Attached files
| file | filename |
|---|---|
| EX-32 - EXHIBIT 32 - LegacyTexas Financial Group, Inc. | exhibit32020161231.htm |
| EX-31.2 - EXHIBIT 31.2 - LegacyTexas Financial Group, Inc. | exhibit31220161231.htm |
| EX-31.1 - EXHIBIT 31.1 - LegacyTexas Financial Group, Inc. | exhibit31120161231.htm |
| EX-23 - EXHIBIT 23 - LegacyTexas Financial Group, Inc. | exhibit23020161231.htm |
| EX-21 - EXHIBIT 21 - LegacyTexas Financial Group, Inc. | exhibit21020161231.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the fiscal year ended December 31, 2016
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 001-34737
LEGACYTEXAS FINANCIAL GROUP, INC.
(Exact name of registrant as specified in its charter)
Maryland | 27-2176993 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
5851 Legacy Circle, Plano, Texas | 75024 | |
(Address of Principal Executive Offices) | (Zip Code) | |
Registrant’s telephone number, including area code: (972) 578-5000
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange on Which | ||
Title of Each Class | Registered | |
Common Stock, par value $0.01 per share | Nasdaq Global Select Market | |
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 þ 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 þ
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 þ No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statement incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ | Accelerated filer ¨ | Non-accelerated filer ¨ | Smaller reporting company ¨ | |||
(Do not check if a smaller reporting company) | ||||||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No þ
The aggregate market value of the voting and non-voting common equity held by nonaffiliates of the Registrant was $1,245.8 million as of June 30, 2016, the last business day of the Registrant’s most recently completed second fiscal quarter. Solely for the purpose of this computation, it has been assumed that executive officers and directors of the Registrant are “affiliates”.
There were issued and outstanding 47,886,498 shares of the Registrant’s common stock as of February 7, 2017.
DOCUMENTS INCORPORATED BY REFERENCE:
Document | Part of Form 10-K | |
Portions of the definitive Proxy Statement to be used in conjunction with the Registrant’s Annual Meeting of Shareholders to be held on May 22, 2017. | Part III | |
LEGACYTEXAS FINANCIAL GROUP, INC.
FORM 10-K
December 31, 2016
INDEX
Page | |
PART I
Item 1. | Business |
The disclosures set forth in this item are qualified by Item 1A. Risk Factors and the section captioned “Special Note Regarding Forward-Looking Statements” in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations of this report and other cautionary statements set forth elsewhere in this report.
General
LegacyTexas Financial Group, Inc. is a Maryland corporation and LegacyTexas Bank is its wholly owned principal operating subsidiary. Unless the context otherwise requires, references in this document to the “Company” refer to LegacyTexas Financial Group, Inc. and references to the “Bank” refer to LegacyTexas Bank, the Company's wholly owned operating subsidiary. References to “we,” “us,” and “our” mean LegacyTexas Financial Group, Inc. and/or LegacyTexas Bank, as the context requires.
Regulators of the Bank are the Texas Department of Banking (“TDOB”) and the Board of Governors of the Federal Reserve System (“FRB”) with back-up oversight by the FDIC. The Bank is a Federal Reserve member bank required to have certain reserves and stock set by the FRB and a member of the Federal Home Loan Bank of Dallas, one of the 12 regional banks in the Federal Home Loan Bank System (“FHLB”). The Company is regulated by the FRB.
Business Strategies
Our principal business consists of attracting retail deposits from the general public and the business community and investing those funds, along with borrowed funds, in commercial real estate loans, secured and unsecured commercial and industrial loans, as well as permanent loans secured by first and second mortgages on one-to-four family residences and consumer loans. Additionally, the Warehouse Purchase Program allows mortgage banking company customers to close one-to- four family real estate loans in their own name and manage its cash flow needs until the loans are sold to investors. We also offer title services, as well as brokerage services for the purchase and sale of non-deposit investment and insurance products through a third party brokerage arrangement. Our operating revenues are derived principally from interest earned on interest-earning assets, including loans and investment securities, and service charges and fees on deposits and other account services. Our primary sources of funds are deposits, FHLB advances and other borrowings, and payments received on loans and securities. We offer a variety of deposit accounts that provide a wide range of interest rates and terms, generally including savings, money market, certificate of deposit and demand accounts.
Our principal objective is to be an independent, commercially-oriented, customer-focused financial services company, providing outstanding service and innovative products in our primary market area of North Texas. Our Board of Directors adopted a strategy designed to maintain growth and profitability, a strong capital position and high asset quality. This strategy primarily involves:
• | A strong focus on growth, both organically and through selective acquisitions |
We are a commercial bank that is focused on meeting the needs of businesses and consumers in the North Texas area by organically growing our loan portfolio while maintaining sound asset quality. We intend to fund loan growth with a low-cost deposit base, which includes increasing our non-interest-bearing demand deposits, especially in the commercial sector, and using our wide array of Treasury Management services to serve as a catalyst for deposit growth. We will also continue to pursue selective acquisitions that will enhance our commercial business model.
•An emphasis on the total customer relationship while diversifying income sources and practicing prudent and focused expense management
We offer both commercial and retail customers a wide range of products and services that provide us with diversification of revenue sources and help us to solidify customer relationships. Our focus on commercial loan growth will positively impact interest income, and increasing our non-interest-bearing demand deposit base will help fund loans at a low cost. We aim to know our customers and their businesses better than our competition, provide effective ideas and solutions for their financial needs, and execute the delivery of these products and services in an efficient and professional manner. We plan to balance non-interest income growth through our relationship-driven approach with prudent and focused core expense management.
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•Maintain sound asset quality
We believe that asset quality is a key to long-term financial success. We seek to maintain sound asset quality and moderate credit risk by strictly adhering to our lending policies, which have historically resulted in low charge-off ratios. As we continue to grow and diversify our loan portfolio, we plan to adhere to sound credit management principles.
•Strategic capital deployment
We plan to maintain strong capital levels while increasing shareholder returns. Our current capital position provides us with the ability to pursue robust organic growth as well as acquisitions that will advance our business strategy.
Market Areas
We are headquartered in Plano, Texas, and currently operate 44 banking offices in the Dallas/Fort Worth Metroplex and surrounding counties. Based on the most recent branch deposit data provided by the FDIC (as of June 2016), we ranked first in deposit share in Collin County, with 17.74% of total deposits, and seventh in the Dallas/Fort Worth Metropolitan Statistical Area, with 2.25% of total deposits.
Our market area includes a diverse population of management, professional and sales personnel, office employees, manufacturing and transportation workers, service industry workers, government employees and self-employed individuals. The population includes a skilled work force with a wide range of education levels and ethnic backgrounds. Major employment sectors include transportation, financial services, health and social services, telecommunications, manufacturing, education, retail trades, and professional services. There are 20 companies headquartered in the Dallas/Fort Worth Metroplex which are on the 2016 Fortune 500 list, including Exxon Mobil, AT&T, American Airlines Group, Kimberly-Clark, Dr. Pepper Snapple Group, Texas Instruments, J.C. Penney, Dean Foods and Southwest Airlines.
For December 2016, the Dallas/Fort Worth Metroplex reported an unemployment rate (not seasonally adjusted) of 3.7%, compared to the national average of 4.5% (source is Bureau of Labor Statistics Local Area Unemployment Statistics Unemployment Rates for Metropolitan Areas, using the Dallas-Fort Worth-Arlington, Texas Metropolitan Statistical Area.)
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Lending Activities
The following table presents information concerning the composition of our loan portfolio in dollar amounts and in percentages (before deductions for deferred fees and discounts and allowances for loan losses) as of the dates indicated.
