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Section 1: 10-K (10-K)

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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, 2018
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 every Interactive Data File required to be submitted 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 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, 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 þ
 
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 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 $1,848.5 million as of June 30, 2018, 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 48,564,680 shares of the Registrant’s common stock as of February 5, 2019.




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 20, 2019.
 
Part III
 
 
 
 
 
 




LEGACYTEXAS FINANCIAL GROUP, INC.
FORM 10-K
December 31, 2018
INDEX

 
Page
 
 
 4
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 





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 Federal Deposit Insurance Corporation (“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 their cash flow needs until the loans are sold to investors. 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.

4



Maintain sound asset quality
We believe that asset quality is a key to long-term financial success. We seek to maintain sound asset quality by moderating credit risk and adhering to prudent lending practices. 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 Area
We are headquartered in Plano, Texas, and currently operate 42 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 2018), we ranked first in deposit share in Collin County, with 18.11% of total deposits, and sixth in the Dallas/Fort Worth Metropolitan Statistical Area, with 2.49% 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 22 companies headquartered in the Dallas/Fort Worth Metroplex which are on the 2018 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 2018, the Dallas/Fort Worth Metroplex reported an unemployment rate (not seasonally adjusted) of 3.3%, compared to the national average of 3.7% (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).

5



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,
 
2018
 
2017
 
2016
 
2015
 
2014
 
Amount
 
Percent
 
Amount
 
Percent
 
Amount
 
Percent
 
Amount
 
Percent
 
Amount
 
Percent
 
(Dollars in thousands)
Loans held for investment:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
$
3,026,754

 
44.57
%
 
$
3,019,339

 
46.57
%
 
$
2,670,455

 
44.73
%
 
$
2,177,543

 
42.98
%
 
$
1,265,868

 
48.07
%
Commercial and industrial
2,057,791

 
30.30

 
1,927,049

 
29.72

 
1,875,356

 
31.42

 
1,612,669

 
31.83

 
781,824

 
29.69

Construction and land
270,629

 
3.99

 
277,864

 
4.28

 
294,894

 
4.94

 
269,708

 
5.32

 
21,298

 
0.81

Consumer real estate
1,390,378

 
20.47

 
1,213,434

 
18.73

 
1,074,923

 
18.01

 
936,757

 
18.49

 
524,199

 
19.90

Other consumer
45,171

 
0.67

 
45,506

 
0.70

 
53,991

 
0.90

 
69,830

 
1.38

 
40,491

 
1.53

Gross loans held for investment, excluding Warehouse Purchase Program
6,790,723

 
100.00
%
 
6,483,192

 
100.00
%
 
5,969,619

 
100.00
%
 
5,066,507

 
100.00
%
 
2,633,680

 
100.00
%
Net of:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Deferred costs (fees) and discounts, net
10,397

 
 
 
6,380

 
 
 
(2,251
)
 
 
 
(1,860
)
 
 
 
(2,927
)
 
 
Allowance for loan losses
(67,428
)
 
 
 
(71,301
)
 
 
 
(64,576
)
 
 
 
(47,093
)
 
 
 
(25,549
)
 
 
Net loans held for investment, excluding Warehouse Purchase Program
6,733,692

 
 
 
6,418,271

 
 
 
5,902,792

 
 
 
5,017,554

 
 
 
2,605,204

 
 
Warehouse Purchase Program
960,404

 
 
 
1,320,846

 
 
 
1,151,145

 
 
 
1,043,719

 
 
 
786,416

 
 
Total loans held for investment, net
$
7,694,096

 
 
 
$
7,739,117

 
 
 
$
7,053,937

 
 
 
$
6,061,273

 
 
 
$
3,391,620

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans held for sale
$
23,193

 
 
 
$
16,707

 
 
 
$
21,279

 
 
 
$
22,535

 
 
 
$

 
 


6



The following table shows the composition of our loan portfolio by fixed and adjustable rate as of the dates indicated.
 
