UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-K

 

(Mark One)

 

 

For the fiscal year ended December 31, 2010

 

OR

 

 

For the transition period from              to             

 

Commission file number 001-34737

 

VIEWPOINT FINANCIAL GROUP, INC.

(Exact name of registrant as specified in its charter)

 

 

Registrant’s telephone number, including area code: (972) 578-5000

 

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

 

 

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 o No þ

 

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 o 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 o

 

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 o No o

 

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. þ

 

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):

 

 

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

 

The aggregate market value of the voting and non-voting common equity held by nonaffiliates of the Registrant was $140.7 million as of June 30, 2010, 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 34,839,491 shares of the Registrant’s common stock as of March 1, 2011.

 

DOCUMENTS INCORPORATED BY REFERENCE:

 

 

 

VIEWPOINT FINANCIAL GROUP, INC.

 

FORM 10-K

 

December 31, 2010

 

INDEX

 

 

 

Special Note Regarding Forward-Looking Statements

 

When used in filings by ViewPoint Financial Group, Inc. (“the Company”) with the Securities and Exchange Commission (the “SEC”) in the Company’s press releases or other public or shareholder communications, and in oral statements made with the approval of an authorized executive officer, the words or phrases “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “project,” “intends” or similar expressions are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks and uncertainties, including, among other things, changes in economic conditions, legislative changes, changes in policies by regulatory agencies, fluctuations in interest rates, the risks of lending and investing activities, including changes in the level and direction of loan delinquencies and write-offs and changes in estimates of the adequacy of the allowance for loan losses, the Company’s ability to access cost-effective funding, fluctuations in real estate values and both residential and commercial real estate market conditions, demand for loans and deposits in the Company’s market area, competition, changes in management’s business strategies and other factors set forth under Risk Factors in this Form 10-K, that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. The Company wishes to advise readers that the factors listed above could materially affect the Company’s financial performance and could cause the Company’s actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements.

 

The Company does not undertake – and specifically declines any obligation – to publicly release the result of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.

 

General

 

The Company, a Maryland corporation, is a full stock holding company for its wholly owned subsidiary, ViewPoint Bank (the “Bank”.) The Bank’s operations include its wholly owned subsidiary, ViewPoint Bankers Mortgage, Inc. (doing business as ViewPoint Mortgage) (“VPM”). On July 6, 2010, the Company completed a public offering and share exchange as part of the Bank’s conversion from the mutual holding company structure and the elimination of ViewPoint Financial Group and ViewPoint MHC (the “Conversion”). Please see Note 2 of the Notes to Consolidated Financial Statements under Item 8 of this report for more information. All share and per share information in this report for periods prior to the Conversion has been adjusted to reflect the 1.4:1 exchange ratio on publicly traded shares, which resulted in a 4,287,752 increase in outstanding shares.

 

Unless the context otherwise requires, references in this document to the “Company” refer to ViewPoint Financial Group, Inc. and its predecessor, ViewPoint Financial Group, a United States corporation, and references to the “Bank” refer to ViewPoint Bank. References to “we,” “us,” and “our” means ViewPoint Financial Group, Inc. or ViewPoint Bank and its subsidiary, unless the context otherwise requires.

 

The Company and the Bank are examined and regulated by the Office of Thrift Supervision (“OTS”), its primary federal regulator. In 2011, the regulatory oversight of the Company will transfer to the Federal Reserve Board, and of the Bank will transfer to the Office of the Comptroller of the Currency (“OCC”.) The Bank is also regulated by the Federal Deposit Insurance Corporation (“FDIC”). The Bank is required to have certain reserves set by the Federal Reserve Board and is a member of the Federal Home Loan Bank of Dallas, which is one of the 12 regional banks in the Federal Home Loan Bank (“FHLB”) System.

 

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 permanent loans secured by first and second mortgages on owner-occupied, one- to four-family residences and on commercial real estate, as well as in secured and unsecured commercial non-mortgage and consumer loans. Additionally, we have an active program with mortgage banking companies that allows them to close one- to four-family real estate loans in their own name and temporarily finance their inventory of these closed loans until the loans are sold to investors approved by the Company (the “Warehouse

Purchase Program”). We also offer 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 earnings on interest-earning assets including loans and investment securities, service charges and fees on deposits, and gains on the sale of loans. 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, term certificate and demand accounts.