December 31, | ||||||||||||||||||||||||||||||||||
2016 | 2015 | 2014 | 2013 | 2012 | ||||||||||||||||||||||||||||||
Amount | Percent | Amount | Percent | Amount | Percent | Amount | Percent | Amount | Percent | |||||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||||||||||
Loans held for investment: | ||||||||||||||||||||||||||||||||||
Commercial real estate | $ | 2,670,455 | 44.03 | % | $ | 2,177,543 | 42.98 | % | $ | 1,265,868 | 48.06 | % | $ | 1,091,200 | 53.23 | % | $ | 825,340 | 48.81 | % | ||||||||||||||
Commercial and industrial | 1,971,160 | 32.50 | 1,612,669 | 31.83 | 781,824 | 29.69 | 439,430 | 21.43 | 278,525 | 16.48 | ||||||||||||||||||||||||
Construction and land | 294,894 | 4.86 | 269,708 | 5.32 | 21,298 | 0.81 | 30,247 | 1.48 | 21,182 | 1.25 | ||||||||||||||||||||||||
Consumer real estate | 1,074,923 | 17.72 | 936,757 | 18.49 | 524,199 | 19.90 | 441,226 | 21.53 | 506,642 | 29.97 | ||||||||||||||||||||||||
Other consumer | 53,991 | 0.89 | 69,830 | 1.38 | 40,491 | 1.54 | 47,799 | 2.33 | 59,080 | 3.49 | ||||||||||||||||||||||||
Gross loans held for investment, excluding Warehouse Purchase Program | 6,065,423 | 100.00 | % | 5,066,507 | 100.00 | % | 2,633,680 | 100.00 | % | 2,049,902 | 100.00 | % | 1,690,769 | 100.00 | % | |||||||||||||||||||
Net of: | ||||||||||||||||||||||||||||||||||
Deferred fees and discounts, net | (2,251 | ) | (1,860 | ) | (2,927 | ) | (1,267 | ) | 486 | |||||||||||||||||||||||||
Allowance for loan losses | (64,576 | ) | (47,093 | ) | (25,549 | ) | (19,358 | ) | (18,051 | ) | ||||||||||||||||||||||||
Net loans held for investment, excluding Warehouse Purchase Program | 5,998,596 | 5,017,554 | 2,605,204 | 2,029,277 | 1,673,204 | |||||||||||||||||||||||||||||
Warehouse Purchase Program | 1,055,341 | 1,043,719 | 786,416 | 673,470 | 1,060,720 | |||||||||||||||||||||||||||||
Total loans held for investment, net | $ | 7,053,937 | $ | 6,061,273 | $ | 3,391,620 | $ | 2,702,747 | $ | 2,733,924 | ||||||||||||||||||||||||
Loans held for sale | $ | 21,279 | $ | 22,535 | $ | — | $ | — | $ | — | ||||||||||||||||||||||||
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The following table shows the composition of our loan portfolio by fixed and adjustable rate as of the dates indicated.
December 31, | ||||||||||||||||||||||||||||||||||
2016 | 2015 | 2014 | 2013 | 2012 | ||||||||||||||||||||||||||||||
Amount | Percent | Amount | Percent | Amount | Percent | Amount | Percent | Amount | Percent | |||||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||||||||||
Fixed rate loans: | ||||||||||||||||||||||||||||||||||
Commercial real estate | $ | 1,638,656 | 27.02 | % | $ | 1,188,884 | 23.47 | % | $ | 728,168 | 27.65 | % | $ | 564,312 | 27.53 | % | $ | 445,885 | 26.37 | % | ||||||||||||||
Commercial and industrial | 212,456 | 3.50 | 664,057 | 13.11 | 67,592 | 2.57 | 76,002 | 3.71 | 46,805 | 2.77 | ||||||||||||||||||||||||
Construction and land | 57,287 | 0.94 | 85,099 | 1.68 | 5,764 | 0.22 | 8,948 | 0.43 | 4,662 | 0.28 | ||||||||||||||||||||||||
Consumer real estate | 589,051 | 9.71 | 508,295 | 10.03 | 337,109 | 12.80 | 326,122 | 15.91 | 383,879 | 22.70 | ||||||||||||||||||||||||
Other consumer | 45,942 | 0.76 | 58,259 | 1.15 | 32,257 | 1.22 | 38,705 | 1.89 | 49,035 | 2.90 | ||||||||||||||||||||||||
Total fixed rate loans | 2,543,392 | 41.93 | 2,504,594 | 49.44 | 1,170,890 | 44.46 | 1,014,089 | 49.47 | 930,266 | 55.02 | ||||||||||||||||||||||||
Adjustable rate loans: | ||||||||||||||||||||||||||||||||||
Commercial real estate | 1,031,799 | 17.01 | 988,659 | 19.51 | 537,700 | 20.42 | 526,888 | 25.70 | 379,455 | 22.44 | ||||||||||||||||||||||||
Commercial and industrial | 1,758,704 | 29.00 | 948,612 | 18.72 | 714,232 | 27.12 | 363,428 | 17.73 | 231,720 | 13.71 | ||||||||||||||||||||||||
Construction and land | 237,607 | 3.92 | 184,609 | 3.64 | 15,534 | 0.59 | 21,299 | 1.04 | 16,520 | 0.98 | ||||||||||||||||||||||||
Consumer real estate | 485,872 | 8.01 | 428,462 | 8.46 | 187,090 | 7.10 | 115,104 | 5.62 | 122,763 | 7.26 | ||||||||||||||||||||||||
Other consumer | 8,049 | 0.13 | 11,571 | 0.23 | 8,234 | 0.31 | 9,094 | 0.44 | 10,045 | 0.59 | ||||||||||||||||||||||||
Total adjustable rate loans | 3,522,031 | 58.07 | 2,561,913 | 50.56 | 1,462,790 | 55.54 | 1,035,813 | 50.53 | 760,503 | 44.98 | ||||||||||||||||||||||||
Gross loans held for investment, excluding Warehouse Purchase Program | 6,065,423 | 100.00 | % | 5,066,507 | 100.00 | % | 2,633,680 | 100.00 | % | 2,049,902 | 100.00 | % | 1,690,769 | 100.00 | % | |||||||||||||||||||
Net of: | ||||||||||||||||||||||||||||||||||
Deferred fees and discounts, net | (2,251 | ) | (1,860 | ) | (2,927 | ) | (1,267 | ) | 486 | |||||||||||||||||||||||||
Allowance for loan losses | (64,576 | ) | (47,093 | ) | (25,549 | ) | (19,358 | ) | (18,051 | ) | ||||||||||||||||||||||||
Net loans held for investment, excluding Warehouse Purchase Program | 5,998,596 | 5,017,554 | 2,605,204 | 2,029,277 | 1,673,204 | |||||||||||||||||||||||||||||
Warehouse Purchase Program: | ||||||||||||||||||||||||||||||||||
Fixed rate loans | — | — | % | — | — | % | 4,147 | 0.53 | % | 234 | 0.03 | % | — | — | % | |||||||||||||||||||
Adjustable rate loans | 1,055,341 | 100.00 | 1,043,719 | 100.00 | 782,269 | 99.47 | 673,236 | 99.97 | 1,060,720 | 100.00 | ||||||||||||||||||||||||
Total Warehouse Purchase Program | 1,055,341 | 100.00 | % | 1,043,719 | 100.00 | % | 786,416 | 100.00 | % | 673,470 | 100.00 | % | 1,060,720 | 100.00 | % | |||||||||||||||||||
Loans held for investment, net | $ | 7,053,937 | $ | 6,061,273 | $ | 3,391,620 | $ | 2,702,747 | $ | 2,733,924 | ||||||||||||||||||||||||
Loans held for sale | $ | 21,279 | $ | 22,535 | $ | — | $ | — | $ | — | ||||||||||||||||||||||||
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The following schedules illustrate the contractual maturity and repricing information for the commercial and industrial and the construction and land portions of our loan portfolio at December 31, 2016. Loans which have adjustable or renegotiable interest rates are shown as maturing in the period during which the contract is due. Purchased credit impaired loans are reported at their contractual interest rate. The schedule does not reflect the effects of possible prepayments or enforcement of due-on-sale clauses.
