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VPFG > SEC Filings for VPFG > Form 10-Q on 30-Oct-2012All Recent SEC Filings

Show all filings for VIEWPOINT FINANCIAL GROUP INC.

Form 10-Q for VIEWPOINT FINANCIAL GROUP INC.


30-Oct-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Private Securities Litigation Reform Act Safe Harbor Statement

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, our ability to successfully integrate any assets, liabilities, customers, systems and management personnel we have acquired or may in the future acquire into our operations and our ability to realize related revenue synergies and cost savings within expected time frames and any goodwill charges related thereto; and other factors set forth under Risk Factors in the Company's 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.

Overview

The Company, a Maryland corporation, is a full stock holding company for its wholly owned subsidiary, ViewPoint Bank, National Association ("the Bank"). Unless the context otherwise requires, references in this document to the "Company" refer to ViewPoint Financial Group, Inc., and references to the "Bank" refer to ViewPoint Bank, N.A. References to "we," "us," and "our" means ViewPoint Financial Group, Inc. and ViewPoint Bank, N.A. and its subsidiary, unless the context otherwise requires.

Previously, the Company and the Bank were examined and regulated by the Office of Thrift Supervision ("OTS"), its primary federal regulator. In July 2011, the regulatory oversight of the Company transferred to the Board of Governors of the Federal Reserve System ("FRB"), and regulatory oversight of the Bank transferred to the thrift division of the Office of the Comptroller of the Currency ("OCC"). On December 19, 2011, the Bank converted its charter from a federal thrift charter to a national banking charter, with regulatory oversight by the OCC. The Bank is also regulated by the Federal Deposit Insurance Corporation ("FDIC"). The Bank is required to maintain certain cash vault and/or deposit reserves with the FRB, and holds stock in the FRB's district bank in Dallas. The Bank 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 commercial real estate, secured and unsecured commercial and industrial loans, as well as in permanent loans secured by first and second mortgages on owner-occupied, one- to four-family residences 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 fund their inventory of these closed loans until the loans are sold to investors approved by the Company (the "Warehouse Purchase Program"). The Company purchases a 100% participation interest in the loans originated by our mortgage banking company customers, which are then held as one- to four- family mortgage loans held for sale on a short-term basis. The mortgage banking company has no obligation to offer and we have no obligation to purchase these participating interests. The mortgage banking company closes mortgage loans consistent with underwriting standards established by approved investors and once the loan closes, the mortgage banking company delivers the loan to a third party investor. We also offer brokerage services for the purchase and sale of non-deposit investment and insurance products through a third party brokerage arrangement.


Table of Contents

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.

On April 2, 2012, the Company announced the completion of its acquisition of Highlands Bancshares, Inc. ("Highlands"), parent company of The First National Bank of Jacksboro, which operated in Dallas under the name Highlands Bank. Under the terms of the all-stock transaction, each outstanding share of Highlands common stock, which totaled 8,307,911 at the time of the transaction, was exchanged for 0.6636 shares of Company stock, resulting in an increase of 5,513,061 shares of Company common stock. As a part of the acquisition, Highlands President and Chief Executive Officer (CEO) Kevin Hanigan joined the Company and the Bank as President and CEO. He also was appointed to the Company's and the Bank's Boards of Directors, along with Highlands' board member Bruce Hunt. The acquisition was not considered to be a significant business combination.

Performance Highlights

Net interest margin increased by 83 basis points for the quarter ended September 30, 2012 compared to the same period in 2011. Due to changes in the earning asset mix, lower deposit and borrowing rates, and the accretion of the Highlands purchase discount, the net interest margin increased by 83 basis points to 3.70% for the three months ended September 30, 2012, from 2.87% for the three months ended September 30, 2011. The net interest margin increased by 71 basis points for the year-to-date periods, increasing to 3.55% for the nine months ended September 30, 2012 from 2.84% for the nine months ended September 30, 2011.

Solid loan growth in 2012: Gross loans increased by $603.7 million, or 29.3%, to $2.67 billion at September 30, 2012 from $2.06 billion at December 31, 2011, with $355.0 million of the increase coming from organic growth and $248.7 million of the increase due to loans acquired from Highlands. The commercial real estate portfolio increased by $209.3 million, or 35.8%, with $134.9 million of this increase attributable to organic growth. Mortgage loans held for sale (primarily Warehouse Purchase Program) increased by $180.1 million, or 21.6%, while commercial and industrial loans increased by $181.7 million, or 257.3%, to $252.3 million at September 30, 2012.