 

Market Areas

 

We are headquartered in Plano, Texas, and have 23 community bank offices in our primary market area, the Dallas/Fort Worth Metroplex. We also have 14 loan production offices located in the Dallas/Fort Worth Metroplex, as well as in Houston, San Antonio, Austin, other Texas cities and in Oklahoma. (Please see Item 2 under Part 1 of this Annual Report on Form 10-K for location details.) Based on the most recent branch deposit data provided by the FDIC (as of June 2010), we ranked third in deposit share in Collin County, with 10.2% of total deposits, and eleventh in the Dallas/Fort Worth Metropolitan Statistical Area, with 1.3% 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 financial services, manufacturing, education, health and social services, retail trades, transportation and professional services. 24 companies headquartered in the Dallas/Fort Worth Metroplex were included on the Fortune 500 list for 2010, giving our market area the fourth-highest concentration of such companies among U.S. metropolitan areas. Large employers headquartered in our market area include Exxon Mobil, AT&T, Kimberly-Clark, American Airlines, Texas Instruments, J.C. Penney, Dean Foods and Southwest Airlines.

 

For December 2010, the Dallas/Fort Worth Metroplex reported an unemployment rate (not seasonally adjusted) of 7.9%, compared to the national average of 9.1% (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.) Housing prices in the Dallas/Fort Worth Metroplex have compared favorably to the national average. From December 2005 to December 2010, the Standards and Poors/Case-Schiller Home Price Index for the Dallas metropolitan area has decreased by 6.2%, while the U.S. National Home Price Index has declined by 30.3% during the same period.

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 losses) as of the dates indicated.

 

 

 

The following table shows the composition of our loan portfolio by fixed and adjustable rate as of the dates indicated. Of the $492.0 million of loans held for sale at December 31, 2010, $460.9 million were Warehouse Purchase Program loans purchased for sale under our standard loan participation agreement. Warehouse Purchase Program facilities adjust with changes to the daily London Interbank Offering Rate (“LIBOR”). These facilities have a yield that is based on the daily LIBOR, with a floor of either 2.00% or 2.50% per annum, plus a margin rate.

 

 

 

 

The following schedule illustrates the contractual maturity of our loan portfolio (not including loans held for sale) at December 31, 2010. Mortgages which have adjustable or renegotiable interest rates are shown as maturing in the period during which the contract is due. The schedule does not reflect the effects of possible prepayments or enforcement of due-on-sale clauses.

 

 

 

 

The total amount of loans due after December 31, 2011 which have fixed interest rates is $697.7 million, or 69.1%. The total amount of loans due after December 31, 2011 which have floating or adjustable interest rates is $312.4 million, or 30.9%.

 

Lending Authority. Residential real estate loans up to $1.5 million and commercial real estate loans up to $1.0 million may be approved by our Chief Credit Officer. Our Chief Executive Officer may approve residential and commercial real estate loans up to $2.0 million. The Management Loan Committee generally may approve loans up to $5.0 million, with the exception of Warehouse Purchase Program relationships, which it can approve up to $20.0 million. Loans over these amounts must be approved by the Director Loan Committee. Loans outside our general underwriting guidelines must be approved by the Board of Directors.

 

At December 31, 2010, the maximum amount under federal regulation that we could lend to any one borrower and the borrower’s related entities was approximately $44.8 million. Our five largest lending relationships (excluding Warehouse Purchase Program relationships) totaled $89.8 million in the aggregate, or 8.1% of our $1.11 billion loan portfolio (not including loans held for sale) at December 31, 2010. The loans making up these lending relationships were with commercial borrowers and were secured by office buildings and retail centers located in Texas. The largest relationship at December 31, 2010, totaled $18.7 million. At December 31, 2010, none of the above referenced loans were classified and all were performing according to their stated terms. At December 31, 2010, we had 58 additional relationships that exceeded $2.0 million, for a total amount of $351.5 million. One of these loans with an outstanding balance of $2.9 million was 30 days delinquent at December 31, 2010 and three of these loans totaling $7.4 million were on nonaccrual status at December 31, 2010. See “Asset Quality” for more information.

