215

)

 

 

(1,706,347

)

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS

 

 

(224,739

)

 

 

1,514,054

 

 

 

34,280

 

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

 

 

1,972,467

 

 

 

458,413

 

 

 

424,133

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

 

$

1,747,728

 

 

$

1,972,467

 

 

$

458,413

 

NONCASH ACTIVITIES:

 

 

 

 

 

 

 

 

 

Acquisition of real estate through foreclosure of collateral

 

$

19,229

 

 

$

9,180

 

 

$

10,806

 

SUPPLEMENTAL INFORMATION:

 

 

 

 

 

 

 

 

 

Cash paid for:

 

 

 

 

 

 

 

 

 

U.S. federal income taxes, net of refunds received

 

$

232,000

 

 

$

27,000

 

 

$

116,000

 

State income taxes, net of refunds received

 

 

4,395

 

 

 

2,017

 

 

 

3,116

 

Interest paid

 

 

499,828

 

 

 

590,127

 

 

 

459,266

 

See notes to consolidated financial statements.

85

 

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.

As of December 31, 2025, the Bank operated 283 full-service banking locations: 62 in the Houston area, including The Woodlands; 33 in the South Texas area including Corpus Christi and Victoria; 61 in the Dallas/Fort Worth area; 22 in the East Texas area; 31 in the Central Texas area including Austin and San Antonio; 45 in the West Texas area including Lubbock, Midland-Odessa, Abilene, Amarillo and Wichita Falls; 15 in the Bryan/College Station area; 6 in the Central Oklahoma area; and 8 in the Tulsa, Oklahoma area.

Summary of Significant Accounting and Reporting Policies—The accounting and reporting policies of the Company conform to generally accepted accounting principles (“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 and held to maturity securities and the calculation of allowance for credit losses. Actual results could differ from these estimates.

Business Combinations—Generally, acquisitions are accounted for under the acquisition method of accounting in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 805, “Business Combinations.” A business combination occurs when the Company acquires net assets that constitute a business and obtains control over that business. Business combinations are effected through the transfer of consideration consisting of cash and/or common stock and are accounted for using the acquisition method. Accordingly, the assets and liabilities of the acquired business are recorded at their respective fair values at the acquisition date. Determining the fair value of assets and liabilities, especially the loan portfolio, is a process involving significant judgment regarding methods and assumptions used to calculate estimated fair values. Fair values are subject to refinement for up to one year after the closing date of the acquisition as information relative to closing date fair values becomes available. The results of operations of an acquired entity are included in the Company’s consolidated results from acquisition date, and prior periods are not restated.

Securities—The investment securities portfolio is measured for expected credit losses by segregating the portfolio into two general classifications and applying the appropriate expected credit losses methodology. Investment securities classified as available for sale or held to maturity are evaluated for expected credit losses under FASB ASC Topic 326, “Financial Instruments-Credit Losses” (“CECL”).

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.

86

 

For available for sale securities in an unrealized loss position, the amount of the expected credit losses 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 expected credit losses will be recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date. If an entity does not intend to sell the security and it is not more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis less any current-period loss, the expected credit losses will 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 expected credit losses 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 expected credit losses related to the noncredit portion is recognized in other comprehensive income, net of applicable taxes. The previous amortized cost basis less the expected credit losses recognized in earnings will 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 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 multi-payment 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 “originated 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 are referred to as “re-underwritten acquired loans.” Modifications are reviewed for determination of loan modifications made to borrowers experiencing financial difficulty 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 originated 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-PCD loans” and “PCD loans” (purchased credit deteriorated loans). Acquired loans with evidence of more than insignificant credit quality deterioration as of the acquisition date when compared to the origination date are classified as PCD loans.

The Company estimates the total cash flows expected to be collected from the PCD 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 PCD loans represents the accretable yield, which is recognized as interest income based on future cash flows, taking into account contractual maturities. The difference between the undiscounted contractual principal and the undiscounted total cash flows expected to be collected is the PCD reserve, which is included in the allowance for credit losses. Subsequent increases in expected cash flows will result in a recovery of any previously recorded allowance for credit losses, to the extent applicable. 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.

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.

Warehouse Purchase Program Loans—All Warehouse Purchase Program loans are collectively evaluated for impairment and are purchased under several contractual requirements, providing safeguards to the Company. These safeguards include the requirement that the mortgage originator clients have a takeout commitment or similar arrangement for each loan. To date, the Company has not experienced a loss on these loans and no allowance for credit losses has been allocated to them.

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.

87

 

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 modified to provide a reduction in the interest rate or a deferral of interest or principal payments. 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. 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 as uncollectible 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. A loan may be returned to accrual status when all the principal and interest amounts contractually due are brought current and future principal and interest amounts contractually due are reasonably assured, which is typically evidenced by a sustained period (at least six months) of repayment performance by the borrower.

Allowance for Credit Losses—The allowance for credit losses is accounted for in accordance with CECL which uses an expected loss methodology that is referred to as the current expected credit loss methodology. CECL requires a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses is an allowance available for losses on loans and held-to-maturity securities that is deducted from the amortized cost basis to estimate the net amount expected to be collected. All losses are charged to the allowance when the loss actually occurs or when a determination is made that such a loss is likely and can be reasonably estimated. Recoveries are credited to the allowance at the time of recovery.

Throughout the year, management estimates the level of lifetime losses to determine whether the allowance for credit losses represents management’s best estimate of current expected credit losses 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. In making its evaluation, management considers factors such as historical lifetime loan loss experience, the amount of nonperforming assets and related collateral, the volume, growth and composition of the portfolio, current economic conditions and reasonable and supportable forecasted economic conditions that may affect borrower ability to pay and the value of collateral, the evaluation of the 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 that is reflected in the consolidated balance sheets represents management’s best estimate of current expected credit losses on the Company’s loan portfolio as of December 31, 2025.

The Company’s allowance for credit losses consists of two elements: (1) specific valuation allowances based on expected losses on impaired loans and PCD loans; and (2) a general valuation allowance based on historical lifetime loan loss experience, current economic conditions, reasonable and supportable forecasted economic conditions, and other qualitative risk factors both internal and external to the Company.

Non-PCD 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-PCD 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-PCD 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-PCD loan with the recorded investment in such loan. In the future, the Company will continue to analyze impaired Non-PCD 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.

PCD loans are monitored individually or on a pooled basis quarterly to assess for changes in expected cash flows subsequent to acquisition. If a deterioration in cash flows is identified, an increase to the PCD reserves for that individual loan or pool of loans may be required. PCD loans were recorded at their acquisition date fair values based on expected cash flows with a reserve established for the estimate of expected future cash flows. 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. For further discussion of the Company’s Allowance for Credit Losses on Loans, see Note 5 to the consolidated financial statements.

88

 

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. 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. For further discussion of the Company’s acquisition and loan accounting, see Note 5 to the consolidated financial statements.

Allowance for Credit Losses on Off-Balance Sheet Credit Exposures—The allowance for credit losses on off-balance sheet credit exposures estimates expected credit losses over the contractual period in which there is exposure to credit risk via a contractual obligation to extend credit, except when an obligation is unconditionally cancellable by the Company. The allowance is adjusted by provisions for credit losses charged to earnings that increase the allowance, or by provision releases returned to earnings that decrease the allowance. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on the commitments expected to fund. The estimate of commitments expected to fund is affected by historical analysis of utilization rates. The expected credit loss rates applied to the commitments expected to fund are affected by the general valuation allowance utilized for outstanding balances with the same underlying assumptions and drivers.

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 one 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 has interest rate swaps with certain commercial customers who wished to obtain a loan at a fixed rate. The Company enters 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 Company agrees to pay another financial institution a similar fixed interest rate on the same notional amount and receive substantially 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 largely offset each other and do not significantly impact the Company’s results of operations.

The Company has interest rate lock commitments and forward mortgage-backed securities trades. In the normal course of business, the Company enters into interest rate lock commitments with consumers to originate mortgage loans at a specified interest rate. These commitments, which contain fixed expiration dates, offer the borrower an interest rate guarantee provided the loan meets underwriting guidelines and closes within the timeframe established by the Company. The Company manages the changes in fair value associated with changes in interest rates related to interest rate lock commitments by using forward sold commitments known as forward mortgage-backed securities trades. These instruments are typically entered into at the time the interest rate lock commitment is made.

These financial instruments are not designated as hedging instruments and are used for asset and liability management and commercial customers’ financing needs. All derivatives are carried at fair value in either other assets or other liabilities and all related cash flows are reported in the operating section of the consolidated statements of cash flows.

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.

Under FASB ASC Topic 350-20, “Intangibles—Goodwill and Other—Goodwill” companies have 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 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 estimated fair value of the reporting unit exceeds its carrying value, goodwill of the reporting unit is not impaired.

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.

89

 

Income Taxes—The Company files a consolidated federal income tax return and consolidated state returns in Oklahoma, Colorado, New Mexico, New York and Tennessee. For the year ended December 31, 2025, the Bank will also file state returns in Arkansas, Florida, Georgia, Idaho, North Carolina, and Pennsylvania. In addition, the Company files a Combined Texas Franchise Tax Report.

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 net to other assets on the Company’s consolidated balance sheets. The Company records uncertain tax positions in accordance with FASB ASC Topic 740, “Income Taxes”, 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.

The Company adopted ASU No. 2023-09, Income Taxes (Topic 740): Improvements to Income, effective as of December 31, 2025 on a retrospective basis. For further discussion of the Company’s income taxes, see Note 10 to the consolidated financial statements.

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 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.

Segment Reporting—The Company adopted ASU No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures effective as of December 31, 2024. The Company offers a variety of traditional loan and deposit products to its customers, which consist primarily of individual consumers and businesses throughout Texas and Oklahoma. The Company’s banking operations are considered by management to be aggregated in one reportable operating segment in accordance with FASB ASC Topic 280. The Chief Executive Officer is designated as the Company’s chief operating decision maker (“CODM”). The CODM evaluates banking operations and decides how to allocate resources based on consolidated net income that is also reported on the Company’s consolidated statement of income. Consolidated net income is used to monitor the Company’s revenue streams, significant expenses and to compare budget to actual results in assessing performance of the Company’s banking operations. Interest expense, provision for credit losses and salaries and employee benefits are considered significant expenses. As the Company’s operations consist of one reportable operating segment, the segment assets are reflected on the accompanying consolidated balance sheets as “total assets” and the significant segment expenses are listed on the accompanying consolidated statements of income. The Company’s segment accounting policies are the same as described herein and the Company does not have any intra-segment sales and transfers of assets.

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 other contracts to issue common stock were exercised or converted into common stock using the treasury stock method.

90

 

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

 

 

Year Ended December 31,

 

 

 

2025

 

 

2024

 

 

2023

 

 

 

Amount

 

 

Per Share Amount

 

 

Amount

 

 

Per Share Amount

 

 

Amount

 

 

Per Share Amount

 

 

 

(Amounts in thousands, except per share data)

 

Net income

 

$

542,843

 

 

 

 

 

$

479,386

 

 

 

 

 

$

419,316

 

 

 

 

Basic:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding

 

 

94,917

 

 

$

5.72

 

 

 

95,000

 

 

$

5.05

 

 

 

92,902

 

 

$

4.51

 

Diluted:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Add incremental shares for:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Effect of dilutive securities - options

 

 

—

 

 

 

 

 

 

—

 

 

 

 

 

 

—

 

 

 

 

Total

 

 

94,917

 

 

$

5.72

 

 

 

95,000

 

 

$

5.05

 

 

 

92,902

 

 

$

4.51

 

As of December 31, 2025, all stock options have been exercised and there are no options outstanding. There were no stock options exercisable at December 31, 2025, 2024 and 2023 that would have had an anti-dilutive effect on the above computation.

New Accounting Standards

Accounting Standards Updates (“ASU”)

ASU 2025-11, Interim Reporting (Topic 270): Narrow-Scope Improvements. ASU 2025‑11 clarifies interim disclosure requirements, including providing a comprehensive list of interim disclosure requirements under U.S. GAAP and a disclosure principle that requires entities to disclose events since the last annual reporting period that have a material impact on the entity. The standard is effective for interim periods within annual reporting periods beginning after December 15, 2027. The Company does not expect the adoption of ASU 2025-11 to have a significant impact on its financial statements.

 

ASU 2025-08, Financial Instruments—Credit Losses (Topic 326): Purchased Loans. Under ASU 2025-08, loans acquired without credit deterioration and deemed “seasoned” will be considered purchased seasoned loans and accounted for using the gross-up approach at acquisition (i.e., record the loan at its purchase price and separately record an allowance for expected credit losses). Seasoned loans include all loans acquired in a business combination that do not have “more-than-insignificant” deterioration of credit quality since origination, as well as loans purchased at least 90 days after origination where the purchaser was not involved in the origination of the loans. ASU 2025-08 is effective for annual and interim periods beginning in our fiscal 2028 with early adoption permitted. The Company is evaluating the impact the adoption of ASU 2025-08 will have on its financial statements.

ASU 2025-06, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Targeted Improvements to the Accounting for Internal-Use Software. ASU 2025-06 modernizes the accounting for internal-use software costs. Under this ASU, software development costs are capitalized when (i) management has authorized and committed to funding the software project and (ii) it is probable that the project will be completed and the software will be used to perform the function intended. ASU 2025-06 is effective for fiscal years beginning after December 15, 2027, and interim reporting periods, with early adoption permitted. The Company does not expect the adoption of ASU 2025-06 to have a significant impact on its financial statements.

 

ASU 2024-03, Income Statement—Reporting Comprehensive Income—Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses. ASU 2024-03 requires public companies to disclose, in the notes to the financial statements, specific information about certain costs and expenses at each interim and annual reporting period. This includes disclosing amounts related to employee compensation, depreciation, and intangible asset amortization. In addition, public companies will need to provide a qualitative description of the amounts remaining in relevant expense captions that are not separately disaggregated quantitatively. ASU 2024-03 is effective for public business entities for annual reporting periods beginning after December 15, 2026, and interim reporting periods beginning after December 15, 2027. Implementation of ASU 2024-03 may be applied prospectively or retrospectively. The Company does not expect the adoption of ASU 2024-03 to have a significant impact on its financial statements.

 

ASU 2024-01, Compensation—Stock Compensation (Topic 718): Scope Application of Profits Interest and Similar Awards. ASU 2024-01 clarifies the scope application of profits interest and similar awards by adding illustrative guidance to help entities determine whether profits interest and similar awards should be accounted for as share-based payment arrangements within the scope of FASB ASC 718, “Compensation—Stock Compensation.” However, this amendment does not change the intent of that guidance, nor how it should be applied. The ASU’s amendments are effective for fiscal years beginning after December 15, 2024, including

91

 

interim periods within those years. ASU 2024-01 became effective for the Company on December 31, 2024 and did not have a significant impact on the Company’s financial statements.

ASU 2023-09, Income Taxes (Topic 740): Improvements to Income. ASU 2023-09 focuses on the rate reconciliation and income taxes paid. ASU 2023-09 requires a public business entity to disclose, on an annual basis, a tabular rate reconciliation using both percentages and currency amounts, broken out into specified categories with certain reconciling items further broken out by nature and jurisdiction to the extent those items exceed a specified threshold. In addition, all entities are required to disclose income taxes paid, net of refunds received disaggregated by federal, state/local, and foreign and by jurisdiction if the amount is at least 5% of total income tax payments, net of refunds received. The Company adopted ASU 2023-09 as of December 31, 2025 on a retrospective basis, and it did not have a significant impact on the Company’s financial statements. For further discussion of the Company’s income taxes, See Note 10 to the consolidated financial statements.

 

ASU 2023-07, Segment Reporting (Topic 280) - Improvement to Reportable Segment Disclosures. ASU 2023-07 amends the disclosure requirements related to segment reporting primarily through enhanced disclosure about significant segment expenses that are regularly provided to the chief operating decision maker and by requiring disclosure of segment information on an annual and interim basis. The amendments in this update are effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. ASU 2023-07 became effective for the Company on December 31, 2024 and did not have a significant impact on the Company’s financial statements.

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 10 to 15 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.

Recent Acquisition

Acquisition of Lone Star State Bancshares, Inc. — Effective April 1, 2024, the Company completed the merger of Lone Star State Bancshares, Inc. (“Lone Star”) into Bancshares and the subsequent merger of its wholly owned subsidiary Lone Star State Bank of West Texas (“Lone Star Bank”), into the Bank (collectively, the “Lone Star Merger”). Lone Star operated five full-service banking offices in the West Texas area, including its main office in Lubbock, and one banking center in each of Brownfield, Midland, Odessa and Big Spring, Texas. The acquisition was not considered significant to the Company’s financial statements and therefore pro forma financial data and related disclosures are not included. Pursuant to the terms of the definitive agreement, Bancshares issued 2,376,182 shares of its common stock plus approximately $64.1 million in cash for all outstanding shares of Lone Star. This resulted in goodwill of $106.7 million as of December 31, 2025, which reflected all final subsequent fair value adjustments. Goodwill represents the excess of the total purchase price paid over the fair value of the assets acquired, net of the fair value of liabilities assumed. Additionally, the Company recognized $17.7 million of core deposit intangibles related to the Lone Star Merger. In October 2024, the Company completed the operational conversion of Lone Star Bank.

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. Projected default rates, loss given default, and recovery rates for purchased credit deteriorated (“PCD”) loans primarily impact the related allowance, as opposed to the fair value mark. During the valuation process, the Company identified PCD and Non-PCD loans in the acquired loan portfolios. Loans acquired with evidence of credit quality deterioration since origination as of the acquisition date were accounted for as PCD. PCD 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 as of the acquisition date when compared to the origination date. Non-PCD 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 PCD and Non-PCD loans will be recognized based on payment structure and the contractual maturity of individual loans.

92

 

PCD Loans. The recorded investment in PCD loans included in the consolidated balance sheets and the related outstanding balances at December 31, 2025 and 2024 are presented in the table below. The outstanding balance represents the total amount owed as of December 31, 2025 and 2024.

 

 

December 31, 2025

 

 

December 31, 2024

 

 

 

(Dollars in thousands)

 

PCD loans:

 

 

 

 

 

 

Outstanding balance

 

$

300,010

 

 

$

440,024

 

Discount

 

 

(5,267

)

 

 

(7,390

)

Recorded investment

 

$

294,743

 

 

$

432,634

 

 

Changes in the accretable yield for acquired PCD loans for the years ended December 31, 2025, and 2024 were as follows:

 

 

Year Ended December 31,

 

 

 

2025

 

 

2024

 

 

 

(Dollars in thousands)

 

Balance at beginning of period

 

$

7,390

 

 

$

7,914

 

Additions

 

 

—

 

 

 

4,558

 

Accretion charge-offs

 

 

10

 

 

 

(78

)

Accretion

 

 

(2,133

)

 

 

(5,004

)

Balance at December 31,

 

$

5,267

 

 

$

7,390

 

Income recognition on PCD loans is subject to the timing and amount of future cash flows. PCD loans for which the Company is accruing interest income are not considered nonperforming or impaired. The PCD discount reflected above as of December 31, 2025, represents the amount of discount available to be recognized as income.

Non-PCD Loans. The recorded investment in Non-PCD loans included in the consolidated balance sheets and the related outstanding balances at December 31, 2025 and 2024 are presented in the table below. The outstanding balance represents the total amount owed as of December 31, 2025 and 2024.

 

 

December 31, 2025

 

 

December 31, 2024

 

 

 

(Dollars in thousands)

 

Non-PCD loans:

 

 

 

 

 

 

Outstanding balance

 

$

1,498,731

 

 

$

2,089,629

 

Discount

 

 

(17,479

)

 

 

(27,845

)

Recorded investment

 

$

1,481,252

 

 

$

2,061,784

 

Changes in the discount accretion for Non-PCD loans for the years ended December 31, 2025 and 2024 were as follows:

 

 

Year Ended December 31,

 

 

 

2025

 

 

2024

 

 

 

(Dollars in thousands)

 

Balance at beginning of period

 

$

27,845

 

 

$

19,992

 

Addition

 

 

—

 

 

 

20,378

 

Accretion charge-offs

 

 

(97

)

 

 

(39

)

Accretion

 

 

(10,269

)

 

 

(12,486

)

Balance at December 31,

 

$

17,479

 

 

$

27,845

 

At December 31, 2025, the Company had $22.7 million of total outstanding net accretable discounts on Non-PCD and PCD loans.

93

 

3. GOODWILL AND CORE DEPOSIT INTANGIBLES

Changes in the carrying amount of the Company’s goodwill and core deposit intangibles for fiscal years 2025 and 2024 were as follows:

 

 

Goodwill

 

 

Core Deposit Intangibles

 

 

 

(Dollars in thousands)

 

Balance as of December 31, 2023

 

$

3,396,086

 

 

$

63,994

 

Less:

 

 

 

 

 

 

Amortization

 

 

—

 

 

 

(15,670

)

Add:

 

 

 

 

 

 

Measurement period adjustment of First Bancshares merger

 

 

316

 

 

 

—

 

Lone Star merger

 

 

106,727

 

 

 

17,723

 

Balance as of December 31, 2024

 

 

3,503,129

 

 

 

66,047

 

Less:

 

 

 

 

 

 

Amortization

 

 

—

 

 

 

(14,442

)

Add:

 

 

 

 

 

 

Measurement period adjustment of Lone Star merger

 

 

(2

)

 

 

—

 

Balance as of December 31, 2025

 

$

3,503,127

 

 

$

51,605

 

Management performs an evaluation annually, and more frequently if a triggering event occurs, of whether any impairment of the goodwill or core deposit intangibles has occurred. If any such impairment is determined, a write down is recorded. Based on the Company’s annual goodwill impairment test, management does not believe any of its goodwill is impaired as of December 31, 2025.

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, 2025, is as follows (dollars in thousands):

2026

 

$

12,763

 

2027

 

 

11,262

 

2028

 

 

9,958

 

2029

 

 

7,609

 

Thereafter

 

 

10,013

 

Total

 

$

51,605

 

 

4. SECURITIES

The amortized cost and fair value of investment securities were as follows:

 

 

December 31, 2025

 

 

 

Amortized Cost

 

 

Gross
Unrealized
Gains

 

 

Gross
Unrealized
Losses

 

 

Fair Value

 

 

 

(Dollars in thousands)

 

Available for Sale

 

 

 

 

 

 

 

 

 

 

 

 

Corporate debt securities

 

$

7,935

 

 

$

2,518

 

 

$

—

 

 

$

10,453

 

Collateralized mortgage obligations

 

 

209,689

 

 

 

5

 

 

 

(2,250

)

 

 

207,444

 

Mortgage-backed securities

 

 

120,948

 

 

 

85

 

 

 

(733

)

 

 

120,300

 

Total

 

$

338,572

 

 

$

2,608

 

 

$

(2,983

)

 

$

338,197

 

Held to Maturity

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agencies

 

$

6,032

 

 

$

78

 

 

$

(70

)

 

$

6,040

 

States and political subdivisions

 

 

69,221

 

 

 

249

 

 

 

(1,347

)

 

 

68,123

 

Corporate debt securities

 

 

12,000

 

 

 

—

 

 

 

(1,020

)

 

 

10,980

 

Collateralized mortgage obligations

 

 

223,675

 

 

 

1,010

 

 

 

(12,177

)

 

 

212,508

 

Mortgage-backed securities

 

 

9,964,300

 

 

 

9,070

 

 

 

(837,656

)

 

 

9,135,714

 

Total

 

$

10,275,228

 

 

$

10,407

 

 

$

(852,270

)

 

$

9,433,365

 

 

94

 

 

 

December 31, 2024

 

 

 

Amortized Cost

 

 

Gross
Unrealized
Gains

 

 

Gross
Unrealized
Losses

 

 

Fair Value

 

 

 

(Dollars in thousands)

 

Available for Sale

 

 

 

 

 

 

 

 

 

 

 

 

Corporate debt securities

 

$

14,350

 

 

$

2,035

 

 

$

(60

)

 

$

16,325

 

Collateralized mortgage obligations

 

 

216,142

 

 

 

81

 

 

 

(3,233

)

 

 

212,990

 

Mortgage-backed securities

 

 

108,524

 

 

 

41

 

 

 

(920

)

 

 

107,645

 

Total

 

$

339,016

 

 

$

2,157

 

 

$

(4,213

)

 

$

336,960

 

Held to Maturity

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agencies

 

$

5,861

 

 

$

—

 

 

$

(44

)

 

$

5,817

 

States and political subdivisions

 

 

98,125

 

 

 

220

 

 

 

(2,510

)

 

 

95,835

 

Corporate debt securities

 

 

12,000

 

 

 

—

 

 

 

(3,840

)

 

 

8,160

 

Collateralized mortgage obligations

 

 

232,345

 

 

 

—

 

 

 

(24,128

)

 

 

208,217

 

Mortgage-backed securities

 

 

10,409,133

 

 

 

380

 

 

 

(1,345,063

)

 

 

9,064,450

 

Total

 

$

10,757,464

 

 

$

600

 

 

$

(1,375,585

)

 

$

9,382,479

 

The investment securities portfolio is measured for expected credit losses by segregating the portfolio into two general classifications and applying the appropriate expected credit losses methodology. Investment securities classified as available for sale or held to maturity are evaluated for expected credit losses under CECL.

Available for sale securities. For available for sale securities in an unrealized loss position, the amount of the expected credit losses 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 expected credit losses will be recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date. If an entity does not intend to sell the security and it is not more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis less any current-period loss, the expected credit losses will 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 expected credit losses 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 expected credit losses related to the noncredit portion is recognized in other comprehensive income, net of applicable taxes. The previous amortized cost basis less the expected credit losses recognized in earnings will become the new amortized cost basis of the investment.

As of December 31, 2025, management does not have the intent to sell any of the securities classified as available for sale before a recovery of cost. In addition, management believes it is more likely than not that the Company will not be required to sell any of its investment securities before a recovery of cost. The unrealized losses are largely due to changes in market interest rates and spread relationships since 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, 2025, management believes that there is no potential for credit losses on available for sale securities.

Held to maturity securities. The Company’s held to maturity investments include mortgage-related bonds issued by either the Government National Mortgage Corporation (“Ginnie Mae”), Federal National Mortgage Association (“Fannie Mae”) or Federal Home Loan Mortgage Corporation (“Freddie Mac”). Ginnie Mae issued securities are explicitly guaranteed by the U.S. government, while Fannie Mae and Freddie Mac issued securities are fully guaranteed by those respective United States government-sponsored agencies, and conditionally guaranteed by the full faith and credit of the United States. The Company’s held to maturity securities also include taxable and tax-exempt municipal securities issued primarily by school districts, utility districts and municipalities located in Texas. The Company’s investment in municipal securities is exposed to credit risk. The securities are highly rated by major rating agencies and regularly reviewed by management. A significant portion are guaranteed or insured by either the Texas Permanent School Fund, Assured Guaranty or Build America Mutual. As of December 31, 2025, the Company’s municipal securities represent 0.7% of the securities portfolio. Management has the ability and intent to hold the securities classified as held to maturity until they mature, at which time the Company will receive full value for the securities. Accordingly, as of December 31, 2025, management believes that there is no potential for material credit losses on held to maturity securities.

95

 

Securities with unrealized losses segregated by length of time such securities have been in a continuous loss position were as follows:

 

 

December 31, 2025

 

 

 

Less than 12 Months

 

 

12 Months or More

 

 

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

 

$

29,345

 

 

$

(71

)

 

$

159,382

 

 

$

(2,179

)

 

$

188,727

 

 

$

(2,250

)

Mortgage-backed securities

 

 

32,483

 

 

 

(91

)

 

 

81,968

 

 

 

(642

)

 

 

114,451

 

 

 

(733

)

Total

 

$

61,828

 

 

$

(162

)

 

$

241,350

 

 

$

(2,821

)

 

$

303,178

 

 

$

(2,983

)

Held to Maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agencies

 

$

4,733

 

 

$

(70

)

 

$

—

 

 

$

—

 

 

$

4,733

 

 

$

(70

)

States and political subdivisions

 

 

1,108

 

 

 

(1

)

 

 

23,482

 

 

 

(1,346

)

 

 

24,590

 

 

 

(1,347

)

Corporate debt securities

 

 

—

 

 

 

—

 

 

 

10,980

 

 

 

(1,020

)

 

 

10,980

 

 

 

(1,020

)

Collateralized mortgage obligations

 

 

548

 

 

 

(8

)

 

 

165,061

 

 

 

(12,169

)

 

 

165,609

 

 

 

(12,177

)

Mortgage-backed securities

 

 

390,495

 

 

 

(775

)

 

 

7,813,697

 

 

 

(836,881

)

 

 

8,204,192

 

 

 

(837,656

)

Total

 

$

396,884

 

 

$

(854

)

 

$

8,013,220

 

 

$

(851,416

)

 

$

8,410,104

 

 

$

(852,270

)

 

 

December 31, 2024

 

 

 

Less than 12 Months

 

 

12 Months or More

 

 

Total

 

 

 

Estimated
Fair Value

 

 

Unrealized
Losses

 

 

Estimated
Fair Value

 

 

Unrealized
Losses

 

 

Estimated
Fair Value

 

 

Unrealized
Losses

 

 

 

(Dollars in thousands)

 

Available for Sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate debt securities

 

$

2,040

 

 

$

(60

)

 

$

—

 

 

$

—

 

 

$

2,040

 

 

$

(60

)

Collateralized mortgage obligations

 

 

47,114

 

 

 

(307

)

 

 

125,942

 

 

 

(2,926

)

 

 

173,056

 

 

 

(3,233

)

Mortgage-backed securities

 

 

6,837

 

 

 

(53

)

 

 

89,513

 

 

 

(867

)

 

 

96,350

 

 

 

(920

)

Total

 

$

55,991

 

 

$

(420

)

 

$

215,455

 

 

$

(3,793

)

 

$

271,446

 

 

$

(4,213

)

Held to Maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agencies

 

$

5,817

 

 

$

(44

)

 

$

—

 

 

$

—

 

 

$

5,817

 

 

$

(44

)

States and political subdivisions

 

 

23,270

 

 

 

(113

)

 

 

47,943

 

 

 

(2,397

)

 

 

71,213

 

 

 

(2,510

)

Corporate debt securities

 

 

—

 

 

 

—

 

 

 

8,160

 

 

 

(3,840

)

 

 

8,160

 

 

 

(3,840

)

Collateralized mortgage obligations

 

 

28,362

 

 

 

(663

)

 

 

179,855

 

 

 

(23,465

)

 

 

208,217

 

 

 

(24,128

)

Mortgage-backed securities

 

 

331,265

 

 

 

(4,647

)

 

 

8,646,541

 

 

 

(1,340,416

)

 

 

8,977,806

 

 

 

(1,345,063

)

Total

 

$

388,714

 

 

$

(5,467

)

 

$

8,882,499

 

 

$

(1,370,118

)

 

$

9,271,213

 

 

$

(1,375,585

)

At December 31, 2025 and 2024 there were 712 securities and 949 securities, respectively, in an unrealized loss position for 12 months or more.

The table below summarizes the amortized cost and fair value of investment securities at December 31, 2025, by contractual maturity. 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

 

 

 

(Dollars in thousands)

 

Due in one year or less

 

$

16,610

 

 

$

16,685

 

 

$

—

 

 

$

—

 

Due after one year through five years

 

 

40,466

 

 

 

40,292

 

 

 

—

 

 

 

—

 

Due after five years through ten years

 

 

30,177

 

 

 

28,166

 

 

 

7,935

 

 

 

10,453

 

Due after ten years

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Subtotal

 

 

87,253

 

 

 

85,143

 

 

 

7,935

 

 

 

10,453

 

Mortgage-backed securities and collateralized mortgage obligations

 

 

10,187,975

 

 

 

9,348,222

 

 

 

330,637

 

 

 

327,744

 

Total

 

$

10,275,228

 

 

$

9,433,365

 

 

$

338,572

 

 

$

338,197

 

 

96

 

At December 31, 2025 and 2024, 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 $9.24 billion and $10.26 billion and a fair value of $8.43 billion and $8.91 billion at December 31, 2025 and 2024, respectively, were pledged to collateralize public deposits and for other purposes required or permitted by law.

The Company recorded no gain or loss on sale of investment securities for the years ended December 31, 2025 and 2023. The Company recorded a $9.4 million net loss on the sale of investment securities for the year ended December 31, 2024. As of December 31, 2025, the Company did not own any non-agency collateralized mortgage obligations.

Visa Class B-1 Stock Exchange. During the second quarter of 2024, the Bank tendered all of its shares of Visa, Inc. (“Visa”) Class B-1 common stock in exchange for a combination of Visa Class B-2 common stock and Visa Class C common stock, pursuant to the terms and subject to the conditions of the public offering of Visa to exchange its Class B-1 common stock for a combination of shares of its Class B-2 common stock and Class C common stock, which expired on May 3, 2024. The Company recorded a gain of $20.6 million during the second quarter of 2024 based on the conversion privilege of the Class C common stock and the closing price of Visa Class A common stock. In the exchange, the Bank received 48,492 shares of Class B-2 stock, recorded at zero cost basis, and 19,245 shares of Class C common stock and has subsequently sold all shares of Class C stock.

5. 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 categorized by major type as follows:

 

 

December 31,

 

 

 

2025

 

 

2024

 

 

 

(Dollars in thousands)

 

Residential mortgage loans held for sale

 

$

14,155

 

 

$

10,690

 

 

 

 

 

 

 

 

Commercial and industrial

 

 

2,303,936

 

 

 

2,508,088

 

Real estate:

 

 

 

 

 

 

Construction, land development and other land loans

 

 

2,741,455

 

 

 

2,859,281

 

1-4 family residential (including home equity)

 

 

8,260,482

 

 

 

8,476,899

 

Commercial real estate (including multi-family residential)

 

 

5,776,397

 

 

 

5,800,985

 

Farmland

 

 

662,031

 

 

 

681,883

 

Agriculture

 

 

365,873

 

 

 

351,663

 

Consumer and other

 

 

376,241

 

 

 

378,817

 

Total loans held for investment, excluding Warehouse Purchase Program

 

 

20,486,415

 

 

 

21,057,616

 

Warehouse Purchase Program

 

 

1,304,798

 

 

 

1,080,903

 

Total loans, including Warehouse Purchase Program

 

$

21,805,368

 

 

$

22,149,209

 

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 $5.0 million are evaluated and acted upon on a daily basis by two of the company-wide designated senior credit officers. Loans to borrowers with aggregate debt relationships above $5.0 million are evaluated and acted upon by an officers’ loan committee that meets weekly.

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 based on the borrower's ability to service the debt from the conversion of working assets or cash flow. Working capital loans are primarily collateralized by short-term assets whereas term loans are primarily collateralized by long-term assets. As a general practice, term loans are secured by any available real estate, equipment or other assets owned by the borrower. Both working capital and term loans are typically supported by a personal guaranty of a principal. In general, commercial loans involve more credit risk than residential mortgage loans and commercial mortgage loans and, therefore, usually yield a higher return.

97

 

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 25-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 of 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, collateral valuation and a review of the financial condition of the borrower and guarantor. Loans to hotels and restaurants are primarily included in commercial real estate loans.

(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 and nonowner-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 30 years. Loans collateralized by 1-4 family residential real estate generally have been originated in amounts of no more than 89% of appraised value. The Company requires mortgage title insurance, as well as hazard, wind and/or flood insurance as appropriate. The Company prefers to retain residential mortgage 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 non-payments on such loans. The Company’s mortgage department also offers a variety of mortgage loan products which are generally amortized over 30 years, including FHA and VA loans, which are sold to secondary market investors.

(iv) Construction, Land Development and Other Land Loans. The Company makes loans to finance the construction of residential and nonresidential properties. Construction loans generally are collateralized by first liens on real estate and have variable 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, with heightened analysis of construction and/or development costs. 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, the Company may not 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. Although the Company has underwriting procedures designed to identify what it believes to be acceptable levels of risks in construction lending, these procedures may not prevent losses from the risks described above.

(v) Warehouse Purchase Program. The Warehouse Purchase Program allows unaffiliated mortgage originators (“Clients”) to close 1-4 family real estate loans in their own name and manage their cash flow needs until the loans are sold to investors. The Company’s Clients are strategically targeted for their experienced management teams and analyzed for the expected profitability of each Client’s business model over the long term. The Clients are located across the U.S. and originate mortgage loans primarily through traditional retail and/or wholesale business models using underwriting standards consistent with the United States government-sponsored enterprises, “Agencies” such as Fannie Mae, the private investors to which the mortgage loans are ultimately sold and the mortgage insurers.

Although not subject to any legally binding commitment, when the Company makes a purchase decision, it acquires a 100% participation interest in the mortgage loans originated by its Clients. Individual mortgage loans are warehoused in the Company’s portfolio only for a short duration, averaging less than 30 days. When instructed by a Client that a warehoused loan has been sold to an investor, the Company delivers the note to the investor that pays the Company, which in turn remits the net sales proceeds to the Client.

(vi) Agriculture Loans. The Company provides agriculture loans for short-term livestock and 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 industry segment, overall financial capacity and

98

 

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.

(vii) Consumer Loans. Consumer loans made by the Company include direct “A”-credit automobile loans, recreational vehicle loans, boat loans, home improvement loans, personal loans (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, personal bankruptcy or death. Furthermore, the application of various federal and state laws may limit the amount which can be recovered on such loans.

Loan Maturities. The contractual maturity ranges of the Company’s loan portfolio, excluding loans held for sale of $14.2 million and Warehouse Purchase Program Loans of $1.30 billion, by type of loan and the amount of such loans with predetermined interest rates and variable rates in each maturity range as of December 31, 2025 are summarized in the following table. Contractual maturities are based on contractual amounts outstanding and do not include loan purchase net discounts of $22.7 million.

 

 

One Year or Less

 

 

After One Year
Through Five Years

 

 

After Five Years
Through Fifteen
Years

 

 

After Fifteen Years

 

 

Total

 

 

 

(Dollars in thousands)

 

Commercial and industrial

 

$

859,054

 

 

$

1,006,972

 

 

$

337,407

 

 

$

102,598

 

 

$

2,306,031

 

Real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction, land development and other land loans

 

 

415,594

 

 

 

684,370

 

 

 

520,508

 

 

 

1,121,878

 

 

 

2,742,350

 

1-4 family residential (includes home equity)

 

 

52,963

 

 

 

191,857

 

 

 

1,721,423

 

 

 

6,293,179

 

 

 

8,259,422

 

Commercial (includes multi-family residential)

 

 

376,117

 

 

 

1,060,274

 

 

 

2,154,266

 

 

 

2,205,267

 

 

 

5,795,924

 

Agriculture (includes farmland)

 

 

341,380

 

 

 

122,069

 

 

 

229,333

 

 

 

336,163

 

 

 

1,028,945

 

Consumer and other

 

 

77,806

 

 

 

97,761

 

 

 

119,048

 

 

 

81,874

 

 

 

376,489

 

Total

 

$

2,122,914

 

 

$

3,163,303

 

 

$

5,081,985

 

 

$

10,140,959

 

 

$

20,509,161

 

Loans with a predetermined interest rate

 

$

522,339

 

 

$

1,229,440

 

 

$

2,757,221

 

 

$

3,299,005

 

 

$

7,808,005

 

Loans with a variable interest rate

 

 

1,600,575

 

 

 

1,933,863

 

 

 

2,324,764

 

 

 

6,841,954

 

 

 

12,701,156

 

Total

 

$

2,122,914

 

 

$

3,163,303

 

 

$

5,081,985

 

 

$

10,140,959

 

 

$

20,509,161

 

Concentrations of Credit. Most of the Company’s lending activity occurs within the states of Texas and Oklahoma. Commercial real estate loans, 1-4 family residential loans and construction, land development and other land loans made up 81.8% and 81.3% of the Company’s total loan portfolio, excluding Warehouse Purchase Program loans, at December 31, 2025 and 2024, respectively. As of December 31, 2025 and 2024, excluding Warehouse Purchase Program loans, there were no concentrations of loans related to any single industry in excess of 10% of total loans.

Related Party Loans. As of December 31, 2025 and 2024, loans outstanding to directors, officers and their affiliates totaled $272 thousand and $266 thousand, respectively. All transactions between the Company and such related parties are conducted 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:

 

 

As of and for the year ended December 31,

 

 

 

2025

 

 

2024

 

 

 

(Dollars in thousands)

 

Beginning balance on January 1

 

$

266

 

 

$

292

 

New loans

 

 

182

 

 

 

5

 

Repayments

 

 

(176

)

 

 

(31

)

Ending balance

 

$

272

 

 

$

266

 

99

 

Nonperforming Assets and Nonaccrual 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, including requiring appraisals on loans collateralized by real estate. The Company also monitors its delinquency levels for any negative or adverse trends. Nevertheless, the Company’s loan portfolio could become subject to increasing pressures from deteriorating borrower credit due to general economic conditions.

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. A loan may be returned to accrual status when all the principal and interest amounts contractually due are brought current and future principal and interest amounts contractually due are reasonably assured, which is typically evidenced by a sustained period (at least six months) of repayment performance by the borrower.

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

An aging analysis of past due loans, segregated by category of loan, is presented below:

 

 

December 31, 2025

 

 

 

Loans Past Due and Still Accruing

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

5,233

 

 

$

297

 

 

$

5,530

 

 

$

177

 

 

$

2,735,748

 

 

$

2,741,455

 

Warehouse Purchase Program loans

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

1,304,798

 

 

 

1,304,798

 

Agriculture and agriculture real estate (includes farmland)

 

 

4,834

 

 

 

—

 

 

 

4,834

 

 

 

15,378

 

 

 

1,007,692

 

 

 

1,027,904

 

1-4 family (includes home equity) (1)

 

 

47,057

 

 

 

—

 

 

 

47,057

 

 

 

53,932

 

 

 

8,173,648

 

 

 

8,274,637

 

Commercial real estate (includes multi-family residential)

 

 

13,386

 

 

 

—

 

 

 

13,386

 

 

 

5,326

 

 

 

5,757,685

 

 

 

5,776,397

 

Commercial and industrial

 

 

9,436

 

 

 

—

 

 

 

9,436

 

 

 

61,387

 

 

 

2,233,113

 

 

 

2,303,936

 

Consumer and other

 

 

1,159

 

 

 

20

 

 

 

1,179

 

 

 

1,017

 

 

 

374,045

 

 

 

376,241

 

Total

 

$

81,105

 

 

$

317

 

 

$

81,422

 

 

$

137,217

 

 

$

21,586,729

 

 

$

21,805,368

 

 

 

December 31, 2024

 

 

 

Loans Past Due and Still Accruing

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

21,464

 

 

$

267

 

 

$

21,731

 

 

$

2,079

 

 

$

2,835,471

 

 

$

2,859,281

 

Warehouse Purchase Program loans

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

1,080,903

 

 

 

1,080,903

 

Agriculture and agriculture real estate (includes farmland)

 

 

4,554

 

 

 

575

 

 

 

5,129

 

 

 

2,634

 

 

 

1,025,783

 

 

 

1,033,546

 

1-4 family (includes home equity) (1)

 

 

49,391

 

 

 

—

 

 

 

49,391

 

 

 

42,048

 

 

 

8,396,150

 

 

 

8,487,589

 

Commercial real estate (includes multi-family residential)

 

 

15,692

 

 

 

—

 

 

 

15,692

 

 

 

18,455

 

 

 

5,766,838

 

 

 

5,800,985

 

Commercial and industrial

 

 

26,852

 

 

 

1,347

 

 

 

28,199

 

 

 

8,348

 

 

 

2,471,541

 

 

 

2,508,088

 

Consumer and other

 

 

478

 

 

 

—

 

 

 

478

 

 

 

83

 

 

 

378,256

 

 

 

378,817

 

Total

 

$

118,431

 

 

$

2,189

 

 

$

120,620

 

 

$

73,647

 

 

$

21,954,942

 

 

$

22,149,209

 

(1)
Includes $14.2 million and $10.7 million of residential mortgage loans held for sale at December 31, 2025 and 2024, respectively.

 

100

 

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

 

 

 

December 31,

 

 

 

2025

 

 

2024

 

 

2023

 

 

 

(Dollars in thousands)

 

Nonaccrual loans (1)(2)

 

$

137,217

 

 

$

73,647

 

 

$

68,688

 

Accruing loans 90 or more days past due

 

 

317

 

 

 

2,189

 

 

 

2,195

 

Total nonperforming loans

 

 

137,534

 

 

 

75,836

 

 

 

70,883

 

Repossessed assets

 

 

12

 

 

 

4

 

 

 

76

 

Other real estate

 

 

13,296

 

 

 

5,701

 

 

 

1,708

 

Total nonperforming assets

 

$

150,842

 

 

$

81,541

 

 

$

72,667

 

Nonperforming assets to total loans and other real estate

 

 

0.69

%

 

 

0.37

%

 

 

0.34

%

Nonperforming assets to total loans, excluding Warehouse Purchase Program loans, and other real estate

 

 

0.74

%

 

 

0.39

%

 

 

0.36

%

Nonaccrual loans to total loans

 

 

0.63

%

 

 

0.33

%

 

 

0.32

%

Nonaccrual loans to total loans, excluding Warehouse Purchase Program loans

 

 

0.67

%

 

 

0.35

%

 

 

0.34

%

 

(1)
ASU 2022-02 became effective for the Company on January 1, 2023.
(2)
There were no nonperforming Warehouse Purchase Program loans or Warehouse Purchase Program lines of credit for the periods presented.

The Company had $150.8 million in nonperforming assets at December 31, 2025, compared with $81.5 million at December 31, 2024, and $72.7 million at December 31, 2023. Nonperforming assets were 0.69% of total loans and other real estate at December 31, 2025, compared with 0.37% and 0.34% of total loans and other real estate at December 31, 2024 and 2023, respectively. The nonperforming assets consisted of 449 separate credits or other real estate properties at December 31, 2025, compared with 368 at December 31, 2024, and 292 at December 31, 2023. The Company had $137.2 million, $73.6 million and $68.7 million in nonaccrual loans at December 31, 2025, 2024 and 2023, respectively.

101

 

Credit Quality Indicators. As part of the ongoing 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.

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—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 to be of acceptable credit quality with moderately greater risk than Grade 3 and receiving closer monitoring. 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—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 Company to risk at a future date. These loans are monitored on the Company’s internally-generated watch list and evaluated on a quarterly basis.

Grade 6—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—Credits in this category are deemed “substandard” and “impaired” pursuant to regulatory guidelines. As such, the Company 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—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 are being evaluated these loans are typically charged down to an amount the Company estimates is collectible.

Grade 9—Credits in this category are deemed a “loss” in accordance with regulatory guidelines and have been charged off or charged down. The Company may continue collection efforts and may have partial recovery in the future.

102

 

The following table presents loans by risk grade and category of loan and year of origination at December 31, 2025.

 

 

Term Loans

 

 

 

 

 

 

 

 

 

 

 

 

Amortized Cost Basis by Origination Year

 

 

 

 

 

 

 

 

 

 

 

 

2025

 

 

2024

 

 

2023

 

 

2022

 

 

2021

 

 

Prior

 

 

Revolving Loans

 

 

Revolving Loans Converted to Term Loans

 

 

Total

 

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction, Land Development and Other Land Loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Grade 1

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

Grade 2

 

 

—

 

 

 

—

 

 

 

476

 

 

 

—

 

 

 

—

 

 

 

12

 

 

 

—

 

 

 

—

 

 

 

488

 

Grade 3

 

 

593,401

 

 

 

366,296

 

 

 

270,218

 

 

 

332,398

 

 

 

95,621

 

 

 

119,548

 

 

 

134,977

 

 

 

11,487

 

 

 

1,923,946

 

Grade 4

 

 

57,125

 

 

 

81,139

 

 

 

249,322

 

 

 

277,136

 

 

 

27,447

 

 

 

20,492

 

 

 

47,593

 

 

 

—

 

 

 

760,254

 

Grade 5

 

 

10

 

 

 

148

 

 

 

12

 

 

 

—

 

 

 

339

 

 

 

4,997

 

 

 

4,500

 

 

 

—

 

 

 

10,006

 

Grade 6

 

 

—

 

 

 

—

 

 

 

685

 

 

 

—

 

 

 

140

 

 

 

599

 

 

 

—

 

 

 

—

 

 

 

1,424

 

Grade 7

 

 

—

 

 

 

—

 

 

 

64

 

 

 

44

 

 

 

—

 

 

 

7

 

 

 

—

 

 

 

—

 

 

 

115

 

Grade 8

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Grade 9

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

PCD Loans

 

 

—

 

 

 

—

 

 

 

9,827

 

 

 

13,929

 

 

 

7,264

 

 

 

8,313

 

 

 

5,889

 

 

 

—

 

 

 

45,222

 

Total

 

$

650,536

 

 

$

447,583

 

 

$

530,604

 

 

$

623,507

 

 

$

130,811

 

 

$

153,968

 

 

$

192,959

 

 

$

11,487

 

 

$

2,741,455

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current-period gross write-offs

 

$

—

 

 

$

82

 

 

$

92

 

 

$

—

 

 

$

73

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

247

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agriculture and Agriculture Real Estate (includes Farmland)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Grade 1

 

$

3,759

 

 

$

882

 

 

$

404

 

 

$

5

 

 

$

24

 

 

$

452

 

 

$

9,241

 

 

$

—

 

 

$

14,767

 

Grade 2

 

 

60

 

 

 

—

 

 

 

4

 

 

 

30

 

 

 

—

 

 

 

519

 

 

 

—

 

 

 

—

 

 

 

613

 

Grade 3

 

 

131,457

 

 

 

78,344

 

 

 

60,070

 

 

 

148,860

 

 

 

70,022

 

 

 

111,020

 

 

 

179,853

 

 

 

31

 

 

 

779,657

 

Grade 4

 

 

43,298

 

 

 

16,999

 

 

 

10,960

 

 

 

27,412

 

 

 

24,142

 

 

 

20,508

 

 

 

48,663

 

 

 

267

 

 

 

192,249

 

Grade 5

 

 

1,826

 

 

 

3,778

 

 

 

653

 

 

 

862

 

 

 

1,187

 

 

 

1,834

 

 

 

30

 

 

 

—

 

 

 

10,170

 

Grade 6

 

 

—

 

 

 

4

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

4

 

Grade 7

 

 

—

 

 

 

455

 

 

 

669

 

 

 

—

 

 

 

177

 

 

 

489

 

 

 

250

 

 

 

—

 

 

 

2,040

 

Grade 8

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Grade 9

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

PCD Loans

 

 

173

 

 

 

—

 

 

 

615

 

 

 

2,016

 

 

 

1,373

 

 

 

18,404

 

 

 

5,823

 

 

 

—

 

 

 

28,404

 

Total

 

$

180,573

 

 

$

100,462

 

 

$

73,375

 

 

$

179,185

 

 

$

96,925

 

 

$

153,226

 

 

$

243,860

 

 

$

298

 

 

$

1,027,904

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current-period gross write-offs

 

$

—

 

 

$

29

 

 

$

5

 

 

$

164

 

 

$

8

 

 

$

5

 

 

$

—

 

 

$

—

 

 

$

211

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 Family (includes Home Equity) (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Grade 1

 

$

—

 

 

$

—

 

 

$

68

 

 

$

133

 

 

$

—

 

 

$

105

 

 

$

—

 

 

$

—

 

 

$

306

 

Grade 2

 

 

124

 

 

 

—

 

 

 

382

 

 

 

182

 

 

 

134

 

 

 

1,920

 

 

 

—

 

 

 

—

 

 

 

2,742

 

Grade 3

 

 

376,294

 

 

 

435,095

 

 

 

1,330,867

 

 

 

2,126,504

 

 

 

1,853,074

 

 

 

1,800,193

 

 

 

99,896

 

 

 

2,762

 

 

 

8,024,685

 

Grade 4

 

 

13,476

 

 

 

12,497

 

 

 

18,410

 

 

 

26,086

 

 

 

29,139

 

 

 

67,152

 

 

 

6,318

 

 

 

—

 

 

 

173,078

 

Grade 5

 

 

251

 

 

 

1,793

 

 

 

672

 

 

 

2,163

 

 

 

2,378

 

 

 

1,706

 

 

 

76

 

 

 

—

 

 

 

9,039

 

Grade 6

 

 

81

 

 

 

557

 

 

 

476

 

 

 

1,178

 

 

 

—

 

 

 

2,884

 

 

 

—

 

 

 

—

 

 

 

5,176

 

Grade 7

 

 

—

 

 

 

191

 

 

 

6,913

 

 

 

18,323

 

 

 

9,381

 

 

 

18,945

 

 

 

—

 

 

 

—

 

 

 

53,753

 

Grade 8

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Grade 9

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

PCD Loans

 

 

46

 

 

 

—

 

 

 

301

 

 

 

3,364

 

 

 

232

 

 

 

1,915

 

 

 

—

 

 

 

—

 

 

 

5,858

 

Total

 

$

390,272

 

 

$

450,133

 

 

$

1,358,089

 

 

$

2,177,933

 

 

$

1,894,338

 

 

$

1,894,820

 

 

$

106,290

 

 

$

2,762

 

 

$

8,274,637

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current-period gross write-offs

 

$

—

 

 

$

41

 

 

$

1,019

 

 

$

1,149

 

 

$

103

 

 

$

35

 

 

$

442

 

 

$

—

 

 

$

2,789

 

 

103

 

 

 

Term Loans

 

 

 

 

 

 

 

 

 

 

 

 

Amortized Cost Basis by Origination Year

 

 

 

 

 

 

 

 

 

 

 

 

2025

 

 

2024

 

 

2023

 

 

2022

 

 

2021

 

 

Prior

 

 

Revolving Loans

 

 

Revolving Loans Converted to Term Loans

 

 

Total

 

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial Real Estate (includes Multi-Family Residential)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Grade 1

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

Grade 2

 

 

383

 

 

 

—

 

 

 

—

 

 

 

444

 

 

 

—

 

 

 

592

 

 

 

—

 

 

 

—

 

 

 

1,419

 

Grade 3

 

 

349,310

 

 

 

269,502

 

 

 

359,421

 

 

 

628,364

 

 

 

637,290

 

 

 

1,161,660

 

 

 

71,831

 

 

 

252

 

 

 

3,477,630

 

Grade 4

 

 

102,337

 

 

 

42,825

 

 

 

92,602

 

 

 

452,856

 

 

 

308,626

 

 

 

735,537

 

 

 

7,903

 

 

 

4,391

 

 

 

1,747,077

 

Grade 5

 

 

3,468

 

 

 

2,379

 

 

 

1,623

 

 

 

9,972

 

 

 

9,682

 

 

 

206,504

 

 

 

801

 

 

 

—

 

 

 

234,429

 

Grade 6

 

 

4,676

 

 

 

—

 

 

 

5,386

 

 

 

9,385

 

 

 

556

 

 

 

109,392

 

 

 

—

 

 

 

—

 

 

 

129,395

 

Grade 7

 

 

—

 

 

 

862

 

 

 

—

 

 

 

1,232

 

 

 

699

 

 

 

1,075

 

 

 

—

 

 

 

—

 

 

 

3,868

 

Grade 8

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Grade 9

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

PCD Loans

 

 

23,777

 

 

 

—

 

 

 

11,513

 

 

 

39,121

 

 

 

32,242

 

 

 

75,926

 

 

 

—

 

 

 

—

 

 

 

182,579

 

Total

 

$

483,951

 

 

$

315,568

 

 

$

470,545

 

 

$

1,141,374

 

 

$

989,095

 

 

$

2,290,686

 

 

$

80,535

 

 

$

4,643

 

 

$

5,776,397

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current-period gross write-offs

 

$

—

 

 

$

74

 

 

$

342

 

 

$

194

 

 

$

941

 

 

$

—

 

 

$

50

 

 

$

—

 

 

$

1,601

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and Industrial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Grade 1

 

$

19,752

 

 

$

11,506

 

 

$

7,039

 

 

$

2,974

 

 

$

4,568

 

 

$

11,389

 

 

$

57,424

 

 

$

199

 

 

$

114,851

 

Grade 2

 

 

—

 

 

 

1,173

 

 

 

360

 

 

 

6,500

 

 

 

—

 

 

 

513

 

 

 

1,360

 

 

 

—

 

 

 

9,906

 

Grade 3

 

 

306,402

 

 

 

122,826

 

 

 

98,437

 

 

 

117,963

 

 

 

55,843

 

 

 

227,590

 

 

 

913,121

 

 

 

1,706

 

 

 

1,843,888

 

Grade 4

 

 

23,141

 

 

 

21,751

 

 

 

19,328

 

 

 

23,377

 

 

 

5,707

 

 

 

40,589

 

 

 

70,560

 

 

 

1,133

 

 

 

205,586

 

Grade 5

 

 

68

 

 

 

206

 

 

 

34

 

 

 

16,772

 

 

 

169

 

 

 

393

 

 

 

6,248

 

 

 

—

 

 

 

23,890

 

Grade 6

 

 

—

 

 

 

2,244

 

 

 

2,685

 

 

 

2,827

 

 

 

387

 

 

 

888

 

 

 

3,869

 

 

 

—

 

 

 

12,900

 

Grade 7

 

 

70

 

 

 

331

 

 

 

2,213

 

 

 

90

 

 

 

70

 

 

 

6,001

 

 

 

34,134

 

 

 

17,341

 

 

 

60,250

 

Grade 8

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Grade 9

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

PCD Loans

 

 

56

 

 

 

156

 

 

 

501

 

 

 

4,389

 

 

 

1,063

 

 

 

15,656

 

 

 

10,844

 

 

 

—

 

 

 

32,665

 

Total

 

$

349,489

 

 

$

160,193

 

 

$

130,597

 

 

$

174,892

 

 

$

67,807

 

 

$

303,019

 

 

$

1,097,560

 

 

$

20,379

 

 

$

2,303,936

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current-period gross write-offs

 

$

78

 

 

$

668

 

 

$

6,903

 

 

$

423

 

 

$

206

 

 

$

85

 

 

$

4,799

 

 

$

—

 

 

$

13,162

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer and Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Grade 1

 

$

14,964

 

 

$

8,687

 

 

$

4,028

 

 

$

2,155

 

 

$

1,031

 

 

$

3,733

 

 

$

1,662

 

 

$

—

 

 

$

36,260

 

Grade 2

 

 

10,740

 

 

 

89,654

 

 

 

10,503

 

 

 

13,622

 

 

 

—

 

 

 

1,698

 

 

 

40,227

 

 

 

—

 

 

 

166,444

 

Grade 3

 

 

38,935

 

 

 

15,501

 

 

 

15,239

 

 

 

18,450

 

 

 

13,651

 

 

 

11,744

 

 

 

34,423

 

 

 

4

 

 

 

147,947

 

Grade 4

 

 

19

 

 

 

203

 

 

 

2

 

 

 

127

 

 

 

784

 

 

 

16,172

 

 

 

6,033

 

 

 

—

 

 

 

23,340

 

Grade 5

 

 

—

 

 

 

—

 

 

 

1,025

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

196

 

 

 

—

 

 

 

1,221

 

Grade 6

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Grade 7

 

 

—

 

 

 

—

 

 

 

24

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

860

 

 

 

130

 

 

 

1,014

 

Grade 8

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Grade 9

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

PCD Loans

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

5

 

 

 

3

 

 

 

7

 

 

 

—

 

 

 

15

 

Total

 

$

64,658

 

 

$

114,045

 

 

$

30,821

 

 

$

34,354

 

 

$

15,471

 

 

$

33,350

 

 

$

83,408

 

 

$

134

 

 

$

376,241

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current-period gross write-offs

 

$

5,998

 

 

$

64

 

 

$

82

 

 

$

64

 

 

$

6

 

 

$

153

 

 

$

108

 

 

$

5

 

 

$

6,480

 

 

104

 

 

 

Term Loans

 

 

 

 

 

 

 

 

 

 

 

 

Amortized Cost Basis by Origination Year

 

 

 

 

 

 

 

 

 

 

 

 

2025

 

 

2024

 

 

2023

 

 

2022

 

 

2021

 

 

Prior

 

 

Revolving Loans

 

 

Revolving Loans Converted to Term Loans

 

 

Total

 

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Warehouse Purchase Program

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Grade 1

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

Grade 2

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Grade 3

 

 

1,304,798

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

1,304,798

 

Grade 4

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Grade 5

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Grade 6

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Grade 7

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Grade 8

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Grade 9

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

PCD Loans

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Total

 

$

1,304,798

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

1,304,798

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current-period gross write-offs

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Grade 1

 

$

38,475

 

 

$

21,075

 

 

$

11,539

 

 

$

5,267

 

 

$

5,623

 

 

$

15,679

 

 

$

68,327

 

 

$

199

 

 

$

166,184

 

Grade 2

 

 

11,307

 

 

 

90,827

 

 

 

11,725

 

 

 

20,778

 

 

 

134

 

 

 

5,254

 

 

 

41,587

 

 

 

—

 

 

 

181,612

 

Grade 3

 

 

3,100,597

 

 

 

1,287,564

 

 

 

2,134,252

 

 

 

3,372,539

 

 

 

2,725,501

 

 

 

3,431,755

 

 

 

1,434,101

 

 

 

16,242

 

 

 

17,502,551

 

Grade 4

 

 

239,396

 

 

 

175,414

 

 

 

390,624

 

 

 

806,994

 

 

 

395,845

 

 

 

900,450

 

 

 

187,070

 

 

 

5,791

 

 

 

3,101,584

 

Grade 5

 

 

5,623

 

 

 

8,304

 

 

 

4,019

 

 

 

29,769

 

 

 

13,755

 

 

 

215,434

 

 

 

11,851

 

 

 

—

 

 

 

288,755

 

Grade 6

 

 

4,757

 

 

 

2,805

 

 

 

9,232

 

 

 

13,390

 

 

 

1,083

 

 

 

113,763

 

 

 

3,869

 

 

 

—

 

 

 

148,899

 

Grade 7

 

 

70

 

 

 

1,839

 

 

 

9,883

 

 

 

19,689

 

 

 

10,327

 

 

 

26,517

 

 

 

35,244

 

 

 

17,471

 

 

 

121,040

 

Grade 8

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Grade 9

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

PCD Loans

 

 

24,052

 

 

 

156

 

 

 

22,757

 

 

 

62,819

 

 

 

42,179

 

 

 

120,217

 

 

 

22,563

 

 

 

—

 

 

 

294,743

 

Total

 

$

3,424,277

 

 

$

1,587,984

 

 

$

2,594,031

 

 

$

4,331,245

 

 

$

3,194,447

 

 

$

4,829,069

 

 

$

1,804,612

 

 

$

39,703

 

 

$

21,805,368

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current-period gross write-offs

 

$

6,076

 

 

$

958

 

 

$

8,443

 

 

$

1,994

 

 

$

1,337

 

 

$

278

 

 

$

5,399

 

 

$

5

 

 

$

24,490

 

 

(1)
Includes $14.2 million of residential mortgage loans held for sale at December 31, 2025.