December 31,
 
2018
 
2017
 
2016
 
2015
 
2014
 
Amount
 
Percent
 
Amount
 
Percent
 
Amount
 
Percent
 
Amount
 
Percent
 
Amount
 
Percent
 
(Dollars in thousands)
Fixed rate loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
$
1,922,400

 
28.31
%
 
$
1,829,829

 
28.22
%
 
$
1,638,656

 
27.45
%
 
$
1,188,884

 
23.47
%
 
$
728,168

 
27.65
%
Commercial and industrial
346,832

 
5.11

 
241,897

 
3.73

 
212,456

 
3.56

 
664,057

 
13.11

 
67,592

 
2.57

Construction and land
46,387

 
0.68

 
58,575

 
0.90

 
57,287

 
0.96

 
85,099

 
1.68

 
5,764

 
0.22

Consumer real estate
805,722

 
11.86

 
657,876

 
10.15

 
589,051

 
9.87

 
508,295

 
10.03

 
337,109

 
12.80

Other consumer
37,391

 
0.55

 
37,888

 
0.58

 
45,942

 
0.77

 
58,259

 
1.15

 
32,257

 
1.22

Total fixed rate loans
3,158,732

 
46.51

 
2,826,065

 
43.58

 
2,543,392

 
42.61

 
2,504,594

 
49.44

 
1,170,890

 
44.46

Adjustable rate loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
1,104,354

 
16.26

 
1,189,510

 
18.35

 
1,031,799

 
17.28

 
988,659

 
19.51

 
537,700

 
20.42

Commercial and industrial
1,710,959

 
25.19

 
1,685,152

 
25.99

 
1,662,900

 
27.86

 
948,612

 
18.72

 
714,232

 
27.12

Construction and land
224,242

 
3.31

 
219,289

 
3.38

 
237,607

 
3.98

 
184,609

 
3.64

 
15,534

 
0.59

Consumer real estate
584,656

 
8.61

 
555,558

 
8.58

 
485,872

 
8.14

 
428,462

 
8.46

 
187,090

 
7.10

Other consumer
7,780

 
0.12

 
7,618

 
0.12

 
8,049

 
0.13

 
11,571

 
0.23

 
8,234

 
0.31

Total adjustable rate loans
3,631,991

 
53.49

 
3,657,127

 
56.42

 
3,426,227

 
57.39

 
2,561,913

 
50.56

 
1,462,790

 
55.54

Gross loans held for investment, excluding Warehouse Purchase Program
6,790,723

 
100.00
%
 
6,483,192

 
100.00
%
 
5,969,619

 
100.00
%
 
5,066,507

 
100.00
%
 
2,633,680

 
100.00
%
Net of:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Deferred costs (fees) and discounts, net
10,397

 
 
 
6,380

 
 
 
(2,251
)
 
 
 
(1,860
)
 
 
 
(2,927
)
 
 
Allowance for loan losses
(67,428
)
 
 
 
(71,301
)
 
 
 
(64,576
)
 
 
 
(47,093
)
 
 
 
(25,549
)
 
 
Net loans held for investment, excluding Warehouse Purchase Program
6,733,692

 
 
 
6,418,271

 
 
 
5,902,792

 
 
 
5,017,554

 
 
 
2,605,204

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Warehouse Purchase Program:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed rate loans

 
%
 

 
%
 

 
%
 

 
%
 
4,147

 
0.53
%
Adjustable rate loans
960,404

 
100.00

 
1,320,846

 
100.00

 
1,151,145

 
100.00

 
1,043,719

 
100.00

 
782,269

 
99.47

Total Warehouse Purchase Program
960,404

 
100.00
%
 
1,320,846

 
100.00
%
 
1,151,145

 
100.00
%
 
1,043,719

 
100.00
%
 
786,416

 
100.00
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans held for investment, net
$
7,694,096

 
 
 
$
7,739,117

 
 
 
$
7,053,937

 
 
 
$
6,061,273

 
 
 
$
3,391,620

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans held for sale
$
23,193

 
 
 
$
16,707

 
 
 
$
21,279

 
 
 
$
22,535

 
 
 
$

 
 


7



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, 2018. 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)
 