 

One- to Four-Family Real Estate Lending. We primarily originate loans secured by first mortgages on owner-occupied, one- to four-family residences in our market area. We originate one- to four-family residential mortgage loans through our wholly owned subsidiary, VPM. All of the one- to four-family loans we originate are funded by us and either retained in our portfolio or sold into the secondary market. We sell a majority of our residential mortgage loans on a servicing released basis. See “Loan Originations, Purchases, Sales, Repayments and Servicing.” An evaluation is conducted at the time of origination based on yield, term, price, credit, marketability, and servicing released premium to determine if the loan is to be sold or retained. Sales of one- to four-family real estate loans can increase liquidity, provide funds for additional lending activities, and generate income.

 

At December 31, 2010, one- to four-family residential mortgage loans (which included a limited amount of home improvement loans) totaled $393.9 million, or 35.6% of our gross loan portfolio, of which $300.0 million were fixed rate loans and $93.9 million were adjustable rate loans. In 2010, the Company sold $402.0 million, or 83.7%, of the one- to four-family loans it originated to investors. These loans were sold servicing released. The remainder of one- to four-family loans originated were retained in the Company’s loan portfolio.

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. We lend up to 95% of the lesser of the value or purchase price for one- to four-family residential loans, and up to 80% for non-owner-occupied residential loans. For certain Federal Housing Administration (“FHA”) loans, we generally lend up to 96.5% with FHA insurance. For conventional loans with a loan-to-value ratio in excess of 80%, we require private mortgage insurance in order to mitigate the higher risk level associated with higher loan-to-value loans. 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 currently originate one- to four-family mortgage loans on a fixed and adjustable rate basis as consumer demand dictates. Our pricing strategy for mortgage loans includes setting interest rates that are competitive with other local financial institutions and consistent with our asset/liability management objectives. Fixed rate loans secured by one- to four-family residences generally have contractual maturities of up to 30 years and are generally fully amortizing, with payments due monthly.

 

In 2010, VPM originated $449.7 million of one- to four-family fixed rate mortgage loans, $23.0 million of one- to four-family adjustable rate mortgage (ARM) loans and $15.0 million in residential construction loans. Additionally, the Bank originated $7.8 million in fixed rate home improvement loans. All ARM loans are offered with annual adjustments that begin after the initial reset date, which is typically three or five years, and lifetime rate caps that vary based on the product, generally with a maximum annual rate change of 2.0% and a maximum overall rate change of 6.0%. We use a variety of indices to reprice our ARM loans. As a consequence of using caps, the interest rates on these loans may not be as rate sensitive as our cost of funds. As of December 31, 2010, 96% of the ARM loans in our portfolio will reset in the next five years.

 

ARM loans generally pose different credit risks than fixed rate loans, primarily because as interest rates rise, the borrower’s payment rises, increasing the potential for default. Our loans, which are generally underwritten using guidelines established by the Federal National Mortgage Association (“Fannie Mae”), the Federal Home Loan Mortgage Corporation (“FHLMC”), the U.S. Department of Housing and Urban Development (“HUD”) and other mortgage investors, are readily saleable to investors. Our real estate loans generally contain a “due on sale” clause, allowing us to declare the unpaid principal balance due and payable upon the sale of the security property. In 2010, the average size of our one- to four-family residential loans at origination was approximately $168,000, while the average size of the one- to four-family residential loans in our portfolio at December 31, 2009, was approximately $128,000.

 

We originate residential construction loans to individuals for the construction and acquisition of personal residences. At December 31, 2010, we had $11.4 million in outstanding balances on residential construction loans with an additional $5.9 million of outstanding commitments to make residential construction fundings. Our residential construction loans generally provide for the payment of interest only during the construction phase, which is typically up to 12 months.

 

We periodically review and inspect each property prior to disbursement of funds during the term of the construction loan. Loan proceeds are disbursed after inspection based on the percentage of completion method. At the end of the construction phase, the residential construction loan generally either converts to a longer-term mortgage loan or is paid off through a permanent loan from another lender. Residential construction loans can be made with a maximum loan-to-value ratio of 90%. Before making a commitment to fund a residential construction loan, we require an “as-complete” appraisal of the property by an independent licensed appraiser.

 

Residential construction lending is generally considered to involve a higher degree of credit risk than longer-term financing on existing, owner-occupied real estate. Risk of loss on a residential construction loan depends largely upon the accuracy of the initial estimate of the value of the property at completion of construction compared to the estimated cost (including interest) of construction and other assumptions. If the estimated construction costs are inaccurate, we may be required to advance funds beyond the amount originally committed in order to ensure completion and protect the value of the property. This scenario can also lead to a project that, when completed, has a value that is below the cost of construction.

