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

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

Form 10-Q for VIEWPOINT FINANCIAL GROUP INC.


30-Jul-2013

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.

Overview
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 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
Solid commercial loan growth continues, driving shift in earning asset revenue: Our commercial loan portfolio, consisting of commercial real estate and commercial and industrial loans, totaled $1.3 billion at June 30, 2013, up $199.3 million, or 17.8%, from December 31, 2012. Interest income on the commercial loan portfolio for the six months ended June 30, 2013 increased $5.7 million, or 27.8%, from the six months ended June 30, 2012, representing a shift in earning asset revenue. Commercial loans generated 48.8% of the Company's interest income earned during the six months ended June 30, 2013, compared to 37.7% of interest income earned during the six months ended June 30, 2012.

Net interest margin increased by ten basis points compared to the second quarter of 2012: Improvements in the earning asset mix and lower deposit and borrowing rates drove a ten basis point increase in the net interest margin to 3.72% for the three months ended June 30, 2013, compared to 3.62% for the same period in 2012. Compared to the six months ended June 30, 2012, the net interest margin increased by 21 basis points, from 3.47% for the six months ended June 30, 2012, to 3.68% for the six months ended June 30, 2013.

Asset quality improved, positively impacting earnings: During the second quarter of 2013, two commercial real estate loans that were classified as troubled debt restructurings were paid in full, resulting in the recovery of $480,000 of accumulated interest, as well as the recapture of $91,000 in allowance for loan losses that was previously allocated to these two loans. These transactions reduced troubled debt restructurings by $5.9 million, which includes a $2.5 million reduction in non-performing loans.

Increase in average balance of Warehouse Purchase Program loans led to $653,000 increase in interest income: The average balance of Warehouse Purchase Program loans for the six months ended June 30, 2013 totaled $747.0 million, up $96.9 million from $650.1 million for the six months ended June 30, 2012. (Loans held for sale for the six months ended June 30, 2012, included $21.3 million in loans held for sale from ViewPoint Mortgage ("VPM") prior to its sale in the third quarter of 2012.) This increase in average balances led interest income earned on loans held for sale to increase by $653,000 for the six months ended June 30, 2013, compared to the same period last year.

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, consumer real estate lending, consisting of loans and lines of credit secured by one- to four-family residential properties, has a lower credit risk profile compared to other 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 loans due to these loans being larger in amount and non-homogeneous 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 June 30, 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 or the guarantee rating of securities that have a guarantee 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 June 30, 2013 and December 31, 2012 General. Total assets decreased by $68.6 million, or 1.9%, to $3.59 billion at June 30, 2013, from $3.66 billion at December 31, 2012, primarily due to a $156.5 million, or 14.8%, decrease in loans held for sale, a $54.9 million, or 9.6%, decline in consumer loans and a $28.8 million, or 4.4%, decrease in the securities portfolio. This decline was partially offset by an increase of $164.8 million, or 19.6%, in commercial real estate loans and a $34.5 million, or 12.4%, increase in commercial and industrial loans.
Loans. Gross loans (including $904.2 million in mortgage loans held for sale at June 30, 2013) decreased by $12.1 million, or 0.4%, to $2.74 billion at June 30, 2013, from $2.75 billion at December 31, 2012.

                                                                                    Dollar        Percent
                                        June 30, 2013       December 31, 2012       Change        Change
                                                              (Dollars in thousands)

Commercial real estate                $     1,004,719     $           839,908     $  164,811         19.62  %

Commercial and industrial loans:
Commercial                                    288,054                 245,799         42,255         17.19
Warehouse lines of credit                      24,977                  32,726         (7,749 )      (23.68 )
Total commercial and industrial loans         313,031                 278,525         34,506         12.39

Consumer:
Consumer real estate                          465,055                 513,256        (48,201 )       (9.39 )
Other consumer                                 52,382                  59,080         (6,698 )      (11.34 )
Total consumer loans                          517,437                 572,336        (54,899 )       (9.59 )

Gross loans held for investment             1,835,187               1,690,769        144,418          8.54

Loans held for sale                           904,228               1,060,720       (156,492 )      (14.75 )

Gross loans                           $     2,739,415     $         2,751,489     $  (12,074 )       (0.44 )%