2019 1
 
2020 - 2023
 
2024 and following
 
Total
Commercial and industrial
 
$
616,205

 
$
1,314,587

 
$
126,999

 
$
2,057,791

Construction and land
 
187,614

 
46,518

 
36,497

 
270,629

1 
Includes demand loans and loans having no stated maturity
(Dollars in thousands)
Maturities after One Year
Loans with fixed interest rates
$
187,930

Loans with floating or adjustable interest rates
1,336,671

Lending Authority. Our Chief Credit Officer can approve cash secured loans up to $4.0 million, loans secured by other collateral up to $3.5 million and unsecured loans up to $2.0 million, while our Chief Executive Officer can approve cash secured loans up to $4.0 million, loans secured by other collateral up to $3.5 million and unsecured loans up to $3.0 million. The Senior Loan Committee has authority to approve loans over these signature authority amounts. At December 31, 2018, under federal regulation, the maximum amount we could lend to any one borrower and the borrower’s related entities was approximately $268.5 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 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 ascertain liquidity and 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, 2018, the commercial real estate lending portfolio totaled $3.03 billion.
Commercial and Industrial Lending. Our commercial and industrial portfolio totaled $2.06 billion at December 31, 2018, with borrowers that 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

8



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).
Reserve-based energy loans, which are secured by deeds of trust on properties containing proven oil and natural gas reserves, are reported as commercial and industrial loans and totaled $520.4 million at December 31, 2018, representing approximately 7.7% of total loans held for investment (excluding Warehouse Purchase Program loans) and 25.3% 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. In addition to 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 by declining commodity prices. At December 31, 2018, “Midstream and Other” loans had a total outstanding balance of $38.1 million. The energy lending portfolio continues to be an important part of our commercial business strategy.
Construction and Land Lending. Our construction and land portfolio, which totaled $270.6 million at December 31, 2018, is primarily made up of commercial entities constructing both commercial and residential projects in the Dallas/Fort Worth area, totaling $245.9 million at December 31, 2018. Our requirements for commercial construction lending 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 our mortgage division, we also originate one-time close residential construction loans to individuals for the construction and acquisition of personal residences. At December 31, 2018, we had $24.8 million in outstanding balances on residential construction loans to individuals. These loans 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 $1.39 billion at December 31, 2018, 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 2018, we recognized $6.6 million in net gains on the sale of mortgage loans, which includes the gain recognized on $187.4 million of one- to four-family mortgage loans that were sold or committed for sale in 2018, fair value changes on mortgage derivatives and mortgage fees collected.
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. 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 unencumbered 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 area. At December 31, 2018, our other consumer loan portfolio totaled $45.2 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 their cash flow needs until the loans are sold to investors. Although not subject to any legally binding commitment, when we make a purchase

9



decision, we acquire 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 both 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, 2018, Warehouse Purchase Program maximum aggregate outstanding purchases ranged in size from $2.0 million to $110.0 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, 2018, the Bank had 41 mortgage banking company customers with a maximum aggregate exposure of $1.92 billion and an actual aggregate outstanding balance of $960.4 million. 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 79%, an average credit score of 711 and an average loan size of $285,000. 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 market 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 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 2018, we sold $324.2 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 2018, we purchased $223.2 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

10



amount of the loans plus a servicing release premium. The sale amounts generally produce gains to us. In 2018, our mortgage division sold $181.3 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 with 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.
Delinquent Loans. The following table sets forth our loan delinquencies by type, by amount and by percentage of type at December 31, 2018. There were no past due Warehouse Purchase Program loans at December 31, 2018.
 
Loans Delinquent For:
 
Total Loans Delinquent 30 Days or More
 
30-89 Days
 
90 Days and Over
 
 
Number
 
Amount
 
Percent of Loan Category
 
Number
 
Amount
 
Percent of Loan Category
 
Number
 
Amount
 
Percent of Loan Category
 
(Dollars in thousands)
Commercial real estate
1
 
$
6

 
0.00
%
 

 
$

 
0.00
%
 
1
 
$
6

 
0.00
%
Commercial and industrial
15
 
289

 
0.01

 
2

 
217

 
0.01

 
17
 
506

 
0.02

Construction and land
2
 
557

 
0.21

 

 

 