Quarterly net income increased by $6.2 million, or 120.0%. Net income for the three months ended September 30, 2012, was $11.3 million, up $6.2 million from $5.1 million for the three months ended September 30, 2011. This includes net gains of $898,000 and expenses of $515,000 relating to the Highlands acquisition and severance costs.

Critical Accounting Estimates

Certain accounting estimates are important to the portrayal of our financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. These estimates are susceptible to material changes as a result of changes in facts and circumstances. Facts and circumstances which could affect these judgments include, but are not limited to, changes in interest rates, changes in the performance of the economy and changes in the financial condition of borrowers. Management believes that its critical accounting estimates include determining the allowance for loan losses and other-than-temporary impairments in our securities portfolio. Our accounting policies relating to these estimates are discussed in detail in Note 1 of the Notes to Consolidated Financial Statements contained in our 2011 Annual Report on Form 10-K.


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Allowance for Loan Loss. The allowance for loan losses and related provision expense are susceptible to change if the credit quality of our loan portfolio changes, which is evidenced by many factors, including but not limited to charge-offs and non-performing loan trends. Generally, one- to four-family residential mortgage lending has a lower credit risk profile compared to consumer lending (such as automobile or personal line of credit loans). Commercial real estate and commercial and industrial lending, however, have higher credit risk profiles than consumer and one- to four- family residential mortgage loans due to these loans being larger in amount and non-homogenous in structure and term. While management uses available information to recognize losses on loans, changes, in economic conditions, the mix and size of the loan portfolio and individual borrower conditions can dramatically impact our level of allowance for loan losses in relatively short periods of time. Management believes that the allowance for loan losses is maintained at a level that represents our best estimate of inherent credit losses in the loan portfolio as of September 30, 2012. In addition, our banking regulators periodically review our allowance for loan losses and 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.

Management evaluates current information and events regarding a borrower's ability to repay its obligations and considers a loan to be impaired when the ultimate 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 loan 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.

Other-than-Temporary Impairments. The Company evaluates securities for other-than-temporary impairment on at least a quarterly basis and more frequently when economic, market, or security specific concerns warrant such evaluation. Consideration is given to the length of time and the extent to which the fair value of the security has been less than its amortized cost, the financial condition and near-term prospects of the issuer, and the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in the fair value of the security. In analyzing an issuer's financial condition, the Company may consider whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuer's financial condition. The Company conducts regular reviews of the bond agency ratings of securities and considers whether the securities were issued by or have principal and interest payments guaranteed by the federal government or its agencies. These reviews focus on the underlying rating of the issuer and also include the insurance rating of securities that have an insurance component. The ratings and financial condition of the issuers are monitored, as well as the financial condition and ratings of the insurers.

For periods in which other-than-temporary impairment of a debt security is recognized, the credit portion of the amount is determined by subtracting the present value of the stream of estimated cash flows as calculated in a discounted cash flow model and discounted at book yield from the prior period's ending carrying value. The non-credit portion of the amount is determined by subtracting the credit portion of the impairment from the difference between the book value and fair value of the security. The credit related portion of the impairments is charged against income and the non-credit related portion is charged to equity as a component of other comprehensive income, net of applicable taxes.


Table of Contents

Comparison of Financial Condition at September 30, 2012 and December 31, 2011

General. Total assets increased by $455.5 million, or 14.3%, to $3.64 billion at September 30, 2012, from $3.18 billion at December 31, 2011, primarily due to a $420.9 million, or 34.8%, increase in net loans held for investment and a $180.1 million, or 21.6%, increase in loans held for sale. The increase in loans included loans acquired from Highlands, which totaled $248.7 million at September 30, 2012. The increase in loans was partially offset by a $221.0 million, or 23.7%, decline in our securities portfolio resulting primarily from maturities, paydowns and sales of securities excluding purchases of new securities.

Loans. Gross loans (including $1.01 billion in mortgage loans held for sale at September 30, 2012) increased by $603.7 million, or 29.3%, to $2.67 billion at September 30, 2012 from $2.06 billion at December 31, 2011. $355.0 million of the increase was due to organic growth, while $248.7 million of the increase was due to loans acquired from Highlands.