Allowance for Credit Losses on Loans. The allowance for credit losses is adjusted through charges to earnings in the form of a provision for credit losses. Management has established an allowance for credit losses that it believes is management’s best estimate of current expected credit losses on the Company’s loan portfolio as of December 31, 2025. The amount of the allowance for credit losses on loans 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, (3) provisions for credit losses charged to earnings that increase the allowance, and (4) provision releases returned to earnings that decrease 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, future adjustments may be necessary if economic conditions or borrower performance differ from the assumptions used in making the initial determinations.

The Company’s allowance for credit losses on loans consists of two components: (1) a specific valuation allowance based on expected losses on specifically identified loans and (2) a general valuation allowance based on historical lifetime loan loss experience, current economic conditions, reasonable and supportable forecasted economic conditions and other qualitative risk factors both internal and external to the Company.

105

 

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 CECL. 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 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 the Warehouse Purchase Program, the capitalization and liquidity of the mortgage banking client, the operating experience, the Client’s satisfactory underwriting of purchased loans and the consistent timeliness by the Client of loan resale to investors;
•
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 lifetime loan loss experience, concentration risk of specific loan types, the volume, growth and composition of the Company’s loan portfolio, current economic conditions and reasonable and supportable forecasted economic conditions that may affect borrower ability to pay and the value of collateral, the evaluation of the Company’s loan portfolio through its internal loan review process, other qualitative risk factors both internal and external to the Company and other relevant factors in accordance with CECL. Historical lifetime loan loss experience is determined by utilizing an open-pool (“cumulative loss rate”) methodology. Adjustments to the historical lifetime loan loss experience are made for differences in current loan pool risk characteristics such as portfolio concentrations, delinquency, non-accrual, and watch list levels, as well as changes in current and forecasted economic conditions such as unemployment rates, property and collateral values, and other indices relating to economic activity. The utilization of reasonable and supportable forecasts includes an immediate reversion to lifetime historical loss rates. 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. Allocation of a portion of the allowance to one category of loans does not preclude its availability to cover expected losses in other categories.

A change in the allowance for credit losses can be attributable to several factors, most notably (1) specific reserves identified for impaired loans and PCD loans, (2) historical lifetime credit loss information, (3) changes in current and forecasted environmental factors and (4) growth in the balance of loans.

106

 

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 lifetime credit losses, on the other hand, are based on an open-pool (“cumulative loss rate”) methodology, which is then applied to estimate lifetime credit losses in the loan portfolio. A deterioration in the credit quality of the loan portfolio in the current period would increase the historical lifetime loss rate to be applied in future periods, just as an improvement in credit quality would decrease the historical lifetime loss rate.

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 current economic metrics, reasonable and supportable forecasted 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 lifetime loss experience. Management’s assessment of qualitative factors is a statistically based approach to determine the loss rate adjustment associated with such factors. Based on the Company’s actual historical lifetime loan loss experience relative to economic and loan portfolio-specific factors at the time the losses occurred, management is able to identify the expected level of lifetime losses as of the date of measurement. The correlation of historical loss experience with current and forecasted economic conditions provides an estimate of lifetime losses that has not been previously factored into the general valuation allowance by the determination of specific reserves and lifetime historical losses. Additionally, the Company considers qualitative factors not easily quantified and the possibility of model 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 lifetime loss.

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. 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.

Non-PCD loans that were not deemed impaired subsequent to the acquisition date are considered non-impaired and are evaluated as part of the general valuation allowance. Non-PCD 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-PCD 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-PCD 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-PCD loan with the recorded investment in such loan. In the future, the Company will continue to analyze impaired Non-PCD 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.

PCD loans are monitored individually or on a pooled basis quarterly to assess for changes in expected cash flows subsequent to acquisition. If a deterioration in cash flows is identified, an increase to the PCD reserves for that individual loan or pool of loans may be required. PCD loans were recorded at their acquisition date fair values based on expected cash flows with a reserve established for the estimate of expected future cash flows. 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.

107

 

The following tables detail the activity in the allowance for credit losses on loans by category of loan for the years ended December 31, 2025, 2024 and 2023, respectively.

 

 

 

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 on loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance January 1, 2025

 

$

77,984

 

 

$

27,693

 

 

$

80,735

 

 

$

92,147

 

 

$

65,500

 

 

$

7,746

 

 

$

351,805

 

Provision for credit losses

 

 

(8,446

)

 

 

(4,314

)

 

 

(1,718

)

 

 

(14,313

)

 

 

22,542

 

 

 

6,249

 

 

 

—

 

Charge-offs

 

 

(247

)

 

 

(211

)

 

 

(2,789

)

 

 

(1,601

)

 

 

(13,162

)

 

 

(6,480

)

 

 

(24,490

)

Recoveries

 

 

526

 

 

 

270

 

 

 

368

 

 

 

1,018

 

 

 

3,059

 

 

 

1,186

 

 

 

6,427

 

Net charge-offs

 

 

279

 

 

 

59

 

 

 

(2,421

)

 

 

(583

)

 

 

(10,103

)

 

 

(5,294

)

 

 

(18,063

)

Balance December 31, 2025

 

$

69,817

 

 

$

23,438

 

 

$

76,596

 

 

$

77,251

 

 

$

77,939

 

 

$

8,701

 

 

$

333,742

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for credit losses on loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance January 1, 2024

 

$

87,775

 

 

$

11,380

 

 

$

77,652

 

 

$

88,664

 

 

$

59,832

 

 

$

7,059

 

 

$

332,362

 

Allowance on loans purchased with credit deterioration

 

 

942

 

 

 

14,309

 

 

 

344

 

 

 

4,306

 

 

 

6,176

 

 

 

1

 

 

 

26,078

 

Provision for credit losses

 

 

(9,954

)

 

 

2,130

 

 

 

4,210

 

 

 

(601

)

 

 

6,266

 

 

 

5,872

 

 

 

7,923

 

Charge-offs

 

 

(781

)

 

 

(636

)

 

 

(1,555

)

 

 

(1,290

)

 

 

(9,706

)

 

 

(6,271

)

 

 

(20,239

)

Recoveries

 

 

2

 

 

 

510

 

 

 

84

 

 

 

1,068

 

 

 

2,932

 

 

 

1,085

 

 

 

5,681

 

Net charge-offs

 

 

(779

)

 

 

(126

)

 

 

(1,471

)

 

 

(222

)

 

 

(6,774

)

 

 

(5,186

)

 

 

(14,558

)

Balance December 31, 2024

 

$

77,984

 

 

$

27,693

 

 

$

80,735

 

 

$

92,147

 

 

$

65,500

 

 

$

7,746

 

 

$

351,805

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for credit losses on loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance January 1, 2023

 

 

78,853

 

 

 

7,699

 

 

 

60,795

 

 

 

66,272

 

 

 

62,319

 

 

 

5,638

 

 

 

281,576

 

Allowance on loans purchased with credit deterioration

 

 

16,878

 

 

 

2,914

 

 

 

1,590

 

 

 

25,292

 

 

 

30,095

 

 

 

24

 

 

 

76,793

 

Provision for credit losses

 

 

(7,929

)

 

 

683

 

 

 

14,999

 

 

 

14,216

 

 

 

(16,177

)

 

 

6,192

 

 

 

11,984

 

Charge-offs

 

 

(77

)

 

 

(114

)

 

 

(144

)

 

 

(17,158

)

 

 

(19,603

)

 

 

(5,688

)

 

 

(42,784

)

Recoveries

 

 

50

 

 

 

198

 

 

 

412

 

 

 

42

 

 

 

3,198

 

 

 

893

 

 

 

4,793

 

Net charge-offs

 

 

(27

)

 

 

84

 

 

 

268

 

 

 

(17,116

)

 

 

(16,405

)

 

 

(4,795

)

 

 

(37,991

)

Balance December 31, 2023

 

$

87,775

 

 

$

11,380

 

 

$

77,652

 

 

$

88,664

 

 

$

59,832

 

 

$

7,059

 

 

$

332,362

 

The allowance for credit losses on loans as of December 31, 2025, totaled $333.7 million or 1.53% of total loans, including acquired loans with discounts, a decrease of $18.1 million or 5.1% compared to the allowance for credit losses on loans totaling $351.8 million or 1.59% of total loans, including acquired loans with discounts, as of December 31, 2024.

There was no provision for credit losses for the year ended December 31, 2025, compared to a $9.1 million provision for credit losses for year ended December 31, 2024 and $18.5 million provision for credit losses for the year ended December 31, 2023. The $9.1 million provision was due to loans acquired in the Lone Star Merger and consisted of a $7.9 million provision for credit losses on loans and a $1.2 million provision for credit losses on off-balance sheet credit exposures.

Net charge-offs were $18.1 million for the year ended December 31, 2025, compared with $14.6 million for the year ended December 31, 2024. For the year ended December 31, 2025, $18.9 million of reserves on resolved PCD loans without any related charge-offs were released to the general reserve.

Allowance for Credit Losses on Off-Balance Sheet Credit Exposures. The allowance for credit losses on off-balance sheet credit exposures estimates expected credit losses over the contractual period in which there is exposure to credit risk via a contractual obligation to extend credit, except when an obligation is unconditionally cancellable by the Company. The allowance is adjusted by provisions for credit losses charged to earnings that increase the allowance, or by provision releases returned to earnings that decrease the allowance. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on the commitments expected to fund. The estimate of commitments expected to fund is affected by historical analysis of utilization rates. The expected credit loss rates applied to the commitments expected to fund are affected by the general valuation allowance utilized for outstanding balances with the same underlying assumptions and drivers. As of December 31, 2025 and 2024, the Company had $37.6 million in allowance for credit losses on off-balance sheet credit exposures. The allowance for credit losses on

108

 

off-balance sheet credit exposures is a separate line item on the Company’s consolidated balance sheet. As of December 31, 2025, the Company had $1.30 billion in commitments expected to fund.

The following table represents a rollforward of the allowance for credit losses on off-balance sheet credit exposures as of the dates indicated.

 

 

 

Year Ended December 31,

 

 

 

2025

 

 

2024

 

 

 

(Dollars in thousands)

 

Balance at beginning of period

 

$

37,646

 

 

$

36,503

 

Provision for credit losses on off-balance sheet credit exposures

 

 

—

 

 

 

1,143

 

Balance at end of period

 

$

37,646

 

 

$

37,646

 

Loan Modifications Made to Borrowers Experiencing Financial Difficulty. The Company evaluates all restructurings, including restructurings for borrowers experiencing financial difficulty, to determine whether they result in a new loan or a continuation of an existing loan. In accordance with CECL, the Company only establishes a specific reserve for modifications to borrowers experiencing financial difficulty when the loan is identified as impaired. The effect of most modifications of loans made to borrowers who are experiencing financial difficulty is already included in the allowance for credit losses because of the measurement methodologies used to estimate the allowance. The Company adjusts the terms of loans for certain borrowers when it believes such changes will help its customers manage their loan obligations and increase the collectability of the loans.

Modifications of loans made to borrowers experiencing financial difficulty may include but are not limited to changes in committed loan amount, interest rate, amortization, note maturity, borrower, guarantor, collateral, forbearance, forgiveness of principal or interest, and other actions intended to minimize economic loss and to avoid foreclosure or repossession of collateral. The approval of modifications of loans for borrowers experiencing financial difficulty is handled on a case-by-case basis.

The following table displays the amortized cost of loans that were both experiencing financial difficulty and modified during the years ended December 31, 2025 and 2024, presented by category of loan and by type of modification.

 

 

 

Payment Delay

 

 

Term Extension

 

 

Interest Rate Reduction

 

 

Combination
Payment Delay and Interest Rate Reduction

 

 

Total

 

 

Percent of Total Class of Loans

 

 

 

(Dollars in thousands)

 

 

 

 

Year Ended December 31, 2025

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

463

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

463

 

 

 

0.0

%

Commercial real estate (includes multi-family residential)

 

 

—

 

 

 

557

 

 

 

22,736

 

 

 

—

 

 

 

23,293

 

 

 

0.4

%

Agriculture and agriculture real estate (includes farmland)

 

 

—

 

 

 

134

 

 

 

—

 

 

 

—

 

 

 

134

 

 

 

0.0

%

Total

 

$

463

 

 

$

691

 

 

$

22,736

 

 

$

—

 

 

$

23,890

 

 

 

0.1

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31, 2024

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

3,049

 

 

$

4,240

 

 

$

—

 

 

$

—

 

 

$

7,289

 

 

 

0.3

%

Construction, land development and other land loans

 

 

—

 

 

 

7,163

 

 

 

—

 

 

 

—

 

 

 

7,163

 

 

 

0.3

%

Commercial real estate (includes multi-family residential)

 

 

—

 

 

 

—

 

 

 

—

 

 

 

7,672

 

 

 

7,672

 

 

 

0.1

%

Total

 

$

3,049

 

 

$

11,403

 

 

$

—

 

 

$

7,672

 

 

$

22,124

 

 

 

0.1

%

The financial effects of the loan modifications made to borrowers experiencing financial difficulty were not significant during the years ended December 31, 2025 and 2024. Furthermore, such modifications did not significantly impact the Company’s determination of the allowance for credit losses during those periods.

The Company did not have any loans made to borrowers experiencing financial difficulty that were modified during the years ended December 31, 2025 and 2024 that subsequently defaulted and were modified in the twelve months prior to default. Payment default is defined as movement to nonperforming status, foreclosure or charge-off, whichever occurs first.

109

 

6. 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 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. FASB 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 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:

 

 

December 31, 2025

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

 

 

(Dollars in thousands)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

Available for sale securities:

 

 

 

 

 

 

 

 

 

 

 

 

Corporate debt securities

 

$

—

 

 

$

10,453

 

 

$

—

 

 

$

10,453

 

Collateralized mortgage obligations

 

 

—

 

 

 

207,444

 

 

 

—

 

 

 

207,444

 

Mortgage-backed securities

 

 

—

 

 

 

120,300

 

 

 

—

 

 

 

120,300

 

Derivative financial instruments:

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate lock commitments

 

 

—

 

 

 

192

 

 

 

—

 

 

 

192

 

Forward mortgage-backed securities trades

 

 

—

 

 

 

6

 

 

 

—

 

 

 

6

 

Loan customer counterparty

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Financial institution counterparty

 

 

—

 

 

 

778

 

 

 

—

 

 

 

778

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Derivative financial instruments:

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate lock commitments

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

Forward mortgage-backed securities trades

 

 

—

 

 

 

50

 

 

 

—

 

 

 

50

 

Loan customer counterparty

 

 

—

 

 

 

782

 

 

 

—

 

 

 

782

 

Financial institution counterparty

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

110

 

 

 

December 31, 2024

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

 

 

(Dollars in thousands)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

Available for sale securities:

 

 

 

 

 

 

 

 

 

 

 

 

Corporate debt securities

 

$

—

 

 

$

16,325

 

 

$

—

 

 

$

16,325

 

Collateralized mortgage obligations

 

 

—

 

 

 

212,990

 

 

 

—

 

 

 

212,990

 

Mortgage-backed securities

 

 

—

 

 

 

107,645

 

 

 

—

 

 

 

107,645

 

Derivative financial instruments:

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate lock commitments

 

 

—

 

 

 

144

 

 

 

—

 

 

 

144

 

Forward mortgage-backed securities trades

 

 

—

 

 

 

75

 

 

 

—

 

 

 

75

 

Loan customer counterparty

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Financial institution counterparty

 

 

—

 

 

 

686

 

 

 

—

 

 

 

686

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Derivative financial instruments:

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate lock commitments

 

$

—

 

 

$

1

 

 

$

—

 

 

$

1

 

Forward mortgage-backed securities trades

 

 

—

 

 

 

37

 

 

 

—

 

 

 

37

 

Loan customer counterparty

 

 

—

 

 

 

693

 

 

 

—

 

 

 

693

 

Financial institution counterparty

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

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, 2025, the Company had additions to other real estate owned of $18.7 million, of which $11.5 million were outstanding as of December 31, 2025. For the year ended December 31, 2025, the Company had additions to impaired loans of $119.9 million, of which $101.3 million were outstanding as of December 31, 2025. The remaining financial assets and liabilities measured at fair value on a non-recurring basis that were recorded in 2025 and remained outstanding at December 31, 2025 were not significant.

The following tables summarize the carrying values and estimated fair values of certain financial instruments not recorded at fair value on a recurring basis:

 

 

As of December 31, 2025

 

 

 

Carrying

 

 

Estimated Fair Value

 

 

 

Amount

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

 

 

(Dollars in thousands)

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

1,747,511

 

 

$

1,747,511

 

 

$

—

 

 

$

—

 

 

$

1,747,511

 

Federal funds sold

 

 

217

 

 

 

217

 

 

 

—

 

 

 

—

 

 

 

217

 

Held to maturity securities

 

 

10,275,228

 

 

 

—

 

 

 

9,433,365

 

 

 

—

 

 

 

9,433,365

 

Loans held for sale

 

 

14,155

 

 

 

—

 

 

 

14,155

 

 

 

—

 

 

 

14,155

 

Loans held for investment, net of allowance

 

 

20,152,673

 

 

 

—

 

 

 

—

 

 

 

19,342,602

 

 

 

19,342,602

 

Loans held for investment - Warehouse Purchase Program

 

 

1,304,798

 

 

 

—

 

 

 

1,304,798

 

 

 

—

 

 

 

1,304,798

 

Other real estate owned

 

 

13,296

 

 

 

—

 

 

 

13,296

 

 

 

—

 

 

 

13,296

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-bearing

 

$

9,467,911

 

 

$

—

 

 

$

9,467,911

 

 

$

—

 

 

$

9,467,911

 

Interest-bearing

 

 

19,014,573

 

 

 

—

 

 

 

19,001,946

 

 

 

—

 

 

 

19,001,946

 

Other borrowings

 

 

1,950,000

 

 

 

—

 

 

 

1,950,000

 

 

 

—

 

 

 

1,950,000

 

Securities sold under repurchase agreements

 

 

201,216

 

 

 

—

 

 

 

201,216

 

 

 

—

 

 

 

201,216

 

 

111

 

 

 

As of December 31, 2024

 

 

 

Carrying

 

 

Estimated Fair Value

 

 

 

Amount

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

 

 

(Dollars in thousands)

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

1,972,175

 

 

$

1,972,175

 

 

$

—

 

 

$

—

 

 

$

1,972,175

 

Federal funds sold

 

 

292

 

 

 

292

 

 

 

—

 

 

 

—

 

 

 

292

 

Held to maturity securities

 

 

10,757,464

 

 

 

—

 

 

 

9,382,479

 

 

 

—

 

 

 

9,382,479

 

Loans held for sale

 

 

10,690

 

 

 

—

 

 

 

10,690

 

 

 

—

 

 

 

10,690

 

Loans held for investment, net of allowance

 

 

20,705,811

 

 

 

—

 

 

 

—

 

 

 

19,379,556

 

 

 

19,379,556

 

Loans held for investment - Warehouse Purchase Program

 

 

1,080,903

 

 

 

—

 

 

 

1,080,903

 

 

 

—

 

 

 

1,080,903

 

Other real estate owned

 

 

5,701

 

 

 

—

 

 

 

5,701

 

 

 

—

 

 

 

5,701

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-bearing

 

$

9,798,438

 

 

$

—

 

 

$

9,798,438

 

 

$

—

 

 

$

9,798,438

 

Interest-bearing

 

 

18,582,900

 

 

 

—

 

 

 

18,559,227

 

 

 

—

 

 

 

18,559,227

 

Other borrowings

 

 

3,200,000

 

 

 

—

 

 

 

3,200,000

 

 

 

—

 

 

 

3,200,000

 

Securities sold under repurchase agreements

 

 

221,913

 

 

 

—

 

 

 

221,902

 

 

 

—

 

 

 

221,902

 

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 earnings at each subsequent reporting date. During the reported periods, the Company had no financial 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:

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 held for sale subjected to nonrecurring fair value adjustments as Level 2.

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. The Company’s discounted cash flow calculation to determine fair value considers internal and market-based information such as prepayment risk, cost of funds and liquidity. 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 Company classifies the estimated fair value of loans held for investment as Level 3.

Other real estate owned—Other real estate owned is primarily foreclosed properties securing residential loans and commercial real estate loans. 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.

112

 

The fair value estimates presented herein are based on information available to management at December 31, 2025. 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.

7. PREMISES AND EQUIPMENT

Premises and equipment are summarized as follows:

 

 

December 31,

 

 

 

2025

 

 

2024

 

 

 

(Dollars in thousands)

 

Land

 

$

141,400

 

 

$

141,613

 

Buildings

 

 

314,302

 

 

 

301,898

 

Furniture, fixtures and equipment

 

 

127,790

 

 

 

113,457

 

Construction in progress

 

 

13,464

 

 

 

11,155

 

Total

 

 

596,956

 

 

 

568,123

 

Less accumulated depreciation

 

 

(213,507

)

 

 

(196,885

)

Premises and equipment, net

 

$

383,449

 

 

$

371,238

 

Depreciation expense was $19.7 million, $19.1 million and $18.3 million for the years ended December 31, 2025, 2024 and 2023, respectively.

8. DEPOSITS

Included in interest-bearing deposits are certificates of deposit in amounts of $250,000 or more. These certificates and their remaining maturities at December 31, 2025 were as follows (dollars in thousands):

Three months or less

 

$

1,149,657

 

 

 

59.2

%

Over three through six months

 

 

437,468

 

 

 

22.6

 

Over six through 12 months

 

 

258,548

 

 

 

13.3

 

Over 12 months

 

 

94,164

 

 

 

4.9

 

Total

 

$

1,939,837

 

 

 

100.0

%

As of December 31, 2025, the Company had no deposits classified as brokered deposits for regulatory purposes, and there are no major concentrations of deposits with any one depositor.

9. 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”), securities sold under repurchase agreements and the Federal Reserve Board Bank Term Funding Program (“BTFP”).

 

 

 

December 31,

 

 

 

2025

 

 

2024

 

 

 

(Dollars in thousands)

 

FHLB advances

 

$

1,950,000

 

 

$

3,200,000

 

Securities sold under repurchase agreements

 

 

201,216

 

 

 

221,913

 

Total

 

$

2,151,216

 

 

$

3,421,913

 

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 borrowings and are 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, 2025, the Company had total borrowing capacity of $7.58 billion under this line. FHLB advances of $1.95 billion were outstanding at December 31, 2025, with a weighted-average interest rate of 3.63%. At December 31, 2025, the Company had no FHLB long-term notes payable balance outstanding.

113

 

Securities sold under repurchase agreements with Company customers—At December 31, 2025, the Company had $201.2 million in securities sold under repurchase agreements compared with $221.9 million at December 31, 2024, a decrease of $20.7 million or 9.3%, with weighted average interest rates paid of 2.35% and 2.70% for the years ended December 31, 2025 and 2024, respectively. Repurchase agreements are generally settled on the following business day. All securities sold under repurchase agreements are collateralized by certain pledged securities.

Bank Term Funding Program— During the second quarter of 2023, the Bank began participating in the BTFP, which ceased extending new loans as of March 11, 2024. Under the BTFP program, eligible depository institutions could obtain loans of up to one year in length by pledging U.S. Treasuries, agency debt and mortgage-backed securities, and other qualifying assets as collateral. At December 31, 2025, the Company had no BTFP balance outstanding.

10. INCOME TAXES

The components of income tax expense are as follows:

 

 

Year Ended December 31,

 

 

 

2025

 

 

2024

 

 

2023

 

 

 

(Dollars in thousands)

 

Current tax provision (benefit):

 

 

 

 

 

 

 

 

 

     Federal

 

$

151,020

 

 

$

127,471

 

 

$

105,431

 

     State

 

 

3,455

 

 

 

3,192

 

 

 

2,392

 

          Total current tax provision (benefit)

 

 

154,475

 

 

 

130,663

 

 

 

107,823

 

 

 

 

 

 

 

 

 

 

 

Deferred tax (benefit) provision:

 

 

 

 

 

 

 

 

 

     Federal

 

 

(3,738

)

 

 

2,616

 

 

 

7,321

 

     State

 

 

—

 

 

 

—

 

 

 

—

 

          Total deferred tax provision (benefit)

 

 

(3,738

)

 

 

2,616

 

 

 

7,321

 

 

 

 

 

 

 

 

 

 

 

Total tax provision (benefit)

 

$

150,737

 

 

$

133,279

 

 

$

115,144

 

 

The Company does not have pretax income from continuing foreign operations or foreign tax expense.

The provision for federal income taxes differs from the amount computed by applying the federal income tax statutory rate of 21% for 2025, 2024 and 2023 to income before income taxes as follows:

 

 

Year Ended December 31,

 

 

 

2025

 

 

2024

 

 

2023

 

 

 

Amount

 

 

Percent of Pretax Income

 

 

Amount

 

 

Percent of Pretax Income

 

 

Amount

 

 

Percent of Pretax Income

 

 

 

(Dollars in thousands)

 

U.S. federal statutory tax rate

 

$

145,652

 

 

 

21.00

%

 

$

128,660

 

 

 

21.00

%

 

$

112,241

 

 

 

21.00

%

Increase (decrease) resulting from:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

State and local income taxes, net of federal income tax effect (1)

 

 

2,729

 

 

 

0.39

 

 

 

2,522

 

 

 

0.41

 

 

 

1,890

 

 

 

0.35

 

Tax credits - Qualified School Construction Bond

 

 

(592

)

 

 

(0.09

)

 

 

(1,225

)

 

 

(0.20

)

 

 

(1,255

)

 

 

(0.23

)

Nontaxable or nondeductible items (2)

 

 

2,948

 

 

 

0.43

 

 

 

3,322

 

 

 

0.54

 

 

 

2,268

 

 

 

0.42

 

Total

 

$

150,737

 

 

 

21.73

%

 

$

133,279

 

 

 

21.75

%

 

$

115,144

 

 

 

21.54

%

 

(1)
State taxes in Oklahoma, New York, and Texas made up the majority (greater than 50%) of the tax effect in this category.
(2)
The “nontaxable or nondeductible items” category includes items such as non-taxable interest income, non-taxable income from bank-owned life insurance policies, non-deductible Federal Deposit Insurance Corporation (“FDIC”) premiums, non-deductible executive compensation, and other non-deductible expenses. None of those items individually or in the aggregate exceeded the 5% quantitative threshold for separate disaggregation in the current year.

114

 

Year-end deferred taxes are presented in the table below. Deferred taxes as of December 31, 2025 and 2024 are based on the U.S. statutory federal corporate income tax rate of 21%.

 

 

December 31,

 

 

 

2025

 

 

2024

 

 

 

(Dollars in thousands)

 

Deferred tax assets:

 

 

 

 

 

 

Allowance for credit losses

 

$

70,086

 

 

$

63,166

 

CECL unfunded loans

 

 

7,906

 

 

 

7,906

 

Loan purchase discounts

 

 

4,777

 

 

 

7,466

 

Securities

 

 

3,545

 

 

 

3,961

 

Accrued liabilities

 

 

3,010

 

 

 

1,068

 

Restricted stock

 

 

2,693

 

 

 

4,905

 

Deferred compensation

 

 

1,759

 

 

 

1,892

 

Unrealized loss on available for sale securities

 

 

79

 

 

 

432

 

Certificates of Deposit

 

 

2

 

 

 

32

 

Other

 

 

2,797

 

 

 

2,803

 

Total deferred tax assets

 

 

96,654

 

 

 

93,631

 

Deferred tax liabilities:

 

 

 

 

 

 

Goodwill and core deposit intangibles

 

 

(40,282

)

 

 

(42,838

)

Deferred loan fees and costs

 

 

(11,506

)

 

 

(11,822

)

Bank premises and equipment

 

 

(7,797

)

 

 

(5,109

)

Prepaid expenses

 

 

(1,427

)

 

 

(1,607

)

Other

 

 

(22

)

 

 

(20

)

Total deferred tax liabilities

 

 

(61,034

)

 

 

(61,396

)

Net deferred tax assets

 

$

35,620

 

 

$

32,235

 

 

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, 2025.

 

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 material tax positions at December 31, 2025 or December 31, 2024 that did not meet the more-likely-than not recognition threshold. FASB ASC Topic 740 “Income Taxes” 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, 2025 and 2024, 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, Oklahoma, Colorado, New Mexico, New York, and Tennessee as “major” tax jurisdictions, as defined. The Bank has identified its state returns in Arkansas, Florida, Georgia, Idaho, North Carolina, and Pennsylvania as “major” tax jurisdictions, as defined. The periods subject to examination for the Company’s federal return are the 2022 through 2025 tax years. The Company has assumed net operating loss (“NOLs”) carryforwards, “acquired NOLs”, through its previous 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. As of December 31, 2025, the Company has fully utilized all acquired NOLs.

 

Enactment of the One Big Beautiful Bill Act — On July 4, 2025, the One Big Beautiful Bill Act (the “OBBB Act”), which included certain modifications to U.S. tax law, was enacted. The Company has completed its initial evaluation of the provisions of the

115

 

OBBB Act and has concluded that it did not have a material impact on the Company's income tax provision for the year ended December 31, 2025.

11. STOCK INCENTIVE PROGRAMS

At December 31, 2025, Bancshares had one active stock-based incentive compensation plan with awards outstanding. The Company accounts for stock-based incentive compensation plans using the fair value-based method of accounting. The Company recognized stock-based compensation expense of $12.1 million, $12.8 million, and $12.2 million for the years ended December 31, 2025, 2024 and 2023, respectively. There was approximately $1.5 million, $1.6 million and $1.7 million of income tax benefit recorded for the stock-based compensation expense for the same periods, respectively.

On March 3, 2020, Bancshares’ Board of Directors established the Prosperity Bancshares, Inc. 2020 Stock Incentive Plan (the “2020 Plan”), which was approved by Bancshares’ shareholders at the annual meeting of shareholders on April 21, 2020. The 2020 Plan authorizes the issuance of up to 2,500,000 shares of common stock upon the exercise of options or pursuant to the grant or exercise, as the case may be, of other awards granted under the 2020 Plan, including incentive stock options, nonqualified stock options, stock appreciation rights, shares of restricted stock and restricted stock units. As of December 31, 2025, 565,381 shares of issued restricted common stock have vested and 552,588 shares of issued restricted stock remain unvested.

Restricted Stock

During 2025, 2024 and 2023, Bancshares granted shares of restricted stock pursuant to the 2020 Plan. These shares of restricted stock generally vest over a period of one to three 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 $12.1 million, $12.8 million and $12.2 million for the years ended December 31, 2025, 2024 and 2023, respectively.

A summary of the status of nonvested shares of issued restricted stock as of December 31, 2025, and changes during the year then ended is as follows:

 

 

Number of Shares

 

 

Weighted Average Grant Date Fair Value

 

 

 

(Shares in thousands)

 

Nonvested share awards outstanding, December 31, 2024

 

 

570

 

 

$

65.88

 

Share awards granted

 

 

164

 

 

 

65.81

 

Unvested share awards forfeited

 

 

(38

)

 

 

64.84

 

Share awards vested

 

 

(143

)

 

 

71.40

 

Nonvested share awards outstanding, December 31, 2025

 

 

553

 

 

$

64.49

 

The total fair value of restricted stock awards that fully vested during the year ended December 31, 2025, was $9.4 million.

As of December 31, 2025, there was $17.1 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 1.42 years.

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12. 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, as well as amounts the Company elected to present, are stated separately.

 

 

Years Ended December 31,

 

 

 

2025

 

 

2024

 

 

2023

 

 

 

(Dollars in thousands)

 

Other noninterest income

 

 

 

 

 

 

 

 

 

Banking related service fees

 

$

7,500

 

 

$

7,902

 

 

$

8,112

 

Bank Owned Life Insurance (BOLI)

 

 

8,328

 

 

 

7,980

 

 

 

6,653

 

Rental income

 

 

2,776

 

 

 

2,382

 

 

 

2,295

 

Other

 

 

19,640

 

 

 

11,665

 

 

 

19,633

 

Total

 

$

38,244

 

 

$

29,929

 

 

$

36,693

 

Other noninterest expense

 

 

 

 

 

 

 

 

 

Advertising

 

$

3,323

 

 

$

3,215

 

 

$

3,230

 

Losses

 

 

3,223

 

 

 

4,184

 

 

 

3,266

 

Printing and supplies

 

 

3,241

 

 

 

3,335

 

 

 

3,537

 

Insurance expense

 

 

3,505

 

 

 

3,655

 

 

 

3,749

 

Professional and legal fees

 

 

8,093

 

 

 

12,101

 

 

 

9,781

 

Property taxes

 

 

9,552

 

 

 

9,483

 

 

 

9,080

 

Travel and development

 

 

8,071

 

 

 

7,538

 

 

 

7,400

 

Other

 

 

11,216

 

 

 

11,679

 

 

 

11,302

 

Total

 

$

50,224

 

 

$

55,190

 

 

$

51,345

 

 

13. PROFIT SHARING PLAN

The Company has adopted a profit sharing plan pursuant to Section 401(k) of the Internal Revenue Code (the “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 Code and excluding catch-up contributions. Such matching contributions were approximately $6.6 million, $6.9 million and $6.0 million for the years ended December 31, 2025, 2024 and 2023, respectively.

14. OFF-BALANCE SHEET ARRANGEMENTS, COMMITMENTS AND CONTINGENCIES

The Company’s contractual obligations and other commitments to make future payments (other than deposit obligations and securities sold under repurchase agreements) as of December 31, 2025, are summarized below.

 

Federal Home Loan Bank Borrowings

The Company’s future cash payments associated with its contractual obligations pursuant to its FHLB advances as of December 31, 2025, is 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)

 

FHLB advances

 

$

1,950,000

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

1,950,000

 

Off-Balance Sheet Items

In the normal course of business, the Company enters into various transactions that, in accordance with GAAP, 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.

117

 

The Company’s commitments associated with outstanding standby letters of credit, unused capacity on Warehouse Purchase Program loans and commitments to extend credit expiring by period as of December 31, 2025, are summarized below. Since commitments associated with letters of credit, unused capacity on Warehouse Purchase Program loans and commitments to extend credit may expire unused, the amounts shown may 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

 

$

83,230

 

 

$

10,995

 

 

$

1,063

 

 

$

26

 

 

$

95,314

 

Unused capacity on Warehouse Purchase Program loans

 

 

808,202

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

808,202

 

Commitments to extend credit

 

 

1,480,685

 

 

 

907,638

 

 

 

181,211

 

 

 

946,127

 

 

 

3,515,661

 

Total

 

$

2,372,117

 

 

$

918,633

 

 

$

182,274

 

 

$

946,153

 

 

$

4,419,177

 

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. If 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.

 

Unused Capacity on Warehouse Purchase Program Loans. For Warehouse Purchase Program loans, the Company has established maximum purchase facility amounts, but reserves the right, at any time, to refuse to buy any mortgage loans offered for sale by each customer, for any reason.

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.

At December 31, 2025, $246.5 million of commitments to extend credit and standby letters of credit have fixed rates ranging from 0% to 21.0%.

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.

Allowance for Credit Losses on Off-Balance Sheet Credit Exposures. The Company records an allowance for credit losses on off-balance sheet credit exposure that is adjusted through an entry to provision for credit losses on the Company’s consolidated statement of income. At December 31, 2025 and 2024, this allowance, reported as a separate line item on the Company’s consolidated balance sheet, totaled $37.6 million.

Leases

The Company’s leases relate primarily to operating leases for office space and banking centers. The Company determines if an arrangement is a lease or contains a lease at inception. The Company’s leases have remaining lease terms of 1 to 15 years, which may include the option to extend the lease when it is reasonably certain for the Company to exercise that option. Operating lease right-of-use (“ROU”) assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. The Company uses its incremental collateralized borrowing rate to determine the present value of lease payments. Short-term leases and leases with variable lease costs are immaterial and the Company has one sublease arrangement. Sublease income for the years ended December 31, 2025, 2024 and 2023 was $3.3 million, $3.4 million and $3.1 million, respectively. As of December 31, 2025, operating lease ROU assets and lease liabilities were approximately $28.1 million. ROU assets and lease liabilities were classified as other assets and other liabilities, respectively.

As of December 31, 2025, the weighted average remaining lease terms of the Company’s operating leases were 5.9 years. The weighted average discount rate used to determine the lease liabilities as of December 31, 2025, for the Company’s operating leases was 3.2%. Cash paid for the Company’s operating leases for the years ended December 31, 2025, 2024 and 2023 was $11.6 million,

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$11.5 million and $12.0 million, respectively. During the year ended December 31, 2025, the Company obtained $3.5 million in ROU assets in exchange for lease liabilities for nine operating leases.

The Company’s future undiscounted cash payments associated with its operating leases as of December 31, 2025, are summarized below (dollars in thousands).

 

2026

 

$

10,066

 

2027

 

 

7,075

 

2028

 

 

4,107

 

2029

 

 

2,768

 

2030

 

 

2,266

 

Thereafter

 

 

9,663

 

Total undiscounted lease payments

 

$

35,945

 

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 operating lease obligations aggregated approximately $11.6 million, $11.5 million and $12.1 million for the years ended December 31, 2025, 2024 and 2023, respectively.

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. After consultations with legal counsel, the Company and the Bank believe that the ultimate liability, if any, arising from such actions will not have a material adverse effect on their financial statements.

15. OTHER COMPREHENSIVE INCOME (LOSS)

 

 

For the Years Ended December 31,

 

 

 

2025

 

 

2024

 

 

2023

 

 

 

Before
Tax
Amount

 

 

Tax
Expense

 

 

Net of
Tax
Amount

 

 

Before
Tax
Amount

 

 

Tax
Expense

 

 

Net of
Tax
Amount

 

 

Before
Tax
Amount

 

 

Tax
Expense

 

 

Net of
Tax
Amount

 

 

 

(Dollars in thousands)

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in unrealized gain (loss) during period

 

$

1,681

 

 

$

(353

)

 

$

1,328

 

 

$

(286

)

 

$

60

 

 

$

(226

)

 

$

2,626

 

 

$

(551

)

 

$

2,075

 

Total securities available for sale

 

 

1,681

 

 

 

(353

)

 

 

1,328

 

 

 

(286

)

 

 

60

 

 

 

(226

)

 

 

2,626

 

 

 

(551

)

 

 

2,075

 

Total other comprehensive income (loss)

 

$

1,681

 

 

$

(353

)

 

$

1,328

 

 

$

(286

)

 

$

60

 

 

$

(226

)

 

$

2,626

 

 

$

(551

)

 

$

2,075

 

Activity in accumulated other comprehensive (loss) income, net of tax, was as follows:

 

 

Securities
Available for Sale

 

 

Accumulated Other
Comprehensive Income

 

 

 

(Dollars in thousands)

 

Balance at January 1, 2025

 

$

(1,624

)

 

$

(1,624

)

Other comprehensive income

 

 

1,328

 

 

 

1,328

 

Balance at December 31, 2025

 

$

(296

)

 

$

(296

)

Balance at January 1, 2024

 

$

(1,398

)

 

$

(1,398

)

Other comprehensive loss

 

 

(226

)

 

 

(226

)

Balance at December 31, 2024

 

$

(1,624

)

 

$

(1,624

)

Balance at January 1, 2023

 

$

(3,473

)

 

$

(3,473

)

Other comprehensive income

 

 

2,075

 

 

 

2,075

 

Balance at December 31, 2023

 

$

(1,398

)

 

$

(1,398

)

16. DERIVATIVE FINANCIAL INSTRUMENTS

 

119

 

The following table provides the outstanding notional balances and fair values of outstanding derivative positions at December 31, 2025 and 2024.

 

 

 

December 31, 2025

 

 

December 31, 2024

 

 

 

Outstanding
Notional
Balance

 

 

Asset
Derivative
Fair Value

 

 

Liability
Derivative
Fair Value

 

 

Outstanding
Notional
Balance

 

 

Asset
Derivative
Fair Value

 

 

Liability
Derivative
Fair Value

 

 

 

(Dollars in thousands)

 

Interest rate lock commitments

 

$

7,837

 

 

$

192

 

 

 

—

 

 

$

7,042

 

 

$

144

 

 

$

1

 

Forward mortgage-backed securities trades

 

 

19,250

 

 

 

6

 

 

 

50

 

 

 

18,500

 

 

 

75

 

 

 

37

 

Commercial loan interest rate swaps and caps:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loan customer counterparty

 

 

40,795

 

 

 

—

 

 

 

782

 

 

 

30,732

 

 

 

—

 

 

 

693

 

Financial institution counterparty

 

 

40,795

 

 

 

778

 

 

 

—

 

 

 

30,732

 

 

 

686

 

 

 

—

 

These financial instruments are not designated as hedging instruments and are used for asset and liability management and commercial customers’ financing needs. All derivatives are carried at fair value in either other assets or other liabilities, and all related cash flows are reported in the operating section of the consolidated statements of cash flows.

Interest rate lock commitments (“IRLCs”) — In the normal course of business, the Company enters into interest rate lock commitments with consumers to originate mortgage loans at a specified interest rate. These commitments, which contain fixed expiration dates, offer the borrower an interest rate guarantee provided the loan meets underwriting guidelines and closes within the timeframe established by the Company.

Forward mortgage-backed securities trades — The Company manages the changes in fair value associated with changes in interest rates related to IRLCs by using forward sold commitments known as forward mortgage-backed securities trades. These instruments are typically entered into at the time the interest rate lock commitment is made.

Interest rate swaps and caps — These derivative positions relate to transactions in which the Company enters into an interest rate swap or cap with a customer, while at the same time entering into an offsetting interest rate swap or cap with another financial institution. An interest rate swap transaction allows the Company’s customer to effectively convert a variable rate loan to a fixed rate. In connection with each swap, the Company agrees to pay interest to the customer on a notional amount at a variable interest rate and receive interest from the customer on a similar notional amount at a fixed interest rate. At the same time, the Company agrees to pay another financial institution a similar fixed interest rate on the same notional amount and receive substantially the same variable interest rate on the same notional amount. In connection with each interest rate cap, the Company sells a cap to the customer and agree to pay interest if the underlying index exceeds the strike price defined in the cap agreement. Simultaneously the Company purchases a cap with matching terms from another financial institution that agrees to pay the Company if the underlying index exceeds the strike price.

The commercial loan customer counterparty weighted average received and paid interest rates for interest rate swaps outstanding at December 31, 2025 and 2024 are presented in the following table.

 

 

 

Weighted-Average Interest Rate

 

 

 

December 31, 2025

 

 

December 31, 2024

 

 

 

Received

 

 

Paid

 

 

Received

 

 

Paid

 

Loan customer counterparty

 

 

4.52

%

 

 

4.78

%

 

 

5.03

%

 

 

6.77

%

 

The Company’s credit exposure on interest rate swaps is limited to the net favorable value of all swaps by each counterparty, which was approximately $778 thousand and $686 thousand at December 31, 2025 and 2024, respectively. This credit exposure is partly mitigated as transactions with customers are secured by the collateral, if any, securing the underlying transaction being hedged. The Company’s credit exposure, net of collateral pledged, relating to interest rate swaps with upstream financial institution counter-parties was zero at December 31, 2025. A credit support annex is in place and allows the Company to call collateral from upstream financial institution counterparties. Collateral levels are monitored and adjusted on a regular basis for changes in interest rate swap values. The Company’s cash collateral pledged for interest rate swaps was $650 thousand and zero at December 31, 2025 and 2024, respectively.

120

 

The initial and subsequent changes in the fair value of IRLCs and the forward sales of mortgage-backed securities are recorded in mortgage income. These gains and losses were not attributable to instrument-specific credit risk. For interest rate swaps and caps, because the Company acts as an intermediary for its customer, changes in the fair value of the underlying derivative contracts substantially offset each other and do not have a material impact on its results of operations. Income for the years ended December 31, 2025, 2024 and 2023 was as follows:

 

 

 

Year Ended December 31,

 

Derivatives not designated as hedging instruments

 

2025

 

 

2024

 

 

2023

 

Interest rate lock commitments

 

$

49

 

 

$

(75

)

 

$

130

 

Forward mortgage-backed securities trades

 

 

(264

)

 

 

589

 

 

 

368

 

 

17. REGULATORY MATTERS

Bancshares 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 its 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. Bancshares’ 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.

The Basel III Capital Rules require Bancshares and the Bank to maintain a capital conservation buffer, composed entirely of common equity tier 1 capital (“CET1”), of 2.5%, effectively resulting in minimum ratios of (1) CET1 to risk-weighted assets of 7.0%, (2) Tier 1 capital to risk-weighted assets of 8.5%, (3) total capital (that is, Tier 1 plus Tier 2) to risk-weighted assets of 10.5% and (4) Tier 1 capital to average quarterly assets as reported on consolidated financial statements (known as the “leverage ratio”) of 4.0%.

The CET1, 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.

To meet the capital adequacy requirements, Bancshares and the Bank must maintain minimum capital amounts and ratios of CET1, Tier 1 and Total capital to risk weighted assets, and of Tier 1 capital to adjusted quarterly average assets as defined in the regulations. As of December 31, 2025, Bancshares and the Bank met all capital adequacy requirements to which they were subject.

As of December 31, 2025, 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 CET1 risk-based, Tier 1 risk-based, total risk-based and Tier 1 leverage ratios as set forth in the table below.

121

 

The following is a summary of Bancshares’ and the Bank’s capital ratios at December 31, 2025 and 2024:

 

 

 

Actual

 

 

Minimum Required For Capital Adequacy Purposes

 

 

Minimum Required Plus Capital Conservation Buffer

 

 

To Be Categorized As Well Capitalized Under Prompt Corrective Action Provisions

 

 

 

Amount

 

 

Ratio

 

 

Amount

 

 

Ratio

 

 

Amount

 

 

Ratio

 

 

Amount

 

 

Ratio

 

 

 

(Dollars in thousands)

 

CONSOLIDATED:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2025

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CET1 Capital (to Risk Weighted Assets)

 

$

4,072,542

 

 

 

17.55

%

 

$

1,044,451

 

 

 

4.50

%

 

$

1,624,702

 

 

 

7.00

%

 

N/A

 

 

N/A

 

Tier 1 Capital (to Risk Weighted Assets)

 

 

4,072,542

 

 

 

17.55

 

 

 

1,392,601

 

 

 

6.00

 

 

 

1,972,852

 

 

 

8.50

 

 

N/A

 

 

N/A

 

Total Capital (to Risk Weighted Assets)

 

 

4,363,072

 

 

 

18.80

 

 

 

1,856,802

 

 

 

8.00

 

 

 

2,437,053

 

 

 

10.50

 

 

N/A

 

 

N/A

 

Tier 1 Capital (to Average Tangible Assets)

 

 

4,072,542

 

 

 

11.93

 

 

 

1,365,178

 

 

 

4.00

 

 

 

1,365,178

 

 

 

4.00

 

 

N/A

 

 

N/A

 

As of December 31, 2024

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CET1 Capital (to Risk Weighted Assets)

 

$

3,908,497

 

 

 

16.42

%

 

$

1,071,015

 

 

 

4.50

%

 

$

1,666,024

 

 

 

7.00

%

 

N/A

 

 

N/A

 

Tier 1 Capital (to Risk Weighted Assets)

 

 

3,908,497

 

 

 

16.42

 

 

 

1,428,021

 

 

 

6.00

 

 

 

2,023,029

 

 

 

8.50

 

 

N/A

 

 

N/A

 

Total Capital (to Risk Weighted Assets)

 

 

4,206,669

 

 

 

17.67

 

 

 

1,904,028

 

 

 

8.00

 

 

 

2,499,036

 

 

 

10.50

 

 

N/A

 

 

N/A

 

Tier 1 Capital (to Average Tangible Assets)

 

 

3,908,497

 

 

 

10.82

 

 

 

1,445,504

 

 

 

4.00

 

 

 

1,445,504

 

 

 

4.00

 

 

N/A

 

 

N/A

 

BANK ONLY:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2025

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CET1 Capital (to Risk Weighted Assets)

 

$

3,830,131

 

 

 

16.51

%

 

$

1,044,087

 

 

 

4.50

%

 

$

1,624,135

 

 

 

7.00

%

 

$

1,508,126

 

 

 

6.50

%

Tier 1 Capital (to Risk Weighted Assets)

 

 

3,830,131

 

 

 

16.51

 

 

 

1,392,116

 

 

 

6.00

 

 

 

1,972,164

 

 

 

8.50

 

 

 

1,856,155

 

 

 

8.00

 

Total Capital (to Risk Weighted Assets)

 

 

4,121,172

 

 

 

17.76

 

 

 

1,856,155

 

 

 

8.00

 

 

 

2,436,203

 

 

 

10.50

 

 

 

2,320,193

 

 

 

10.00

 

Tier 1 Capital (to Average Tangible Assets)

 

 

3,830,131

 

 

 

11.22

 

 

 

1,364,910

 

 

 

4.00

 

 

 

1,364,910

 

 

 

4.00

 

 

 

1,706,137

 

 

 

5.00

 

As of December 31, 2024

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CET1 Capital (to Risk Weighted Assets)

 

$

3,893,275

 

 

 

16.36

%

 

$

1,070,586

 

 

 

4.50

%

 

$

1,665,356

 

 

 

7.00

%

 

$

1,546,402

 

 

 

6.50

%

Tier 1 Capital (to Risk Weighted Assets)

 

 

3,893,275

 

 

 

16.36

 

 

 

1,427,448

 

 

 

6.00

 

 

 

2,022,219

 

 

 

8.50

 

 

 

1,903,264

 

 

 

8.00

 

Total Capital (to Risk Weighted Assets)

 

 

4,191,332

 

 

 

17.62

 

 

 

1,903,264

 

 

 

8.00

 

 

 

2,498,035

 

 

 

10.50

 

 

 

2,379,081

 

 

 

10.00

 

Tier 1 Capital (to Average Tangible Assets)

 

 

3,893,275

 

 

 

10.78

 

 

 

1,445,188

 

 

 

4.00

 

 

 

1,445,188

 

 

 

4.00

 

 

 

1,806,485

 

 

 

5.00

 

 

Dividends paid by Bancshares and the Bank are subject to restrictions by certain regulatory agencies. Dividends declared to be paid by Bancshares during the years ended December 31, 2025, 2024 and 2023 were $221.4 million, $214.4 million and $205.7 million, respectively. Dividends paid by the Bank to Bancshares during the years ended December 31, 2025, 2024 and 2023 were $607.2 million, $352.8 million and $373.2 million, respectively.

122

 

18. PARENT COMPANY ONLY FINANCIAL STATEMENTS

PROSPERITY BANCSHARES, INC.

(Parent Company Only)

CONDENSED BALANCE SHEETS

 

 

December 31,

 

 

 

2025

 

 

2024

 

 

 

(Dollars in thousands)

 

ASSETS

 

 

 

 

 

 

Cash

 

$

233,935

 

 

$

5,187

 

Investment in subsidiary

 

 

7,369,747

 

 

 

7,419,290

 

Goodwill

 

 

3,982

 

 

 

3,982

 

Other assets

 

 

10,073

 

 

 

11,530

 

TOTAL

 

$

7,617,737

 

 

$

7,439,989

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

LIABILITIES:

 

 

 

 

 

 

Accrued interest payable and other liabilities

 

$

1,597

 

 

$

1,494

 

SHAREHOLDERS’ EQUITY:

 

 

 

 

 

 

Common stock

 

 

93,058

 

 

 

95,276

 

Capital surplus

 

 

3,653,751

 

 

 

3,796,622

 

Retained earnings

 

 

3,869,627

 

 

 

3,548,221

 

Unrealized loss on available for sale securities, net of tax

 

 

(296

)

 

 

(1,624

)

Total shareholders’ equity

 

 

7,616,140

 

 

 

7,438,495

 

TOTAL

 

$

7,617,737

 

 

$

7,439,989

 

123

 

PROSPERITY BANCSHARES, INC.

(Parent Company Only)

CONDENSED STATEMENTS OF INCOME

 

 

For the Years Ended December 31,

 

 

 

2025

 

 

2024

 

 

2023

 

 

 

(Dollars in thousands)

 

OPERATING INCOME:

 

 

 

 

 

 

 

 

 

Dividends from subsidiary

 

$

607,191

 

 

$

352,766

 

 

$

373,248

 

Other income (expense)

 

 

178

 

 

 

(2

)

 

 

25

 

Total income

 

 

607,369

 

 

 

352,764

 

 

 

373,273

 

OPERATING EXPENSE:

 

 

 

 

 

 

 

 

 

Subordinated notes interest expense

 

 

—

 

 

 

—

 

 

 

38

 

Stock based compensation expense (includes restricted stock)

 

 

12,103

 

 

 

12,843

 

 

 

12,181

 

Other expenses

 

 

3,522

 

 

 

2,881

 

 

 

2,896

 

Total operating expense

 

 

15,625

 

 

 

15,724

 

 

 

15,115

 

INCOME BEFORE INCOME TAX BENEFIT AND EQUITY IN UNDISTRIBUTED EARNINGS OF SUBSIDIARIES

 

 

591,744

 

 

 

337,040

 

 

 

358,158

 

FEDERAL INCOME TAX BENEFIT

 

 

1,970

 

 

 

2,057

 

 

 

2,076

 

INCOME BEFORE EQUITY IN UNDISTRIBUTED EARNINGS OF SUBSIDIARIES

 

 

593,714

 

 

 

339,097

 

 

 

360,234

 

EQUITY IN UNDISTRIBUTED EARNINGS OF SUBSIDIARIES

 

 

(50,871

)

 

 

140,289

 

 

 

59,082

 

NET INCOME

 

$

542,843

 

 

$

479,386

 

 

$

419,316

 

124

 

PROSPERITY BANCSHARES, INC.

(Parent Company Only)

CONDENSED STATEMENTS OF COMPREHENSIVE INCOME

 

 

For the Years Ended December 31,

 

 

 

2025

 

 

2024

 

 

2023

 

 

 

(Dollars in thousands)

 

Net income

 

$

542,843

 

 

$

479,386

 

 

$

419,316

 

Other comprehensive income (loss), before tax:

 

 

 

 

 

 

 

 

 

Securities available for sale:

 

 

 

 

 

 

 

 

 

Change in unrealized income (loss) during the period

 

 

1,681

 

 

 

(286

)

 

 

2,626

 

Total other comprehensive income (loss)

 

 

1,681

 

 

 

(286

)

 

 

2,626

 

Deferred tax (expense) benefit related to other comprehensive income (loss)

 

 

(353

)

 

 

60

 

 

 

(551

)

Other comprehensive income (loss), net of tax

 

 

1,328

 

 

 

(226

)

 

 

2,075

 

Comprehensive income

 

$

544,171

 

 

$

479,160

 

 

$

421,391

 

125

 

PROSPERITY BANCSHARES, INC.

(Parent Company Only)

CONDENSED STATEMENTS OF CASH FLOWS

 

 

For the Years Ended December 31,

 

 

 

2025

 

 

2024

 

 

2023

 

 

 

(Dollars in thousands)

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

 

Net income

 

$

542,843

 

 

$

479,386

 

 

$

419,316

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

 

Equity in undistributed earnings of subsidiaries

 

 

50,871

 

 

 

(140,289

)

 

 

(59,082

)

Stock based compensation expense

 

 

12,102

 

 

 

12,843

 

 

 

12,181

 

Decrease (increase) in other assets

 

 

1,457

 

 

 

(840

)

 

 

(1,543

)

Increase in accrued interest payable and other liabilities

 

 

103

 

 

 

747

 

 

 

576

 

Net cash provided by operating activities

 

 

607,376

 

 

 

351,847

 

 

 

371,448

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

 

Net cash paid for acquisitions

 

 

—

 

 

 

(63,246

)

 

 

(88,490

)

Net cash used in investing activities

 

 

—

 

 

 

(63,246

)

 

 

(88,490

)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

 

Redemption of junior subordinated debentures

 

 

—

 

 

 

—

 

 

 

(3,158

)

Repurchase of common stock

 

 

(157,191

)

 

 

(74,766

)

 

 

(72,248

)

Payments of cash dividends

 

 

(221,437

)

 

 

(214,375

)

 

 

(205,715

)

Net cash used in financing activities

 

 

(378,628

)

 

 

(289,141

)

 

 

(281,121

)

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

 

 

228,748

 

 

 

(540

)

 

 

1,837

 

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

 

 

5,187

 

 

 

5,727

 

 

 

3,890

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

 

$

233,935

 

 

$

5,187

 

 

$

5,727

 

126

 

19. SUBSEQUENT EVENTS

Acquisition of American Bank Holding Corporation — On January 1, 2026, the Company completed the merger of American Bank Holding Corporation (“American”) into Bancshares and the subsequent merger of its wholly owned subsidiary American Bank, N.A. (“American Bank”), into the Bank (collectively, the “American Merger”). American Bank operated 18 banking offices and 2 loan production offices in South and Central Texas including its main office in Corpus Christi, and banking offices in San Antonio, Austin, Victoria and the greater Corpus Christi area including Port Aransas and Rockport and a loan production office in Houston, Texas. Pursuant to the terms of the definitive agreement, Bancshares issued 4,439,938 shares of its common stock for all outstanding shares of American common stock in the first quarter of 2026.

Acquisition of Southwest Bancshares, Inc. — On February 1, 2026, the Company completed the merger of Southwest Bancshares, Inc. (“Southwest”) into Bancshares and the subsequent merger of its wholly owned subsidiary Texas Partners Bank (“Texas Partners”), into the Bank (collectively, the “Southwest Merger”). Texas Partners operated 11 banking offices in Central Texas including its main office in San Antonio, and banking offices in the San Antonio area, Austin and the Hill Country. Pursuant to the terms of the definitive agreement, Bancshares issued 4,094,974 shares of its common stock for all outstanding shares of Southwest common stock in the first quarter of 2026.

Pending Acquisition of Stellar Bancorp, Inc.— On January 28, 2026, Bancshares and Stellar Bancorp, Inc. (“Stellar”) jointly announced the signing of a definitive merger agreement whereby Stellar, the parent company of Stellar Bank (“Stellar Bank”) will merge with and into Bancshares and Stellar Bank will merge with and into the Bank. Stellar Bank operates 52 banking offices in greater Houston and Beaumont, Texas and surrounding areas. Under the terms and subject to the conditions of the definitive agreement, Bancshares will issue 0.3803 shares of Prosperity Bancshares common stock and $11.36 in cash for each outstanding share of Stellar common stock. Based on the closing price of the Company’s common stock of $72.90 on January 27, 2026, the total consideration was valued at approximately $2.00 billion. The transaction is subject to customary closing conditions, including the receipt of regulatory approvals.

 

127

Exhibit 10.2

Form of Prosperity Bancshares, Inc.
Restricted Stock Award Agreement

This Restricted Stock Award Agreement (this “Agreement”) is made and entered into as of [DATE] (the “Grant Date”) by and between Prosperity Bancshares, Inc., a Texas corporation (the “Company”) and [EMPLOYEE NAME] (the “Grantee”).

WHEREAS, the Company has adopted the Prosperity Bancshares, Inc. 2020 Stock Incentive Plan, as the same may be amended from time to time (the “Plan”) pursuant to which awards of Restricted Stock may be granted; and

WHEREAS, the Committee has determined that it is in the best interests of the Company and its shareholders to grant the award of Restricted Stock provided for herein.

NOW, THEREFORE, in consideration of the premises, the mutual covenants contained herein, and other good and valuable consideration, the parties hereto agree as follows:

1.
Grant of Restricted Stock. Pursuant to Section 7.2 of the Plan, the Company hereby issues to the Grantee on the Grant Date a Restricted Award consisting of all right, title and interest in [NUMBER] shares of Common Stock of the Company, par value $1.00 per share (the “Restricted Stock”), on the terms and conditions and subject to the restrictions set forth in this Agreement and the Plan. Capitalized terms that are used but not defined herein have the meaning ascribed to them in the Plan.
2.
Consideration. The grant of the Restricted Stock is made in consideration of the services to be rendered by the Grantee to the Company.
3.
Restricted Period; Vesting.
3.1
Except as otherwise provided herein, provided that the Grantee remains in Continuous Service through the applicable vesting date, the Restricted Stock will vest in accordance with the following schedule:

Vesting Date

Shares of Common Stock

[VESTING DATE]

[NUMBER OR PERCENTAGE OF SHARES THAT VEST ON THE VESTING DATE]

 

The period over which the Restricted Stock vests is referred to as the “Restricted Period”.