 
2
 
557

 
0.21

Consumer real estate
183
 
23,126

 
1.66

 
16

 
1,632

 
0.12

 
199
 
24,758

 
1.78

Other consumer
24
 
286

 
0.63

 
1

 
29

 
0.06

 
25
 
315

 
0.69

Total loans
225
 
$
24,264

 
0.36
%
 
19

 
$
1,878

 
0.03
%
 
244
 
$
26,142

 
0.39
%
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. At December 31, 2018, we had $17.7 million in nonaccrual loans that were not past due, but where the collection of all principal and interest is considered doubtful.
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

11



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, 2018, we had $2.1 million in TDRs, of which $926,000 were accruing interest and $1.2 million were classified as nonaccrual.
 
Years Ended December 31,
 
2018
 
2017
 
2016
 
2015
 
2014
 
(Dollars in thousands)
Nonaccrual loans: 1
 
 
 
 
 
 
 
 
 
Commercial real estate
$
159

 
$
4,134

 
$
5,195

 
$
11,418

 
$
6,703

Commercial and industrial
16,710

 
84,003

 
86,664

 
16,877

 
5,778

Construction and land

 

 
11,385

 
33

 
149

Consumer real estate
5,506

 
6,190

 
7,987

 
9,781

 
10,591

Other consumer
46

 
76

 
158

 
107

 
286

Total non-performing loans
22,421

 
94,403

 
111,389

 
38,216

 
23,507

 
 
 
 
 
 
 
 
 
 
Foreclosed assets:
 
 
 
 
 
 
 
 
 
Commercial real estate

 
6,694

 
10,638

 
4,784

 
551

Construction and land

 
859

 
194

 
1,802

 

Consumer real estate
720

 
192

 

 
106

 

Other
613

 
687

 
6

 

 

Total foreclosed assets
1,333

 
8,432

 
10,838

 
6,692

 
551

Total non-performing assets
$
23,754

 
$
102,835

 
$
122,227

 
$
44,908

 
$
24,058

 
 
 
 
 
 
 
 
 
 
Total non-performing assets as a percentage of total assets 2
0.26
%
 
1.13
%
 
1.46
%
 
0.58
%
 
0.58
%
Total non-performing loans as a percentage of total loans held for investment, excluding Warehouse Purchase Program loans 2
0.33
%
 
1.46
%
 
1.87
%
 
0.75
%
 
0.89
%
 
 
 
 
 
 
 
 
 
 
Performing troubled debt restructurings:
 
 
 
 
 
 
 
 
 
Commercial real estate
$
136

 
$
145

 
$
154

 
$
161

 
$
702

Commercial and industrial

 
2

 

 
30

 
153

Construction and land

 

 

 

 

Consumer real estate
788

 
600

 
269

 
368

 
204

Other consumer
2

 
21

 
31

 
46

 
39

Total
$
926

 
$
768

 
$
454

 
$
605

 
$
1,098

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 $58,000, $0, $141,000, $111,000 and $612,000 for the years ended December 31, 2018, 2017, 2016, 2015 and 2014, respectively, and consisted entirely of PCI loans.
For the year ended December 31, 2018, 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 $656,000. No interest income on these loans was recorded for the year ended December 31, 2018.
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,

12



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.
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,
 
2018
 
2017
 
(Dollars in thousands)
Doubtful
$
345

 
$
1,134

Substandard
74,263

 
112,632

Total classified loans
74,608

 
113,766

Foreclosed assets
1,333

 
8,432

Total classified assets
$
75,941

 
$
122,198

 
 
 
 
Classified assets as a percentage of equity
6.94
%
 
12.73
%
Classified assets as a percentage of assets
0.84

 
1.34

Classified assets as a percentage of total loans held for investment, excluding Warehouse Purchase Program loans
1.12