Due During Years Ending December 31, | ||||||||||||||||
(Dollars in thousands) | 2017 1 | 2018 - 2021 | 2022 and following | Total | ||||||||||||
Commercial and industrial | $ | 662,876 | $ | 1,232,980 | $ | 75,304 | $ | 1,971,160 | ||||||||
Construction and land | 188,210 | 74,027 | 32,657 | 294,894 | ||||||||||||
1 Includes demand loans and loans having no stated maturity
(Dollars in thousands) | Maturities after One Year | ||
Loans with fixed interest rates | $ | 210,832 | |
Loans with floating or adjustable interest rates | 1,204,136 | ||
Lending Authority. Our Chief Credit Officer can approve cash secured loans up to $4 million, loans secured by other collateral up to $3.5 million and unsecured loans up to $2 million, while our Chief Executive Officer can approve cash secured loans up to $4 million, loans secured by other collateral up to $3.5 million and unsecured loans up to $3 million. The Senior Loan Committee has authority to approve loans over these signature authority amounts. At December 31, 2016, under federal regulation, the maximum amount we could lend to any one borrower and the borrower's related entities was approximately $200.8 million.
Commercial Real Estate Lending. The current focus of commercial real estate lending is direct relationships with investor-owned commercial projects primarily with experienced regional owners of three commercial product types: office, retail and multifamily. The office and retail secured projects are occupied by local, regional, and national tenants, while the primarily Class B multifamily secured projects are occupied by individuals unlikely to become single family homeowners. Although we finance other project types (industrial, self-storage facilities, mixed use, etc.), these other projects do not constitute a significant concentration of the commercial real estate portfolio. Our commercial real estate projects are primarily located in Texas, with the majority of the projects being located in major metropolitan markets, such as Dallas, Fort Worth, and Houston.
Our commercial real estate lending business model is relatively unique and its success has been tested over several years. The primary focus of the analysis and repayment reliance of the loan is almost exclusively the commercial project itself, as opposed to a combination of project and sponsorship reliance. By choosing this project reliance focus, we make sure the project has ample equity at loan inception rather than relying on it developing in the future when sponsorship liquidity might not equal project liquidity needs. This additional equity investment required at loan inception generally ensures that the project ownership is engaged and attentive to the project's ongoing success. We also have a Chief Appraiser in-house to help order, review, and approve appraisals, both commercial and residential.
Our reliance on loan structures that emphasize upfront equity rather than back-end guaranty of payment provides multiple benefits to us, most driven by the lower initial loan balance. For example, the lower loan balance typically drives the initial loan to value ratio of each project well below regulatory requirements for commercial projects. This lower ratio also provides a cushion in case appraised values drop as a result of reduced occupancy, reduced cash flow, or increased capitalization rates. The low loan balance also aids in achieving a higher debt yield ratio (net operating income to loan amount), and a higher debt service coverage ratio (net operating income to debt service requirement), both important metrics for us. Escrows for taxes and insurance are typically maintained for loans in this portfolio, as well as funds for tenant improvement, leasing commissions, or capital expenditures as needed. Regular financial information is gathered so we can stay apprised of the financial status of the project. Although a guaranty of payment is not utilized on these transactions, we do require annual statements on the sponsors in order to identify other projects likely to cause financial hardship to our borrower.
This portfolio also includes a smaller portion of commercial real estate loans to owner occupied businesses. These loans are typically characterized by higher loan to value ratios than our other commercial real estate loans, but generally come with an unlimited guaranty of payment from the company owner(s). At December 31, 2016, the commercial real estate lending portfolio totaled $2.67 billion.
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Commercial and Industrial Lending. Our commercial and industrial portfolio has grown from 16.5% of gross loans held for investment (excluding Warehouse Purchase Program loans) at December 31, 2012, to 32.5% at December 31, 2016. Our commercial and industrial borrowers are typically located in Texas, but often provide their products and services regionally or nationally. Loans are generally secured by a pledge of business assets such as accounts receivable, inventory, equipment, or vehicles, with the objective of reducing loan balances more quickly than the decline in useful life or value of the asset. The likelihood of loans being paid depends on the success of the business itself, and economic conditions can play a large role in the long-term viability of a company. We generally obtain personal guarantees for privately held companies.
Financial information on these borrowers is required at regular intervals, with company information required on monthly or quarterly terms and annual personal financial statements required on owner/guarantors. Covenants are included in loan structure with the most common being leverage, liquidity and debt service covenants and generally include debt to tangible net worth or minimum tangible net worth, minimum current and liquidity ratios, and minimum Earnings Before Interest, Taxes, Depreciation, and Amortizations (EBITDA).
Energy loans, which are reported as commercial and industrial loans, totaled $527.2 million at December 31, 2016, representing approximately 8.7% of total loans held for investment (excluding Warehouse Purchase Program loans) and 26.7% of total commercial and industrial loans. In May 2013, we formed our Energy Finance group, which is comprised of a group of seasoned lenders, executives and credit risk professionals with more than 100 years of combined Texas energy experience, to focus on providing loans to private and public oil and gas companies throughout the United States. The group also offers the Bank's full array of commercial services, including Treasury Management and letters of credit, to its customers. Substantially all of the loans in the Energy portfolio are reserve based loans, secured by deeds of trust on properties containing proven oil and natural gas reserves. In addition to the reserve based energy loans, we have loans categorized as "Midstream and Other," which are typically related to the transmission of oil and natural gas and would only be indirectly impacted from declining commodity prices. At December 31, 2016, "Midstream and Other" loans had a total outstanding balance of $39.0 million. The energy lending portfolio continues to be an important part of our commercial business strategy. Due to the sensitivity of this portfolio to downward movements in oil and gas prices, we have seen migration in the portfolio into criticized classifications. Please see "Asset Quality" below.
At December 31, 2016, we had four relationships in the commercial and industrial loan portfolio (outside of the reserve based and midstream loans discussed above) that are involved in the energy exploration sector providing front-end services to companies who drill oil and gas wells and whose business could be impacted by the dramatic reduction in drilling activity as a result of a sustained drop in the price of oil and gas. These relationships totaled $2.4 million at December 31, 2016, of which one relationship totaling $97,000 is currently classified as Substandard and Impaired. The other relationships consist of performing loans and are not criticized.
Construction and Land Lending. The Company's 2015 merger with LegacyTexas Group, Inc. added a construction and land portfolio, which totaled $294.9 million at December 31, 2016. This portfolio is primarily made up of commercial entities constructing both commercial and residential projects in the Dallas Fort Worth area, totaling $265.7 million at December 31, 2016. Our requirements for commercial construction is predicated on dealing with reputable project developers, and financially capable contractors, on projects with good equity and significant pre-leasing. Requirements for builders of single family residential projects are similar, with additional controls over the amount of exposure to custom, speculative and model units being built, both financed by us and by competing institutions. Additionally, through the mortgage division acquired from LegacyTexas Group, Inc., we also originate one-time close residential construction loans to individuals for the construction and acquisition of personal residences. At December 31, 2016, we had $29.2 million in outstanding balances on residential construction loans to individuals, which generally provide for the payment of interest only during the construction phase, which is typically up to 12 months.
Consumer Real Estate Lending. Our consumer real estate lending portfolio, which totaled $1.07 billion at December 31, 2016, consists of one-to-four family real estate and home equity/home improvement loans. We primarily originate loans secured by first mortgages on owner-occupied, one-to-four family residences in our market area. All of the one-to-four family loans we originate are funded by us and either sold into the secondary market on a servicing released basis or retained in our portfolio. See “Loan Originations, Purchases, Sales, Repayments and Servicing” for more information. Sales of one-to-four family real estate loans can increase liquidity, provide funds for additional lending activities, and generate income. In 2016, we recognized $8.2 million in net gains on the sale of mortgage loans, which includes the gain recognized on $218.6 million of one-to-four family mortgage loans that were sold or committed for sale in 2016, fair value changes on mortgage derivatives and mortgage fees collected.
