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Table of Contents

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2011
OR
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission file number 001-34737
VIEWPOINT FINANCIAL GROUP, INC.
(Exact name of registrant as specified in its charter)
         
Maryland   6035   27-2176993
       
(State or other jurisdiction of   (Primary Standard Industrial   (I.R.S. Employer Identification No.)
incorporation or organization)   Classification Code Number)    
1309 W. 15th Street, Plano, Texas 75075
(972) 578-5000
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
             
Large accelerated filer o   Accelerated filer o   Non-accelerated filer þ   Smaller reporting company o
        (Do not check if a smaller reporting company)    
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
     
Class: Common Stock   Shares Outstanding as of July 26, 2011: 34,839,491
 
 

 

 


 

         
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 Exhibit 31.1
 Exhibit 31.2
 Exhibit 32
 EX-101 INSTANCE DOCUMENT
 EX-101 SCHEMA DOCUMENT
 EX-101 CALCULATION LINKBASE DOCUMENT
 EX-101 LABELS LINKBASE DOCUMENT
 EX-101 PRESENTATION LINKBASE DOCUMENT
 EX-101 DEFINITION LINKBASE DOCUMENT

 

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PART 1 — FINANCIAL INFORMATION
Item 1. Financial Statements
VIEWPOINT FINANCIAL GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands, except share data)
                 
    June 30,     December 31,  
    2011     2010  
    (unaudited)        
ASSETS
               
Cash and due from financial institutions
  $ 17,485     $ 16,465  
Short-term interest-bearing deposits in other financial institutions
    33,340       52,185  
 
           
Total cash and cash equivalents
    50,825       68,650  
Securities available for sale, at fair value
    683,849       717,497  
Securities held to maturity (fair value: June 30, 2011 — $557,314, December 31, 2010 — $434,296)
    544,976       432,519  
Loans held for sale (includes $6,324 and $16,877 carried at fair value at June 30, 2011 and December 31, 2010)
    420,617       491,985  
Loans held for investment (net of allowance for loan losses of $16,159 at June 30, 2011 and $14,847 at December 31, 2010)
    1,130,277       1,092,114  
FHLB stock, at cost
    18,352       20,569  
Bank-owned life insurance
    28,786       28,501  
Foreclosed assets, net
    2,377       2,679  
Premises and equipment, net
    48,007       48,731  
Goodwill
    818       1,089  
Accrued interest receivable
    8,478       9,248  
Prepaid FDIC assessment
    5,548       6,606  
Other assets
    20,972       21,807  
 
           
Total assets
  $ 2,963,882     $ 2,941,995  
 
           
 
               
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
Deposits
               
Non-interest-bearing demand
  $ 194,704     $ 201,998  
Interest-bearing demand
    482,552       438,719  
Savings and money market
    741,723       711,911  
Time
    651,915       664,922  
 
           
Total deposits
    2,070,894       2,017,550  
FHLB advances (net of prepayment penalty of $4,740 at June 30, 2011 and $5,259 at December 31, 2010)
    406,602       461,219  
Repurchase agreement
    25,000       25,000  
Other borrowings
    10,000       10,000  
Accrued interest payable
    1,455       1,541  
Other liabilities
    42,925       30,096  
 
           
Total liabilities
    2,556,876       2,545,406  
 
               
Commitments and contingent liabilities
           
 
               
Shareholders’ equity
               
Common stock, $.01 par value; 90,000,000 shares authorized; 34,839,491 shares issued — June 30, 2011 and December 31, 2010
    349       349  
Additional paid-in capital
    290,975       289,591  
Retained earnings
    133,052       125,125  
Accumulated other comprehensive income, net
    2,746       2,373  
Unearned Employee Stock Ownership Plan (ESOP) shares; 2,194,331 shares at June 30, 2011 and 2,286,428 shares at December 31, 2010
    (20,116 )     (20,849 )
 
           
Total shareholders’ equity
    407,006       396,589  
 
           
Total liabilities and shareholders’ equity
  $ 2,963,882     $ 2,941,995  
 
           
See accompanying notes to unaudited consolidated financial statements.

 

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VIEWPOINT FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Dollar amounts in thousands, except per share data)
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2011     2010     2011     2010  
    (unaudited)     (unaudited)  
Interest and dividend income
                               
Loans, including fees
  $ 20,833     $ 21,643     $ 41,294     $ 41,969  
Taxable securities
    6,639       5,564       13,507       10,986  
Nontaxable securities
    473       367       946       663  
Interest-bearing deposits in other financial institutions
    28       129       100       277  
FHLB stock
    13       15       34       32  
 
                       
 
    27,986       27,718       55,881       53,927  
Interest expense
                               
Deposits
    6,260       7,889       12,343       15,518  
FHLB advances
    2,407       3,022       4,893       6,161  
Repurchase agreement
    204       204       405       405  
Other borrowings
    150       150       298       298  
 
                       
 
    9,021       11,265       17,939       22,382  
 
                       
 
                               
Net interest income
    18,965       16,453       37,942       31,545  
Provision for loan losses
    1,065       1,888       2,160       3,034  
 
                       
Net interest income after provision for loan losses
    17,900       14,565       35,782       28,511  
 
                       
 
                               
Non-interest income
                               
Service charges and fees
    4,721       4,724       9,368       9,144  
Other charges and fees
    225       170       400       338  
Net gain on sale of mortgage loans
    1,879       3,165       3,828       5,820  
Bank-owned life insurance income
    167       112       285       170  
Gain on sale of available for sale securities
                3,415        
Gain (loss) on sale and disposition of assets
    (6 )     (228 )     (216 )     (341 )
Impairment of goodwill
    (271 )           (271 )      
Other
    921       226       1,294       594  
 
                       
 
    7,636       8,169       18,103       15,725  
Non-interest expense
                               
Salaries and employee benefits
    11,542       11,450       23,396       22,633  
Advertising
    510       321       866       598  
Occupancy and equipment
    1,399       1,458       2,822       2,947  
Outside professional services
    704       454       1,357       943  
Regulatory assessments
    498       795       1,457       1,590  
Data processing
    1,129       1,043       2,198       2,045  
Office operations
    1,477       1,433       2,931       2,879  
Other
    1,009       1,054       2,102       1,885  
 
                       
 
    18,268       18,008       37,129       35,520  
 
                               
Income before income tax expense
    7,268       4,726       16,756       8,716  
Income tax expense
    2,411       1,530       5,345       2,815  
 
                       
 
                               
Net income
  $ 4,857     $ 3,196     $ 11,411     $ 5,901  
 
                       
Earnings per share:
                               
Basic
  $ 0.15     $ 0.11     $ 0.35     $ 0.21  
 
                       
Diluted
  $ 0.15     $ 0.11     $ 0.35     $ 0.21  
 
                       
See accompanying notes to unaudited consolidated financial statements.

 

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VIEWPOINT FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(Dollar amounts in thousands)
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2011     2010     2011     2010  
 
                               
Net income
  $ 4,857     $ 3,196     $ 11,411     $ 5,901  
 
                               
Change in unrealized gains on securities available for sale
    4,672       2,005       3,995       1,856  
Reclassification of amount realized through sale of securities
                (3,415 )      
Tax effect
    (1,666 )     (695 )     (207 )     (643 )
 
                       
Other comprehensive income, net of tax
    3,006       1,310       373       1,213  
 
                       
 
                               
Comprehensive income
  $ 7,863     $ 4,506     $ 11,784     $ 7,114  
 
                       
See accompanying notes to unaudited consolidated financial statements.

 

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VIEWPOINT FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Unaudited)
(Dollar amounts in thousands, except share and per share data)
                                                         
                            Accumulated                      
            Additional             Other     Unearned             Total  
    Common     Paid-In     Retained     Comprehensive     ESOP             Shareholders’  
For the six months ended June 30, 2010   Stock     Capital     Earnings     Income (Loss)     Shares     Treasury Stock     Equity  
Balance at January 1, 2010
  $ 305     $ 118,254     $ 111,188     $ 3,802     $ (6,159 )   $ (21,708 )   $ 205,682  
ESOP shares earned, 65,621 shares
          257                   469             726  
Share-based compensation expense
          925                               925  
Adjustment to deferred tax asset for difference between fair value of vested restricted stock and expense booked
          (86 )                             (86 )
Treasury stock purchased at cost, 25,634 shares
                                  (407 )     (407 )
Dividends declared ($0.08 per share)
                (1,074 )                       (1,074 )
Comprehensive income:
                                                       
Net income
                5,901                         5,901  
Change in unrealized gains (losses) on securities available for sale, net of reclassifications and taxes
                      1,213                   1,213  
 
                                         
Total comprehensive income
                                                    7,114  
 
                                                     
Balance at June 30, 2010
  $ 305     $ 119,350     $ 116,015     $ 5,015     $ (5,690 )   $ (22,115 )   $ 212,880  
 
                                         
For the six months ended June 30, 2011
                                                       
Balance at January 1, 2011
  $ 349     $ 289,591     $ 125,125     $ 2,373     $ (20,849 )   $     $ 396,589  
ESOP shares earned, 92,097 shares
          447                   733             1,180  
Share-based compensation expense
          937                               937  
Dividends declared ($0.10 per share)
                (3,484 )                       (3,484 )
Comprehensive income:
                                                       
Net income
                11,411                         11,411  
Change in unrealized gains (losses) on securities available for sale, net of reclassifications and taxes
                      373                   373  
 
                                         
Total comprehensive income
                                                    11,784  
 
                                                     
Balance at June 30, 2011
  $ 349     $ 290,975     $ 133,052     $ 2,746     $ (20,116 )   $     $ 407,006  
 
                                         
See accompanying notes to unaudited consolidated financial statements.