3.2
Except as otherwise provided herein or in the Plan, if the Grantee’s Continuous Service terminates for any reason at any time before all of his or her Restricted Stock has vested, the Grantee’s then-unvested Restricted Stock shall be automatically and immediately forfeited for no consideration upon such termination of Continuous Service and neither the Company nor any Affiliate shall have any further obligations to the Grantee under this Agreement. Notwithstanding the immediately preceding sentence, in the event of the

 

 

Grantee’s death or if the Grantee’s Continuous Service is terminated by the Company or an Affiliate as a result of the Grantee’s Disability, 100% of the then-unvested Restricted Stock shall vest as of the date of such termination.
3.3
Unless otherwise determined by the Committee at the time of a Change in Control, a Change in Control shall have no effect on the Restricted Stock.
4.
Restrictions. Subject to any exceptions set forth in this Agreement or the Plan, during the Restricted Period, the Restricted Stock or the rights relating thereto may not be assigned, alienated, pledged, attached, sold, hypothecated, exchanged or otherwise transferred or encumbered by the Grantee. Any attempt to assign, alienate, pledge, attach, sell, hypothecate, exchange or otherwise transfer or encumber the Restricted Stock or the rights relating thereto during the Restricted Period shall be wholly ineffective and, if any such attempt is made, the Restricted Stock will be automatically and immediately forfeited by the Grantee and all of the Grantee’s rights to such shares shall automatically and immediately terminate without any consideration therefor.
5.
Rights as Shareholder; Dividends.
5.1
The Grantee shall be the record owner of the Restricted Stock until the shares of Common Stock are sold or otherwise disposed of, and shall be entitled to all of the rights of a shareholder of the Company including, without limitation, the right to vote such shares and receive all dividends or other distributions paid with respect to such shares. The Grantee shall be entitled to dividends paid or declared on Restricted Stock for which the record date is on or after the date such Restricted Stock has been issued in the Grantee’s name and shall be entitled to receive such dividends at the same time dividends are paid to holders of Common Stock generally.
5.2
The Company may issue stock certificates or evidence the Grantee’s interest by using a restricted book entry account with the Company’s transfer agent. Physical possession or custody of any stock certificates that are issued may be retained by the Company until such time as the Restricted Stock vests.
5.3
If the Grantee forfeits any rights he or she has under this Agreement, the Grantee shall, on the date of such forfeiture, no longer have any rights as a shareholder with respect to the then-unvested Restricted Stock and shall no longer be entitled to vote or receive dividends on such shares.
6.
Covenants to Protect the Company’s Business. By signing below and accepting the Restricted Stock, the Grantee acknowledges and agrees to the confidentiality and non-solicitation provisions set forth in Appendix A of this Agreement. In addition, as a condition for the granting and vesting of the Restricted Stock, Grantee agrees to keep confidential all information and knowledge, except that which has been disclosed in any public filings required by law, relating to the terms and conditions of this Agreement; provided, however, that such information may be disclosed as required by law and may be given in confidence to a spouse and tax and financial advisors.
7.
No Right to Continued Service. Neither the Plan nor this Agreement shall confer upon the Grantee any right to be retained in any position, as an Employee, Consultant or Director. Further,

2

 

nothing in the Plan or this Agreement shall be construed to limit the discretion of the Company to terminate the Grantee’s Continuous Service at any time for any reason or for no reason.
8.
Adjustments. If any change is made to the outstanding Common Stock or the capital structure of the Company, if required, the shares of Common Stock shall be adjusted or terminated in any manner as contemplated by Section 11 of the Plan.
9.
Tax Liability and Withholding.
9.1
The Grantee shall be required to pay to the Company by way of a cash payment, and the Company shall have the right to deduct from any compensation paid to the Grantee pursuant to the Plan, the amount of any required withholding taxes in respect of the Restricted Stock and to take all such other action as the Committee deems necessary to satisfy all obligations for the payment of such withholding taxes.
9.2
Notwithstanding any action the Company takes with respect to any or all income tax, payroll tax, or other tax-related withholding (“Tax-Related Items”), the ultimate liability for all Tax-Related Items is and remains the Grantee’s responsibility and none of the Company, the Board or any agents of either of the foregoing (a) make any representation or undertakings regarding the treatment of any Tax-Related Items in connection with the grant or vesting of the Restricted Stock (or dividends or distributions with respect thereto) or the subsequent sale of any shares; and (b) commit to structure the Restricted Stock (or dividends or distributions with respect thereto) to reduce or eliminate the Grantee’s liability for Tax-Related Items.
10.
Compliance with Law. The issuance and transfer of shares of Common Stock shall be subject to compliance by the Company and the Grantee with all applicable requirements of federal and state securities laws and with all applicable requirements of any stock exchange on which the Company’s shares of Common Stock may be listed. No shares of Common Stock shall be issued or transferred unless and until any then applicable requirements of state and federal laws and regulatory agencies have been fully complied with to the satisfaction of the Company and its counsel. The Grantee understands that the Company is under no obligation to register the shares of Common Stock with the Securities and Exchange Commission, any state securities commission or any stock exchange to effect such compliance.
11.
Legends. A legend may be placed on any certificate(s) or other document(s) delivered to the Grantee indicating restrictions on transferability of the shares of Restricted Stock pursuant to this Agreement or any other restrictions that the Committee may deem advisable under the rules, regulations and other requirements of the Securities and Exchange Commission, any applicable federal or state securities laws or any stock exchange on which the shares of Common Stock are then listed or quoted.
12.
Notices. Any notice required to be delivered to the Company under this Agreement shall be in writing and addressed to the Secretary of the Company at the Company’s principal corporate offices. Any notice required to be delivered to the Grantee under this Agreement shall be in writing and addressed to the Grantee at the Grantee’s address as shown in the records of the

3

 

Company. Either party may designate another address in writing (or by such other method approved by the Company) from time to time.
13.
Governing Law. This Agreement will be construed and interpreted in accordance with the laws of the State of Texas without regard to conflict of law principles.
14.
Interpretation. Any dispute regarding the interpretation of this Agreement shall be submitted by the Grantee or the Company to the Committee for review. The resolution of such dispute by the Committee shall be final and binding on the Grantee and the Company.
15.
Restricted Stock Subject to Plan. This Agreement is subject to the Plan as approved by the Company’s shareholders. The terms and provisions of the Plan as it may be amended from time to time are hereby incorporated herein by reference. In the event of a conflict between any term or provision contained herein and a term or provision of the Plan, the applicable terms and provisions of the Plan will govern and prevail. The Grantee acknowledges receipt of a copy of the Plan and agrees that this Award of Restricted Shares shall be subject to all of the terms and conditions set forth in the Plan, including future amendments thereto, if any, pursuant to the terms thereof
16.
Successors and Assigns. The Company may assign any of its rights under this Agreement. This Agreement will be binding upon and inure to the benefit of the successors and assigns of the Company. Subject to the restrictions on transfer set forth herein, this Agreement will be binding upon the Grantee and the Grantee’s beneficiaries, executors, administrators and the person(s) to whom the Restricted Stock may be transferred by will or the laws of descent or distribution.
17.
Severability. The invalidity or unenforceability of any provision of the Plan or this Agreement shall not affect the validity or enforceability of any other provision of the Plan or this Agreement, and each provision of the Plan and this Agreement shall be severable and enforceable to the extent permitted by law.
18.
Discretionary Nature of Plan. The Plan is discretionary and may be amended, cancelled or terminated by the Company at any time, in its discretion. The grant of the Restricted Stock in this Agreement does not create any contractual right or other right to receive any Restricted Stock or other Awards in the future. Future Awards, if any, will be at the sole discretion of the Company. Any amendment, modification, or termination of the Plan shall not constitute a change or impairment of the terms and conditions of the Grantee’s employment with or other service to the Company or its Affiliates.
19.
Amendment. The Committee has the right to amend, alter, suspend, discontinue or cancel the Restricted Stock, prospectively or retroactively; provided, that, no such amendment shall adversely affect the Grantee’s material rights under this Agreement without the Grantee’s consent.
20.
No Impact on Other Benefits. The value of the Grantee’s Restricted Stock is not part of his or her normal or expected compensation for purposes of calculating any severance, retirement, welfare, insurance or similar employee benefit unless expressly provided for by the terms of the applicable plan or pursuant to applicable law.

4

 

21.
Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original but all of which together will constitute one and the same instrument. Counterpart signature pages to this Agreement transmitted by facsimile transmission, by electronic mail in portable document format (.pdf), or by any other electronic means intended to preserve the original graphic and pictorial appearance of a document, will have the same effect as physical delivery of the paper document bearing an original signature.
22.
Acceptance. The Grantee hereby acknowledges receipt of a copy of the Plan and this Agreement. The Grantee has read and understands the terms and provisions thereof, and accepts the Restricted Stock subject to all of the terms and conditions of the Plan and this Agreement. The Grantee acknowledges that there may be adverse tax consequences upon the grant or vesting of the Restricted Stock or disposition of the underlying shares and that the Grantee has been advised to consult a tax advisor prior to such grant, vesting or disposition.

[signature page follows]

5

 

 

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written.

 

 

Prosperity Bancshares, Inc.

 

By: _________________________________

 

Name:

 

Title:

 

 

 

 

 

_____________________________________

 

[EMPLOYEE NAME]

 

 

 

 

 

 

 

 

 

 

 

 

6

 

APPENDIX A

Covenants to Protect the Company’s Business

 

(a)
Definitions. For purposes of this Appendix, the following terms shall have the meanings set forth below. Any capitalized term used but not defined in this Appendix shall have the meaning set forth in the Agreement or the Plan.

“Business Opportunities” means any specialized information or plans of the Company not disclosed or available to the public concerning the provision of financial services to a Person, together with all related information concerning the specifics of any contemplated financial services regardless of whether the Company has contacted or communicated with such Person.

“Business Relation” means any Person other than the Company who, at any time during the term of employment or service with the Company, was a Person (a) who is or was a customer of the Company, or (b) who had entered into any contract or other arrangement with the Company for the provision of services or the sale of products, (c) to whom the Company had furnished a written proposal for the performance of services or the sale of products, or (d) with whom the Company entered or agreed to enter into any other business relationship such as a joint venture, collaborative agreement, joint development agreement, teaming arrangement or agreement, or similar arrangement or understanding for the provision of services or sale of products.

“Company” means, when used in this Appendix, shall include Prosperity Bancshares, Inc., Prosperity Bank, and each of their direct and indirect subsidiaries and their affiliates, as applicable.

“Confidential Information” means all “non-public Personal Information,” as defined in Title V of The Gramm-Leach-Bliley Act (15 U.S.C. §§680 et seq.) and its implementing regulations (collectively, the "GLB Act'') that concerns any of the Company's "customers and/or consumers", as defined by the GLB Act, and any data or information, other than Trade Secrets, which is material to the Company and not generally known by or available to the public. Confidential Information shall include, but not be limited to, Business Opportunities of the Company, the details of this Agreement, the Company's business plans and financial statements and projections, information as to the capabilities of the Company's employees, their respective salaries and benefits and any other terms of their employment, the costs of the services the Company may offer or provide to the customers it serves, and any list of actual or active prospective customers, to the extent such information is material to the Company and not generally known by or available to the public.

“Person” means any individual, corporation, partnership, limited liability company, joint venture, trust, unincorporated organization, any other legal or commercial entity, or two or more of any of the foregoing having a joint or common interest.

7

 

“Trade Secret” means the identity and addresses of customers of the Company and any other information, without regard to form, including, but not limited to, any technical or nontechnical data, any formula, pattern, compilation, program, device, method, technique, drawing, process, financial data, financial plans, and product plans, that (a) is valuable and secret (in the sense that it is not generally known by or available to competitors of the Company) and (b) otherwise qualifies as a "trade secret" under applicable law.

(b)
Confidential Information. By signing below and accepting the Restricted Stock, Grantee acknowledges that, in the course of employment or service with the Company, Grantee will have access to and learn Confidential Information. Grantee acknowledges that all Confidential Information is and shall continue to be the exclusive property of the Company, whether or not prepared in whole or in part by Grantee and whether or not disclosed to or entrusted to Grantee in connection with employment or service with the Company.

Grantee agrees not to disclose Confidential Information, directly or indirectly, under any circumstances or by any means, to any third persons without the prior written consent of the Company. Grantee agrees not to copy, transmit, reproduce, summarize, quote, or make any commercial or other use whatsoever of Confidential Information, except as may be necessary to perform work for the Company. Grantee agrees to exercise the highest degree of care in safeguarding Confidential Information against loss, theft or other inadvertent disclosure and agrees generally to take all steps necessary or requested by the Company to ensure maintenance of the confidentiality of the Confidential Information. Grantee further agrees, in addition to the specific covenants contained herein, to comply with all of the Company's policies and procedures, as well as all applicable laws, for the protection of Confidential Information.

The Defend Trade Secrets Act (18 U.S.C. § 1833(b)) states: "An individual shall not be held criminally or civilly liable under any federal or state trade secret law for the disclosure of a trade secret that (A) is made (i) in confidence to a federal, state, or local government official, either directly or indirectly, or to an attorney; and (ii) solely for the purpose of reporting or investigating a suspected violation of law; or (B) is made in a complaint or other document filed in a lawsuit or other proceeding, if such filing is made under seal." Accordingly, Grantee shall have the right to disclose in confidence Trade Secrets to federal, state, and local government officials, or to an attorney, for the sole purpose of reporting or investigating a suspected violation of law. Grantee shall also have the right to disclose Trade Secrets in a document filed in a lawsuit or other proceeding, but only if the filing is made under seal and protected from public disclosure. Nothing in this Appendix is intended to conflict with 18 U.S.C. § 1833(b) or create liability for disclosures of trade secrets that are expressly allowed by 18 U.S.C. § 1833(b).

(c)
Non-Solicitation. For a period of twelve (12) months following termination of employment (the “Restricted Period”), Grantee agrees not to, directly or indirectly, as owner, partner, director, officer, employee, agent, consultant, advisor, contractor or otherwise, whether for consideration or without consideration, for the benefit of any Person other than the Company, take any of the following actions:
(i)
call on, solicit, service, or attempt to do any of the foregoing with respect to, Business Relations or prospective Business Relations of the Company if, within the twelve (12)

8

 

months before the termination of Grantee’s employment with the Company, Grantee had material contact with the Business Relations or prospective Business Relations, or had obtained material information about the Business Relations or prospective Business Relations; or
(ii)
hire, retain, call on, solicit for hire or induce to leave employment, any Person who is or was an employee of the Company on the date of, or within the three (3) month period before the date of, such hire, retention, solicitation or inducement, provided that such individual is an individual whom Grantee had contact with, knowledge of, or association with in the course of Grantee’s employment with the Company, and Grantee will not assist any other person or entity in such activities.
(d)
Reasonableness; Enforcement. Grantee acknowledges and agrees that the restrictions contained in this Appendix regarding scope, length of term and types of activities restricted are reasonable and shall continue in effect through the entire Restricted Period regardless of whether Grantee is then entitled to receive any further payments or benefits from the Company. Grantee further agrees that the restrictions contained in this Appendix shall be construed as agreements independent of each other and of any provision of this or any other contract between the parties, and that should any restriction, or part thereof, be held invalid, void or unenforceable in any court of competent jurisdiction, such invalidity, voidness or unenforceability shall not render invalid, void or unenforceable any other restriction, or part thereof. If any portion of the foregoing provisions is found to be invalid or unenforceable by a court of competent jurisdiction because its duration, the territory, the definition of activities or the definition of information covered is considered to be invalid or unreasonable in scope, the invalid or unreasonable term shall be redefined, or a new enforceable term provided, such that the intent of the Company and Grantee in agreeing to the provisions of this Appendix will not be impaired and the provision in question shall be enforceable to the fullest extent of the applicable laws.

The existence of any claim or cause of action by Grantee against the Company, whether predicated upon this or any other contract, shall not constitute a defense to the enforcement by the Company of said covenants. Grantee agrees that a breach of any of the covenants of this Appendix would cause material and irreparable harm to the Company that would be difficult or impossible to measure, and that damages or other legal remedies available to the Company for any such injury would, therefore, be an inadequate remedy for any such breach. Accordingly, Grantee agrees that if any term of this Appendix is breached, the Company shall be entitled, in addition to other remedies the Company may have at law or otherwise, to obtain injunctive or other appropriate equitable relief, without bond or other security, to restrain any such breach. In the event the enforceability of any of the terms of this Appendix shall be challenged in court and Grantee is not enjoined from breaching any of the protective covenants, then if a court of competent jurisdiction finds that the challenged protective covenant is enforceable, the time periods shall be deemed tolled upon the filing of the lawsuit challenging the enforceability of this Appendix until the dispute is finally resolved and all periods of appeal have expired.

9

Exhibit 10.8

 

 

 

 

Pre-Approved

Defined Contribution Plan

(PROFIT SHARING/401(K) PLAN)

A FIDELITY PRE-APPROVED PLAN

Adoption Agreement No. 001 For use With

Fidelity Basic Plan Document No. 17

 

 

 

 

 

 

 

 

 

 

 

FMR LLC and its affiliates do not provide tax or legal advice. Nothing herein or in any attachments hereto should be construed, or relied upon, as tax or legal advice.

 

 

IRS CIRCULAR 230 DISCLOSURE: To the extent this document (including attachments), mentions or references any tax matter, it is not intended or written to be used, and cannot be used by the recipient or any other person, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party the matter addressed herein. Please consult an independent tax advisor for advice on your particular circumstances.

 

 

Pre-Approved Defined Contribution Plan – 06/30/2020 PS Plan

54092-1657685234AA

 

2020 FMR LLC

All rights reserved.

 

 

TABLE OF CONTENTS

1.01
PLAN INFORMATION 1
1.02
EMPLOYER 3
1.03
TRUSTEE 3
1.04
COVERAGE 3
1.05
COMPENSATION 6
1.06
TESTING RULES 8
1.07
DEFERRAL CONTRIBUTIONS 9
1.08
EMPLOYEE CONTRIBUTIONS (AFTER-TAX CONTRIBUTIONS) 11
1.09
ROLLOVER CONTRIBUTIONS 12
1.10
QUALIFIED NONELECTIVE EMPLOYER CONTRIBUTIONS 12
1.11
MATCHING EMPLOYER CONTRIBUTIONS 13
1.12
NONELECTIVE EMPLOYER CONTRIBUTIONS 18
1.13
EXCEPTIONS TO CONTINUING ELIGIBILITY REQUIREMENTS 22
1.14
RETIREMENT 22
1.15
DEFINITION OF DISABLED 23
1.16
VESTING 23
1.17
PREDECESSOR EMPLOYER SERVICE 24
1.18
PARTICIPANT LOANS 24
1.19
IN-SERVICE WITHDRAWALS 25
1.20
FORM OF DISTRIBUTIONS 26
1.21
TIMING OF DISTRIBUTIONS 28
1.22
TOP HEAVY STATUS 28
1.23
CORRECTION TO MEET 415 REQUIREMENTS UNDER MULTIPLE DEFINED CONTRIBUTION PLANS 29
1.24
INVESTMENT DIRECTION 29
1.25
ADDITIONAL PROVISIONS AND PROTECTED BENEFITS 29
1.26
SUPERSEDING PROVISIONS 30
1.27
RELIANCE ON OPINION LETTER 30
1.28
ELECTRONIC SIGNATURE AND RECORDS 30
1.29
PRE-APPROVED PLAN PROVIDER’S INFORMATION 30

EXECUTION PAGE 31

ELIGIBILITY, SERVICE AND VESTING ADDENDUM 32

COMPENSATION ADDENDUM 36

IN-SERVICE WITHDRAWALS ADDENDUM 38

FORMS OF PAYMENT ADDENDUM 39

FIDUCIARY ADDENDUM 40

ADDENDUM TO ADOPTION AGREEMENT 41

EFFECTIVE DATES FOR INTERIM LEGAL COMPLIANCE SNAP OFF ADDENDUM 43

 

i

 

 

 

ADOPTION AGREEMENT ARTICLE 1

PROFIT SHARING/401(K) PLAN

 

1.01
PLAN INFORMATION
(a)
Name of Plan:

This is the Prosperity Bancshares, Inc. 40l(k) Profit Sharing Plan (the "Plan")

(b)
Type of Plan:
(1)
401(k) Only
(2)
401(k) and Profit Sharing
(3)
Profit Sharing Only
(c)
Fiduciary Structure:
(1)
Except to the extent elected otherwise below, the Employer shall be the Administrator in accordance with Article 19 of the Basic Plan Document and the Investment Fiduciary as defined in Section 2.01(ee).
(A)
Name of Administrator (if not the Employer):
(B)
Name of Investment Fiduciary (if not the Administrator):
(C)
Fiduciary duties shall be allocated as described on the Fiduciary Addendum.
(2)
See Fiduciary Addendum for other applicable provisions.
(d)
Plan Year End (month/day): 12/31
(e)
Three Digit Plan Number: 001
(f)
Limitation Year (check one):
(1)
Calendar Year
(2)
Plan Year
(3)
Other, (12-month period ending on the following date):
(g)
Plan Status:
(1)
Adoption Agreement Effective Date: 08/01/2022 (cannot be earlier than the later of (i) the first day of the current Plan Year or (ii) the effective date of the Plan)

Pre-Approved Defined Contribution Plan – 06/30/2020 PS Plan

 

@2020 FMR LLC

All rights reserved.

1

 

 

(2)
The Adoption Agreement Effective Date is:
(A)
A new Plan Effective Date, except to the extent elected below. (Check (i), if applicable.)
(i)
the Plan is an immediate continuation of a portion of a plan spun off from a larger plan that satisfied ADP and/or ACP testing using a safe harbor formula, such formula will continue without interruption under the Plan, and the Plan may satisfy ADP/ACP testing under the safe harbor for the first Plan Year of the Plan, unless the Employer makes a subsequent change. (Check one of the following):
(I)
The Plan is a spin off from a plan maintained by an entity that was not a Related Employer of the Employer prior to the Effective Date.
(II)
The Plan is spin off from a plan maintained by an entity that was a Related Employer of the Employer prior to the Effective Date.
(B)
An amendment Effective Date (check one):
(i)
an amendment and restatement of this Basic Plan Document No. 17 and its Adoption Agreement previously executed by the Employer. With the execution of this restatement, the Trust Agreement formerly within Basic Plan Document No.17 is hereby removed to become a separate, independent Trust Agreement without altering the substance thereof.
(ii)
a conversion to Basic Plan Document No. 17 and its Adoption Agreement.

The original effective date of the Plan: 01/01/1984

(3)
Special Effective Dates. Certain provisions of the Plan shall be effective as of a date other than the date specified in Subsection 1.01(g)(1) above. Please complete the Special Effective Dates Addendum to the Adoption Agreement indicating the affected provisions and their Effective Dates.
(4)
Plan Merger Effective Dates. Certain plan(s) were merged into the Plan on or after the date specified in Subsection 1.01(g)(1) above. Please complete the appropriate subsection(s) of the Plan Mergers Addendum.
(5)
Frozen Plan. The Plan is currently frozen. While the Plan is frozen, the definition of Compensation for purposes of determining contributions under Section 5.02 of the Basic Plan Document shall not include compensation earned after the date the Plan is frozen. Plan assets will continue to be held on behalf of Participants and their Beneficiaries until distributed in accordance with the Plan terms. (If this provision is selected, it will override any conflicting provision selected in the Adoption Agreement.)(Choose one.)
(A)
Contributions under the Plan are permanently discontinued. Accounts of all Employees shall be 100% vested without regard to any schedule selected in 1.16.
(B)
Contributions under the Plan are temporarily suspended. The Employer contemplates that contributions will resume at a later date.

Pre-Approved Defined Contribution Plan – 06/30/2020 PS Plan

 

@2020 FMR LLC

All rights reserved.

2

 

 

 

Note: No contributions shall be made to the Plan with respect to Compensation earned after the date the Plan is frozen, nor shall any Rollover Contributions be made; however, loan repayments shall continue to be made until the loan obligation is satisfied. An Employee who is not already a Participant shall not become a Participant while the Plan is frozen.

 

1.02
EMPLOYER
(a)
Employer Name: Prosperity Bancshares, Inc.
(1)
Employer's Tax Identification Number: 74-2331986
(2)
Employer's fiscal year end: 12/31
(b)
The term "Employer" includes the following participating employers (choose one):
(1)
No other employers participate in the Plan.
(2)
Certain other employers participate in the Plan. Please complete the Participating Employers Addendum.

 

1.03
TRUSTEE
(a)
Trustee: The individual(s) or entity designated as the Trustee under the Trust Agreement.

 

1.04
COVERAGE

All Employees who meet the conditions specified below shall be eligible to participate in the Plan:

(a)
Age Requirement (check one):
(1)
no age requirement.
(2)
must have attained age: 21 (not to exceed 21).
(3)
See Eligibility, Service and Vesting Addendum for differing age requirements for different groups.
(b)
Eligibility Service Requirement(s) -

 

(1) Deferral Contributions, Employee Contributions, Qualified Nonelective Employer Contributions

(2) Nonelective Employer Contributions (other than Safe Harbor Nonelective Employer Contributions)

(3) Matching Employer Contributions (other than Safe Harbor Matching Employer Contributions)

(4) Safe Harbor Nonelective Employer Contributions

(5) Safe Harbor Matching Employer Contributions

 

 

 

 

X

X

N/A – not applicable – Plan does not offer this type of contribution or no Eligibility Service requirement applies

 

 

 

 

 

days of Eligibility Service requirement (no minimum Hours of Service). (Do not indicate more than 365 days in column (1), (4), or (5) or 730 days in any of the other columns.)

3

3

3

 

 

months of Eligibility Service requirement (no minimum Hours of Service). (Do not indicate more than 12 months in column (1), (4), or

(5) or 24 months in any of the other

 

 

Pre-Approved Defined Contribution Plan – 06/30/2020 PS Plan

 

@2020 FMR LLC

All rights reserved.

3

 

 

 

 

 

 

 

columns.)

 

 

 

 

 

(not to exceed 12) months of Eligibility Service (at least (not to exceed an average of 83 1/3 hours per month or 1,000 hours per year) Hours of Service are required during the Eligibility Computation Period). (Regardless of the foregoing, an Employee who completes 1000 Hours of Service during an Eligibility Computation Period satisfies the eligibility service requirement at the close of that computation period.)

 

 

 

 

 

one year of Eligibility Service requirement (at least (not to exceed 1,000) Hours of Service are required during the Eligibility Computation Period).

 

 

 

 

 

two years of Eligibility Service requirement (at least (not to exceed 1,000) Hours of Service are required during the Eligibility Computation Period). (Select only for column (2) or (3).)

 

Note: If the Employer selects an Eligibility Service requirement of more than 365 days or 12 months or selects the two year Eligibility Service requirement, then (1) contributions subject to such Eligibility Service requirement must be 100% vested when made, and (2) if the Plan has selected either Safe Harbor Matching Employer Contributions in Option 1.11(a)(3) or Safe Harbor Formula in Option 1.12(a)(3), then only one year of Eligibility Service (with at least 1000 Hours of Service) may be required for such contributions.

Note: The Plan shall be disaggregated for testing pursuant to Section 6.09 of the Basic Plan Document if a more stringent eligibility requirement is elected in Subsection 1.04(a) or (b) either (1) with respect to Matching Employer Contributions and Option 1.11(a)(3), 401(k) Safe Harbor Matching Employer Contributions, is selected or (2) with respect to Nonelective Employer Contributions and Option 1.12(a)(3), 401(k) Safe Harbor Formula, is selected, than with respect to Deferral Contributions.

Note: If different eligibility requirements are selected for Deferral Contributions than for Employer Contributions and the Plan becomes a "top-heavy plan," the Employer may need to make a minimum Employer Contribution on behalf of non-key Employees who have satisfied the eligibility requirements for Deferral Contributions and are employed on the last day of the Plan Year, but have not satisfied the eligibility requirements for Employer Contributions.

(6)
See Eligibility, Service and Vesting Addendum for differing eligibility service requirements for different groups.
(7)
Hours of Service Crediting. Hours of Service will be credited in accordance with the equivalency selected in the Eligibility, Service and Vesting Addendum rather than in accordance with the equivalency described in Subsection 2.01(cc) of the Basic Plan Document.
(c)
Eligibility Computation Period - The Eligibility Computation Period will be as selected in the Eligibility, Service and Vesting Addendum rather than the anniversary period described in Subsection 2.01(p) of the Basic Plan Document.
(d)
Eligible Class of Employees:
(1)
Generally, the Employees eligible to participate in the Plan are (choose one):
(A)
all Employees of the Employer.

Pre-Approved Defined Contribution Plan – 06/30/2020 PS Plan

 

@2020 FMR LLC

All rights reserved.

4

 

 

(B)
only Employees of the Employer who are covered by (choose one):
(i)
any collective bargaining agreement with the Employer, provided that the agreement requires the employees to be included under the Plan.
(ii)
the following collective bargaining agreement(s) with the Employer:

 

(2)
Notwithstanding the selection in Subsection 1.04(d)(1) above, certain Employees of the Employer are excluded from participation in the Plan:

Note: Certain employees (e.g., residents of Puerto Rico) are excluded automatically pursuant to Subsection 2.01(r) of the Basic Plan Document, regardless of the Employer's selection under this Subsection 1.04(d)(2).

(A)
employees covered by a collective bargaining agreement, unless the agreement requires the employees to be included under the Plan. (Do not choose if Option 1.04(d)(1)(B) is selected above.)
(B)
Highly Compensated Employees as defined in Subsection 2.01(bb) of the Basic Plan Document.
(C)
Leased Employees as defined in Subsection 2.01(ff) of the Basic Plan Document.
(D)
nonresident aliens who do not receive any earned income from the Employer which constitutes United States source income.
(E)
other:

 

Note: The eligible group defined above must be a definitely determinable group and cannot be subject to the discretion of the Employer. In addition, the design of the classifications cannot be such that the only Non-Highly Compensated Employees benefiting under the Plan are those with the lowest compensation and/or the shortest periods of service and who may represent the minimum number of such employees necessary to satisfy coverage under Code Section 410(b).

(i)
Notwithstanding the exclusion in Subsection 1.04(d)(2)(E) above, any Employee described below shall be part of the class of Employees eligible to participate in the Plan (i.e., an Eligible Employee) and enter the Plan on the Entry Date immediately following the end of the Eligibility Computation Period during which he first satisfies the following requirements: (I) has attained age 21 and (II) has completed at least 1,000 Hours of Service. This Subsection 1.04(d)(2)(E)(i) applies to the following Employees (Must choose if an exclusion in

(E) above directly or indirectly imposes an age and/or service requirement for participation, for example by excluding part-time, seasonal or temporary employees):

 

(F)
The Plan previously contained a provision allowing employees to irrevocably elect out of the Plan. Notwithstanding any lack of exclusion provided in the above, all such employees have made that previous irrevocable election are

Pre-Approved Defined Contribution Plan – 06/30/2020 PS Plan

 

@2020 FMR LLC

All rights reserved.

5

 

 

excluded from participation in the Plan. The Administrator maintains the list of all such exclusions.

Note: Exclusion of employees may adversely affect the Plan's satisfaction of the minimum coverage requirements, as provided in Code Section 410(b).

(e)
Entry Dates – The Entry Dates shall be as indicated below with respect to the applicable type(s) of contribution.

 

 

(1) Deferral Contributions, Employee Contributions, Qualified Nonelective Employer Contributions

(2) Nonelective Employer Contributions (other than Safe Harbor Nonelective Employer Contributions)

(3) Matching Employer Contributions (other than Safe Harbor Matching Employer Contributions)

(4) Safe Harbor Nonelective Employer Contributions

(5) Safe Harbor Matching Employer Contributions

 

(A)

 

 

 

X

X

N/A – not applicable – Plan does not offer this type of contribution

(B)

 

 

 

 

 

immediate upon meeting the eligibility requirements specified in Subsections 1.04(a) and 1.04(b)

(C)

 

 

 

 

 

the first day of each Plan Year and the first day of the seventh month of each Plan Year

(D)

 

 

 

 

 

the first day of each Plan Year and the first day of the fourth, seventh, and tenth months of each Plan Year

(E)

X

X

X

 

 

the first day of each month

(F)

 

 

 

 

 

the first day of each Plan Year (Do not select if there is an Eligibility Service requirement of more than six months in Subsection 1.04(b) for the type(s) of contribution or if there is an age requirement of more than 20 1/2 in Subsection 1.04(a) for the type(s) of contribution.)

 

Note: If another plan is merged into the Plan, the Plan may provide on the Plan Mergers Addendum that the Effective Date of the merger is also an Entry Date with respect to certain Employees.

(f)
Date of Initial Participation - An Eligible Employee shall become a Participant on the Entry Date coinciding with or immediately following the date such Eligible Employee completes the age and service requirement(s) in Subsections 1.04(a) and (b), if any, or in Subsection 1.04(d)(2)(E)(i), if applicable, except (check one):
(1)
No exceptions.
(2)
Eligible Employees employed on (insert date) shall become Participants on that date.
(3)
Eligible Employees who meet the age and service requirement(s) of Subsections 1.04(a) and (b) on (insert date) shall become Participants on that date.

 

 

1.05
COMPENSATION

Compensation, as defined in Subsection 2.01(k) of the Basic Plan Document, shall be modified as provided below.

Pre-Approved Defined Contribution Plan – 06/30/2020 PS Plan

 

@2020 FMR LLC

All rights reserved.

6

 

 

(a)
Compensation Base - The base for the definition of Compensation described in Section 2.01(k), prior to making the additional adjustments described in subsections (b) and (c) below, shall be as follows:
(1)
A W-2 definition as described in 2.01(k)(1)(A).
(2)
A Code Section 3401(a) wages definition as described in 2.01(k)(1)(B).
(3)
A Code Section 415 definition as described in 2.01(k)(1)(C).
(b)
Additional Alterations - For all purposes except as noted below (and as found in Sections 6.01 and 15.03 of the Basic Plan Document), Compensation as selected above shall be adjusted by excluding all of the following (or making the specific adjustments described on the Compensation Addendum if Option (10) is selected):
(1)
Reimbursements or other expense allowances, fringe benefits (cash and non-cash), moving expenses, all deferred compensation, and welfare benefits.
(2)
Differential Wages (as defined in Section 2.01(k)(2)(B)(i)).
(3)
Unused leave (as described in Section 2.01(k)(2)(B)(ii)(II)).
(4)
Overtime pay.
(5)
Bonuses.
(6)
Commissions.
(7)
The value of restricted stock or of a qualified or a non-qualified stock option granted to an Employee by the Employer to the extent such value is includable in the Employee's taxable income.
(8)
Severance pay received prior to termination of employment. (Severance pay for this purpose would be amounts other than those described in Section 2.01(k)(2)(B)(ii) and any such amounts received following severance from employment would always be excluded.)
(9)
Amounts paid to, or on behalf of, the Employee to reduce or offset student loan repayment obligations.
(10)
The Plan has other alterations to the definition of Compensation which cannot be captured solely by the above exclusions. All alterations to the definition of Compensation will be found in the Compensation Addendum rather than this subsection.

Note: Generally, if the Employer makes no selections or selects only options (1), (2) and/or (3) above, Compensation will not be required to be tested to show that it meets the requirements of Code Section 414(s) and it will be deemed an acceptable definition of Compensation for 401(k) Safe Harbor Nonelective Employer Contributions. If the Employer selects any of options (4) – (9), then it must be determined that the type of Compensation excluded is irregular or additional based on all the relevant facts and circumstances and must generally meet the following requirements: (1) for Nonelective Employer Contributions other than 401(k) Safe Harbor Nonelective Contributions, the Plan must either pass the requirements under Code Section 414(s) or must pass the general test under regulations issued under Code Section 401(a)(4); (2) for 401(k) Safe Harbor Nonelective Employer Contributions, Compensation must be tested to show that it meets the requirements of Code Section 414(s); (3) for Deferral Contributions and Safe Harbor Matching Employer Contributions, a Participant must be permitted to make Deferral Contributions under the Plan sufficient to receive the full 401(k) Safe Harbor Matching Employer Contribution, determined as a percentage of Compensation meeting the requirements of Code Section

Pre-Approved Defined Contribution Plan – 06/30/2020 PS Plan

 

@2020 FMR LLC

All rights reserved.

7

 

 

414(s); (4) for Matching Employer Contributions (other than 401(k) Safe Harbor Matching Employer Contributions), Compensation for purposes of applying the limitations on Matching Employer Contributions described in Section 6.10 of the Basic Plan Document (for deemed satisfaction of the "ACP" test) must be tested to show that it meets the requirements of Code Section 414(s). Unless elected otherwise above or in the Compensation Addendum, Compensation will include amounts described in Section 2.01(k)(2)(A) and (B) of the Basic Plan Document and exclude deemed Code Section 125 compensation. If the Plan is determined to be top heavy (in accordance with Option 1.22 and Article 15 of the Basic Plan Document), then contributions made pursuant to Section 15.03 of the Basic Plan Document will be based on Compensation without the above chosen exclusions.

 

(c)
Compensation for the First Year of Participation - Contributions for the Plan Year in which an Employee first becomes a Participant shall be determined based on the Employee's Compensation as provided below.
(1)
Compensation for the entire Plan Year. (Complete (A) below, if applicable. If (A) is not selected, the amount of any Nonelective Employer Contribution for a Plan’s initial Plan Year will be determined in accordance with this subsection 1.05(c)(1) using only Compensation from the original effective date of the Plan through the end of the initial Plan Year.)
(A)
Short Initial Plan Year: For purposes of determining the amount of Nonelective Employer Contributions, other than 401(k) Safe Harbor Nonelective Employer Contributions, Compensation for the 12-month period ending on the last day of the initial Plan Year shall be used.
(2)
Only Compensation for the portion of the Plan Year in which the Employee is eligible to participate in the Plan. (Complete (A) below, if applicable. If (A) is not selected, the amount of any Nonelective Employer Contribution for a Plan’s initial Plan Year will be determined in accordance with this subsection 1.05(c)(2) using only Compensation from the original effective date of the Plan through the end of the initial Plan Year.)
(A)
Short Initial Plan Year: For purposes of determining the amount of Nonelective Employer Contributions, other than 401(k) Safe Harbor Nonelective Employer Contributions, for those Employees who become Active Participants on the original effective date of the Plan, Compensation for the 12-month period ending on the last day of the initial Plan Year shall be used. For all other Employees, only Compensation for the period in which they are eligible shall be used.

 

 

1.06
TESTING RULES
(a)
ADP/ACP Present Testing Method - The testing method for purposes of applying the "ADP" and "ACP" tests described in Sections 6.03 and 6.06 of the Basic Plan Document shall be the (check one):
(1)
Current Year Testing Method - The "ADP" or "ACP" of Highly Compensated Employees for the Plan Year shall be compared to the "ADP" or "ACP" of Non-Highly Compensated Employees for the same Plan Year. (Must choose if Option 1.11(a)(3), 401(k) Safe Harbor Matching Employer Contributions, or Option 1.12(a)(3), 401(k) Safe Harbor Formula, with respect to Nonelective Employer Contributions is checked.)
(2)
Prior Year Testing Method - The "ADP" or "ACP" of Highly Compensated Employees for the Plan Year shall be compared to the "ADP" or "ACP" of Non-Highly Compensated Employees for the immediately preceding Plan Year.

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(3)
Not applicable. (Only if Option 1.01(b)(3), Profit Sharing Only, is checked and Option 1.08(a)(1), Future Employee Contributions, and Option 1.11(a), Matching Employer Contributions, are not checked or Option 1.04(d)(2)(B), excluding all Highly Compensated Employees from the eligible class of Employees, is checked.)

Note: Restrictions apply on elections to change testing methods.

(b)
First Year Testing Method - If the first Plan Year that the Plan, other than a successor plan, permits Deferral Contributions or provides for either Employee or Matching Employer Contributions, occurs on or after the Effective Date specified in Subsection 1.01(g), the "ADP" and/or "ACP" test for such first Plan Year shall be applied using the actual "ADP" and/or "ACP" of Non-Highly Compensated Employees for such first Plan Year, unless otherwise provided below.
(1)
The "ADP" and/or "ACP" test for the first Plan Year that the Plan permits Deferral Contributions or provides for either Employee or Matching Employer Contributions shall be applied assuming a 3% "ADP" and/or "ACP" for Non-Highly Compensated Employees. (Do not choose unless Plan uses prior year testing method described in Subsection 1.06(a)(2).)
(c)
HCE Determinations: Look Back Year - The look back year for purposes of determining which Employees are Highly Compensated Employees shall be the 12-consecutive-month period preceding the Plan Year, unless otherwise provided below.
(1)
Calendar Year Determination - The look back year shall be the calendar year beginning within the preceding Plan Year. (Do not choose if the Plan Year is the calendar year.)
(d)
HCE Determinations: Top Paid Group Election - All Employees with Compensation exceeding the dollar amount specified in Code Section 414(q)(1)(B)(i) adjusted pursuant to Code Section 415(d) (e.g., $115,000 for "determination years" beginning in 2013 and "look-back years" beginning in 2012) shall be considered Highly Compensated Employees, unless Top Paid Group Election below is checked.
(1)
Top Paid Group Election - Employees with Compensation exceeding the dollar amount specified in Code Section 414(q)(1)(B)(i) adjusted pursuant to Code Section 415(d) shall be considered Highly Compensated Employees only if they are in the top paid group (the top 20% of Employees ranked by Compensation).

Note: Plan provisions for Sections 1.06(c) and 1.06(d) must apply consistently to all retirement plans of the Employer for determination years that begin with or within the same calendar year

 

 

1.07
DEFERRAL CONTRIBUTIONS
(a)
Deferral Contributions - Participants may elect to have a portion of their Compensation contributed to the Plan on a before-tax basis pursuant to Code Section 401(k).
(1)
Regular Contributions - The Employer shall make a Deferral Contribution in accordance with Section 5.03 of the Basic Plan Document on behalf of each Participant who has an executed salary reduction agreement in effect with the Employer for the payroll period in question. Such Deferral Contribution shall not exceed the deferral limit below.
(A)
The deferral limit is 75% (must be a whole number multiple of one percent) of Compensation.
(i)
The following lower deferral limit applies to Highly Compensated Employees: %

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Note: If Catch-Up Contributions are selected below, a Participant eligible to make Catch-Up Contributions shall (subject to the statutory limits in Treasury Regulation Section 1.414(v)-1(b)(1)(i)) in any event be permitted to contribute in excess of the specified deferral limit up to 100% of the Participant's "effectively available Compensation" (as defined in Section 5.03), unless elected otherwise in Option 1.07(a)(4).

(B)
Instead of specifying a percentage of Compensation, a Participant's salary reduction agreement may specify a dollar amount to be contributed each payroll period, provided such dollar amount does not exceed the maximum percentage of Compensation specified in Subsection 5.03(a) or in Subsection 1.07(a)(1)(A), as applicable, and is not less than the minimum percentage of Compensation specified in Subsection 1.07(a)(1)(E), if applicable.
(C)
A Participant may change, on a prospective basis, his salary reduction agreement (check one):
(i)
as of the beginning of each payroll period.
(ii)
as of the first day of each month.
(iii)
as of each Entry Date. (Do not select if immediate entry is elected with respect to Deferral Contributions in Subsection 1.04(e).)
(iv)
as of the first day of each calendar quarter.
(v)
as of the first day of each Plan Year.
(vi)
other. (Specify, but must be at least once per Plan Year)

 

Note: Notwithstanding the Employer's election hereunder, if Option 1.11(a)(3), 401(k) Safe Harbor Matching Employer Contributions, or Option 1.12(a)(3), 401(k) Safe Harbor Formula, with respect to Nonelective Employer Contributions is checked, the Plan provides that an Active Participant may change his salary reduction agreement for the Plan Year within a reasonable period (not fewer than 30 days) of receiving the notice described in Section 6.09 of the Basic Plan Document.

(D)
A Participant may revoke, on a prospective basis, a salary reduction agreement at any time upon proper notice to the Administrator, but in such case a new salary reduction agreement may not become effective until the time selected in 1.07(a)(1)(C), unless one of the below options is selected. (Check one if applicable):
(i)
the beginning of the next payroll period.
(ii)
the first day of the next month.
(iii)
the next Entry Date. (Do not select if immediate entry is elected with respect to Deferral Contributions in Subsection 1.04(e).)
(iv)
as of the first day of each calendar quarter.
(v)
as of the first day of each Plan Year.
(vi)
other. (Specify, but must be at least once per Plan Year)

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(E)
The minimum Deferral Contribution is % of Compensation.

Note: The ability to make Deferral Contributions is a benefit, right or feature subject to discrimination testing under Code Section 401(a)(4). If a minimum percentage is specified above, it should be reviewed to be sure that under the facts and circumstances of the Plan, Deferral Contributions are effectively available to Employees who are not Highly Compensated Employees.

(2)
Catch-Up Contributions - The following deferral limit applies to Participants eligible to make Catch-Up Contributions: 100% (cannot be less than 75% and must be a whole number multiple of one percent) of Compensation. The following Participants who have attained or are expected to attain age 50 before the close of the taxable year will be permitted to make Catch-Up Contributions to the Plan, as described in Subsection 5.03(a):
(A)
All such Participants.
(B)
All such Participants except those covered by a collective-bargaining agreement under which retirement benefits were a subject of good faith bargaining unless the bargaining agreement specifically provides for Catch-Up Contributions to be made on behalf of such Participants.

Note: The Employer must not select Option 1.07(a)(2) above unless all applicable plans (as defined in Code Section 414(v)(6)(A), other than any plan that is qualified under Puerto Rican law or that covers only employees who are covered by a collective bargaining agreement under which retirement benefits were a subject of good faith bargaining) maintained by the Employer and by any other employer that is treated as a single employer with the Employer under Code Section 414(b), (c), (m), or (o) also permit Catch-Up Contributions in the same dollar amount.

(3)
Roth 401(k) Contributions. Participants shall be permitted to irrevocably designate pursuant to Subsection 5.03(b) that a portion or all of the Deferral Contributions made under this Subsection 1.07(a) are Roth 401(k) Contributions that are includable in the Participant's gross income at the time deferred.
(4)
Automatic Enrollment Contributions. Unless they affirmatively elect otherwise, certain Eligible Employees will have their Compensation reduced in accordance with the provisions of Subsection 5.03(c) (an "Automatic Enrollment Contribution"), the Administrator’s separate procedures described therein, and the following, if applicable:
(A)
A qualified automatic contribution arrangement described in Code Section 401(k)(13) (“QACA”) has been adopted. (Select Option 1.11(a)(3) or 1.12(a)(3).) See Automatic Enrollment Addendum.
(B)
An eligible automatic enrollment arrangement described in Code Section 414(w) (“EACA”) has been adopted. See Automatic Enrollment Addendum.

 

1.08
EMPLOYEE CONTRIBUTIONS (AFTER-TAX CONTRIBUTIONS)
(a)
Future Employee Contributions - Participants may make voluntary, non-deductible, after-tax Employee Contributions pursuant to Section 5.04 of the Basic Plan Document. The Employee Contribution made on behalf of an Active Participant each payroll period shall not exceed the contribution limit specified in Subsection 1.08(a)(1) below.
(1)
The contribution limit is % of Compensation.
(b)
Frozen Employee Contributions - Participants may not currently make after-tax Employee

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Contributions to the Plan, but the Employer does maintain frozen Employee Contributions sub-accounts.

 

 

1.09
ROLLOVER CONTRIBUTIONS
(a)
Rollover Contributions - Except as may be indicated below, Eligible Employees who have satisfied the age and Eligibility Service requirements specified in Subsections 1.04(a) and (b) may roll over any eligible rollover distribution as described in Section 5.06 of the Basic Plan Document.
(1)
Expanded Rollover Eligibility – The following Employees and/or Participants are also eligible to make Rollover Contributions to the Plan:
(A)
Eligible Employees who have not yet satisfied the age and Eligibility Service requirements specified in Subsections 1.04(a) and (b).
(B)
Inactive Participants who have not terminated employment.
(C)
All Inactive Participants.
(2)
The Plan will not accept rollovers of after-tax employee contributions.
(3)
The Plan will not accept rollovers of designated Roth contributions. (Must be selected if Roth 401(k) Contributions are not elected in Subsection 1.07(a)(3).)
(b)
In-Plan Roth Rollover Contributions (Choose only if Roth 401(k) Contributions are selected in Option 1.07(a)(3) above) – Unless Option 1.09(b)(1) is selected below and in accordance with Section 5.06 of the Basic Plan Document, any Participant, spousal alternate payee or spousal Beneficiary may elect to have otherwise distributable portions of his Account, which are not part of an outstanding loan balance pursuant to Article 9 of the Basic Plan Document and are not “designated Roth contributions” under the Plan, be considered “designated Roth contributions” for purposes of the Plan.
(1)
Only a Participant who is still employed by the Employer (or a spousal alternate payee or spousal Beneficiary of such a Participant) may elect to make such an in-plan Roth Rollover.
(c)
In-Plan Roth Conversions. In accordance with Section 5.06 and as may be limited in (2) below, any Participant who is still employed by the Employer may elect to have any part of the below-listed portions of his Account, which is fully vested, not part of an outstanding loan balance pursuant to Article 9 of the Basic Plan Document, not currently distributable and not “designated Roth contributions” under the Plan, be considered “designated Roth contributions” for purposes of the Plan.
(1)
The following sub-accounts are available to be converted: .
(2)
A Participant may not make an In-Plan Roth Conversion more frequently than:

.

 

1.10
QUALIFIED NONELECTIVE EMPLOYER CONTRIBUTIONS
(a)
Qualified Nonelective Employer Contributions - The Employer may contribute an amount which it designates as a Qualified Nonelective Employer Contribution for any permissible purpose, as provided in

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Section 5.07 of the Basic Plan Document. If Option 1.07(a) or 1.08(a)(1) is checked, except as provided in Section 5.07 of the Basic Plan Document or as otherwise provided below, Qualified Nonelective Employer Contributions shall be allocated to all Participants who were eligible to participate in the Plan at any time during the Plan Year and are Non-Highly Compensated Employees (except as may be modified in the Nonelective Employer Contributions Addendum with regard to prevailing wage contributions) in the ratio which each such Participant's "testing compensation", as defined in Subsection 6.01(s) of the Basic Plan Document, for the Plan Year bears to the total of all such Participants' "testing compensation" for the Plan Year.

(1)
Qualified Nonelective Employer Contributions shall be allocated only among such Participants described above who are designated by the Employer as eligible to receive a Qualified Nonelective Employer Contribution for the Plan Year. The amount of the Qualified Nonelective Employer Contribution allocated to each such Participant shall be as designated by the Employer, but not in excess of the "regulatory maximum." The "regulatory maximum" means the amount prescribed in Treasury Regulation Section 1.401(k)-2 which is 5% (10% for Qualified Nonelective Contributions made in connection with the Employer's obligation to pay prevailing wages) of the "testing compensation" for such Participant for the Plan Year. The "regulatory maximum" shall apply separately with respect to Qualified Nonelective Contributions to be included in the "ADP" test and Qualified Nonelective Contributions to be included in the "ACP" test. (Cannot be selected if the Employer has elected prior year testing in Subsection 1.06(a)(2).)

Note: Each eligible Participant who is a Non-Highly Compensated Employee will be considered his own allocation group. The Employer shall notify the Plan Administrator of the amount allocable to each group.

 

1.11
MATCHING EMPLOYER CONTRIBUTIONS
(a)
Matching Employer Contributions - The Employer shall make Matching Employer Contributions on behalf of each of its "eligible" Participants as provided in this Section 1.11. For purposes of this Section 1.11, an "eligible" Participant means any Participant who is an Active Participant during the Contribution Period and who satisfies the requirements of Subsection 1.11(e) or Section 1.13.
(1)
Non-Discretionary Matching Employer Contributions - The Employer shall make a Matching Employer Contribution on behalf of each "eligible" Participant in an amount equal to the following percentage of the eligible contributions made by the "eligible" Participant during the Contribution Period (complete all that apply):
(A)
Flat Percentage Match
(i)
% to all “eligible” Participants.
(ii)
to certain “eligible” Participants as specified in the Matching Employer Contributions Addendum.
(B)
Tiered Match:
(i)
To all “eligible” Participants.

% of the first % of the "eligible" Participant's Compensation contributed to the Plan,

% of the next % of the "eligible" Participant's Compensation contributed to the Plan,

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% of the next % of the "eligible" Participant's Compensation contributed to the Plan.

(ii)
To certain “eligible” Participants as specified in the Matching Employer Contributions Addendum.

Note: The group of "eligible" Participants benefiting under each match rate must satisfy the nondiscriminatory coverage requirements of Code Section 410(b) and the group to whom the match rate is effectively available must not substantially favor HCEs.

 

(C)
See Matching Employer Contributions Addendum for age and/or service weighted allocation options or special allocations for collectively bargained Employees.
(D)
Limit on Non-Discretionary Matching Employer Contributions (check the appropriate box(es)):
(i)
Contributions in excess of % of the "eligible" Participant's Compensation for the Contribution Period shall not be considered for non-discretionary Matching Employer Contributions.
(ii)
Matching Employer Contributions for each "eligible" Participant for each Plan Year shall be limited to $ .
(2)
Discretionary Matching Employer Contributions - The Employer may make a discretionary Matching Employer Contribution on behalf of "eligible" Participants, or a designated group of "eligible" Participants, in accordance with Section 5.08 of the Basic Plan Document. An "eligible" Participant's allocable share of the discretionary Matching Employer Contribution shall be a percentage of the eligible contributions made by the "eligible" Participant during the Contribution Period. The Employer may limit the eligible contributions taken into account under the allocation formula to contributions up to a specified percentage of Compensation or dollar amount or may provide for Matching Employer Contributions to be made in a different ratio for eligible contributions above and below a specified percentage of Compensation or dollar amount. The Matching Employer Contribution is allocated among “eligible” Participants so that each “eligible” Participant receives a rate or amount (which may be zero) that is identical to the rate or amount received by all other “eligible” Participants (or designated group of “eligible” Participants, if applicable) as determined by the Employer on or before the due date of the Employer’s tax return for the year of allocation.

Note: If the Matching Employer Contribution made in accordance with this Subsection 1.11(a)(2) matches different percentages of contributions for different groups of "eligible" Participants, the group of "eligible" Participants benefiting under each match rate must satisfy the nondiscriminatory coverage requirements of Code Section 410(b) and the group to whom the match rate is effectively available must not substantially favor HCEs. Each group of “eligible” Participants must also be clearly defined in a manner which will not violate the definite predetermined allocation formula requirement Section 1.401-l(b)(l)(ii) of Treasury Regulations. The Employer must notify the Trustee in writing of the amount of such Matching Employer Contributions being given to each such group.

Note: If the Matching Employer Contribution made in accordance with this Subsection 1.11(a)(2) is made to Participants who are receiving 401(k) Safe Harbor Nonelective Employer Contributions or 401(k) Safe Harbor Matching Contributions, in order to satisfy the safe harbor contribution requirement for the "ACP" Test, the dollar amount of

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the discretionary Matching Employer Contribution made on an "eligible" Participant's behalf for the Plan Year may not exceed 4% of the "eligible" Participant's Compensation for the Plan Year.

(3)
401(k) Safe Harbor Matching Employer Contributions - If the Employer elects one of the safe harbor formula Options in (A), (B), or (C) below and complies with Sections

6.09 and 6.10 of the Basic Plan Document, the Plan (or portion of the Plan if (D) is selected) or if the Employer elects more restrictive age, service or Entry Date requirements for Safe Harbor Matching Employer Contributions than for Deferral Contributions) shall be deemed to satisfy the "ADP" test and, under certain circumstances, the "ACP" test. If the Employer selects (A) or (B) and does not elect Option 1.11(b), Additional Matching Employer Contributions, Matching Employer Contributions will automatically meet the safe harbor contribution requirements for deemed satisfaction of the "ACP" test. (Employee Contributions must still be tested.) 401(k) Safe Harbor Matching Employer Contributions will be made on behalf of all "eligible" Participants, unless (D) is selected below. (Choose (A), (B), or (C) below and, if applicable (D)).

(A)
100% of the first 3% of the "eligible" Participant's Compensation contributed to the Plan and 50% of the next 2% of the "eligible" Participant's Compensation contributed to the Plan.
(B)
100% of the first 1% of the "eligible" Participant's Compensation contributed to the Plan and 50% of the next 5% of the "eligible" Participant's Compensation contributed to the Plan. (Allowable only if Employer has selected 1.07(a)(4)(D) (QACA)).
(C)
Enhanced Match:

% of the first % of the "eligible" Participant's Compensation contributed to the Plan,

% of the next % of the "eligible" Participant's Compensation contributed to the Plan,

% of the next % of the "eligible" Participant's Compensation contributed to the Plan.

(D)
Allocation of Safe Harbor Matching Employer Contributions will only be made to certain “eligible” Participants in the amounts specified on the Matching Employer Contributions Addendum.

Note: To satisfy the 401(k) safe harbor contribution requirement for the "ADP" test, the percentages specified above for Matching Employer Contributions may not increase as the percentage of Compensation contributed increases, and the aggregate amount of Matching Employer Contributions at such rates must at least equal the aggregate amount of Matching Employer Contributions which would be made under the percentages described in Subsection (a)(1) of this Addendum.

Note: To satisfy the safe harbor contribution requirement for the "ACP" test, the Deferral Contributions and/or Employee Contributions matched cannot exceed 6% of an "eligible" Participant's Compensation.

(b)
Additional Matching Employer Contributions - The Employer may at Plan Year end make an additional Matching Employer Contribution on behalf of "eligible" Participants, or a designated group of "eligible" Participants, in accordance with the provisions of Section 5.08 of the Basic Plan Document describing discretionary Matching Employer Contributions. An "eligible"

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Participant's allocable share of the additional Matching Employer Contribution shall be a percentage of the eligible contributions made by the "eligible" Participant during the Plan Year. The additional Matching Employer Contribution may be limited to match only contributions up to a specified percentage of Compensation or dollar amount or may provide for the additional Matching Employer Contributions to be made in a different ratio for eligible contributions above and below a specified percentage of Compensation or dollar amount. The additional Matching Employer Contribution is allocated among “eligible” Participants so that each “eligible” Participant receives a rate or amount (which may be zero) that is identical to the rate or amount received by all other “eligible” Participants (or designated group of “eligible” Participants, if applicable) as determined by the Employer on or before the due date of the Employer’s tax return for the year of allocation.

Note: If the additional Matching Employer Contribution made in accordance with this Subsection 1.11(b) matches different percentages of contributions for different groups of "eligible" Participants, the group of "eligible" Participants benefiting under each match rate must satisfy the nondiscriminatory coverage requirements of Code Section 410(b) and the group to whom the match rate is effectively available must not substantially favor HCEs. Each group of “eligible” Participants must also be clearly defined in a manner which will not violate the definite predetermined allocation formula requirement Section 1.401-l(b)(l)(ii) of Treasury Regulations. The Employer must notify the Trustee in writing of the amount of such Matching Employer Contributions being given to each such group.

Note: If the Employer elected Option 1.11(a)(3), 401(k) Safe Harbor Matching Employer Contributions, above and wants to be deemed to have satisfied the "ADP" test, the additional Matching Employer Contribution must meet the requirements of Section 6.09 of the Basic Plan Document. In addition to the foregoing requirements, if the Employer elected Option 1.11(a)(3), 401(k) Safe Harbor Matching Employer Contributions, or Option 1.12(a)(3), 401(k) Safe Harbor Formula, with respect to Nonelective Employer Contributions, and wants to be deemed to have satisfied the "ACP" test with respect to Matching Employer Contributions for the Plan Year, the eligible contributions matched may not exceed the limitations in Section 6.10 of the Basic Plan Document.

(c)
Contributions Matched - The Employer matches the following contributions (check appropriate box(es)):
(1)
Deferral Contributions - Deferral Contributions made to the Plan are matched at the rate specified in this Section 1.11. Catch-Up Contributions are not matched unless the Employer elects Option 1.11(c)(1)(A) below.
(A)
Catch-Up Contributions made to the Plan pursuant to Subsection 1.07(a)(4) are matched at the rates specified in this Section 1.11.

Note: Notwithstanding the above, if the Employer elected Option 1.11(a)(3), 401(k) Safe Harbor Matching Employer Contributions, Deferral Contributions shall be matched at the rate specified therein without regard to whether they are Catch-Up Contributions.

(d)
Contribution Period for Matching Employer Contributions - The Contribution Period for purposes of calculating the amount of Matching Employer Contributions is:
(1)
each calendar month.
(2)
each Plan Year quarter.
(3)
each Plan Year.
(4)
each payroll period.

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(5)
The Employer shall determine the Contribution Period for calculation of any discretionary Matching Employer Contributions elected pursuant to Option 1.11(a)(2) above at the time that the matching contribution formula is determined.

The Contribution Period for additional Matching Employer Contributions described in Subsection 1.11(b) is the Plan Year.

Note: If Option (5) is selected, one of the other options must be selected to apply to any non-discretionary Matching Employer Contributions. If Option (5) is not selected, the Employer may amend at any time to change the option chosen with regard to discretionary Matching Employer Contributions.

Note: If Option (1), (2) or (3) is selected above and Matching Employer Contributions are made more frequently than for the Contribution Period selected above, the Employer must calculate the Matching Employer Contribution required with respect to the full Contribution Period, taking into account the "eligible" Participant's contributions and Compensation for the full Contribution Period, and contribute any additional Matching Employer Contributions necessary to "true up" the Matching Employer Contribution so that the full Matching Employer Contribution is made for the Contribution Period.

(e)
Continuing Eligibility Requirement(s) - A Participant who is an Active Participant during a Contribution Period and makes eligible contributions during the Contribution Period shall only be entitled to receive Matching Employer Contributions under Section 1.11 for that Contribution Period if the Participant satisfies the following requirement(s) (Check the appropriate box(es). Options (3), (4), (8), (9), and (10) may not be elected in any combination; Option (5) may not be elected with Options (2) through (4) or Options (8) through (10)):
(1)
No requirements.
(2)
Is employed by the Employer or a Related Employer on the last day of the Contribution Period.
(3)
Earns at least 501 Hours of Service during the Plan Year. (Only if the Contribution Period is the Plan Year.)
(4)
Earns at least (not to exceed 1,000) Hours of Service during the Plan Year.

(Only if the Contribution Period is the Plan Year.)

(5)
Either earns at least 501 Hours of Service during the Plan Year or is employed by the Employer or a Related Employer on the last day of the Plan Year. (Only if the Contribution Period is the Plan Year.)
(6)
Is not a Highly Compensated Employee for the Plan Year.
(7)
Is not a partner or a member of the Employer, if the Employer is a partnership or an entity taxed as a partnership.
(8)
Is employed by the Employer or a Related Employer on the last day of the Employer's fiscal year.
(9)
Is employed by the Employer or a Related Employer on the date the Matching Employer Contribution allocation is declared.
(10)
Is employed by the Employer or a Related Employer on the date the Matching Employer Contribution is made.
(11)
Special continuing eligibility requirement(s) for additional Matching Employer Contributions or “true up” Matching Employer Contributions.

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(A)
The continuing eligibility requirement(s) for additional Matching Employer Contributions selected in Option 1.11(b) is/are:
(B)
The continuing eligibility requirement(s) for “true up” Matching Employer Contributions described in Section 1.11(d) is/are: (2)

(For each blank above, fill in number of applicable eligibility requirement(s) from above, including the number of Hours of Service if Option (4) has been selected. Options (2) through (5), and (7), through (10) may not be elected with respect to additional Matching Employer Contributions if Option 1.11(a)(3), 401(k) Safe Harbor Matching Employer Contributions, is checked or if Option 1.12(a)(3), 401(k) Safe Harbor Formula, with respect to Nonelective Employer Contributions is checked and the Employer intends to satisfy the Code Section 401(m)(11) safe harbor with respect to Matching Employer Contributions.)

Note: Except when added in conjunction with the addition of a new Matching Employer Contribution, if Option (2) through (5) or (8) through (10) is adopted during a Contribution Period, such Option shall not become effective until the first day of the next Contribution Period. Matching Employer Contributions attributable to the Contribution Period that are allocated to Participant Accounts during the Contribution Period shall not be subject to the eligibility requirements of Option (2) through (5) or (7) through (10). If Option (2) through (5) or (7) through (10) is elected with respect to any Matching Employer Contributions and if Option 1.11(a)(3), 401(k) Safe Harbor Matching Employer Contributions, or Option 1.12(a)(3), 401(k) Safe Harbor Formula, is also elected, the Plan will not be deemed to satisfy the "ACP" test in accordance with Section 6.10 of the Basic Plan Document and will have to pass the "ACP" test each year.

(f)
Qualified Matching Employer Contributions - Prior to making any Matching Employer Contribution hereunder (other than a 401(k) Safe Harbor Matching Employer Contribution), the Employer may designate all or a portion of such Matching Employer Contribution as a Qualified Matching Employer Contribution that may be used to satisfy the "ADP" test on Deferral Contributions and excluded in applying the "ACP" test on Employee and Matching Employer Contributions. Unless the additional eligibility requirement is selected below, Qualified Matching Employer Contributions shall be allocated to all Participants who were Active Participants during the Contribution Period and who meet the continuing eligibility requirement(s) described in Subsection 1.11(e) above for the type of Matching Employer Contribution being characterized as a Qualified Matching Employer Contribution.
(1)
To receive an allocation of Qualified Matching Employer Contributions a Participant must also be a Non-Highly Compensated Employee for the Plan Year.

Note: Qualified Matching Employer Contributions may not be excluded in applying the "ACP" test for a Plan Year if the Employer elected Option 1.11(a)(3), 401(k) Safe Harbor Matching Employer Contributions, or Option 1.12(a)(3), 401(k) Safe Harbor Formula, with respect to Nonelective Employer Contributions, and the "ADP" test is deemed satisfied under Section 6.09 of the Basic Plan Document for such Plan Year.