The areas of growth in our loan portfolio illustrate the advancement in our commercial banking strategy, as commercial loans (including commercial real estate and commercial and industrial) have increased a combined $199.3 million from December 31, 2012. The commercial real estate portfolio increased by $164.8 million, or 19.6%, to $1.0 billion at June 30, 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 properties. 90% of our commercial real estate loan balances


are secured by properties located in Texas. Commercial and industrial ("C&I") loans increased by $34.5 million, or 12.4%, to $313.0 million at June 30, 2013, from $278.5 million at December 31, 2012. Oil and gas loans, which are included in our commercial and industrial loans, totaled $57.5 million at June 30, 2013. To further develop this line of business, in May 2013, the Company announced the formation of a new energy lending group. The Energy Finance group will focus on providing loans to private and public oil and gas companies throughout the United States, with an emphasis on reserve-based transactions for development drilling, capital expenditures against oil and gas reserves, and acquisitions of oil and gas reserves. The group's offerings will also include the Bank's full array of commercial services, including Treasury Management and Letters of Credit. Warehouse lines of credit in the C&I category decreased by $7.7 million, or 23.7%, from $32.7 million at December 31, 2012, to $25.0 million at June 30, 2013.

Loans held for sale decreased by $156.5 million, or 14.8%, to $904.2 million at June 30, 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 second quarter of 2013 consisted of 60% conforming, 38% government and 2% Home Affordable Refinance Program (HARP) loans, and the number of Warehouse Purchase Program clients totaled 50 at June 30, 2013, compared to 43 at December 31, 2012 and 39 at June 30, 2012.

Consumer real estate loans decreased by $48.2 million, or 9.4%, to $465.1 million at June 30, 2013, from $513.3 million at December 31, 2012. The Company does not originate one- to four- family real estate loans due to the sale of ViewPoint Mortgage in the third quarter of 2012, 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, market, industry or business 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. 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 June 30, 2013, of our $11.9 million in TDRs, $1.0 million were accruing interest and $11.0 million were classified as nonaccrual. Nonaccrual TDRs included $8.2 million attributable to five commercial real estate loans, $4.8 million of which were performing in accordance with their restructured terms at June 30, 2013. During the second quarter of 2013, two commercial real estate loans that were classified as troubled debt restructurings were paid in full, resulting in the recovery of $480,000 of accumulated interest, as well as the recapture of $91,000 in allowance for loan losses that was previously allocated to these two loans. These transactions reduced troubled debt restructurings by $5.9 million, which includes a $2.5 million reduction in non-performing loans.
Non-performing loans to total loans at June 30, 2013, was 1.30%, compared to 1.61% at December 31, 2012. Non-performing loans decreased by $3.4 million to $23.8 million at June 30, 2013, from $27.2 million at December 31, 2012. This decrease was primarily due to a $2.5 million decrease in commercial real estate non-performing loans attributable to one of the loans paid in full described above, as well as a $1.8 million decrease in commercial real estate non-performing loans as a result of two loans being charged-off during the second quarter of 2013. These two charged-off loans had $941,000 of reserves allocated to them, which resulted in a net reduction of reserves totaling $225,000.
Our allowance for loan losses at June 30, 2013, was $19.3 million, or 1.05% 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 was 81.00% at June 30, 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 June 30, 2013, there was an aggregate of $35.5 million of these potential problem loans, an increase of $14.7 million from the $20.8 million reported at December 31, 2012.
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 8.1% of our equity capital and 1.2% of our total assets at June 30, 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:


                         June 30, 2013      December 31, 2012
                                (Dollars in thousands)
Doubtful                $         5,101    $             5,334
Substandard                      37,478                 50,351
Total classified loans           42,579                 55,685
Foreclosed assets                   557                  1,901
Total classified assets $        43,136    $            57,586

Securities. Our securities portfolio decreased by $28.8 million, or 4.4%, to $618.8 million at June 30, 2013, from $647.6 million at December 31, 2012. The decrease in our securities portfolio primarily resulted from paydowns and maturities totaling $560.0 million and sales of $10.6 million, which were partially offset by purchases totaling $547.9 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 $11.4 million, or 0.5%, to $2.19 billion at June 30, 2013, from $2.18 billion at December 31, 2012.

                                                                        Dollar     Percent
                             June 30, 2013      December 31, 2012       Change      Change
                                                (Dollars in thousands)
Non-interest-bearing demand $       384,836    $           357,800    $ 27,036       7.6  %
Interest-bearing demand             464,262                488,748     (24,486 )    (5.0 )
Savings and money market            887,082                880,924       6,158       0.7
Time                                453,000                450,334       2,666       0.6
Total deposits              $     2,189,180    $         2,177,806    $ 11,374       0.5  %

The increase in deposits was primarily due to a $27.0 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 checking . . .

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