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We underwrite one-to-four family owner-occupied loans based on the applicant’s ability to repay. This includes evaluating their employment, credit history and the value of the subject property. Properties securing our one-to-four family loans are appraised by independent fee appraisers who are selected in accordance with industry and regulatory standards. We require our borrowers to obtain title and hazard insurance, and flood insurance, if necessary.
We also originate consumer home equity and home improvement loans. All of our home equity loans are secured by Texas real estate. Under Texas law, home equity borrowers are allowed to borrow a maximum of 80% (combined LTV of the first lien, if any, plus the home equity loan) of the fair market value of their primary residence. The same 80% combined LTV maximum applies to home equity lines of credit, with the home equity line further limited to 50% of the fair market value of the home. As a result, our home equity loans and home equity lines of credit have low LTV ratios compared to similar loans in most other states. Home equity lines of credit are originated with an adjustable rate of interest based on the Wall Street Journal Prime (“Prime”) rate of interest plus a margin. Home equity lines of credit have up to a ten year draw period and amounts may be re-borrowed after payment at any time during the draw period. While the rate of interest continues to float, once the draw period has lapsed, the payment amount is calculated on a ten year period based on the loan balance at that time. For home improvement loans, borrowers are allowed to borrow a maximum of 90% of the fair market value of their primary residence.
Other Consumer Lending. We offer a variety of secured and unsecured consumer loans, including new and used automobile loans, recreational vehicle loans and loans secured by savings deposits. We originate these loans primarily in our market areas. At December 31, 2016, our other consumer loan portfolio totaled $54.0 million.
Warehouse Purchase Program. The Warehouse Purchase Program, which we initiated in July 2008, allows unaffiliated mortgage originators to close one-to-four family real estate loans in their own name and manage its cash flow needs until the loans are sold to investors. Although not bound by any legally binding commitment, when a purchase decision is made, we purchase a 100% participation interest in the mortgage loans originated by our mortgage banking company customers. The mortgage banking company customer closes mortgage loans consistent with underwriting standards established by the bank and approved investors and, once all pertinent documents are received, the participation interest is delivered by the Bank to the investor selected by the originator and approved by us.
The unaffiliated mortgage originating customers are located across the U.S. and originate loans primarily through traditional retail and/ or wholesale business models. These customers are strategically targeted for their experienced management teams and thoroughly analyzed to ensure long-term and profitable business models. By using this approach, we believe that this type of lending carries a lower risk profile than other one-to-four family mortgage loans held for investment in our portfolio, due to the short-term nature (averaging less than 30 days) of the exposure and the additional strength offered by the mortgage originator sponsorship.
At December 31, 2016, Warehouse Purchase Program maximum aggregate outstanding purchases ranged in size from $2 million to $100 million. The maximum aggregate outstanding purchases are priced using a combined base rate and a risk premium set for both product type (Prime, Jumbo, etc.) and age of the loan. The typical maximum aggregate outstanding purchase facility includes the payment guaranty of company owners holding significant ownership positions, along with non-interest-bearing compensating balance deposits in line with the maximum aggregate outstanding purchase limit. Typical covenants include minimum tangible net worth, maximum leverage and minimum liquidity. As loans age, the Company requires loan curtailments to reduce our risk involving loans that are not purchased by investors on a timely basis.
At December 31, 2016, the Bank had 43 mortgage banking company customers with a maximum aggregate exposure of $1.79 billion and an actual aggregate outstanding balance of $1.06 billion. The average mortgage loan being purchased by the Bank reflects a blend of both Conforming and Government loan characteristics, including an average loan to value ratio (LTV) of 81%, an average credit score of 726 and an average loan size of $273,000. These characteristics illustrate the low risk profile of loans purchased under the Warehouse Purchase Program. To date, we have not experienced a loss on any Warehouse Purchase Program loan.
Loan Originations, Purchases, Sales, Repayments and Servicing
We attempt to meet the needs of the markets we serve by originating thoroughly analyzed and documented loans to both businesses and consumers. These loans typically involve a direct relationship with the borrower, owner(s), and management of the borrowing entity in an attempt to better identify borrower needs and better identify risks to us that must be mitigated in the loan structure.
It is not unusual for a loan request to be so large as to exceed our house limit for transaction size, or for us to have an existing concentration to a particular borrower or industry, such that a smaller loan size is preferred. In these instances we will solicit one or more financial partners to take a portion of a transaction by way of purchasing a participation in the loan. The
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participation agreement outlines the relationship between the Bank and the participant with regard to borrower access, loan servicing, and loan documents. The participant ends up having an indirect relationship with the borrower through the Bank; essentially becoming a “silent partner” in the transaction. The participant's transactional involvement is typically limited to only that provided by the Bank as “agent” in the transaction, and the participation interest is sold without recourse.
When a participation arrangement is unacceptable to the financial partner and a direct relationship with the borrower is the only structure acceptable, a syndication arrangement may be formed. In a syndication arrangement, the financial partner has a direct relationship with the borrower and has its own documents, with terms that mirror those of the other banks in the syndication group. Just like in a participation, the financial partner shares pro-rata in collateral, but because syndication partners are essentially equal in rights and responsibilities, there is usually a designated partner responsible for administering the flow of funds and information between the parties. The Bank has entered into the sale of both participations and syndications of loans to commercial real estate and commercial and industrial borrowers in an attempt to meet our borrowers' needs and stay within our own risk tolerances. During 2016, we sold $219.1 million in participations and syndications.
We have also entered into the purchase of both participation and syndication transactions as a means of assisting our financial partners who may have encountered excess loan exposure to their own borrowers. The rights and remedies of these purchases are essentially the same as outlined above for the sale of a participation or syndication. A participation purchased would give the Bank little to no access to our financial partner's borrower and we would have to accept the terms outlined and documents used for that borrower. During 2016, we purchased $319.0 million in participations and syndications.
We also sell whole residential real estate loans originated by our mortgage division to private investors, such as other banks and mortgage companies, generally subject to a provision for repurchase upon breach of representation, warranty or covenant. These loans are generally sold, on a servicing-released basis, for cash in amounts equal to the unpaid principal amount of the loans plus a servicing release premium. The sale amounts generally produce gains to us. In 2016, our mortgage division sold $219.5 million of residential real estate loans to investors.
Asset Quality
An accurate assessment of asset quality is essential to our long-term health. Failure to identify deterioration in our largest asset category, loans, could result in a shortfall of loan loss reserves needed for loans requiring charge-off, and a charge against capital would be required. Credit analysts, loan officers, and lending managers are charged with not only proper risk analysis before loans are made, but also after they are booked and performing as expected. The goal is to identify the proper risk status and take actions appropriate to that risk. We have a risk rating system and a loss reserve methodology for each category of loan that includes Pass, Special Mention, Substandard, Doubtful, and Loss. We also regularly engage the services of third party firms to perform an independent assessment of individual loan risk grades and the processes for risk identification.
We have a variety of monitoring tools that serve as indicators of potential borrower weakness and early warning signs of possible risk grade deterioration. For example, a borrower's inability to provide ongoing loan documentation, meet loan covenants, maintain positive balances in deposit accounts, and make loan payments as scheduled are all signs of potential deterioration in a borrower's financial condition and the need for a review of the asset risk grade. Borrowers who are unable to meet original loan terms and require concessions that we would not ordinarily grant are automatically downgraded and examined for the need for additional reserves to cover specific impairment. Loans are reviewed regularly to ensure that they are properly graded, structured to meet the borrower's cash flow capability, and considered in our calculation of the allowance for loan losses.
