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VPFG > SEC Filings for VPFG > Form 10-Q on 30-Apr-2013All Recent SEC Filings

Show all filings for VIEWPOINT FINANCIAL GROUP INC. | Request a Trial to NEW EDGAR Online Pro



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," "we," or "our") 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; the industry-wide decline in mortgage production; 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 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; changes in regulatory policy, including how certain assets are risk-weighted; 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 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 that may be made to any forward-looking statements to reflect events or circumstances occurring after the date of such statements.

The Company, a Maryland corporation, is a full stock holding company for its wholly owned subsidiary, ViewPoint Bank, N.A. (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. or ViewPoint Bank, N.A. , as the context requires. The Company is regulated by the Board of Governors of the Federal Reserve System ("FRB") and the Bank is regulated by the Office of the Comptroller of the Currency ("OCC") with certain back-up oversight by the Federal Deposit Insurance Corporation ("FDIC"). The Bank is required to have certain reserves and stock set by the FRB 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 commercial real estate loans, secured and unsecured commercial and industrial loans, as well as permanent loans secured by first and second mortgages on owner-occupied, one- to four-family residences and consumer loans. Additionally, the Warehouse Purchase Program allows mortgage banking company customers to close one- to four-family real estate loans in their own name and manage its cash flow needs until the loans are sold to investors. We also offer brokerage services for the purchase and sale of non-deposit investment and insurance products through a third party brokerage arrangement. Our operating revenues are derived principally from interest earned on interest-earning assets including loans and investment securities and service charges and fees on deposits and other account services. Our primary sources of funds are deposits, FHLB advances and other borrowings, and payments received on loans and securities. We offer a variety of deposit accounts, generally including savings, money market, term certificate and demand accounts, that provide a wide range of interest rates and terms.

Performance Highlights
Continued success in commercial loan growth strategy: Our commercial loan portfolio, consisting of commercial real estate and commercial and industrial loans, provided solid growth as we continue to shift our focus to commercial lending. The commercial loan portfolio totaled $1.20 billion at March 31, 2013, up $81.6 million, or 7.3%, from December 31, 2012.

Net interest margin increased by 34 basis points compared to first quarter 2012: Due to changes in the earning asset mix and lower deposit and borrowing rates, the net interest margin increased by 34 basis points to 3.64% for the three months ended March 31, 2013, compared to 3.30% for the same period in 2012.

Net charge-offs decline: Net charge-offs totaled $292,000 for the first quarter of 2013, down from $1.8 million and $359,000, respectively, for the quarters ended December 31, 2012 and March 31, 2012.

Net income increased by $986,000, or 13.9%: Net income for the three months ended March 31, 2013 was $8.1 million, an increase of $986,000, or 13.9%, from net income of $7.1 million for the three months ended March 31, 2012. The increase in net income was driven by an increase in net interest income and was partially offset by higher non-interest expense and lower non-interest income. Basic and diluted earnings per share for the three months ended March 31, 2013, were $0.21, a $0.01 decrease from $0.22 for the three months ended March 31, 2012.

Critical Accounting Estimates
Certain of our 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. 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 are discussed in detail in Note 1 of the Notes to Consolidated Financial Statements contained in Item 8 of our 2012 Annual Report on Form 10-K.
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 March 31, 2013.

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 has been less than 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 fair value. 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. Comparison of Financial Condition at March 31, 2013 and December 31, 2012 General. Total assets decreased by $289.4 million, or 7.9%, to $3.37 billion at March 31, 2013, from $3.66 billion at December 31, 2012, primarily due to a $303.2 million, or 28.6%, decrease in loans held for sale and a $26.6 million, or 4.6%, decline in consumer loans. The decline in loans held for sale and consumer loans was partially offset by an increase of $57.6 million, or 6.9%, in commercial real estate loans, as well as a $23.9 million, or 8.6%, increase in commercial and industrial loans.
Loans. Gross loans (including $757.5 million in mortgage loans held for sale at March 31, 2013) decreased by $248.3 million, or 9.0%, to $2.50 billion at March 31, 2013, from $2.75 billion at December 31, 2012.