                                           September 30,        December 31,        Dollar        Percent
                                               2012                 2011            Change         Change
                                                                  (Dollars in thousands)
Real estate loans:
One-to four-family                        $       400,951      $      379,944      $  21,007           5.5 %
Commercial                                        794,619             585,328        209,291          35.8
Home equity/home improvement                      141,152             140,966            186           0.1

Total real estate loans                         1,336,722           1,106,238        230,484          20.8

Consumer loans:
Automobile                                         39,271              33,027          6,244          18.9
Other consumer loans                               23,319              18,143          5,176          28.5

Total consumer loans                               62,590              51,170         11,420          22.3

Commercial and industrial loans:
Warehouse lines of credit                          25,936              16,141          9,795          60.7
Commercial                                        226,391              54,479        171,912         315.6

Total commercial and industrial loans             252,327              70,620        181,707         257.3

Gross loans held for investment                 1,651,639           1,228,028        423,611          34.5

Mortgage loans held for sale                    1,014,445             834,352        180,093          21.6

Gross loans                               $     2,666,084      $    2,062,380      $ 603,704          29.3 %


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The commercial real estate portfolio increased by $209.3 million, or 35.8%, to $794.6 million at September 30, 2012, from $585.3 million at December 31, 2011, with $134.9 million of this increase attributable to organic growth. $74.4 million of the increase was due to the acquisition of Highlands. Our commercial real estate portfolio consists almost exclusively of loans secured by existing, multi-tenanted commercial real estate. 93% of our commercial real estate loan balances are secured by properties located in Texas, a market that we do not believe has experienced the same level of economic pressure experienced in certain other geographic areas in the United States. The table below illustrates the geographic concentration of our commercial real estate portfolio at September 30, 2012:

                               Texas          93  %
                               Oklahoma         2
                               Louisiana        2
                               California       1
                               Illinois         1
                               Other*           1

                                              100 %

* "Other" consists of Arizona, Colorado, Georgia, Kansas, Missouri, Nevada, New Mexico, Oregon, and Washington. Does not include $18.3 million in real estate secured agricultural loans.

Commercial and industrial ("C&I") loans increased by $181.7 million, or 257.3%, to $252.3 million at September 30, 2012, from $70.6 million at December 31, 2011, with $111.7 million of this increase due to the acquisition of Highlands. Net of the impact of the Highlands acquisition, commercial loans (excluding warehouse lines of credit) increased by $60.3 million from December 31, 2011, by virtue of loans originated during the second and third quarters of 2012. In conjunction with management's desire to expand C& I lending, the Company has entered into selected lending participations that are different than the industries the Company has lent to in the past. During the third quarter of 2012, the Company syndicated a $30.0 million facility with two other banks, which is secured by notes receivable that have real estate pledged to the notes. The Company's share in this syndication is $13.5 million. Also, during the third quarter of 2012, the Company purchased participations in two reserve-based oil and gas loans that are governed by semi-annual borrowing base reserve evaluations. The Company's position in these two loans totaled $25.5 million. The Company had the reserve reports and valuations for these loans independently verified by a respected engineering firm. Warehouse lines of credit increased by $9.7 million, or 60.7%, from $16.1 million at December 31, 2011, to $25.9 million at September 30, 2012.

One- to four-family loans increased by $21.0 million, or 5.5%, to $400.9 million at September 30, 2012, from $379.9 million at December 31, 2011, with $49.7 million of the growth attributable to the acquisition of Highlands. Net of the acquisition, the one- to four-family loan portfolio decreased by $28.7 million. Prior to its sale in the third quarter of 2012, VPM originated $201.3 million in one- to four-family mortgage loans during the nine months ended September 30, 2012, compared to $262.8 million for the same period in 2011. Of the $201.3 million originated during the nine months ended September 30, 2012, $145.9 million was sold or committed to be sold to investors, generating a net gain on sale of loans of $5.4 million during the nine month period ended September 30, 2012. The remaining $55.4 million of VPM production was retained in the Company's loan portfolio.