 

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VIEWPOINT FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollar amounts in thousands)
                 
    Six Months Ended  
    June 30,  
    2011     2010  
Operating activities
               
Net income
  $ 11,411     $ 5,901  
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
               
Provision for loan losses
    2,160       3,034  
Depreciation and amortization
    1,756       1,807  
Deferred tax expense (benefit)
    140       (11 )
Premium amortization and accretion of securities, net
    2,321       1,918  
Gain on sale of available for sale securities
    (3,415 )      
ESOP compensation expense
    1,180       726  
Share-based compensation expense
    937       925  
Net gain on loans held for sale
    (3,828 )     (5,820 )
Loans originated or purchased for sale
    (3,404,976 )     (3,209,231 )
Proceeds from sale of loans held for sale
    3,480,172       3,051,624  
FHLB stock dividends
    (34 )     (32 )
Increase in bank-owned life insurance
    (285 )     (170 )
Loss on sale and disposition of assets
    72       525  
Impairment of goodwill
    271        
Net change in deferred loan fees
    (319 )     (272 )
Net change in accrued interest receivable
    770       (796 )
Net change in other assets
    1,829       (713 )
Net change in other liabilities
    12,536       7,400  
 
           
Net cash provided by (used in) operating activities
    102,698       (143,185 )
Investing activities
               
Available-for-sale securities:
               
Maturities, prepayments and calls
    72,671       121,927  
Purchases
    (129,232 )     (239,315 )
Proceeds from sale of securities
    93,008        
Held-to-maturity securities:
               
Maturities, prepayments and calls
    41,678       30,511  
Purchases
    (155,260 )     (56,806 )
Net change in loans
    (40,525 )     (1,854 )
Redemption (purchase) of FHLB stock
    2,251       (5,505 )
Purchases of premises and equipment
    (1,039 )     (899 )
Proceeds from sale of assets
    682       1,864  
 
           
Net cash (used in) investing activities
    (115,766 )     (150,077 )
Financing activities
               
Net change in deposits
    53,344       152,413  
Proceeds from FHLB advances
    153,000       157,000  
Repayments on FHLB advances
    (207,617 )     (24,669 )
Proceeds from Stock Subscriptions
          85,615  
Payment of dividends
    (3,484 )     (1,074 )
Treasury stock purchased
          (407 )
 
           
Net cash provided by (used in) financing activities
    (4,757 )     368,878  
 
           
Net change in cash and cash equivalents
    (17,825 )     75,616  
Beginning cash and cash equivalents
    68,650       55,470  
 
           
Ending cash and cash equivalents
  $ 50,825     $ 131,086  
 
           
Supplemental cash flow information:
               
Interest paid
  $ 18,025     $ 22,382  
Income taxes paid
  $ 5,880     $ 1,900  
Supplemental noncash disclosures:
               
Transfers from loans to other real estate owned
  $ 521     $ 3,110  
See accompanying notes to unaudited consolidated financial statements.

 

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VIEWPOINT FINANCIAL GROUP, INC.
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)
1. Basis of Financial Statement Presentation
The accompanying consolidated financial statements of ViewPoint Financial Group, Inc. (the “Company”) have been prepared in accordance with U.S. generally accepted accounting principles and with the rules and regulations of the Securities and Exchange Commission for interim financial reporting. Accordingly, they do not include all of the information and footnotes required for complete financial statements. In the opinion of management, all normal and recurring adjustments which are considered necessary to fairly present the results for the interim periods presented have been included. These statements should be read in conjunction with the consolidated financial statements and notes thereto included in ViewPoint Financial Group, Inc.’s 2010 Annual Report on Form 10-K (“2010 Form 10-K”). Interim results are not necessarily indicative of results for a full year.
In preparing the financial statements, management is required to make estimates and assumptions that affect the recorded amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses for the period. Actual results could differ from those estimates. For further information with respect to significant accounting policies followed by the Company in preparation of its consolidated financial statements, refer to the 2010 Form 10-K.
The accompanying Unaudited Consolidated Interim Financial Statements include the accounts of ViewPoint Financial Group, Inc., whose business primarily consists of the operations of its wholly owned subsidiary, ViewPoint Bank (the “Bank”). The Bank’s operations include its wholly owned subsidiary, ViewPoint Bankers Mortgage, Inc., doing business as ViewPoint Mortgage (“VPM”). All significant intercompany transactions and balances are eliminated in consolidation. Some items in prior years have been reclassified to conform to current presentation.
On July 6, 2010, the Company completed its conversion from the mutual holding company structure and related public stock offering, so that it is now a stock holding company that is wholly owned by public shareholders. Please see Note 2 — Share Transactions for more information. All share and per share information in this report for periods prior to the Conversion (defined below) has been revised to reflect the 1.4:1 conversion ratio on publicly traded shares, which resulted in a 4,287,752 increase in outstanding shares.
2. Share Transactions
The Company, a Maryland corporation, was organized by ViewPoint MHC (the “MHC”), ViewPoint Financial Group and ViewPoint Bank to facilitate the “second-step” conversion of ViewPoint Bank from the mutual holding company structure to the stock holding company structure (the “Conversion”). Upon consummation of the Conversion, which occurred on July 6, 2010, the Company became the holding company for ViewPoint Bank and now owns all of the issued and outstanding shares of ViewPoint Bank’s common stock. As part of the Conversion, shares of the Company’s common stock were issued and sold in an offering to certain depositors of ViewPoint Bank and others. Concurrent with the offering, each share of ViewPoint Financial Group’s common stock owned by public shareholders was exchanged for 1.4 shares of the Company’s common stock, with cash being paid in lieu of issuing any fractional shares.
The Company sold a total of 19,857,337 shares of common stock in the offering at $10.00 per share. Proceeds from the offering, net of $7,773 in expenses, totaled $190,800. The Company used $15,886 of the proceeds to fund a loan to the Employee Stock Ownership Plan (“ESOP”) to purchase shares in the Conversion.
3. Earnings per Common Share
Basic earnings per common share is computed by dividing net income by the weighted-average number of common shares outstanding for the period, reduced for average unallocated ESOP shares and average unvested restricted stock awards. Diluted earnings per common share reflects the potential dilution that could occur if securities or other contracts to issue common stock (such as stock awards and options) were exercised or converted to common stock, or resulted in the issuance of common stock that then shared in the Company’s earnings. Diluted earnings per common share is computed by dividing net income by the weighted-average number of common shares outstanding for the period increased for the dilutive effect of unexercised stock options and unvested restricted stock awards. The dilutive effect of the unexercised stock options and unvested restricted stock awards is calculated under the treasury stock

 

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VIEWPOINT FINANCIAL GROUP, INC.
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)
method utilizing the average market value of the Company’s stock for the period. Unvested share-based awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method described in Accounting Standards Codification (“ASC”) 260-10-45-60B. A reconciliation of the numerator and denominator of the basic and diluted earnings per common share computation for the three and six months ended June 30, 2011 and 2010 is as follows.
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2011     2010     2011     2010  
Basic earnings per share:
                               
Numerator:
                               
Net income
  $ 4,857     $ 3,196     $ 11,411     $ 5,901  
Distributed and undistributed earnings to participating securities
    (25 )     (35 )     (67 )     (70 )
 
                       
Income available to common shareholders
  $ 4,832     $ 3,161     $ 11,344     $ 5,831  
 
                       
Denominator:
                               
Weighted average common shares outstanding
    34,839,491       29,206,205       34,839,491       29,211,527  
Less: Average unallocated ESOP shares
    (2,224,524 )     (810,799 )     (2,247,419 )     (827,111 )
Average unvested restricted stock awards
    (169,440 )     (309,643 )     (192,389 )     (335,360 )
 
                       
Average shares for basic earnings per share
    32,445,527       28,085,763       32,399,683       28,049,056  
 
                       
 
                               
Basic earnings per common share
  $ 0.15     $ 0.11     $ 0.35     $ 0.21  
 
                       
 
                               
Diluted earnings per share:
                               
Numerator:
                               
Income available to common shareholders
  $ 4,832     $ 3,161     $ 11,344     $ 5,831  
 
                       
Denominator:
                               
Average shares for basic earnings per share
    32,445,527       28,085,763       32,399,683       28,049,056  
Dilutive effect of share-based compensation plan
    64,607       30,634       71,678       27,394  
 
                       
Average shares for diluted earnings per share
    32,510,134       28,116,397       32,471,361       28,076,450  
 
                       
 
                               
Diluted earnings per common share
  $ 0.15     $ 0.11     $ 0.35     $ 0.21  
 
                       
All of the stock options outstanding for the three and six months ended June 30, 2010 were excluded in the computation of diluted earnings per share because the options’ exercise prices were greater than the average market price of the common stock and were, therefore, antidilutive.
4. Dividends
On January 20, 2011, the Company’s Board of Directors declared a quarterly cash dividend of $0.05 per share. The dividend was paid on February 17, 2011, to the Company’s shareholders of record as of February 3, 2011. On April 21, 2011, the Company’s Board of Directors declared a quarterly cash dividend of $0.05 per share. The dividend was paid on May 19, 2011, to the Company’s shareholders of record as of May 5, 2011. On July 21, 2011, the Company’s Board of Directors declared a quarterly cash dividend of $0.05. The dividend will be paid on August 18, 2011 to the Company’s shareholders of record as of August 4, 2011.