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Delinquent Loans. The following table sets forth our loan delinquencies by type, by amount and by percentage of type at December 31, 2016. There were no past due Warehouse Purchase Program loans at December 31, 2016.
Loans Delinquent For: | |||||||||||||||||||||||||||
30-89 Days | 90 Days and Over | Total Loans Delinquent 30 Days or More | |||||||||||||||||||||||||
Number | Amount | Percent of Loan Category | Number | Amount | Percent of Loan Category | Number | Amount | Percent of Loan Category | |||||||||||||||||||
(Dollars in thousands) | |||||||||||||||||||||||||||
Commercial real estate | 8 | $ | 1,901 | 0.07 | % | 1 | $ | 766 | 0.03 | % | 9 | $ | 2,667 | 0.10 | % | ||||||||||||
Commercial and industrial | 47 | 21,405 | 1.09 | 16 | 46 | — | 63 | 21,451 | 1.09 | ||||||||||||||||||
Construction and land | 32 | 19,800 | 6.71 | 2 | — | — | 34 | 19,800 | 6.71 | ||||||||||||||||||
Consumer real estate | 116 | 12,403 | 1.15 | 15 | 1,199 | 0.11 | 131 | 13,602 | 1.26 | ||||||||||||||||||
Other consumer | 56 | 1,554 | 2.88 | 2 | 6 | 0.01 | 58 | 1,560 | 2.89 | ||||||||||||||||||
Total loans | 259 | $ | 57,063 | 0.94 | % | 36 | $ | 2,017 | 0.03 | % | 295 | $ | 59,080 | 0.97 | % | ||||||||||||
Non-performing Assets. The table below sets forth the amounts and categories of non-performing assets in our loan portfolio. Loans are placed on nonaccrual status when the collection of principal and/or interest becomes doubtful or other factors involving the loan warrant placing the loan on nonaccrual status. Loans that are past due 30 days or greater are considered delinquent. Interest income on loans is discontinued at the time the loan is 90 days delinquent unless the loan is well-secured and in process of collection. Consumer loans are typically charged off no later than 120 days past due. Past due status is based on the contractual terms of the loan. In all cases, loans are placed on nonaccrual status or charged-off at an earlier date if collection of principal or interest is considered doubtful. Nonaccrual loans include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.
All interest accrued but not received for loans placed on nonaccrual status is reversed against interest income. Subsequent receipts on non-accrual loans are recorded as a reduction of principal, and interest income is recorded only after principal recovery is reasonably assured. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
Troubled debt restructurings, also referred to as "TDRs" herein, which are accounted for under Accounting Standards Codification ("ASC") 310-40, are loans which have renegotiated loan terms to assist borrowers who are unable to meet the original terms of their loans. Such modifications to loan terms may include a below market interest rate, a reduction in principal, or a longer term to maturity. All TDRs are initially classified as nonaccrual loans, regardless of whether the loan was performing at the time it was restructured. Once a TDR has performed according to its modified terms for six months and the collection of future principal and interest under the revised terms is deemed probable, the Bank will consider placing the loan back on accrual status. At December 31, 2016, we had $12.2 million in TDRs, of which $454,000 were accruing interest and $11.7 million were classified as nonaccrual.
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Years Ended December 31, | |||||||||||||||||||
2016 | 2015 | 2014 | 2013 | 2012 | |||||||||||||||
(Dollars in thousands) | |||||||||||||||||||
Nonaccrual loans: 1 | |||||||||||||||||||
Commercial real estate | $ | 5,195 | $ | 11,418 | $ | 6,703 | $ | 7,604 | $ | 13,567 | |||||||||
Commercial and industrial | 86,664 | 16,877 | 5,778 | 5,141 | 5,401 | ||||||||||||||
Construction and land | 11,385 | 33 | 149 | — | 134 | ||||||||||||||
Consumer real estate | 7,987 | 9,781 | 10,591 | 8,812 | 7,839 | ||||||||||||||
Other consumer | 158 | 107 | 286 | 567 | 262 | ||||||||||||||
Total non-performing loans | 111,389 | 38,216 | 23,507 | 22,124 | 27,203 | ||||||||||||||
Foreclosed assets: | |||||||||||||||||||
Commercial real estate | 10,638 | 4,784 | 551 | 102 | 485 | ||||||||||||||
Construction and land | 194 | 1,802 | — | 172 | 177 | ||||||||||||||
Consumer real estate | — | 106 | — | 204 | 1,224 | ||||||||||||||
Other consumer | 6 | — | — | 2 | 15 | ||||||||||||||
Total foreclosed assets | 10,838 | 6,692 | 551 | 480 | 1,901 | ||||||||||||||
Total non-performing assets | $ | 122,227 | $ | 44,908 | $ | 24,058 | $ | 22,604 | $ | 29,104 | |||||||||
Total non-performing assets as a percentage of total assets 2 | 1.46 | % | 0.58 | % | 0.58 | % | 0.64 | % | 0.79 | % | |||||||||
Total non-performing loans as a percentage of total loans held for investment, excluding Warehouse Purchase Program loans 2 | 1.84 | % | 0.75 | % | 0.89 | % | 1.08 | % | 1.61 | % | |||||||||
Performing troubled debt restructurings: | |||||||||||||||||||
Commercial real estate | $ | 154 | $ | 161 | $ | 702 | $ | — | $ | 3,384 | |||||||||
Commercial and industrial | — | 30 | 153 | 185 | 207 | ||||||||||||||
Construction and land | — | — | — | 2 | 5 | ||||||||||||||
Consumer real estate | 269 | 368 | 204 | 737 | 553 | ||||||||||||||
Other consumer | 31 | 46 | 39 | 47 | 67 | ||||||||||||||
Total | $ | 454 | $ | 605 | $ | 1,098 | $ | 971 | $ | 4,216 | |||||||||
1 There were no non-performing or TDR warehouse lines of credit or Warehouse Purchase Program loans for the periods presented.
2 Purchased credit impaired (PCI) loans, which were acquired in 2012 through the Highlands Bancshares, Inc. ("Highlands") acquisition and in 2015 through the LegacyTexas acquisition, are not considered non-performing loans, and therefore are not included in the numerator of the non-performing loans to total loans ratio, but are included in total loans, which is reflected in the denominator. Loans past due over 90 days that were still accruing interest totaled $141,000, $111,000, $612,000, $266,000, and $593,000 for the years ended December 31, 2016, 2015, 2014, 2013 and 2012, respectively, and consisted entirely of PCI loans.
For the year ended December 31, 2016, gross interest income which would have been recorded had the nonaccrual loans been current in accordance with their original terms throughout the entire year amounted to $1.7 million. No interest income on these loans was recorded for the year ended December 31, 2016.
Classified Assets. Loans and other assets, such as debt and equity securities, considered by management to be of lesser quality, are classified as “substandard,” “doubtful” or “loss.” An asset is considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. “Substandard” assets include those characterized by the “distinct possibility” that the insured institution will sustain “some loss” if the deficiencies are not corrected. Assets classified as “doubtful” have all of the weaknesses of those classified “substandard,” with the added characteristic that the weaknesses present make “collection or liquidation in full,” on the basis of currently existing facts, conditions and values, “highly questionable and improbable.” Assets classified as “loss” are those considered “uncollectible” and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted.