 

1.12
NONELECTIVE EMPLOYER CONTRIBUTIONS

If (a) or (b) is elected below, the Employer may make Nonelective Employer Contributions on behalf of each of its "eligible" Participants in accordance with the provisions of this Section 1.12. Except as otherwise defined in this Adoption Agreement pertaining to Nonelective Employer Contributions, for purposes of this Section 1.12, an "eligible" Participant means a Participant who is an Active Participant during the Contribution Period and who satisfies the requirements of Subsection 1.12(d) or Section 1.13.

Note: An Employer may elect both a fixed formula and a discretionary formula. If both are selected, the discretionary formula shall be treated as an additional Nonelective Employer Contribution and allocated separately in accordance with the allocation formula selected by the Employer.

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(a)
Fixed Formula:
(1)
Fixed Percentage Employer Contribution - For each Contribution Period, the Employer shall contribute for each "eligible" Participant a percentage of such "eligible" Participant's Compensation equal to:
(A)
% (not to exceed 25%) to all “eligible” Participants.
(B)
To “eligible” employees indicated in the Nonelective Employer Contributions Addendum.

Note: The allocation formula in Option 1.12(a)(1)(A) above generally satisfies a design-based safe harbor pursuant to the regulations under Code Section 401(a)(4).

(2)
Fixed Flat Dollar Employer Contribution - The Employer shall contribute for each "eligible" Participant an amount equal to:
(A)
$ to all “eligible” Participants. (Complete (i) below).
(i)
The contribution amount is based on an "eligible" Participant's service for the following period (check one of the following):
(I)
Each paid hour.
(II)
Each Plan Year.
(III)
Other: (must be a period within the Plan Year that does not exceed one week and is uniform with respect to all "eligible" Participants).
(B)
To “eligible” employees indicated in the Nonelective Employer Contributions Addendum.

Note: The allocation formula in Option 1.12(a)(2)(A) above generally satisfies a design-based safe harbor pursuant to the regulations under Code Section 401(a)(4).

(3)
401(k) Safe Harbor Formula - If the Employer elects one of the safe harbor formula Options below and complies with Sections 6.09 and 6.10 of the Basic Plan Document, the Plan (or portion of the Plan if (C) is selected or if the Employer elects more restrictive age, service or Entry Date requirements for Safe Harbor Nonelective Employer Contributions than for Deferral Contributions) shall be deemed to satisfy the "ADP" test and, under certain circumstances, the "ACP" test (if the requirements of Section 6.10 of the Basic Plan Document are met with regard to Matching Deferral Contributions). 401(k) Safe Harbor Nonelective Employer Contributions shall be made on behalf of all "eligible" Participants, unless (C) is selected below.
(A)
% (must be at least 3% and not to exceed 25%) to all “eligible” Participants.
(B)
As indicated on the Nonelective Employer Contributions Addendum as specified for particular Plan Years.
(C)
Allocation of Safe Harbor Nonelective Employer Contributions will only be made to certain “eligible” Participants as specified in the Nonelective Employer Contributions Addendum.

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(4)
Other allocation formula(s) as specified in the Nonelective Employer Contributions Addendum, (e.g., integrated, group-based, prevailing wage or pursuant to a collective bargaining agreement).
(b)
Discretionary Formula - The Employer may decide each Contribution Period whether to make a discretionary Nonelective Employer Contribution on behalf of "eligible" Participants in accordance with Section 5.10 of the Basic Plan Document.
(1)
Non-Integrated Allocation Formula - In the ratio that each "eligible" Participant's Compensation bears to the total Compensation paid to all "eligible" Participants for the Contribution Period.

Note: The allocation formula in Option 1.12(b)(1) above generally satisfies a design-based safe harbor pursuant to the regulations under Code Section 401(a)(4).

(2)
Integrated Allocation Formula - As (1) a percentage of each "eligible" Participant's Compensation plus (2) a percentage of each "eligible" Participant's Compensation in excess of the "integration level" as defined below. The percentage of Compensation in excess of the "integration level" shall be equal to the lesser of the percentage of the "eligible" Participant's Compensation allocated under (1) above or the "permitted disparity limit" as defined below.

Note: An Employer that has elected Option 1.12(a)(3), 401(k) Safe Harbor Formula, may not take Nonelective Employer Contributions made to satisfy the 401(k) safe harbor into account in applying the integrated allocation formula described above.

(A)
"Integration level" means the Social Security taxable wage base for the Plan Year, unless the Employer elects a lesser amount in (i) or (ii) below.
(i)
% (not to exceed 100%) of the Social Security taxable wage base for the Plan Year, or
(ii)
$ (not to exceed the Social Security taxable wage base).
(B)
"Permitted disparity limit" means the percentage provided by the following table:

 

The "Integration Level" is % of the

Taxable Wage Base

The "Permitted Disparity Limit" is

20% or less

5.7%

More than 20%, but not more than 80%

4.3%

More than 80%, but less than 100%

5.4%

100%

5.7%

 

(C)
The Social Security taxable wage base is the contribution and benefit base in effect under Section 230 of the Social Security Act at the beginning of the Plan Year.

Note: The allocation formula in Option 1.12(b)(2) above generally satisfies a design-based safe harbor pursuant to the regulations under Code Section 401(a)(4).

 

Note: An Employer who maintains any other plan that provides for or imputes Social Security Integration (permitted disparity) may not elect Option 1.12(b)(2).

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(3)
Other allocation formula(s) as specified in the Nonelective Employer Contributions Addendum, (e.g., group-based, conditional points or flat-dollar).
(c)
Contribution Period for Nonelective Employer Contributions - The Contribution Period for purposes of calculating the amount of Nonelective Employer Contributions is the Plan Year, unless the Employer elects another Contribution Period below. Regardless of any selection made below, the Contribution Period for 401(k) Safe Harbor Nonelective Employer Contributions under Option 1.12(a)(3) or Nonelective Employer Contributions allocated under an integrated formula selected under Option 1.12(b)(2) or allocated pursuant to the Prevailing Wage Contribution provided in the Nonelective Employer Contributions Addendum is the Plan Year.
(1)
each calendar month.
(2)
each Plan Year quarter.
(3)
each payroll period.

Note: If Nonelective Employer Contributions are made more frequently than for the Contribution Period selected above, the Employer must calculate the Nonelective Employer Contribution required with respect to the full Contribution Period, taking into account the "eligible" Participant's Compensation for the full Contribution Period, and contribute any additional Nonelective Employer Contributions necessary to "true up" the Nonelective Employer Contribution so that the full Nonelective Employer Contribution is made for the Contribution Period.

(d)
Continuing Eligibility Requirement(s) - A Participant shall only be entitled to receive Nonelective Employer Contributions for a Plan Year under this Section 1.12 if the Participant is an Active Participant during the Plan Year and satisfies the following requirement(s) (Check the appropriate box(es) - Options

(3) and (4) may not be elected together; Option (5) may not be elected with Options (2) through (4) or Options (8) through (10); Options (2) through (5) and (7) through (10) may not be elected if the only Nonelective Employer Contribution selected is the fixed formula in Option 1.12(a)(3), 401(k) Safe Harbor Formula, and will not apply to the 401(k) Safe Harbor Formula if other allocation options have also been selected):

(1)
No requirements.
(2)
Is employed by the Employer or a Related Employer on the last day of the Contribution Period.
(3)
Earns at least 501 Hours of Service during the Plan Year. (Only if the Contribution Period is the Plan Year.)
(4)
Earns at least (not to exceed 1,000) Hours of Service during the Plan Year.

(Only if the Contribution Period is the Plan Year.)

(5)
Either earns at least 501 Hours of Service during the Plan Year or is employed by the Employer or a Related Employer on the last day of the Plan Year. (Only if the Contribution Period is the Plan Year.)
(6)
Is not a Highly Compensated Employee for the Plan Year.
(7)
Is not a partner or a member of the Employer, if the Employer is a partnership or an entity taxed as a partnership.
(8)
Is employed by the Employer or a Related Employer on the last day of the Employer's fiscal year.

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(9)
Is employed by the Employer or a Related Employer on the date the Nonelective Employer Contribution allocation is declared.
(10)
Is employed by the Employer or a Related Employer on the date the Nonelective Employer Contribution is made.
(11)
Special continuing eligibility requirement(s) for discretionary Nonelective Employer Contributions. (Only if both Options 1.12(a) and (b) are checked.)
(A)
The continuing eligibility requirement(s) for discretionary Nonelective Employer Contributions is/are: (Fill in number of applicable eligibility requirement(s) from above, including the number of Hours of Service if Option (4) has been selected.)

Note: Except when added in conjunction with the addition of a new Nonelective Employer Contribution, if Option (2) through (5) or (8) through (10) is adopted during a Contribution Period, such Option shall not become effective until the first day of the next Contribution Period. Nonelective Employer Contributions attributable to the Contribution Period that are allocated to Participant Accounts during the Contribution Period shall not be subject to the eligibility requirements of Option (2) through (5) or (8) through (10).

 

 

1.13
EXCEPTIONS TO CONTINUING ELIGIBILITY REQUIREMENTS
(a)
Death, Disability, and Retirement Exceptions - All Participants who become disabled, as defined in Section 1.15, retire, as provided in Subsection 1.14(a), (b), or (c), or die are excepted from any last day or Hours of Service requirement. For purposes of this Section, any Participant who dies while performing qualified military service as defined in Code Section 414(u)(5) will be excepted from any last day or Hours of Service requirement.

 

 

1.14
RETIREMENT
(a)
The Normal Retirement Age under the Plan is (check one):
(1)
age 65.
(2)
age 62 (specify between 55 and 64).
(3)
later of age (not less than 55 or greater than 65) or the (not to exceed 5th) anniversary of the Participant's Employment Commencement Date.
(b)
The Early Retirement Age is the date the Participant attains age and completes

years of Vesting Service.

Note: If this Option is elected, Participants who are employed by the Employer or a Related Employer on the date they reach Early Retirement Age shall be 100% vested in their Accounts under the Plan.

(c)
A Participant who becomes disabled, as defined in Section 1.15, is eligible for disability retirement.

Note: If this Option is elected, Participants who are employed by the Employer or a Related Employer on the date they become disabled shall be 100% vested in their Accounts under the Plan. Pursuant to Section

11.03 of the Basic Plan Document, a Participant is not considered to be disabled until he terminates his employment with the Employer.

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1.15
DEFINITION OF DISABLED

A Participant is disabled if he/she meets any of the requirements selected below:

(a)
The Participant is eligible for benefits under the Employer's long-term disability plan.
(b)
The Participant is eligible for Social Security disability benefits.
(c)
The Participant is determined to be disabled by the Participant’s physician.

 

 

1.16
VESTING

A Participant's vested interest in Matching Employer Contributions and/or Nonelective Employer Contributions, other than those described in Subsection 5.11(a) of the Basic Plan Document, shall be based upon his years of Vesting Service and the schedule selected in Subsection 1.16(c) below, except as provided in the Vesting Schedule Addendum to the Adoption Agreement or as provided in Subsection 1.22(c).

(a)
When years of Vesting Service are determined, the elapsed time method shall be used.
(b)
Years of Vesting Service shall exclude service prior to the Plan's original effective date as listed in Subsection 1.01(g)(1) or Subsection 1.01(g)(2), as applicable.
(c)
Vesting Schedule(s)

 

(1)
Nonelective Employer Contributions

(check one):

(A)
N/A - No Nonelective Employer Contributions
(B)
100% Vesting immediately
(C)
3 year cliff (see C below)
(D)
6 year graduated (see D below)
(E)
Other vesting (complete E1 below)

(2) Matching Employer Contributions

(check one):

(A)
N/A – No Matching Employer Contributions
(B)
100% Vesting immediately
(C)
3 year cliff (see C below)
(D)
6 year graduated (see D below)
(E)
Other vesting (complete E2 below)

 

Years of Vesting Service

Applicable Vesting Schedule(s)

 

C

D

E1

E2

0

0%

0%

%

%

1

0%

0%

%

%

2

0%

20%

%

%

3

100%

40%

%

%

4

100%

60%

%

%

5

100%

80%

%

%

6 or more

100%

100%

100%

100%

 

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Note: A schedule elected under E1 or E2 above must be, at each year, at least as favorable as one of the schedules in C or D above. If the vesting schedule is amended, any such amendment must satisfy the requirements of section

16.04 of the Basic Plan Document.

Note: The amendment of the plan to add a Fixed Nonelective Employer Contribution, Discretionary Nonelective Employer Contribution, 401(k) Safe Harbor Nonelective Employer Contribution, Fixed Matching Employer Contribution, Discretionary Matching Employer Contribution, Additional Matching Employer Contribution, or 401(k) Safe Harbor Matching Employer Contribution and an attendant vesting schedule does not constitute an amendment to a vesting schedule under Section 1.16(e) below, unless a contribution source of the same type exists under the Plan on the effective date of such amendment. Any amendment to the vesting schedule of one such contribution source shall not require the amendment of the vesting schedule of any other such contribution source, notwithstanding the fact that one or more Participants may be subject to different vesting schedules for such different contribution sources.

(d)
A vesting schedule or schedules different from the vesting schedule(s) selected above applies to certain Participants. See Eligibility, Service and Vesting Addendum to the Adoption Agreement.
(e)
If the Plan's vesting schedule is amended and an Active Participant's vested interest, as calculated by using the amended vesting schedule, is less in any year than the Active Participant's vested interest calculated under the Plan's vesting schedule immediately prior to the amendment, the amended vesting schedule shall apply only to Employees first hired on or after the effective date of the change in vesting schedule.
(f)
Other special provisions concerning Vesting Service or forfeitures apply under the Plan. See Eligibility, Service and Vesting Addendum.

 

 

1.17
PREDECESSOR EMPLOYER SERVICE
(a)
Section 3.05 of the Basic Plan Document requires service to be credited for purposes of eligibility under Subsection 1.04(b) and vesting under Subsection 1.16 in certain situations. Additionally, the Plan shall credit service for such purposes in the following situations):
(1)
Service with the following employer(s) (for the employees and time periods described, if applicable):

 

 

 

 

(2)
Additional grants of service of a more general nature (e.g., covering situations such as corporate actions or mergers). See Eligibility, Service and Vesting Addendum.

 

 

1.18
PARTICIPANT LOANS
(a)
Participant loans are allowed in accordance with Article 9 of the Basic Plan Document. Except as otherwise provided below, if a Participant has an outstanding loan balance at the time his employment terminates, the entire outstanding principal and accrued interest shall be due and payable by the end of the cure period specified in the separate loan procedures. Notwithstanding the foregoing, if a Participant with an outstanding loan balance terminates employment with the Employer and all Related Employers in conjunction with a transfer of Employees and Employer assets to an entity unrelated to the Employer, such Participant may elect, within 90 days of such termination, to roll over the outstanding loan to an eligible retirement plan, as defined in Section

13.04 of the Basic Plan Document, that accepts such rollovers.

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(1) If a Participant with an outstanding loan balance terminates employment with the Employer and all Related Employers, the outstanding principal and accrued interest on such loan shall not be immediately due and payable as provided in Section 9.11 of the Basic Plan Document. Instead, such loan shall continue to be payable in accordance with the provisions of the loan note and Article 9. Notwithstanding the foregoing, if a Participant dies, outstanding loan amounts are immediately due and payable as provided in Section 9.11.

 

1.19
IN-SERVICE WITHDRAWALS

Participants may make withdrawals prior to termination of employment under the following circumstances:

(a)
Hardship Withdrawals - Hardship withdrawals shall be allowed in accordance with Section 10.05 of the Basic Plan Document, subject to a $0 minimum amount.
(1)
Hardship withdrawals will be permitted from:
(A)
A Participant's Deferral Contributions sub-account only.
(B)
The sub-accounts specified in the In-Service Withdrawals Addendum to the Adoption Agreement.

Note: The Administrator may set a limit on the number of hardship withdrawals per year which shall be uniform and non-discriminatory with respect to all Participants.

(b)
Age 59 1/2 - Participants shall be entitled to receive a distribution of all or any portion of the following sub-accounts upon attainment of age 59 1/2:
(1)
Deferral Contributions sub-account.
(2)
All vested sub-account balances.
(3)
The sub-accounts specified in the In-Service Withdrawals Addendum.
(4)
Special restrictions apply to such in-service withdrawals as described in the In-Service Withdrawals Addendum.
(c)
Withdrawal of Employee Contributions, Rollover Contributions and certain other contributions
(1)
Unless otherwise provided below, Employee Contributions may be withdrawn in accordance with Section 10.02 of the Basic Plan Document at any time.
(A)
Employees may not make withdrawals of Employee Contributions more frequently than:

 

 

(2)
Unless otherwise provided below, Rollover Contributions may be withdrawn in accordance with Section 10.03 of the Basic Plan Document at any time.
(A)
Employees may not make withdrawals of Rollover Contributions more frequently than:

 

 

(3)
Active Military Distribution (HEART Act) - Certain contributions restricted from distribution only due to Code Section 401(k)(2)(B)(i)(I) may be withdrawn by

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Participants performing military service in accordance with Section 10.01 of the Basic Plan Document at any time.

(d)
Qualified Reservist Distribution - A Qualified Reservist Distribution shall be allowed in accordance with Section 10.08 of the Basic Plan Document.
(e)
Age 62 Distribution of Money Purchase Benefits - A Participant who has attained at least age 62, shall be entitled to receive a distribution of all or any portion of the vested amounts attributable to benefit amounts accrued as a result of the Participant’s participation in a money purchase pension plan (due to a merger into this Plan of money purchase pension plan assets), if any. (Choose only if Option 1.20(d)(1)(B) is selected.)
(f)
Normal Retirement Age Distribution – A Participant who continues in employment after reaching Normal Retirement Age shall have a continuing right to elect to receive distribution of all or any portion of his Account in accordance with the provisions of Articles 12 and 13 of the Basic Plan Document.
(g)
Additional In-Service Withdrawal Provisions - Benefits are payable as (check the appropriate box(es)):
(1)
an in-service withdrawal of vested amounts attributable to Employer Contributions maintained in a Participant's Account (check (A) and/or (B)):
(A)
for at least (24 or more) months.
(i)
Special restrictions apply to such in-service withdrawals, see the In-Service Withdrawals Addendum.
(B)
after the Participant has at least 60 months of participation.
(i)
Special restrictions apply to such in-service withdrawals, see the In-Service Withdrawals Addendum.
(2)
another in-service withdrawal option that is permissible under the Code. Please complete the In-Service Withdrawals Addendum identifying the in-service withdrawal option(s).

Note: Any withdrawal indicated in this Section may be a "protected benefit" under Code Section 411(d)(6) which can be eliminated only to the extent permitted by applicable guidance.

 

 

1.20
FORM OF DISTRIBUTIONS

Subject to Section 13.01, 13.02 and Article 14 of the Basic Plan Document, distributions under the Plan shall be paid as provided below.

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(a)
Lump Sum Payments - Lump sum payments are always available under the Plan and are the normal form of payment under the Plan except as modified in Subsection 1.20(d)(2) below.
(b)
Installment Payments - Participants may elect distribution under a systematic withdrawal plan.
(c)
Partial Withdrawals - A Participant whose employment has terminated and whose Account is distributable in accordance with the provisions of Article 12 of the Basic Plan Document may elect to withdraw any portion of his distributable vested interest in his Account in a lump sum or any other form of distribution provided in this Section, at any time.
(d)
Annuities (Check if the Plan is retaining any annuity form(s) of payment.)
(1)
An annuity form of payment is available under the Plan because the Plan either converted from or received a transfer of assets from a plan that was subject to the minimum funding requirements of Code Section 412 and therefore an annuity form of payment is a protected benefit under the Plan in accordance with Code Section 411(d)(6).
(2)
The normal form of payment under the Plan is (check (A) or (B)):
(A)
Lump sum is the normal form of payment for:
(i)
All Participants
(ii)
All Participants except those Participants or Participant’s sub-accounts identified on the Forms of Payment Addendum.
(B)
Life annuity is the normal form of payment for all Participants.
(3)
The Plan offers at least one other form of annuity as specified in the Forms of Payment Addendum.

Note: A life annuity option will continue to be an available form of payment for any Participant who elected such life annuity payment before the effective date of its elimination.

(e)
Cash Outs and Implementation of Required Rollover Rule
(1)
If the vested Account balance payable to an individual is less than or equal to the cash out limit utilized for such individual, such Account will be distributed in accordance with the provisions of Section 13.02 or 18.04 of the Basic Plan Document. The cash out limit is:
(A)
$1,000.
(B)
The dollar amount specified in Code Section 411(a)(11)(A) ($5,000 as of January 1, 2013). Any distribution greater than $1,000 that is made to a Participant without the Participant's consent before the Participant's Normal Retirement Age (or age 62, if later) will be rolled over to an individual retirement plan designated by the Plan Administrator.
(f)
See the additional distribution forms described in the Forms of Payment Addendum.

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1.21
TIMING OF DISTRIBUTIONS

Except as provided in Subsection 1.21(a) or (b), distribution shall be made to an eligible Participant from his vested interest in his Account as soon as reasonably practicable following the Participant's request for distribution pursuant to Article 12 of the Basic Plan Document.

(a)
Distribution shall be made to an eligible Participant from his vested interest in his Account as soon as reasonably practicable following the date the Participant's application for distribution is received by the Administrator, but in no event later than his Required Beginning Date, as defined in Subsection 2.01(vv).
(b)
Preservation of Same Desk Rule - Check if the Employer wants to continue application of the same desk rule described in Subsection 12.01(b) of the Basic Plan Document regarding distribution of Deferral Contributions, Qualified Nonelective Employer Contributions, Qualified Matching Employer Contributions, 401(k) Safe Harbor Matching Employer Contributions, and 401(k) Safe Harbor Nonelective Employer Contributions. (If any or all of the above-listed contribution types were previously distributable upon severance from employment, this Option may not be selected.)

 

1.22
TOP HEAVY STATUS
(a)
The Plan shall be subject to the Top-Heavy Plan requirements of Article 15 (check one):
(1)
for each Plan Year, whether or not the Plan is a "top-heavy plan" as defined in Subsection 15.01(g) of the Basic Plan Document.
(2)
for each Plan Year, if any, for which the Plan is a "top-heavy plan" as defined in Subsection 15.01(g) of the Basic Plan Document.
(3)
Not applicable. (Choose only if (A) Plan covers only employees subject to a collective bargaining agreement, or (B) Option 1.11(a)(3), 401(k) Safe Harbor Matching Employer Contributions, or Option 1.12(a)(3), 401(k) Safe Harbor Formula, is selected, and the Plan does not provide for Employee Contributions or any other type of Employer Contributions.)
(b)
If the Plan is or is treated as a "top-heavy plan" for a Plan Year, each non-key Employee shall receive an Employer Contribution of at least 3% (3 or 5)% of Compensation for the Plan Year or such other amount in accordance with Section 15.03 of the Basic Plan Document or as elected on the 416 Contributions Addendum. The minimum Employer Contribution provided in this Subsection 1.22(b) shall be made under this Plan only if the Participant is not entitled to such contribution under another qualified plan of the Employer, unless the Employer elects otherwise below:
(1)
The minimum Employer Contribution shall be paid under this Plan in any event.
(2)
Another method of satisfying the requirements of Code Section 416. Please complete the 416 Contributions Addendum to the Adoption Agreement describing the way in which the minimum contribution requirements will be satisfied in the event the Plan is or is treated as a "top-heavy plan".
(3)
Not applicable. (Choose only if (A) Plan covers only employees subject to a collective bargaining agreement, or (B) Option 1.11(a)(3), 401(k) Safe Harbor Matching Employer Contributions, or Option 1.12(a)(3), 401(k) Safe Harbor Formula, is selected, and the Plan does not provide for Employee Contributions or any other type of Employer contributions.)

Note: The minimum Employer contribution may be less than the percentage indicated in Subsection 1.22(b) above to the extent provided in Section 15.03 of the Basic Plan Document.

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(c)
If the Plan is or is treated as a "top-heavy plan" for a Plan Year, the vesting schedule found in Subsection 1.16(c)(1) shall apply for such Plan Year and each Plan Year thereafter, except with regard to Participants for whom there is a more favorable vesting schedule for Nonelective Employer Contributions. If the Employer has selected Option 1.01(b)(1) and the minimum Employer contribution will not be immediately 100% vested, the Vesting Schedule Addendum must contain the applicable vesting schedule.

 

1.23
CORRECTION TO MEET 415 REQUIREMENTS UNDER MULTIPLE DEFINED CONTRIBUTION PLANS

Other Order for Limiting Annual Additions – If the Employer maintains other defined contribution plans, annual additions to a Participant's Account shall be limited as provided in Section 6.12 of the Basic Plan Document to meet the requirements of Code Section 415, unless the Employer elects this Option and completes the 415 Correction Addendum describing the order in which annual additions shall be limited among the plans.

 

1.24
INVESTMENT DIRECTION

Subject to Sections 8.02 and 8.03 of the Basic Plan Document, Participant Accounts shall be invested (check one):

(a)
in accordance with the investment directions provided to the Trustee by the Investment Fiduciary for allocating all Participant Accounts among the Permissible Investments.
(b)
in accordance with the investment directions provided to the Trustee by each Participant for allocating his entire Account among the Permissible Investments.
(c)
in accordance with the investment directions provided to the Trustee by each Participant for all contribution sources in his Account, except that the following sources shall be invested in accordance with the investment directions provided by the Investment Fiduciary (check (1) and/or (2)):
(1)
Nonelective Employer Contributions
(2)
Matching Employer Contributions

Note: The Investment Fiduciary must direct the applicable sources among the Permissible Investments.

Note: If the Investment Fiduciary directs that a portion or all of a Participant's Nonelective Employer Contributions be invested in employer securities (as described in Section 8.02(b) of the Basic Plan Document), such investment must be discontinued with respect to any Participant who has completed three or more years of Vesting Service, and investment of the Participant's Nonelective Employer Contributions must be diversified among the other Permissible Investments.

 

1.25
ADDITIONAL PROVISIONS AND PROTECTED BENEFITS
(a)
Additional Provisions - The Plan includes certain provisions that are not delineated through the above elections in this Adoption Agreement, but are incorporated into the Adoption Agreement through the Additional Provisions Addendum. The provisions included within the Additional Provisions Addendum supplement and/or alter the provisions of this Adoption Agreement.
(b)
Protected Benefit Provisions - The Plan includes provisions that are “protected benefits” under Code Section 411(d)(6) and are not delineated through the above elections in this Adoption Agreement, but are described within the Protected Benefit Provisions Addendum.

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1.26
SUPERSEDING PROVISIONS
(a)
The Employer has completed the Plan Superseding Provisions Addendum to show the provisions of the Plan which supersede provisions of this Adoption Agreement and/or the Basic Plan Document.

Note: If the Employer elects superseding provisions in Option (a) above, unless such provisions are of the type found in Section 8.03 of Revenue Procedure 2017-41 as not causing a plan to fail to be identical (i.e., changes to the administrative provisions of the Plan, such as provisions relating to investments or plan claims procedures), the Employer will not be permitted to rely on the Pre-Approved Plan Provider’s opinion letter for qualification of its Plan. In addition, such superseding provisions may in certain circumstances affect the Plan's status as a pre-approved plan eligible for the 6-year remedial amendment cycle. Superseding provisions which alter only provisions governed by Title I of ERISA and solely administered by the Department of Labor will not impact the ability of the Employer to rely upon the Pre-Approved Plan Provider’s opinion letter because they are outside the scope of such opinion letter.

 

1.27
RELIANCE ON OPINION LETTER

An adopting Employer may rely on an opinion letter issued by the Internal Revenue Service as evidence that this Plan is qualified under Code Section 401 only to the extent provided in Section 7.02 of Revenue Procedure 2017-41. The Employer may not rely on the opinion letter in certain other circumstances or with respect to certain qualification requirements, which are specified in the opinion letter issued with respect to this Plan and in Section

7.03 of Revenue Procedure 2017-41. In order to have reliance in such circumstances or with respect to such qualification requirements, application for a determination letter must be made to Employee Plans Determinations of the Internal Revenue Service.

Failure to properly complete the Adoption Agreement and failure to operate the Plan in accordance with the terms of the Plan document may result in disqualification of the Plan.

This Adoption Agreement may be used only in conjunction with Fidelity Basic Plan Document No. 17. The Pre-Approved Plan Provider shall inform the adopting Employer of any amendments made to the Plan or of the discontinuance or abandonment of the Pre-Approved Plan.

 

1.28
ELECTRONIC SIGNATURE AND RECORDS

This Adoption Agreement, and any amendment thereto, may be executed or affirmed by an electronic signature or electronic record permitted under applicable law or regulation, provided the type or method of electronic signature or electronic record is acceptable to the Trustee.

 

1.29
PRE-APPROVED PLAN PROVIDER’S INFORMATION

Name of Pre-Approved Plan Provider: FMR LLC Address of Pre-Approved Plan Provider: 245 Summer Street

Boston, MA 02210 Pre-Approved Plan Provider’s Telephone Number: 833-349-6757

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EXECUTION PAGE

 

 

 

Plan Name: Prosperity Bancshares, Inc. 40l(k) Profit Sharing Plan (the "Plan")

Employer: Prosperity Bancshares, Inc.

 

The Fidelity Basic Plan Document No. 17 and the accompanying Adoption Agreement together comprise the Pre-Approved Defined Contribution Plan. It is the responsibility of the adopting Employer to review this Pre-Approved Plan with its legal counsel to ensure that the Pre-Approved Plan is suitable for the Employer and that the Adoption Agreement has been properly completed prior to signing.

7/22/2022

IN WITNESS WHEREOF, the Employer has caused this Adoption Agreement to be executed this day of

, .

 

Employer:

Prosperity Bancshares, Inc.

By:

/s/ J. Mays Davenport

Title:

EVP

 

 

Note: Only one authorized signature is required to execute this Adoption Agreement unless the Employer's corporate policy mandates two authorized signatures.

 

 

Employer:

 

By:

 

Title:

 

 

Note: This page may be duplicated, if needed, to allow separate execution when the Employer indicated in Section 1.02(a) is changing.

 

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ELIGIBILITY, SERVICE AND VESTING ADDENDUM

 

for Plan Name: Prosperity Bancshares, Inc. 40l(k) Profit Sharing Plan

(a)
The following replaces Subsection 1.16(a):
(a)
An Employee shall be credited with a year of Vesting Service for each 12-consecutive-month period specified by the Employer in Subsection 1.16(a)(2) (the “Vesting Computation Period”) during which the Employee has been credited with at least 1000 (not to exceed 1,000) Hours of Service in a Vesting Computation Period.
(1)
Hours of Service Crediting. Hours of Service will be credited in accordance with the following equivalency rather than in accordance with the equivalency described in Subsection 2.01(cc) of the Basic Plan Document:
(A)
10 Hours of Service for each day on which he performs an Hour of Service.
(B)
45 Hours of Service for each week in which he performs an Hour of Service.
(C)
95 Hours of Service for each semi-monthly payroll period in which he performs an Hour of Service.
(2)
The Vesting Computation Period is the Plan Year.
(3)
"Break in Vesting Service" means a Vesting Computation Period in which the Employee does not complete more than 1/2 the Hours of Service specified in Subsection 1.16(a)(1). The following rules shall apply solely for purposes of determining whether a person who is on leave has incurred a Break in Vesting Service:
(A)
If an individual is absent from work because of "maternity/paternity leave", he shall be credited with the Hours of Service with which he would otherwise be credited during such absence or, in any case in which such number of Hours of Service cannot be determined, eight Hours of Service per day, up to a maximum of the number of Hours of Service required to prevent a Break in Service. Such Hours of Service shall be credited to the Vesting Computation Period in which the person's absence begins if necessary to prevent a Break in Vesting Service in such Vesting Computation Period or, in all other cases, to the Vesting Computation Period following the Vesting Computation Period in which his absence began. For purposes of this paragraph, "maternity/paternity leave" means a leave of absence (i) by reason of the pregnancy of the individual, (ii) by reason of the birth of a child of the individual, (iii) by reason of the placement of a child with the individual in connection with the adoption of such child by the individual, or (iv) for purposes of caring for a child for the period beginning immediately following such birth or placement.
(B)
If an individual is absent from work because of "FMLA leave", and returns to employment with the Employer or a Related Employer following such FMLA leave, he shall be credited with the Hours of Service with which he would otherwise be credited during such absence or, in any case in which such number of Hours of Service cannot be determined, eight Hours of Service per day, for each Vesting Computation Period during which he is absent because of FMLA leave, as necessary to prevent a Break in Vesting Service. For purposes of this paragraph, "FMLA leave" means an approved leave of absence pursuant to the Family and Medical Leave Act of 1993.

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(b)
Different Vesting Schedule

Note: With regard to contributions for Plan Years beginning after December 31, 2006, any schedule provided hereunder must be, at each year, at least as favorable as one of the schedules in C or D in the table shown in Section 1.16(c). In addition, each eligible group defined below must be a definitely determinable group, cannot be subject to the discretion of the Employer, and cannot be designed such that the only Non-Highly Compensated Employees benefiting under the Plan are those with the lowest compensation and/or the shortest periods of service and who may represent the minimum number of such employees necessary to satisfy coverage under Code Section 410(b).

(1)
A vesting schedule different from the vesting schedule selected in Section 1.16 applies to the Participants and contributions described below.
(A)
The following vesting schedule applies to the class of Participants described in (b)(1)(B) and the contributions described in (b)(1)(C) below:

 

Years of Vesting Service

Vested Interest

0

0

1

20

2

40

3

60

4

80

5

100
(B)
The vesting schedule specified in (b)(1)(A) above applies to the following class of Participants:

Participants that had their monies transferred into this Plan in a plan to plan transfer from the Community National Bank (10/2012) and Texas Bankers Inc. (2012) mergers continue to vest under the 5-year graded schedule.

(C)
The vesting schedule specified in (b)(1)(A) above applies to the following contributions: Match - Discretionary.

Nonelective - Discretionary.

Note: The eligible group defined in (B) above must be a definitely determinable group and cannot be subject to the discretion of the Employer. In addition, the design of the classifications cannot be such that the only Non-Highly Compensated Employees benefiting under the Plan are those with the lowest compensation and/or the shortest periods of service and who may represent the minimum number of such employees necessary to satisfy coverage under Code Section 410(b).

 

(2)
Additional different vesting schedule.
(A)
The following vesting schedule applies to the class of Participants described in (b)(2)(B) and the contributions described in (b)(2)(C) below:

 

Years of Vesting Service

Vested Interest

0

100
(B)
The vesting schedule specified in (b)(2)(A) above applies to the following class of Participants:

Participants with account balances in the Prior Plan Employer account will remain 100% vested at all times.

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(C)
The vesting schedule specified in (b)(2)(A) above applies to the following contributions: Prior Plan Employer.

Note: The eligible group defined in (B) above must be a definitely determinable group and cannot be subject to the discretion of the Employer. In addition, the design of the classifications cannot be such that the only Non-Highly Compensated Employees benefiting under the Plan are those with the lowest compensation and/or the shortest periods of service and who may represent the minimum number of such employees necessary to satisfy coverage under Code Section 410(b).

 

(3)
Additional different vesting schedule.
(A)
The following vesting schedule applies to the class of Participants described in (b)(3)(B) and the contributions described in (b)(3)(C) below:

 

Years of Vesting Service

Vested Interest

0

0

1

0

2

20

3

40

4

60

5

80

6

100
(B)
The vesting schedule specified in (b)(3)(A) above applies to the following class of Participants:

Participants with an account balance in the Prior Plan ESOP account which transferred into this Plan.

(C)
The vesting schedule specified in (b)(3)(A) above applies to the following contributions: Prior Plan ESOP.

Note: The eligible group defined in (B) above must be a definitely determinable group and cannot be subject to the discretion of the Employer. In addition, the design of the classifications cannot be such that the only Non-Highly Compensated Employees benefiting under the Plan are those with the lowest compensation and/or the shortest periods of service and who may represent the minimum number of such employees necessary to satisfy coverage under Code Section 410(b).

 

(4)
Additional different vesting schedule.
(A)
The following vesting schedule applies to the class of Participants described in (b)(4)(B) and the contributions described in (b)(4)(C) below:

 

Years of Vesting Service

Vested Interest

0

0

1

0

2

50

3

100

 

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(B)
The vesting schedule specified in (b)(4)(A) above applies to the following class of Participants:

Participants with an account balance in the Prior Plan Employer Match (Texas Bankers Match) account which transferred into the Plan from the Texas Bankers Plan .

(C)
The vesting schedule specified in (b)(4)(A) above applies to the following contributions: Prior Plan Employer Match.

Note: The eligible group defined in (B) above must be a definitely determinable group and cannot be subject to the discretion of the Employer. In addition, the design of the classifications cannot be such that the only Non-Highly Compensated Employees benefiting under the Plan are those with the lowest compensation and/or the shortest periods of service and who may represent the minimum number of such employees necessary to satisfy coverage under Code Section 410(b).

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COMPENSATION ADDENDUM

 

for Plan Name: Prosperity Bancshares, Inc. 40l(k) Profit Sharing Plan

(a)
Compensation Base Additions – Compensation shall also include the following:
(1)
None or N/A
(2)
Deemed Code Section 125 compensation (as described in Section 2.01(k)(2))
(3)
Other:

Note: If the Employer elects in (a)(3) above to include an item in Compensation only for a particular group of Employees, any eligible group defined in (a)(3) above must be a definitely determinable group and cannot be subject to the discretion of the Employer. In addition, the design of the classifications cannot be such that the only Non-Highly Compensated Employees benefiting under the Plan are those with the lowest compensation and/or the shortest periods of service and who may represent the minimum number of such employees necessary to satisfy coverage under Code Section 410(b).

(b)
Compensation Exclusions – Compensation shall exclude the following item(s):
(1)
Not applicable - There are no exclusions from the definition of Compensation. (Do not select with any of options (2) through (15) below.)
(2)
Reimbursements or other expense allowances.
(3)
Fringe benefits (cash and non-cash).
(4)
Moving expenses.
(5)
Deferred compensation.
(6)
Welfare benefits.
(7)
Unused leave (as described in Section 2.01(k)(2)(B)(ii)(II)).
(8)
Differential Wages (as defined in Section 2.01(k)(2)(B)(i)).
(9)
Overtime pay.
(10)
Bonuses.
(11)
Commissions.
(12)
The value of restricted stock or of a qualified or a non-qualified stock option granted to an Employee by the Employer to the extent such value is includable in the Employee's taxable income.
(13)
Severance pay received prior to termination of employment. (Severance pay for this purpose would be amounts other than those described in Section 2.01(k)(2)(B)(ii)) and any such amounts received following severance from employment would always be excluded.)
(14)
Amounts paid to, or on behalf of, the Employee to reduce or offset student loan repayment obligations.

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(15)
Other (List separately any items excluded from Compensation only for a particular group of Employees, with a description of that group.):

dividends.

Note: Any eligible group defined in (15) above must be a definitely determinable group and cannot be subject to the discretion of the Employer. In addition, the design of the classifications cannot be such that the only Non-Highly Compensated Employees benefiting under the Plan are those with the lowest compensation and/or the shortest periods of service and who may represent the minimum number of such employees necessary to satisfy coverage under Code Section 410(b).

Note: Generally, the Employer’s selection of option (1) or of only options (2) through (6) (as a group), (7) and/or (8) above will not require Compensation be tested to show that it meets the requirements of Code Section 414(s) and it will be deemed an acceptable definition of Compensation for 401(k) Safe Harbor Nonelective Employer Contributions. If the Employer selects any of options (9) through (15), then it must be determined that the type of Compensation excluded is irregular or additional based on all the relevant facts and circumstances and must generally meet the following requirements: (1) for Nonelective Employer Contributions other than 401(k) Safe Harbor Nonelective Employer Contributions, the Plan must either pass the requirements under Code Section 414(s) or must pass the general test under regulations issued under Code Section 401(a)(4); (2) for 401(k) Safe Harbor Nonelective Employer Contributions, Compensation must not, for Non-Highly Compensated Employees, exclude amounts over a certain dollar amount (except as otherwise provided by Code Section 401(a)(17)) and must be tested to show that it meets the requirements of Code Section 414(s); (3) for Deferral Contributions and Safe Harbor Matching Employer Contributions, a Participant must be permitted to make Deferral Contributions under the Plan sufficient to receive the full 401(k) Safe Harbor Matching Employer Contribution, determined as a percentage of Compensation meeting the requirements of Code Section 414(s); (4) for Matching Employer Contributions (other than 401(k) Safe Harbor Matching Employer Contributions), Compensation for purposes of applying the limitations on Matching Employer Contributions described in Section 6.10 of the Basic Plan Document (for deemed satisfaction of the "ACP" test) must be tested to show that it meets the requirements of Code Section 414(s). Unless elected otherwise above, Compensation will include amounts described in Section 2.01(k)(2)(A) and (B) of the Basic Plan Document and exclude deemed Code Section 125 compensation. If the Plan is determined to be top heavy (in accordance with Option 1.22 and Article 15 of the Basic Plan Document), then contributions made pursuant to Section 15.03 of the Basic Plan Document will be based on Compensation without the above chosen exclusions.

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IN-SERVICE WITHDRAWALS ADDENDUM

 

for Plan Name: Prosperity Bancshares, Inc. 40l(k) Profit Sharing Plan

(a)
Sources Available for In-Service Hardship Withdrawal - In-service hardship withdrawals are permitted from the sub-accounts specified below, subject to the conditions applicable to hardship withdrawals under Section 10.05 of the Basic Plan Document:

Deferral Contributions and vested amounts from the following sub-accounts:

QMAC QNEC

Match

Profit Sharing

Prior After-tax Rollover Prior Plan Employer Match Prior Plan ESOP

Prior Plan Employer

(b)
Other In-Service Withdrawal Provisions - In-service withdrawals from a Participant's sub-accounts specified below shall be available to Participants who satisfy the requirements also specified below (Indicate whether any such withdrawals listed are only permissible when the amounts so withdrawn are to complete a rollover described in Subsection 1.09(b) of this Adoption Agreement resulting in such amounts being retained in the Plan and treated as “designated Roth contributions” for purposes of the Plan.):

Participants with a Region Code of 16B and balance in the Prosperity Stock Fund (RT5X) are permitted to take an in-service withdrawal upon Hardship, Age 59-1/2 and both military withdrawals (HEART and Qualified Reservists Distribution) however are subject to the following restriction.

(1)
The following restrictions apply to a Participant's Account following an in-service withdrawal made pursuant to this subsection (cannot include any mandatory suspension of contributions restriction):

Participants with a Region Code of 16B and balance in the Prosperity Stock Fund (RT5X) must gain approval to initiate a Hardship Withdrawal, Age 59-1/2 withdrawal, HEART withdrawal and Qualified Reservist Withdrawal.

(c)
Restrictions on Age 59 ½ Withdrawals -
(1)
The following restrictions apply to a Participant's Account following an in-service withdrawal made pursuant to 1.19(b) (cannot include any mandatory suspension of contributions restriction):

Participants with a Region Code of 16B and balance in the Prosperity Stock Fund (RT5X) must gain approval to initiate a Hardship Withdrawal, Age 59-1/2 withdrawal, HEART withdrawal and Qualified Reservist Withdrawal.

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FORMS OF PAYMENT ADDENDUM

 

for Plan Name: Prosperity Bancshares, Inc. 40l(k) Profit Sharing Plan

(a)
In-Kind Distribution of Employer Securities. To the extent that a Participant's Account is invested in employer securities, as described in Subsection 8.02(b) of the Basic Plan Document, a Participant may elect to receive distribution of his Account under the lump sum payment method in shares of employer securities instead of in cash.

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FIDUCIARY ADDENDUM

 

for Plan Name: Prosperity Bancshares, Inc. 40l(k) Profit Sharing Plan

(a)
Amounts a service provider agrees to credit to the Plan in recognition of the service provider’s compensation for Plan services may be allocated to an ERISA account as provided in Section 19.05. If not so allocated and not utilized for the payment of Plan expenses, such amounts shall be allocated:
(1)
To the Accounts of Participants and Beneficiaries pro rata based on their Account balances in the Trust excluding amounts invested in a loan pursuant to Article 9.
(2)
To the Accounts of Participants who are employed by the Employer or a Related Employer pro rata based on their Account balances in the Trust excluding amounts invested in a loan pursuant to Article 9.
(3)
To the Accounts of Participants and Beneficiaries on a per capita basis.
(4)
To the Accounts of Participants who are employed by the Employer or a Related Employer on a per capita basis.
(5)
As follows: (A) to the extent an amount is attributable to a Permissible Investment, such amount shall be allocated to the Accounts of Participants and Beneficiaries pro rata based on the ratio that each Participant and Beneficiary’s balance in each such Permissible Investment bears to the total balances for all such Participants and Beneficiaries in such Permissible Investment; and, (B) to the extent an amount is a credit for float earnings of the Plan in excess of float expenses, such amount shall be allocated to an ERISA account from which the Administrator may pay Plan expenses and/or allocate amounts to the Accounts of Participants and Beneficiaries pro rata based on their Account balances in the Trust excluding amounts invested in a loan pursuant to Article 9.

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ADDENDUM TO ADOPTION AGREEMENT

FIDELITY BASIC PLAN DOCUMENT No. 17

 

RE: The Bipartisan Budget Act of 2018, and Code Sections 401(k) and 401(m) 2019 Final Hardship Regulations

 

Plan Name: Prosperity Bancshares, Inc. 40l(k) Profit Sharing Plan

Fidelity 5-digit Plan Number: 54092

 

PREAMBLE

Adoption and Effective Date of Amendment. This amendment of the Plan is adopted to reflect statutory changes pursuant to the Bipartisan Budget Act of 2018 (BBA), and Code Sections 401(k) and (m) 2019 Final Hardship Regulations and any related guidance. This amendment is intended as good faith compliance with the requirements of the Disaster Relief Act, the TCJA and the BBA and those final regulations and is to be construed in accordance with guidance issued thereunder. This amendment shall be effective for Plan Years beginning after December 31, 2018 with respect to Fidelity’s Pre-Approved plan and with respect to the Employer’s plan except as provided below.

Supersession of Inconsistent Provisions. This amendment shall supersede the provisions of the Plan to the extent those provisions are inconsistent with the provisions of this amendment.

Hardship Provisions

(a)
No Loan Requirement Prior to Hardship. Unless otherwise indicated below, the loan requirement described in Section 10.05(b)(1) is removed effective for Plan Years beginning after December 31, 2018.
(1)
Later effective date:
(2)
Loan Required Prior to Hardship. A Participant shall obtain all nontaxable (at the time of the loan) loans currently available under all plans maintained by the Employer or any Related Employer in order for the distribution to be considered as necessary to satisfy an immediate and heavy financial need of the Participant.

This subsection (a)(2) shall be effective:

(A)
The first day of the Plan Year beginning after December 31, 2018.
(B)
Later effective date:
(b)
Earnings. Unless otherwise indicated below, earnings accrued on Accounts specified by the Employer will be included in amounts available for withdrawals effective for Plan Years beginning after December 31, 2018.
(1)
Later effective date:
(2)
Earnings excluded from hardship withdrawals. A hardship withdrawal will exclude any earnings on the Deferral Contributions Account accrued after the later of December 31, 1988 or the last day of the last Plan Year ending before July 1, 1989.

This subsection (b)(2) shall be effective:

(A)
The first day of the Plan Year beginning after December 31, 2018.
(B)
Later effective date:
(c)
Suspension Removal. Effective for Plan Years beginning after December 31, 2018, unless otherwise indicated below, the suspension of contributions described in Section 10.05(b) of the Plan is removed.
(1)
Later effective date: (cannot be later than January 1, 2020).

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Amendment Execution

 

 

IN WITNESS WHEREOF, the Employer has caused this Amendment to be executed on the date given below.

 

 

Employer:

Prosperity Bancshares, Inc.

Employer: Prosperity Bancshares, Inc.

By:

 

By:

Title:

 

 

Title:

Date:

 

 

Date:

 

Note: Only one authorized signature is required to execute this Adoption Agreement unless the Employer's corporate policy mandates two authorized signatures.

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EFFECTIVE DATES FOR INTERIM LEGAL COMPLIANCE SNAP OFF ADDENDUM

 

for Plan Name: Prosperity Bancshares, Inc. 40l(k) Profit Sharing Plan

 

Notwithstanding any other provision of the Plan to the contrary, to comply with changes promulgated under the American Taxpayers Relief Act of 2012 (“ATRA”), final Treasury regulations under Code Section 401(k) and 401(m) (“Final 401(k) Contributions”), and proposed Treasury regulations under Code Section 401(k) and 401(m) defining qualified nonelective contributions and qualified matching contributions ("Proposed 401(k) Regulations"), the following provisions shall apply effective as of the dates set forth below:

(b)
ATRA Compliance – If selected by the Employer below and on the effective date provided below, the Plan was amended to allow Participants to convert Plan assets that are not “designated Roth contributions” to “designated Roth contributions” in accordance with ATRA, regardless of whether the assets to be converted were otherwise eligible for withdrawal under the Plan, according to the following:
(1)
In-Plan Roth Conversion. The Plan was amended, effective on the date provided in (A) below, to allow any Participant or Beneficiary meeting the requirements, if any, adopted by the Employer, to elect to have any part of the eligible portions of his Account, as designated by the Employer, that are not “designated Roth contributions” under the Plan, be considered “designated Roth contributions” for purposes of the Plan.
(A)
Effective Date: (cannot be prior to January 1, 2013)
(B)
Prior to the date specified in Subsection 1.01(g), the provisions of this amendment and restatement related to the provisions found within (a) of this Snap Off Addendum shall apply in accordance with the provisions of this amendment and restatement, except as otherwise provided below:

 

(c)
Final 401(k) Regulations Compliance – The Plan was revised to allow the Employer to amend its Plan to reduce or suspend 401(k) Safe Harbor Matching Employer Contributions or 401(k) Safe Harbor Nonelective Employer Contributions and revert to the “ADP” testing method (and, if applicable, the “ACP” testing method) if either (i) the annual safe harbor notice provided to Participants included a provision that such amendment may be made during the Plan Year or (ii) the Employer is operating at an economic loss, as described in Code Section 412(c)(2)(A). The revision was effective with respect to 401(k) Nonelective Employer Contributions for amendments adopted after May 18, 2009 and with respect to 401(k) Safe Harbor Matching Employer Contributions, for Plan Years beginning on or after January 1, 2015.
(d)
Proposed 401(k) Regulations Compliance – Effective January 18, 2017, the Plan was amended to remove any provisions that would prevent utilizing forfeitures to fund any 401(k) Safe Harbor Matching Employer Contribution, 401(k) Safe Harbor Nonelective Employer Contribution, Qualified Matching Employer Contribution, or Qualified Nonelective Employer Contribution.

 

 

 

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Pre-Approved

Defined Contribution Plan

 

Fidelity Basic Plan Document No. 17

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FMR LLC and its affiliates do not provide tax or legal advice. Nothing herein or in any attachments hereto should be construed, or relied upon, as tax or legal advice.

IRS CIRCULAR 230 DISCLOSURE: To the extent this document (including attachments), mentions or references any tax matter, it is not intended or written to be used, and cannot be used by the recipient or any other person, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party the matter addressed herein. Please consult an independent tax advisor for advice on your particular circumstances.

 

Pre-Approved Defined Contribution Plan – 06/30/2020 Basic Plan Document 17

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Pre-approved Defined

Contribution Plan

 

 

PREAMBLE. 1

ARTICLE 1. ADOPTION AGREEMENT1

ARTICLE 2. DEFINITIONS1

2.1.
Definitions1
2.2.
Interpretation and Construction of Terms11
2.3.
Special Effective Dates11

ARTICLE 3. SERVICE11

3.1.
Crediting of Eligibility Service11
3.2.
Re-Crediting of Eligibility ServiceFollowing Termination of Employment12
3.3.
Crediting of Vesting Service12
3.4.
Application of Vesting Service to a Participant's Account Following a Break in Vesting Service12
3.5.
Service with Predecessor Employer12
3.6.
Change in Service Crediting12

ARTICLE 4. PARTICIPATION12

4.1.
Date of Participation12
4.2.
Transfers Out of CoveredEmployment13
4.3.
Transfers IntoCovered Employment13
4.4.
Resumption of Participation Following Reemployment13

ARTICLE 5. CONTRIBUTIONS13

5.1.
Contributions Subjectto Limitations13
5.2.
Compensation Takeninto Account in Determining Contributions13
5.3.
Deferral Contributions13
5.4.
Employee Contributions15
5.5.
No Deductible Employee Contributions15
5.6.
Rollover Contributions16
5.7.
Qualified Nonelective Employer Contributions17
5.8.
Matching EmployerContributions17
5.9.
Qualified Matching Employer Contributions18
5.10.
Nonelective Employer Contributions18
5.11.
Vested Interest in Contributions19
5.12.
Time for Making Contributions19
5.13.
Exclusive Benefitand Return of Employer Contributions20
5.14.
Frozen Plan20

ARTICLE 6. LIMITATIONS ONCONTRIBUTIONS20

6.1.
Special Definitions20
6.2.
Code Section402(g) Limit on Deferral Contributions26
6.3.
Additional Limit on DeferralContributions ("ADP" Test)26
6.4.
Allocation and Distribution of "Excess Contributions"27
6.5.
Reductions in Deferral or Employee Contributions to Meet CodeRequirements28
6.6.
Limit on Matching EmployerContributions and Employee Contributions ("ACP" Test)28
6.7.
Allocation, Distribution, and Forfeiture of "Excess Aggregate Contributions"29

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6.8.
Income or Loss on Distributable Contributions29
6.9.
Deemed Satisfaction of "ADP" Test30
6.10.
Deemed Satisfaction of "ACP" Test With Respectto Matching EmployerContributions31
6.11.
Changing TestingMethods32
6.12.
Code Section415 Limitations33

ARTICLE 7. PARTICIPANTS' ACCOUNTS34

7.1.
Individual Accounts34
7.2.
Valuation of Accounts35

ARTICLE 8. INVESTMENT OFCONTRIBUTIONS35

8.1.
Manner of Investment35
8.2.
Investment Decisions35
8.3.
Participant Directions to Trustee36
8.4.
Life Insurance36

ARTICLE 9. PARTICIPANT LOANS36

9.1.
Special Definition36
9.2.
Participant Loans36
9.3.
Separate Loan Procedures36
9.4.
Availability of Loans37
9.5.
Limitation on Loan Amount37
9.6.
Interest Rate37
9.7.
Level Amortization37
9.8.
Security37
9.9.
Loan Repayments37
9.10.
Default37
9.11.
Effect of Termination Where Participant has Outstanding LoanBalance38
9.12.
Deemed Distributions Under Code Section72(p)38
9.13.
Determination of Vested InterestUpon Distribution WherePlan Loan is Outstanding38

ARTICLE 10. IN-SERVICE WITHDRAWALS38

10.1.
Availability of In-Service Withdrawals38
10.2.
Withdrawal of Employee Contributions39
10.3.
Withdrawal of Rollover Contributions39
10.4.
AGE 59 1/2 WITHDRAWALS39
10.5.
Hardship Withdrawals39
10.6.
Additional In-Service Withdrawal Rules40
10.7.
Restrictions on In-Service Withdrawals40
10.8.
Qualified Reservist Distributions40
10.9.
Age 62 Distribution of Money Purchase Benefits41

ARTICLE 11. RIGHT TO BENEFITS41

11.1.
Normal or Early Retirement41
11.2.
Late Retirement41
11.3.
Disability Retirement41
11.4.
DEATH41
11.5.
Other Termination of Employment42
11.6.
Application for Distribution42
11.7.
Application of Vesting Schedule Following Partial Distribution42
11.8.
Forfeitures42
11.9.
Application of Forfeitures42
11.10.
Reinstatement of Forfeitures43
11.11.
Adjustment for Investment Experience43

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ARTICLE 12. DISTRIBUTIONS43

12.1.
Restrictions on Distributions43
12.2.
Timing of Distribution Following Retirement or Termination of Employment44
12.3.
Participant Consentto Distribution44
12.4.
Required Commencement of Distribution to Participants44
12.5.
Required Commencement of Distribution to Beneficiaries45
12.6.
Whereabouts of Participants and Beneficiaries46

ARTICLE 13. FORM OFDISTRIBUTION46

13.1.
Normal Form of Distribution Under Profit SharingPlan46
13.2.
Cash Out Of SmallAccounts46
13.3.
Minimum Distributions46
13.4.
Direct Rollovers49
13.5.
Notice Regarding Timing and Formof Distribution50
13.6.
Determination of Method of Distribution50
13.7.
Notice to Trustee50

ARTICLE 14. SUPERSEDING ANNUITY DISTRIBUTION PROVISIONS51

14.1.
Special Definitions51
14.2.
Applicability51
14.3.
Annuity Form of Payment51
14.4.
"Qualified Joint and Survivor Annuity" and "Qualified Preretirement Survivor

Annuity" Requirements52

14.5.
Waiver of the "Qualified Joint and Survivor Annuity" and/or "Qualified Preretirement Survivor Annuity" Rights52
14.6.
Spouse's Consentto Waiver53
14.7.
Notice Regarding "Qualified Joint and Survivor Annuity"53
14.8.
Notice Regarding "Qualified Preretirement Survivor Annuity"53
14.9.
Former Spouse53

ARTICLE 15. TOP-HEAVY PROVISIONS53

15.1.
Definitions53
15.2.
Application55
15.3.
Minimum Contribution55
15.4.
Determination of Minimum Required Contribution56
15.5.
Accelerated Vesting56
15.6.
Exclusion of Collectively-Bargained Employees56

ARTICLE 16. AMENDMENT AND TERMINATION56

16.1.
Amendments by the Employer that do not Affect Pre-Approved Status56
16.2.
Amendments by the EmployerAdopting Provisions not Included in Pre-Approved Plan,

through the PlanSuperseding Provisions Addendum57

16.3.
Amendment by the Pre-Approved Plan Provider57
16.4.
Amendments Affecting Vested Interest and/orAccrued Benefits57
16.5.
Retroactive Amendments made by Pre-Approved Plan Provider57
16.6.
Termination and Discontinuation of Contributions57
16.7.
Distribution upon Termination of the Plan58
16.8.
Merger or Consolidation of Plan; Transferof Plan Assets58

ARTICLE 17. AMENDMENT AND CONTINUATION OF PRIOR PLAN;TRANSFER OF FUNDSTO OR

FROM OTHER QUALIFIED PLANS58

17.1.
Amendment and Continuation of Prior Plan58
17.2.
Transfer of Funds froman Existing Plan59
17.3.
Transfer of Assets fromTrust60

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ARTICLE 18. MISCELLANEOUS61

18.1.
Communication to Participants61
18.2.
Limitation of Rights61
18.3.
Nonalienability of Benefits61
18.4.
Qualified DomesticRelations Orders Procedures61
18.5.
Application of Plan Provisions for Multiple EmployerPlans62
18.6.
Veterans Reemployment Rights62
18.7.
Facility of Payment62
18.8.
Information betweenEmployer and/or Administrator and Trustee62
18.9.
Effect of Failure to Qualify UnderCode62
18.10.
Directions, Notices and Disclosure62
18.11.
Governing Law63
18.12.
Discharge of Duties by Fiduciaries63

ARTICLE 19. PLAN ADMINISTRATION63

19.1.
Powers and Responsibilities of the Administrator 63
19.2.
Nondiscriminatory Exercise of Authority 63
19.3.
Claims and Review Procedures 63
19.4.
Named Fiduciary 64
19.5.
Costs of Administration 64

ADDENDUM RE: THE BIPARTISAN BUDGETACT OF 2018,AND CODE SECTIONS401(K) AND 401(M)

2019 FINAL HARDSHIP REGULATIONS 65

AMENDMENT TO FIDELITY BASIC PLAN DOCUMENT NO. 17 RE: CORONAVIRUS AID, RELIEF, AND ECONOMIC SECURITY ACT 67

 

 

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Preamble.

This Pre-Approved Plan consists of two parts: (1) an Adoption Agreement that is a separate document incorporated by reference into this Basic Plan Document; and (2) this Basic Plan Document. Each part of the Pre-Approved Plan contains substantive provisions that are integral to the operation of the plan. The Adoption Agreement is the means by which an adopting Employer elects the optional provisions that shall apply under its plan. The Basic Plan Document describes the standard provisions elected in the Adoption Agreement. The Pre-Approved Plan is intended to qualify under Code Section 401(a). Depending upon the Adoption Agreement completed by an adopting Employer, the Pre-Approved Plan may be used to implement a profit sharing plan with or without a cash or deferred arrangement intended to qualify under Code Section 401(k). To the extent the Employer selects provisions available to it through an Addendum to the Adoption Agreement, such Addendum will be included with the Plan’s Adoption Agreement and the provisions in such Addendum will supplement or alter provisions appearing in the Adoption Agreement in the manner described within that Addendum. Provisions appearing on the Plan Superseding Provisions Addendum of the Adoption Agreement, if present, supersede any conflicting provisions appearing in the Adoption Agreement, Basic Plan Document or any addendum to either in the manner described therein.

 

Article 1. Adoption Agreement.

 

Article 2. Definitions.

2.1.
Definitions.

Wherever used herein, the following terms have the meanings set forth below, unless a different meaning is clearly required by the context:

2.1.1.
"Account" means an account established for the purpose of recording any contributions made on behalf of a Participant and any income, expenses, gains, or losses incurred thereon. The Administrator shall establish and maintain sub-accounts within a Participant's Account as necessary to depict accurately a Participant's interest under the Plan.
2.1.2.
"Active Participant" means any Eligible Employee who has met the requirements of Article 4 to participate in the Plan and who may be entitled to receive allocations under the Plan.
2.1.3.
"Administrator" means the Employer adopting this Plan, as listed in Subsection 1.02(a) of the Adoption Agreement, or another person or entity designated by the Employer in Subsection 1.01(c) of the Adoption Agreement.
2.1.4.
"Adoption Agreement" means Article 1, under which the Employer establishes and adopts, or amends the Plan and designates the optional provisions selected by the Employer. The provisions of the Adoption Agreement shall be an integral part of the Plan.
2.1.5.
"Annuity Starting Date" means the first day of the first period for which an amount is payable as an annuity or in any other form permitted under the Plan.
2.1.6.
"Basic Plan Document" means this Fidelity Pre-Approved Plan document, qualified with the Internal Revenue Service as Basic Plan Document No. 17.
2.1.7.
"Beneficiary" means the person or persons (including a trust) entitled under Section 11.04 or 14.04 to receive benefits under the Plan upon the death of a Participant.
2.1.8.
"Break in Vesting Service" means, unless provided otherwise in the Adoption Agreement, a 12-consecutive-month period beginning on an Employee's Severance Date or any anniversary thereof in which the Employee is not credited with an Hour of Service. Notwithstanding the foregoing, the following special rules apply in determining whether an Employee who is on leave has incurred a Break in Vesting Service:
2.1.8.1.
If an individual is absent from work because of maternity/paternity leave on the first anniversary of his Severance Date, the 12-consecutive-month period beginning on the individual's Severance Date shall not constitute a Break in Vesting Service. For purposes of this paragraph, "maternity/paternity leave" means a leave of absence (i) by reason of the pregnancy of the individual, (ii) by reason of the birth of a


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child of the individual, (iii) by reason of the placement of a child with the individual in connection with the adoption of such child by the individual, or (iv) for purposes of caring for a child for the period beginning immediately following such birth or placement.