 

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VIEWPOINT FINANCIAL GROUP, INC.
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)
5. Securities
The amortized cost and fair value of available for sale securities and the related gross unrealized gains and losses recognized in accumulated other comprehensive income, net of taxes, were as follows:
                                 
            Gross     Gross        
    Amortized     Unrealized     Unrealized        
June 30, 2011   Cost     Gains     Losses     Fair Value  
Agency residential mortgage-backed securities
  $ 262,671     $ 2,713     $ (434 )   $ 264,950  
Agency residential collateralized mortgage obligations
    412,293       2,407       (469 )     414,231  
SBA pools
    4,617       51             4,668  
 
                       
Total available for sale securities
  $ 679,581     $ 5,171     $ (903 )   $ 683,849  
 
                       
                                 
            Gross     Gross        
    Amortized     Unrealized     Unrealized        
December 31, 2010   Cost     Gains     Losses     Fair Value  
Agency residential mortgage-backed securities
  $ 351,385     $ 4,545     $ (1,433 )   $ 354,497  
Agency residential collateralized mortgage obligations
    357,340       3,031       (2,479 )     357,892  
SBA pools
    5,084       24             5,108  
 
                       
Total available for sale securities
  $ 713,809     $ 7,600     $ (3,912 )   $ 717,497  
 
                       
The amortized cost, unrecognized gains and losses, and fair value of securities held to maturity were as follows:
                                 
            Gross     Gross        
    Amortized     Unrealized     Unrealized        
June 30, 2011   Cost     Gains     Losses     Fair Value  
U.S. government and federal agency
  $ 10,000     $ 32     $     $ 10,032  
Agency residential mortgage-backed securities
    186,957       7,463       (26 )     194,394  
Agency commercial mortgage-backed securities
    7,415       133             7,548  
Agency residential collateralized mortgage obligations
    290,124       3,250       (870 )     292,504  
Municipal bonds
    50,480       2,382       (26 )     52,836  
 
                       
Total held to maturity securities
  $ 544,976     $ 13,260     $ (922 )   $ 557,314  
 
                       
                                 
            Gross     Gross        
    Amortized     Unrealized     Unrealized        
December 31, 2010   Cost     Gains     Losses     Fair Value  
U.S. government and federal agency
  $ 9,997     $ 168     $     $ 10,165  
Agency residential mortgage-backed securities
    162,841       5,305       (380 )     167,766  
Agency residential collateralized mortgage obligations
    209,193       1,951       (4,864 )     206,280  
Municipal bonds
    50,488       578       (981 )     50,085  
 
                       
Total held to maturity securities
  $ 432,519     $ 8,002     $ (6,225 )   $ 434,296  
 
                       

 

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VIEWPOINT FINANCIAL GROUP, INC.
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)
The fair value of debt securities and carrying amount, if different, at June 30, 2011, by contractual maturity were as follows. Securities not due at a single maturity date, primarily mortgage-backed securities and collateralized mortgage obligations, are shown separately.
                         
                    Available  
    Held to maturity     for sale  
    Carrying              
    Amount     Fair Value     Fair Value  
Due from one to five years
  $ 13,205     $ 13,460     $  
Due from five to ten years
    9,758       10,409       4,668  
Due after ten years
    37,517       38,999        
Agency residential mortgage-backed securities
    186,957       194,394       264,950  
Agency commercial mortgage-backed securities
    7,415       7,548        
Agency residential collateralized mortgage obligations
    290,124       292,504       414,231  
 
                 
Total
  $ 544,976     $ 557,314     $ 683,849  
 
                 
Proceeds from the sale of available for sale securities during the three and six months ended June 30, 2011, totaled $0 and $93,008, respectively. Gross gains from those sales totaled $0 and $3,415 for the three and six months ended June 30, 2011, respectively. There was no sales activity during the six months ended June 30, 2010. The specific identification method was used to determine cost in order to compute the realized gains.
Public fund certificates totaled $381.6 million at June 30, 2011, and were secured by securities pledged by the Company with a carrying value of $434.3 million as of June 30, 2011.

 

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VIEWPOINT FINANCIAL GROUP, INC.
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)
Securities available for sale and held to maturity with unrealized losses at June 30, 2011, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, are as follows.
AFS
                                                                         
    Less than 12 Months     12 Months or More     Total  
            Unrealized                     Unrealized                     Unrealized        
June 30, 2011   Fair Value     Loss     Number     Fair Value     Loss     Number     Fair Value     Loss     Number  
Agency residential mortgage-backed securities
  $ 75,546     $ (311 )     13     $ 8,656     $ (123 )     2     $ 84,202     $ (434 )     15  
Agency residential collateralized mortgage obligations
    80,208       (307 )     13       29,354       (162 )     11       109,562       (469 )     24  
 
                                                     
Total temporarily impaired
  $ 155,754     $ (618 )     26     $ 38,010     $ (285 )     13     $ 193,764     $ (903 )     39  
 
                                                     
HTM
                                                                         
    Less than 12 Months     12 Months or More     Total  
            Unrealized                     Unrealized                     Unrealized        
June 30, 2011   Fair Value     Loss     Number     Fair Value     Loss     Number     Fair Value     Loss     Number  
Agency residential mortgage-backed securities
  $ 5,115     $ (26 )     1     $     $           $ 5,115     $ (26 )     1  
Agency residential collateralized mortgage obligations
    132,322       (870 )     16                         132,322       (870 )     16  
Municipal bonds
    3,759       (26 )     6                         3,759       (26 )     6  
 
                                                     
Total temporarily impaired
  $ 141,196     $ (922 )     23     $     $           $ 141,196     $ (922 )     23  
 
                                                     
Securities available for sale and held to maturity with unrealized losses at December 31, 2010, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, are as follows.
AFS
                                                                         
    Less than 12 Months     12 Months or More     Total  
            Unrealized                     Unrealized                     Unrealized        
December 31, 2010   Fair Value     Loss     Number     Fair Value     Loss     Number     Fair Value     Loss     Number  
Agency residential mortgage-backed securities
  $ 161,854     $ (1,433 )     32     $     $           $ 161,854     $ (1,433 )     32  
Agency residential collateralized mortgage obligations
    125,819       (2,372 )     18       32,358       (107 )     11       158,177       (2,479 )     29  
 
                                                     
Total temporarily impaired
  $ 287,673     $ (3,805 )     50     $ 32,358     $ (107 )     11     $ 320,031     $ (3,912 )     61  
 
                                                     
HTM
                                                                         
    Less than 12 Months     12 Months or More     Total  
            Unrealized                     Unrealized                     Unrealized        
December 31, 2010   Fair Value     Loss     Number     Fair Value     Loss     Number     Fair Value     Loss     Number  
Agency residential mortgage-backed securities
  $ 28,394     $ (380 )     4     $     $           $ 28,394     $ (380 )     4  
Agency residential collateralized mortgage obligations
    137,099       (4,864 )     15                         137,099       (4,864 )     15  
Municipal bonds
    30,316       (981 )     72                         30,316       (981 )     72  
 
                                                     
Total temporarily impaired
  $ 195,809     $ (6,225 )     91     $     $           $ 195,809     $ (6,225 )     91  
 
                                                     
The unrealized losses at June 30, 2011 and December 31, 2010, are substantially due to changes in market interest rates since the date of purchase that have adversely affected the market values of those securities. The unrealized losses are not due to credit impairment.

 

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VIEWPOINT FINANCIAL GROUP, INC.
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)
6. Loans
Loans consist of the following:
                 
    June 30,     December 31,  
    2011     2010  
Real estate loans:
               
One- to four-family
  $ 376,618     $ 370,149  
Commercial real estate
    512,636       479,071  
One- to four-family construction
    8,840       11,435  
Commercial construction
    9,212       569  
Home equity/home improvement
    142,328       139,165  
 
           
Total real estate loans
    1,049,634       1,000,389  
 
               
Other loans:
               
Automobile indirect loans
    448       1,606  
Automobile direct loans
    33,352       40,944  
Government-guaranteed student loans
          4,557  
Commercial non-mortgage loans
    44,441       39,279  
Consumer lines of credit and unsecured loans
    12,255       14,197  
Other consumer loans, secured
    6,060       6,062  
 
           
Total other loans
    96,556       106,645  
 
           
 
               
Gross loans
    1,146,190       1,107,034  
Deferred net loan origination fees
    246       (73 )
Allowance for loan losses
    (16,159 )     (14,847 )
 
           
Net loans held for investment
  $ 1,130,277     $ 1,092,114  
 
           
 
               
Mortgage loans held for sale:
               
ViewPoint Mortgage
    15,629       31,073  
Warehouse Purchase Program
    404,988       460,912  
 
           
Total mortgage loans held for sale
  $ 420,617     $ 491,985  
 
           

 

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VIEWPOINT FINANCIAL GROUP, INC.
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)
Activity in the allowance for loan losses for the three and six months ended June 30, 2011, and 2010 segregated by portfolio segment and evaluation for impairment is as follows:
                                                 
            Home                          
    One- to     Equity/Home     Commercial     Commerical              
Quarter to date June 30, 2011   Four- Family     Improvement     Real Estate     Non-Mortgage     Consumer     Total  
Allowance for loan losses:
                                               
Beginning balance — April 1, 2011
  $ 3,220     $ 893     $ 8,668     $ 1,845     $ 868     $ 15,494  
Charge-offs
    (62 )     (61 )           (154 )     (250 )     (527 )
Recoveries
    7                   13       107       127  
Provision expense (benefit)
    (142 )     41       891       193       82       1,065  
 
                                   
Ending balance — June 30, 2011
  $ 3,023     $ 873     $ 9,559     $ 1,897     $ 807     $ 16,159  
 
                                   
                                                 
            Home                          
    One- to     Equity/Home     Commercial     Commerical              
Year to date June 30, 2011   Four- Family     Improvement     Real Estate     Non-Mortgage     Consumer     Total  
Allowance for loan losses:
                                               