Warehouse Purchase Program. Our Warehouse Purchase Program enables our mortgage banking company customers to close conforming and some jumbo one- to four-family real estate loans in their own name and temporarily finance their inventory of these closed loans until the loans are sold to investors approved by the Company. We initiated the Warehouse Purchase Program in July 2008 and began funding these types of facilities in October 2008. At December 31, 2010, the Warehouse Purchase Program had 29 clients, compared to eight clients at December 31, 2008. The approved maximum borrowing amounts for our existing Warehouse Purchase Program clients ranged from $10.0 million to $30.0 million at December 31, 2010. During 2010, the average daily outstanding balance per client was $14.8 million and the average daily balance of this portfolio was $368.3 million. The underwriting standards for Warehouse Purchase Program relationships require a minimum tangible net worth of at least $2.0 million and a requirement for personal guarantees and historical profitability of the mortgage banking company client. Warehouse Purchase Program loans, which are made under our standard loan participation agreement, are secured by one- to four-family mortgage loans and are classified as mortgage loans held for sale. This type of lending has a lower risk profile than other one- to four-family loans because the loans are conforming (and a limited number of jumbo) one- to four-family real estate loans that are subject to purchase commitments from an approved investor, and are subject to specific curtailments. If the loan is not sold within 90 days, the mortgage banking company client buys back the loan.

 

At December 31, 2010, Warehouse Purchase Program loans totaled $460.9 million. During 2010, the Company purchased $7.79 billion and sold $7.32 billion in mortgage loans made under these loan participation agreements. Warehouse Purchase Program facilities adjust with changes to the daily LIBOR, with a floor of either 2.00% or 2.50% per annum, plus a margin rate. The margin rate, which is an agreed upon value stated in the pricing schedule of each Warehouse Purchase Program client, typically ranged between 1.75% and 2.75% at December 31, 2010, which resulted in a minimum total rate for Warehouse Purchase Program facilities of 3.75%. For the year ended December 31, 2010, the average yield earned on Warehouse Purchase Program facilities was 4.88%. All loans in this portfolio were performing at December 31, 2010.

 

Commercial Real Estate Lending. We offer a variety of commercial real estate loans. These loans are generally secured by commercial, income-producing, multi-tenanted properties located primarily in our market area or elsewhere in Texas. These properties primarily include office buildings, retail centers, light industrial facilities, warehouses and multifamily properties. This category also includes small business real estate loans for owner-occupied or single tenant properties. At December 31, 2010, commercial real estate loans totaled $479.1 million, or 43.3% of our gross loan portfolio. Our commercial real estate loans are originated internally by our Commercial Real Estate Lending and Business Lending departments.

 

Our loans secured by commercial real estate are primarily originated with a fixed interest rate for terms between three and ten years, 25 to 30-year amortization periods and balloon payments due at maturity. Most loans with a fixed interest rate are generally originated with a term of five years or less. Commercial real estate adjustable rate loans generally have fixed rates for the first three to five years, then have a one-time rate adjustment to a new fixed rate for the remaining term (generally an additional three to five years.) Loan-to-value ratios on our commercial real estate loans typically do not exceed 75% of the appraised value of the property securing the loan. At December 31, 2010, the average loan-to-value ratio of our commercial real estate portfolio was 58.2%, using the current loan balances and collateral values at origination (or adjusted values for those properties which have required updated appraisals as a result of loan modification requests or evaluations of classified assets.) Loans for non-owner-occupied properties are generally originated at lower loan-to-value ratios to single purpose entities and are generally accompanied by personal guaranties that are limited to cases of breach of representation, warranty or covenant. Loans for owner-occupied or single tenant properties may have higher loan-to-value ratios, but often require unlimited personal guaranties. At December 31, 2010, $28.5 million, or 6.0%, of the $479.1 million

commercial real estate portfolio was owner-occupied. The below table illustrates our commercial real estate portfolio by collateral type and loan-to-value ratio based on the most recent data available.

 

 

Loans secured by commercial real estate are generally underwritten based on the net operating income of the property and the financial strength of the borrower/guarantor. The net operating income, which is the income derived from the operation of the property less all operating expenses, must be sufficient to cover the payments related to the outstanding debt plus an additional coverage requirement. Appraisals on properties securing commercial real estate loans are performed by independent state certified or licensed fee appraisers. See “Loan Originations, Purchases, Sales, Repayments and Servicing.”