2.1.8.2.
If an individual is absent from work because of FMLA leave and returns to employment with the Employer or a Related Employer following such FMLA leave, he shall not incur a Break in Vesting Service due to such FMLA leave. For purposes of this paragraph, "FMLA leave" means an approved leave of absence pursuant to the Family and Medical Leave Act of 1993.
2.1.9.
"Catch-Up Contribution" means any Deferral Contribution made to the Plan by the Employer in accordance with the provisions of Subsection 5.03(a).
2.1.10.
"Code" means the Internal Revenue Code of 1986, as amended from time to time.
2.1.11.
"Compensation" means the base compensation described in (1) below paid or made available to an Eligible Employee by the Employer (in the course of the Employer's trade or business) for services to the Employer as an Eligible Employee with the adjustments described in (2) below.
2.1.11.1.
Base Compensation. One of the following shall be elected by the Employer in Subsection 1.05(a) as the base compensation:
2.1.11.1.1.
The W-2 definition shall include wages as defined in Code Section 3401(a) (for purposes of income tax withholding at the source) plus amounts that would be included in wages but for an election under Code Section 125(a), 132(f)(4), 402(e)(3), 402(h)(1)(B), 402(k), or 457(b) and all other payments of compensation to an Eligible Employee for which the Employer is required to furnish the Eligible Employee a written statement under Code Sections 6041(d), 6051(a)(3) and 6052. Compensation must be determined without regard to any rules under Code Section 3401(a) that limit the remuneration included in wages based on the nature or location of the employment or the services performed (such as the exception for agricultural labor in Code Section 3401(a)(2)).
2.1.11.1.2.
The Code Section 3401(a) wages definition shall include wages within the meaning of Code Section 3401(a) for the purposes of income tax withholding at the source but determined without regard to any rules that limit the remuneration included in wages based on the nature or location of the employment or the services performed (such as the exception for agricultural labor in Code Section 3401(a)(2)) plus amounts that would be included in wages but for an election under Code Section 125(a), 132(f)(4), 402(e)(3), 402(h)(1)(B), 402(k), or 457(b).
2.1.11.1.3.
The Code Section 415 definition shall include wages, salaries, and fees for professional services and other amounts received (without regard to whether or not an amount is paid in cash) for personal services actually rendered in the course of employment with the employer maintaining the plan to the extent that the amounts are includible in gross income (or would have been includible in gross income but for the Eligible Employee’s election under Code Section 125, 132(f)(4), 402(e)(3), 402(h)(1)(B), 403(b), or 457(b)), including, but not limited to, commissions paid salespersons, compensation for services on the basis of a percentage of profits, commissions on insurance premiums, tips, bonuses, fringe benefits, and reimbursements, or other expense allowances under a nonaccountable plan (as described in Section 1.62-2(c)of the Income Tax Regulations), and excluding the following:
2.1.11.1.3.1.
Employer contributions (other than elective contributions described in Code Section 402(e)(3), 408(k)(6), 408(p)(2)(A)(i), or 457(b)) to a plan of deferred compensation (including a simplified employee pension described in Code Section 408(k) or a simple retirement account described in Code Section 408(p), and whether or not qualified) to the extent such contributions are not includible in the employee’s gross income for the taxable year in which contributed, and any distributions (whether or not includible in gross income when distributed) from a plan of deferred compensation (whether or not qualified), other than, if the employer so elects in the Compensation Addendum to the Adoption Agreement, amounts received during the year by an


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employee pursuant to a nonqualified unfunded deferred compensation plan to the extent includible in gross income;

2.1.11.1.3.2.
Amounts realized from the exercise of a nonstatutory stock option (that is, an option other than a statutory stock option as defined in Section 1.421-1(b) of the Treasury Regulations), or when restricted stock (or property) held by the employee either becomes freely transferable or is no longer subject to a substantial risk of forfeiture;
2.1.11.1.3.3.
Amounts realized from the sale, exchange or other disposition of stock acquired under a statutory stock option;
2.1.11.1.3.4.
Other amounts that receive special tax benefits, such as premiums for group-term life insurance (but only to the extent that the premiums are not includible in the gross income of the employee and are not salary reduction amounts that are described in Code Section 125);
2.1.11.1.3.5.
Other items of remuneration that are similar to any of the items listed in (i) through (iv).
2.1.11.2.
Adjustments. Self-Employed Individuals will have the Compensation described in (A) below. Unless specifically excluded by the Employer’s election in Subsection 1.05(b), the amounts described in

(B) shall be included in Compensation. Additionally, Compensation excludes any amounts elected by the Employer in Subsection 1.05(b) or (c), as applicable, of the Adoption Agreement and any severance amounts (for purposes of this Subsection 2.01(j), “severance amounts” are amounts paid after severance from employment except any such amounts described in (B) below). Deemed Code Section 125 compensation (amounts under a plan of the Employer that are not available to a Participant in cash in lieu of group health coverage, because the Participant is unable to certify that he has other health coverage) shall only be included in the definition of Compensation if so elected by the Employer on the Compensation Addendum to the Adoption Agreement.

2.1.11.2.1.
Self-Employed Individuals. Notwithstanding the foregoing, for any Self-Employed Individual, Compensation means Earned Income; provided, however, that if the Employer elects to exclude specified items from Compensation, such Earned Income shall be adjusted in a similar manner so that it is equivalent under regulations issued under Code Section 414(s) to Compensation for Participants who are not Self-Employed Individuals. "Earned Income" means the net earnings of a Self-Employed Individual derived from the trade or business with respect to which the Plan is established and for which the personal services of such individual are a material income-providing factor, excluding any items not included in gross income and the deductions allocated to such items, except that net earnings shall be determined with regard to the deduction allowed under Code Section 164(f), to the extent applicable to the Employer. Net earnings shall be reduced by contributions of the Employer to any qualified plan, to the extent a deduction is allowed to the Employer for such contributions under Code Section 404.
2.1.11.2.2.
Includable Amounts. Unless otherwise elected by the Employer in Subsection 1.05(b) or (c), as applicable, of the Adoption Agreement, Compensation includes the following:
2.1.11.2.2.1.
Differential Wages as defined below; and
2.1.11.2.2.2.
any of the following, provided payment is made within the post-severance period defined below:
2.1.11.2.2.2.1.
a payment of regular compensation for services during the Eligible Employee’s regular working hours, or compensation for services outside the Eligible Employee’s regular working hours (such as overtime or shift differential), commissions, bonuses, or other similar payments to the extent such payment would have been made prior to a severance from employment if the Eligible Employee had continued in employment with the Employer;


(II) payments for “unused leave” (i.e., unused accrued bona fide sick, vacation,

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or other leave, but only if the Eligible Employee would have been able to use the leave if employment had continued); and

(III) payments received by a Participant pursuant to a nonqualified unfunded deferred compensation plan, but only if the payment would have been paid to the Participant at the same time if the Participant had not severed employment and only to the extent that the payment is includible in the Participant’s gross income.

The following terms have the following meanings:

2.1.11.2.3.
An Eligible Employee has a “severance from employment” when (i) the employee ceases to be an employee of an employer (applying the aggregation rules in Code Section 414) maintaining a plan and (ii) in connection with a change of employment, the individual’s new employer does not maintain such plan with respect to the individual. The determination of whether an Eligible Employee ceases to be an employee of an employer maintaining a plan is based on all of the relevant facts and circumstances.
2.1.11.2.4.
“Differential Wages” means Compensation paid to an Employee by the Employer with regard to military service meeting the definition of differential wage payment found in Code Section 3401(h)(2).
2.1.11.2.5.
The "post-severance period" means the period beginning on the Eligible Employee's severance from employment and ending on the later of (i) 2-1/2 months after or (ii) the end of the Limitation Year that includes the date of the Eligible Employee’s severance from employment.
2.1.11.3.
Timing Rules. Compensation shall generally be based on the amount actually paid or made available to the Eligible Employee during the Plan Year or, for purposes of Article 5, if so elected by the Employer in Subsection 1.05(c) of the Adoption Agreement, during that portion of the Plan Year during which the Eligible Employee is an Active Participant. Compensation is treated as paid on a date if it is actually paid on that date or it would have been paid on that date but for an election under Code Section 125, 132(f)(4), 401(k), 403(b), 408(k), 408(p)(2)(A)(i), or 457(b). If the Plan Year and the Limitation Year are based on the same 12-month period, Compensation may include amounts earned, but not paid during the Plan Year solely because of the timing of pay periods and pay dates, provided:
2.1.11.3.1.
such amounts are paid during the first few weeks of the next Plan Year;
2.1.11.3.2.
such amounts are included on a uniform and consistent basis with respect to all similarly situated Participants; and
2.1.11.3.3.
no such amounts are included in more than one Plan Year.
2.1.11.4.
Short Plan Years. If the initial Plan Year of a new plan consists of fewer than 12 months, calculated from the Effective Date listed in Subsection 1.01(g)(1) of the Adoption Agreement through the end of such initial Plan Year, Compensation for such initial Plan Year shall be determined from such Effective Date through the end of the initial Plan Year. Notwithstanding the foregoing, if selected in Subsection 1.05 of the Adoption Agreement, for purposes of allocating Nonelective Employer Contributions under Section 1.12 of the Adoption Agreement (other than 401(k) Safe Harbor Nonelective Employer Contributions), Compensation for the initial Plan Year shall be determined by using the 12-month period ending on the last day of the Plan Year.
2.1.11.5.
Annual Compensation Limit (Code Section 401(a)(17) Limit). The annual Compensation of each Active Participant taken into account for determining benefits provided under the Plan for any 12-month determination period shall not exceed the annual Compensation limit under Code Section 401(a)(17) as in effect on the first day of the determination period (e.g., $275,000 for determination periods beginning in 2018). A "determination period" means the Plan Year or other 12-consecutive-month period over which Compensation is otherwise determined for purposes of the Plan (e.g., the Limitation Year).


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The annual Compensation limit under Code Section 401(a)(17) shall be adjusted by the Secretary to reflect increases in the cost of living, as provided in Code Section 401(a)(17)(B); provided, however, that the dollar increase in effect on January 1 of any calendar year is effective for determination periods beginning in such calendar year. If a Plan determines Compensation over a determination period that contains fewer than 12 calendar months (a "short determination period"), then the Compensation limit for such "short determination period" is equal to the Compensation limit for the calendar year in which the "short determination period" begins multiplied by the ratio obtained by dividing the number of months (counting any portion of a month as a whole month) in the "short determination period" by 12; provided, however, that such proration shall not apply if there is a "short determination period" due to the Employer’s election in Subsection 1.05(c) of the Adoption Agreement to determine contributions based only on Compensation paid during the portion of the Plan Year during which an individual was an Active Participant.

Rather than requiring an Active Participant to cease making Deferral Contributions for a Plan Year after his Compensation has reached the annual Compensation limit under Code Section 401(a)(17), an Active Participant may make Deferral Contributions until his total Deferral Contributions for a Plan Year equals the product of (i) such Active Participant's Compensation for the Plan Year up to the annual Compensation limit multiplied by (ii) the deferral limit specified in Subsection 1.07(a)(1)(A) of the Adoption Agreement or Subsection 5.03(a), as applicable. Also, rather than requiring an Active Participant to cease making Employee Contributions once the annual Compensation limit is reached, an Active Participant may make Employee Contributions until his total Employee Contributions for a Plan Year equals the product of (i) such Active Participant's Compensation for the Plan Year up to the annual Compensation limit multiplied by (ii) the contribution limit specified in Subsection 1.08(a) of the Adoption Agreement or Section 6.05, as applicable.

2.1.12.
"Contribution Period" means the period for which Matching Employer and Nonelective Employer Contributions are made and calculated. The Contribution Period for Matching Employer Contributions described in Subsection 1.11 of the Adoption Agreement is the period specified by the Employer in Subsection 1.11(d) of the Adoption Agreement.

The Contribution Period for Nonelective Employer Contributions is the Plan Year, unless the Employer designates a different Contribution Period in Subsection 1.12(c) of the Adoption Agreement.

2.1.13.
"Deferral Contribution" means any contribution made to the Plan by the Employer in accordance with the provisions of Section 5.03.
2.1.14.
"Early Retirement Age" means the early retirement age specified in Subsection 1.14(b) of the Adoption Agreement, if any.
2.1.15.
"Effective Date" means the effective date specified by the Employer in Subsection 1.01(g)(1). The Employer may select special Effective Dates with respect to specified Plan provisions, as set forth in Section (a) of the Special Effective Dates Addendum to the Adoption Agreement. In the event that another plan is merged into and made a part of the Plan, the effective date of the merger shall be reflected in the Plan Mergers Addendum to the Adoption Agreement. Any Effective Date which is given in the Plan shall be construed to mean that the prior provision or merging plan existed until the last minute of the last day prior to that Effective Date and that the new provision or merger is effective on the first minute of the stated Effective Date.
2.1.16.
"Eligibility Computation Period" means each 12-consecutive-month period beginning with an Employee's Employment Commencement Date and each anniversary thereof.
2.1.17.
"Eligibility Service" means an Employee's service that is taken into account in determining his eligibility to participate in the Plan as may be required under Subsection 1.04(b) of the Adoption Agreement. Eligibility Service shall be credited in accordance with Article 3.
2.1.18.
"Eligible Employee" means any Employee of the Employer who is in the class of Employees eligible to participate in the Plan. The Employer must specify in Subsection 1.04(d) of the Adoption Agreement any Employee or class of Employees not eligible to participate in the Plan. Regardless of the provisions of Subsection 1.04(d), the following Employees are automatically excluded from eligibility to participate in the Plan:


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(1) any individual who is a signatory to a contract, letter of agreement, or other document that acknowledges his status as an independent contractor not entitled to benefits under the Plan or any individual (other than a Self-Employed Individual) who is not otherwise classified by the Employer as a common law employee, even if such independent contractor or other individual is later determined to be a common law employee; and

(2) any Employee who is a resident of Puerto Rico.

If the Employer elects, in Subsection 1.04(d)(2)(A) of the Adoption Agreement, to exclude collective bargaining employees from the eligible class, the exclusion applies to any Employee of the Employer included in any unit of Employees covered by a collective bargaining agreement between employee representatives and one or more employers, unless the collective bargaining agreement requires the Employee to be covered under the Plan. The term "employee representatives" does not include any organization more than half the members of which are owners, officers, or executives of the Employer.

If the Employer does not elect, in Subsection 1.04(d)(2)(C) of the Adoption Agreement, to exclude Leased Employees from the eligible class, contributions or benefits provided by the leasing organization which are attributable to services performed for the Employer shall be treated as provided by the Employer and there shall be no duplication of benefits under this Plan.

Anything to the contrary herein notwithstanding, unless the Employer elects to exclude statutory employees who are full-time life insurance salespersons (as described in Code Section 7701(a)(20)) from the eligible class in Subsection 1.04(d)(2)(E) of the Adoption Agreement, such statutory employees are Eligible Employees.

2.1.19.
"Employee" means any common law employee (or statutory employee who is a full-time life insurance salesperson as described in Code Section 7701(a)(20)) of the Employer or a Related Employer, any Self-Employed Individual, and any Leased Employee. Notwithstanding the foregoing, a Leased Employee shall not be considered an Employee if Leased Employees do not constitute more than 20 percent of the Employer's non-highly compensated work-force (taking into account all Related Employers) and the Leased Employee is covered by a money purchase pension plan maintained by the leasing organization and providing (1) a nonintegrated employer contribution rate of at least 10 percent of compensation, as defined for purposes of Code Section 415(c)(3), (2) full and immediate vesting, and (3) immediate participation by each employee of the leasing organization.
2.1.20.
"Employee Contribution" means any after-tax contribution made by an Active Participant to the Plan.
2.1.21.
"Employer" means the employer named in Subsection 1.02(a) of the Adoption Agreement and any Related Employer designated in the Participating Employers Addendum to the Adoption Agreement. If the Employer has elected in Subsection (c) of the Participating Employers Addendum to the Adoption Agreement that the term "Employer" includes all Related Employers, an employer that becomes a Related Employer as a result of an asset or stock acquisition, merger or other similar transaction shall not be included in the term "Employer" for periods prior to the first day of the second Plan Year beginning after the date of such transaction, unless the Employer has designated therein to accept such Related Employer as a participating employer prior to that date. Notwithstanding the foregoing, the term "Employer" for purposes of authorizing any particular action under the Plan means solely the employer named in Subsection 1.02(a).

If the organization or other entity named in the Adoption Agreement is a sole proprietor or a professional corporation and the sole proprietor of such proprietorship or the sole shareholder of the professional corporation dies, then the legal representative of such sole proprietor or shareholder shall be deemed to be the Employer until such time as, through the disposition of such sole proprietor's or sole shareholder's estate or otherwise, any organization or other entity succeeds to the interests of the sole proprietor in the proprietorship or the sole shareholder in the professional corporation. The legal representative of a sole proprietor or shareholder shall be

(1) the person appointed as such by the sole proprietor or shareholder prior to his death under a legally enforceable power of attorney, or, if none, (2) the executor or administrator of the sole proprietor's or shareholder's estate.

If a participating Employer designated through Subsection 1.02(b) of the Adoption Agreement is not related to the Employer (hereinafter "un-Related Employer"), the term "Employer" includes such un-Related Employer and the provisions of Section 18.05 shall apply.

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2.1.22.
"Employment Commencement Date" means the date on which an Employee first performs an Hour of Service.
2.1.23.
"Entry Date" means the date(s) specified by the Employer in Subsection 1.04(e) of the Adoption Agreement as of which an Eligible Employee who has met the applicable eligibility requirements begins to participate in the Plan. The Employer may specify different Entry Dates for purposes of eligibility to participate in the Plan for purposes of (1) making Deferral Contributions and (2) receiving allocations of Matching and/or Nonelective Employer Contributions.
2.1.24.
"ERISA" means the Employee Retirement Income Security Act of 1974, as from time to time amended.
2.1.25.
"401(k) Safe Harbor Matching Employer Contribution" means any Matching Employer Contribution made by the Employer to the Plan in accordance with Subsection 1.11(a)(3) or the Matching Employer Contributions Addendum to the Adoption Agreement, Section 5.08, and Section 6.09, that is intended to satisfy the requirements of Code Section 401(k)(12)(B) or 401(k)(13)(D)(i)(I). 401(k) Safe Harbor Matching Employer Contributions are subject to the same distribution restrictions as Qualified Matching Employer Contributions pursuant to applicable regulations and will only satisfy the “ACP” test if the requirements of Section 6.10 are met.
2.1.26.
"401(k) Safe Harbor Nonelective Employer Contribution" means any Nonelective Employer Contribution made by the Employer to the Plan in accordance with Subsection 1.12(a)(3) or the Nonelective Employer Contributions Addendum to the Adoption Agreement, Section 5.10, and Section 6.09, that is intended to satisfy the requirements of Code Section 401(k)(12)(C) or 401(k)(13)(D)(i)(II). 401(k) Safe Harbor Nonelective Employer Contributions are subject to the same distribution restrictions as Qualified Nonelective Employer Contributions pursuant to applicable regulations and will only satisfy the “ACP” test if the requirements of Section

6.10 are met.

(aa) "Fund Share" means the share, unit, or other evidence of ownership in a Permissible Investment.

(bb) "Highly Compensated Employee" means both highly compensated active Employees and highly compensated former Employees.

A highly compensated active Employee includes any Employee who performs service for the Employer during the "determination year" and who (1) at any time during the "determination year" or the "look-back year" was a five percent owner or (2) received “415 Compensation” (as defined in Section 6.01(m)) from the Employer during the "look-back year" in excess of the dollar amount specified in Code Section 414(q)(1)(B)(i) adjusted pursuant to Code Section 415(d) (e.g., $120,000 for "determination years" beginning in 2018 and "look-back years" beginning in 2017) and, if elected by the Employer in Subsection 1.06(d)(1) of the Adoption Agreement, was a member of the top-paid group for such year.

For this purpose, the "determination year" shall be the Plan Year. The "look-back year" shall be the twelve-month period immediately preceding the "determination year", unless the Employer has elected in Subsection 1.06(c)(1) of the Adoption Agreement to make the "look-back year" the calendar year beginning within the preceding Plan Year.

A highly compensated former Employee includes any Employee who separated from service (or was deemed to have separated) prior to the "determination year", performs no service for the Employer during the "determination year", and was a highly compensated active Employee for either the separation year or any "determination year" ending on or after the Employee's 55th birthday, as determined under the rules in effect for determining Highly Compensated Employees for such separation year or "determination year".

The determination of who is a Highly Compensated Employee, including the determinations of the number and identity of Employees in the top-paid group, shall be made in accordance with Code Section 414(q) and the Treasury Regulations issued thereunder.

For purposes of this Subsection 2.01(bb), if the initial Plan Year of a new plan consists of fewer than 12 months, calculated from the Effective Date listed in Subsection 1.01(g)(1) of the Adoption Agreement through the end of such initial Plan Year, Compensation for such initial Plan Year shall be determined over the 12-month period ending on the last day of the Plan Year.


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(cc) "Hour of Service", with respect to any individual, means:

(1)
Each hour for which the individual is directly or indirectly paid, or entitled to payment, for the performance of duties for the Employer or a Related Employer, each such hour to be credited to the individual for the Eligibility Computation Period in which the duties were performed;
(2)
Each hour for which the individual is directly or indirectly paid, or entitled to payment, by the Employer or a Related Employer (including payments made or due from a trust fund or insurer to which the Employer contributes or pays premiums) on account of a period of time during which no duties are performed (irrespective of whether the employment relationship has terminated) due to vacation, holiday, illness, incapacity, disability, layoff, jury duty, military duty, or leave of absence, each such hour to be credited to the individual for the Eligibility Computation Period in which such period of time occurs, subject to the following rules:
a.
No more than 501 Hours of Service shall be credited under this paragraph (2) on account of any single continuous period during which the individual performs no duties, unless the individual performs no duties because of military duty, the individual's employment rights are protected by law, and the individual returns to employment with the Employer or a Related Employer during the period that his employment rights are protected under Federal law;
b.
Hours of Service shall not be credited under this paragraph (2) for a payment which solely reimburses the individual for medically-related expenses, or which is made or due under a plan maintained solely for the purpose of complying with applicable worker's compensation, unemployment compensation or disability insurance laws; and
c.
If the period during which the individual performs no duties falls within two or more Eligibility Computation Periods and if the payment made on account of such period is not calculated on the basis of units of time, the Hours of Service credited with respect to such period shall be allocated between not more than the first two such Eligibility Computation Periods on any reasonable basis consistently applied with respect to similarly situated individuals;
(3)
Each hour not counted under paragraph (1) or (2) for which he would have been scheduled to work for the Employer or a Related Employer during the period that he is absent from work because of military duty, provided the individual's employment rights are protected under Federal law and the individual returns to work with the Employer or a Related Employer during the period that his employment rights are protected, each such hour to be credited to the individual for the Eligibility Computation Period for which he would have been scheduled to work; and
(4)
Each hour not counted under paragraph (1), (2), or (3) for which back pay, irrespective of mitigation of damages, has been either awarded or agreed to be paid by the Employer or a Related Employer, shall be credited to the individual for the Eligibility Computation Period to which the award or agreement pertains rather than the Eligibility Computation Period in which the award, agreement, or payment is made.

Hours of Service attributable to a predecessor employer pursuant to Section 3.05 shall be considered as Hours of Service attributable to the Employer. For purposes of paragraphs (2) and (4) above, Hours of Service shall be calculated in accordance with the provisions of Section 2530.200b-2(b) and (c) of the Department of Labor regulations, which are incorporated herein by reference.

If the Employer does not maintain records that accurately reflect the actual Hours of Service to be credited to an Employee, 190 Hours of Service will be credited to the Employee for each month worked, unless the Employer has elected to credit Hours of Service in accordance with one of the other equivalencies set forth in paragraph (e) of Department of Labor Regulation Section 2530.200b-3, as provided in the Eligibility, Service and Vesting Addendum to the Adoption Agreement.

(dd) "Inactive Participant" means any individual who was an Active Participant, but is no longer an Eligible Employee and who has an Account under the Plan.


(ee) "Investment Fiduciary" means the Administrator or another person or entity designated by the Employer in

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Subsection 1.01(c) of the Adoption Agreement having the responsibility for all investment-related decisions described throughout the Plan, other than those made by Participants and Beneficiaries pursuant to Section 1.24 of the Adoption Agreement.

(ff) "Leased Employee" means any individual who provides services to the Employer or a Related Employer (the "recipient") but is not otherwise an employee of the recipient if (1) such services are provided pursuant to an agreement between the recipient and any other person (the "leasing organization"), (2) such individual has performed services for the recipient (or for the recipient and any related persons within the meaning of Code Section 414(n)(6)) on a substantially full-time basis for at least one year, and (3) such services are performed under primary direction of or control by the recipient. The determination of who is a Leased Employee shall be made in accordance with any rules and regulations issued by the Secretary of the Treasury or his delegate.

(gg) "Limitation Year" means the 12-consecutive-month period designated by the Employer in Subsection 1.01(f) of the Adoption Agreement. If no other Limitation Year is designated by the Employer, the Limitation Year shall be the calendar year. All qualified plans of the Employer and any Related Employer must use the same Limitation Year. If the Limitation Year is amended to a different 12-consecutive-month period, the new Limitation Year must begin on a date within the Limitation Year in which the amendment is made.

(hh) "Matching Employer Contribution" means any contribution made by the Employer to the Plan in accordance with Section 5.08 or 5.09 on account of an Active Participant's eligible contributions, as elected by the Employer in Subsection 1.11(c) of the Adoption Agreement.

(ii) "Nonelective Employer Contribution" means any contribution made by the Employer to the Plan in accordance with Section 5.10.

(jj) "Non-Highly Compensated Employee" means any Employee who is not a Highly Compensated Employee.

(kk) "Normal Retirement Age" means the normal retirement age specified in Subsection 1.14(a) of the Adoption Agreement. If the Employer enforces a mandatory retirement age in accordance with Federal law, the Normal Retirement Age is the lesser of that mandatory age or the age specified in Subsection 1.14(a).

(ll) "Participant" means any individual who is either an Active Participant or an InactiveParticipant.

(mm) "Permissible Investment" means each investment available for investment of assets of the Plan as generally described in the Service Agreement.

(nn) "Plan" means the plan established by the Employer in the form of the Pre-Approved Plan, as set forth herein as a new plan or as an amendment to an existing plan, by executing the Adoption Agreement, together with any and all amendments hereto.

(oo) "Plan Year" means the 12-consecutive-month period ending on the date designated in Subsection 1.01(d) of the Adoption Agreement, except that the initial Plan Year of a new Plan may consist of fewer than 12 months, calculated from the Effective Date listed in Subsection 1.01(g)(1) of the Adoption Agreement through the end of such initial Plan Year, in which event Compensation for such initial Plan Year shall be treated as provided in Subsection 2.01(k). Additionally, in the event the Plan has a short Plan year, i.e., a Plan Year consisting of fewer than 12 months, otherwise applicable limits and requirements that are applied on a Plan Year basis shall be prorated, but only if and to the extent required by law.

(pp) "Pre-Approved Plan" means the Pre-Approved Provider’s plan as approved by the IRS. (qq) "Pre-Approved Plan Provider" means FMR LLC or its successor.

(rr) "Qualified Matching Employer Contribution" means any contribution made by the Employer to the Plan on account of Deferral Contributions or Employee Contributions made by or on behalf of Active Participants in accordance with Section 5.09, that may be included in determining whether the Plan meets the "ADP" test described in Section 6.03.


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(ss) "Qualified Nonelective Employer Contribution" means any contribution made by the Employer to the Plan in accordance with Section 5.07.

(tt) "Reemployment Commencement Date" means the date on which an Employee who terminates employment with the Employer and all Related Employers first performs an Hour of Service following such termination of employment.

(uu) "Related Employer" means any employer other than the Employer named in Subsection 1.02(a) of the Adoption Agreement if the Employer and such other employer are members of a controlled group of corporations (as defined in Code Section 414(b)) or an affiliated service group (as defined in Code Section 414(m)), or are trades or businesses (whether or not incorporated) which are under common control (as defined in Code Section 414(c)), or such other employer is required to be aggregated with the Employer pursuant to regulations issued under Code Section 414(o).

(x)
"Required Beginning Date" means:
a.
for a Participant who is not a five percent owner, April 1 of the calendar year following the calendar year in which occurs the later of (i) the Participant's retirement or (ii) the Participant's attainment of age 70 1/2; provided, however, that a Participant may elect to have his Required Beginning Date determined without regard to the provisions of clause (i).
b.
for a Participant who is a five percent owner, April 1 of the calendar year following the calendar year in which the Participant attains age 70 1/2.

Once the Required Beginning Date of a five percent owner or a Participant who has elected to have his Required Beginning Date determined in accordance with the provisions of Section 2.01(vv)(1)(ii) has occurred, such Required Beginning Date shall not be re-determined, even if the Participant ceases to be a five percent owner in a subsequent year or continues in employment with the Employer or a Related Employer.

For purposes of this Subsection 2.01(vv), a Participant is treated as a five percent owner if such Participant is a five percent owner as defined in Code Section 416(i) (determined in accordance with Code Section 416 but without regard to whether the Plan is top-heavy) at any time during the Plan Year ending with or within the calendar year in which such owner attains age 70 1/2.

(ww) "Rollover Contribution" means any distribution from an eligible retirement plan, as described in Section 5.06, that an Employee or Participant elects to contribute to the Plan, or have considered as contributed, in accordance with the provisions of Section 5.06.

(xx) "Roth 401(k) Contribution" means any Deferral Contribution made to the Plan by the Employer in accordance with the provisions of Subsection 5.03(b) that is not excludable from gross income and is intended to satisfy the requirements of Code Section 402A.

(yy) "Self-Employed Individual" means an individual who has Earned Income for the taxable year from the Employer or who would have had Earned Income but for the fact that the trade or business had no net profits for the taxable year, including, but not limited to, a partner in a partnership, a sole proprietor, a member in a limited liability company or a shareholder in a subchapter S corporation.

(zz) "Service Agreement" means the agreement between the Employer and the Pre-Approved Plan Provider (or an agent or affiliate of the Pre-Approved Plan Provider) relating to the provision of investment and other services to the Plan and shall include any addendum to the agreement and any other separate written agreement between the Employer and the Pre-Approved Plan Provider (or an agent or affiliate of the Pre-Approved Plan Provider) relating to the provision of services to the Plan.

(aaa) "Severance Date" means the earlier of (i) the date an Employee retires, dies, quits, or is discharged from employment with the Employer and all Related Employers or (ii) the 12-month anniversary of the date on which the Employee was otherwise first absent from employment; provided, however, that if an individual terminates or is absent from employment with the Employer and all Related Employers because of military duty, such individual shall not incur a Severance Date if his employment rights are protected under Federal law and he returns to employment with the Employer or a Related Employer within the period during which he retains such employment


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rights, but, if he does not return to such employment within such period, his Severance Date shall be the earlier of

(1) the first anniversary of the date his absence commenced or (2) the last day of the period during which he retains such employment rights.

(bbb) “Spouse” means the person to whom an individual is married for purposes of Federal incometaxes.

(ccc) "Trust" means the trust created by the Employer and the Trustee to hold the assets of the Plan. The provisions of the Plan override any conflicting provision contained in the Trust or any other custodial account or trust documents used with the Plan.

(ddd) "Trust Agreement" means the separate agreement between the Employer and the Trustee under which the assets of the Plan are held, administered, and managed.

(eee) "Trustee" means the individual(s) or entity designated as the Trustee under the Trust Agreement, or its successor or permitted assigns. The term Trustee shall include any delegate of the Trustee as may be provided in the Trust Agreement.

(fff) "Trust Fund" means the property held in Trust by the Trustee for the benefit of Participants and their Beneficiaries.

(ggg) "Vesting Service" means an Employee's service that is taken into account in determining his vested interest in his Matching Employer and Nonelective Employer Contributions sub-accounts as may be required under Section 1.16 of the Adoption Agreement. Vesting Service shall be credited in accordance with Article 3.

2.2.
Interpretation and Construction of Terms. Where required by the context, the noun, verb, adjective, and adverb forms of each defined term shall include any of its other forms. Pronouns used in the Plan are in the masculine gender but include all individuals. Wherever used herein, the singular shall include the plural, and the plural shall include the singular, unless the context requires otherwise. Any titles, headings and/or subheadings used in the Plan have been inserted for convenience of reference and are to be ignored in any construction of the Plan’s provisions.
2.3.
Special Effective Dates. Some provisions of the Plan are only effective beginning as of a specified date or until a specified date. Any such special effective dates are specified within Plan text where applicable and are exceptions to the general Plan Effective Date as defined in Section 2.01(o).

 

Article 3. Service.

3.1.
Crediting of Eligibility Service. If the Employer has selected an Eligibility Service requirement in Subsection 1.04(b) of the Adoption Agreement for an Eligible Employee to become an Active Participant, Eligibility Service shall be credited to an Employee as follows:
3.1.1.
If the Employer has selected the one year or two years requirement, an Employee shall be credited with a year of Eligibility Service for each Eligibility Computation Period during which the Employee has been credited with the number of Hours of Service specified in that Subsection, as applicable. An Eligible Employee who has attained the required number of Hours of Service shall be credited with that year of service on the last day of that Eligibility Computation Period. When the Employer has selected an eligibility requirement with a specified number of Hours of Service, such Hours of Service must be attained during an Eligibility Computation Period.
3.1.2.
If the Employer has specified a number of months which requires a minimum number of Hours of Service during the Eligibility Computation Period as the requirement, an Employee shall be credited with Eligibility Service for each Eligibility Computation Period during which the Employee has been credited with the number of months specified within which the requisite number of Hours of Service has been earned or has earned the maximum number of Hours of Service specified, as applicable.
3.1.3.
If the Employer has selected a days or months requirement which does not require a minimum number of Hours of Service during the Eligibility Computation Period, an Employee shall be credited with Eligibility Service for the aggregate of the periods beginning with the Employee's Employment Commencement Date (or Reemployment Commencement Date) and ending on his subsequent Severance Date; provided, however, that an Employee who has a Reemployment Commencement Date within the 12-consecutive-month period following the earlier of the first date of his absence or his Severance Date shall be credited with Eligibility Service for the period

between his Severance Date and his Reemployment Commencement Date. A day of Eligibility Service shall be credited for each day on which an Employee is credited with Eligibility Service. Months of Eligibility Service shall be measured

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from the Employee's Employment Commencement Date or Reemployment Commencement Date to the corresponding date in the applicable following month.

3.2.
Re-Crediting of Eligibility Service Following Termination of Employment. An Employee whose employment with the Employer and all Related Employers terminates and who is subsequently reemployed by the Employer or a Related Employer shall be re-credited upon reemployment with his Eligibility Service earned prior to his termination of employment.
3.3.
Crediting of Vesting Service. If the Plan provides for Matching Employer and/or Nonelective Employer Contributions that are not 100 percent vested when made, Vesting Service shall be credited to an Employee, subject to any modifications elected by the Employer in Section 1.16 of the Adoption Agreement, for the aggregate of the periods beginning with the Employee's Employment Commencement Date (or Reemployment Commencement Date) and ending on his subsequent Severance Date; provided, however, that an Employee who has a Reemployment Commencement Date within the 12-consecutive-month period following the earlier of the first date of his absence or his Severance Date shall be credited with Vesting Service for the period between his Severance Date and his Reemployment Commencement Date. Fractional periods of a year shall be expressed in terms of days.
3.4.
Application of Vesting Service to a Participant's Account Following a Break in Vesting Service. The following rules describe how Vesting Service earned before and after a Break in Vesting Service shall be applied for purposes of determining a Participant's vested interest in his Matching Employer and Nonelective Employer Contributions sub-accounts:
3.4.1.
If a Participant incurs five-consecutive Breaks in Vesting Service, all years of Vesting Service earned by the Employee after such Breaks in Service shall be disregarded in determining the Participant's vested interest in his Matching Employer and Nonelective Employer Contributions sub-account balances attributable to employment before such Breaks in Vesting Service. However, Vesting Service earned both before and after such Breaks in Vesting Service shall be included in determining the Participant's vested interest in his Matching Employer and Nonelective Employer Contributions sub-account balances attributable to employment after such Breaks in Vesting Service.
3.4.2.
If a Participant incurs fewer than five-consecutive Breaks in Vesting Service, Vesting Service earned both before and after such Breaks in Vesting Service shall be included in determining the Participant's vested interest in his Matching Employer and Nonelective Employer Contributions sub-account balances attributable to employment both before and after such Breaks in Vesting Service.
3.5.
Service with Predecessor Employer. If the Plan is the plan of a predecessor employer, an Employee's Eligibility and Vesting Service shall include years of service with such predecessor employer. If elected in Section 1.17 of the Adoption Agreement, in any case in which the Plan is not the plan maintained by a predecessor employer, service for any employer described in Section 1.17 shall be treated as Eligibility and Vesting Service as indicated therein.
3.6.
Change in Service Crediting. Unless provided otherwise in the Adoption Agreement, if an amendment to the Plan or a transfer from employment as an Employee covered under another qualified plan maintained by the Employer or a Related Employer results in a change in the method of crediting Eligibility and/or Vesting Service with respect to a Participant between the Hours of Service crediting method set forth in Section 2530.200b-2 of the Department of Labor Regulations and the elapsed-time crediting method set forth in Section 1.410(a)-7 of the Treasury Regulations, each Participant with respect to whom the method of crediting Eligibility and/or Vesting Service is changed shall have his Eligibility and/or Vesting Service determined in the manner set forth in Section 1.410(a)-7(f)(1) of the Treasury Regulations.

 

Article 4. Participation.

4.1.
Date of Participation. If the Plan is an amendment, as indicated in Subsection 1.01(g)(2)(B) of the Adoption Agreement, all employees who were active participants in the Plan immediately prior to the Effective Date shall continue as Active Participants on the Effective Date, provided that they are Eligible Employees on the Effective Date. If elected by the Employer in Subsection 1.04(f) of the Adoption Agreement, all Eligible Employees who are in the service of the Employer on the date specified in Subsection 1.04(f) (and, if this is an amendment, as indicated in Subsection 1.01(g)(2)(B), were not active participants in the Plan immediately prior to that date) shall become Active Participants on the date elected by the Employer in Subsection 1.04(f). Any other Eligible Employee shall become an Active Participant in the Plan on the Entry

 

Date coinciding with or immediately following the date on which he first satisfies the eligibility requirements set forth in Subsections 1.04(a) and (b) of the Adoption Agreement.

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Any age and/or Eligibility Service requirement that the Employer elects to apply in determining an Eligible Employee's eligibility to make Deferral Contributions shall also apply in determining an Eligible Employee's eligibility to make Employee Contributions, if Employee Contributions are permitted under the Plan, and to receive Qualified Nonelective Employer Contributions. An Eligible Employee who has met the eligibility requirements with respect to certain contributions, but who has not met the eligibility requirements with respect to other contributions, shall become an Active Participant in accordance with the provisions of the preceding paragraph, but only with respect to the contributions for which he has met the eligibility requirements.

Notwithstanding any other provision of the Plan, if the Employer selects in Subsection 1.01(g)(5) of the Adoption Agreement that the Plan is a frozen plan, no Employee who was not already an Active Participant on the date the Plan was frozen shall become an Active Participant while the Plan is frozen. If the Employer amends the Plan to remove the freeze, Employees shall again become Active Participants in accordance with the provisions of the amended Plan.

4.2.
Transfers Out of Covered Employment. If any Active Participant ceases to be an Eligible Employee, but continues in the employ of the Employer or a Related Employer, such Employee shall cease to be an Active Participant, but shall continue as an Inactive Participant until his entire Account balance is forfeited or distributed. An Inactive Participant shall not be entitled to receive an allocation of contributions or forfeitures under the Plan for the period that he is not an Eligible Employee and wages and other payments made to him by the Employer or a Related Employer for services other than as an Eligible Employee shall not be included in Compensation for purposes of determining the amount and allocation of any contributions to the Account of such Inactive Participant. Such Inactive Participant shall continue to receive credit for Vesting Service completed during the period that he continues in the employ of the Employer or a Related Employer.
4.3.
Transfers Into Covered Employment. If an Employee who is not an Eligible Employee becomes an Eligible Employee, such Eligible Employee shall become an Active Participant immediately as of his transfer date if such Eligible Employee has already satisfied the eligibility requirements and would have otherwise previously become an Active Participant in accordance with Section 4.01. Otherwise, such Eligible Employee shall become an Active Participant in accordance with Section 4.01.

Wages and other payments made to an Employee prior to his becoming an Eligible Employee by the Employer or a Related Employer for services other than as an Eligible Employee shall not be included in Compensation for purposes of determining the amount and allocation of any contributions to the Account of such Eligible Employee.

4.4.
Resumption of Participation Following Reemployment. If a Participant who terminates employment with the Employer and all Related Employers is reemployed as an Eligible Employee, he shall again become an Active Participant on his Reemployment Commencement Date. If a former Employee is reemployed as an Eligible Employee on or after an Entry Date coinciding with or following the date on which he met the age and service requirements elected by the Employer in Section 1.04 of the Adoption Agreement, he shall become an Active Participant on his Reemployment Commencement Date. Any other former Employee who is reemployed as an Eligible Employee shall become an Active Participant as provided in Section 4.01 or 4.03. Any distribution which a Participant is receiving under the Plan at the time he is reemployed by the Employer or a Related Employer shall cease, except as otherwise required under Section 12.04.

 

Article 5. Contributions.

5.1.
Contributions Subject to Limitations. All contributions made to the Plan under this Article 5 shall be subject to the limitations contained in Article 6.
5.2.
Compensation Taken into Account in Determining Contributions. Compensation for purposes of determining contributions other than minimum contributions described in Section 15.03 shall be determined in accordance with Section 1.05 of the Adoption Agreement.
5.3.
Deferral Contributions. If so provided in Subsection 1.07(a) of the Adoption Agreement, each Active Participant may elect to execute a salary reduction agreement with the Employer to reduce his Compensation by an amount, as specified in Subsection 1.07(a), for each payroll period or to reduce some portion of his Compensation in accordance with procedures determined by the Administrator which shall be uniform and nondiscriminatory with regard to all Participants (except as permitted pursuant to Section 6.05). Except as specifically elected by the Employer within Subsections 1.07(a) with respect

to each payroll period, an Active Participant may not elect to make Deferral Contributions in excess of the percentage of Compensation specified by the Employer in Subsection 1.07(a)(1)(A) and Subsection 5.03(a) below. Notwithstanding the foregoing, if the Employer has elected 401(k) Safe Harbor Matching Contributions in Option 1.11(a)(3) of the Adoption Agreement, a Participant must be permitted to make Deferral Contributions under the Plan sufficient to receive the full 401(k) Safe Harbor

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Matching Employer Contribution provided under such Option and/or the Matching Employer Contributions Addendum to the Adoption Agreement, as applicable. To satisfy the ADP and/or ACP tests (described in Article 6) on the basis of 401(k) Safe Harbor Matching Employer Contributions, the Plan may not limit Deferral Contributions except as permitted under Treasury Regulations Section 1.401(k)-3(c)(6).

An Active Participant's salary reduction agreement shall become effective on the first day of the first payroll period for which the Employer can reasonably process the request, but not earlier than the later of (a) the effective date of the provisions permitting Deferral Contributions or (b) the date the Employer adopts such provisions. The Employer shall make a Deferral Contribution on behalf of the Participant corresponding to the amount of said reduction. Under no circumstances may a salary reduction agreement be adopted retroactively.

An Active Participant may elect to change or discontinue the amount by which his Compensation is reduced by notice to the Employer as provided in Subsection 1.07(a)(1)(C) or (D). Notwithstanding the Employer's election in Subsection 1.07(a)(1)(C) or (D), if the Employer has elected 401(k) Safe Harbor Matching Employer Contributions in Subsection 1.11(a)(3) or 401(k) Safe Harbor Nonelective Employer Contributions in Subsection 1.12(a)(3) of the Adoption Agreement, an Active Participant may elect to change or discontinue the amount by which his Compensation is reduced by notice to the Employer within a reasonable period, as specified by the Employer (but not less than 30 days), of receiving the notice described in Section 6.09.

Based upon the Employer's elections in Subsection 1.07(a), the following special types of Deferral Contributions may be made to the Plan:

5.3.1.
Catch-Up Contributions. If elected by the Employer in Subsection 1.07(a)(2) of the Adoption Agreement, an Active Participant who has attained or is expected to attain age 50 before the close of the taxable year shall be eligible to make Catch-Up Contributions to the Plan in excess of an otherwise applicable Plan limit, but not in excess of (i) the dollar limit in effect under Code Section 414(v)(2)(B)(i) for the taxable year or (ii) when added to the other Deferral Contributions made by the Participant for the taxable year, the limit specified in 1.07(a)(2), which cannot exceed 100 percent of the Participant's "effectively available Compensation," as defined in this Section 5.03. An otherwise applicable Plan limit is a limit that applies to Deferral Contributions without regard to Catch-Up Contributions, including, but not limited to, (1) the dollar limitation on Deferral Contributions under Code Section 402(g), described in Section 6.02, (2) the limitations on annual additions in effect under Code Section 415, described in Section 6.12, (3) the limitation on Deferral Contributions for Highly Compensated Employees under Code Section 401(k)(3), described in Section 6.03, and (4) the limitation on Deferral Contributions for Highly Compensated Employees which the Administrator may impose, in accordance with the provisions of Section 6.05

In the event that the deferral limit described in Subsection 1.07(a)(1)(A) or the administrative limit described in Section 6.05, as applicable, is changed during the Plan Year, for purposes of determining Catch-Up Contributions for the Plan Year, such limit shall be determined using the time-weighted average method described in Section 1.414(v)-1(b)(2)(i)(B)(1) of the Treasury Regulations, applying the alternative definition of compensation permitted under Section 1.414(v)-1(b)(2)(i)(B)(2) of the Treasury Regulations.

5.3.2.
Roth 401(k) Contributions. Notwithstanding any other provision of the Plan to the contrary, if the Employer elects in Subsection 1.07(a)(3) of the Adoption Agreement to permit Roth 401(k) Contributions, then a Participant may irrevocably designate all or a portion of his Deferral Contributions made pursuant to Subsection 1.07(a) as Deferral Contributions that are includible in the Participant’s gross income at the time deferred, pursuant to Code Section 402A and any applicable guidance or regulations issued thereunder (“Roth 401(k) Contributions”). A Participant may change his designation prospectively with respect to future Deferral Contributions as of the date or dates elected by the Employer in Subsection 1.07(a)(1)(C). The Administrator will maintain all such contributions made pursuant to Code Section 402A separately and make distributions in accordance with the Plan unless required to do otherwise by Code Section 402A and any applicable guidance or regulations issued thereunder.
5.3.3.
Automatic Enrollment Contributions. If the Employer elected Option 1.07(a)(4) of the Adoption Agreement, for each Eligible Employee to whom the Employer has elected to apply the automatic enrollment

contribution provisions, such Eligible Employee's Compensation shall be reduced as soon as administratively feasible in accordance with the Administrator’s separate written procedures and the Automatic Enrollment Addendum, if applicable. The Administrator’s separate procedures shall be drafted to be in accord with the Automatic Enrollment Addendum, if applicable, and cover specifics surrounding automatic enrollment (including but not limited to, deferral and increase rates

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and timing, differences among different groups of employees and coverage for an EACA). The Administrator’s separate procedures may provide that a Participant’s affirmative election out of automatic enrollment expires annually and, in such case, if a Participant fails to complete a new affirmative election subsequent to their prior election expiring, the Participant becomes subject to the default deferral percentage as outlined in the Administrator’s separate procedures; provided, however, that each year, the Participant can always complete a new affirmative election and designate a new deferral percentage. These amounts shall be contributed to the Plan on behalf of such an Eligible Employee as Deferral Contributions. If the Employer has designated in Subsection 1.07(a)(4)(B) that the Plan has an EACA, then the Employer shall also provide to each Eligible Employee covered by the EACA a comprehensive notice, written in a manner calculated to be understood by the average Participant, of the Eligible Employee’s rights and obligations under the Plan within the time described in Section 6.09 for a safe harbor contribution notice. If the Employer has elected through the Automatic Enrollment Addendum, then a Participant who has made automatic enrollment contributions pursuant to the EACA has a permissible withdrawal available pursuant to the following:

5.3.3.1.
The EACA Participant must make any such election within ninety days of the date of his automatic enrollment indicated therein. Upon making such an election, the EACA Participant’s Deferral Contribution election will be set to zero until such time as the EACA Participant’s Deferral Contribution rate has changed pursuant to Subsection 1.07(a)(1).
5.3.3.2.
The amount of such withdrawal shall be equal to the amount of the EACA Deferrals through the end of the fifteen-day period beginning on the date the Participant makes the election described in (1) above, adjusted for allocable gains and losses to the date of such withdrawal.
5.3.3.3.
Any amounts attributable to Employer Matching Contributions allocated to the Account of an EACA Participant with respect to EACA Deferrals that have been withdrawn pursuant to such permissible withdrawal shall be forfeited. In the event that Employer Matching Contributions would otherwise be allocated to the EACA Participant’s Account with respect to EACA Deferrals that have been so withdrawn, the Employer shall not contribute such Employer Matching Contributions to the Plan.
5.3.3.4.
In the event such withdrawal provision is removed from the Plan via an amendment, the transaction continues to be available to EACA Participants who were covered by this provision and who were enrolled automatically prior to the effective date of the provision’s removal.

Except as provided in paragraph (1) above with respect to an EACA Participant who elects a permissible withdrawal, an Active Participant's Compensation shall continue to be reduced and Deferral Contributions made to the Plan on his behalf until the Active Participant elects to change or discontinue the percentage by which his Compensation is reduced by notice to the Plan Administrator in accordance with procedures the Plan Administrator has developed for that purpose. An Eligible Employee may affirmatively elect not to have his Compensation reduced in accordance with this Subsection 5.03(c) by notice to the Plan Administrator within a reasonable period ending no later than the date Compensation subject to reduction hereunder becomes available to the Eligible Employee.

Notwithstanding any other provision of this Section or of any Participant's salary reduction agreement, in no event shall a Participant be permitted to make Deferral Contributions in excess of his "effectively available Compensation." A Participant's "effectively available Compensation" is his Compensation remaining after all applicable amounts have been withheld (e.g., tax-withholding and withholding of contributions to a cafeteria plan).

5.4.
Employee Contributions. If so provided by the Employer in Subsection 1.08(a) of the Adoption Agreement, each Active Participant may elect to make non-deductible Employee Contributions to the Plan in accordance with the rules and procedures established by the Employer and subject to the limits provided through Subsection 1.08(a).
5.5.
No Deductible Employee Contributions. No deductible Employee Contributions may be made to the Plan. Deductible Employee Contributions made prior to January 1, 1987 shall be maintained in a separate sub-account. No part of the deductible Employee Contributions sub-account shall be used to purchase life insurance.

 

5.06. Rollover Contributions. If so provided by the Employer in Subsection 1.09 of the Adoption Agreement, subject to any limits or modifications provided therein, an Eligible Employee or Participant who is or was entitled to receive a distribution that is eligible for rollover to a qualified plan under Code Section 408(d)(3) or an eligible rollover distribution, as defined in Code Section 402(c)(4) and Treasury Regulations issued thereunder, including an eligible rollover distribution received by such Eligible

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Employee or Participant as a surviving Spouse or as a Spouse or former Spouse who is an alternate payee under a qualified domestic relations order, from an eligible retirement plan, as defined in Section 13.04 (except that such definition shall also include for these purposes a qualified defined benefit plan described in Code Section 401(a)), may elect to contribute all or any portion of such distribution to the Trust directly from such eligible retirement plan (a "direct rollover"). Except as otherwise provided in Subsection 1.09(b) of the Adoption Agreement and to the extent permitted by the Trustee, Rollover Contributions shall be made in the form of cash, Fund Shares, or promissory notes evidencing a plan loan to the Eligible Employee.

Notwithstanding the foregoing, the Plan shall not accept the following as Rollover Contributions:

5.5.1.
the contributions excluded by the Employer, if any, in Subsection 1.09(a);
5.5.2.
any rollover of after-tax employee contributions that is not made by a direct rollover;
5.5.3.
any rollover from an individual retirement account or annuity described in Code Section 408(a) or (b) (including a Roth IRA under Code Section 408A) to the extent such amount would not otherwise be includible in the Employee's income; or
5.5.4.
except as provided in Subsection 1.09(b), any rollover amounts which are not “designated Roth contributions” which are to be contributed to the Plan as “designated Roth contributions.”

To the extent the Plan accepts Rollover Contributions of after-tax employee contributions, the Plan will separately account for such contributions, including separate accounting for the portion of the Rollover Contribution that is includible in gross income and the portion that is not includible in gross income.

Except with regard to a rollover made pursuant to Subsection 1.09(b), any rollover of "designated Roth contributions", as defined in Subsection 6.01(e), shall be subject to the requirements of Code Section 402(c). To the extent the Plan accepts Rollover Contributions of "designated Roth contributions", the Plan will separately account for such contributions in accordance with the provisions of Section 7.01, including separate accounting for the portion of the Rollover Contribution that is includible in gross income and the portion that is not includible in gross income, if applicable. If the Plan accepts a direct rollover of "designated Roth contributions", the Trustee and the Plan Administrator shall be entitled to rely on a statement from the distributing plan's administrator identifying (i) the Eligible Employee's basis in the rolled over amounts and (ii) the date on which the Eligible Employee's 5-taxable-year period of participation (as required under Code Section 402A(d)(2) for a qualified distribution of "designated Roth contributions") started under the distributing plan. If the 5-taxable-year period of participation under the distributing plan would end sooner than the Eligible Employee's 5-taxable-year period of participation under the Plan, the 5-taxable-year period of participation applicable under the distributing plan shall continue to apply with respect to the Rollover Contribution.

Notwithstanding the above, if so provided in Subsection 1.09(b), and as limited as provided therein, a Participant or Beneficiary may elect to have any portion of his Account otherwise distributable under the terms of the Plan, which is not “designated Roth contributions” under the Plan and meets the definition of an “eligible rollover distribution” found in Section 13.04(c), be considered “designated Roth contributions” for purposes of the Plan. Any assets converted in such a way shall be separately accounted for and shall still be subject to distribution constraints found in Article 14 applicable to them prior to the conversion. Such assets shall also retain any distribution rights, such as those found in Article 10, applicable to them prior to the conversion and shall be treated as Rollover Contributions for purposes of withdrawal pursuant to Section 10.03. Each such in-plan rollover shall be subject to its own 5-taxable year period of participation and subject to the requirements of Code Section 408A(d)(3)(F). Also, if elected by the Employer in Section 1.09(c) of the Adoption Agreement, any Participant meeting the requirements set forth in Section 1.09(c) may elect to have any part of the portions of his Account as may be described and limited therein, which are not “designated Roth contributions” and are not currently distributable under the Plan, be considered “designated Roth contributions” for purposes of the Plan. Any assets converted in such a way shall be considered a rollover only for purposes of this Section, be separately accounted for, be maintained in such records as are necessary for the proper reporting thereof, and have any distribution constraints, such as those found in Article 14, applicable

 

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to them prior to the conversion continue to apply to them. A conversion in accordance with the preceding sentence will not eliminate any Code Section 411(d)(6) protected distribution rights attributable to the amount being converted.

If so elected in Option 1.09(a)(1)(A), an Eligible Employee who has not yet become an Active Participant in the Plan in accordance with the provisions of Article 3 may make a Rollover Contribution to the Plan. Such Eligible Employee shall be treated as a Participant under the Plan for all purposes of the Plan, except eligibility to have Deferral Contributions made on his behalf and to receive an allocation of Matching Employer or Nonelective Employer Contributions.

The Administrator shall require such information from Eligible Employees as it deems necessary to ensure that amounts contributed under this Section 5.06 meet the requirements for tax-deferred rollovers established by this Section and by Code Section 402(c) and develop procedures to govern the Plan’s acceptance of Rollover Contributions.

If a Rollover Contribution made under this Section is later determined by the Administrator not to have met the requirements of this Section or of the Code or Treasury regulations, the Trustee shall, within a reasonable time after such determination is made, and on instructions from the Administrator, distribute to the Employee the amounts then held in the Trust attributable to such Rollover Contribution.

A Participant's Rollover Contributions sub-account shall be subject to the terms of the Plan, including Article 14, except as otherwise provided in this Section.

5.6.
Qualified Nonelective Employer Contributions. The Employer may, in its discretion, make a Qualified Nonelective Employer Contribution for the Plan Year in any amount it deems necessary for a permissible purpose. Unless another allocation method will be utilized to address a correction in accordance with the Employee Plans Compliance Resolution System (EPCRS, as described in Revenue Procedure 2016-51 and any subsequent guidance), any Qualified Nonelective Employer Contribution shall be allocated to Participants in accordance with Subsection 1.10(a) of the Adoption Agreement.

Participants shall not be required to satisfy any Hours of Service or employment requirement for the Plan Year in order to receive an allocation of Qualified Nonelective Employer Contributions.

Qualified Nonelective Employer Contributions shall be distributable only in accordance with Section 1.401(k)-6 of the Treasury Regulations.

5.7.
Matching Employer Contributions. If so provided by the Employer in Section 1.11(a) of the Adoption Agreement, the Employer shall make Matching Employer Contributions on behalf of each of its "eligible" Participants as indicated therein. The amount of the Matching Employer Contribution shall be determined in accordance with Subsections 1.11(a) and/or the Matching Employer Contributions Addendum to the Adoption Agreement, as applicable. If the Employer has elected to make Matching Employer Contributions in accordance with Subsection 1.11(a)(2) or 1.11(b) of the Adoption Agreement, then such contributions shall be made in the amount and frequency described within timely-adopted governance from that Employer’s board of directors or other governing body under applicable local law. If the Employer has selected Subsection 1.11(d)(5) with respect to discretionary Matching Employer Contributions made in accordance with Subsection 1.11(a)(2), such governance shall also specify the period for which discretionary Matching Employer Contributions will be made. After such adoption, the Employer must provide the Administrator written instructions describing (1) how the Matching Employer Contribution will be allocated to “eligible” Participants, (2) the Contribution Period(s) to which the Matching Employer Contribution allocation(s) apply(-ies), and (3) if applicable, a description of the designated groups of “eligible” Participants receiving such allocation(s). Additionally, for Plan Years beginning after the Effective Date listed in Section 1.01(g)(1) of the Adoption Agreement, a summary of these instructions must be communicated to Participants who receive discretionary Matching Employer Contributions. The summary must be communicated to Participants no later than 60 days following the date on which the last discretionary Matching Employer Contribution is made to the Plan for the Plan Year.

Notwithstanding the foregoing, unless otherwise elected in Subsection 1.11(c)(1)(A) of the Adoption Agreement, the Employer shall not make Matching Employer Contributions, other than 401(k) Safe Harbor Matching Employer Contributions, with respect to an "eligible" Participant's Catch-Up Contributions. If, due to application of a Plan limit, Matching Employer Contributions other than 401(k) Safe Harbor Matching Employer Contributions are attributable to Catch-Up Contributions, such Matching Employer Contributions, plus any income and minus any loss allocable thereto, shall be forfeited and applied as provided in Section 11.09.


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5.8.
Qualified Matching Employer Contributions. If so provided by the Employer in Subsection 1.11(f) of the Adoption Agreement, prior to making its Matching Employer Contribution (other than any 401(k) Safe Harbor Matching Employer Contribution) to the Plan, the Employer may designate all or a portion of such Matching Employer Contribution as a Qualified Matching Employer Contribution. The Employer shall notify the Trustee of such designation at the time it makes its Matching Employer Contribution. Qualified Matching Employer Contributions shall be distributable only in accordance with Section 1.401(k)-6 of the Treasury Regulations.

If the amount of an Employer's Qualified Matching Employer Contribution is determined based on a Participant's Compensation, and the Qualified Matching Employer Contribution is necessary to satisfy the "ADP" test described in Section 6.03, the compensation used in determining the amount of the Qualified Matching Employer Contribution shall be "testing compensation", as defined in Subsection 6.01(s). If the Qualified Matching Employer Contribution is not necessary to satisfy the "ADP" test described in Section 6.03, the compensation used to determine the amount of the Qualified Matching Employer Contribution shall be Compensation as defined in Subsection 2.01(k).

5.10.
Nonelective Employer Contributions. If so provided by the Employer in Subsection 1.12(a) and/or (b) of the Adoption Agreement, the Employer shall make Nonelective Employer Contributions to the Trust in accordance with Section 1.12 of the Adoption Agreement to be allocated among "eligible" Participants as indicated therein. Nonelective Employer Contributions shall be allocated as follows:
1.
If the Employer has elected a fixed contribution formula, Nonelective Employer Contributions shall be allocated among "eligible" Participants in the manner specified in Section 1.12 or the Nonelective Employer Contributions Addendum to the Adoption Agreement, as applicable.
2.
If the Employer has elected a discretionary contribution amount, Nonelective Employer Contributions shall be allocated among "eligible" Participants, as determined in accordance with Section 1.12, as follows:
2.1.
If the non-integrated formula is elected in Subsection 1.12(b)(1), Nonelective Employer Contributions shall be allocated to "eligible" Participants in the ratio that each "eligible" Participant's Compensation bears to the total Compensation paid to all "eligible" Participants for the Contribution Period.
2.2.
If the integrated formula is elected in Subsection 1.12(b)(2), Nonelective Employer Contributions shall be allocated in the following steps:
2.2.1.
First, to each "eligible" Participant in the same ratio that the sum of the "eligible" Participant's Compensation and "excess Compensation" for the Plan Year bears to the sum of the Compensation and "excess Compensation" of all "eligible" Participants for the Plan Year. This allocation as a percentage of the sum of each "eligible" Participant's Compensation and "excess Compensation" shall not exceed the "permitted disparity limit", as defined in Section 1.12.

Notwithstanding the foregoing, if in any Plan Year an "eligible" Participant has reached the "cumulative permitted disparity limit", such "eligible" Participant shall receive an allocation under this Subsection 5.10(b)(2)(A) based on two times his Compensation for the Plan Year, rather than the sum of his Compensation and "excess Compensation" for the Plan Year. If an "eligible" Participant did not benefit under a qualified defined benefit plan or target benefit plan for any Plan Year beginning on or after January 1, 1994, the "eligible" Participant shall have no "cumulative disparity limit".

2.2.2.
Second, if any Nonelective Employer Contributions remain after the allocation in Subsection 5.10(b)(2)(A), the remaining Nonelective Employer Contributions shall be allocated to each "eligible" Participant in the same ratio that the "eligible" Participant's Compensation for the Plan Year bears to the total Compensation of all "eligible" Participants for the Plan Year.