Mortgage loans held for sale increased by $180.1 million, or 21.6%, to $1.01 billion at September 30, 2012, from $834.3 million at December 31, 2011, and primarily consisted of Warehouse Purchase Program loans purchased for sale under our standard loan participation agreement. The Company purchases a 100% participation interest in the loans originated by our mortgage banking company customers, which are then held as one- to four- family mortgage loans held for sale on a short-term basis. The mortgage banking company has no obligation to offer and we have no obligation to purchase these participating interests. The mortgage banking company closes mortgage loans consistent with underwriting standards established by approved investors and once the loan closes, the mortgage banking company delivers the loan to a third party investor. The Warehouse Purchase Program had 41 clients with approved maximum borrowing amounts ranging from $8.0 million to $45.0 million at September 30, 2012, compared to 36 clients at December 31, 2011, and 31 clients at September 30, 2011. The average approved borrowing amount for all clients was $30.9 million at September 30, 2012. Loans funded by Warehouse Purchase Program facilities during the third quarter of 2012 consisted of 59% conforming loans and 41% government loans, with properties located in 49 states. The average turn time on the Warehouse Purchase Program was 19.7 days for September, and the average utilization rate for the quarter was 67%.

The Company maintains a mortgage repurchase liability that reflects management's estimate of losses for loans for which the Company could have repurchase obligations based on historical investor repurchase and indemnification demands and historical loss ratios. Although investors may demand repurchase at any time, the Company's historical demands have mainly occurred within 12 months of the investor purchase. The Company has two anticipated repurchases or indemnifications pending during the nine months ended September 30, 2012, compared to one repurchase and five indemnifications for the same period in 2011. This mortgage repurchase liability, included in "Other Liabilities" in the consolidated balances sheet, was $178,000 at September 30, 2012, compared to $52,000 at December 31, 2011. In 2012, the Company increased the repurchase liability calculation to measure potential future losses. Additions to the liability reduced net gains on mortgage loan origination/sales. Actual losses were $9,000 and $91,000 for the nine months ended September 30, 2012 and 2011, respectively.


Table of Contents

Allowance for Loan Losses and Non-Performing Loans. The allowance for loan losses is maintained to cover losses that are estimated in accordance with U.S. generally accepted accounting principles. It is our estimate of credit losses 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 loss allocations. The historical loss ratio is generally defined as an average percentage of net annual loan losses to loans outstanding. Qualitative loss factors are based on management's judgment of company-specific data and external economic indicators which may not yet be reflective in the historical loss ratios and how this information could impact the Company's specific loan portfolios. The Allowance for Loan Loss Committee sets and adjusts qualitative loss factors by reviewing changes in 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/or classified loans and bankruptcy within the Company's loan portfolio when evaluating qualitative loss factors. Additionally, the Allowance for Loan Loss Committee adjusts qualitative factors periodically to account for the potential impact of external economic factors, including the unemployment rate, housing price, vacancy rates and inventory levels specific to our primary market area.

For the specific component, the allowance for loan losses on individually analyzed impaired loans includes commercial and industrial and one- to four-family and commercial real estate loans where management has concerns about the borrower's ability to repay. Loss estimates include the negative difference, if any, between the current fair value of the collateral or the estimated discounted cash flows and the loan amount due.

We are focused on maintaining our asset quality by applying strong underwriting guidelines to all loans that we originate. Substantially all of our residential mortgage loans are full-documentation, standard "A" type products. We do not offer any sub-prime loan products.

Our non-performing loans, which consist of nonaccrual loans, include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans. 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.

Our non-performing loans to total loans ratio at September 30, 2012, was 1.70%, compared to 1.88% at December 31, 2011. Non-performing loans increased by $5.0 million to $28.1 million at September 30, 2012, from $23.1 million at December 31, 2011. This increase was primarily due to three substandard commercial lines of credit acquired from Highlands totaling $2.9 million that were placed on nonaccrual in the third quarter of 2012. These three loans are reported net of a $1.6 million purchase accounting discount, which we anticipate would offer sufficient coverage in the event of credit deterioration. At September 30, 2012, no purchased credit impaired loans from the Highlands transaction were included in non-performing loans.

Our foreclosed assets, which included one commercial real estate property with a carrying value of $1.5 million, totaled $3.9 million at September 30, 2012, compared to $2.3 million at December 31, 2011. In October 2012, the commercial real estate property was sold for $1.5 million resulting in a $78,000 gain, which will help offset prior value declines recorded in prior periods.

A modified loan is considered a troubled debt restructuring ("TDR") when two conditions are met: 1) the borrower is experiencing financial difficulty and 2) concessions are made by the Company that would not otherwise be considered for a borrower or collateral with similar credit risk characteristics. Modifications to loan terms may include a modification of the contractual interest rate to a below-market rate (even if the modified rate is higher than the original rate), . . .

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