 

We generally maintain an insurance and/or tax escrow for loans on non-owner-occupied properties; however, we generally do not require them for owner-occupied properties. Loans over $250,000 that are secured by owner-occupied properties are monitored through an insurance tracking service, and the tax information for all commercial real estate loans is pulled annually to ensure that real estate taxes are current. In order to monitor the adequacy of cash flows on income-producing properties, the borrower is generally required to provide annual financial information.

 

Loans secured by commercial real estate properties generally involve a greater degree of credit risk than one- to four-family residential mortgage loans. These loans typically involve large balances to single borrowers or groups of related borrowers. Because payments on loans secured by commercial real estate properties are often dependent on the successful operation or management of the properties, repayment of these loans may be impacted by adverse conditions in the real estate market or the economy. If the cash flow from the property is reduced, or if leases are not obtained or renewed, the borrower’s ability to repay the loan may be impaired. See “Asset Quality – Non-performing Assets.” Our largest commercial real estate lending relationship at December 31, 2010, was $18.7 million. At December 31, 2010, the loans making up this relationship were performing in accordance with their terms.

 

Home Equity Lending. Our home equity loans totaled $115.4 million and comprised 10.4% of our gross loan portfolio at December 31, 2010, including $25.3 million of home equity lines of credit. 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 loan-to-value of the first lien, if any, plus the home equity loan) of the fair market value of their primary residence. The same 80% combined loan-to-value maximum applies to home equity lines of credit, which are 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 loan-to-value ratios compared to similar loans in 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 reborrowed 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 is amortized over a ten year period based on the loan balance at that time. At December 31, 2010, unfunded commitments on these lines of credit totaled $19.9 million.

 

Consumer Lending. We offer a variety of secured consumer loans, including new and used automobile loans, recreational vehicle loans and loans secured by savings deposits. We also offer unsecured consumer loans. We originate our consumer loans primarily in our market areas. At December 31, 2010, our consumer loan portfolio totaled $67.4 million, or 6.1% of our gross loan portfolio.

 

We currently originate automobile loans on a direct basis only. Automobile loans totaled $42.5 million at December 31, 2010, or 3.9% of our gross loan portfolio, with $40.9 million in direct loans and $1.6 million in indirect loans. New automobile loans may be written for a term of up to six years and have fixed rates of interest. Loan-to-value ratios are up to 110% of the manufacturer’s suggested retail price for new auto loans and 110% of the National Automobile Dealers Association (“NADA”) retail value for used auto loans.

 

We follow our internal underwriting guidelines in evaluating direct automobile loans, which includes a maximum debt-to-income ratio of 55%. At December 31, 2010, the average borrower credit score in our automobile portfolio at origination was 731.

 

We also originate unsecured consumer loans. At December 31, 2010, our unsecured consumer loans totaled $14.2 million, or 1.3% of our gross loan portfolio. These loans have either a fixed rate of interest for a maximum term of 48 months or are revolving lines of credit with an adjustable rate of interest tied to the Prime rate of interest. At December 31, 2010, unfunded commitments on our unsecured lines of credit totaled $40.3 million, and the average outstanding balance of the individual lines was approximately $4,000.

 

Consumer loans generally entail greater risk than do one- to four-family residential mortgage loans, particularly in the case of loans that are secured by rapidly depreciable assets, such as automobiles. In the case of automobile loans, any repossessed collateral for a defaulted loan may not provide an adequate source of repayment of the outstanding loan balance. As a result, consumer loan collections are dependent on the borrower’s continuing financial stability. As a result, these loans are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy.

 

Commercial Non-Mortgage Lending. At December 31, 2010, commercial non-mortgage loans totaled $39.3 million, or 3.5% of our gross loan portfolio. Our commercial non-mortgage lending activities encompass loans with a variety of purposes and security, including loans to finance business working capital, commercial vehicles and equipment, as well as lines of credit.

 

Approximately $9.0 million of our commercial non-mortgage loans are unsecured. Our commercial non-mortgage lending policy includes requirements related to credit file documentation and analysis of the borrower’s background, capacity to repay the loan, the adequacy of the borrower’s capital and collateral, as well as an evaluation of other conditions affecting the borrower. A review of the borrower’s past, present and future cash flows is also an important aspect of our credit analysis. We generally obtain personal guarantees on both our secured and unsecured commercial non-mortgage loans.