Beginning balance — January 1, 2011
  $ 3,307     $ 936     $ 7,949     $ 1,652     $ 1,003     $ 14,847  
Charge-offs
    (74 )     (138 )     (15 )     (342 )     (531 )     (1,100 )
Recoveries
    23             27       17       185       252  
Provision expense (benefit)
    (233 )     75       1,598       570       150       2,160  
 
                                   
Ending balance — June 30, 2011
  $ 3,023     $ 873     $ 9,559     $ 1,897     $ 807     $ 16,159  
 
                                   
Ending balance: individually evaluated for impairment
  $ 609     $ 101     $ 1,600     $ 51     $ 9     $ 2,370  
Ending balance: collectively evaluated for impairment
    2,414       772       7,959       1,846       798       13,789  
Loans:
                                               
Ending balance
  $ 385,458     $ 142,328     $ 521,848     $ 44,441     $ 52,115     $ 1,146,190  
Ending balance: individually evaluated for impairment
    5,564       1,292       11,556       266       79       18,757  
Ending balance: collectively evaluated for impairment
    379,894       141,036       510,292       44,175       52,036       1,127,433  

 

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VIEWPOINT FINANCIAL GROUP, INC.
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)
                                                 
            Home                          
    One- to     Equity/Home     Commercial     Commerical              
Quarter to date June 30, 2010   Four- Family     Improvement     Real Estate     Non-Mortgage     Consumer     Total  
Allowance for loan losses:
                                               
Beginning balance — April 1, 2010
  $ 2,207     $ 779     $ 7,070     $ 1,645     $ 1,228     $ 12,929  
Charge-offs
    (84 )                 (269 )     (278 )     (631 )
Recoveries
    5       2             1       121       129  
Provision expense
    312       21       1,287       237       31       1,888  
 
                                   
Ending balance — June 30, 2010
  $ 2,440     $ 802     $ 8,357     $ 1,614     $ 1,102     $ 14,315  
 
                                   
                                                 
            Home                          
    One- to     Equity/Home     Commercial     Commerical              
Year to date June 30, 2010   Four- Family     Improvement     Real Estate     Non-Mortgage     Consumer     Total  
Allowance for loan losses:
                                               
Beginning balance — January 1, 2010
  $ 2,379     $ 730     $ 6,457     $ 1,382     $ 1,362     $ 12,310  
Charge-offs
    (160 )     (28 )           (313 )     (745 )     (1,246 )
Recoveries
    8       2             1       206       217  
Provision expense
    213       98       1,900       544       279       3,034  
 
                                   
Ending balance — June 30, 2010
  $ 2,440     $ 802     $ 8,357     $ 1,614     $ 1,102     $ 14,315  
 
                                   
Ending balance: individually evaluated for impairment
  $ 195     $ 130     $ 888     $ 45     $ 23     $ 1,281  
Ending balance: collectively evaluated for impairment
    2,245       672       7,469       1,569       1,079       13,034  
Loans:
                                               
Ending balance
  $ 385,759     $ 134,516     $ 480,553     $ 37,958     $ 80,558     $ 1,119,344  
Ending balance: individually evaluated for impairment
    4,362       477       13,515       377       357       19,088  
Ending balance: collectively evaluated for impairment
    381,397       134,039       467,038       37,581       80,201       1,100,256  

 

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VIEWPOINT FINANCIAL GROUP, INC.
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)
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 charge-offs and non-performing loan trends. Generally, one- to four-family residential real estate lending has a lower credit risk profile compared to consumer lending (such as automobile or personal line of credit loans). Commercial real estate and non-mortgage lending, however, have higher credit risk profiles than consumer and one- to four- family residential real estate loans due to these loans being larger in amount and non-homogenous in structure and term. 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 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. For permanently 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. 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 and then to interest income.
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 inherent 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 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 secured by real estate and commercial non-mortgage 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.

 

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VIEWPOINT FINANCIAL GROUP, INC.
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)
Impaired loans at June 30, 2011 and December 31, 2010 were as follows:
                                                         
    June 30, 2011  
                            Current             Current        
                            Quarter     Year-to-Date     Quarter     Year-to-Date  
            Unpaid             Average     Average     Interest     Interest  
    Recorded     Principal     Related     Recorded     Recorded     Income     Income  
    Investment     Balance     Allowance     Investment     Investment     Recognized     Recognized  
With no related allowance recorded :
                                                       
Real estate loans:
                                                       
One- to four- family
  $ 2,700     $ 2,700     $     $ 1,644     $ 1,861     $ 11     $ 29  
Home equity/home improvement
    1,103       1,103             1,058       918       6       14  
Commercial
    771       771             771       771       15       30  
 
                                         
Total real estate loans
    4,574       4,574             3,473       3,550       32       73  
 
                                         
 
                                                       
Commercial non-mortgage
                                  1       1  
 
                                         
 
                                                       
Impaired loans with no related allowance recorded
    4,574       4,574             3,473       3,550       33       74  
 
                                         
 
                                                       
With an allowance recorded :
                                                       
Real estate loans:
                                                       
One- to four- family
    2,864       2,864       609       3,150       2,974       7       25  
Home equity/home improvement
    189       189       101       160       289       2       2  
Commercial
    10,785       10,785       1,600       10,310       10,214       116       216  
 
                                         
Total real estate loans
    13,838       13,838       2,310       13,620       13,477       125       243  
 
                                         
 
                                                       
Consumer loans:
                                                       
Automobile indirect
    19       19       2       35       54              
Automobile direct
    51       51       6       83       108              
Other secured
    9       9       1       11       11              
Lines of credit/unsecured
                      4       50              
 
                                         
Total consumer loans
    79       79       9       133       223              
 
                                         
 
                                                       
Commercial non-mortgage
    266       266       51       317       345       2       5  
 
                                         
 
                                                       
Impaired loans with allowance recorded
    14,183       14,183       2,370       14,070       14,045       127       248  
 
                                         
 
                                                       
Total:
                                                       
Residential real estate
    6,856       6,856       710       6,012       6,042       26       70  
Commercial real estate
    11,556       11,556       1,600       11,081       10,985       131       246  
Consumer
    79       79       9       133       223              
Commercial non-mortgage
    266       266       51       317       345       3       6  
 
                                         
 
  $ 18,757     $ 18,757     $ 2,370     $ 17,543     $ 17,595     $ 160     $ 322  
 
                                         

 

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VIEWPOINT FINANCIAL GROUP, INC.
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)
                                         
    December 31, 2010  
            Unpaid             Average     Interest  
    Recorded     Principal     Related     Recorded     Income  
    Investment     Balance     Allowance     Investment     Recognized  
With no related allowance recorded :
                                       
Real estate loans:
                                       
One- to four- family
  $ 3,188     $ 3,188     $     $ 3,651     $ 107  
Home equity/home improvement
    455       455             366       16  
Commercial
    1,635       1,635             2,710       203  
 
                             
Total real estate loans
    5,278       5,278             6,727       326  
 
                             
 
                                       
Commercial non-mortgage
                      54       8  
 
                             
 
                                       
Impaired loans with no related allowance recorded
    5,278       5,278             6,781       334  
 
                             
 
                                       
With an allowance recorded :
                                       
Real estate loans:
                                       
One- to four- family
    2,893       2,893       474       1,631       59  
Home equity/home improvement
    851       851       95       381       2  
Commercial
    9,295       9,295       1,407       6,432       134  
 
                             
Total real estate loans
    13,039       13,039       1,976       8,444       195  
 
                             
 
                                       
Consumer loans:
                                       
Automobile indirect
    88       88       6       141        
Automobile direct
    117       117       10       145        
Other secured
    13       13       2       8        
Lines of credit/unsecured
    108       108       5       120        
 
                             
Total consumer loans
    326       326       23       414        
 
                             
 
                                       
Commercial non-mortgage
    272       272       8       299       6  
 
                             
 
                                       
Impaired loans with allowance recorded
    13,637       13,637       2,007       9,157       201  
 
                             
 
                                       
Total:
                                       
Residential real estate
    7,387       7,387       569       6,029       184  
Commercial real estate
    10,930       10,930       1,407       9,142       337  
Consumer
    326       326       23       414        
Commercial non-mortgage
    272       272       8       353       14  
 
                             
 
  $ 18,915     $ 18,915     $ 2,007     $ 15,938     $ 535  
 
                             
Average impaired loans outstanding during the three and six months ended June 30, 2010, totaled $13,993 and $13,453, respectively.

 

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VIEWPOINT FINANCIAL GROUP, INC.
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)
Loans that are past due 30 days or greater are considered delinquent. Interest income on loans is discontinued at the time the loan is 90 days delinquent unless the loan is well-secured and in process of collection. Consumer loans are typically charged off no later than 120 days past due. Past due status is based on the contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful. Nonaccrual loans include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans. A loan is moved to nonaccrual status in accordance with the Company’s policy, typically after 90 days of non-payment.
All interest accrued but not received for loans placed on nonaccrual is reversed against interest income. Interest received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
Non-performing (nonaccrual) loans were as follows. There were no loans past due over 90 days that were still accruing interest at June 30, 2011 or December 31, 2010.
                 