Notwithstanding the provisions of Subsections 5.10(b)(2)(A) and (B) above, if in any Plan Year an "eligible" Participant benefits under another qualified plan or simplified employee pension, as defined in Code Section 408(k), that provides for or imputes permitted disparity, the Nonelective Employer Contributions for the Plan Year allocated to such "eligible" Participant shall be in the ratio that his Compensation for the Plan Year bears to the total Compensation paid to all "eligible" Participants.


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For purposes of this Subsection 5.10(b)(2), the following definitions shall apply:

2.2.3.
"Cumulative permitted disparity limit" means 35 multiplied by the sum of an "eligible" Participant's annual permitted disparity fractions, as defined in Sections 1.401(l)-5(b)(3) through (b)(7) of the Treasury Regulations, attributable to the "eligible" Participant's total years of service under the Plan and any other qualified plan or simplified employee pension, as defined in Code Section 408(k), maintained by the Employer or a Related Employer. For each Plan Year commencing prior to January 1, 1989, the annual permitted disparity fraction shall be deemed to be one, unless the Participant never accrued a benefit under any qualified plan or simplified employee pension maintained by the Employer or a Related Employer during any such Plan Year. In determining the annual permitted disparity fraction for any Plan Year, the Employer may elect to assume that the full disparity limit has been used for such Plan Year.
2.2.4.
"Excess Compensation" means Compensation in excess of the "integration level" specified by the Employer in Subsection 1.12(b)(2) of the Adoption Agreement.
5.11.
Vested Interest in Contributions.
(a)
Participant's vested interest in the following sub-accounts shall be 100 percent:
a.
his Deferral Contributions sub-account;
b.
his Qualified Nonelective Employer Contributions sub-account;
c.
his Qualified Matching Employer Contributions sub-account;
d.
his 401(k) Safe Harbor Nonelective Employer Contributions sub-account (unless such sub-account is attributable to a QACA in such case Subsection 5.11(b) shall apply);
e.
his 401(k) Safe Harbor Matching Employer Contributions sub-account (unless such sub-account is attributable to a QACA in such case Subsection 5.11(b) shall apply);
f.
his Rollover Contributions sub-account;
g.
his Employee Contributions sub-account; and
h.
his deductible Employee Contributions sub-account
(b)
Contributions attributable to a QACA shall become 100% vested no later than upon a Participant’s completion of two Years of Service.

Except as otherwise specifically provided in the Eligibility, Service and Vesting Addendum to the Adoption Agreement or as may be required under Section 15.05, a Participant's vested interest in his Nonelective Employer Contributions sub-account attributable to Nonelective Employer Contributions other than those described in Subsection 5.11(a)(4) above, shall be determined in accordance with the vesting schedule elected by the Employer in Subsection 1.16(c)(1) of the Adoption Agreement. Except as otherwise specifically provided in the Eligibility, Service and Vesting Addendum to the Adoption Agreement, a Participant's vested interest in his Matching Employer Contributions sub-account attributable to Matching Employer Contributions other than those described in Subsection 5.11(a)(5) above, shall be determined in accordance with the vesting schedule elected by the Employer in Subsection 1.16(c)(2) of the Adoption Agreement.

5.12.
Time for Making Contributions. The Employer shall pay its contribution for each Plan Year not later than the time prescribed by law for filing the Employer's Federal income tax return for the fiscal (or taxable) year with or within which such Plan Year ends (including extensions thereof).

If the Employer has elected the payroll period as the Contribution Period in Subsection 1.11(d) of the Adoption Agreement, the Employer shall remit any 401(k) Safe Harbor Matching Employer Contributions made during a Plan Year quarter to the Trustee no later than the last day of the immediately following Plan Year quarter.

The Employer must remit Employee Contributions and Deferral Contributions to the Trustee as of the earliest date on which such contributions can reasonably be segregated from the Employer's general assets, but not later than the 15th

 

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business day of the calendar month following the month in which such amount otherwise would have been paid to the Participant, or within such other time frame as may be determined by applicable regulation or legislation.

The Trustee shall have no authority to inquire into the correctness of the amounts contributed and remitted to the Trustee or to determine whether any contribution is payable under this Article 5. The Administrator shall be the named fiduciary responsible for ensuring the Employer remits contributions and loan repayments to the Trust and shall have the duty and responsibility for the collection of such contributions and repayments when not timely made by the Employer, provided that the Administrator may appoint another named fiduciary to handle such responsibility and notify the Trustee of such appointment in writing.

5.13.
Exclusive Benefit and Return of Employer Contributions. In accordance with Code Section 401(a)(2) and ERISA Section 403(c) (if applicable), Plan assets shall be held for the exclusive purpose of providing benefits to Participants and Beneficiaries and defraying the reasonable expenses of administering the Plan, and no such assets shall ever revert to the Employer except that if the Employer or the Plan Administrator so direct:
(a)
contributions made by the Employer by mistake of fact may be returned to the Employer within 1 year of the date of payment,
(b)
contributions that are conditioned on the deductibility thereof under Code Section 404 may be returned to the Employer within 1 year of the disallowance of the deduction, and
(c)
contributions that are conditioned on the initial qualification of the Plan under the Code may be returned to the Employer within 1 year after such qualification is denied by determination of the Internal Revenue Service, but only if an application for determination of such qualification is made within the time prescribed by law for filing the Employer’s federal income tax return for its taxable year in which the Plan is adopted, or such later date as the Secretary of the Treasury may prescribe.

All contributions under the Plan are hereby expressly conditioned on the initial qualification of the Plan and their deductibility under the Code.

5.14.
Frozen Plan. If the Employer has elected Subsection 1.01(g)(5) of the Adoption Agreement, then in accordance therewith and notwithstanding any other provision of the Plan to the contrary, the Plan is a frozen plan. If the Employer amends the Plan to remove the freeze, contributions shall resume in accordance with the provisions of the amended Plan.

 

Article 6. Limitations on Contributions.

6.1.
Special Definitions. For purposes of this Article, the following definitions shall apply:
6.1.1.
"Annual additions" mean the sum of the following amounts allocated to an Active Participant for a Limitation Year:
6.1.1.1.
all employer contributions allocated to an Active Participant's account under qualified defined contribution plans maintained by the "415 employer", including amounts applied to reduce employer contributions as provided under Section 11.09, but excluding amounts treated as Catch-Up Contributions;
6.1.1.2.
all employee contributions allocated to an Active Participant's account under a qualified defined contribution plan or a qualified defined benefit plan maintained by the "415 employer" if separate accounts are maintained with respect to such Active Participant under the defined benefit plan;
6.1.1.3.
all forfeitures allocated to an Active Participant's account under a qualified defined contribution plan maintained by the "415 employer";
6.1.1.4.
all amounts allocated to an "individual medical benefit account" which is part of a pension or annuity plan maintained by the "415 employer";
6.1.1.5.
all amounts derived from contributions paid or accrued after December 31, 1985, in taxable years ending after such date, which are attributable to post-retirement medical benefits allocated to the separate account of a key employee, as defined in Code Section 419A(d)(3), under a "welfare benefit fund" maintained by the "415 employer"; and
6.1.1.6.
all allocations to an Active Participant under a "simplified employee pension".

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(b) "Contribution percentage" means the ratio (expressed as a percentage) of (1) the "contribution percentage amounts" allocated to an "eligible participant's" Accounts for the Plan Year to (2) the "eligible participant's" "testing compensation" for the Plan Year.

(c) "Contribution percentage amounts" mean those amounts included in applying the "ACP" test.

(1) "Contribution percentage amounts" include the following:

(A) any Employee Contributions made by an "eligible participant" to the Plan;

(B) any Matching Employer Contributions on eligible contributions as elected by the Employer in Subsection 1.11(c) of the Adoption Agreement, made for the Plan Year, but excluding (A) Qualified Matching Employer Contributions that are taken into account in satisfying the "ADP" test described in Section 6.03 and (B) Matching Employer Contributions that are forfeited (to the extent the forfeiture is completed prior to applying the “ACP” test) either to correct "excess aggregate contributions" or because the contributions to which they relate are "excess deferrals", "excess contributions", "excess aggregate contributions", or Catch-Up Contributions (in the event the Plan does not provide for Matching Employer Contributions with respect to Catch-Up Contributions);

(C) Qualified Nonelective Employer Contributions allocated as of a date within the “testing year” and designated at the time of contribution as applying for the “ACP” test;

(D) 401(k) Safe Harbor Nonelective Employer Contributions may be included to the extent such contributions are not required to satisfy the safe harbor contribution requirements under Section 1.401(k)-3(b) of the Treasury Regulations, excluding 401(k) Safe Harbor Nonelective Employer Contributions that are taken into account in satisfying the "ADP" test described in Section 6.03; and

(E) Deferral Contributions, when necessary to pass the “ACP” test, provided that the "ADP" test described in Section 6.03 is satisfied or treated as satisfied (except as in accordance with Section 6.09) both including Deferral Contributions included as "contribution percentage amounts" and excluding such Deferral Contributions.

(2) Notwithstanding the foregoing, for any Plan Year in which the "ADP" test described in Section 6.03 is deemed satisfied pursuant to Section 6.09 with respect to some or all Deferral Contributions, "contribution percentage amounts":

(A) shall not include any Deferral Contributions with respect to which the "ADP" test is deemed satisfied; and

(B) may have the following Matching Employer Contributions excluded:

(i) if the requirements described in Section 6.10 for deemed satisfaction of the "ACP" test with respect to some or all Matching Employer Contributions are met, those Matching Employer Contributions with respect to which the "ACP" test is deemed satisfied; or

(ii) if the "ADP" test is deemed satisfied using 401(k) Safe Harbor Matching Employer Contributions, but the requirements described in Section 6.10 for deemed satisfaction of the "ACP" test with respect to Matching Employer Contributions are not met, any Matching Employer Contributions made on behalf of an "eligible participant" for the Plan Year that do not exceed four percent of the "eligible participant's" Compensation for the Plan Year.

(3) Notwithstanding any other provisions of this Subsection, if an Employer elects to change from the current year testing method described in Subsection 1.06(a)(1) of the Adoption Agreement to the prior year testing method described in Subsection 1.06(a)(2) of the Adoption Agreement, the following shall not be considered "contribution percentage amounts" for purposes of determining the "contribution percentages"


 

 

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of Non-Highly Compensated Employees for the prior year immediately preceding the Plan Year in which the change is effective:

6.1.1.6.1.
Qualified Matching Employer Contributions that were taken into account in satisfying the "ADP" test described in Section 6.03 for such prior year;
6.1.1.6.2.
Qualified Nonelective Employer Contributions that were taken into account in satisfying the "ADP" test described in Section 6.03 or the "ACP" test described in Section 6.06 for such prior year; and
6.1.1.6.3.
401(k) Safe Harbor Nonelective Employer Contributions that were taken into account in satisfying the "ADP" test described in Section 6.03 or the "ACP" test described in Section 6.06 for such prior year or that were required to satisfy the safe harbor contribution requirements under Section 1.401(k)-3(b) of the Treasury Regulations for such prior year.;

To be included in determining an "eligible participant's" "contribution percentage" for a Plan Year, Employee Contributions must be made to the Plan before the end of such Plan Year and other "contribution percentage amounts" must be allocated to the "eligible participant's" Account as of a date within such Plan Year and made before the last day of the 12-month period immediately following the Plan Year to which the "contribution percentage amounts" relate. If an Employer has elected the prior year testing method described in Subsection 1.06(a)(2) of the Adoption Agreement, "contribution percentage amounts" that are taken into account for purposes of determining the "contribution percentages" of Non-Highly Compensated Employees for the prior year relate to such prior year. Therefore, such "contribution percentage amounts" must be made before the last day of the Plan Year being tested.

6.1.2.
"Deferral ratio" means the ratio (expressed as a percentage) of (1) the amount of "includable contributions" made on behalf of an Active Participant for the Plan Year to (2) the Active Participant's "testing compensation" for such Plan Year. An Active Participant who does not receive "includable contributions" for a Plan Year shall have a "deferral ratio" of zero.
6.1.3.
"Designated Roth contributions" mean any Roth 401(k) Contributions made to the Plan and any "elective deferrals" made to another plan that would be excludable from a Participant's income, but for the Participant's election to designate such contributions as Roth contributions and include them in income.
6.1.4.
"Determination year" means (1) for purposes of determining income or loss with respect to "excess deferrals", the calendar year in which the "excess deferrals" were made and (2) for purposes of determining income or loss with respect to "excess contributions", and "excess aggregate contributions", the Plan Year in which such "excess contributions" or "excess aggregate contributions" were made.
6.1.5.
"Elective deferrals" mean all employer contributions, other than Deferral Contributions, made on behalf of a Participant pursuant to an election to defer under any qualified cash or deferred arrangement as described in Code Section 401(k), any simplified employee pension cash or deferred arrangement as described in Code Section 402(h)(1)(B), any eligible deferred compensation plan under Code Section 457, any plan as described under Code Section 501(c)(18), and any employer contributions made on behalf of a Participant pursuant to a salary reduction agreement for the purchase of an annuity contract under Code Section 403(b). "Elective deferrals" include "designated Roth contributions" made to another plan. "Elective deferrals" do not include any deferrals properly distributed as excess "annual additions" or any deferrals treated as catch-up contributions in accordance with the provisions of Code Section 414(v).
6.1.6.
"Eligible participant" means any Active Participant who is eligible to make Employee Contributions, or Deferral Contributions (if the Employer takes such contributions into account in calculating "contribution percentages"), or to receive a Matching Employer Contribution. Notwithstanding the foregoing, the term "eligible participant" shall not include any Active Participant who is included in a unit of Employees covered by an agreement which the Secretary of Labor finds to be a collective bargaining agreement between employee representatives and one or more employers.
6.1.7.
"Excess aggregate contributions" with respect to any Plan Year mean the excess of


 

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(1) The aggregate "contribution percentage amounts" actually taken into account in computing the average "contribution percentages" of "eligible participants" who are Highly Compensated Employees for such Plan Year, over

(2) The maximum amount of "contribution percentage amounts" permitted to be made on behalf of Highly Compensated Employees under Section 6.06 (determined by reducing "contribution percentage amounts" made for the Plan Year on behalf of "eligible participants" who are Highly Compensated Employees in order of their "contribution percentages" beginning with the highest of such "contribution percentages").

"Excess aggregate contributions" shall be determined after first determining "excess deferrals" and then determining "excess contributions".

6.1.8.
"Excess contributions" with respect to any Plan Year mean the excess of
6.1.8.1.
The aggregate amount of "includable contributions" actually taken into account in computing the average "deferral percentage" of Active Participants who are Highly Compensated Employees for such Plan Year, over
6.1.8.2.
The maximum amount of "includable contributions" permitted to be made on behalf of Highly Compensated Employees under Section 6.03 (determined by reducing "includable contributions" made for the Plan Year on behalf of Active Participants who are Highly Compensated Employees in order of their "deferral ratios", beginning with the highest of such "deferral ratios").
6.1.9.
"Excess deferrals" mean those Deferral Contributions and/or "elective deferrals" that are includable in a Participant's gross income under Code Section 402(g) to the extent such Participant's Deferral Contributions and/or "elective deferrals" for a calendar year exceed the dollar limitation under such Code Section for such calendar year.
6.1.10.
"Excess 415 amount" means the excess of an Active Participant's "annual additions" for the Limitation Year over the "maximum permissible amount".
6.1.11.
“415 compensation” means Compensation (as defined in Section 2.01(k)), subject to the following:
6.1.11.1.
"415 compensation" does not exclude any amounts elected by the Employer in Subsection 1.05(b) of the Adoption Agreement.
6.1.11.2.
“415 compensation” shall be based on compensation for all services to the "415 employer."
6.1.11.3.
“415 compensation” shall be based on the amount actually paid or made available to the Participant (or, if earlier, includible in the gross income of the Participant) during the Limitation Year.
6.1.11.4.
An Eligible Employee's severance from employment, as defined in Section 2.01(k), shall be applied using the modification to the employer aggregation rules prescribed in Code Section 415(h).
6.1.11.5.
“415 compensation” may include amounts earned, but not paid during the Limitation Year solely because of the timing of pay periods and pay dates, provided
6.1.11.5.1.
such amounts are paid during the first few weeks of the next Limitation Year;
6.1.11.5.2.
such amounts are included on a uniform and consistent basis with respect to all similarly situated Participants; and
6.1.11.5.3.
no such amounts are included in more than one Limitation Year.
6.1.11.6.
If the initial Plan Year of a new plan consists of fewer than 12 months, calculated from the Effective Date listed in Subsection 1.01(g)(1) of the Adoption Agreement through the end of such initial Plan Year and if the Employer has designated in Subsection 1.01(f) of the Adoption Agreement that the Limitation Year is based on the Plan Year, for purposes of determining Compensation for such initial Plan Year, the Limitation Year shall be the 12-month period ending on the last day of the Plan Year.

In addition, “415 compensation” shall not reflect compensation for a Limitation Year greater than the limit under Code Section 401(a)(17) that applies to that Limitation Year.

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6.1.12.
"415 employer" means the Employer and any other employers which constitute a controlled group of corporations (as defined in Code Section 414(b) as modified by Code Section 415(h)) or which constitute trades or businesses (whether or not incorporated) which are under common control (as defined in Code Section 414(c) as modified by Code Section 415(h)) or which constitute an affiliated service group (as defined in Code Section 414(m)) and any other entity required to be aggregated with the Employer pursuant to regulations issued under Code Section 414(o).
6.1.13.
"Includable contributions" mean those amounts included in applying the "ADP" test.
6.1.13.1.
"Includable contributions" include the following:
6.1.13.1.1.
any Deferral Contributions made on behalf of an Active Participant, including "excess deferrals" of Highly Compensated Employees and "designated Roth contributions", except as specifically provided in Subsection 6.01(o)(2);
6.1.13.1.2.
Qualified Nonelective Employer Contributions allocated as of a date within the “testing year” and designated at the time of contribution as applying for the "ADP" test; and
6.1.13.1.3.
to the extent necessary to satisfy the “ADP” test, Qualified Matching Employer Contributions on Deferral Contributions or Employee Contributions made for the Plan Year allocated as of a date within the “testing year” and so designated at the time of contribution; provided, however, that the maximum amount of Qualified Matching Employer Contributions included in "includable contributions" with respect to an Active Participant shall not exceed the greater of 5% of the Active Participant's "testing compensation" or 100% of his Deferral Contributions for the Plan Year.
6.1.13.2.
"Includable contributions" shall not include the following:
6.1.13.2.1.
Catch-Up Contributions, except to the extent that a Participant's Deferral Contributions are classified as Catch-Up Contributions as provided in Section 6.04 solely because of a failure of the "ADP" test described in Section 6.03;
6.1.13.2.2.
"excess deferrals" of Non-Highly Compensated Employees that arise solely from Deferral Contributions made under the Plan or plans maintained by the Employer or a Related Employer;
6.1.13.2.3.
Deferral Contributions that are taken into account in satisfying the "ACP" test described in Section 6.06;
6.1.13.2.4.
additional elective contributions made pursuant to Code Section 414(u) that are treated as Deferral Contributions;
6.1.13.2.5.
for any Plan Year in which the "ADP" test described in Section 6.03 is deemed satisfied pursuant to Section 6.09 with respect to some or all Deferral Contributions, the following:
6.1.13.2.5.1.
any Deferral Contributions with respect to which the "ADP" test is deemed satisfied; and
6.1.13.2.5.2.
Qualified Matching Employer Contributions, except to the extent that the "ADP" test described in Section 6.03 must be satisfied with respect to some Deferral Contributions and such Qualified Matching Employer Contributions are used in applying the "ADP" test.
6.1.13.3.
Notwithstanding any other provision of this Subsection, if an Employer elects to change from the current year testing method described in Subsection 1.06(a)(1) of the Adoption Agreement to the prior year testing method described in Subsection 1.06(a)(2) of the Adoption Agreement, the following shall not be considered "includable contributions" for purposes of determining the "deferral ratios" of Non-Highly Compensated Employees for the prior year immediately preceding the Plan Year in which the change is effective:


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(A) Deferral Contributions that were taken into account in satisfying the "ACP" test described in Section 6.06 for such prior year pursuant to Subsection 6.01(c)(1)(E) above;

(B) Qualified Nonelective Employer Contributions that were taken into account in satisfying the "ADP" test described in Section 6.03 or the "ACP" test described in Section 6.06 for such prior year;

(C) 401(k) Safe Harbor Nonelective Employer Contributions that were taken into account in satisfying the "ADP" test described in Section 6.03 or the "ACP" test described in Section 6.06 for such prior year or that were required to satisfy the safe harbor contribution requirements under Section 1.401(k)-3(b) of the Treasury Regulations for such prior year;

(D) 401(k) Safe Harbor Matching Employer Contributions that were taken into account in satisfying the "ADP" test described in Section 6.03 for such prior year or that were required to satisfy the safe harbor contribution requirements under Section 1.401(k)-3(c) of the Treasury Regulations for such prior year; and

(E) Qualified Matching Employer Contributions that were taken into account in satisfying the "ADP" test described in Section 6.03 or the "ACP" test described in Section 6.06 for such prior year.

To be included in determining an Active Participant's "deferral ratio" for a Plan Year, "includable contributions" must be allocated to the Participant's Account as of a date within such Plan Year and made before the last day of the 12-month period immediately following the Plan Year to which the "includable contributions" relate. If an Employer has elected the prior year testing method described in Subsection 1.06(a)(2), "includable contributions" that are taken into account for purposes of determining the "deferral ratios" of Non-Highly Compensated Employees for the prior year relate to such prior year. Therefore, such "includable contributions" must be made before the last day of the Plan Year being tested.

6.1.14.
"Individual medical benefit account" means an individual medical benefit account as defined in Code Section 415(l)(2).
6.1.15.
"Maximum permissible amount" means for a Limitation Year with respect to any Active Participant the lesser of (1) the maximum dollar amount permitted for the Limitation Year under Code Section 415(c)(1)(A) adjusted as provided in Code Section 415(d) (e.g., $51,000 for the Limitation Year ending in 2013) or

(2) 100 percent of the Active Participant's “415 compensation” for the Limitation Year. If a short Limitation Year is created because of an amendment changing the Limitation Year to a different 12-consecutive-month period, the dollar limitation specified in clause (1) above shall be adjusted by multiplying it by a fraction the numerator of which is the number of months (counting any portion of a month as a whole month) in the short Limitation Year and the denominator of which is 12.

The limitation specified in clause (2) above shall not apply to any contribution for medical benefits within the meaning of Code Section 401(h) or 419A(f)(2) after separation from service which is otherwise treated as an "annual addition" under Code Section 419A(d)(2) or 415(l)(1).

6.1.16.
"Simplified employee pension" means a simplified employee pension as defined in Code Section 408(k).
6.1.17.
"Testing compensation" means the base compensation definition elected by the Employer in Subsection 1.05(a), as described in Subsection 2.01(k)(1) or, in the case of a Self-Employed Individual, Earned Income as described in Subsection 2.01(k)(1)(A). However in lieu of such definition and at the option of the Employer or Plan Administrator, the Employer or Plan Administrator may specify any other definition of compensation allowable under Code Section 414(s) or applicable guidance or regulations issued thereunder. "Testing compensation" shall be based on the amount actually paid to a Participant during the "testing year" or, at the option of the Employer or Plan Administrator, during that portion of the "testing year" during which the Participant is an Active Participant; provided, however, that if the Employer elected different Eligibility Service requirements for purposes of eligibility to make Deferral Contributions and to receive Matching Employer Contributions, then "testing compensation" must be based on the amount paid to a Participant during the full "testing year".


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The annual "testing compensation" of each Active Participant taken into account in applying the "ADP" test described in Section 6.03 and the "ACP" test described in Section 6.06 for any "testing year" shall not exceed the annual compensation limit under Code Section 401(a)(17) as in effect on the first day of the "testing year" (e.g.,

$255,000 for the "testing year" beginning in 2013). This limit shall be adjusted by the Secretary to reflect increases in the cost of living, as provided in Code Section 401(a)(17)(B); provided, however, that the dollar increase in effect on January 1 of any calendar year is effective for "testing years" beginning in such calendar year. If a Plan determines "testing compensation" over a period that contains fewer than 12 calendar months (a "short determination period"), then the Compensation limit for such "short determination period" is equal to the Compensation limit for the calendar year in which the "short determination period" begins multiplied by the ratio obtained by dividing the number of full months in the "short determination period" by 12; provided, however, that such proration shall not apply if there is a "short determination period" because an election was made, in accordance with any rules and regulations issued by the Secretary of the Treasury or his delegate, to apply the "ADP" test described in Section 6.03 and/or the "ACP" test described in Section 6.06 based only on “testing compensation” paid during the portion of the "testing year" during which an individual was an Active Participant.

6.1.18.
"Testing year" means:
6.1.18.1.
if the Employer has elected the current year testing method in Subsection 1.06(a)(1) of the Adoption Agreement, the Plan Year being tested.
6.1.18.2.
if the Employer has elected the prior year testing method in Subsection 1.06(a)(2) of the Adoption Agreement, the Plan Year immediately preceding the Plan Year being tested.
6.1.19.
"Welfare benefit fund" means a welfare benefit fund as defined in Code Section 419(e).

To the extent that types of contributions defined in Section 2.01 are referred to in this Article 6, the defined term includes similar contributions made under other plans where the context so requires.

6.2.
Code Section 402(g) Limit on Deferral Contributions. In no event shall the amount of Deferral Contributions, other than Catch-Up Contributions, made under the Plan for a calendar year, when aggregated with the "elective deferrals" made under any other plan maintained by the Employer or a Related Employer, exceed the dollar limitation contained in Code Section 402(g) in effect at the beginning of such calendar year.

A Participant may assign to the Plan any "excess deferrals" made during a calendar year by notifying the Administrator on or before March 15 following the calendar year in which the "excess deferrals" were made of the amount of the "excess deferrals" to be assigned to the Plan. A Participant is deemed to notify the Administrator of any "excess deferrals" that arise by taking into account only those Deferral Contributions made to the Plan and those "elective deferrals" made to any other plan maintained by the Employer or a Related Employer. Notwithstanding any other provision of the Plan, "excess deferrals", plus any income and minus any loss allocable thereto, as determined under Section 6.08, shall be distributed no later than April 15 to any Participant to whose Account "excess deferrals" were so assigned for the preceding calendar year and who claims "excess deferrals" for such calendar year. In the event that "excess deferrals" are allocated to a Participant's Deferral Contributions sub-accounts, such "excess deferrals" will be distributed first from the Participant's Deferral Contributions for the Plan Year other than his Roth 401(k) Contributions then from his Roth 401(k) Contributions unless provided otherwise in the Adoption Agreement.

"Excess deferrals" to be distributed to a Participant for a calendar year shall be reduced by any "excess contributions" for the Plan Year beginning within such calendar year that were previously distributed or re-characterized in accordance with the provisions of Section 6.04.

Any Matching Employer Contributions attributable to "excess deferrals", plus any income and minus any loss allocable thereto, as determined under Section 6.08, shall be forfeited and applied as provided in Section 11.09.

"Excess deferrals" shall be treated as "annual additions" under the Plan, unless such amounts are distributed no later than the first April 15 following the close of the calendar year in which the "excess deferrals" were made.

6.3.
Additional Limit on Deferral Contributions ("ADP" Test). Except to the extent the Employer has elected in Subsection 1.11(a)(3) or Subsection 1.12(a)(3) of the Adoption Agreement to make 401(k) Safe Harbor Matching Employer Contributions or 401(k) Safe Harbor Nonelective Employer Contributions for a Plan Year and the "ADP" test is deemed satisfied in accordance with Section 6.09, notwithstanding any other provision of the Plan to the contrary, the Deferral

 

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Contributions, excluding additional elective contributions made pursuant to Code Section 414(u) that are treated as Deferral Contributions and Catch-Up Contributions (except to the extent that a Participant's Deferral Contributions are classified as Catch-Up Contributions as provided in Section 6.04 solely because of a failure of the "ADP" test described herein), made with respect to the Plan Year on behalf of Active Participants who are Highly Compensated Employees for such Plan Year may not result in an average "deferral ratio" for such Active Participants that exceeds the greater of:

6.3.1.
the average "deferral ratio" for the "testing year" of Active Participants who are Non-Highly Compensated Employees for the "testing year" multiplied by 1.25; or
6.3.2.
the average "deferral ratio" for the "testing year" of Active Participants who are Non-Highly Compensated Employees for the "testing year" multiplied by two, provided that the average "deferral ratio" for Active Participants who are Highly Compensated Employees for the Plan Year being tested does not exceed the average "deferral ratio" for Participants who are Non-Highly Compensated Employees for the "testing year" by more than two percentage points.

For the first Plan Year in which the Plan provides a cash or deferred arrangement, the average "deferral ratio" for Active Participants who are Non-Highly Compensated Employees used in determining the limits applicable under Subsections 6.03(a) and (b) shall be either three percent or the actual average "deferral ratio" for such Active Participants for such first Plan Year, as elected by the Employer in Section 1.06(b) of the Adoption Agreement.

The "deferral ratios" of Active Participants who are included in a unit of Employees covered by an agreement which the Secretary of Labor finds to be a collective bargaining agreement shall be disaggregated from the "deferral ratios" of other Active Participants and the provisions of this Section 6.03 shall be applied separately with respect to each group.

The "deferral ratio" for any Active Participant who is a Highly Compensated Employee for the Plan Year being tested and who is eligible to have "includable contributions" allocated to his accounts under two or more cash or deferred arrangements described in Code Section 401(k) that are maintained by the Employer or a Related Employer, shall be determined as if such "includable contributions" were made under the Plan. If a Highly Compensated Employee participates in two or more cash or deferred arrangements that have different plan years, all "includable contributions" made during the Plan Year under all such arrangements shall be treated as having been made under the Plan. Notwithstanding the foregoing, certain plans, and contributions made thereto, shall be treated as separate if mandatorily disaggregated under regulations under Code Section 401(k).

If this Plan satisfies the requirements of Code Section 401(k), 401(a)(4), or 410(b) only if aggregated with one or more other plans, or if one or more other plans satisfy the requirements of such Code Sections only if aggregated with this Plan, then this Section shall be applied by determining the "deferral ratios" of Employees as if all such plans were a single plan. Plans may be aggregated in order to satisfy Code Section 401(k) only if they have the same plan year and use the same method to satisfy the "ADP" test.

Notwithstanding anything herein to the contrary, if the Plan permits Employees to make Deferral Contributions prior to the time the Employees have completed the minimum age and service requirements of Code Section 410(a)(1)(A) and the Employer elects, pursuant to Code Section 410(b)(4)(B), to disaggregate the Plan into two component plans for purposes of complying with Code Section 410(b)(1), one benefiting Employees who have completed such minimum age and service requirements and the other benefiting Employees who have not, the Plan must be disaggregated in the same manner for ADP testing purposes, unless the Plan applies the alternative rule in Code Section 401(k)(3)(F). In determining the component plans for purposes of such disaggregation, the Employer may apply the maximum entry dates permitted under Code Section 410(a)(4) and may utilize the Plan Year for purposes of determining Hours of Service.

The Employer shall maintain records sufficient to demonstrate satisfaction of the "ADP" test and the amount of Qualified Nonelective Employer Contributions and/or Qualified Matching Employer Contributions used in such test.

6.4.
Allocation and Distribution of "Excess Contributions". Unless provided otherwise in the Adoption Agreement, the "excess contributions" allocable to the Account of a Participant, plus any income and minus any loss allocable thereto, as determined under Section 6.08, shall be distributed to the Participant no later than the last day of the Plan Year immediately following the Plan Year in which the "excess contributions" were made, unless the Employer elected Catch-Up Contributions in Subsection 1.07(a)(2) of the Adoption Agreement and such "excess contributions" are classified as Catch-Up Contributions.


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If "excess contributions" are to be distributed from the Plan and such "excess contributions" are distributed more than 2 1/2 months (this period may be 6 months if the Plan has adopted an EACA within Subsection 1.07(a)(4) of the Adoption Agreement and has elected, pursuant to the Administrator’s separate written procedures established pursuant to Subsection 5.03(c), to cover all Eligible Employees by the EACA) after the last day of the Plan Year in which the "excess contributions" were made, a ten percent excise tax shall be imposed on the Employer maintaining the Plan with respect to such amounts.

The "excess contributions" allocable to a Participant's Account shall be determined by reducing the "includable contributions" made for the Plan Year on behalf of Active Participants who are Highly Compensated Employees in order of the dollar amount of such "includable contributions", beginning with the highest such dollar amount. "Excess contributions" allocated to a Participant for a Plan Year shall be reduced by the amount of any "excess deferrals" previously distributed for the calendar year ending in such Plan Year.

"Excess contributions" shall be treated as "annual additions".

For purposes of distribution, "excess contributions" shall be considered allocated among a Participant's Deferral Contributions sub-accounts and, if applicable, the Participant's Qualified Nonelective Employer Contributions sub-account and/or Qualified Matching Employer Contributions sub-account in the order prescribed and communicated to the Trustee, which order shall be uniform with respect to all Participants and nondiscriminatory. In the event that "excess contributions" are allocated to a Participant's Deferral Contributions sub-accounts, such "excess contributions" will be distributed first from the Participant's Deferral Contributions for the Plan Year other than his Roth 401(k) Contributions then from his Roth 401(k) Contributions unless provided otherwise in the Adoption Agreement.

Any Matching Employer Contributions attributable to "excess contributions", plus any income and minus any loss allocable thereto, as determined under Section 6.08, shall be forfeited and applied as provided in Section 11.09.

6.5.
Reductions in Deferral or Employee Contributions to Meet Code Requirements. If the Administrator anticipates that the Plan will not satisfy the "ADP" and/or "ACP" test for the year, the Administrator may reduce the rate of Deferral Contributions and/or Employee Contributions of Participants who are Highly Compensated Employees to an amount determined by the Administrator to be necessary to satisfy the "ADP" and/or "ACP" test.
6.6.
Limit on Matching Employer Contributions and Employee Contributions ("ACP" Test). The provisions of this Section 6.06 shall not apply to Active Participants who are included in a unit of Employees covered by an agreement which the Secretary of Labor finds to be a collective bargaining agreement between employee representatives and one or more employers. The provisions of this Section shall not apply to Matching Employer Contributions made on account of amounts deferred pursuant to Code Section 457 under a separate eligible deferred compensation plan.

Except to the extent the Employer has elected in Subsection 1.11(a)(3) or Subsection 1.12(a)(3) of the Adoption Agreement to make 401(k) Safe Harbor Matching Employer Contributions or 401(k) Safe Harbor Nonelective Employer Contributions for a Plan Year and the "ACP" test is deemed satisfied in accordance with Section 6.10, notwithstanding any other provision of the Plan to the contrary, Matching Employer Contributions and Employee Contributions made with respect to a Plan Year by or on behalf of "eligible participants" who are Highly Compensated Employees for such Plan Year may not result in an average "contribution percentage" for such "eligible participants" that exceeds the greater of:

6.6.1.
the average "contribution percentage" for the "testing year" of "eligible participants" who are Non-Highly Compensated Employees for the "testing year" multiplied by 1.25; or
6.6.2.
the average "contribution percentage" for the "testing year" of "eligible participants" who are Non-Highly Compensated Employees for the "testing year" multiplied by two, provided that the average "contribution percentage" for the Plan Year being tested of "eligible participants" who are Highly Compensated Employees does not exceed the average "contribution percentage" for the "testing year" of "eligible participants" who are Non-Highly Compensated Employees for the "testing year" by more than two percentage points.

For the first Plan Year in which the Plan provides for "contribution percentage amounts" to be made, the "ACP" for "eligible participants" who are Non-Highly Compensated Employees used in determining the limits applicable under paragraphs (a) and (b) of this Section shall be either three percent or the actual "ACP" of such eligible participants for such first Plan Year, as elected by the Employer in Section 1.06(b) of the Adoption Agreement.


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The "contribution percentage" for any "eligible participant" who is a Highly Compensated Employee for the Plan Year and who is eligible to have "contribution percentage amounts" allocated to his accounts under two or more plans described in Code Section 401(a) that are maintained by the Employer or a Related Employer, shall be determined as if such "contribution percentage amounts" were contributed to the Plan. If a Highly Compensated Employee participates in two or more such plans that have different plan years, all "contribution percentage amounts" made during the Plan Year under such other plans shall be treated as having been contributed to the Plan. Notwithstanding the foregoing, certain plans shall be treated as separate if mandatorily disaggregated under Treasury Regulations issued under Code Section 401(m).

If this Plan satisfies the requirements of Code Section 401(m), 401(a)(4) or 410(b) only if aggregated with one or more other plans, or if one or more other plans satisfy the requirements of such Code Sections only if aggregated with this Plan, then this Section shall be applied by determining the "contribution percentages" of Employees as if all such plans were a single plan. Plans may be aggregated in order to satisfy Code Section 401(m) only if they have the same plan year and use the same method to satisfy the "ACP" test.

Notwithstanding anything herein to the contrary, if the Plan permits Employees to make Employee Contributions and/or receive Matching Employer Contributions prior to the time the Employees have completed the minimum age and service requirements of Code Section 410(a)(1)(A) and the Employer elects, pursuant to Code Section 410(b)(4)(B), to disaggregate the Plan into two component plans for purposes of complying with Code Section 410(b)(1), one benefiting Employees who have completed such minimum age and service requirements and the other benefiting Employees who have not, the Plan must be disaggregated in the same manner for ACP testing purposes, unless the Plan applies the alternative rule in Code Section 401(m)(5)(C). In determining the component plans for purposes of such disaggregation, the Employer may apply the maximum entry dates permitted under Code Section 410(a)(4).

The Employer shall maintain records sufficient to demonstrate satisfaction of the "ACP" test and the amount of Deferral Contributions, Qualified Nonelective Employer Contributions, and/or Qualified Matching Employer Contributions used in such test.

6.7.
Allocation, Distribution, and Forfeiture of "Excess Aggregate Contributions". Notwithstanding any other provision of the Plan, the "excess aggregate contributions" allocable to the Account of a Participant, plus any income and minus any loss allocable thereto, as determined under Section 6.08, shall be forfeited, if forfeitable, or if not forfeitable, distributed to the Participant no later than the last day of the Plan Year immediately following the Plan Year in which the "excess aggregate contributions" were made. If such excess amounts are distributed more than 2 1/2 months (this period may be 6 months if the Plan has adopted an EACA within Subsection 1.07(a)(4)(B) of the Adoption Agreement and has elected, pursuant to the Administrator’s separate written procedures established pursuant to Subsection 5.03(c), to cover all Eligible Employees by the EACA) after the last day of the Plan Year in which such "excess aggregate contributions" were made, a ten percent excise tax shall be imposed on the Employer maintaining the Plan with respect to such amounts.

The "excess aggregate contributions" allocable to a Participant's Account shall be determined by reducing the "contribution percentage amounts" made for the Plan Year on behalf of "eligible participants" who are Highly Compensated Employees in order of the dollar amount of such "contribution percentage amounts", beginning with the highest such dollar amount.

"Excess aggregate contributions" shall be treated as "annual additions".

"Excess aggregate contributions" shall be forfeited or distributed from a Participant's Employee Contributions sub-account, Matching Employer Contributions sub-account and, if applicable, the Participant's Deferral Contributions sub-account and/or Qualified Nonelective Employer Contributions sub-account in the order prescribed and communicated to the Trustee, which order shall be uniform with respect to all Participants and nondiscriminatory. In the event that "excess aggregate contributions" are allocated to a Participant's Deferral Contributions sub-accounts, such "excess aggregated contributions" will be distributed first from the Participant's Deferral Contributions for the Plan Year other than his Roth 401(k) Contributions then from his Roth 401(k) Contributions unless provided otherwise in the Adoption Agreement.

Forfeitures of "excess aggregate contributions" shall be applied as provided in Section 11.09.

6.8.
Income or Loss on Distributable Contributions. The income or loss allocable to "excess deferrals", "excess contributions", and "excess aggregate contributions" shall be determined under one of the following methods:


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(a) the income or loss attributable to such distributable contributions shall be the income or loss for the "determination year" allocable to the Participant's Account to which such contributions were made multiplied by a fraction, the numerator of which is the amount of the distributable contributions and the denominator of which is the balance of the Participant's Account to which such contributions were made, determined as of the end of the "determination year" without regard to any income or loss occurring during the "determination year"; or

(b) the income or loss attributable to such distributable contributions shall be the income or loss on such contributions for the "determination year", determined under any other reasonable method. Any reasonable method used to determine income or loss hereunder shall be used consistently for all Participants in determining the income or loss allocable to distributable contributions hereunder and shall be the same method that is used by the Plan in allocating income or loss to Participants' Accounts.

6.09. Deemed Satisfaction of "ADP" Test. Notwithstanding any other provision of this Article 6 to the contrary, if the Employer has elected in Subsection 1.11(a)(3) or Subsection 1.12(a)(3) of the Adoption Agreement to make 401(k) Safe Harbor Matching Employer Contributions or 401(k) Safe Harbor Nonelective Employer Contributions, the portion of the Plan for which the election applies shall be deemed to have satisfied the "ADP" test described in Section 6.03 for a Plan Year provided all of the following requirements are met with regard to the Active Participants within such portion of the Plan:

(a) The 401(k) Safe Harbor Matching Employer Contribution or 401(k) Safe Harbor Nonelective Employer Contribution must be allocated to an Active Participant's Account, unless provided otherwise in the Adoption Agreement, as of a date within such Plan Year and must be made before the last day of the 12-month period immediately following such Plan Year.

(b) If the Employer has elected to make 401(k) Safe Harbor Matching Employer Contributions, such 401(k) Safe Harbor Matching Employer Contributions must be made with respect to Deferral Contributions made by the Active Participant for such Plan Year.

(c) The Employer shall provide to each Active Participant during the Plan Year a comprehensive notice, written in a manner calculated to be understood by the average Active Participant, of the Active Participant's rights and obligations under the Plan. If the Employer either (i) is considering amending its Plan to satisfy the "ADP" test using 401(k) Safe Harbor Nonelective Employer Contributions, as provided in Section 6.11, or (ii) has selected 401(k) Safe Harbor Nonelective Employer Contributions under Subsection 1.12(a)(3)(B), the notice shall include a statement that the Plan may be amended to provide a 401(k) Safe Harbor Nonelective Employer Contribution for the Plan Year. The notice shall be provided to each Active Participant within one of the following periods, whichever is applicable:

(1) if the Employee is an Active Participant 90 days before the beginning of the Plan Year, within the period beginning 90 days and ending 30 days, or any other reasonable period as required by Sections l.401(k)-3 and 1.401(m)-3 of the Treasury Regulations, before the first day of the Plan Year; or

(2) if the Employee becomes an Active Participant after the date described in paragraph (1) above, within the period beginning 90 days before and ending on the date he becomes an Active Participant.

However, in the case of a notice for an automatic contribution arrangement pursuant to Code Section 401(k)(13), the notice must be provided sufficiently early to allow an Eligible Employee to make an election to avoid the contribution pursuant to Section 5.03(c). Notwithstanding the preceding requirement, the Administrator cannot make a Participant’s default contribution pursuant to Section 5.03(c) effective any later than the earlier of (i) the pay date for the second payroll period that begins after the date the notice is provided; or, (ii) the first pay date that occurs at least 30 days after the notice is provided.

If the notice provides that the Plan may be amended to provide a 401(k) Safe Harbor Nonelective Employer Contribution for the Plan Year and the Plan is amended to provide such contribution, a supplemental notice shall be provided to all Active Participants stating that a 401(k) Safe Harbor Nonelective Employer Contribution in the specified amount shall be made for the Plan Year. Such supplemental notice shall be provided to Active Participants at least 30 days before the last day of the Plan Year.

(d)
If the Employer has elected to make 401(k) Safe Harbor Matching Employer Contributions, the ratio of Matching Employer Contributions made on behalf of each Highly Compensated Employee for the Plan Year to each

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such Highly Compensated Employee's eligible contributions for the Plan Year is not greater than the ratio of Matching Employer Contributions to eligible contributions that would apply to any Non-Highly Compensated Employee for whom such eligible contributions are the same percentage of Compensation, adjusted as provided in Section 5.02, for the Plan Year.

(e)
Except as otherwise provided in Subsection 6.11(b) or with respect to a Plan Year described in (2) below, the Plan is amended to provide for 401(k) Safe Harbor Matching Employer Contributions or 401(k) Safe Harbor Nonelective Employer Contributions before the first day of such Plan Year and, except as otherwise provided in Subsection 6.11(d) or with respect to a Plan Year described in (1) through (4) below, such provisions remain in effect for an entire 12-month Plan Year. The 12-month Plan Year requirement shall not apply to:

(1) The first Plan Year of a newly established Plan (other than a successor plan) if such Plan Year is at least 3 months long, provided that the 3-month requirement shall not apply in the case of a newly established employer that establishes a plan as soon as administratively feasible;

(2) The Plan Year in which a cash or deferred arrangement is first added to an existing plan (other than a successor plan) if the cash or deferred arrangement is effective no later than 3 months before the end of such Plan Year;

(3) Any short Plan Year resulting from a change in Plan Year if (i) the Plan satisfied the safe harbor requirements for the immediately preceding Plan Year and (ii) the Plan satisfies the safe harbor requirements for the immediately following Plan Year (or the immediately following 12 months, if the following Plan Year has fewer than 12 months);

 

(4) The final Plan Year of a terminating Plan if any of the following applies: (i) the Plan would satisfy the provisions of paragraph Subsection 6.11(d) below, other than the provisions of paragraph Subsection 6.11(d)(3), treating the termination as an election to reduce or suspend 401(k) Safe Harbor Matching Employer Contributions or 401(k) Safe Harbor Nonelective Employer Contributions; (ii) the termination is in connection with a transaction described in Code Section 410(b)(6)(C); or (iii) the Employer incurs a substantial business hardship comparable to a substantial business hardship described in Code Section 412(d).

Notwithstanding any other provision of this Section, if the Employer has elected a more stringent eligibility requirement in Section 1.04 of the Adoption Agreement for 401(k) Safe Harbor Matching Employer Contributions or 401(k) Safe Harbor Nonelective Employer Contributions than for Deferral Contributions, the Plan shall be disaggregated in accordance with Section 6.03 and treated as two separate plans pursuant to Code Section 410(b)(4)(B). The separate disaggregated plan that satisfies Code Section 401(k)(12) shall be deemed to have satisfied the "ADP" test. The other disaggregated plan shall be subjected to the "ADP" test described in Section 6.03. If the Employer has elected Option 1.11(a)(3)(D) or 1.12(a)(3)(C) to exclude some Participants from receiving 401(k) Safe Harbor Matching Employer Contributions or 401(k) Safe Harbor Nonelective Employer Contributions, the Plan shall be deemed to have satisfied the "ADP" test only with respect to those employees who are eligible to receive such contributions. The remainder of the Plan shall be subjected to the "ADP" test described in Section 6.03.

Except as otherwise provided in Subsection 6.11(d) regarding amendments suspending or eliminating 401(k) Safe Harbor Matching Contributions or 401(k) Safe Harbor Nonelective Employer Contributions, a plan that does not meet the requirements specified in (a) through (e) above with respect to a Plan Year may not default to ADP testing in accordance with Section 6.03 above.

j)
Deemed Satisfaction of "ACP" Test With Respect to Matching Employer Contributions. The portion of the Plan that is deemed to satisfy the "ADP" test pursuant to Section 6.09 shall also be deemed to have satisfied the "ACP" test described in Section 6.06 with respect to Matching Employer Contributions, if Matching Employer Contributions to the Plan for the Plan Year meet all of the following requirements:
(a)
Matching Employer Contributions meet the requirements of Subsections 6.09(a) and (b) as if they were 401(k) Safe Harbor Matching Employer Contributions;
(b)
the percentage of eligible contributions matched does not increase as the percentage of Compensation contributed increases;

(c) the ratio of Matching Employer Contributions made on behalf of each Highly Compensated Employee for the Plan Year to each such Highly Compensated Employee's eligible contributions for the Plan Year is not greater than the

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ratio of Matching Employer Contributions to eligible contributions that would apply to each Non-Highly Compensated Employee for whom such eligible contributions are the same percentage of Compensation, adjusted as provided in Section 5.02, for the Plan Year;

(d) eligible contributions matched do not exceed six percent of a Participant's Compensation; and

(e) if the Employer elected in Subsection 1.11(a)(2) or 1.11(b) of the Adoption Agreement to provide discretionary Matching Employer Contributions, the Employer also limited the dollar amount of such discretionary Matching Employer Contributions allocated to a Participant for the Plan Year to no more than four percent of such Participant's Compensation for the Plan Year.

The portion of the Plan not deemed to have satisfied the "ACP" test pursuant to this Section shall be subject to the "ACP" test described in Section 6.06 with respect to Matching Employer Contributions.

If the Plan provides for Employee Contributions, the "ACP" test described in Section 6.06 must be applied with respect to such Employee Contributions.

k)
Changing Testing Methods. In accordance with Treas. Regs. 1.401(k)-1(e)(7) and 1.401(m)-1(c)(2), it is impermissible for the Employer to use "ADP" and "ACP" testing for a Plan Year in which it is intended for the Plan through its written terms to be a Code Section 401(k) safe harbor plan and Code Section 401(m) safe harbor plan and the Employer fails to satisfy the requirements of such safe harbors for the Plan Year. Notwithstanding any other provisions of the Plan, if the Employer elects to change between the "ADP" testing method and the safe harbor testing method, the following shall apply:
i)
Except as otherwise specifically provided in this Section or Subsection 6.09, or applicable regulation, the Employer may not change from the "ADP" testing method to the safe harbor testing method unless Plan provisions adopting the safe harbor testing method are adopted before the first day of the Plan Year in which they are to be effective and remain in effect for an entire 12-month Plan Year.
ii)
A Plan may be amended during a Plan Year to make 401(k) Safe Harbor Nonelective Employer Contributions to satisfy the testing rules for such Plan Year if:
(1)
The Employer provides both the initial and subsequent notices described in Section 6.09 for such Plan Year within the time period prescribed in Section 6.09.
(2)
The Employer amends its Adoption Agreement no later than 30 days prior to the end of such Plan Year to provide for 401(k) Safe Harbor Nonelective Employer Contribution in accordance with the provisions of Option 1.12(a)(3)(B).
iii)
Except as otherwise specifically provided in this Section, a Plan may not be amended during the Plan Year to discontinue 401(k) Safe Harbor Nonelective or Matching Employer Contributions and revert to the "ADP" testing method for such Plan Year.
iv)
A Plan may be amended to reduce or suspend 401(k) Safe Harbor Matching Contributions or 401(k) Safe Harbor Nonelective Employer Contributions for a Plan year, if the Employer provides in the notice described in Section 6.09(b) that the plan may be amended during the Plan Year to reduce or suspend such contributions or the Employer is operating at an economic loss (as described in Code Section 412(c)(2)(A)), and revert to the "ADP" testing method (and, if applicable, the “ACP” testing method) for such Plan Year if:
(1)
All Eligible Employees are provided notice of the reduction or suspension describing (i) the consequences of the amendment, (ii) the procedures for changing their salary reduction agreements, and

(iii) the effective date of the reduction orsuspension.

(2)
The reduction or suspension of such contributions is no earlier than the later of (i) 30 days after the date the notice described in paragraph (1) is provided to Eligible Employees or (ii) the date the amendment is adopted.


.

 

(3) Active Participants are given a reasonable opportunity before the reduction or suspension occurs, including a reasonable period after the notice described in paragraph (1) is provided to Eligible Employees, to

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change amounts elected or deemed elected under Section 5.03 and, if applicable, Section 5.04.

(4) With regard to 401(k) Safe Harbor Matching Employer Contributions, the Plan satisfies the 401(k) Safe Harbor Matching Employer Contributions provisions of the Adoption Agreement in effect prior to the amendment with respect amounts elected or deemed elected under Section 5.03 and, if applicable, Section

5.04 made through the effective date of theamendment.

(3)
With regard to 401(k) Safe Harbor Nonelective Employer Contributions, the Plan satisfies the 401(k) Safe Harbor Nonelective Employer Contributions provisions of the Adoption Agreement in effect prior to the amendment with respect to the safe harbor compensation (compensation meeting the requirements of Section 1.401(k)-3(b)(2) of the Treasury Regulations) paid through the effective date of the amendment.

If the Employer amends its Plan in accordance with the provisions of this paragraph (d), the "ADP" test described in Section 6.03 and the “ACP” test described in Section 6.06 shall be applied as if they had been in effect for the entire Plan Year using the current year testing method in Subsection 1.06(a)(1) of the Adoption Agreement.

l)
Code Section 415 Limitations. Notwithstanding any other provisions of the Plan, the following limitations shall apply:
i)
Employer Maintains Single Plan. If the "415 employer" does not maintain any other qualified defined contribution plan or any "welfare benefit fund", "individual medical benefit account", or "simplified employee pension" in addition to the Plan, the provisions of this Subsection 6.12(a) shall apply.
(1)
If a Participant does not participate in, and has never participated in any other qualified defined contribution plan, "welfare benefit fund", "individual medical benefit account", or "simplified employee pension" maintained by the "415 employer", which provides an "annual addition", the amount of "annual additions" to the Participant's Account for a Limitation Year shall not exceed the lesser of the "maximum permissible amount" or any other limitation contained in the Plan. If a contribution that would otherwise be contributed or allocated to the Participant's Account would cause the "annual additions" for the Limitation Year to exceed the "maximum permissible amount", the amount contributed or allocated shall be reduced so that the "annual additions" for the Limitation Year shall equal the "maximum permissible amount".
(2)
Prior to the determination of a Participant's actual “415 compensation” for a Limitation Year, the "maximum permissible amount" may be determined on the basis of a reasonable estimation of the Participant's “415 compensation” for such Limitation Year, uniformly determined for all Participants similarly situated. Any Employer contributions to be made based on estimated annual “415 compensation” shall be reduced by any "excess 415 amounts" carried over from prior Limitation Years.
(3)
As soon as is administratively feasible after the end of the Limitation Year, the "maximum permissible amount" for such Limitation Year shall be determined on the basis of the Participant's actual "415 compensation" for such Limitation Year.
ii)
Employer Maintains Multiple Defined Contribution Type Plans. Unless the Employer specifies another method for limiting "annual additions" in the 415 Correction Addendum to the Adoption Agreement, if the "415 employer" maintains any other qualified defined contribution plan or any "welfare benefit fund", "individual medical benefit account", or "simplified employee pension" in addition to the Plan, the provisions of this Subsection 6.12(b) shall apply.
(1)
If a Participant is covered under any other qualified defined contribution plan or any "welfare benefit fund", "individual medical benefit account", or "simplified employee pension" maintained by the "415 employer", that provides an "annual addition", the amount of "annual additions" to the Participant's Account for a Limitation Year shall not exceed the lesser of:
(a)
the "maximum permissible amount", reduced by the sum of any "annual additions" to the Participant's accounts for the same Limitation Year under such other qualified defined


contribution plans and "welfare benefit funds", "individual medical benefit accounts", and "simplified employee pensions", or

(b)
any other limitation contained in the Plan.

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If the "annual additions" with respect to a Participant under other qualified defined contribution plans, "welfare benefit funds", "individual medical benefit accounts", and "simplified employee pensions" maintained by the "415 employer" are less than the "maximum permissible amount" and a contribution that would otherwise be contributed or allocated to the Participant's Account under the Plan would cause the "annual additions" for the Limitation Year to exceed the "maximum permissible amount", the amount to be contributed or allocated shall be reduced so that the "annual additions" for the Limitation Year shall equal the "maximum permissible amount". If the "annual additions" with respect to the Participant under such other qualified defined contribution plans, "welfare benefit funds", "individual medical benefit accounts", and "simplified employee pensions" in the aggregate are equal to or greater than the "maximum permissible amount", no amount shall be contributed or allocated to the Participant's Account under the Plan for the Limitation Year.

(2)
Prior to the determination of a Participant's actual “415 compensation” for the Limitation Year, the amounts referred to in Subsection 6.12(b)(1)(A) above may be determined on the basis of a reasonable estimation of the Participant's “415 compensation” for such Limitation Year, uniformly determined for all Participants similarly situated. Any Employer contribution to be made based on estimated annual “415 compensation” shall be reduced by any "excess 415 amounts" carried over from prior Limitation Years.
(3)
As soon as is administratively feasible after the end of the Limitation Year, the amounts referred to in Subsection 6.12(b)(1)(A) shall be determined on the basis of the Participant's actual "415 compensation" for such Limitation Year.
iii)
Corrections. In correcting an “excess 415 amount” in a Limitation Year, the Employer may use any appropriate correction under the Employee Plans Compliance Resolution System, or any successor thereto.
iv)
Exclusion from Annual Additions. Restorative payments allocated to a Participant’s Account, which include payments made to restore losses to the Plan resulting from actions (or a failure to act) by a fiduciary for which there is a reasonable risk of liability under Title I of ERISA or under other applicable federal or state law, where similarly situated Participants are similarly treated do not give rise to an “annual addition” for any Limitation Year.

Article 7. Participants' Accounts.

7.1.
Individual Accounts. The Administrator shall establish and maintain an Account for each Participant that shall reflect Employer and Employee contributions made on behalf of the Participant and earnings, expenses, gains and losses attributable thereto, and investments made with amounts in the Participant's Account. The Administrator shall separately account for any Deferral Contributions made on behalf of a Participant and the earnings, expenses, gains and losses attributable thereto. The Administrator shall establish and maintain such other accounts, including plan-level accounts not specifically described within the Plan, and records as it decides in its discretion to be reasonably required or appropriate in order to discharge its duties under the Plan. The Administrator shall notify the Trustee of all Accounts established and maintained under the Plan.

If "designated Roth contributions", as defined in Section 6.01, are held under the Plan either as Rollover Contributions or because of an Active Participant's election to make Roth 401(k) Contributions under the terms of the Plan, separate accounts shall be maintained with respect to such "designated Roth contributions." Contributions and withdrawals of "designated Roth contributions" will be credited and debited to the "designated Roth contributions" sub-account maintained for each Participant within the Participant's Account. The Plan will maintain a record of the amount of "designated Roth contributions" in each such sub-account. Gains, losses, and other credits or charges will be separately allocated on a reasonable and consistent basis to each Participant's "designated Roth contributions" sub-account and the Participant's other sub-accounts within the Participant's Account under the Plan. No contributions other than "designated Roth contributions" and properly attributable earnings will be credited to each Participant's "designated Roth contributions" sub-account.


 

 

7.2.
Valuation of Accounts. Participant Accounts shall be valued at their fair market value at least annually as of a "determination date", as defined in Subsection 15.01(a), in accordance with a method consistently followed and uniformly applied, and on such date earnings, expenses, gains and losses on investments made with amounts in each Participant's Account shall be allocated to such Account.

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Article 8. Investment of Contributions.

8.1.
Manner of Investment. All contributions made to the Accounts of Participants shall be held for investment by the Trustee. The Accounts of Participants shall be invested and reinvested only in Permissible Investments generally described in the Service Agreement.
8.2.
Investment Decisions. Investments in Participant Accounts shall be directed in accordance with the Employer's election in Subsection 1.24 of the Adoption Agreement.
8.2.1.
With respect to those Participant Accounts for which Investment Fiduciary investment direction is elected, the Investment Fiduciary shall direct the Trustee with respect to the investment and reinvestment of assets in the Permissible Investments.
8.2.2.
With respect to those Participant Accounts for which Participant investment direction is elected, each Participant shall direct the investment of his Account among the Permissible Investments.
8.2.2.1.
While any balance remains in the Account of a Participant after his death, the Beneficiary of the Participant shall make decisions as to the investment of the Account as though the Beneficiary were the Participant. To the extent not prohibited by a qualified domestic relations order as defined in Code Section 414(p), an alternate payee shall make investment decisions with respect to any segregated account established in the name of the alternate payee as provided in Section 18.04.
8.2.2.2.
If the Trustee receives any contribution under the Plan as to which investment instructions have not been provided, such amount shall be invested in the Permissible Investment(s) directed by the Investment Fiduciary.

To the extent that the Employer elects to allow Participants to direct the investment of their Account in Section 1.24 of the Adoption Agreement, the Plan is intended to constitute a plan described in ERISA Section 404(c)(1) and regulations issued thereunder. The fiduciaries of the Plan shall be relieved of liability for any losses that are the direct and necessary result of investment instructions given by the Participant, his Beneficiary, or an alternate payee under a qualified domestic relations order.

If one of the Permissible Investments for the Plan is employer securities (as defined in Section 407(d)(1) of ERISA) of a publicly traded company or one treated as publicly traded pursuant to Section 401(a)(35)(F) of the Code, the Plan must have no fewer than three Permissible Investments, other than such employer securities, each of which must be diversified and have materially different risk and return characteristics. To the extent contributions to the Plan have been required to be invested in such employer securities through Section 1.24(b) and subject to any restrictions described therein, a Participant or Beneficiary must be permitted to direct the investment of the proceeds from an exchange out of employer securities into one of the Permissible Investments described in this paragraph. Except as provided in Reg. Section 1.401(a)(35)-1 and other applicable guidance, the Plan shall not impose restrictions or conditions with respect to the investment of employer securities that are not imposed on the other Permissible Investments, except any restrictions or conditions imposed by reason of the application of securities laws.

8.2.3.
All dividends, interest, gains and distributions of any nature received in respect of Fund Shares shall be reinvested in additional shares of that Permissible Investment, except as otherwise directed by the Investment Fiduciary.
8.2.4.
Expenses attributable to the acquisition of investments shall be charged to the Account of the Participant for which such investment is made as directed by the Investment Fiduciary.

The Investment Fiduciary, as named fiduciary for the Plan, may appoint one or more investment managers (as defined under Section 3(38) of ERISA) who may have such duties as the Investment Fiduciary in its sole discretion shall determine in its appointment and agreement with such investment manager(s), up to and including any


authority to determine what shall be the Permissible Investments for the Plan at any given time, what restrictions will exist upon those and how unallocated accounts under the Plan and contributions described in Section 8.02(b)(2) of the Plan shall be invested. Such agreement(s) may limit, to the extent permissible under ERISA, the Investment Fiduciary’s authority

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and responsibility for the Plan’s Permissible Investments so delegated to the investment manager(s). The Investment Fiduciary shall retain the authority to revoke any such appointment of an investment manager and, if such investment manager is not the Trustee, shall notify the Trustee of any such revocation in a mutually agreed upon form and manner. The Investment Fiduciary may appoint an investment manager (which may be an affiliate of the Trustee) to determine the allocation of amounts held in Participants' Accounts among various investment options (the "Managed Account" option) for Participants who direct the Trustee to invest any portion of their accounts in the Managed Account option. The investment options utilized under the Managed Account option may be those generally available under the Plan or may be as selected by the investment manager for use under the Managed Account option. Participation in the Managed Account option shall be subject to such conditions and limitations (including account minimums) as may be imposed by the investment manager. Notwithstanding anything else herein to the contrary, an investment manager (which may be the Trustee or an affiliate of the Trustee) may also be appointed to manage any Permissible Investment subject to management by such investment manager.