 

At December 31, 2010, $15.5 million of our commercial non-mortgage loans were comprised of two loans secured by promissory notes, which are in turn secured by commercial real estate. Commercial non-mortgage loans are typically made on the basis of the borrower’s ability to make repayment from the profitable operation of the borrower’s business and, therefore, are of higher credit risk. Commercial non-mortgage loans are generally secured by business assets, such as accounts receivable, inventory, equipment and commercial vehicles. To the extent that the collateral depreciates over time, the collateral may be difficult to appraise and may fluctuate in value based on the specific type of business and equipment used. As a result, the availability of funds for the repayment of commercial non-mortgage loans are substantially dependent on the success of the business itself (which, in turn, is often dependent in part upon general economic conditions.) The majority of our commercial non-mortgage loans are to borrowers in our market area. We intend to continue our commercial non-mortgage lending within this geographic area.

Loan Originations, Purchases, Sales, Repayments and Servicing

 

We originate both fixed rate and adjustable rate loans. Our ability to originate loans, however, is dependent upon customer demand for loans in our market area. In addition to interest earned on loans and loan origination fees, we receive fees for loan commitments, late payments and other miscellaneous services. These fees vary from time to time, generally depending on the supply of funds and other competitive conditions in the market. Fees for late payments and other miscellaneous services totaled $521,000, $628,000 and $853,000 for the years ended December 31, 2010, 2009 and 2008, respectively. The decline in fees for late payments and other services has been primarily due to the decline in our consumer lending portfolio.

 

We also may purchase whole loans and loan participations from other financial institutions. These purchase transactions are governed by participation agreements entered into by the originators and participant (the Bank) containing guidelines as to ownership, control and servicing rights, among others. The originators may retain all rights with respect to enforcement, collection and administration of the loan. This may limit our ability to control our credit risk when we purchase participations in these loans. For instance, we may not have direct access to the borrower, and the institution administering the loan may have some discretion in the administration of performing loans and the collection of non-performing loans. At December 31, 2010, approximately $50.7 million, or 4.6% of our total loan portfolio, consisted of purchased loans or loan participations. At December 31, 2010, $34.7 million of purchased loans consisted of one- to four- family real estate loan pools purchased from Bank of America (formerly Countrywide) and Citimortgage (formerly ABN Amro,) while $16.0 million consisted of individual participations in commercial real estate loans. At December 31, 2010, the delinquency percentage for purchased one- to four- family real estate loans was 10.00%, compared to 1.86% for one- to four- family real estate loans originated by the Company.

 

From time to time we sell non-residential loan participations to private investors, including other banks, thrifts and credit unions (participants). These sales transactions are governed by participation agreements entered into by the originator (the Bank) and participants containing guidelines as to ownership, control and servicing rights, among others. We service these participations sold. These participations are generally sold without recourse, except in cases of breach of representation, warranty or covenant.

 

We also sell whole residential real estate loans to private investors, such as other banks, thrifts and mortgage companies, generally subject to a provision for repurchase upon breach of representation, warranty or covenant. These loans are generally sold for cash in amounts equal to the unpaid principal amount of the loans determined using present value yields to the buyer. The sale amounts generally produce gains to us. Our residential real estate loans are currently being sold on a servicing released basis.

 

Sales of one- to four- family real estate loans originated by VPM and participations in commercial real estate loans can be beneficial to us since these sales generally generate income at the time of sale, produce future servicing income on loans where servicing is retained or a servicing release premium when servicing is sold, reduce our loan exposure to one borrower, provide funds for additional lending and other investments, and/or increase liquidity. The total volume of loans sold in 2010 and 2009 increased due to the growth of our Warehouse Purchase Program.

 

Gains, losses and transfer fees on sales of loans and loan participations are recognized at the time of the sale. Net gains and transfer fees on sales of loans for 2010, 2009, and 2008 were $13.0 million, $16.6 million and $9.4 million, respectively. In 2009, the Company experienced heavy refinance volume that drove the increase in one-to four-family originations and related income.