    June 30,     December 31,  
    2011     2010  
Real Estate loans:
               
One- to four- family
  $ 5,337     $ 5,938  
Commercial
    10,785       9,812  
Home equity/home improvement
    1,292       1,306  
 
           
Total real estate loans
    17,414       17,056  
 
               
Consumer loans:
               
Automobile indirect
    59       84  
Automobile direct
    126       95  
Consumer other secured
          13  
Consumer lines of credit/unsecured
    1       108  
 
           
Total consumer loans
    186       300  
 
               
Commercial non-mortgage
    266       272  
 
           
Total
  $ 17,866     $ 17,628  
 
           
Nonperforming loans includes both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans. At June 30, 2011, $9,874 of the $17,866 reported for nonaccrual loans are troubled debt restructurings that are on nonaccrual status. An additional $265 of performing troubled debt restructurings are not included as non-performing loans at June 30, 2011; these loans have been performing for at least six months and the Company is accruing interest on these loans. At December 31, 2010, $8,669 of the $17,628 reported for nonaccrual loans are troubled debt restructurings that are on nonaccrual status. An additional $1,287 of performing troubled debt restructurings are not included as non-performing loans at December 31, 2010. Performing troubled debt restructurings are removed from troubled debt restructuring status after performing for one year under modified terms and meeting other criteria.
The Company has recorded $1,465 and $947 of specific reserves to loans whose terms have been modified in troubled debt restructurings as of June 30, 2011, and December 31, 2010, respectively. There are no outstanding commitments to lend additional funds to borrowers with loans whose terms have been modified in troubled debt restructurings.

 

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VIEWPOINT FINANCIAL GROUP, INC.
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)
Below is an analysis of the age of recorded investment in loans that were past due at June 30, 2011, and December 31, 2010:
                                                 
                    90 Days     Total              
    30-59 Days     60-89 Days     and Greater     Loans Past              
June 30, 2011   Past Due     Past Due     Past Due     Due     Current Loans     Total Loans  
Real estate loans:
                                               
One- to four- family
  $ 225     $ 2,750     $ 4,041     $ 7,016     $ 378,442     $ 385,458  
Commercial
          148       899       1,047       520,801       521,848  
Home equity/home improvement
    9       279       1,089       1,377       140,951       142,328  
 
                                   
Total real estate loans
    234       3,177       6,029       9,440       1,040,194       1,049,634  
 
                                   
 
                                               
Other loans:
                                               
Consumer loans:
                                               
Automobile indirect
    7             57       64       384       448  
Automobile direct
    94             117       211       33,141       33,352  
Other secured
                            6,060       6,060  
Lines of credit/unsecured
    12       19       1       32       12,223       12,255  
 
                                   
Total consumer loans
    113       19       175       307       51,808       52,115  
 
                                   
 
                                               
Commercial non-mortgage
    102       99             201       44,240       44,441  
 
                                   
Total
  $ 449     $ 3,295     $ 6,204     $ 9,948     $ 1,136,242     $ 1,146,190  
 
                                   
                                                 
                    90 Days     Total              
    30-59 Days     60-89 Days     and Greater     Loans Past              
December 31, 2010   Past Due     Past Due     Past Due     Due     Current Loans     Total Loans  
Real estate loans:
                                               
One- to four- family
  $ 3,248     $ 3,068     $ 3,952     $ 10,268     $ 371,316     $ 381,584  
Commercial
    2,869             1,645       4,514       475,126       479,640  
Home equity/home improvement
    1,009       175       1,047       2,231       136,934       139,165  
 
                                   
Total real estate loans
    7,126       3,243       6,644       17,013       983,376       1,000,389  
 
                                   
 
                                               
Other loans:
                                               
Consumer loans:
                                               
Automobile indirect
    56       3       78       137       1,469       1,606  
Automobile direct
    193       15       64       272       40,672       40,944  
Other secured
    32             2       34       10,585       10,619  
Lines of credit/unsecured
    84       47       108       239       13,958       14,197  
 
                                   
Total consumer loans
    365       65       252       682       66,684       67,366  
 
                                   
 
                                               
Commercial non-mortgage
    174             52       226       39,053       39,279  
 
                                   
Total
  $ 7,665     $ 3,308     $ 6,948     $ 17,921     $ 1,089,113     $ 1,107,034  
 
                                   
There were no accruing loans that were greater than 90 days past due at June 30, 2011, and December 31, 2010.
For loans collateralized by real property and commercial non-mortgage loans, credit exposure is monitored by internally assigned grades used for classification of loans. A loan is considered “special mention” if it is a potential problem loan that is currently performing and does not meet the criteria for impairment, but where some concern exists. A loan 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” loans include those characterized by the “distinct possibility” that the insured institution will sustain “some loss” if the deficiencies are not corrected. Loans 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.” All other loans that do not fall into the above mentioned categories are considered “pass” loans. Updates to internally assigned grades are made monthly and/or upon significant developments.

 

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VIEWPOINT FINANCIAL GROUP, INC.
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)
For consumer loans, credit exposure is monitored by payment history of the loans. Non-performing consumer loans are on nonaccrual status and are generally greater than 90 days past due.
The recorded investment in loans by credit quality indicators at June 30, 2011, and December 31, 2010 are as follows:
Real Estate and Commercial Non-Mortgage Credit Exposure
Credit Risk Profile by Internally Assigned Grade
                                 
            Commercial Real     Commercial Non-     Home Equity/Home  
June 30, 2011   One- to Four- Family     Estate     Mortgage     Improvement  
Grade:
                               
Pass
  $ 379,244     $ 495,198     $ 43,844     $ 140,790  
Special Mention
    650       15,094       331       246  
Substandard
    2,660       10,835       266       307  
Doubtful
    2,904       721             985  
 
                       
Total
  $ 385,458     $ 521,848     $ 44,441     $ 142,328  
 
                       
                                 
            Commercial Real     Commercial Non-     Home Equity/Home  
December 31, 2010   One- to Four- Family     Estate     Mortgage     Improvement  
Grade:
                               
Pass
  $ 374,790     $ 466,230     $ 38,768     $ 137,796  
Special Mention
    713       2,479       239       63  
Substandard
    3,663       10,185       220       337  
Doubtful
    2,418       746       52       969  
 
                       
Total
  $ 381,584     $ 479,640     $ 39,279     $ 139,165  
 
                       
Consumer Credit Exposure
Credit Risk Profile Based on Payment Activity
                                 
                            Lines of  
June 30, 2011   Automobile Indirect     Automobile Direct     Other Secured     Credit/Unsecured  
Performing
  $ 389     $ 33,226     $ 6,060     $ 12,254  
Non-performing
    59       126             1  
 
                       
Total
  $ 448     $ 33,352     $ 6,060     $ 12,255  
 
                       
                                 
                            Lines of  
December 31, 2010   Automobile Indirect     Automobile Direct     Other Secured     Credit/Unsecured  
Performing
  $ 1,522     $ 40,849     $ 10,606     $ 14,089  
Non-performing
    84       95       13       108  
 
                       
Total
  $ 1,606     $ 40,944     $ 10,619     $ 14,197  
 
                       
7. Fair Value Disclosures
ASC 820, Fair Value Measurements and Disclosures, establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3: Prices or valuation techniques that require inputs that are both significant and unobservable in the market. These instruments are valued using the best information available, some of which is internally developed, and reflects a reporting entity’s own assumptions about the risk premiums that market participants would generally require and the assumptions they would use.

 

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VIEWPOINT FINANCIAL GROUP, INC.
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)
The fair values of securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs) or matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs).
The Company elected the fair value option for certain residential mortgage loans held for sale originated after May 1, 2010 in accordance with Statement of Financial Accounting Standard No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (as codified in ASC 820.) This election allows for a more effective offset of the changes in fair values of the loans and the derivative instruments used to economically hedge them without the burden of complying with the requirements for hedge accounting under ASC 815, “Derivatives and Hedging.” The Company has not elected the fair value option for other loans held for sale primarily because they are not economically hedged using derivative instruments.
Fair values of certain loans held for sale are based on traded market prices of similar assets, where available, and/or discounted cash flows at market interest rates. At June 30, 2011, certain loans held for sale for which the fair value option was elected had an aggregate fair value of $6,324 and an aggregate outstanding principal balance of $6,267 and were recorded in mortgage loans held for sale in the consolidated balance sheet. At December 31, 2010, certain loans held for sale for which the fair value option was elected had an aggregate fair value of $16,877 and an aggregate outstanding principal balance of $17,092.
Interest income on certain mortgage loans held for sale is recognized based on contractual rates and reflected in interest income on mortgage loans held for sale in the consolidated income statement. Net gains of $455 and $373 resulting from changes in fair value of these loans were recorded in mortgage income during the three and six months ended June 30, 2011, respectively, offset by economic hedging losses in the amounts of $423 and $260, respectively. Net gains of $365 resulting from changes in fair value of these loans were recorded in mortgage income during the three and six months ended June 30, 2010, offset by economic hedging losses in the amount of $364.
Mortgage loans held for sale for which the fair value option was elected are typically pooled together and sold into the mortgage market, depending upon underlying attributes of the loan, such as agency eligibility, product type, interest rate, and credit quality. These mortgage loans held for sale are valued predominantly using quoted market prices for similar instruments. As these prices are derived from quoted market prices, the Company classifies these valuations as Level 2 in the fair value disclosures.
The Company enters into a variety of derivative financial instruments as part of its hedging strategy. The majority of these derivatives are exchange-traded or traded within highly active dealer markets. In order to determine the fair value of these instruments, the Company utilizes the exchange price or dealer market price for the particular derivative contract; therefore, these contracts are classified as Level 2.