 
1.88

Substandard loans at December 31, 2018 decreased by $38.4 million from December 31, 2017, which was primarily related to the resolution of two corporate healthcare finance relationships in 2018, which totaled $20.6 million in the 2017 period. At December 31, 2018, the Company had only one corporate healthcare finance relationship remaining, which totaled $19.3 million and was performing and not adversely rated. Additionally, substandard energy loans declined by $5.8 million from December 31, 2017, as a $42.7 million decline in non-performing substandard energy loans (which included $23.0 million in charge-offs on the resolution of two reserve-based energy relationships) was partially offset by a $36.9 million increase in performing substandard energy loans (which are considered to be “other loans of concern”.) Foreclosed assets at December 31, 2018 decreased by $7.1 million from December 31, 2017 due to the sale of a foreclosed medical facility in the 2018 period, which generated a $1.3 million gain. 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.
Other Loans of Concern. We had $50.9 million of potential problem loans at December 31, 2018, 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, compared to $15.4 million at December 31, 2017. The $35.5 million increase from December 31, 2017 was primarily due to the above-mentioned $36.9 million increase in substandard performing energy loans. 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, 2018 (excluding PCI loans). Other loans of concern, which were performing at December 31, 2018, 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

13



ultimate 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, 2018, $19.2 million in loans were individually impaired, with $4.1 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, 2018 and December 31, 2017 — Loans” contained in Item 7 and Note 6 of the Notes to Consolidated Financial Statements contained in Item 8 of this report for more information.
At December 31, 2018, our allowance for loan losses was $67.4 million, or 0.99% 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 Note 1 and Note 6 of the Notes to Consolidated Financial Statements contained in Item 8 of this report.
Our banking regulators periodically review our allowance for loan losses. These entities may require us to recognize additions to the allowance for loan losses based on their judgments about information available to them at the time of their review. Any increase in our allowance for loan losses or loan charge‑offs as required by these authorities may have a material adverse effect on our financial condition and results of operations. Further, the Financial Accounting Standards Board has adopted a new accounting standard that will be effective for our fiscal year beginning on January 1, 2020. This standard, referred to as Current Expected Credit Loss, or CECL, will require financial institutions to determine periodic estimates of lifetime expected credit losses on loans, and recognize the expected credit losses as allowances for loan losses. This will change the current method of providing allowances for loan losses that are probable, which may require us to increase our allowance for loan losses, and may greatly increase the types of data we would need to collect and review to determine the appropriate level of the allowance for loan losses. It may also result in even small changes to future forecasts having a significant impact on the allowance, which could make the allowance more volatile, and regulators may impose additional capital buffers to absorb this volatility.

14



The following table sets forth an analysis of our allowance for loan losses.
 
Years Ended December 31,
 
2018
 
2017
 
2016
 
2015
 
2014
 
(Dollars in thousands)
Balance at beginning of period
$
71,301

 
$
64,576

 
$
47,093

 
$
25,549

 
$
19,358

Charge-offs:1
 
 
 
 
 
 
 
 
 
Commercial real estate
239

 
16

 
79

 
167

 

Commercial and industrial
42,356

 
32,846

 
7,746

 
3,129

 
568

Construction and land

 
418

 

 

 
51

Consumer real estate
98

 
96

 
107

 
321

 
237

Other consumer
1,083

 
1,366

 
927

 
1,090

 
605

Total charge-offs
43,776

 
34,742

 
8,859

 
4,707

 
1,461

Recoveries:1
 
 
 
 
 
 
 
 
 
Commercial real estate

 
205

 
21

 
29

 
435

Commercial and industrial
3,699

 
405

 
472

 
246

 
94

Construction and land

 
75

 

 

 
1

Consumer real estate
34

 
42

 
109

 
85

 
38

Other consumer
235

 
640

 
340

 
426

 
363

Total recoveries
3,968

 
1,367

 
942

 
786

 
931

Net charge-offs
39,808

 
33,375

 
7,917

 
3,921

 
530

Provision expense
35,935

 
40,100

 
25,400

 
25,465

 
6,721

Balance at end of period
$
67,428

 
$
71,301

 
$
64,576

 
$
47,093

 
$
25,549

Ratio of net charge-offs during the period to
 
 
 
 
 
 
 
 
 
average loans outstanding during the period
0.53
%
 
0.46
%
 
0.12
%
 
0.08
%
 
0.02
%
Ratio of net charge-offs during the period to
 
 
 
 
 
 
 