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We regularly review the problem assets in our portfolio to determine the appropriate classification. The aggregate amount of classified assets at the dates indicated was as follows:
At December 31, | |||||||
2016 | 2015 | ||||||
(Dollars in thousands) | |||||||
Doubtful | $ | 2,880 | $ | 4,201 | |||
Substandard | 136,815 | 97,523 | |||||
Total classified loans | 139,695 | 101,724 | |||||
Foreclosed assets | 10,838 | 6,692 | |||||
Total classified assets | $ | 150,533 | $ | 108,416 | |||
Classified assets as a percentage of equity | 17.00 | % | 13.48 | % | |||
Classified assets as a percentage of assets | 1.80 | 1.41 | |||||
Classified assets as a percentage of total loans held for investment, excluding Warehouse Purchase Program loans | 2.48 | 2.14 | |||||
Substandard loans at December 31, 2016 increased by $39.3 million from December 31, 2015, which was primarily due to downgrades on energy loans related to collateral value deterioration and diminished operating performance. At December 31, 2016, our energy loans totaled $527.2 million, representing approximately 8.7% of total loans (excluding Warehouse Purchase Program loans). Additionally, in 2016, commercial and industrial substandard loans (excluding energy loans) and construction and land substandard loans increased by $27.2 million and $11.4 million, respectively, from December 31, 2015. The increase in commercial and industrial substandard loans (excluding energy loans) included a $12.1 million relationship with a borrower who owns and operates hospitals in Texas, while the increase in construction and land was due to a relationship with a residential home builder. Both relationships were downgraded to substandard in 2016 due to diminished operating performance. When establishing our allowance for loan losses, all portfolio and general economic factors are considered, including the level of criticized assets and the level of commodity prices. Please see “Comparison of Financial Condition at December 31, 2016, and December 31, 2015 — Allowance for Loan Losses” contained in Item 7 of this report for more information.
We had $21.3 million of potential problem loans at December 31, 2016, considered "other loans of concern," that are currently performing and do not meet the criteria for impairment, but where there is the distinct possibility that we could sustain some loss if credit deficiencies are not corrected. These possible credit problems may result in the future inclusion of these loans in the non-performing asset categories and were classified as "substandard" but were still accruing interest and were not considered impaired at December 31, 2016 (excluding PCI loans). Other loans of concern at December 31, 2016 decreased by $30.3 million from December 31 2015, primarily due to energy loans that migrated to substandard non-accrual during 2016. Please see “Comparison of Financial Condition at December 31, 2016, and December 31, 2015 — Allowance for Loan Losses” contained in Item 7 of this report for more information. Other loans of concern, which were performing at December 31, 2016, have been considered in management's analysis of potential loan losses.
Allowance for Loan Losses. The allowance for loan losses is maintained to cover losses that are estimated in accordance with US GAAP. It is our estimate of credit losses inherent in our loan portfolio at each balance sheet date. Our methodology for analyzing the allowance for loan losses consists of general and specific components. For the general component, we stratify the loan portfolio into homogeneous groups of loans that possess similar loss potential characteristics and apply a loss ratio to these groups of loans to estimate the credit losses in the loan portfolio. We use both historical loss ratios and qualitative loss factors assigned to major loan collateral types to establish general component loss allocations. Qualitative loss factors are based on management's judgment of company, market, industry or business specific data and external economic indicators, which may not yet be reflected in the historical loss ratios, and that could impact our specific loan portfolios. The Allowance for Loan Loss Committee sets and adjusts qualitative loss factors by regularly reviewing changes in underlying loan composition and the seasonality of specific portfolios. The Allowance for Loan Loss Committee also considers credit quality and trends relating to delinquency, non-performing and classified loans within our loan portfolio when evaluating qualitative loss factors. Additionally, the Allowance for Loan Loss Committee adjusts qualitative factors to account for the potential impact of external economic factors, including the unemployment rate, vacancy, capitalization rates, commodity prices and other pertinent economic data specific to our primary market area and lending portfolios.
For the specific component, the allowance for loan losses includes loans where management has concerns about the borrower's ability to repay and on individually analyzed loans found to be impaired. Management evaluates current information and events regarding a borrower's ability to repay its obligations and considers a loan to be impaired when the ultimate
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collectability of amounts due, according to the contractual terms of the loan agreement, is in doubt. If an impaired loan is collateral-dependent, the fair value of the collateral, less the estimated cost to sell, is used to determine the amount of impairment. If an impaired loan is not collateral-dependent, the impairment amount is determined using the negative difference, if any, between the estimated discounted cash flows and the loan amount due. For impaired loans, the amount of the impairment can be adjusted, based on current data, until such time as the actual basis is established by acquisition of the collateral or until the basis is collected. Impairment losses are reflected in the allowance for loan losses through a charge to the provision for credit losses. Subsequent recoveries are credited to the allowance for loan losses. Cash receipts for accruing loans are applied to principal and interest under the contractual terms of the loan agreement. Cash receipts on impaired loans for which the accrual of interest has been discontinued are applied first to principal.
At December 31, 2016, $106.6 million in loans were individually impaired, with $4.8 million of the allowance for loan losses allocated to impaired loans at period-end (these figures do not include PCI loans). Please see “Comparison of Financial Condition at December 31, 2016, and December 31, 2015 — Loans” contained in Item 7 and Note 5 of the Notes to Consolidated Financial Statements contained in Item 8 of this report for more information.
At December 31, 2016, our allowance for loan losses was $64.6 million, or 1.06% of total loans held for investment, excluding the Warehouse Purchase Program loans. Assessing the allowance for loan losses is inherently subjective, as it requires making material estimates, including the amount and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change. In the opinion of management, the allowance, when taken as a whole, reflects estimated credit losses in our loan portfolio. See Notes 1 and 5 of the Notes to Consolidated Financial Statements contained in Item 8 of this report.
The following table sets forth an analysis of our allowance for loan losses.
Years Ended December 31, | |||||||||||||||||||
2016 | 2015 | 2014 | 2013 | 2012 | |||||||||||||||
(Dollars in thousands) | |||||||||||||||||||
Balance at beginning of period | $ | 47,093 | $ | 25,549 | $ | 19,358 | $ | 18,051 | $ | 17,487 | |||||||||
Charge-offs:1 | |||||||||||||||||||
Commercial real estate | 79 | 167 | — | 806 | 187 | ||||||||||||||
Commercial and industrial | 7,746 | 3,129 | 568 | 607 | 1,178 | ||||||||||||||
Construction and land | — | — | 51 | 31 | — | ||||||||||||||
Consumer real estate | 107 | 321 | 237 | 416 | 798 | ||||||||||||||
Other consumer | 927 | 1,090 | 605 | 621 | 1,039 | ||||||||||||||
Total charge-offs | 8,859 | 4,707 | 1,461 | 2,481 | 3,202 | ||||||||||||||
Recoveries:1 | |||||||||||||||||||
Commercial real estate | 21 | 29 | 435 | — | — | ||||||||||||||
Commercial and industrial | 472 | 246 | 94 | 124 | 114 | ||||||||||||||
Construction and land | — | — | 1 | — | — | ||||||||||||||
Consumer real estate | 109 | 85 | 38 | 77 | 70 | ||||||||||||||
Other consumer | 340 | 426 | 363 | 388 | 443 | ||||||||||||||
Total recoveries | 942 | 786 | 931 | 589 | 627 | ||||||||||||||
Net charge-offs | 7,917 | 3,921 | 530 | 1,892 | 2,575 | ||||||||||||||
Provision expense | 25,400 | 25,465 | 6,721 | 3,199 | 3,139 | ||||||||||||||
Balance at end of period | $ | 64,576 | $ | 47,093 | $ | 25,549 | $ | 19,358 | $ | 18,051 | |||||||||
Ratio of net charge-offs during the period to | |||||||||||||||||||
average loans outstanding during the period | 0.12 | % | 0.08 | % | 0.02 | % | 0.08 | % | 0.11 | % | |||||||||
Ratio of net charge-offs during the period to | |||||||||||||||||||
average non-performing assets | 9.47 | % | 11.37 | % | 2.27 | % | 7.32 | % | 9.45 | % | |||||||||
Allowance as a percentage of non-performing loans2 | 57.97 | % | 123.23 | % | 108.69 | % | 87.50 | % | 66.36 | % | |||||||||
Allowance as a percentage of total loans, excluding | |||||||||||||||||||
Warehouse Purchase Program (end of period) 2 | 1.06 | % | 0.93 | % | 0.97 | % | 0.94 | % | 1.07 | % | |||||||||
1 There was no net charge-off activity on Warehouse Purchase Program loans during the periods presented.
2 PCI loans, which were acquired in 2012 through the Highlands acquisition and in 2015 through the LegacyTexas acquisition, are not considered non-performing loans, and therefore are not included in the numerator of the non-performing loans to total loans ratio, but are included in total loans, which is reflected in the denominator. PCI loans had a carrying value of $7.0 million, $12.0 million, $6.6 million, $7.4 million and $12.8 million for the years ended December 31, 2016, 2015, 2014, 2013 and 2012, respectively.