 

The Asset/Liability Management Committee directs the Company’s mortgage secondary marketing unit to evaluate, in accordance with guidelines, whether to keep loans in portfolio, sell with a servicing release premium, or sell with servicing retained based on price, yield and duration. We held servicing rights of approximately $636,000, $872,000 and $1.4 million at December 31, 2010, 2009 and 2008, respectively, for loans sold to others. The servicing of these loans generated net servicing fees to us for the years ended December 31, 2010, 2009 and 2008 of $235,000, $239,000 and $252,000, respectively. At December 31, 2010, the Company serviced $275.3 million of loans for others that were not reported as assets. The Company held servicing rights on $110.7 million of these loans. The remaining $164.6 million consisted of mortgage loan portfolios subserviced for third parties; no mortgage servicing asset was recorded related to these loans as the Company does not own such rights.

The following table shows the loan origination, purchase, sales and repayment activities (including loans held for sale) of the Company for the periods indicated.

 

 

 

 

Asset Quality

 

When a borrower fails to make a required payment on a residential real estate loan, we attempt to cure the delinquency by contacting the borrower. A late notice is sent 15 days after the due date, and the borrower is contacted by phone beginning 16 days after the due date. When the loan is 31 days past due, a delinquency letter is mailed to the borrower. All delinquent accounts are reviewed by a collector who attempts to cure the delinquency by working with the borrower. When the loan is 50 days past due, the borrower is sent a Notice of Intent to Accelerate via certified mail and regular mail. Between 50 and 90 days past due, a loss mitigation officer reviews the loan to identify possible workout, cure, or loss mitigation opportunities.

 

If the account becomes 90 days delinquent and an acceptable repayment plan has not been agreed upon, a collection officer will generally refer the account to legal counsel with instructions to prepare a notice of intent to foreclose. The notice of intent to foreclose allows the borrower up to 20 days to bring the account current. If foreclosed, generally we take title to the property and sell it directly using a real estate broker.

 

Delinquent consumer loans are handled in a similar manner, except that late notices are sent at 10 and 20 days after the due date. Our procedures for repossession and sale of consumer collateral are subject to various requirements under the applicable consumer protection laws as well as other applicable laws and the determination by us that it would be beneficial from a cost basis.

 

The Credit Administration department works with commercial loan officers to see that the necessary steps are taken to collect delinquent commercial real estate and commercial non-mortgage loans and ensures that standard delinquency notices and letters are mailed to the borrower. In addition, we have a management loan committee that meets as needed and reviews past due and classified commercial real estate loans, as well as other loans that management feels may present possible collection problems. If an acceptable workout of a delinquent commercial loan cannot be reached, we generally initiate foreclosure or repossession proceedings on any collateral securing the loan.

 

Prospective clients of the Warehouse Purchase Program undergo a thorough risk analysis process that includes a three year review of financial statements to assess trends, financial condition, and historical performance. Operational documents are also reviewed to assess the soundness of the loan origination process. A risk rating is assigned to the prospect based upon the results of the due diligence review and are presented to the Management Loan Committee or Director Loan Committee, depending on the facility amount.

 

Once accepted, clients are subject to monthly financial monitoring to compare trends and performance, production volume and type, repurchase and/or indemnification requests, and litigation. Financial covenant ratios from the compliance certificate are verified to the financial statements. An annual audit of financial statements is required, for each client performed by an independent auditing firm.

 

Prospective clients of the Commercial Real Estate group also undergo a thorough analysis, focusing both on the sponsorship of the credit as well as the project itself. Borrowers and sponsor/guarantors must provide detailed financial information, including tax returns, so that global cash flow and debt service coverage can be analyzed. The project itself is thoroughly underwritten, based on historical leasing information and conservative projections for both income and expenses. Reserves for future leasing expenses and for deferred maintenance are often required. Third party appraisals and environmental assessments are required and reviewed for risk in the project. Once the analysis is complete, a risk assessment is completed and a rating is assigned. The loan is presented to the Management Loan Committee or the Director Loan Committee for approval, or both, depending upon the size of the transaction.

 

Once a loan is approved, it is subject to ongoing monitoring on a quarterly basis. Rent roll and operating income information is collected and analyzed to ascertain a current risk profile of the project and assign a new risk rating, if applicable. These quarterly loan reviews are incorporated into periodic portfolio reviews where interest rate and value stresses are applied.

Delinquent Loans. The following table sets forth our loan delinquencies by type, by amount and by percentage of type at December 31, 2010.