 

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VIEWPOINT FINANCIAL GROUP, INC.
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)
Assets and Liabilities Measured on a Recurring Basis
Assets and liabilities measured at fair value on a recurring basis are summarized below:
                                 
            Fair Value Measurements at June 30, 2011, Using  
            Quoted Prices in              
            Active Markets for     Significant Other     Significant  
            Identical Assets     Observable Inputs     Unobservable  
    June 30, 2011     (Level 1)     (Level 2)     Inputs (Level 3)  
Assets:
                               
Agency residential mortgage-backed securities
  $ 264,950     $     $ 264,950     $  
Agency residential collateralized mortgage obligations
    414,231             414,231        
SBA pools
    4,668             4,668        
 
                       
Total securities available for sale
  $ 683,849     $     $ 683,849     $  
 
                       
 
                               
Loans held for sale
  $ 6,324     $     $ 6,324     $  
Derivative instruments
  $ 38     $     $ 38     $  
                                 
            Fair Value Measurements at December 31, 2010, Using  
            Quoted Prices in              
            Active Markets for     Significant Other     Significant  
            Identical Assets     Observable Inputs     Unobservable  
    December 31, 2010     (Level 1)     (Level 2)     Inputs (Level 3)  
Assets:
                               
Agency residential mortgage-backed securities
  $ 354,497     $     $ 354,497     $  
Agency residential collateralized mortgage obligations
    357,892             357,892        
SBA pools
    5,108             5,108        
 
                       
Total securities available for sale
  $ 717,497     $     $ 717,497     $  
 
                       
 
                               
Loans held for sale
  $ 16,877     $     $ 16,877     $  
Derivative instruments
  $ 116     $     $ 116     $  
Assets and Liabilities Measured on a Non-Recurring Basis
Assets and liabilities measured at fair value on a non-recurring basis are summarized below:
                                 
            Fair Value Measurements at June 30, 2011, Using  
            Quoted Prices in              
            Active Markets for     Significant Other     Significant  
            Identical Assets     Observable Inputs     Unobservable  
    June 30, 2011     (Level 1)     (Level 2)     Inputs (Level 3)  
Assets:
                               
Impaired loans
  $ 11,813     $     $     $ 11,813  
Other real estate owned
    2,326             71       2,255  
                                 
            Fair Value Measurements at December 31, 2010, Using  
            Quoted Prices in              
            Active Markets for     Significant Other     Significant  
            Identical Assets     Observable Inputs     Unobservable  
    December 31, 2010     (Level 1)     (Level 2)     Inputs (Level 3)  
Assets:
                               
Impaired loans
  $ 11,630     $     $     $ 11,630  
Other real estate owned
    2,668             2,219       449  
Impaired loans, which primarily consist of commercial real estate, one- to four-family residential, home equity/home improvement and commercial non-mortgage loans, are measured for impairment using the fair value of the collateral (as determined by third party appraisals using recent comparative sales data and other Level 3 valuation inputs) for collateral dependent loans. Impaired loans with an allocated allowance for loan losses at June 30, 2011, had a carrying amount of $11,813, which is made up of the outstanding balance of $14,183, net of a valuation allowance of $2,370. Impaired loans with an allocated allowance for loan losses at December 31, 2010, had a carrying amount of $11,630, which is made up of the outstanding balance of $13,637, net of a valuation allowance of $2,007.

 

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VIEWPOINT FINANCIAL GROUP, INC.
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)
At June 30, 2011, other real estate owned, which is measured at the lower of book or fair value less costs to sell, had a net book value of $2,326, which is made up of the outstanding balance of $2,817, net of a valuation allowance of $491. Other real estate owned that were valued using third party appraisals less costs to sell are classified as Level 2, while other real estate owned that were valued using third party appraisals less costs to sell and other Level 3 valuation inputs are classified as Level 3. These Level 3 valuation inputs include discounts of the appraised value based on real estate market activity. Of the $491, $116 resulted from write-downs during the six months ended June 30, 2011. At December 31, 2010, other real estate owned, which is measured at the lower of book or fair value less costs to sell, had a net book value of $2,668, which is made up of the outstanding balance of $3,120 net of a valuation allowance of $452, resulting in net write-downs of $502 for the year ended December 31, 2010.
Activity for other real estate owned for the three and six months ended June 30, 2011 and 2010, and the related valuation allowance follows:
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2011     2010     2011     2010  
Beginning balance
  $ 2,465     $ 3,073     $ 2,668     $ 3,917  
Transfers in at fair value
    389       2,380       521       3,021  
Change in valuation allowance
    (69 )     (210 )     (39 )     (267 )
Sale of property (gross)
    (459 )     (807 )     (824 )     (2,235 )
 
                       
Ending balance
  $ 2,326     $ 4,436     $ 2,326     $ 4,436  
 
                       
 
                               
Valuation allowance:
                               
Beginning balance
  $ 422     $ 94     $ 452     $ 37  
Sale of property
    (27 )     (49 )     (77 )     (60 )
Valuation adjustment
    96       259       116       327  
 
                       
Ending balance
  $ 491     $ 304     $ 491     $ 304  
 
                       

 

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VIEWPOINT FINANCIAL GROUP, INC.
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)
Carrying amount and estimated fair values of financial instruments were as follows:
                                 
    June 30, 2011     December 31, 2010  
    Carrying             Carrying        
    Amount     Fair Value     Amount     Fair Value  
 
                               
Financial assets
                               
Cash and cash equivalents
  $ 50,825     $ 50,825     $ 68,650     $ 68,650  
Securities available for sale
    683,849       683,849       717,497       717,497  
Securities held to maturity
    544,976       557,314       432,519       434,296  
Loans held for sale
    420,617       421,181       491,985       492,367  
Loans, net
    1,130,277       1,150,598       1,092,114       1,107,640  
FHLB stock
    18,352       N/A       20,569       N/A  
Bank-owned life insurance
    28,786       28,786       28,501       28,501  
Accrued interest receivable
    8,478       8,478       9,248       9,248  
Derivative instruments
    38       38       116       116  
 
                               
Financial liabilities
                               
Deposits
  $ (2,070,894 )   $ (1,980,814 )   $ (2,017,550 )   $ (2,087,160 )
FHLB advances
    (406,602 )     (418,487 )     (461,219 )     (470,729 )
Repurchase agreement
    (25,000 )     (27,381 )     (25,000 )     (27,255 )
Other borrowings
    (10,000 )     (10,000 )     (10,000 )     (10,000 )
Accrued interest payable
    (1,455 )     (1,455 )     (1,541 )     (1,541 )
The methods and assumptions used to estimate fair value are described as follows:
Estimated fair value is the carrying amount for cash and cash equivalents, bank-owned life insurance and accrued interest receivable and payable. For loans, fair value is based on discounted cash flows using current market offering rates, estimated life, and applicable credit risk. For deposits and borrowings, fair value is calculated using the FHLB advance curve to discount cash flows for the estimated life for deposits and according to the contractual repayment schedule for borrowings. Fair value of debt is based on discounting the estimated cash flows using the current rate at which similar borrowings would be made with similar terms and remaining maturities. It was not practicable to determine the fair value of FHLB stock due to restrictions on its transferability. The fair value of off-balance sheet items is based on the current fees or costs that would be charged to enter into or terminate such arrangements and are not considered significant to this presentation.
8. Derivative Financial Instruments
In May 2010, the Company began entering into interest rate lock commitments (“IRLCs”) with prospective residential mortgage borrowers whereby the interest rate on the loan is determined prior to funding and the borrowers have locked into that interest rate. These commitments are carried at fair value in accordance with ASC 815, Derivatives and Hedging. The estimated fair values of IRLCs are based on quoted market values and are recorded in other assets in the consolidated balance sheets. The initial and subsequent changes in the value of IRLCs are a component of net gain on sale of loans.
The Company actively manages the risk profiles of its IRLCs and mortgage loans held for sale on a daily basis. To manage the price risk associated with IRLCs, the Company enters into forward sales of mortgage-backed securities in an amount similar to the portion of the IRLC expected to close, assuming no change in mortgage interest rates. In addition, to manage the interest rate risk associated with mortgage loans held for sale, the Company enters into forward sales of mortgage-backed securities to deliver mortgage loan inventory to investors. The estimated fair values of forward sales of mortgage-backed securities and forward sale commitments are based on quoted market values and are recorded as an other asset or an accrued liability in the consolidated balance sheets. The initial and subsequent changes in value on forward sales of mortgage-backed securities are a component of net gain on sale of loans.

 

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VIEWPOINT FINANCIAL GROUP, INC.
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)
The following table provides the outstanding notional balances and fair values of outstanding positions for the dates indicated, and recorded gains (losses) during the periods indicated.
                                 
            Outstanding                
    Expiration     Notional             Recorded  
June 30, 2011   Dates     Balance     Fair Value     Gains/(Losses)  
Other Assets
                               
IRLCs
    2011     $ 8,460     $ 10     $ 10  
Loan sale commitments
    2011       4,271       13       373  
Forward mortgage-backed securities trades
    2011       9,750       28       (260 )
                                 
            Outstanding                
    Expiration     Notional             Recorded  
December 31, 2010   Dates     Balance     Fair Value     Gains/(Losses)  
Other Assets
                               
IRLCs
    2011     $ 16,082     $ 11     $ 11  
Loan sale commitments
    2011       10,207       (79 )     1,367  
Forward mortgage-backed securities trades
    2011       23,102       105       (1,176 )
9. Repurchase Agreement
In April 2008, the Company entered into a ten-year term structured repurchase callable agreement with Credit Suisse Securities (U.S.A.) LLC for $25,000 to leverage the balance sheet and reduce the cost of funds. The interest rate was fixed at 1.62% for the first year of the agreement. After the first year, the interest rate adjusts quarterly to 6.25% less the three month Libor rate, subject to a lifetime cap of 3.22%. The rate was 3.22% at June 30, 2011 and December 31, 2010. The securities sold under agreement to repurchase had an average balance of $32,288 and an average interest rate of 2.02% during the six months ended June 30, 2011. The maximum month-end balance during the six months ended June 30, 2011 was $32,794. At maturity, the securities underlying the agreement are returned to the Company. The fair value of these securities sold under the agreement to repurchase was $33,532 at June 30, 2011. The Company retains the right to substitute securities under the terms of the agreement.
10. FHLB Advances
At June 30, 2011, advances from the FHLB totaled $406,602, net of a restructuring prepayment penalty of $4,740, and had interest rates ranging from 0.04% to 5.99% with a weighted average rate of 2.15%. At December 31, 2010, advances from the FHLB totaled $461,219, net of a restructuring prepayment penalty of $5,259, and had interest rates ranging from 0.16% to 5.99% with a weighted average rate of 1.95%. At June 30, 2011 and December 31, 2010, the Company had $22,000 in variable rate FHLB advances; the remainder of FHLB advances at those dates had fixed rates.
In November 2010, $91,644 in fixed-rate FHLB advances were modified. The 22 advances that were modified had a weighted average rate of 4.15% and an average term to maturity of approximately 2.6 years. These advances were prepaid and restructured with $91,644 of new, lower-cost FHLB advances with a weighted average rate of 1.79% and an average term to maturity of approximately 4.9 years. The early repayment of the debt resulted in a prepayment penalty of $5,421, which will be amortized to interest expense in future periods as an adjustment to the cost of the new FHLB advances. The effective rate of the new advances after accounting for the prepayment penalty is 2.98%.

