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VPFG > SEC Filings for VPFG > Form 10-Q on 29-Apr-2014All Recent SEC Filings




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.
On November 25, 2013, the Company and LegacyTexas Group, Inc. ("LegacyTexas") announced that they had entered into a definitive merger agreement whereby LegacyTexas will merge into the Company and, immediately thereafter, the Bank will merge into LegacyTexas' subsidiary bank, LegacyTexas Bank. Under the terms of the agreement, the Company will issue 7.85 million shares of the Company's common stock plus approximately $115 million in cash for all the outstanding stock of LegacyTexas. Each LegacyTexas shareholder will have the right to elect to receive either the Company's stock or cash, subject to proration as specified in the merger agreement. The Company and LegacyTexas expect to complete the transaction in the second quarter of 2014, after receipt of regulatory approvals, the approval of the LegacyTexas Group shareholders and the satisfaction of other customary closing conditions.

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 that provide a wide range of interest rates and terms, generally including

savings, money market, term certificate and demand accounts. Our principal objective is to remain an independent, community-oriented financial institution, providing outstanding service and innovative products to customers in our primary market area.

Performance Highlights
Loans held for investment, excluding Warehouse Purchase Program loans, grew $157.7 million, or 7.7%, from December 31, 2013, with commercial loans increasing by $137.9 million, or 8.8%, to $1.70 billion at March 31, 2014.

Net interest margin increased nine basis points from the three months ended March 31, 2013, to 3.73%.

Non-interest-bearing demand deposits increased to a record high of $434.5 million at March 31, 2014, an increase of $23.5 million from December 31, 2013.

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 2013 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 risk profile compared to consumer lending (such as automobile or personal line of credit loans). Commercial real estate and commercial and industrial lending, however, can have higher risk profiles than consumer and one- to four- family residential mortgage loans due to these loans being larger in amount and more susceptible to fluctuations in industry, market and economic conditions. 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 coverage of our best estimate of inherent credit losses in the loan portfolio as of March 31, 2014.

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, adverse conditions specifically related to the security, issuer, or geographic area, 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 or guarantee rating of securities that have an insurance or 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 March 31, 2014 and December 31, 2013 General. Total assets increased by $78.4 million, or 2.2%, to $3.60 billion at March 31, 2014, from $3.53 billion at December 31, 2013, primarily due to an increase of $104.2 million, or 23.7%, in commercial and industrial loans and a $26.9 million, or 2.5%, increase in commercial real estate loans. These increases were partially offset by an $82.6 million, or 12.3%, decrease in Warehouse Purchase Program loans and a $26.0 million, or 4.8%, decrease in the securities portfolio.
Loans. Gross loans increased by $75.1 million, or 2.8%, to $2.80 billion at March 31, 2014, from $2.72 billion at December 31, 2013.

                                                                                     Dollar        Percent
                                       March 31, 2014       December 31, 2013        Change         Change
                                                              (Dollars in thousands)
Commercial real estate               $      1,118,059     $         1,091,200     $   26,859           2.5  %
Commercial and industrial loans:
Commercial                                    517,247                 425,030         92,217          21.7
Warehouse lines of credit                      26,333                  14,400         11,933          82.9
Total commercial and industrial
loans                                         543,580                 439,430        104,150          23.7
Construction and land loans
Commercial construction and land               34,465                  27,619          6,846          24.8
Consumer construction and land                  2,604                   2,628            (24 )        (0.9 )
Total construction and land loans              37,069                  30,247          6,822          22.6
Consumer real estate                          463,857                 441,226         22,631           5.1
Other consumer                                 45,015                  47,799         (2,784 )        (5.8 )
Total consumer loans                          508,872                 489,025         19,847           4.1
Gross loans held for investment,
excluding Warehouse Purchase Program
loans                                       2,207,580               2,049,902        157,678           7.7  %
Warehouse Purchase Program loans              590,904                 673,470        (82,566 )       (12.3 )
Gross loans                          $      2,798,484     $         2,723,372     $   75,112           2.8  %

In the first quarter of 2014, the increase in gross loans was fueled by growth in our commercial lending portfolio, as commercial loans (including commercial real estate, commercial and industrial and commercial construction and land loans) increased a combined $137.9 million, or 8.8%, from December 31, 2013. Our commercial real estate portfolio consists almost exclusively of loans secured by well-established, multi-tenanted commercial real estate properties. Approximately 91% of our commercial real estate loan balances are secured by properties located in Texas. The Company has historically participated in several energy loan transactions, but 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 focuses 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 also include the Bank's full array of commercial services, including Treasury Management and letters of credit. Energy loans, which are reported as commercial and industrial loans, totaled $212.8 million at March 31, 2014, up $46.3 million from $166.5 million at December 31, 2013.