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The distribution of our allowance for losses on loans at the dates indicated is summarized below.
December 31, | ||||||||||||||||||||||||||||||||||
2016 | 2015 | 2014 | 2013 | 2012 | ||||||||||||||||||||||||||||||
Allocated Allowance | % 1 | Allocated Allowance | % 1 | Allocated Allowance | % 1 | Allocated Allowance | % 1 | Allocated Allowance | % 1 | |||||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||||||||||
Commercial real estate | $ | 18,303 | 44.03 | % | $ | 14,123 | 42.98 | % | $ | 11,830 | 48.06 | % | $ | 10,944 | 53.23 | % | $ | 11,182 | 48.81 | % | ||||||||||||||
Commercial and industrial | 35,464 | 32.50 | 24,975 | 31.83 | 9,068 | 29.69 | 4,536 | 21.43 | 2,574 | 16.48 | ||||||||||||||||||||||||
Construction and land | 5,075 | 4.86 | 3,013 | 5.32 | 174 | 0.81 | 212 | 1.48 | 149 | 1.25 | ||||||||||||||||||||||||
Consumer real estate | 4,484 | 17.72 | 3,992 | 18.49 | 4,069 | 19.90 | 3,280 | 21.53 | 3,528 | 29.97 | ||||||||||||||||||||||||
Other consumer | 1,250 | 0.89 | 990 | 1.38 | 408 | 1.54 | 386 | 2.33 | 618 | 3.49 | ||||||||||||||||||||||||
Total | $ | 64,576 | 100.00 | % | $ | 47,093 | 100.00 | % | $ | 25,549 | 100.00 | % | $ | 19,358 | 100.00 | % | $ | 18,051 | 100.00 | % | ||||||||||||||
1 Loans outstanding as a percentage of total loans held for investment, excluding Warehouse Purchase Program loans.
Investment Activities
We have broad investment authority, except for corporate equity securities, which are generally limited to stock in subsidiaries, certain housing projects and bank service companies. Debt securities are categorized by law and bank regulation into various types, with each type subject to different permitted investment levels calculated as percentages of capital, except for government and government-related obligations, which may be invested in without limit.
The Chief Financial Officer delegates the basic responsibility for the management of our investment portfolio to the Executive Vice President/Treasurer, subject to the direction and guidance of the Asset/Liability Management Committee. The Executive Vice President/Treasurer considers various factors when making decisions, including the marketability, duration, maturity and tax consequences of the proposed investment. The amount, mix, and maturity structure of investments will be affected by various market conditions, including the current and anticipated slope of the yield curve, the level of interest rates, the trend of new deposit inflows, and the anticipated demand for funds via deposit withdrawals and loan originations and purchases.
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The general objectives of our investment portfolio are to provide liquidity when loan demand is high, to assist in maintaining earnings when loan demand is low and to optimize earnings while satisfactorily managing risk, including credit risk, reinvestment risk, liquidity risk and interest rate risk. Our investment securities currently consist primarily of agency collateralized mortgage obligations, agency mortgage-backed securities, Small Business Administration securitized loan pools consisting of only the U.S. government guaranteed portion, and Texas entity municipal bonds. These securities are of industry investment grade and possess acceptable credit risk. For more information, please see Note 4 of the Notes to Consolidated Financial Statements contained in Item 8 of this report and “Asset/Liability Management” contained in Item 7A of this report. We also have restricted securities, which totaled $43.3 million at December 31, 2016 and primarily consisted of Federal Home Loan Bank stock and Federal Reserve stock and is carried on the balance sheet at cost.
The following table sets forth the composition of our securities portfolio and other investments at the dates indicated. At December 31, 2016, our securities portfolio did not contain securities of any issuer with an aggregate book value in excess of 10% of our equity capital, excluding those issued by the United States Government or its agencies or United States GSEs.
December 31, | ||||||||||||||||||||||||
2016 | 2015 | 2014 | ||||||||||||||||||||||
Amortized Cost | Fair Value | Amortized Cost | Fair Value | Amortized Cost | Fair Value | |||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Available for sale: | ||||||||||||||||||||||||
Agency residential mortgage-backed securities | $ | 220,744 | $ | 218,551 | $ | 224,582 | $ | 223,848 | $ | 144,368 | $ | 145,518 | ||||||||||||
Agency commercial mortgage-backed securities | 9,422 | 9,347 | 9,483 | 9,417 | — | — | ||||||||||||||||||
Agency collateralized mortgage obligations | 87,959 | 86,529 | 22,430 | 22,314 | 50,424 | 50,554 | ||||||||||||||||||
US government and agency securities | 2,150 | 2,251 | 14,906 | 15,054 | 3,475 | 3,627 | ||||||||||||||||||
Municipal bonds | 38,417 | 37,837 | 40,512 | 41,075 | — | — | ||||||||||||||||||
Total available for sale | 358,692 | 354,515 | 311,913 | 311,708 | 198,267 | 199,699 | ||||||||||||||||||
Held to maturity: | ||||||||||||||||||||||||
Agency residential mortgage-backed securities | 74,881 | 75,211 | 87,935 | 89,488 | 63,161 | 66,272 | ||||||||||||||||||
Agency commercial mortgage-backed securities | 28,023 | 28,693 | 24,848 | 25,697 | 25,301 | 26,396 | ||||||||||||||||||
Agency collateralized mortgage obligations | 40,707 | 41,371 | 59,174 | 60,206 | 86,470 | 88,156 | ||||||||||||||||||
Municipal bonds | 66,776 | 67,706 | 68,476 | 71,811 | 66,988 | 70,288 | ||||||||||||||||||
Total held to maturity | 210,387 | 212,981 | 240,433 | 247,202 | 241,920 | 251,112 | ||||||||||||||||||
Total investment securities | 569,079 | 567,496 | 552,346 | 558,910 | 440,187 | 450,811 | ||||||||||||||||||
FHLB stock and other restricted securities, at cost | 43,266 | 43,266 | 63,075 | 63,075 | 44,084 | 44,084 | ||||||||||||||||||
Total securities | $ | 612,345 | $ | 610,762 | $ | 615,421 | $ | 621,985 | $ | 484,271 | $ | 494,895 | ||||||||||||
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The composition and contractual maturities of the investment securities portfolio as of December 31, 2016, excluding FHLB stock and other restricted securities, are indicated in the following table. Prepayment options exist for the US government and agency securities, agency collateralized mortgage obligations and agency mortgage-backed securities. In addition, many of the municipal bonds are callable prior to maturity. The weighted average yield is prospective and based on amortized cost.