The Investment Fiduciary may also, by written instrument, allocate and delegate its fiduciary responsibilities in accordance with ERISA Section 405.

8.3.
Participant Directions to Trustee. The method and frequency for change of investments shall be determined under the rules applicable to the Permissible Investments, including any additional rules limiting the frequency of investment changes, as may be agreed upon by the recordkeeper. The Trustee shall have no duty to inquire into the investment decisions of a Participant, Beneficiary, or alternate payee or to advise such individual regarding the purchase, retention, or sale of assets credited to his Account.
8.4.
Life Insurance. All insurance contracts must provide that proceeds shall be payable to the Plan; provided, however, that the policy holder shall be required to pay over all proceeds of any such contract to the Participant's designated Beneficiary in accordance with the distribution provisions of this Plan. A Participant's Spouse shall be the designated Beneficiary of the proceeds in all circumstances unless a qualified election has been made in accordance with Article 14. Under no circumstances shall the policy holder retain any part of the proceeds. In the event of any conflict between the terms of the Plan and the terms of any insurance contract purchased hereunder, the Plan provisions shall control.

Any life insurance contracts held for the Plan are subject to the following limits:

8.4.1.
Ordinary life - For purposes of these incidental insurance provisions, ordinary life insurance contracts are contracts with both nondecreasing death benefits and nonincreasing premiums. If such contracts are held, less than 1/2 of the aggregate employer contributions allocated to any Participant shall be used to pay the premiums attributable to them.
8.4.2.
Term and universal life - No more than 1/4 of the aggregate employer contributions allocated to any participant shall be used to pay the premiums on term life insurance contracts, universal life insurance contracts, and all other life insurance contracts which are not ordinary life.
8.4.3.
Combination - The sum of 1/2 of the ordinary life insurance premiums and all other life insurance premiums shall not exceed 1/4 of the aggregate employer contributions allocated to any Participant.

 

Article 9. Participant Loans.

9.1.
Special Definition. For purposes of this Article, a "participant" is any Participant or Beneficiary, including an alternate payee under a qualified domestic relations order, as defined in Code Section 414(p), who is a party-in-interest (as determined under ERISA Section 3(14)) with respect to the Plan.
9.2.
Participant Loans. If so provided by the Employer in Section 1.18 of the Adoption Agreement, the Administrator shall allow "participants" to apply for a loan from their Accounts under the Plan, subject to the provisions of this Article 9.
9.3.
Separate Loan Procedures. All Plan loans shall be made and administered in accordance with separate loan procedures that are hereby incorporated into the Plan by reference. The separate loan procedures shall describe the portions of a Participant’s Account from which loans may be calculated or taken.

9.04. Availability of Loans. Loans shall be made available to all "participants" on a reasonably equivalent basis. Loans shall not be made available to "participants" who are Highly Compensated Employees in an amount greater than the amount made available to other "participants".

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9.05. Limitation on Loan Amount. No loan to any "participant" shall be made to the extent that such loan when added to the outstanding balance of all other loans to the "participant" would exceed the lesser of (a) $50,000 reduced by the excess (if any) of the highest outstanding balance of plan loans during the one-year period ending on the day before the loan is made over the outstanding balance of plan loans on the date the loan is made, or (b) one-half the present value of the "participant's" vested interest in his Account. For purposes of the above limitation, plan loans include all loans from all plans maintained by the Employer and any Related Employer.

9.06. Interest Rate. Subject to the requirements of the Servicemembers Civil Relief Act, all loans shall bear a reasonable rate of interest as determined by the Administrator based on the prevailing interest rates charged by persons in the business of lending money for loans which would be made under similar circumstances.

9.07. Level Amortization. All loans shall by their terms require that repayment (principal and interest) be amortized in level payments, not less frequently than quarterly, over a period not extending beyond five years from the date of the loan unless such loan is for the purchase of a "participant's" primary residence. Notwithstanding the foregoing, the amortization requirement may be waived while a "participant" is on a leave of absence from employment with the Employer and any Related Employer either without pay or at a rate of pay which, after withholding for employment and income taxes, is less than the amount of the installment payments required under the terms of the loan, provided that the period of such waiver shall not exceed one year, unless the "participant" is absent because of military leave during which the "participant" performs services with the uniformed services (as defined in chapter 43 of title 38 of the United States Code), regardless of whether such military leave is a qualified military leave in accordance with the provisions of Code Section 414(u). Installment payments must resume after such leave of absence ends or, if earlier, after the first year of such leave of absence, in an amount that is not less than the amount of the installment payments required under the terms of the original loan. Unless a "participant" is absent because of military leave, as discussed below, no waiver of the amortization requirements shall extend the period of the loan beyond five years from the date of the loan, unless the loan is for purchase of the "participant's" primary residence. If a "participant" is absent because of military leave during which the "participant" performs services with the uniformed services (as defined in chapter 43 of title 38 of the United States Code), regardless of whether such military leave is a qualified military leave in accordance with the provisions of Code Section 414(u), waiver of the amortization requirements may extend the period of the loan to the maximum period permitted for such loan under the separate loan procedures extended by the period of such military leave.

9.08. Security. Loans must be secured by the "participant's" vested interest in his Account not to exceed 50 percent of such vested interest. If the provisions of Section 14.04 apply to a Participant, a Participant must obtain the consent of his or her Spouse, if any, to use his vested interest in his Account as security for the loan. Spousal consent shall be obtained no earlier than the beginning of the 180-day period that ends on the date on which the loan is to be so secured. The consent must be in writing, must acknowledge the effect of the loan, and must be witnessed by a Plan representative or notary public. Such consent shall thereafter be binding with respect to the consenting Spouse or any subsequent Spouse with respect to that loan. Any revision of such a loan permitted by Q & A 24(c) of Section 1.401(a)-20 of the Treasury Regulations and the Plan's separate loan procedures shall be treated as a new loan made on the date of such revision for purposes of spousal consent.

9.09. Loan Repayments. If a "participant's" loan is being repaid through payroll withholding, the Employer shall remit any such loan repayment to the Trustee as of the earliest date on which such amount can reasonably be segregated from the Employer's general assets, but not later than the earlier of (a) the close of the period specified in the separate loan procedures for preventing a default or (b) the 15th business day of the calendar month following the month in which such amount otherwise would have been paid to the "participant".

9.10.
Default. The Administrator shall treat a loan in default if:
(a)
any scheduled repayment remains unpaid at the end of the cure period specified in the separate loan procedures for that payment (unless payment is not made due to a waiver of the amortization schedule for a "participant" who is on a leave of absence, as described in Section 9.07), or
(b)
there is an outstanding principal balance existing on a loan after the last scheduled repayment date.


Upon default, the entire outstanding principal and accrued interest shall be immediately due and payable. If a distributable event (as defined by the Code) has occurred, the Administrator shall direct the Trustee to foreclose on the promissory note and offset the "participant's" vested interest in his Account by the outstanding balance of the loan. If a distributable event has not

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occurred, the Administrator shall direct the Trustee to foreclose on the promissory note and offset the "participant's" vested interest in his Account as soon as a distributable event occurs. The Trustee shall have no obligation to foreclose on the promissory note and offset the outstanding balance of the loan except as directed by the Administrator.

9.11.
Effect of Termination Where Participant has Outstanding Loan Balance. If so provided in Section 1.18(a) of the Adoption Agreement, if a Participant has an outstanding loan balance at the time his employment terminates, the entire outstanding principal and accrued interest shall be due and payable by the end of the cure period specified in the separate loan procedures. Any outstanding loan amounts that are immediately due and payable hereunder shall be treated in accordance with the provisions of Sections 9.10 and 9.12 as if the Participant had defaulted on the outstanding loan.
9.12.
Deemed Distributions Under Code Section 72(p). Notwithstanding the provisions of Section 9.10, if a "participant's" loan is in default, the "participant" shall be treated as having received a taxable "deemed distribution" for purposes of Code Section 72(p), whether or not a distributable event has occurred. The tax treatment of that portion of a defaulted loan that is secured by Roth 401(k) Contributions shall be determined in accordance with Code Section 402A and guidance issued thereunder.

The amount of a loan that is a deemed distribution ceases to be an outstanding loan for purposes of Code Section 72, except as otherwise specifically provided herein, and a Participant shall not be treated as having received a taxable distribution when the Participant's Account is offset by the outstanding balance of the loan amount as provided in Section 9.10. In addition, interest that accrues on a loan after it is deemed distributed shall not be treated as an additional loan to the Participant and shall not be included in the income of the Participant as a deemed distribution. Notwithstanding the foregoing, unless a Participant repays a loan that has been deemed distributed, with interest thereon, the amount of such loan, with interest, shall be considered an outstanding loan under Code Section 72(p) for purposes of determining the applicable limitation on subsequent loans under Section 9.05.

If a Participant makes payments on a loan that has been deemed distributed, payments made on the loan after the date it was deemed distributed shall be treated as Employee Contributions to the Plan for purposes of increasing the Participant's tax basis in his Account, but shall not be treated as Employee Contributions for any other purpose under the Plan, including application of the "ACP" test described in Section 6.06 and application of the Code Section 415 limitations described in Section 6.12.

The provisions of this Section 9.12 regarding treatment of loans that are deemed distributed shall not apply to loans made prior to January 1, 2002, except to the extent provided under the transition rules in Q & A 22(c)(2) of Section 1.72(p)-l of the Treasury Regulations.

9.13.
Determination of Vested Interest Upon Distribution Where Plan Loan is Outstanding. Notwithstanding any other provision of the Plan, the portion of a "participant's" vested interest in his Account that is held by the Plan as security for a loan outstanding to the "participant" in accordance with the provisions of this Article shall reduce the amount of the Account payable at the time of death or distribution, but only if the reduction is used as repayment of the loan. If less than 100 percent of a "participant's" vested interest in his Account (determined without regard to the preceding sentence) is payable to the "participant's" surviving Spouse or other Beneficiary, then the Account shall be adjusted by first reducing the "participant's" vested interest in his Account by the amount of the security used as repayment of the loan, and then determining the benefit payable to the surviving Spouse or other Beneficiary.

 

Article 10. In-Service Withdrawals.

10.1.
Availability of In-Service Withdrawals. Except as otherwise provided in this Article, as permitted under Section 11.02 with respect to Participants who continue in employment past Normal Retirement Age, or as required under Section 12.04 with respect to Participants who continue in employment past their Required Beginning Date, a Participant shall not be permitted to make a withdrawal from his Account under the Plan prior to retirement or termination of employment with the Employer and all Related Employers, if any.
10.1.1.
Active Military Distribution (HEART Act): If so provided by the Employer in Subsection 1.19(c)(3), a Participant performing service in the uniformed services as described in Code Section 3401(h)(2)(A) shall be treated

as having been severed from employment with the Employer for purposes of Code Section 401(k)(2)(B)(i)(I) and shall, as long as that service in the uniformed services continues, have the option to request a distribution of all or any part of his or her Account restricted from distribution only due to Code Section 401(k)(2)(B)(i)(I). Any distribution taken by a Participant pursuant to the previous sentence shall be considered an eligible rollover distribution pursuant to Section 13.04(c) of the Plan and any Participant taking a distribution under this Subsection shall be suspended from making Deferral Contributions and Employee Contributions under the Plan for a period of 6 months following the date of any such

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distribution.

10.2.
Withdrawal of Employee Contributions. A Participant may elect to withdraw up to 100 percent of the amount then credited to his Employee Contributions sub-account. Such withdrawals may be made in accordance with the frequency constraints selected through Subsection 1.19(c) of the Adoption Agreement.
10.3.
Withdrawal of Rollover Contributions. A Participant may elect to withdraw up to 100 percent of the amount then credited to his Rollover Contributions sub-account. Such withdrawals may be made at any time.
10.4.
Age 59 1/2 Withdrawals. If so provided by the Employer in Subsection 1.19(b) of the Adoption Agreement or the In-Service Withdrawals Addendum to the Adoption Agreement, a Participant who continues in employment as an Employee and who has attained the age of 59 1/2 is permitted to withdraw upon request all or any portion of his Accounts specified by the Employer in Subsection 1.19(b) of the Adoption Agreement or the In-Service Withdrawals Addendum to the Adoption Agreement, as applicable and as may be limited therein.
10.5.
Hardship Withdrawals. If so provided by the Employer in Subsection 1.19(a) of the Adoption Agreement, a Participant who continues in employment as an Employee may apply for a hardship withdrawal. Unless provided otherwise in the Service Agreement, the Participant may apply by certifying to the Administrator all of the required criteria specified in this Section. Such certification shall represent that the Participant has documentation substantiating the hardship. Such a hardship withdrawal may include all or any portion of the Accounts specified by the Employer in Subsection 1.19(a)(1) of the Adoption Agreement and the In-Service Withdrawals Addendum to the Adoption Agreement, if applicable, excluding any earnings on the Deferral Contributions sub-account accrued after the later of December 31, 1988 or the last day of the last Plan Year ending before July 1, 1989. The minimum amount, if any, that a Participant may withdraw because of hardship is the dollar amount specified by the Employer in Subsection 1.19(a).

For purposes of this Section 10.05, a withdrawal is made on account of hardship if made on account of an immediate and heavy financial need of the Participant where such Participant lacks other available resources. The Administrator shall direct the Trustee with respect to hardship withdrawals and those withdrawals shall be based on the following special rules:

10.5.1.
The following are the only financial needs considered immediate and heavy:
10.5.1.1.
expenses incurred or necessary for medical care (that would be deductible under Code Section 213(d), determined without regard to whether the expenses exceed any applicable income limit) of the Participant, the Participant's Spouse, children, or dependents, or a primary beneficiary of the Participant;
10.5.1.2.
costs directly related to the purchase (excluding mortgage payments) of a principal residence for the Participant;
10.5.1.3.
payment of tuition, related educational fees, and room and board for the next 12 months of post-secondary education for the Participant, the Participant's Spouse, children or dependents (as defined in Code Section 152, without regard to subsections (b)(1), (b)(2), and (d)(1)(B) thereof), or a primary beneficiary of the Participant;
10.5.1.4.
payments necessary to prevent the eviction of the Participant from, or a foreclosure on the mortgage on, the Participant's principal residence;
10.5.1.5.
payments for funeral or burial expenses for the Participant's deceased parent, Spouse, child, or dependent (as defined in Code Section 152, without regard to subsection (d)(1)(B) thereof), or a primary beneficiary of the Participant;


 

 

 

(6) expenses for the repair of damage to the Participant's principal residence that would qualify for a casualty loss deduction under Code Section 165 (determined without regard to whether the loss exceeds any applicable income limit); or

(7) any other financial need determined to be immediate and heavy under rules and regulations issued by the Secretary of the Treasury or his delegate; provided, however, that any such financial need shall constitute an

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immediate and heavy need under this paragraph (7) no sooner than administratively practicable following the date such rule or regulation is issued.

For purposes of this Section, the term “primary beneficiary” means a Beneficiary under the Plan who has an unconditional right to all or a portion of the Participant’s Account upon the death of the Participant.

10.5.2.
A distribution shall be considered as necessary to satisfy an immediate and heavy financial need of the Participant only if:
10.5.2.1.
The Participant has obtained all distributions, other than the hardship withdrawal, and all nontaxable (at the time of the loan) loans currently available under all plans maintained by the Employer or any Related Employer;
10.5.2.2.
The Participant suspends Deferral Contributions and Employee Contributions to the Plan for the 6-month period following receipt of his hardship withdrawal. The suspension must also apply to all elective contributions and employee contributions to all other qualified plans and non-qualified plans maintained by the Employer or any Related Employer, other than any mandatory employee contribution portion of a defined benefit plan, including stock option, stock purchase, and other similar plans, but not including health and welfare benefit plans (other than the cash or deferred arrangement portion of a cafeteria plan); and
10.5.2.3.
The withdrawal amount is not in excess of the amount of an immediate and heavy financial need (including amounts necessary to pay any Federal, state or local income taxes or penalties reasonably anticipated to result from the distribution).
10.6.
Additional In-Service Withdrawal Rules. To the extent required under Code Section 411(d)(6), in-service withdrawals that were available under a prior plan shall be available under the Plan and indicated using Subsection 1.19(g) of the Adoption Agreement. The Employer may also elect additional in-service withdrawal options using Section 1.19(g).
10.7.
Restrictions on In-Service Withdrawals. The following restrictions apply to any in-service withdrawal made from a Participant's Account under this Article:
10.7.1.
Except with regard to a rollover made pursuant to Subsection 1.09(b), if the provisions of Section 14.04 apply to a Participant's Account, the Participant must obtain the consent of his Spouse, if any, to obtain an in-service withdrawal.
10.7.2.
The Participant may elect to receive in-service withdrawals under this Article in any form of distribution described in Section 1.20 of the Adoption Agreement. However, if the provisions of Section 14.04 apply to a Participant's Account, the Participant shall receive the in-service withdrawal in the form of a "qualified joint and survivor annuity", as defined in Subsection 14.01(a), unless the consent rules in Section 14.05 are satisfied, or the Participant has elected to receive the in-service withdrawal in the form of a "qualified optional survivor annuity", as defined in Subsection 14.01(b).
10.7.3.
Notwithstanding any other provision of the Plan to the contrary other than the provisions of Section 10.09, 11.02 or 12.04, a Participant shall not be permitted to make an in-service withdrawal from his Account of amounts attributable to contributions made to a money purchase pension plan, except employee and/or rollover contributions that were held in a separate account(s) under such plan.
10.8.
Qualified Reservist Distributions. If so elected by the Employer in Section 1.19(d) of the Adoption Agreement, and notwithstanding anything herein to the contrary, a Participant ordered or called to active duty for a period in excess of 179 days or for an indefinite period by reason of being a member of a reserve component (as defined in Section 101 of Title 37, United States Code), shall be eligible to elect to receive a Qualified Reservist Distribution. A “Qualified Reservist Distribution” means a distribution from the Participant’s Account of amounts attributable to Deferral Contributions, provided


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such distribution is made during the period beginning on the date of the order or call to active duty and ending at the close of the active duty period.

10.9.
Age 62 Distribution of Money Purchase Benefits. If so elected by the Employer in Section 1.19(e) of the Adoption Agreement, a Participant who has attained at least age 62 shall be eligible to elect to receive a distribution of vested benefit amounts accrued as a result of the Participant’s participation in a money purchase pension plan (due to a merger into this Plan of money purchase pension plan assets), if any.

 

Article 11. Right to Benefits.

11.1.
Normal or Early Retirement. Each Participant who continues in employment as an Employee until his Normal Retirement Age or, if so elected by the Employer in Subsection 1.14(b) of the Adoption Agreement, Early Retirement Age, shall have a vested interest in his Account of 100 percent regardless of any vesting schedule elected in Section 1.16 of the Adoption Agreement. If a Participant retires upon the attainment of Normal or Early Retirement Age, such retirement is referred to as a normal retirement.
11.2.
Late Retirement. If a Participant continues in employment as an Employee after his Normal Retirement Age, he shall continue to have a 100 percent vested interest in his Account and shall continue to participate in the Plan until the date he establishes with the Employer for his late retirement. If so elected by the Employer in Section 1.19(f) of the Adoption Agreement, until he retires, he has a continuing right to elect to receive distribution of all or any portion of his Account in accordance with the provisions of Articles 12 and 13; provided, however, that a Participant may not receive any portion of his Deferral Contributions, Qualified Nonelective Employer Contributions, Qualified Matching Employer Contributions, 401(k) Safe Harbor Matching Employer Contributions, or 401(k) Safe Harbor Nonelective Employer Contributions sub-accounts prior to his attainment of age 59 1/2.
11.3.
Disability Retirement. If so elected by the Employer in Subsection 1.14(c) of the Adoption Agreement, a Participant who becomes disabled while employed as an Employee, or, unless provided otherwise in the Additional Provisions Addendum to the Adoption Agreement, while performing qualified military service as defined in Code Section 414(u)(5), shall have a 100 percent vested interest in his Account regardless of any vesting schedule elected in Section 1.16 of the Adoption Agreement. An Employee is considered disabled if he satisfies any of the requirements for disability retirement selected by the Employer in Section 1.15 of the Adoption Agreement and terminates his employment with the Employer. Such termination of employment is referred to as a disability retirement.
11.4.
Death. A Participant who dies while employed as an Employee, or while performing qualified military service as defined in Code Section 414(u)(5), shall have a 100 percent vested interest in his Account and his designated Beneficiary shall be entitled to receive the balance of his Account, plus any amounts thereafter credited to his Account. If a Participant whose employment as an Employee has terminated dies, his designated Beneficiary shall be entitled to receive the Participant's vested interest in his Account.

A copy of the death notice or other sufficient documentation must be provided to the Administrator using procedures established by the Administrator. If upon the death of the Participant there is, in the opinion of the Administrator, no designated Beneficiary for part or all of the Participant's Account, such amount shall be paid to his surviving Spouse or, if none, to his estate (such Spouse or estate shall be deemed to be the Beneficiary for purposes of the Plan). If a Beneficiary dies after benefits to such Beneficiary have commenced, but before they have been completed, and, in the opinion of the Administrator, no person has been designated to receive such remaining benefits, then such benefits shall be paid in a lump sum to the deceased Beneficiary's estate.

Subject to the requirements of Section 14.04, a Participant may designate a Beneficiary, or change any prior designation of Beneficiary by giving notice to the Administrator using procedures established by the Administrator. If more than one person is designated as the Beneficiary, their respective interests shall be as indicated on the designation form. In the case of a married Participant, the Participant's Spouse shall be deemed to be the designated Beneficiary unless the Participant's Spouse has consented to another designation in the manner described in Section 14.06. Notwithstanding the foregoing, if a Participant’s Account is subject to the requirements of Section 14.04 and the Employer has specified in the Forms of Payment Addendum to the Adoption Agreement that less than 100 percent of the Participant’s Account that is subject to Section 14.04 shall be used to purchase the “qualified preretirement survivor annuity”, as defined in Section 14.01, the Participant may designate a Beneficiary other than his Spouse for the portion of his Account that would not be used to purchase the “qualified preretirement survivor annuity,” regardless of whether the Spouse consents to such designation.

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11.5.
Other Termination of Employment. If a Participant terminates his employment with the Employer and all Related Employers, if any, for any reason other than death or normal, late, or disability retirement, he shall be entitled to a termination benefit equal to the sum of (a) his vested interest in the balance of his Matching Employer and/or Nonelective Employer Contributions sub-account(s), such vested interest to be determined in accordance with Section 5.11 and the vesting schedule(s) selected by the Employer in Section 1.16 of the Adoption Agreement and/or the Eligibility, Service and Vesting Addendum to the Adoption Agreement, and (b) the balance of his Deferral, Employee, Qualified Nonelective Employer, Qualified Matching Employer, and Rollover Contributions sub-accounts.
11.6.
Application for Distribution. Except as provided in Subsection 1.21(a) of the Adoption Agreement, a Participant (or his Beneficiary, if the Participant has died) who is entitled to a distribution hereunder must request such distribution, using procedures established by the Administrator, unless the Employer has elected in Subsection 1.20(e)(1) of the Adoption Agreement to cash out de minimus Accounts and the Participant's vested interest in his Account does not exceed the amount subject to automatic distribution pursuant to Section 13.02.
11.7.
Application of Vesting Schedule Following Partial Distribution. If a distribution from a Participant's Matching Employer and/or Nonelective Employer Contributions sub-account has been made to him at a time when his vested interest in such Account balance is less than 100 percent, the vesting schedule(s) in Section 1.16 of the Adoption Agreement shall thereafter apply only to the balance of his Account attributable to Matching Employer and/or Nonelective Employer Contributions allocated after such distribution. The balance of the Account from which such distribution was made shall be transferred to a separate account immediately following such distribution.

At any relevant time prior to a forfeiture of any portion thereof under Section 11.08, a Participant's vested interest in such separate account shall be equal to P(AB+(RxD))-(RxD), where P is the Participant's vested interest expressed as a percentage at the relevant time determined under Section 11.05; AB is the account balance of the separate account at the relevant time; D is the amount of the distribution; and R is the ratio of the account balance at the relevant time to the account balance after distribution. Following a forfeiture of any portion of such separate account under Section 11.08 below, the Participant's vested interest in any balance in such separate account shall remain 100 percent.

11.8.
Forfeitures. If a Participant terminates his employment with the Employer and all Related Employers before his vested interest in his Matching Employer and/or Nonelective Employer Contributions sub-accounts is 100 percent, the non-vested portion of his Account (including any amounts credited after his termination of employment) shall be forfeited by him as follows:
11.8.1.
If the Inactive Participant elects to receive distribution of his entire vested interest in his Account, the non-vested portion of his Account shall be forfeited upon the complete distribution of such vested interest, subject to the possibility of reinstatement as provided in Section 11.10. For purposes of this Subsection, if the value of an Employee's vested interest in his Account balance is zero, the Employee shall be deemed to have received a distribution of his vested interest immediately following termination of employment.
11.8.2.
If the Inactive Participant elects not to receive distribution of his vested interest in his Account following his termination of employment, the non-vested portion of his Account shall be forfeited after the Participant has incurred five consecutive Breaks in Vesting Service.

Except as otherwise provided in the Adoption Agreement, no forfeitures shall occur solely as a result of a Participant's withdrawal of Employee Contributions.

11.9.
Application of Forfeitures. Any forfeitures occurring during a Plan Year may be used to pay administrative expenses under the Plan at any time, if so directed by the Administrator. Except as provided otherwise in the Adoption Agreement, any forfeitures not used to pay administrative expenses under the Plan shall be applied to reduce the contributions of the Employer for the immediately following Plan Year and held and applied in accordance with this Section 11.09.

Pending application, forfeitures shall be invested as directed by the Investment Fiduciary.

Except as permitted pursuant to EPCRS and notwithstanding any other provision of the Plan to the contrary, in no event may forfeitures be used to reduce the Employer's obligation to remit to the Trust (or other appropriate Plan funding vehicle) loan repayments made pursuant to Article 9, Deferral Contributions, or Employee Contributions.


 

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11.10.
Reinstatement of Forfeitures. If a Participant forfeits any portion of his Account under Subsection 11.08(a) because of distribution of his complete vested interest in his Account, but again becomes an Eligible Employee, then the amount so forfeited, without any adjustment for the earnings, expenses, losses, or gains of the assets credited to his Account since the date forfeited, shall be recredited to his Account (or to a separate account as described in Section 11.07, if applicable) if he repays the entire amount of his distribution not attributable to Employee Contributions or Rollover Contributions before the earlier of:
(a)
his incurring five-consecutive Breaks in Vesting Service following the date complete distribution of his vested interest was made to him; or
(b)
five years after his Reemployment Commencement Date.

If an Employee is deemed to have received distribution of his complete vested interest as provided in Section 11.08, the Employee shall be deemed to have repaid such distribution on his Reemployment Commencement Date.

Upon such an actual or deemed repayment, the provisions of the Plan (including Section 11.07) shall thereafter apply as if no forfeiture had occurred. The amount to be recredited pursuant to this paragraph shall be derived first from the forfeitures, if any, which as of the date of recrediting have yet to be applied as provided in Section 11.09 and, to the extent such forfeitures are insufficient, from a special contribution to be made by the Employer.

11.11.
Adjustment for Investment Experience. If any distribution under this Article 11 is not made in a single payment, the amount retained by the Trustee after the distribution shall be subject to adjustment until distributed to reflect the income and gain or loss on the investments in which such amount is invested and any expenses properly charged under the Plan and Trust to such amounts.

 

Article 12. Distributions.

12.1.
Restrictions on Distributions.
12.1.1.
Severance from Employment Rule. A Participant, or his Beneficiary, may not receive a distribution from the Participant's Deferral Contributions, Qualified Nonelective Employer Contributions, Qualified Matching Employer Contributions, 401(k) Safe Harbor Matching Employer Contributions or 401(k) Safe Harbor Nonelective Employer Contributions sub-accounts earlier than upon the Participant's severance from employment with the Employer and all Related Employers, death, or disability, except as otherwise provided in Article 10, Section 11.02 or Section 12.04. If the Employer elected Subsection 1.21(b) of the Adoption Agreement, distribution from the Participant's Deferral Contributions, Qualified Nonelective Employer Contributions, Qualified Matching Employer Contributions, 401(k) Safe Harbor Matching Employer Contributions or 401(k) Safe Harbor Nonelective Employer Contributions sub-accounts may be further postponed in accordance with the provisions of Subsection 12.01(b) below.
12.1.2.
Same Desk Rule. If the Employer elected in Subsection 1.21(b) of the Adoption Agreement to preserve the separation from service rules in effect for Plan Years beginning before January 1, 2002, a Participant, or his Beneficiary, may not receive a distribution from the Participant's Deferral Contributions, Qualified Nonelective Employer Contributions, Qualified Matching Employer Contributions, 401(k) Safe Harbor Matching Employer Contributions or 401(k) Safe Harbor Nonelective Employer Contributions sub-accounts earlier than upon the Participant's separation from service with the Employer and all Related Employers, death, or disability, except as otherwise provided in Article 10, Section 11.02 or Section 12.04. Notwithstanding the foregoing, amounts may also be distributed from such sub-accounts, in the form of a lump sum only, upon:
12.1.2.1.
The disposition by a corporation to an unrelated corporation of substantially all of the assets (within the meaning of Code Section 409(d)(2)) used in a trade or business of such corporation if such corporation continues to maintain the Plan with respect to the Participant after the disposition, but only with respect to former Employees who continue employment with the corporation acquiring such assets.
12.1.2.2.
The disposition by a corporation to an unrelated entity of such corporation's interest in a subsidiary (within the meaning of Code Section 409(d)(3)) if such corporation continues to maintain the Plan with respect to the Participant, but only with respect to former Employees who continue employment with such subsidiary.


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In addition to the distribution events described in paragraph (a) or (b) above, as applicable, such amounts may also be distributed upon the termination of the Plan provided that the Employer does not maintain another defined contribution plan (other than an employee stock ownership plan as defined in Code Section 4975(e)(7) or 409(a), a simplified employee pension plan as defined in Code Section 408(k), a SIMPLE IRA plan as defined in Code Section 408(p), a plan or contract described in Code Section 403(b) or a plan described in Code Section 457(b) or (f)) at any time during the period beginning on the date of plan termination and ending 12 months after all assets have been distributed from the Plan. Subject to Section 14.04, such a distribution must be made in a lump sum.

12.2.
Timing of Distribution Following Retirement or Termination of Employment. The balance of a Participant's vested interest in his Account shall be distributable upon his termination of employment with the Employer and all Related Employers, if any, because of death, normal, early, or disability retirement (as permitted under the Plan), or other termination of employment. Notwithstanding the foregoing, a Participant may elect to postpone distribution of his Account until the date in Subsection 1.21(a) of the Adoption Agreement, unless the Employer has elected in Subsection 1.20(e)(1) of the Adoption Agreement to cash out de minimus Accounts and the Participant's vested interest in his Account does not exceed the amount subject to automatic distribution pursuant to Section 13.02. A Participant who elects to postpone distribution has a continuing election to receive such distribution prior to the date as of which distribution is required, unless such Participant is reemployed as an Employee.

Consistent with the provisions of Section 11.06, if a Participant (or his Beneficiary, if the Participant has died) whose Account is not subject to cash out in accordance with Section 13.02 does not request a distribution when his Account becomes distributable hereunder, he shall be deemed to have elected to postpone distribution of his Account until the earlier of the date he requests distribution or the date in Subsection 1.21(a).

12.3.
Participant Consent to Distribution. As required under Code Section 411(a)(11)(A) and consistent with Section 11.06, no distribution shall be made to the Participant before he reaches his Normal Retirement Age (or age 62, if later) without the Participant's consent, unless the Employer has elected in Subsection 1.20(e)(1) of the Adoption Agreement to cash out de minimus Accounts and the Participant's vested interest in his Account does not exceed the amount subject to automatic distribution pursuant to Section 13.02. Such consent shall be made within the 180-day period ending on the Participant's Annuity Starting Date. Once a Participant reaches his Normal Retirement Age (or age 62, if later), distribution shall be made upon the Participant's request, as provided in Section 12.02.

If a Participant's vested interest in his Account exceeds the maximum cash out limit permitted under Code Section 411(a)(11)(A) ($5,000 as of January 1, 2018), the consent of the Participant's Spouse must also be obtained if the Participant's Account is subject to the provisions of Section 14.04 and distribution is made before the Participant reaches his Normal Retirement Age (or age 62, if later), unless the distribution shall be made in the form of a "qualified joint and survivor annuity" or "qualified preretirement survivor annuity" as those terms are defined in Section 14.01. A Spouse's consent to early distribution, if required, must satisfy the requirements of Section 14.06.

Notwithstanding any other provision of the Plan to the contrary, neither the consent of the Participant nor the Participant's Spouse shall be required to the extent that a distribution is required to satisfy Code Section 401(a)(9) or Code Section 415. In addition, upon termination of the Plan if it does not offer an annuity option (purchased from a commercial provider) and if the Employer or any Related Employer does not maintain another defined contribution plan (other than an employee stock ownership plan as defined in Code Section 4975(e)(7)) the Participant's Account shall, without the Participant's consent, be distributed to the Participant. However, if any Related Employer maintains another defined contribution plan (other than an employee stock ownership plan as defined in Code Section 4975(e)(7)) then the Participant's Account shall be transferred, without the Participant's consent, to the other plan if the Participant does not consent to an immediate distribution.

12.4.
Required Commencement of Distribution to Participants. In no event shall distribution to a Participant commence later than the date in Section 1.21(a) of the Adoption Agreement, which date shall not be later than the earlier of the dates described in (a) and (b) below:
12.4.1.
unless the Participant (and his Spouse, if appropriate) elects otherwise, the 60th day after the close of the Plan Year in which occurs the latest of (i) the date on which the Participant attains Normal Retirement Age, or age 65, if earlier, (ii) the date on which the Participant's employment with the Employer and all Related Employers ceases, or (iii) the 10th anniversary of the year in which the Participant commenced participation in the Plan; and


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(b) the Participant's Required Beginning Date.

Notwithstanding the provisions of Subsection 12.04(a) above, the failure of a Participant (and the Participant's Spouse, if applicable) to consent to a distribution shall be deemed to be an election to defer commencement of payment as provided in Section 12.02 above.

12.5.
Required Commencement of Distribution to Beneficiaries. Subject to the requirements of Subsection 12.05(a) below, if a Participant dies before his Annuity Starting Date, the Participant’s Beneficiary shall receive distribution of the Participant’s vested interest in his Account in the form provided under Article 13 or 14, as applicable, beginning as soon as reasonably practicable following the date the Beneficiary’s application for distribution is filed with the Administrator. If distribution is to be made to a Participant’s Spouse, it shall be made available within a reasonable period of time after the Participant’s death that is no less favorable than the period of time applicable to other distributions.
12.5.1.
Death of Participant Before Distributions Begin. If the Participant dies before distributions begin, the Participant’s entire vested interest will be distributed, or begin to be distributed, no later than as follows:
12.5.1.1.
If the Participant’s surviving Spouse is the Participant’s sole “designated beneficiary,” then, except as otherwise elected under Subsection 12.05(b), minimum distributions, as described in Section 13.03, will begin to the surviving Spouse by December 31 of the calendar year immediately following the calendar year in which the Participant died, or by December 31 of the calendar year in which the Participant would have attained age 70 ½, if later.
12.5.1.2.
If the Participant’s surviving Spouse is not the Participant’s sole “designated beneficiary,” then, except as otherwise elected under Subsection 12.05(b), minimum distributions, as described in Section 13.03, will begin to the “designated beneficiary” by December 31 of the calendar year immediately following the calendar year in which the Participant died.
12.5.1.3.
If there is no “designated beneficiary” as of September 30 of the year following the year of the Participant’s death, the Participant’s entire vested interest will be distributed by December 31 of the calendar year containing the fifth anniversary of the Participant’s death.
12.5.1.4.
If the Participant’s surviving Spouse is the Participant’s sole “designated beneficiary” and the surviving Spouse dies after the Participant but before distributions to the surviving Spouse begin, this Subsection 12.05(a), other than Subsection 12.05(a)(1), will apply as if the surviving Spouse were the Participant.

For purposes of this Subsection 12.05(a), unless Subsection 12.05(a)(4) applies, distributions are considered to begin on the Participant’s Required Beginning Date. If Subsection 12.05(a)(4) applies, distributions are considered to begin on the date distributions are required to begin to the surviving Spouse under Subsection 12.05(a)(1). If distributions under an annuity purchased from an insurance company irrevocably commence to the Participant before the Participant’s Required Beginning Date (or to the Participant’s surviving Spouse before the date distributions are required to begin to the surviving Spouse under Subsection 12.05(a)(1)), the date distributions are considered to begin is the date distributions actually commence.

12.5.2.
Election of 5-Year Rule. Participants or Beneficiaries may elect on an individual basis whether the 5-year rule described in Subsection 12.05(a)(3) or the minimum distribution rule described in Section 13.03 applies to distributions after the death of a Participant who has a “designated beneficiary.” The election must be made no later than the earlier of September 30 of the calendar year in which distribution would be required to begin under Subsection 12.05(a), or by September 30 of the calendar year which contains the fifth anniversary of the Participant’s (or, if applicable, the surviving Spouse’s) death. If neither the Participant nor the Beneficiary makes an election under this Subsection 12.05(b), distributions will be made in accordance with Subsection 12.05(a) and Section 13.03.

Subject to the requirements of Subsection 12.05(a) above, if a Participant dies on or after his Annuity Starting Date, but before his entire vested interest in his Account is distributed, his Beneficiary shall receive distribution of the remainder of the Participant’s vested interest in his Account beginning as soon as reasonably practicable following the Participant’s date of death in a form that provides for distribution at least as rapidly as under the form in which the Participant was receiving distribution.


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For purposes of this Section 12.05, “designated beneficiary” is as defined in Subsection 13.03(c)(1).

12.6.
Whereabouts of Participants and Beneficiaries. The Administrator shall at all times be responsible for determining the whereabouts of each Participant or Beneficiary who may be entitled to benefits under the Plan and shall direct the Trustee as to the maintenance of a current address of each such Participant or Beneficiary.

If the Administrator is unable after diligent attempts to locate a Participant or Beneficiary who is entitled to a benefit under the Plan, the benefit otherwise payable to such Participant or Beneficiary shall be forfeited and applied as provided in Section 11.09. If a benefit is forfeited because the Administrator determines that the Participant or Beneficiary cannot be found, such benefit shall be reinstated by the Employer if a claim is filed by the Participant or Beneficiary with the Administrator and the Administrator confirms the claim to the Employer.

 

Article 13. Form of Distribution.

13.1.
Normal Form of Distribution Under Profit Sharing Plan. Unless a Participant's Account is subject to the requirements of Section 14.03 or 14.04, distributions to a Participant shall be made in a lump sum or, if elected by the Participant and provided by the Employer in Section 1.20 of the Adoption Agreement, under a systematic withdrawal plan (installments). Subject to the requirements of Article 14, if applicable, a Participant may elect other forms of distribution which appear in the Adoption Agreement. The recipient of payments under a systematic withdrawal plan may, with regard to all remaining payments or any portion thereof, elect to accelerate installment payments, decelerate installment payments, stop such payments altogether, or receive a lump sum distribution of the remainder of his Account balance, as long as, in any event, the requirements of Code Section 401(a)(9) are satisfied. If the Employer elects partial withdrawals in Section 1.20(c) of the Adoption Agreement, the preceding sentence applies to a Participant who elects installment payments with respect to such a withdrawal. Beneficiaries and alternate payees as provided in Section 18.04 may elect any form of distribution available to a Participant, except that annuities may only be elected by Beneficiaries in accordance with the provisions of Article 14.

Notwithstanding anything herein to the contrary, if distribution to a Participant commences on the Participant's Required Beginning Date as determined under Subsection 2.01(vv), the Participant may elect to receive distributions under a systematic withdrawal plan that provides the minimum distributions required under Code Section 401(a)(9), as described in Section 13.03.

A Participant whose distribution includes an outstanding loan balance may roll over that outstanding loan in-kind to a plan which agrees to accept such an outstanding loan in accordance with the provisions of Section 9.11.

13.2.
Cash Out Of Small Accounts. Notwithstanding any other provision of the Plan to the contrary, if the Employer elected to cash out small Accounts as provided in and pursuant to Subsection 1.20(e)(1) of the Adoption Agreement, the Participant's vested interest in his Account shall be distributed following the Participant's termination of employment because of retirement, disability, or other termination of employment. For purposes of determining whether an amount being distributed pursuant to this Section 13.02 will be subject to a direct rollover by the Administrator, a Participant's “designated Roth contributions”, as defined in Subsection 6.01(e), will be considered separately from the amount within the Participant's non-Roth sub-account.

If the Employer elected to cash out small Accounts as provided in Subsection 1.20(e)(1) and if distribution is to be made to a Participant's Beneficiary following the death of the Participant and the Beneficiary's vested interest in the Participant's Account does not exceed the maximum cash out limit permitted under Code Section 411(a)(11)(A), distribution shall be made to the Beneficiary in a lump sum following the Participant's death.

13.3.
Minimum Distributions. Unless a Participant’s vested interest in his Account is distributed in the form of an annuity purchased from an insurance company or in a single sum on or before the Participant’s Required Beginning Date, as of the first “distribution calendar year” distributions will be made in accordance with this Section. If a Participant's Account is subject to the provisions of Section 14.04, in lieu of the minimum distribution required hereunder, the Administrator may distribute the Participant’s full vested interest in his Account in the form of an annuity purchased from an insurance company. Any annuity purchased on behalf of a Participant will provide for distributions thereunder to be made in accordance with the requirements of Code Section 401(a)(9) and the Treasury Regulations issued thereunder and the minimum distribution incidental benefit requirement of Code Section 401(a)(9)(G).


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Notwithstanding the foregoing or any other provisions of this Section, distributions may be made under a designation made before January 1, 1984, in accordance with Section 242(b)(2) of the Tax Equity and Fiscal Responsibility Act (TEFRA) and the provisions of Subsection 13.03(d) below.

13.3.1.
Required Minimum Distributions During a Participant’s Lifetime. During a Participant’s lifetime, the minimum amount that will be distributed for each “distribution calendar year” is the lesser of:
13.3.1.1.
the quotient obtained by dividing the Participant’s “account balance” by the distribution period in the Uniform Lifetime Table set forth in Q & A 2 of Section 1.401(a)(9)-9 of the Treasury Regulations, using the Participant’s age as of the Participant’s birthday in the “distribution calendar year”; or
13.3.1.2.
if the Participant’s sole “designated beneficiary” for the “distribution calendar year” is the Participant’s Spouse, the quotient obtained by dividing the Participant’s “account balance” by the number in the Joint and Last Survivor Table set forth in Q & A 3 of Section 1.401(a)(9)-9 of the Treasury Regulations, using the Participant’s and Spouse’s attained ages as of the Participant’s and Spouse’s birthdays in the “distribution calendar year.”

Required minimum distributions will be determined under this Subsection 13.03(a) beginning with the first “distribution calendar year” and up to and including the “distribution calendar year” that includes the Participant’s date of death. A Participant who has retired may elect at any time to take any portion of his Account in excess of the amount required to be paid pursuant to this Subsection 13.03(a).

13.3.2.
Required Minimum Distributions After Participant’s Death.
13.3.2.1.
If a Participant dies on or after the date distributions begin and there is a “designated beneficiary,” the minimum amount that will be distributed for each “distribution calendar year” after the year of the Participant’s death is the quotient obtained by dividing the Participant’s “account balance” by the longer of the remaining “life expectancy” of the Participant or the remaining “life expectancy” of the Participant’s “designated beneficiary,” determined as follows:
13.3.2.1.1.
The Participant’s remaining “life expectancy” is calculated using the age of the Participant in the year of death, reduced by one for each subsequent year.
13.3.2.1.2.
If the Participant’s surviving Spouse is the Participant’s sole “designated beneficiary,” the remaining life expectancy of the surviving Spouse is calculated for each distribution calendar year after the year of the Participant’s death using the surviving Spouse’s age as of the Spouse’s birthday in that year. For “distribution calendar years” after the year of the surviving Spouse’s death, the remaining “life expectancy” of the surviving Spouse is calculated using the age of the surviving Spouse as of the Spouse’s birthday in the calendar year of the Spouse’s death, reduced by one for each subsequent calendar year.
13.3.2.1.3.
If the Participant’s surviving Spouse is not the Participant’s sole “designated beneficiary,” the “designated beneficiary’s” remaining “life expectancy” is calculated using the age of the “designated beneficiary” in the year following the year of the Participant’s death, reduced by one for each subsequent year.
13.3.2.2.
If the Participant dies on or after the date distributions begin and there is no “designated beneficiary” as of September 30 of the year after the year of the Participant’s death, the minimum amount that will be distributed for each “distribution calendar year” after the year of the Participant’s death is the quotient obtained by dividing the Participant’s “account balance” by the Participant’s remaining “life expectancy” calculated using the age of the Participant in the year of death, reduced by one for each subsequent year.
13.3.2.3.
Unless the Participant or Beneficiary elects otherwise in accordance with Subsection 12.05(b), if the Participant dies before the date distributions begin and there is a “designated beneficiary,” the minimum amount that will be distributed for each “distribution calendar year” after the year of the Participant’s death is the quotient obtained by dividing the Participant’s “account balance” by the remaining “life expectancy” of the Participant’s “designated beneficiary,” determined as provided in Subsection 13.03(b)(1).


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(4) If the Participant dies before the date distributions begin and there is no “designated beneficiary” as of September 30 of the year following the year of the Participant’s death, distribution of the Participant’s full vested interest in his Account will be completed by December 31 of the calendar year containing the fifth anniversary of the Participant’s death.

(5) If the Participant dies before the date distributions begin, the Participant’s surviving Spouse is the Participant’s sole “designated beneficiary,” and the surviving Spouse dies before distributions are required to begin to the surviving Spouse under Subsection 12.05(a)(1), Subsections 13.03(b)(3) and (4) will apply as if the surviving Spouse were the Participant.

For purposes of this Subsection 13.03(b), unless Subsection 13.03(b)(5) applies, distributions are considered to begin on the Participant’s Required Beginning Date. If Subsection 13.03(b)(5) applies, distributions are considered to begin on the date distributions are required to begin to the surviving Spouse under Subsection 12.05(a)(1). If distributions under an annuity purchased from an insurance company irrevocably commence to the Participant before the Participant’s Required Beginning Date (or to the Participant’s surviving Spouse before the date distributions are required to begin to the surviving Spouse under Subsection 12.05(a)(1)), the date distributions are considered to begin is the date distributions actually commence.

13.3.3.
Definitions. For purposes of this Section 13.03, the following special definitions shall apply:
13.3.3.1.
“Designated beneficiary” means the individual who is the Participant’s Beneficiary as defined under Section 2.01(g) and is the designated beneficiary under Code Section 401(a)(9) and Section 1.401(a)(9)-4 of the Treasury Regulations.
13.3.3.2.
“Distribution calendar year” means a calendar year for which a minimum distribution is required. For distributions beginning before the Participant’s death, the first “distribution calendar year” is the calendar year immediately preceding the calendar year which contains the Participant’s Required Beginning Date. For distributions beginning after the Participant’s death, the first “distribution calendar year” is the calendar year in which distributions are required to begin under Subsection 12.05(a). The required minimum distribution for the Participant’s first “distribution calendar year” will be made on or before the Participant’s Required Beginning Date. The required minimum distribution for other “distribution calendar years,” including the required minimum distribution for the “distribution calendar year” in which the Participant’s Required Beginning Date occurs, will be made on or before December 31 of that “distribution calendar year.”
13.3.3.3.
“Life expectancy” means life expectancy as computed by use of the Single Life Table in Q & A - 1 of Section 1.401(a)(9)-9 of the Treasury Regulations.
13.3.3.4.
A Participant’s “account balance” means the balance of the Participant's vested interest in his Account as of the last valuation date in the calendar year immediately preceding the “distribution calendar year” (valuation calendar year) increased by the amount of any contributions made and allocated or forfeitures allocated to the Account as of dates in the valuation calendar year after the valuation date and decreased by distributions made in the valuation calendar year after the valuation date. The “account balance” for the valuation calendar year includes any amounts rolled over or transferred to the Plan either in the valuation calendar year or in the “distribution calendar year” if distributed or transferred in the valuation calendar year.
13.3.4.
Section 242(b)(2) Elections. Notwithstanding any other provisions of this Section and subject to the requirements of Article 14, if applicable, distribution on behalf of a Participant, including a five-percent owner, may be made pursuant to an election under Section 242(b)(2) of the Tax Equity and Fiscal Responsibility Act of 1982 and in accordance with all of the following requirements:
13.3.4.1.
The distribution is one which would not have disqualified the Trust under Code Section 401(a)(9), if applicable, or any other provisions of Code Section 401(a), as in effect prior to the effective date of Section 242(a) of the Tax Equity and Fiscal Responsibility Act of 1982.


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(2) The distribution is in accordance with a method of distribution elected by the Participant whose vested interest in his Account is being distributed or, if the Participant is deceased, by a Beneficiary of such Participant.

(3) Such election was in writing, was signed by the Participant or the Beneficiary, and was made before January 1, 1984.

(4) The Participant had accrued a benefit under the Plan as of December 31, 1983.

(5) The method of distribution elected by the Participant or the Beneficiary specifies the form of the distribution, the time at which distribution will commence, the period over which distribution will be made, and in the case of any distribution upon the Participant's death, the Beneficiaries of the Participant listed in order of priority.

A distribution upon death shall not be made under this Subsection 13.03(d) unless the information in the election contains the required information described above with respect to the distributions to be made upon the death of the Participant. For any distribution which commences before January 1, 1984, but continues after December 31, 1983, the Participant or the Beneficiary to whom such distribution is being made will be presumed to have designated the method of distribution under which the distribution is being made, if this method of distribution was specified in writing and the distribution satisfies the requirements in Subsections 13.03(d)(1) and (5). If an election is revoked, any subsequent distribution will be in accordance with the other provisions of the Plan. Any changes in the election will be considered to be a revocation of the election. However, the mere substitution or addition of another Beneficiary (one not designated as a Beneficiary in the election), under the election will not be considered to be a revocation of the election, so long as such substitution or addition does not alter the period over which distributions are to be made under the election directly, or indirectly (for example, by altering the relevant measuring life).

The Administrator shall direct the Trustee regarding distributions necessary to comply with the minimum distribution rules set forth in this Section 13.03.

13.4.
Direct Rollovers.

Notwithstanding any other provision of the Plan to the contrary, a "distributee" may elect, at the time and in the manner prescribed by the Administrator, to have any portion or all of an "eligible rollover distribution" paid directly to an "eligible retirement plan" specified by the "distributee" in a direct rollover; provided, however, that a "distributee" may not elect a direct rollover with respect to a portion of an "eligible rollover distribution" if such portion totals less than $500. In applying the $500 minimum on rollovers of a portion of a distribution, any "eligible rollover distribution" from a Participant's “designated Roth contributions”, as defined in Subsection 6.01(e), will be considered separately from any "eligible rollover distribution" from the Participant's non-Roth sub-accounts.

The portion of any "eligible rollover distribution" consisting of Employee Contributions may only be rolled over to an individual retirement account or annuity described in Code Section 408(a) or (b) or to a qualified defined contribution plan described in Code Section 401(a), 403(a) or 403(b) that provides for separate accounting with respect to such accounts, including separate accounting for the portion of such "eligible rollover distribution" that is includible in income (including the earnings on the portion that is not so includible) and the portion that is not includible in income. That portion of any "eligible rollover distribution" consisting of Roth 401(k) Contributions, may only be rolled over to another designated Roth account established for the individual under an applicable retirement plan described in Code Section 402A(e)(1) that provides for "designated Roth contributions", as defined in Section 6.01, or to a Roth individual retirement account described in Code Section 408A, subject to the rules of Code Section 402(c).

For purposes of this Section 13.04, the following definitions shall apply:

13.4.1.
"Distributee" means a Participant, the Participant's surviving Spouse, and the Participant's Spouse or former Spouse who is the alternate payee under a qualified domestic relations order, who is entitled to receive a distribution from the Participant's vested interest in his Account. The term “distributee” shall also include a designated beneficiary (as defined in Code Section 401(a)(9)(E)) of a Participant who is not the surviving Spouse of the Participant who may only elect to roll over such a distribution to an individual retirement plan described in clause (i) or (ii) of paragraph (8)(B) of Code Section 402(c) established for the purposes of receiving such distribution.

(b) "Eligible retirement plan" means an individual retirement account described in Code Section 408(a), an individual retirement annuity described in Code Section 408(b), an annuity plan described in Code Section 403(a), a

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qualified defined contribution plan described in Code Section 401(a), an annuity contract described in Code Section 403(b), an eligible deferred compensation plan described in Code Section 457(b) that is maintained by a state, political subdivision of a state, or any agency or instrumentality of a state or political subdivision of a state, provided that such 457 plan provides for separate accounting with respect to such rolled over amounts, that accepts "eligible rollover distributions", or a Roth individual retirement account described in Code Section 408A However, for a “distributee” who is a designated beneficiary of the Participant (and not the Participant’s surviving Spouse), the definition of “eligible retirement plan” shall be limited as described in (a) above.

(c) "Eligible rollover distribution" means any distribution of all or any portion of the balance to the credit of the "distributee", except that an "eligible rollover distribution" does not include the following:

(1) any distribution that is one of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the "distributee" or the joint lives (or joint life expectancies) of the "distributee" and the "distributee's" designated beneficiary, or for a specified period of ten years or more;

(2) any distribution to the extent such distribution is required under Code Section 401(a)(9); or

(3) any hardship withdrawal made in accordance with the provisions of Section 10.05 or the In-Service Withdrawals Addendum to the Adoption Agreement.

13.05. Notice Regarding Timing and Form of Distribution. Within the period beginning 180 days before a Participant's Annuity Starting Date and ending 30 days before such date, the Administrator shall provide such Participant with written notice containing a general description of the material features of each form of distribution available under the Plan and an explanation of the financial effect of electing each form of distribution available under the Plan. The notice shall also inform the Participant of his right to defer receipt of the distribution until the date in Subsection 1.21(a) of the Adoption Agreement, the consequences of failing to defer, and his right to make a direct rollover.

Distribution may commence fewer than 30 days after such notice is given, providedthat:

13.4.2.
the Administrator clearly informs the Participant that the Participant has a right to a period of at least 30 days after receiving the notice to consider the decision of whether or not to elect a distribution (and, if applicable, a particular distribution option);
13.4.3.
the Participant, after receiving the notice, affirmatively elects a distribution, with his Spouse's written consent, if necessary;
13.4.4.
if the Participant's Account is subject to the requirements of Section 14.04, the following additional requirements apply:
13.4.4.1.
the Participant is permitted to revoke his affirmative distribution election at any time prior to the later of (A) his Annuity Starting Date or (B) the expiration of the seven-day period beginning the day after such notice is provided to him; and
13.4.4.2.
distribution does not begin to such Participant until such revocation period ends.

13.06 Determination of Method of Distribution. Subject to Section 13.02, the Participant shall determine the method of distribution of benefits to himself and may determine the method of distribution to his Beneficiary. If the Participant does not determine the method of distribution to his Beneficiary or if the Participant permits his Beneficiary to override his determination, the Beneficiary, in the event of the Participant's death, shall determine the method of distribution of benefits to himself as if he were the Participant. A determination by the Beneficiary must be made no later than the close of the calendar year in which distribution would be required to begin under Section 12.05 or, if earlier, the close of the calendar year in which the fifth anniversary of the death of the Participant occurs.

 

13.07 Notice to Trustee. The Administrator shall notify the Trustee in any medium acceptable to the Trustee, which may be specified in the Service Agreement, whenever any Participant or Beneficiary is entitled to receive benefits under the Plan. To facilitate distributions, the Administrator shall develop processes and procedures to communicate to the Trustee the form


of payment of benefits that such Participant or Beneficiary shall receive, the name of any designated Beneficiary or Beneficiaries, and

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any such other information as the Trustee shall require.

 

Article 14. Superseding Annuity Distribution Provisions.

14.1.
Special Definitions. For purposes of this Article, the following special definitions shall apply:
14.1.1.
"Qualified joint and survivor annuity" means (1) if the Participant is not married on his Annuity Starting Date, an immediate annuity payable for the life of the Participant or (2) if the Participant is married on his Annuity Starting Date, an immediate annuity for the life of the Participant with a survivor annuity for the life of the Participant's Spouse (to whom the Participant was married on the Annuity Starting Date) equal to 50 percent (or the percentage designated in the Forms of Payment Addendum to the Adoption Agreement) of the amount of the annuity which is payable during the joint lives of the Participant and such Spouse, provided that the survivor annuity shall not be payable to a Participant's Spouse if such Spouse is not the same Spouse to whom the Participant was married on his Annuity Starting Date.
14.1.2.
"Qualified optional survivor annuity" means a joint and survivor annuity that the Participant, subject to the spousal consent rules described in Section 14.05, may elect and which (1) if the survivor annuity portion of the Plan’s qualified joint and survivor annuity (as defined in (a) above) is less than 75%, then has a survivor annuity portion of 75% or (2) if the survivor annuity portion of the Plan’s qualified joint and survivor annuity (as defined in

(a) above) is greater than or equal to 75%, then has a survivor annuity portion of 50%. The “qualified optional survivor annuity” shall be designated in the Forms of Payment Addendum as a joint and survivor annuity.

14.1.3.
"Qualified preretirement survivor annuity" means an annuity purchased with at least 50 percent of a Participant's vested interest in his Account that is payable for the life of a Participant's surviving Spouse. The Employer shall specify that portion of a Participant's vested interest in his Account that is to be used to purchase the "qualified preretirement survivor annuity" in the Forms of Payment Addendum to the Adoption Agreement.
14.2.
Applicability. Except as otherwise specifically provided in the Plan, the provisions of this Article shall apply to a Participant's Account only if:
14.2.1.
the Plan includes assets transferred from a money purchase pension plan;
14.2.2.
the Plan is an amendment and restatement of a plan that provided an annuity form of payment and such form of payment has not been eliminated;
14.2.3.
the Plan is an amendment and restatement of a plan that provided an annuity form of payment and such form of payment has been eliminated, but the Participant elected a life annuity form of payment before the effective date of the elimination;
14.2.4.
the Participant's Account contains assets attributable to amounts directly or indirectly transferred from a plan that provided an annuity form of payment and such form of payment has not been eliminated;
14.2.5.
the Participant's Account contains assets attributable to amounts directly or indirectly transferred from a plan that provided an annuity form of payment and such form of payment has been eliminated, but the Participant elected a life annuity form of payment before the effective date of the elimination.
14.3.
Annuity Form of Payment. To the extent provided through Section 1.20 of the Adoption Agreement, a Participant may elect distributions made in whole or in part in the form of an annuity contract. Any annuity contract distributed under the Plan shall be subject to the provisions of this Section 14.03 and, to the extent provided therein, Sections 14.04 through 14.09.
14.3.1.
At the direction of the Administrator, the Trustee shall purchase the annuity contract on behalf of a Participant or Beneficiary from an insurance company. Such annuity contract shall be nontransferable.
14.3.2.
The terms of the annuity contract shall comply with the requirements of the Plan and distributions under such contract shall be made in accordance with Code Section 401(a)(9) and the Treasury Regulations issued thereunder.


(c) The annuity contract may provide for payment over the life of the Participant and, upon the death of the Participant, may provide a survivor annuity continuing for the life of the Participant's designated Beneficiary. Such an annuity may provide for an annuity certain feature for a period not exceeding the life expectancy of the Participant or, if

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the annuity is payable to the Participant and a designated Beneficiary, the joint life and last survivor expectancy of the Participant and such Beneficiary. If the Participant dies prior to his Annuity Starting Date, the annuity contract distributed to the Participant's Beneficiary may provide for payment over the life of the Beneficiary, and may provide for an annuity certain feature for a period not exceeding the life expectancy of the Beneficiary. The types of annuity contracts provided under the Plan shall be limited to the types of annuities described in Section 1.20 of the Adoption Agreement and the Forms of Payment Addendum to the Adoption Agreement.

(d) The annuity contract must provide for non-increasing payments.

14.04. "Qualified Joint and Survivor Annuity" and "Qualified Preretirement Survivor Annuity" Requirements. The requirements of this Section 14.04 apply to a Participant's Account if:

(a) the Plan includes assets transferred from a money purchase pension plan;

(b) the Employer has selected in Subsection 1.20(d)(2) of the Adoption Agreement that distribution in the form of a life annuity is the normal form of distribution with respect to such Participant's Account; or

(c) the Employer has indicated on the Forms of Payment Addendum to the Adoption Agreement that distribution in the form of a life annuity is an optional form of distribution with respect to such Participant's Account and the Participant is permitted to elect and has elected distribution in the form of an annuity contract payable over the life of the Participant.

If a Participant's Account is subject to the requirements of this Section, distribution shall be made to the Participant with respect to such Account in the form of a "qualified joint and survivor annuity" (with a survivor annuity in the percentage amount specified by the Employer in the Forms of Payment Addendum to the Adoption Agreement) in the amount that can be purchased with such Account, unless the Participant waives the "qualified joint and survivor annuity" as provided in Section 14.05. If the Participant dies prior to his Annuity Starting Date, distribution shall be made to the Participant's surviving Spouse, if any, in the form of a "qualified preretirement survivor annuity" in the amount that can be purchased with such Account, unless the Participant waives the "qualified preretirement survivor annuity" as provided in Section 14.05, or the Participant's surviving Spouse elects in writing to receive distribution in one of the other forms of payment provided under the Plan. A Participant's Account that is subject to the requirements of this Section shall be used to purchase the "qualified preretirement survivor annuity" and the balance of the Participant's vested interest in his Account that is not used to purchase the "qualified preretirement survivor annuity" shall be distributed to the Participant's designated Beneficiary in accordance with the provisions of Sections 11.04 and 12.05.

 

14.05 Waiver of the "Qualified Joint and Survivor Annuity" and/or "Qualified Preretirement Survivor Annuity" Rights. A Participant may waive the "qualified joint and survivor annuity" described in Section 14.04 and elect another form of distribution permitted under the Plan at any time during the 180-day period ending on his Annuity Starting Date; provided, however, that if the Participant is married, his Spouse must consent in writing to such election as provided in Section 14.06. A Participant may waive or revoke a waiver of the "qualified joint and survivor annuity" described in Section 14.04 and elect another form of distribution permitted under the Plan at any time and any number of times during the 180-day period ending on his Annuity Starting Date; provided, however, that if the Participant is married and is electing a form of distribution other than the "qualified joint and survivor annuity" or the "qualified optional survivor annuity", his Spouse must consent in writing to such election as provided in Section 14.06.