Warehouse Purchase Program loans decreased by $82.6 million, or 12.3%, to $590.9 million at March 31, 2014, from $673.5 million at December 31, 2013. 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. The mortgage banking company has no obligation to offer to sell to us 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 2014 consisted of 56% conforming, 43% government and 1% Home Affordable Refinance Program (HARP) loans, and the number of Warehouse Purchase Program clients totaled 42 at March 31, 2014, compared to 45 at December 31, 2013 and 47 at March 31, 2013.
Prior to the December 31, 2013 reporting period, the Company reported Warehouse Purchase Program loans as held for sale, as the Company believed that was the most meaningful presentation to our financial statement users given that the collection of the loan was based upon the sale of the loan. Effective December 31, 2013, the Company concluded that, under US GAAP, these loans should be accounted for as held for investment. This correction changed the accounting for Warehouse Purchase Program loans from a lower of cost or market accounting method to accounting for the loans under ASC 310, with any credit losses incurred as of the balance sheet date recognized in the allowance for loan losses. As we had not reported any valuation decreases below cost in prior periods and we have experienced no credit losses on these loans, this correction had no impact on net income, comprehensive income, earnings per share or income taxes. Additionally, total assets and shareholders' equity remained unchanged. However, this correction did impact the statement of cash flows by moving cash flows associated with the Warehouse Purchase Program from operating cash flows to investing cash flows.
Consumer real estate loans increased by $22.6 million, or 5.1%, to $463.9 million at March 31, 2014, from $441.2 million at December 31, 2013. 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. Also, the Company originates consumer home equity and home improvement loans.
Allowance for Loan Losses. The allowance for loan losses is maintained to cover losses that are estimated in accordance with US GAAP. It is our estimate of credit losses 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. 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 that 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 loans where management has concerns about the borrower's ability to repay. This impairment analysis includes all loans secured by commercial real estate and all commercial and industrial loans, as well as certain residential real estate loans. All troubled debt restructurings are considered to be impaired, regardless of collateral type or note amount. 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.
Acquired loans are initially recorded at fair value, which includes an estimate of credit losses expected to be realized over the remaining lives of the loans, and therefore no corresponding allowance for loan losses is 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 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. All TDRs are considered to be impaired loans. At March 31, 2014, of our $14.2 million in TDRs, $945,000 were accruing interest and $13.2 million were classified as nonaccrual. Nonaccrual TDRs included $7.4 million attributable to five commercial real estate loans, all of which were performing in accordance with their restructured terms at March 31, 2014.
Non-performing loans to total loans held for investment, excluding Warehouse Purchase Program loans, was 1.03% at March 31, 2014, compared to 1.08% at December 31, 2013. Including Warehouse Purchase Program loans, non-performing loans to total loans held for investment was 0.82% at March 31, 2014, compared to 0.81% at December 31, 2013. Non-performing loans increased by $705,000 to $22.8 million at March 31, 2014, from $22.1 million at December 31, 2013. This increase was primarily attributable to a commercial and industrial loan totaling $2.0 million and a commercial real estate loan totaling $558,000, both of which were placed on nonaccrual status during the first quarter of 2014. The $2.0 million commercial and industrial loan, which is not past due, was placed on nonaccrual solely due to its designation as a troubled debt restructuring. The $558,000 commercial real estate loan is currently past due, but as a result of our collateral position in the loan, no specific reserve has been allocated to this loan. The increase in non-performing loans during the first quarter of 2014 was partially offset by a $609,000 decrease in non-performing consumer real estate loans.
Our allowance for loan losses was $19.4 million at March 31, 2014 and December 31, 2013, or 0.69% of total loans held for investment (including Warehouse Purchase Program loans) at March 31, 2014, compared to 0.71% at December 31, 2013. Our allowance for loan losses to non-performing loans was 84.99% at March 31, 2014, compared to 87.50% at December 31, 2013.
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 Company will sustain some loss if the deficiencies are not corrected. Assets classified as "doubtful" have all of the weaknesses of those classified as "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 should be considered as classified. The total amount of classified assets represented 8.0% of our total equity and 1.2% of our total assets at March 31, 2014, compared to 9.1% of our total equity and 1.4% of our total assets at December 31, 2013. The aggregate amount of classified assets at the dates indicated was as follows:

                         March 31, 2014     December 31, 2013
                                (Dollars in thousands)
Doubtful                $         4,686    $             5,307
Substandard                      38,857                 43,827
Total classified loans           43,543                 49,134
Foreclosed assets                   387                    480
Total classified assets $        43,930    $            49,614

The Company has potential problem loans, considered "other loans of concern," that are currently performing and do not meet the criteria for impairment, but where there is the distinct possibility that we could sustain some loss if credit deficiencies are not corrected. These possible credit problems may result in the future inclusion of these loans in the non-performing asset categories and consisted of $13.2 million in loans that were classified as "substandard" but were still accruing

interest and were not considered impaired at March 31, 2014. These loans have been considered in management's analysis of potential loan losses. Securities. Our securities portfolio decreased by $26.0 million, or 4.8%, to $516.6 million at March 31, 2014, from $542.6 million at December 31, 2013. The decrease in our securities portfolio primarily resulted from paydowns and maturities totaling $312.7 million, which were partially offset by purchases totaling $286.9 million. The majority of these purchases were done for tax strategy purposes. The proceeds from the securities paydowns were maintained in cash accounts to build liquidity in preparation for the merger with LegacyTexas. Deposits. Total deposits increased by $104.6 million, or 4.6%, to $2.37 billion at March 31, 2014, from $2.26 billion at December 31, 2013.

                                                                         Dollar     Percent
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