 
 
average non-performing assets
62.89
%
 
29.66
%
 
9.47
%
 
11.37
%
 
2.27
%
Allowance as a percentage of non-performing loans2
300.74
%
 
75.53
%
 
57.97
%
 
123.23
%
 
108.69
%
Allowance as a percentage of total loans, excluding
 
 
 
 
 
 
 
 
 
Warehouse Purchase Program (end of period) 2
0.99
%
 
1.10
%
 
1.08
%
 
0.93
%
 
0.97
%

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 $1.2 million, $3.6 million, $7.0 million, $12.0 million and $6.6 million for the years ended December 31, 2018, 2017, 2016, 2015 and 2014, respectively.
The distribution of our allowance for losses on loans at the dates indicated is summarized below.
 
December 31,
 
2018
 
2017
 
2016
 
2015
 
2014
 
Allocated Allowance
 
% 1
 
Allocated Allowance
 
% 1
 
Allocated Allowance
 
% 1
 
Allocated Allowance
 
% 1
 
Allocated Allowance
 
% 1
 
(Dollars in thousands)
Commercial real estate
$
20,045

 
44.57
%
 
$
21,587

 
46.57
%
 
$
18,303

 
44.73
%
 
$
14,123

 
42.98
%
 
$
11,830

 
48.07
%
Commercial and industrial
36,398

 
30.30

 
39,005

 
29.72

 
35,464

 
31.42

 
24,975

 
31.83

 
9,068

 
29.69

Construction and land
3,910

 
3.99

 
4,644

 
4.28

 
5,075

 
4.94

 
3,013

 
5.32

 
174

 
0.81

Consumer real estate
5,843

 
20.47

 
4,838

 
18.73

 
4,484

 
18.01

 
3,992

 
18.49

 
4,069

 
19.90

Other consumer
1,232

 
0.67

 
1,227

 
0.70

 
1,250

 
0.90

 
990

 
1.38

 
408

 
1.53

Total
$
67,428

 
100.00
%
 
$
71,301

 
100.00
%
 
$
64,576

 
100.00
%
 
$
47,093

 
100.00
%
 
$
25,549

 
100.00
%
1 
Loans outstanding as a percentage of total loans held for investment, excluding Warehouse Purchase Program loans.







15



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 Director of Quantitative Analysis, subject to the direction and guidance of the Asset/Liability Management Committee. The Director of Quantitative Analysis 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.
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 5 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 $56.2 million at December 31, 2018 and primarily consisted of Federal Home Loan Bank stock and Federal Reserve stock and are carried on the balance sheet at cost.

16



The following table sets forth the composition of our securities portfolio and other investments at the dates indicated. At December 31, 2018, 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 Government Sponsored Enterprises.
 
 
December 31,
 
 
2018
 
2017
 
2016
 
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
 
 
(Dollars in thousands)
Available for sale:
 
 
 
 
 
 
 
 
 
 
 
 
Agency residential mortgage-backed securities
 
$
153,671

 
$
149,871

 
$
191,216

 
$
189,466

 
$
220,744

 
$
218,551

Agency commercial mortgage-backed securities
 
9,063

 
8,920

 
9,360

 
9,235

 
9,422

 
9,347

Agency collateralized mortgage obligations
 
284,886

 
280,639

 
187,637

 
184,216

 
87,959

 
86,529

US government and agency securities
 
1,500

 
1,543

 
1,590

 
1,671

 
2,150

 
2,251

Municipal bonds
 
31,053

 
30,773

 
35,196

 
35,129

 
38,417

 
37,837

Total available for sale
 
480,173

 
471,746

 
424,999

 
419,717

 
358,692

 
354,515

 
 
 
 
 
 
 
 
 
 
 
 
 
Held to maturity:
 
 
 
 
 
 
 
 
 
 
 
 
Agency residential mortgage-backed securities
 
53,377

 
52,492

 
57,334

 
57,304

 
74,881

 
75,211

Agency commercial mortgage-backed securities
 
21,872

 
21,765

 
27,435

 
27,926

 
28,023

 
28,693

Agency collateralized mortgage obligations
 
17,645

 
17,546

 
27,112

 
27,278

 
40,707

 
41,371

Municipal bonds
 
53,152

 
52,988

 
61,628

 
62,418

 
66,776