 

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VIEWPOINT FINANCIAL GROUP, INC.
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)
Each advance is payable at its maturity date and is subject to prepayment penalties. The advances were collateralized by mortgage and commercial loans with FHLB collateral values of $563,640 and $654,913 under a blanket lien arrangement at June 30, 2011 and December 31, 2010, respectively. Based on this collateral, and including securities safekept at FHLB and otherwise unpledged, the Company was eligible to borrow an additional $798,971 and $756,432 at June 30, 2011 and December 31, 2010, respectively. In addition, FHLB stock also secures debts to the FHLB. The current agreement provided for a maximum borrowing amount of approximately $1,210,437 and $1,223,035 at June 30, 2011 and December 31, 2010, respectively.
At June 30, 2011, the advances are structured to contractually pay down as follows:
                 
            Weighted  
            Average  
    Balance     Rate  
2011
  $ 113,221       0.39 %
2012
    36,720       2.19  
2013
    67,134       1.70  
2014
    36,516       2.86  
2015
    61,743       3.66  
Thereafter
    96,008       3.27  
 
           
 
    411,342       2.15 %
Restructruing prepayment penalty
    (4,740 )        
 
             
Total
  $ 406,602          
 
             
11. Share-Based Compensation
In May 2007, ViewPoint Financial Group’s shareholders approved the ViewPoint Financial Group 2007 Equity Incentive Plan, which was assumed by the Company in connection with the Conversion. The Company is accounting for this plan under ASC 718, Compensation — Stock Compensation, which requires companies to record compensation cost for share-based payment transactions with employees in return for employment service. Under this plan, 1,624,690 options to purchase shares of common stock and 649,877 restricted shares of common stock were made available.
The compensation cost that has been charged against income for the restricted stock portion of the Equity Incentive Plan was $353 and $395 for the three months ended June 30, 2011 and 2010, respectively. The compensation cost that has been charged against income for the stock option portion of the Equity Incentive Plan was $155 and $88 for the three months ended June 30, 2011 and 2010, respectively. The total income tax benefit recognized in the income statement for share-based compensation was $178 and $164 for the three months ended June 30, 2011 and 2010, respectively.
The compensation cost that has been charged against income for the restricted stock portion of the Equity Incentive Plan was $703 and $786 for the six months ended June 30, 2011 and 2010, respectively. The compensation cost that has been charged against income for the stock option portion of the Equity Incentive Plan was $235 and $139 for the six months ended June 30, 2011 and 2010, respectively. The total income tax benefit recognized in the income statement for share-based compensation was $328 and $315 for the six months ended June 30, 2011 and 2010, respectively.

 

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VIEWPOINT FINANCIAL GROUP, INC.
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)
A summary of the status of the non-vested shares of the restricted stock portion of the Equity Incentive Plan at June 30, 2011, is presented below:
                 
            Weighted-  
            Average  
            Grant Date  
    Shares     Fair Value  
Non-vested at January 1, 2011
    218,393     $ 13.14  
Granted
           
Vested
    (107,798 )     13.15  
Forfeited
           
 
           
 
               
Non-vested at June 30, 2011
    110,595     $ 13.12  
 
           
The grant date fair value is based on the last sale price as quoted on the NASDAQ Stock Market on the grant date. As of June 30, 2011, there was $1,287 of total unrecognized compensation expense related to non-vested shares awarded under the restricted stock portion of the Equity Incentive Plan. That expense is expected to be recognized over a weighted-average period of 0.92 year.
A summary of the activity under the stock option portion of the Equity Incentive Plan as of June 30, 2011, and changes for the six months then ended is presented below.
                                 
                    Weighted-        
            Weighted-     Average        
            Average     Remaining     Aggregate  
            Exercise     Contractual     Intrinsic  
Options   Shares     Price     Term     Value  
Outstanding at January 1, 2011
    457,555     $ 12.01       7.6     $ 170  
Granted
    108,500       12.72       10.0       117  
Exercised
                       
Forfeited
    (12,580 )     11.21             33  
 
                             
Outstanding at June 30, 2011
    553,475     $ 12.16       7.6     $ 906  
 
                       
Fully vested and expected to vest
    507,125     $ 12.18       7.4     $ 724  
 
                       
Exercisable at June 30, 2011
    132,114     $ 12.24       6.8     $ 206  
 
                       
As of June 30, 2011, there was $696 of total unrecognized compensation expense related to non-exercisable shares awarded under the stock option portion of the Equity Incentive Plan. That expense is expected to be recognized over a weighted-average period of 2.4 years.
12. Income Taxes
The net deferred tax assets totaled $6,233 and $6,580 at June 30, 2011, and December 31, 2010, respectively. No valuation allowance was provided on deferred tax assets as of June 30, 2011, or December 31, 2010, as the Company expects to realize the future tax benefits. The Company estimates the annual effective tax rate for 2011 will be between 32.0% and 33.0%. The actual effective tax rate for the three and six months ended June 30, 2011, is different than the estimated annual effective tax rate due to various immaterial adjustments to income tax expense recorded during the quarter.

 

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VIEWPOINT FINANCIAL GROUP, INC.
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)
13. Segment Information
The reportable segments are determined by the products and services offered, primarily distinguished between banking and VPM, our mortgage banking subsidiary. Loans, investments and deposits generate the revenues in the banking segment; secondary marketing sales primarily generate the revenue in the VPM segment. Segment performance is evaluated using segment profit (loss). Information reported internally for performance assessment for the three and six months ended June 30, 2011 and 2010 follows:
                                 
    Three Months Ended  
    June 30, 2011  
                            Total  
                    Eliminations     Segments  
                    and     (Consolidated  
Results of Operations:   Banking     VPM     Adjustments1     Total)  
Total interest income
  $ 27,916     $ 410     $ (340 )   $ 27,986  
Total interest expense
    9,077       340       (396 )     9,021  
Provision (benefit) for loan losses
    1,085       (20 )           1,065  
 
                       
Net interest income after provision for loan losses
    17,754       90       56       17,900  
Other revenue
    5,459       (273 )     571       5,757  
Net gain (loss) on sale of mortgage loans
    (356 )     2,235             1,879  
Total noninterest expense
    15,061       2,915       292       18,268  
 
                       
Income before income tax expense (benefit)
    7,796       (863 )     335       7,268  
Income tax expense (benefit)
    2,771       (279 )     (81 )     2,411  
 
                       
Net income (loss)
  $ 5,025     $ (584 )   $ 416     $ 4,857  
 
                       
Segment assets
  $ 2,964,412     $ 34,794     $ (35,324 )   $ 2,963,882  
Noncash items:
                               
Net gain (loss) on sale of mortgage loans
    (356 )     2,235             1,879  
Depreciation
    800       76             876  
Provision (benefit) for loan losses
    1,085       (20 )           1,065  
                                 
    Three Months Ended  
    June 30, 2010  
                            Total  
                    Eliminations     Segments  
                    and     (Consolidated  
Results of Operations:   Banking     VPM     Adjustments1     Total)  
Total interest income
  $ 27,585     $ 641     $ (508 )   $ 27,718  
Total interest expense
    11,201       509       (445 )     11,265  
Provision for loan losses
    1,873       15             1,888  
 
                       
Net interest income after provision for loan losses
    14,511       117       (63 )     14,565  
Other revenue
    4,894       1       109       5,004  
Net gain (loss) on sale of mortgage loans
    (311 )     3,476             3,165  
Total noninterest expense
    14,156       3,786       66       18,008  
 
                       
Income before income tax expense (benefit)
    4,938       (192 )     (20 )     4,726  
Income tax expense (benefit)
    1,642       (61 )     (51 )     1,530  
 
                       
Net income (loss)
  $ 3,296     $ (131 )   $ 31     $ 3,196  
 
                       
Segment assets
  $ 2,762,090     $ 63,479     $ (61,108 )   $ 2,764,461  
Noncash items:
                               
Net gain (loss) on sale of mortgage loans
    (311 )     3,476             3,165  
Depreciation
    834       74             908  
Provision for loan losses
    1,873       15             1,888  
     
1  
Includes eliminating entries for intercompany transactions and stand-alone expenses of the Company

 

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VIEWPOINT FINANCIAL GROUP, INC.
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)
                                 
    Six Months Ended  
    June 30, 2011  
                            Total  
                    Eliminations     Segments  
                    and     (Consolidated  
Results of Operations:   Banking     VPM     Adjustments1     Total)  
Total interest income
  $ 55,745     $ 859     $ (723 )   $ 55,881  
Total interest expense
    18,051       723       (835 )     17,939  
Provision (benefit) for loan losses
    2,178       (18 )           2,160  
 