1 year or less | After 1 to 5 years | After 5 to 10 years | After 10 years | Total Securities | ||||||||||||||||||||||||||||||||||
Amortized Cost | Weighted Average Yield | Amortized Cost | Weighted Average Yield | Amortized Cost | Weighted Average Yield | Amortized Cost | Weighted Average Yield | Amortized Cost | Weighted Average Yield | Fair Value | ||||||||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||||||||||||||
Available for sale: | ||||||||||||||||||||||||||||||||||||||
Agency residential mortgage-backed securities | $ | — | — | % | $ | 6,370 | 1.08 | % | $ | 47,844 | 1.83 | % | $ | 166,530 | 1.68 | % | $ | 220,744 | 1.69 | % | $ | 218,551 | ||||||||||||||||
Agency commercial mortgage-backed securities | — | — | 9,422 | 1.85 | — | — | — | — | 9,422 | 1.85 | 9,347 | |||||||||||||||||||||||||||
Agency residential collateralized mortgage obligations | — | — | — | — | 3,699 | 2.43 | 84,260 | 2.16 | 87,959 | 2.17 | 86,529 | |||||||||||||||||||||||||||
US government and agency securities | 72 | 3.34 | 578 | 3.59 | 1,500 | 3.37 | — | — | 2,150 | 3.43 | 2,251 | |||||||||||||||||||||||||||
Municipal bonds | 2,083 | 1.16 | 11,429 | 2.03 | 16,341 | 2.50 | 8,564 | 2.88 | 38,417 | 2.37 | 37,837 | |||||||||||||||||||||||||||
Total available for sale | 2,155 | 1.23 | 27,799 | 1.79 | 69,384 | 2.05 | 259,354 | 1.87 | 358,692 | 1.90 | 354,515 | |||||||||||||||||||||||||||
Held to maturity: | ||||||||||||||||||||||||||||||||||||||
Agency residential mortgage-backed securities | — | — | 10,608 | 3.63 | 22,700 | 2.95 | 41,573 | 2.21 | 74,881 | 2.64 | 75,211 | |||||||||||||||||||||||||||
Agency commercial mortgage-backed securities | — | — | 13,793 | 3.23 | 14,230 | 2.44 | — | — | 28,023 | 2.83 | 28,693 | |||||||||||||||||||||||||||
Agency residential collateralized mortgage obligations | — | — | 2,263 | 4.08 | 37,252 | 2.72 | 1,192 | (0.05 | ) | 40,707 | 2.71 | 41,371 | ||||||||||||||||||||||||||
Municipal bonds | 1,952 | 5.31 | 9,035 | 5.30 | 48,327 | 4.89 | 7,462 | 3.61 | 66,776 | 4.81 | 67,706 | |||||||||||||||||||||||||||
Total held to maturity | 1,952 | 5.31 | 35,699 | 3.92 | 122,509 | 3.58 | 50,227 | 2.37 | 210,387 | 3.37 | 212,981 | |||||||||||||||||||||||||||
Total investment securities | $ | 4,107 | 3.17 | % | $ | 63,498 | 2.99 | % | $ | 191,893 | 3.03 | % | $ | 309,581 | 1.95 | % | $ | 569,079 | 2.44 | % | $ | 567,496 | ||||||||||||||||
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Sources of Funds
General. Our sources of funds are deposits, borrowings, payments of principal and interest on loans and investments, sales of loans and funds provided from operations.
Deposits. The Bank's deposit base is our primary source of funding and consists of core deposits from the communities served by our branch and office locations. We offer a variety of deposit accounts with a competitive range of interest rates and terms to both consumers and businesses. Deposits include interest-bearing and non-interest-bearing demand accounts, savings, money market, certificates of deposit and individual retirement accounts. These accounts earn interest at rates established by management based on competitive market factors, management's desire to increase certain product types or maturities, and in keeping with our asset/liability, liquidity and profitability objectives. Competitive products, competitive pricing and high touch customer service are important to attracting and retaining these deposits.
We have historically been an active bidder for public fund deposits within the state of Texas. This strategy has been refined to one which will seek to attract future public funds primarily in the direct markets that we serve and only at rates that are consistent with our strategy of providing a low cost source of core funding for the Bank. At December 31, 2016 and 2015, our public fund deposits totaled $1.00 billion and $708.7 million, respectively. At December 31, 2016, $774.9 million of the $1.00 billion in public funds were time deposits, of which $187.0 million of such time deposits had a maturity date over 12 months. Additionally, public funds at December 31, 2016 included $123.9 million in money market, $98.3 million in interest-bearing demand and $4.7 million in non-interest-bearing demand deposits.
We provide an avenue for large depositors to maintain full FDIC insurance coverage for all deposits up to $50 million or $75 million, depending on product. Under an agreement with Promontory Interfinancial Network, we participate in the Certificate of Deposit Account Registry Service (CDARS®) and the Insured Cash Sweep (ICS) money market product. These are deposit-matching programs which distribute excess balances on deposit with the Bank across other participating banks. In return, those participating financial institutions place their excess customer deposits with the Bank in a reciprocal amount. These products are designed to enhance our ability to attract and retain customers and increase deposits by providing additional FDIC insurance for large deposits. We also participate in the ICS One-Way Buy program, which allows the Bank to buy cost-effective wholesale funding on customizable terms. Due to the nature of the placement of the funds, CDARS® and ICS deposits are classified as “brokered deposits” by regulatory agencies. At December 31, 2016 and 2015, we had $355.5 million and $371.7 million, respectively, in aggregate CDARS® and ICS deposits.
The following table sets forth our deposit flows during the periods indicated.
Years Ended December 31, | |||||||||||
2016 | 2015 | 2014 | |||||||||
(Dollars in thousands) | |||||||||||
Opening balance | $ | 5,226,711 | $ | 2,657,809 | $ | 2,264,639 | |||||
Net deposits 1 | 1,117,731 | 2,555,775 | 384,958 | ||||||||
Interest | 21,034 | 13,127 | 8,212 | ||||||||
Ending balance | $ | 6,365,476 | $ | 5,226,711 | $ | 2,657,809 | |||||
Net increase | $ | 1,138,765 | $ | 2,568,902 | $ | 393,170 | |||||
Percent increase | 21.79 | % | 96.65 | % | 17.36 | % | |||||
1 2015 amount includes $1.63 billion in deposits acquired on January 1, 2015 in connection with the Company's merger with LegacyTexas Group, Inc.
19
The following table sets forth the dollar amount of deposits in the various types of deposit programs offered at the dates indicated.
December 31, | ||||||||||||||||||||
2016 | 2015 | 2014 | ||||||||||||||||||
Amount | Percent of Total | Amount | Percent of Total | Amount | Percent of Total | |||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
Transaction and Savings Deposits: | ||||||||||||||||||||
Non-interest-bearing demand | $ | 1,383,951 | 21.74 | % | $ | 1,170,272 | 22.38 | % | $ | 494,376 | 18.60 | % | ||||||||
Interest-bearing demand | 903,314 | 14.19 | 819,350 | 15.68 | 472,703 | 17.79 | ||||||||||||||
Savings and money market | 2,710,307 | 42.58 | 2,209,698 | 42.28 | 1,176,749 | 44.27 | ||||||||||||||
Total non-certificates | 4,997,572 | 78.51 | 4,199,320 | 80.34 | 2,143,828 | 80.66 | ||||||||||||||
Certificates: | ||||||||||||||||||||
0.00-1.99% | 1,356,657 | 21.31 | 1,006,050 | 19.25 | 491,520 | 18.49 | ||||||||||||||
2.00-3.99% | 11,226 | 0.18 | 21,317 | 0.41 | 21,972 | 0.83 | ||||||||||||||
4.00-5.99% | 21 | — | 20 | — | 486 | 0.02 | ||||||||||||||
6.00% and over | — | — | 4 | — | 3 | — | ||||||||||||||
Total certificates | 1,367,904 | 21.49 | 1,027,391 | 19.66 | 513,981 | 19.34 | ||||||||||||||
Total deposits | $ | 6,365,476 | 100.00 | % | $ | 5,226,711 | 100.00 | % | $ | 2,657,809 | 100.00 | % | ||||||||
The following table shows rate and maturity information for our certificates of deposit at December 31, 2016.
0.00-1.99% | 2.00-3.99% | 4.00-5.99% | Total | ||||||||||||||||