                                                                                     Dollar        Percent
                                        March 31, 2013       December 31, 2012       Change        Change
                                                               (Dollars in thousands)

Commercial real estate                $        897,534     $           839,908     $   57,626          6.86  %

Commercial and industrial loans:
Commercial                                     271,605                 245,799         25,806         10.50
Warehouse lines of credit                       30,861                  32,726         (1,865 )       (5.70 )
Total commercial and industrial loans          302,466                 278,525         23,941          8.60

One- to four-family real estate                358,823                 378,255        (19,432 )       (5.14 )
Home equity/home improvement                   131,776                 135,001         (3,225 )       (2.39 )
Other consumer                                  55,138                  59,080         (3,942 )       (6.67 )
Total consumer loans                           545,737                 572,336        (26,599 )       (4.65 )

Gross loans held for investment              1,745,737               1,690,769         54,968          3.25

Loans held for sale                            757,472               1,060,720       (303,248 )      (28.59 )

Gross loans                           $      2,503,209     $         2,751,489     $ (248,280 )       (9.02 )%

The commercial real estate portfolio increased by $57.6 million, or 6.9%, to $897.5 million at March 31, 2013, from $839.9 million at December 31, 2012. 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. Commercial and industrial ("C&I") loans increased by $23.9 million, or 8.6%, to $302.5 million at March 31, 2013, from $278.5 million at December 31, 2012. In 2013, the Company will continue to emphasize growth in the C&I line of business, which is supported by the experienced lenders both from the Highlands acquisition and new hires added in 2012. Warehouse lines of credit decreased by $1.9 million, or 5.7%, from $32.7 million at December 31, 2012, to $30.9 million at March 31, 2013.

Loans held for sale decreased by $303.2 million, or 28.6%, to $757.5 million at March 31, 2013, from $1.06 billion at December 31, 2012, and 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 participation interests. The mortgage banking company closes mortgage loans consistent with underwriting standards established by approved

investors and once the loan closes, the participation interest is delivered by the Company to the investor selected by the originator and approved by the Company. Loans funded by the Warehouse Purchase Program during the first quarter of 2013 consisted of 59% conforming, 38% government and 3% Home Affordable Refinance Program (HARP) loans, and the number of Warehouse Purchase Program clients totaled 47 at March 31, 2013, compared to 43 at December 31, 2012 and 38 at March 31, 2012. Compared to the first quarter of 2012, Warehouse Purchase Program balances increased by $44.3 million.

One- to four-family real estate loans decreased by $19.4 million, or 5.1%, to $358.8 million at March 31, 2013, from $378.3 million at December 31, 2012. The Company does not originate one- to four- family real estate loans, but does periodically purchase these loans from correspondents on both a servicing retained and servicing released basis.
Allowance for Loan Losses. 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.
Loans acquired from Highlands were initially recorded at fair value, which included an estimate of credit losses expected to be realized over the remaining lives of the loans, and therefore no corresponding allowance for loan losses was recorded for these loans at acquisition. Methods utilized to estimate the required allowance for loan losses for acquired loans not deemed credit-impaired at acquisition are similar to originated loans; however, the estimate of loss is based on the unpaid principal balance less the remaining purchase discount. Purchased credit impaired (PCI) loans, which totaled $10.6 million and $12.8 million at March 31, 2013 and December 31, 2012, respectively, are not considered nonperforming loans, and accordingly, are not included in the non-performing loans to total loans ratio as a numerator, but are included in total loans reflected in the denominator. The result is a downward trend in the ratio when compared to prior periods, assuming all other factors stay the same. Similarly, other asset quality ratios, such as the allowance for loan losses to total loans ratio will reflect a downward trend, assuming all other factors stay the same, due to the impact of PCI loans on the denominator with no corresponding impact in the numerator.
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. 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), forgiveness of accrued interest, forgiveness of a portion of principal, an extended repayment period or a deed in lieu of foreclosure or other transfer of assets other than cash to fully or partially satisfy a debt. The Company's policy is to place all TDRs on nonaccrual for a minimum period of six months. Loans qualify for a return to accrual status once they have demonstrated performance with the restructured terms of the loan agreement for a minimum of six months and the collection of principal and interest under the revised terms is deemed probable. At March 31, 2013, of our $18.7 million in TDRs, $4.6 million were accruing interest and