A Participant may waive the "qualified preretirement survivor annuity" and designate a non-Spouse Beneficiary at any time during the "applicable election period"; provided, however, that the Participant's Spouse must consent in writing to such election as provided in Section 14.06. The "applicable election period" begins on the later of (1) the date the Participant's Account becomes subject to the requirements of Section 14.04 or (2) the first day of the Plan Year in which the Participant attains age 35 or, if he terminates employment prior to such date, the date he terminates employment with the Employer and all Related Employers. The "applicable election period" ends on the earlier of the Participant's Annuity Starting Date or the date of the Participant's death. A Participant whose employment has not terminated may elect to waive the "qualified preretirement survivor annuity" prior to the Plan Year in which he attains age 35, provided that any such waiver shall cease to be effective as of the first day of the Plan Year in which the Participant attains age 35.

A Participant's waiver of the "qualified joint and survivor annuity" or "qualified preretirement survivor annuity" shall be valid only if the applicable notice described in Section 14.07 or 14.08 has been provided to the Participant.

14.06 Spouse's Consent to Waiver. A Spouse's written consent must acknowledge the effect of the Participant's election and must be witnessed by a Plan representative or a notary public. In addition, the Spouse's written consent must either

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(a) specify any non-Spouse Beneficiary designated by the Participant and that such designation may not be changed without written spousal consent or (b) acknowledge that the Spouse has the right to limit consent as provided in clause (a) above, but permit the Participant to change the designated Beneficiary without the Spouse's further consent.

A Participant's Spouse shall be deemed to have given written consent to a Participant's waiver if the Participant establishes to the satisfaction of a Plan representative that spousal consent cannot be obtained because the Spouse cannot be located or because of other circumstances set forth in Code Section 401(a)(11) and Treasury Regulations issued thereunder.

Any written consent given or deemed to have been given by a Participant's Spouse hereunder shall be irrevocable and shall be effective only with respect to such Spouse and not with respect to any subsequent Spouse.

In addition, with regard to a Participant's waiver of the "qualified joint and survivor annuity" form of distribution, the Spouse's written consent must either (a) specify the form of distribution elected instead of the "qualified joint and survivor annuity", and that such form may not be changed (except to a "qualified joint and survivor annuity") without written spousal consent or (b) acknowledge that the Spouse has the right to limit consent as provided in clause (a) above, but permit the Participant to change the form of distribution elected without the Spouse's further consent. To the extent a Participant's Account is subject to the requirements of Section 14.04, a Spouse's consent to a Participant's waiver shall be valid only if the applicable notice described in Section 14.07 or 14.08 has been provided to the Participant.

14.07 Notice Regarding "Qualified Joint and Survivor Annuity". The notice provided to a Participant under Section

14.05 shall include a written explanation that satisfies the requirements of Code Section 417(a)(3) and regulations issued thereunder. The notice will include a description of the following: (i) the terms and conditions of a qualified joint and survivor annuity and the qualified optional survivor annuity; (ii) the participant's right to make and the effect of any election to waive the qualified joint and survivor annuity form of benefit; (iii) the rights of a participant's spouse; and (iv) the right to make, and the effect of, a revocation of a previous election to waive the qualified joint and survivor annuity.

14.08 Notice Regarding "Qualified Preretirement Survivor Annuity". If a Participant's Account is subject to the requirements of Section 14.04, the Participant shall be provided with a written explanation of the "qualified preretirement survivor annuity" comparable to the written explanation provided with respect to the "qualified joint and survivor annuity", as described in Section 14.07. Such explanation shall be furnished within whichever of the following periods ends last:

14.3.3.
the period beginning with the first day of the Plan Year in which the Participant reaches age 32 and ending with the end of the Plan Year preceding the Plan Year in which he reaches age 35;
14.3.4.
a reasonable period ending after the Employee becomes an Active Participant;
14.3.5.
a reasonable period ending after Section 14.04 first becomes applicable to the Participant's Account;or
14.3.6.
in the case of a Participant who separates from service before age 35, a reasonable period ending after such separation from service.

For purposes of the preceding sentence, the two-year period beginning one year prior to the date of the event described in Subsection 14.08(b), (c) or (d) above, whichever is applicable, and ending one year after such date shall be considered reasonable, provided, that in the case of a Participant who separates from service under Subsection 14.08(d) above and subsequently recommences employment with the Employer, the applicable period for such Participant shall be re-determined in accordance with this Section 14.08.

14.09 Former Spouse. For purposes of this Article, a former Spouse of a Participant shall be treated as the Spouse or surviving Spouse of the Participant, and a current Spouse shall not be so treated, to the extent required under a qualified domestic relations order, as defined in Code Section 414(p).

 

Article 15. Top-Heavy Provisions.

15.1.
Definitions. For purposes of this Article, the following special definitions shall apply:

(a) "Determination date" means, for any Plan Year subsequent to the first Plan Year, the last day of the preceding Plan Year. For the first Plan Year of the Plan, "determination date" means the last day of that Plan Year.

(b) "Determination period" means the Plan Year containing the "determination date".

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(c) "Distribution period" means (i) for any distribution made to an employee on account of severance from employment, death, disability, or termination of a plan which would have been part of the “required aggregation group” had it not been terminated, the one-year period ending on the "determination date" and (ii) for any other distribution, the five-year period ending on the "determination date".

(d) "Key employee" means any Employee or former Employee (including any deceased Employee) who at any time during the "determination period" was (1) an officer of the Employer or a Related Employer having annual Compensation greater than the dollar amount specified in Code Section 416(i)(1)(A)(I) adjusted under Code Section 416(i)(1) for Plan Years beginning after December 31, 2002 (e.g., $175,000 for Plan Years beginning in 2018), (2) a five-percent owner of the Employer or a Related Employer, or (3) a one-percent owner of the Employer or a Related Employer having annual Compensation of more than $150,000. The determination of who is a "key employee" shall be made in accordance with Code Section 416(i)(1) and any applicable guidance or regulations issued thereunder.

(e) "Permissive aggregation group" means the "required aggregation group" plus any other qualified plans of the Employer or a Related Employer which, when considered as a group with the "required aggregation group", would continue to satisfy the requirements of Code Sections 401(a)(4) and 410.

(f) "Required aggregation group" means:

(1) Each qualified plan of the Employer or Related Employer in which at least one "key employee" participates, or has participated at any time during the "determination period" or, unless and until modified by future Treasury guidance, any of the four preceding Plan Years (regardless of whether the plan has terminated), and

(2) any other qualified plan of the Employer or Related Employer which enables a plan described in Subsection 15.01(f)(1) above to meet the requirements of Code Section 401(a)(4) or 410.

(g) "Top-heavy plan" means a plan in which any of the following conditions exists:

(1) the "top-heavy ratio" for the plan exceeds 60 percent and the plan is not part of any "required aggregation group" or "permissive aggregation group";

(2) the plan is a part of a "required aggregation group" but not part of a "permissive aggregation group" and the "top-heavy ratio" for the "required aggregation group" exceeds 60 percent; or

(3) the plan is a part of a "required aggregation group" and a "permissive aggregation group" and the "top-heavy ratio" for both groups exceeds 60 percent.

Notwithstanding the foregoing, a plan is not a "top-heavy plan" for a Plan Year if it consists solely of a cash or deferred arrangement that satisfies the nondiscrimination requirements under Code Section 401(k) by application of Code Section 401(k)(12) or 401(k)(13) and, if matching contributions are provided under such plan, satisfies the nondiscrimination requirements under Code Section 401(m) by application of Code Section 401(m)(11) or 401(m)(12).

(h) "Top-heavy ratio" means:

15.1.1.1.
With respect to the Plan, or with respect to any "required aggregation group" or "permissive aggregation group" that consists solely of defined contribution plans (including any simplified employee pension, as defined in Code Section 408(k)), a fraction, the numerator of which is the sum of the account balances of all "key employees" under the plans as of the "determination date" (including any part of any account balance distributed during the "distribution period"), and the denominator of which is the sum of all account balances (including any part of any account balance distributed during the "distribution period") of all participants under the plans as of the "determination date". Both the numerator and denominator of the "top-heavy ratio" shall be increased, to the extent required by Code Section 416, to reflect any contribution which is due but unpaid as of the "determination date".

(2) With respect to any "required aggregation group" or "permissive aggregation group" that includes one or more defined benefit plans which, during the "determination period", has covered or could cover an Active Participant in the Plan, a fraction, the numerator of which is the sum of the account balances under the defined contribution plans for all "key employees" and the present value of accrued benefits under the defined benefit

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plans for all "key employees", and the denominator of which is the sum of the account balances under the defined contribution plans for all participants and the present value of accrued benefits under the defined benefit plans for all participants. Both the numerator and denominator of the "top-heavy ratio" shall be increased for any distribution of an account balance or an accrued benefit made during the "distribution period" and any contribution due but unpaid as of the "determination date".

For purposes of Subsections 15.01(h)(1) and (2) above, the value of accounts shall be determined as of the most recent "determination date" and the present value of accrued benefits shall be determined as of the date used for computing plan costs for minimum funding that falls within 12 months of the most recent "determination date", except as provided in Code Section 416 and the regulations issued thereunder for the first and second plan years of a defined benefit plan. When aggregating plans, the value of accounts and accrued benefits shall be calculated with reference to the "determination dates" that fall within the same calendar year.

The accounts and accrued benefits of a Participant who is not a "key employee" but who was a "key employee" in a prior year, or who has not performed services for the Employer or any Related Employer at any time during the one-year period ending on the "determination date", shall be disregarded. The calculation of the "top-heavy ratio", and the extent to which distributions, rollovers, and transfers are taken into account, shall be made in accordance with Code Section 416 and the regulations issued thereunder. Deductible employee contributions shall not be taken into account for purposes of computing the "top-heavy ratio".

For purposes of determining if the Plan, or any other plan included in a "required aggregation group" of which the Plan is a part, is a "top-heavy plan", the accrued benefit in a defined benefit plan of an Employee other than a "key employee" shall be determined under the method, if any, that uniformly applies for accrual purposes under all plans maintained by the Employer or a Related Employer, or, if there is no such method, as if such benefit accrued not more rapidly than the slowest accrual rate permitted under the fractional accrual rate of Code Section 411(b)(1)(C).

Notwithstanding any other provision herein to the contrary, Compensation for purposes of this Article 15 shall be based on the amount actually paid or made available to the Participant (or, if earlier, includible in the gross income of the Participant) during the Plan Year, does not exclude any amounts elected by the Employer in Subsection 1.05(b) of the Adoption Agreement except moving expenses paid or reimbursed by the Employer if it is reasonable to believe they are deductible by the Employee, and shall include Differential Wages as defined in Section 2.01(k)(2)(B)(i).

15.2.
Application. If the Plan is or becomes a "top-heavy plan" in any Plan Year or is automatically deemed to be a "top-heavy plan" in accordance with the Employer's selection in Subsection 1.22(a)(1) of the Adoption Agreement, the provisions of this Article shall apply and shall supersede any conflicting provision in the Plan. Notwithstanding the foregoing, the provisions of this Article shall not apply if Subsection 1.22(a)(3) of the Adoption Agreement is selected.
15.3.
Minimum Contribution. Except as otherwise specifically provided in this Section 15.03, the Nonelective Employer Contributions made for the Plan Year on behalf of any Active Participant who is not a "key employee", when combined with the Matching Employer Contributions made on behalf of such Active Participant for the Plan Year, shall not be less than the lesser of three percent (or five percent, if selected by the Employer in Subsection 1.22(b) of the Adoption Agreement) of such Participant's Compensation for the Plan Year or, in the case where neither the Employer nor any Related Employer maintains a defined benefit plan which uses the Plan to satisfy Code Section 401(a)(4) or 410, the largest percentage of Employer contributions made on behalf of any "key employee" for the Plan Year, expressed as a percentage of the "key employee's" Compensation for the Plan Year. Catch-Up Contributions made on behalf of a "key employee" for the Plan Year shall not be taken into account for purposes of determining the amount of the minimum contribution required hereunder.

If an Active Participant is entitled to receive a minimum contribution under another qualified plan maintained by the Employer or a Related Employer that is a "top-heavy plan", no minimum contribution shall be made hereunder unless the Employer has provided in Subsection 1.22(b)(1) of the Adoption Agreement that the minimum contribution shall be made under this Plan in any event. If the Employer has provided in Subsection 1.22(b)(2) that an alternative means shall be used to


satisfy the minimum contribution requirements where an Active Participant is covered under multiple plans that are "top-heavy plans", no minimum contribution shall be required under this Section, except as provided under the 416 Contributions Addendum to the Adoption Agreement. If a minimum contribution is required to be made under the Plan for the Plan Year on behalf of an

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Active Participant who is not a "key employee" and who is a participant in a defined benefit plan maintained by the Employer or a Related Employer that is aggregated with the Plan, the minimum contribution shall not be less than five percent of such Participant's Compensation for the Plan Year.

The minimum contribution required under this Section shall be made to the Account of an Active Participant even though, under other Plan provisions, the Active Participant would not otherwise be entitled to receive a contribution, or would have received a lesser contribution for the Plan Year, because (a) the Active Participant failed to complete the Hours of Service requirement selected by the Employer in Subsection 1.11(e) or 1.12(d) of the Adoption Agreement, or (b) the Participant's Compensation was less than a stated amount; provided, however, that no minimum contribution shall be made for a Plan Year to the Account of an Active Participant who is not employed by the Employer or a Related Employer on the last day of the Plan Year.

That portion of a Participant's Account that is attributable to minimum contributions required under this Section 15.03, to the extent required to be nonforfeitable under Code Section 416(b), may not be forfeited under Code Section 411(a)(3)(B).

15.4.
Determination of Minimum Required Contribution. For purposes of determining the amount of any minimum contribution required to be made on behalf of a Participant who is not a "key employee" for a Plan Year, the Matching Employer Contributions made on behalf of such Participant and the Nonelective Employer Contributions allocated to such Participant for the Plan Year shall be aggregated. If the aggregate amount of such contributions, when expressed as a percentage of such Participant's Compensation for the Plan Year, is less than the minimum contribution required to be made to such Participant under Section 15.03, the Employer shall make an additional contribution on behalf of such Participant in an amount that, when aggregated with the Qualified Nonelective Contributions, Matching Employer Contributions and Nonelective Employer Contributions previously allocated to such Participant, will equal the minimum contribution required to be made to such Participant under Section 15.03.
15.5.
Accelerated Vesting. If applicable, for any Plan Year in which the Plan is or is deemed to be a "top-heavy plan" and all Plan Years thereafter, the top-heavy vesting schedule described within Subsection 1.22(c) of the Adoption Agreement shall automatically apply in lieu of any less favorable schedule specified in the Eligibility, Service and Vesting Addendum to the Adoption Agreement. The top-heavy vesting schedule applies to all benefits within the meaning of Code Section 411(a)(7) except those already subject to a vesting schedule which vests at least as rapidly in all cases as the schedule described within Subsection 1.22(c), including benefits accrued before the Plan becomes a "top-heavy plan". Notwithstanding the foregoing provisions of this Section 15.05, the top-heavy vesting schedule does not apply to the Account of any Participant who does not have an Hour of Service after the Plan initially becomes or is deemed to have become a "top-heavy plan" and such Employee's Account attributable to Employer Contributions shall be determined without regard to this Section.
15.6.
Exclusion of Collectively-Bargained Employees. Notwithstanding any other provision of this Article 15, Employees who are included in a unit covered by a collective bargaining agreement between employee representatives and one or more employers may be included in determining whether or not the Plan is a "top-heavy plan"; provided, however, that if a "key employee" is covered by a collective bargaining agreement for the "determination period," all Employees covered by such agreement shall be included. No Employees in a unit covered by a collective bargaining agreement shall be entitled to a minimum contribution under Section 15.03 or accelerated vesting under Section 15.05, unless otherwise provided in the collective bargaining agreement.

 

Article 16. Amendment and Termination.

16.1.
Amendments by the Employer that do not Affect Pre-Approved Status. The Employer reserves the authority through a board of directors' resolution or similar action, subject to the provisions of Article 1 and Section 16.04, to amend the Plan as provided herein, and such amendment shall not affect the status of the Plan as a pre-approved plan.
16.1.1.
The Employer may amend the Adoption Agreement to make a change or changes in the provisions previously elected by it. Such amendment may be made either by (1) completing an amended Adoption Agreement,


or (2) adopting an amendment in the form provided by the Pre-Approved Plan Provider. Any such amendment must be filed with the Trustee.

16.1.2.
The Employer may adopt certain model amendments published by the Internal Revenue Service which specifically provide that their adoption shall not cause the Plan to be treated as an individually designed plan.

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16.1.3.
The Employer may adopt or change the separate loan procedures described in Section 9.03 by a board of directors' resolution or similar action, or any procedure established thereby.
16.2.
Amendments by the Employer Adopting Provisions not Included in Pre-Approved Plan, through the Plan Superseding Provisions Addendum. The Employer reserves the authority, subject to the provisions of Section 16.04, to amend the Plan by adopting provisions that are not included in the Pre-Approved Plan. Such amendment(s) shall be made through use of the Plan Superseding Provisions Addendum to the Adoption Agreement. In accordance with Section 1.26(a), the following amendments will not impact reliance on the opinion letter:
16.2.1.
Amendments to administrative provisions of the plan such as provisions relating to investments, plan claims procedures, and employer contact information provided the amended provisions are not in conflict with any other provision of the plan and do not cause the plan to fail to qualify under Code Section 401(a).
16.2.2.
Interim amendments or discretionary amendments that are related to a change in qualification requirements. An Employer that amends the Plan for any other reason will no longer have reliance on the opinion letter.
16.3.
Amendment by the Pre-Approved Plan Provider. Effective as of the date the Pre-Approved Plan Provider receives approval from the Internal Revenue Service of the Pre-Approved Plan, the Pre-Approved Plan Provider may in its discretion amend the Pre-Approved Plan at any time, which amendment may also apply to the Plan maintained by the Employer. The Pre-Approved Plan Provider shall satisfy any recordkeeping and notice requirements imposed by the Internal Revenue Service in order to maintain its amendment authority. The Pre-Approved Plan Provider shall provide a copy of any such amendment to each Employer adopting its Pre-Approved Plan at the Employer's last known address as shown on the books maintained by the Pre-Approved Plan Provider or its affiliates.

The Pre-Approved Plan Provider will no longer have the authority to amend the Plan on behalf of an adopting Employer as of the earlier of (a) the date of the adoption of an Employer amendment to the Plan to incorporate a provision that is not allowable in the pre-approved plan program, as described in Section 6.03 of Rev. Proc. 2017-41 (or the successor thereto), or (b) the date the Internal Revenue Service gives notice that the Plan is being treated as an individually-designed plan due to the nature and extent of amendments, pursuant to Section 8.06(3) of Rev. Proc. 2017-41 (or the successor thereto).

16.4.
Amendments Affecting Vested Interest and/or Accrued Benefits. Except as permitted by Section 16.05, Section 1.20(d) of the Adoption Agreement, and/or Code Section 411(d)(6) and regulations issued thereunder, no amendment to the Plan shall be effective to the extent that it has the effect of decreasing a Participant's Account or eliminating an optional form of benefit with respect to benefits attributable to service before the amendment. Furthermore, if the vesting schedule of the Plan is amended, the nonforfeitable interest of a Participant in his Account, determined as of the later of the date the amendment is adopted or the date it becomes effective, shall not be less than the Participant's nonforfeitable interest in his Account determined without regard to such amendment.

If the Plan's vesting schedule is amended because of a change to "top-heavy plan" status, as described in Subsection 15.01(g), the accelerated vesting provisions of Section 15.05 shall continue to apply for all Plan Years thereafter, regardless of whether the Plan is a "top-heavy plan" for such Plan Year.

16.5.
Retroactive Amendments made by Pre-Approved Plan Provider. An amendment made by the Pre-Approved Plan Provider in accordance with Section 16.03 may be made effective on a date prior to the first day of the Plan Year in which it is adopted if, in published guidance, the Internal Revenue Service either permits or requires such an amendment to be made to enable the Plan and Trust to satisfy the applicable requirements of the Code and all requirements for the retroactive amendment are satisfied.
16.6.
Termination and Discontinuation of Contributions. The Employer has adopted the Plan with the intention and expectation that assets shall continue to be held under the Plan on behalf of Participants and their Beneficiaries indefinitely and, unless the Plan is a frozen plan as provided in Subsection 1.01(g)(5) of the Adoption Agreement, that contributions

 

under the Plan shall be continued indefinitely. However, said Employer has no obligation or liability whatsoever to maintain the Plan for any length of time and may amend the Plan to discontinue contributions under the Plan or terminate the Plan at any time without any liability hereunder for any such discontinuance or termination.

If the Plan is not already a frozen plan, the Employer may amend the Plan to discontinue further contributions to the Plan by selecting Subsection 1.01(g)(5) of the Adoption Agreement. An Employer that has selected in Subsection 1.01(g)(5) may change

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its selection and provide for contributions under the Plan to recommence with the intention that such contributions continue indefinitely, as provided in the preceding paragraph.

The Employer may terminate the Plan by written notice delivered to the Trustee. Notwithstanding the effective date of the termination of the Plan, loan payments being made pursuant to Section 9.07 shall continue to be remitted to the Trust until the loan has been defaulted or distributed pursuant to Sections 9.10 and 9.11 or Section 9.13, respectively.

16.7.
Distribution upon Termination of the Plan. Upon termination or partial termination of the Plan or complete discontinuance of contributions thereunder, each Participant (including a terminated Participant with respect to amounts not previously forfeited by him) who is affected by such termination or partial termination or discontinuance shall have a vested interest in his Account of 100 percent. Subject to Section 12.01 and Article 14, upon receipt of instructions from the Administrator, the Trustee shall distribute to each Participant or other person entitled to distribution the balance of the Participant's Account in a single lump sum payment. In the absence of such instructions, the Trustee shall notify the Administrator of such situation and the Trustee shall be under no duty to make any distributions under the Plan until it receives instructions from the Administrator. Upon the completion of such distributions, the Trust shall terminate, the Trustee shall be relieved from all liability under the Trust, and no Participant or other person shall have any claims thereunder, except as required by applicable law.

If distribution is to be made to a Participant or Beneficiary who cannot be located, following the Administrator’s completion of such search methods as described in applicable Department of Labor guidance, the Administrator shall give instructions to the Trustee to roll over the distribution to an individual retirement account established by the Administrator in the name of the missing Participant or Beneficiary, which account shall satisfy the requirements of the Department of Labor automatic rollover safe harbor generally applicable to amounts less than or equal to the maximum cashout amount specified in Code Section 401(a)(31)(B)(ii) ($5,000 as of January 1, 2018) that are mandatorily distributed from the Plan. In the alternative, the Employer may direct the Trustee, subject to applicable guidance, to transfer the Account of any such missing Participant or Beneficiary, regardless of the amount of any such Account to the Pension Benefit Guarantee Corporation. In the absence of such instructions, the Trustee shall make no distribution to the distributee.

16.8.
Merger or Consolidation of Plan; Transfer of Plan Assets. In case of any merger or consolidation of the Plan with, or transfer of assets and liabilities of the Plan to, any other plan, provision must be made so that each Participant would, if the Plan then terminated, receive a benefit immediately after the merger, consolidation or transfer which is equal to or greater than the benefit he would have been entitled to receive immediately before the merger, consolidation or transfer if the Plan had then terminated.

 

Article 17. Amendment and Continuation of Prior Plan; Transfer of Funds to or from Other Qualified Plans.

17.1.
Amendment and Continuation of Prior Plan. In the event the Employer has previously established a plan (the "prior plan") which is a defined contribution plan under the Code and which on the date of adoption of the Plan meets the applicable requirements of Code Section 401(a), the Employer may, in accordance with the provisions of the prior plan, amend and restate the prior plan in the form of the Plan and become the Employer hereunder, subject to the following:
17.1.1.
Subject to the provisions of the Plan, each individual who was a Participant in the prior plan immediately prior to the effective date of such amendment and restatement shall become a Participant in the Plan on the effective date of the amendment and restatement, provided he is an Eligible Employee as of that date.
17.1.2.
Except as provided in Section 16.04, no election may be made under the vesting provisions of the Adoption Agreement if such election would reduce the benefits of a Participant under the Plan to less than the benefits to which he would have been entitled if he voluntarily separated from the service of the Employer immediately prior to such amendment and restatement.
17.1.3.
No amendment to the Plan shall decrease a Participant's accrued benefit or eliminate an optional form of benefit, except as permitted under Subsection 1.20(d) of the Adoption Agreement.
17.1.4.
The amounts standing to the credit of a Participant's account immediately prior to such amendment and restatement which represent the amounts properly attributable to (1) contributions by the Participant and

(2) contributions by the Employer and forfeitures shall constitute the opening balance of his Account or Accounts under the Plan.

17.1.5.
Amounts being paid to an Inactive Participant or to a Beneficiary in accordance with the provisions of the prior plan shall continue to be paid in accordance with such provisions.

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17.1.6.
Any election and waiver of the "qualified preretirement survivor annuity", as defined in Section 14.01, in effect after August 23, 1984, under the prior plan immediately before such amendment and restatement shall be deemed a valid election and waiver of Beneficiary under Section 14.04 if such designation satisfies the requirements of Sections 14.05 and 14.06, unless and until the Participant revokes such election and waiver under the Plan.
17.1.7.
Except as otherwise agreed within the Service Agreement, all assets of the predecessor trust shall be invested by the Trustee as soon as reasonably practicable pursuant to Article 8. The Employer agrees to assist the Trustee in any way requested by the Trustee in order to facilitate the transfer of assets from the predecessor trust to the Trust Fund.
17.2.
Transfer of Funds from an Existing Plan. The Employer may from time to time direct the Trustee, in accordance with such rules as the Trustee may establish, to accept cash, Fund Shares or participant loan promissory notes transferred for the benefit of Participants from a trust forming part of another qualified plan under the Code, provided such plan is a defined contribution plan. Such transferred assets shall become assets of the Trust as of the date they are received by the Trustee. Such transferred assets shall be credited to Participants' Accounts in accordance with their respective interests immediately upon receipt by the Trustee. A Participant's vested interest under the Plan in transferred assets which were fully vested and nonforfeitable under the transferring plan or which were transferred to the Plan in a manner intended to satisfy the requirements of subsection (b) of this Section shall be fully vested and nonforfeitable at all times. A Participant's interest under the Plan in transferred assets which were transferred to the Plan in a manner intended to satisfy the requirements of subsection (a) of this Section shall be determined in accordance with the terms of the Plan, but applying the Plan's vesting schedule or the transferor plan's vesting schedule, whichever is more favorable, for each year of Vesting Service completed by the Participant. Such transferred assets shall be invested by the Trustee in accordance with the provisions of Subsection 17.01(g) as if such assets were transferred from a prior plan, as defined in Section 17.01. Except as otherwise provided below, no transfer of assets in accordance with this Section 17.02 may cause a loss of an accrued or optional form of benefit protected by Code Section 411(d)(6).

The terms of the Plan as in effect at the time of the transfer shall apply to amounts transferred to the Plan from another defined contribution plan regardless of whether such application would have the effect of eliminating or reducing an optional form of benefit provided by such other plan that is protected by Code Section 411(d)(6) and that was previously available with respect to the transferred amount, provided that such transfer satisfies the requirements set forth in either (a) or (b):

17.2.1.
(1) The transfer is conditioned upon a voluntary, fully informed election by the Participant to transfer his entire account balance to the Plan. As an alternative to the transfer, the Participant is offered the opportunity to retain the form of benefit previously available to him (or, if the transferor plan is terminated, to receive any optional form of benefit for which the participant is eligible under the transferor plan as required by Code Section 411(d)(6));
17.2.1.2.
The amounts being transferred are not part of either (i) a qualified cash or deferred arrangement or

(ii) an employee stock ownership plan, as defined in Code Section 4975(e)(7);

17.2.1.3.
The defined contribution plan from which the transfer is made is not a money purchase pension plan and
17.2.1.4.
The transfer is made either in connection with an asset or stock acquisition, merger or other similar transaction involving a change in employer of the employees of a trade or business (i.e., an acquisition or disposition within the meaning of Section 1.410(b)-2(f) of the Treasury Regulations) or in connection with the participant's change in employment status such that the participant is not entitled to additional allocations under the transferor plan.


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(b) (1) The transfer satisfies the requirements of subsection (a)(1) of this Section 17.02;

(2) The transfer occurs at a time when the Participant is eligible, under the terms of the transferor plan, to receive an immediate distribution of his account;

(3) The transfer occurs at a time when the participant is not eligible to receive an immediate distribution of his entire nonforfeitable account balance in a single sum distribution that would consist entirely of an eligible rollover distribution within the meaning of Code Section 401(a)(31)(C); and

(4) The amount transferred, together with the amount of any contemporaneous Code Section 401(a)(31) direct rollover to the Plan, equals the entire nonforfeitable account of the participant whose account is being transferred.

It is the Employer's obligation to ensure that all assets of the Plan, other than those maintained in a separate trust or fund, are transferred to the Trustee.

17.3.
Transfer of Assets from Trust. The Employer may direct the Trustee to transfer all or a specified portion of the Trust assets to any other plan or plans maintained by the Employer or the employer or employers of an Inactive Participant or Participants, provided that the Trustee has received evidence satisfactory to it that such other plan meets all applicable requirements of the Code, subject to the following:
17.3.1.
The assets so transferred shall be accompanied by instructions from the Employer naming the persons for whose benefit such assets have been transferred, showing separately the respective contributions by the Employer and by each Inactive Participant, if any, and identifying the assets attributable to the various contributions. The Trustee shall not transfer assets hereunder until all applicable filing requirements are met. The Trustee shall have no further liabilities with respect to assets so transferred.
17.3.2.
A transfer of assets made pursuant to this Section may result in the elimination or reduction of an optional form of benefit protected by Code Section 411(d)(6), provided that the transfer satisfies the requirements set forth in either (1) or (2):
(1)
(i) The transfer is conditioned upon a voluntary, fully informed election by the Participant to transfer his entire Account to the other defined contribution plan. As an alternative to the transfer, the Participant is offered the opportunity to retain the form of benefit previously available to him (or, if the Plan is terminated, to receive any optional form of benefit for which the Participant is eligible under the Plan as required by Code Section 411(d)(6));
b.
If the Plan includes a qualified cash or deferred arrangement under Code Section 401(k), the defined contribution plan to which the transfer is made must include a qualified cash or deferred arrangement; and
c.
The transfer is made either in connection with an asset or stock acquisition, merger or other similar transaction involving a change in employer of the employees of a trade or business (i.e., an acquisition or disposition within the meaning of Section 1.410(b)-2(f) of the Treasury Regulations) or in connection with the Participant's change in employment status such that the Participant becomes an Inactive Participant.
(2)
(i) The transfer satisfies the requirements of subsection (1)(i) of this Section;
b.
The transfer occurs at a time when the Participant is eligible, under the terms of the Plan, to receive an immediate distribution of his benefit;
c.
The transfer occurs at a time when the Participant is not eligible to receive an immediate distribution of his entire nonforfeitable Account in a single sum distribution that would consist entirely of an eligible rollover distribution within the meaning of Code Section 401(a)(31)(C);
d.
The Participant is fully vested in the transferred amount in the transferee plan; and
e.
The amount transferred, together with the amount of any contemporaneous Code Section 401(a)(31) direct rollover to the transferee plan, equals the entire nonforfeitable Account of the Participant whose Account is being transferred.

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Article 18. Miscellaneous.

18.1.
Communication to Participants. The Plan shall be communicated to all Eligible Employees by the Employer promptly after the Plan is adopted.
18.2.
Limitation of Rights. Neither the establishment of the Plan and the Trust, nor any amendment thereof, nor the creation of any fund or account, nor the payment of any benefits, shall be construed as giving to any Participant or other person any legal or equitable right against the Employer, Administrator or Trustee, except as provided herein; and in no event shall the terms of employment or service of any Participant be modified or in any way affected hereby. It is a condition of the Plan, and each Participant expressly agrees by his participation herein, that each Participant shall look solely to the assets held in the Trust for the payment of any benefit to which he is entitled under the Plan.

No Participant or Beneficiary shall have or acquire any right, title or interest in or to the Plan assets or any portion of the Plan assets, except by the actual payment or distribution from the Plan to such Participant or Beneficiary of such Participant’s or Beneficiary’s benefit to which he or she is entitled under the provisions of the Plan. Whenever the Plan pays a benefit in excess of the maximum amount of payment required under the provisions of the Plan, the Administrator will have the right to recover any such excess payment, plus earnings at the Administrator’s discretion, on behalf of the Plan from the Participant and/or Beneficiary, as the case may be. Notwithstanding anything to the contrary herein stated, this right of recovery includes, but is not limited to, a right of offset against future benefit payments to be paid under the Plan to the Participant and/or Beneficiary, as the case may be, which the Administrator may exercise in its sole discretion.

18.3.
Nonalienability of Benefits. Except as provided in Code Sections 401(a)(13)(C) and (D)(relating to offsets ordered or required under a criminal conviction involving the Plan, a civil judgment in connection with a violation or alleged violation of fiduciary responsibilities under ERISA, or a settlement agreement between the Participant and the Department of Labor in connection with a violation or alleged violation of fiduciary responsibilities under ERISA), Section 1.401(a)-13(b)(2) of the Treasury Regulations (relating to Federal tax levies), or as otherwise required by law, the benefits provided hereunder shall not be subject to alienation, assignment, garnishment, attachment, execution or levy of any kind, either voluntarily or involuntarily, and any attempt to cause such benefits to be so subjected shall not be recognized. The preceding sentence shall also apply to the creation, assignment, or recognition of a right to any benefit payable with respect to a Participant pursuant to a domestic relations order, unless such order is determined in accordance with procedures established by the Administrator to be a qualified domestic relations order, as defined in Code Section 414(p), or any domestic relations order entered before January 1, 1985.
18.4.
Qualified Domestic Relations Orders Procedures. The Administrator must establish reasonable procedures to determine the qualified status of a domestic relations order. Upon receiving a domestic relations order, the Participant and any alternate payee named in the order shall be notified, in writing, of the receipt of the order and the Plan's procedures for determining the qualified status of the order. Within a reasonable period of time after receiving the domestic relations order, the Administrator must determine the qualified status of the order. The Participant and each alternate payee shall be provided notice of such determination by mailing to the individual's address specified in the domestic relations order, or in a manner consistent with the Department of Labor regulations.

If any portion of the Participant's Account is payable during the period the Administrator is making its determination of the qualified status of the domestic relations order, the Administrator must make a separate accounting of the amounts payable. If the Administrator determines the order is a qualified domestic relations order within 18 months of the date amounts first are payable following receipt of the order, the Administrator shall direct the Trustee to distribute the payable amounts in accordance with the order. If the determination of the qualified status of the order is not made within the 18-month determination period, the Administrator shall direct the Trustee to distribute the payable amounts in the manner the Plan would distribute if the order did not exist and shall apply the order prospectively if the Administrator later determines that the order is a qualified domestic relations order.

The Trustee shall set up segregated accounts for each alternate payee as directed by the Administrator.

A domestic relations order shall not fail to be deemed a qualified domestic relations order merely because it permits distribution or requires segregation of all or part of a Participant's Account with respect to an alternate payee prior to the Participant's earliest retirement age (as defined in Code Section 414(p)) under the Plan. A distribution to an alternate payee prior to the Participant's attainment of the earliest retirement age is available only if the alternate payee consents to a distribution occurring prior to the Participant's attainment of earliest retirement age.

 

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Notwithstanding any other provisions of this Section or of a domestic relations order, if the Employer has elected to cash out small Accounts as provided in Subsection 1.20(e)(1) of the Adoption Agreement and the alternate payee's benefits under the Plan do not exceed the maximum cash out limit permitted under Code Section 411(a)(11)(A), distribution shall be made to the alternate payee in a lump sum as soon as practicable following the Administrator's determination that the order is a qualified domestic relations order.

18.5.
Application of Plan Provisions for Multiple Employer Plans. When elected in the Participating Employers Addendum to the Adoption Agreement, and notwithstanding any other provision of the Plan to the contrary, if one of the Employers designated in the Participating Employers Addendum is not or has ceased to be a Related Employer (hereinafter "un-Related Employer"), the Plan shall be treated as a multiple employer plan (as defined in Code Section 413(c)) in accordance with applicable guidance. Any subsequent removal of an un-Related Employer will not be treated as a termination of the Plan with regard to that un-Related Employer and not be considered a distributable event for Participants still employed with that un-Related Employer.

For the period, if any, that the Plan is a multiple employer plan, each un-Related Employer shall be treated as a separate Employer for purposes of contributions, application of the "ADP" and "ACP" tests described in Sections 6.03 and 6.06, application of the Code Section 415 limitations described in Section 6.12, top-heavy determinations and application of the top-heavy requirements under Article 15, and application of such other Plan provisions as the Employers determine to be appropriate. For any such period, the Pre-Approved Plan Provider shall continue to treat the Employer as an adopter of this Pre-Approved Plan for purposes of notice or other communications in connection with the Plan, and other Plan-related services. The Administrator shall be responsible for administering the Plan as a multiple employer plan.

18.6.
Veterans Reemployment Rights. Notwithstanding any other provision of the Plan to the contrary, contributions, benefits, and service credit with respect to qualified military service shall be provided in accordance with Code Section 414(u) and the regulations thereunder. The Administrator shall notify the Trustee of any Participant with respect to whom additional contributions are made because of qualified military service. Additional contributions made to the Plan pursuant to Code Section 414(u) shall be treated as Deferral Contributions (if Option 1.07(a)(3) is selected in the Adoption Agreement, including, to the extent designated by the Participant, Roth 401(k) Contributions), Employee Contributions, Matching Employer Contributions, Qualified Matching Employer Contributions, Qualified Nonelective Employer Contributions, or Nonelective Employer Contributions based on the character of the contribution they are intended to replace; provided, however, that the Plan shall not be treated as failing to meet the requirements of Code Section 401(a)(4), 401(k)(3), 401(k)(12), 401(m), 410(b), or 416 by reason of the making of or the right to make such contribution. Notwithstanding the foregoing, Participants dying and/or becoming disabled while performing qualified military service as defined in Code Section 414(u)(5) shall not be treated as having resumed employment pursuant to this Section on the day prior to dying or becoming disabled for purposes of calculating contributions pursuant to Code Section 414(u)(9).
18.7.
Facility of Payment. In the event the Administrator determines, on the basis of medical reports or other evidence satisfactory to the Administrator, that the recipient of any benefit payments under the Plan is incapable of handling his affairs by reason of minority, illness, infirmity or other incapacity, the Administrator may direct the Trustee to disburse such payments to a person or institution designated by a court which has jurisdiction over such recipient or a person or institution otherwise having the legal authority under state law for the care and control of such recipient. The receipt by such person or institution of any such payments shall be complete acquittance therefore, and any such payment to the extent thereof, shall discharge the liability of the Trust for the payment of benefits hereunder to such recipient.
18.8.
Information between Employer and/or Administrator and Trustee. The Employer and/or Administrator will furnish the Trustee, and the Trustee will furnish the Employer and/or Administrator, with such information relating to the Plan and Trust as may be required by the other in order to carry out their respective duties hereunder, including without limitation information required under the Code and any regulations issued or forms adopted by the Treasury Department thereunder or under the provisions of ERISA and any regulations issued or forms adopted by the Department of Labor thereunder.
18.9.
Effect of Failure to Qualify Under Code. Notwithstanding any other provision contained herein, if the Employer's plan fails to be a qualified plan under the Code, such plan can no longer participate in this pre-approved plan arrangement and shall be considered an individually designed plan.
18.10.
Directions, Notices and Disclosure. Any notice or other communication in connection with this Plan shall be deemed delivered in writing if addressed as follows and if either actually delivered at said address or, in the case of a letter,

 

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three business days shall have elapsed after the same shall have been deposited in the United States mail, first-class postage prepaid and registered or certified:

(a)
If to the Employer or Administrator, to it at such address as the Administrator shall direct pursuant to the Service Agreement;
(b)
If to the Trustee, to it at the address set forth in Section 1.29 of the Adoption Agreement;

or, in each case at such other address as the addressee shall have specified by written notice delivered in accordance with the foregoing to the addressor's then effective notice address.

Any direction, notice or other communication provided to the Employer, the Administrator or the Trustee by another party which is stipulated to be in written form under the provisions of this Plan may also be provided in any medium which is permitted under applicable law or regulation. Any written communication or disclosure to Participants required under the provisions of this Plan may be provided in any other medium (electronic, telephone or otherwise) that is permitted under applicable law or regulation.

18.11.
Governing Law. Unless provided otherwise in the Adoption Agreement, the Plan shall be construed, administered and enforced according to ERISA, and to the extent not preempted thereby, the laws of the Commonwealth of Massachusetts.
18.12.
Discharge of Duties by Fiduciaries. The Trustee, the Employer and any other fiduciary shall discharge their duties under the Plan in accordance with the requirements of ERISA solely in the interests of Participants and their Beneficiaries and with the care, skill, prudence, and diligence under the applicable circumstances that a prudent man acting in a like capacity and familiar with such matters would use in conducting an enterprise of like character with like aims.

 

Article 19. Plan Administration.

a)
Powers and Responsibilities of the Administrator. The Administrator has the full power and the full responsibility to administer the Plan in all of its details, subject, however, to the requirements of ERISA. The Administrator is the agent for service of legal process for the Plan. In addition to the powers and authorities expressly conferred upon it in the Plan, the Administrator shall have all such powers and authorities as may be necessary to carry out the provisions of the Plan, including the discretionary power and authority to interpret and construe the provisions of the Plan, such interpretation to be final and conclusive on all persons claiming benefits under the Plan; to make benefit determinations; to utilize the correction programs or systems established by the Internal Revenue Service (such as the Employee Plans Compliance and Resolution System) or the Department of Labor; and to resolve any disputes arising under the Plan. The Employer may elect through Section 1.01(c) of the Adoption Agreement to allocate the responsibilities of the Administrator among one or more persons or entities as indicated therein or within the Fiduciary Addendum to the Adoption Agreement. The Administrator may also, by written instrument, allocate and delegate its fiduciary responsibilities in accordance with ERISA Section 405, including allocation of such responsibilities to an administrative committee or committees formed to administer the Plan.
b)
Nondiscriminatory Exercise of Authority. Whenever, in the administration of the Plan, any discretionary action by the Administrator, Investment Fiduciary or other fiduciary named on the Fiduciary Addendum to the Adoption Agreement is required, such fiduciary shall exercise its authority in a nondiscriminatory manner so that all persons similarly situated shall receive substantially the same treatment.
c)
Claims and Review Procedures. As required under Section 2560.503-1(b)(2) of Regulations issued by the Department of Labor, the claims and review procedures are described in detail in the summary plan description for the Plan. Unless provided otherwise in the Adoption Agreement, claims will also be subject to the restrictions described below.

A Participant, Beneficiary or alternate payee (collectively referred to as “Claimant” in this section) seeking judicial review of an adverse benefit determination under the Plan, whether in whole or in part, is required to exhaust all claims and review procedures under the Plan as described in the summary plan description for the Plan before filing suit in state or federal court. The Claimant must file any suit or legal action (including, without limitation, a civil action under Section 502(a) of ERISA) within 12 months of the date the final adverse benefit determination is issued. Notwithstanding the foregoing, any Claimant that fails to engage in or exhaust the claims and review procedures must file any suit or legal action within 12 months of the date of the alleged facts or conduct giving rise to the claim (including, without limitation, the date the Claimant alleges he or she became entitled to the Plan benefits requested in the suit or legal action). A Claimant who fails to file such suit or legal action within the 12 months limitations period will lose any rights to bring any such suit or legal action thereafter. In any

such suit or legal action, a Claimant is prohibited from presenting any evidence not timely presented as part of the Plan’s administrative

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claims review process.

d)
Named Fiduciary. The Administrator is a "named fiduciary" for purposes of ERISA Section 402(a)(1) and has the powers and responsibilities with respect to the management and operation of the Plan described herein.
e)
Costs of Administration. All reasonable costs and expenses (including legal, accounting, and employee communication fees) incurred by the Administrator and the Trustee in administering the Plan and Trust may be paid from the forfeitures (if any) resulting under Section 11.08, from the ERISA account established under this Section, if any, or from the remaining Trust Fund. All such costs and expenses paid from the remaining Trust Fund shall, unless allocable to the Accounts of particular Participants, be charged against the Accounts of all Participants as directed by the Administrator. Amounts a service provider agrees to credit to the Plan in recognition of the service provider’s compensation for Plan services may be allocated to an ERISA account from which the Administrator may pay Plan expenses and/or allocate amounts to the Accounts of Participants and Beneficiaries pro rata based on their Account balances in the Trust or as set forth in the Fiduciary Addendum to the Adoption Agreement.


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Pre-Approved Defined Contribution Plan

Addendum

RE: The Bipartisan Budget Act of 2018, and Code Sections 401(k) and 401(m) 2019 Final Hardship Regulations Amendments for Fidelity Basic Plan Document No. 17

PREAMBLE

Adoption and Effective Date of Amendment. This amendment of the Plan is adopted to reflect statutory changes pursuant to the Bipartisan Budget Act of 2018 (BBA) and Code Sections 401(k) and 401(m) 2019 Final Hardship Regulations and any related guidance. This amendment is intended as good faith compliance with the requirements of the BBA and those final regulations and is to be construed in accordance with guidance issued thereunder.

Except as provided otherwise below, the amendments contained herein shall be effective for Plan Years beginning after December 31, 2018.

Supersession of Inconsistent Provisions. This amendment shall supersede the provisions of the Plan to the extent those provisions are inconsistent with the provisions of this amendment.

Article 1. Qualified Matching Employer Contributions. Section 5.09 is amended by replacing the first paragraph in its entirety with the following:

If so provided by the Employer in Subsection 1.11(f) of the Adoption Agreement, prior to making its Matching Employer Contribution (other than any 401(k) Safe Harbor Matching Employer Contribution) to the Plan, the Employer may designate all or a portion of such Matching Employer Contribution as a Qualified Matching Employer Contribution. The Employer shall notify the Trustee of such designation at the time it makes its Matching Employer Contribution. Qualified Matching Employer Contributions shall be distributable only in accordance with the distribution provisions that are applicable to Deferral Contributions; provided, however, that a Participant shall not be permitted to take Qualified Matching Employer Contributions as part of a Qualified Reservist Distribution pursuant to Section 10.08. Qualified Matching Employer Contributions shall not be included in the amounts available for hardship withdrawals unless specified in the In-Service Withdrawals Addendum.

Article 2. Qualified Nonelective Employer Contributions Section 5.07 is amended by replacing the last paragraph it in its entirety with the following:

Qualified Nonelective Employer Contributions shall be distributable only in accordance with the distribution provisions that are applicable to Deferral Contributions; provided, however, that a Participant shall not be permitted to take Qualified Nonelective Employer Contributions as part of a Qualified Reservist Distribution pursuant to Section 10.08. Qualified Nonelective Employer Contributions shall not be included in the amounts available for hardship withdrawals unless specified in the In-Service Withdrawals Addendum.

Article 3. Hardship Distributions Section 10.05 is amended and replaced in its entirety with the following:

If so provided by the Employer in Subsection 1.19(a) of the Adoption Agreement, a Participant who continues in employment as an Employee may apply for a hardship withdrawal. Unless provided otherwise in the Service Agreement, the Participant may apply by certifying to the Administrator all of the required criteria specified in this Section. Such certification shall represent that the Participant has documentation substantiating the hardship. Such a hardship withdrawal may include all or any portion of the Accounts specified by the Employer in Subsection 1.19(a)(1) of the Adoption Agreement and the In-Service Withdrawals Addendum to the Adoption Agreement, if applicable. The minimum amount, if any, that a Participant may withdraw because of hardship is the dollar amount specified by the Employer in Subsection 1.19(a) of the Adoption Agreement.

For purposes of this Section 10.05, a withdrawal is made on account of hardship if made on account of an immediate and heavy financial need of the Participant where such Participant lacks other available resources. The Administrator shall direct the Trustee with respect to hardship withdrawals and those withdrawals shall be based on the following special rules:

i)
The following are the only financial needs considered immediate and heavy:


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(1) expenses incurred or necessary for medical care (that would be deductible under Code Section 213(d), determined without regard to whether the expenses exceed any applicable income limit) of the Participant, the Participant's Spouse, children, or dependents, or a primary beneficiary of the Participant;

(2) costs directly related to the purchase (excluding mortgage payments) of a principal residence for the Participant;

(3) payment of tuition, related educational fees, and room and board for the next 12 months of postsecondary education for the Participant, the Participant's Spouse, children or dependents (as defined in Code Section 152, without regard to subsections (b)(1), (b)(2), and (d)(1)(B) thereof), or a primary beneficiary of the Participant;

(4) payments necessary to prevent the eviction of the Participant from, or a foreclosure on the mortgage on, the Participant's principal residence;

(5) payments for funeral or burial expenses for the Participant's deceased parent, Spouse, child, or dependent (as defined in Code Section 152, without regard to subsection (d)(1)(B) thereof), or a primary beneficiary of the Participant;

(6) expenses for the repair of damage to the Participant's principal residence that would qualify for a casualty loss deduction under Code Section 165 (determined without regard to Code Section 165(h)(5) and whether the loss exceeds any applicable income limit);

(7) expenses and losses (including loss of income) incurred by the Participant on account of a disaster declared by the Federal Emergency Management Agency (FEMA) under the Robert T. Stafford Disaster Relief and Emergency Assistance Act, Public Law 100-707, provided that

(8) the employee's principal residence or principal place of employment at the time of the disaster was located in an area designated by FEMA for individual assistance with respect to the disaster; or any other financial need determined to be immediate and heavy under rules and regulations issued by the Secretary of the Treasury or his delegate; provided, however, that any such financial need shall constitute an immediate and heavy need under this paragraph (8) no sooner than administratively practicable following the date such rule or regulation is issued.

For purposes of this Section, the term “primary beneficiary” means a Beneficiary under the Plan who has an unconditional right to all or a portion of the Participant’s Account upon the death of the Participant.

ii)
Except to the extent provided otherwise on the Adoption Agreement Addendum regarding the Bipartisan Budget Act of 2018, and Code Sections 401(k) and 401(m) 2019 Final Hardship Regulations, the distribution shall be considered as necessary to satisfy an immediate and heavy financial need of the Participant only if:
(1)
The Participant has obtained all distributions, other than the hardship withdrawal.
(2)
The withdrawal amount is not in excess of the amount of an immediate and heavy financial need (including amounts necessary to pay any Federal, state or local income taxes or penalties reasonably anticipated to result from the distribution).

 

 

 

 

 

 

The Pre-Approved Plan Provider (Fidelity Management & Research Company) executed this Amendment by separate resolution on July 29, 2020.


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PRE-APPROVED DEFINED CONTRIBUTION PLAN AMENDMENT

 

to Fidelity Basic Plan Document No. 17

 

RE: Coronavirus Aid, Relief, and Economic SecurityAct

 

PREAMBLE

Adoption and Effective Date of Amendment. This document amends the Basic Plan Document and is adopted by the Pre-Approved Plan Provider on behalf of adopting Employers for such Employer’s Plan, to reflect statutory changes pursuant to the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) and any related guidance (this “CARES Act Amendment”). The Employer may further modify this CARES Act Amendment through the addendum, prepared by the Preapproved Plan Provider, to the Adoption Agreement prepared to reflect statutory changes pursuant to the CARES Act and any related guidance (the “CARES Act Addendum”). This CARES Act Amendment and the CARES Act Addendum are intended as good-faith compliance with the requirements of the CARES Act, and are to be construed in accordance with guidance issued thereunder, regardless of when such guidance is issued.

Except as provided otherwise below or by the Employer through the CARES Act Addendum, this CARES Act Amendment shall be effective beginning January 1, 2020.

Supersession of Inconsistent Provisions. This CARES Act Amendment shall supersede the provisions of the Basic Plan Document and the Plan to the extent those provisions are inconsistent with the provisions of this CARES Act Amendment. However, this CARES Act Amendment shall be interpreted in concert with the CARES Act Addendum. Except as otherwise provided in this CARES Act Amendment, terms defined in the Plan will have the same meaning in this CARES Act Amendment. The Article headings Articles 1 (CARES Act Distribution), 2 (CARES Act Loans), and 3 (Modification of Minimum Distribution Rules for 2020) and references to those Articles and their Subarticles are references for this CARES Act Amendment only and do not relate to the Basic Plan Document’s numbering and references.

Article 1. CARES Act Distribution. The following is added as a new section, Section 10.10, at the end of Article 10, In-Service Withdrawals, of the Basic Plan Document.

10.10. CARES Act Distributions. Unless provided otherwise in the Adoption Agreement (as amended by the CARES Act Addendum), the Plan allows a Participant who is a Qualified Individual to take a CARES Act Distribution from any vested balances in all sub-accounts where available, except for assets transferred from a money purchase pension plan.

(a)
“CARES Act Distribution” is a distribution made from an eligible retirement plan, as defined under section 402(c)(8)(B) of the Code, on or after January 1, 2020, and before December 31, 2020, to a Qualified Individual. The aggregate amount of distributions received by a Qualified Individual that may be treated as a CARES Act Distribution cannot exceed $100,000. Notwithstanding this limit, for the Plan, a CARES Act distribution, when aggregated with all other CARES Act Distributions the Qualified Individual made under the Plan (and under any other plan maintained by the Employer or a Related Employer), cannot exceed $100,000. The Administrator may rely on a Participant’s certification that the Participant satisfies a condition to be a Qualified Individual unless the Administrator has actual knowledge to the contrary. A CARES Act Distribution must be made in accordance with and pursuant to the distribution provisions of the Plan, except that:
a.
Any CARES Act Distribution of amounts attributable to eligible Participant's Deferral Contributions, Qualified Nonelective Employer Contributions, Qualified Matching Employer Contributions, 401(k) Safe Harbor Matching Employer Contributions or 401(k) Safe Harbor Nonelective Employer Contributions Accounts shall be deemed to be made after the occurrence of any distributable events otherwise applicable under Code section 401(k)(2)(B)(i), such as termination of employment (and shall be deemed permissible under Section 12.01);
b.
The requirements of Code sections 401(a)(31), 402(f) and 3405 and Section 13.04 shall not apply;
c.
Restrictions based on the Participant’s age and/or length of Plan participation, or how long Nonelective and/or Matching Employer Contributions have been held in the Plan, do not apply;

 

(4) Restrictions applicable to terminated Participants not allowing for partial distributions do not apply.

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Terminated Participants may take partial distributions of their Account as a CARES Act Distribution.

(b) “Qualified Individual” is defined in section 2202(a)(4)(A)(ii) of the CARES Act and Section 1B of Notice 2020-50.

(c) “Member of the Participant’s Household” is someone who shares the Participant’s principal residence.

(d) Recontribution of a CARES Act Distribution. An Eligible Employee who may make Rollover Contributions to the Plan, as specified in Section 1.09(a) of the Adoption Agreement, may recontribute any part of a CARES Act Distribution to the Plan if the Plan permits Rollover Contributions in Subsection 1.09(a) of the Adoption Agreement at the time of recontribution. Any such recontribution will be treated as having been made in a direct rollover to the Plan, provided the recontribution is made during the three-year period beginning on the day after the date on which the Eligible Employee received the CARES Act Distribution being recontributed and does not exceed the amount of the CARES Act Distributions to which the rollover relates. CARES Act Recontributions are available for CARES Act Distributions taken from the Plan or from another eligible retirement plan as defined under section 402(c)(8)(B) of the Code. Unless the Administrator has actual knowledge to the contrary, the Administrator may rely on the Eligible Employee’s certification that they satisfy the conditions to recontribute a CARES Act Distribution, in determining whether a distribution is a coronavirus-related distribution that is eligible for recontribution.

 

Article 2. CARES Act Loans

2.1.
Limitation on Loan Amount. Section 9.05 of the Basic Plan Document is amended to add the following to the end of the section:

If so provided in the Plan’s loan procedures, for loans made to a Qualified Individual from the date described in the Adoption Agreement (as amended by the CARES Act Addendum) until September 22, 2020 (a “CARES Act Loan”), the dollar limit in

(a) may be increased up to $100,000 (or such other amount as may be provided in the applicable Code provision) and the portion of the Account in (b) may be “all of the “participant’s” vested interest in his Account” instead of “one-half the present value of the “participant’s” vested interest in his Account.”

2.2.
Level Amortization. Section 9.07 of the Basic Plan Document is amended to add the following to the end of the section:

A CARES Act Loan will include a loan repayment Deferment Period. For a CARES Act Loan, the “Deferment Period” begins on the date of the CARES Act Loan was made to the Participant and ends December 31, 2020. Interest will continue to accrue during the Deferment Period. The repayment amount of the re-amortized CARES Act Loan will reflect the outstanding principal balance of the CARES Act Loan and the accrued interest on the CARES Act Loan including the interest that accrued during the Deferment Period. The loan period will be extended by the length of the Deferment Period.

If so elected by the Employer in Section (c) of the CARES Act Addendum, Qualified Individuals are also permitted to delay the repayment of Participant loans outstanding on or after March 27, 2020 that are not a CARES Act Loan. For a loan that is not a CARES Act Loan, the “Deferment Period” begins on the date the Participant directs Fidelity to delay repayment and ends December 31, 2020, and interest continues to accrue during the Deferment Period. The repayment amount of the re-amortized loan will reflect the outstanding principal balance of the loan and the accrued interest on the loan including the interest that accrued during the Deferment Period.

2.3.
Security. Section 9.08 of the Basic Plan Document is amended to add the following to the end of thesection:

If so provided in the Plan’s loan procedures, a CARES Act Loan must be secured by the "participant's" vested interest in his Account not to exceed 100 percent of such vested interest.

 

Article 3. Modification of Minimum Distribution Rules for 2020

3.1.
Except to the extent that the Employer, or its previous pre-approved plan provider, has amended the Plan prior to the end of the first plan year beginning on or after January 1, 2022 to provide otherwise and notwithstanding Section 13.03 of the


Plan, a Participant or Beneficiary who would have been required to receive required minimum distributions for 2020, but for the

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enactment of Code Section 401(a)(9)(I) (“2020 RMDs”), and who would have satisfied that requirement by receiving distributions specifically equal to the 2020 RMDs, will not receive those distributions for 2020 unless the Participant or Beneficiary chooses to receive such distributions.

3.2.
Any Participant or Beneficiary who has elected a systematic withdrawal plan (“installments”) pursuant to Section

13.01 of the Plan to satisfy (in part or whole) a 2020 RMD is hereby permitted to elect to stop these installments.

3.3.
For only those Participants and Beneficiaries who have made the election in Subarticle 3.2, there is hereby added to the Plan a partial withdrawal to allow such a Participant or Beneficiary to withdrawal any part of his or her Account prior to December 31, 2020.
3.4.
Participants and Beneficiaries described in Subarticle 3.1 will be given the opportunity to elect to receive 2020 RMDs as described in the preceding sentences of this Article 3. However, a direct rollover will be offered as a payment option only for distributions that would be eligible rollover distributions in the absence of section 401(a)(9)(I) of the Code.
3.5.
An Eligible Employee or Participant who may make Rollover Contributions to the Plan, as specified in Section 1.09(a) of the Adoption Agreement and 5.06 of the Basic Plan Document, may rollover any part of the 2020 RMD to the Plan if the Plan permits Rollover Contributions in Subsection 1.09(a) of the Adoption Agreement at the time of rollover. Notwithstanding any other part of the Plan, rollover of 2020 RMDs do not have to occur through a direct rollover if the amount was rolled over to the Trust (1) by August 31, 2020 for amounts originally distributed January 1, 2020 through July 2, 2020 or (2) by the 60th day after the distribution was originally distributed if the amount was originally distributed July 3, 2020 through December 31, 2020.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The Pre-Approved Plan Sponsor (Fidelity Management & Research Company) executed this Amendment by separate resolution on September 9, 2022.

 

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Exhibit 21.1

PROSPERITY BANCSHARES, INC.

LIST OF SUBSIDIARIES

Direct Subsidiaries

 

Jurisdiction of

Organization

 

Parent Entity

 

 

 

 

 

Prosperity Bank

 

Texas

 

Prosperity Bancshares, Inc.

Prosperity Interim Corporation

 

Texas

 

Prosperity Bancshares, Inc.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Indirect Subsidiaries

 

Jurisdiction of

Organization

 

Parent Entity

 

 

 

 

 

Coppermark Card Services, Inc.

 

Oklahoma

 

Prosperity Bank

 

 

 

 

 

Citizens Insurance Agency of Texas, Inc.

 

Texas

 

Prosperity Bank

 

 

 

 

 

HSUMY, Inc.

 

Oklahoma

 

Prosperity Bank

 

 

 

 

 

LegacyTexas Holdings, Inc.

 

Texas

 

Prosperity Bank

 

EXHIBIT 23.1

 

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

We consent to the incorporation by reference in Registration Statement Nos. 333-92997 and 333-237766 on Form S-8 and Registration Statement Nos. 333-136848 and 333-93857 on Form S-3 of our reports dated February 26, 2026, relating to the consolidated financial statements of Prosperity Bancshares, Inc. and subsidiaries and the effectiveness of Prosperity Bancshares, Inc. and subsidiaries’ internal control over financial reporting appearing in this Annual Report on Form 10-K for the year ended December 31, 2025.

 

/s/ Deloitte and Touche LLP

Houston, Texas

February 26, 2026

Exhibit 31.1

CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER PURSUANT TO RULE 13a-14(a) OF THE

SECURITIES EXCHANGE ACT OF 1934, AS AMENDED

I, David Zalman, certify that:

1.
I have reviewed this Annual Report on Form 10-K of Prosperity Bancshares, Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
c)
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a)
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: February 26, 2026

/s/ David Zalman

David Zalman

Senior Chairman of the Board and Chief Executive Officer

 

Exhibit 31.2

CERTIFICATION OF THE CHIEF FINANCIAL OFFICER PURSUANT TO RULE 13a-14(a) OF THE

SECURITIES EXCHANGE ACT OF 1934, AS AMENDED

I, Asylbek Osmonov, certify that:

1.
I have reviewed this Annual Report on Form 10-K of Prosperity Bancshares, Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
c)
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a)
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: February 26, 2026

/s/ ASYLBEK OSMONOV

Asylbek Osmonov

Chief Financial Officer

Exhibit 32.1

Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to

Section 906 of the Sarbanes-Oxley Act of 2002

In connection with this Annual Report of Prosperity Bancshares, Inc. (the “Company”) on Form 10-K for the year ended December 31, 2025, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, David Zalman, Senior Chairman of the Board and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1.
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2.
The information contained in the Report fairly presents, in all material respects, the financial condition and operating results of the Company.

/s/ David Zalman

David Zalman

Senior Chairman of the Board and Chief Executive Officer

February 26, 2026

Exhibit 32.2

Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to

Section 906 of the Sarbanes-Oxley Act of 2002

In connection with this Annual Report of Prosperity Bancshares, Inc. (the “Company”) on Form 10-K for the year ended December 31, 2025, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Asylbek Osmonov, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1.
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2.
The information contained in the Report fairly presents, in all material respects, the financial condition and operating results of the Company.

/s/ ASYLBEK OSMONOV

Asylbek Osmonov

Chief Financial Officer

February 26, 2026