$14.1 million were classified as nonaccrual. Nonaccrual TDRs included $11.8 million attributable to seven commercial real estate loans, all of which were performing in accordance with their restructured terms at March 31, 2013. Our non-performing loans to total loans ratio at March 31, 2013, was 1.59%, compared to 1.61% at December 31, 2012. Non-performing loans increased by $518,000 to $27.7 million at March 31, 2013, from $27.2 million at December 31, 2012. This increase was primarily due to a $1.4 million increase in C&I non-performing loans, which was driven by two C&I loans acquired from Highlands totaling $1.8 million that were moved to non-performing status during the first quarter of 2013 (neither loan is considered purchased credit impaired). Our allowance for loan losses at March 31, 2013, was $18.6 million, or 1.07% of total loans, compared to $18.1 million, or 1.07% of total loans, at December 31, 2012. Our allowance for loan losses to non-performing loans ratio was 67.25% at March 31, 2013, compared to 66.36% as of December 31, 2012.
Other Loans of Concern. The Company has other potential problem loans that are currently performing and do not meet the criteria for impairment, but where some concern exists. These possible credit problems may result in the future inclusion of these items in the non-performing asset categories. These loans consist of residential and commercial real estate and commercial and industrial loans that are classified as "special mention," meaning that these loans have potential weaknesses that deserve management's close attention. These loans are not adversely classified according to regulatory classifications and do not expose the Company to sufficient risk to warrant adverse classification. These loans have been considered in management's determination of our allowance for loan losses. As of March 31, 2013, there was an aggregate of $20.8 million of these potential problem loans, no change from the $20.8 million at December 31, 2012. Of the $20.8 million, three commercial real estate loans totaling $14.6 million were not delinquent at March 31, 2013, but are being monitored due to circumstances such as low occupancy rate, low debt service coverage or prior payment history problems.
Classified Assets. Loans and other assets, such as securities and foreclosed assets that are considered by management to be of lesser quality, are classified as "substandard," "doubtful" or "loss." An asset is considered "substandard" if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. "Substandard" assets include those characterized by the distinct possibility that the insured institution will sustain some loss if the deficiencies are not corrected. Assets classified as "doubtful" have all of the weaknesses of those classified "substandard," with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. Assets classified as "loss" are those considered uncollectible and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted. We regularly review the assets in our portfolio to determine whether any assets require classification. The total amount of assets classified represented 10.2% of our equity capital and 1.6% of our total assets at March 31, 2013, compared to 11.1% of our equity capital and 1.6% of our total assets at December 31, 2012. The aggregate amount of classified assets at the dates indicated was as follows:

                         March 31, 2013     December 31, 2012
                                (Dollars in thousands)
Loss                    $             -    $                 -
Doubtful                          5,558                  5,334
Substandard                      47,229                 50,351
Total classified loans           52,787                 55,685
Foreclosed assets                 1,505                  1,901
Total classified assets $        54,292    $            57,586

Securities. Our securities portfolio decreased by $2.2 million, or 0.33%, to $645.4 million at March 31, 2013, from $647.6 million at December 31, 2012. The decrease in our securities portfolio primarily resulted from paydowns and maturities totaling $157.4 million and sales of $10.6 million, which were partially offset by purchases totaling $167.3 million. The majority of these purchases were done for tax strategy purposes. The securities were sold as their increasing prepayment speeds were no longer consistent with portfolio requirements.

Deposits. Total deposits increased by $35.3 million, or 1.6%, to $2.21 billion at March 31, 2013, from $2.18 billion at December 31, 2012.

                                                                         Dollar     Percent
                             March 31, 2013      December 31, 2012       Change      Change
                                                 (Dollars in thousands)
Non-interest-bearing demand $        392,759    $           357,800    $ 34,959       9.8  %
Interest-bearing demand              481,966                488,748      (6,782 )    (1.4 )
Savings and money market             888,874                880,924       7,950       0.9
Time                                 449,491                450,334        (843 )    (0.2 )
Total deposits              $      2,213,090    $         2,177,806    $ 35,284       1.6  %

The increase in deposits was primarily due to a $35.0 million increase in non-interest-bearing demand deposits compared to December 31, 2012, which was driven by higher balances in commercial and Warehouse Purchase Program products, and an $8.0 million increase in savings and money market deposits. These increases were partially offset by a $6.8 million decline in interest-bearing demand deposits. Time deposits remained relatively flat compared to December 31, 2012, decreasing by $843,000.
Borrowings. FHLB advances, net of a $2.9 million restructuring prepayment penalty, decreased by $328.0 million, or 36.8%, to $564.2 million at March 31, 2013, from $892.2 million at December 31, 2012. The outstanding balance of FHLB advances decreased due to a lower Warehouse Purchase Program balance at March 31, 2013, of which a portion was strategically funded with short term advances. At March 31, 2013, the Company was eligible to borrow an additional $1.03 billion from the FHLB, which includes $558.9 million of the blanket lien on Warehouse Purchase Program loans. The FHLB is currently reviewing the eligibility of inclusion of Warehouse Purchase Program loans under the blanket lien due the risk-weighting change from 50% to 100%. If the FHLB determines that Warehouse Purchase Program loans are ineligible for inclusion under the blanket lien, the Company's borrowing availability with FHLB at March 31, 2013, would have been $492.4 million. See "Capital Resources." Additionally, the Company has . . .

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