                       
Net interest income after provision for loan losses
    35,516       154       112       35,782  
Other revenue
    13,594       (272 )     953       14,275  
Net gain (loss) on sale of mortgage loans
    (891 )     4,719             3,828  
Total noninterest expense
    30,521       6,046       562       37,129  
 
                       
Income before income tax expense (benefit)
    17,698       (1,445 )     503       16,756  
Income tax expense (benefit)
    5,965       (467 )     (153 )     5,345  
 
                       
Net income (loss)
  $ 11,733     $ (978 )   $ 656     $ 11,411  
 
                       
Segment assets
  $ 2,964,412     $ 34,794     $ (35,324 )   $ 2,963,882  
Noncash items:
                               
Net gain (loss) on sale of mortgage loans
    (891 )     4,719             3,828  
Depreciation
    1,604       152             1,756  
Provision (benefit) for loan losses
    2,178       (18 )           2,160  
                                 
    Six Months Ended  
    June 30, 2010  
                            Total  
                    Eliminations     Segments  
                    and     (Consolidated  
Results of Operations:   Banking     VPM     Adjustments1     Total)  
Total interest income
  $ 53,737     $ 1,007     $ (817 )   $ 53,927  
Total interest expense
    22,257       818       (693 )     22,382  
Provision for loan losses
    2,977       57             3,034  
 
                       
Net interest income after provision for loan losses
    28,503       132       (124 )     28,511  
Other revenue
    9,429             476       9,905  
Net gain (loss) on sale of mortgage loans
    (467 )     6,287             5,820  
Total noninterest expense
    28,154       7,189       177       35,520  
 
                       
Income before income tax expense (benefit)
    9,311       (770 )     175       8,716  
Income tax expense (benefit)
    3,186       (255 )     (116 )     2,815  
 
                       
Net income (loss)
  $ 6,125     $ (515 )   $ 291     $ 5,901  
 
                       
Segment assets
  $ 2,762,090     $ 63,479     $ (61,108 )   $ 2,764,461  
Noncash items:
                               
Net gain (loss) on sale of mortgage loans
    (467 )     6,287             5,820  
Depreciation
    1,668       141             1,809  
Provision for loan losses
    2,977       57             3,034  
     
1  
Includes eliminating entries for intercompany transactions and stand-alone expenses of the Company

 

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VIEWPOINT FINANCIAL GROUP, INC.
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)
14. Legal Proceedings
The Company is subject to various pending or threatened legal proceedings arising out of the normal course of business or operations. Although there can be no assurance as to the ultimate outcome, the Company believes it has meritorious defenses to the claims asserted against it in its currently outstanding legal proceedings, including the matter described below, and with respect to such legal proceedings, intends to continue to defend itself vigorously, litigating or settling cases according to management’s judgment as to the best interests of the Company and its shareholders.
On at least a quarterly basis, the Company assesses its liabilities and contingencies in connection with pending or threatened legal proceedings utilizing the latest information available. On a case-by-case basis, reserves are established for those legal claims as to which the Company believes it is probable that a loss may be incurred and that the amount of such loss can be reasonably estimated.
Resolution of legal claims is inherently dependent on the specific facts and circumstances of each case, and therefore the actual costs of resolving these claims may be substantially higher or lower than the amounts reserved. Based on current knowledge, and after consultation with legal counsel, management believes that current reserves are adequate and the amount of any incremental liability that may otherwise arise is not expected to have a material adverse effect on the Company’s consolidated financial condition or results of operations. Certain legal claims considered by the Company in its analysis of the sufficiency of its related reserves include the following:
In March 2011, the Company was named in a class action lawsuit alleging that the Company, the Bank and VPM improperly classified VPM’s mortgage loan officers as exempt employees under the Fair Labor Standards Act (“FLSA”), and thereby failed to properly compensate them for overtime. To date, six former employees have opted in to the class action, including the two named plaintiffs. The litigation is presently set for mediation in August 2011. At June 30, 2011, the Company had recorded a $225 pending litigation liability in connection with this lawsuit.
15. Goodwill
Goodwill is evaluated for impairment on an annual basis in the fourth quarter. According to ASC 350-20-35-30, goodwill shall be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value below its carrying amount. Adverse changes in the economic environment, declining operations, or other factors could result in a decline in the implied fair value of goodwill. A goodwill impairment test includes two steps. Step One, used to identify potential impairment, compares the estimated fair value of a reporting unit with its carrying amount, including goodwill. If the estimated fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired. If the carrying amount of a reporting unit exceeds its estimated fair value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any. Step Two of the goodwill impairment test compares the implied estimated fair value of reporting unit goodwill with the carrying amount of that goodwill. If the carrying amount of goodwill for that reporting unit exceeds the implied fair value of that unit’s goodwill, an impairment loss is recognized in an amount equal to that excess.
On September 1, 2007, the Company, through the Bank’s wholly-owned subsidiary, Community Financial Services, Inc. (now known as VPM), completed its acquisition of substantially all of the assets and the loan origination business of Bankers Financial Mortgage Group, LTD. The terms of the agreement provided for an initial payment of an amount equal to the net book value of the purchased assets plus $1,000. The excess of the cost of the acquired entity over the net of the amounts assigned to assets acquired was recognized as goodwill in the amount of $1,000. An additional $89 of goodwill was recognized in October 2007 due to further expenses associated with the acquisition, resulting in total goodwill of $1,089.
Due to the downturn in current mortgage market conditions and the loss of key production personnel, an evaluation of goodwill was performed outside of the normal annual cycle. For purposes of performing Step One of the goodwill impairment test, the fair value was determined using the income approach by discounting the next five years projected cash flows. The assumptions in the model considered market economic and industry forecasts and management’s judgment. Based on the estimated results in the Step Two analysis, a goodwill impairment of $271 was recognized.

 

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VIEWPOINT FINANCIAL GROUP, INC.
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)
Deterioration in economic market conditions, increased estimates of the effects of recent regulatory or legislative changes, or additional regulatory or legislative changes may result in declines in projected business performance beyond management’s current expectations. Such declines in business performance could cause the estimated fair values of VPM’s associated goodwill to decline, which could result in an impairment charge to earnings in a future period related to some portion of the associated goodwill.
16. Recent Accounting Developments
In April 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-02, Receivables (Topic 310): A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring. This ASU amends ASC 310-40, Receivables — Troubled Debt Restructurings by Creditors to clarify the guidance on a creditor’s evaluation of whether it has granted a concession and whether a debtor is experiencing financial difficulties. In addition, the amendments to Topic 310 clarify that a creditor is precluded from using the effective interest rate test in the debtor’s guidance on restructuring of payables when evaluating whether a restructuring constitutes a troubled debt restructuring. The guidance on identifying and disclosing troubled debt restructurings is effective for interim and annual periods beginning on or after June 15, 2011 and applies retrospectively to restructurings occurring on or after the beginning of the year. The guidance on measuring the impairment of a receivable restructured in a troubled debt restructuring is effective on a prospective basis. Early adoption is allowed. This ASU also sets the effective dates for troubled debt restructuring disclosures required by the recent guidance on credit quality disclosures outlined in ASU 2010-20, Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. These requirements are effective for interim and annual periods beginning on or after June 15, 2011, the same date as the clarifying guidance. The Company is currently evaluating this guidance and does not expect the adoption of this ASU to have a significant impact to the Company’s financial statements.

 

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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 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, the industry-wide decline in mortgage production, competition, changes in management’s business strategies and other factors set forth under Risk Factors in the Company’s Annual Report on 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 the stock holding company for its wholly owned subsidiary, ViewPoint Bank (the “Bank”). The Bank’s operations include its wholly owned subsidiary, ViewPoint Bankers Mortgage, Inc., doing business as ViewPoint Mortgage (“VPM”). On July 6, 2010, the Company completed a public offering and share exchange as part of the Bank’s conversion from the mutual holding company structure (the “Conversion”). Please see Note 2 of the Notes to the Unaudited Consolidated Financial Statements under Item 1 of this report for more information. All share and per share information in this report for periods prior to the Conversion has been adjusted to reflect the 1.4:1 exchange ratio on publicly traded shares, which resulted in a 4,287,752 increase in outstanding shares.
The Company and the Bank were historically examined and regulated by the Office of Thrift Supervision (“OTS”). On July 21, 2011, the regulatory oversight of the Company transferred to the Federal Reserve Board and the regulatory oversight of the Bank transferred to the Office of the Comptroller of the Currency (“OCC”) as part of the consolidation of the OTS into the OCC under the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”). In May 2011, the Company filed applications with the OCC and the Federal Reserve Board to change its charter to that of a national bank, which are currently under review.
The Bank is also regulated by the Federal Deposit Insurance Corporation (“FDIC”). The Bank is required to have certain reserves set by the Federal Reserve Board and is a member of the Federal Home Loan Bank of Dallas, which is one of the 12 regional banks in the Federal Home Loan Bank (“FHLB”) System.
Our principal business consists of attracting retail deposits from the general public and the business community and investing those funds, along with borrowed funds, in permanent loans secured by first and second mortgages on owner-occupied, one- to four-family residences and on commercial real estate, as well as in secured and unsecured commercial non-mortgage and consumer loans. Additionally, we have an active program with mortgage banking companies that allows them to close one- to four-family real estate loans in their own name and temporarily finance their inventory of these closed loans until the loans are sold to investors approved by the Company (the “Warehouse Purchase Program”). We also offer brokerage services for the purchase and sale of non-deposit investment and insurance products through a third party brokerage arrangement.
Our operating revenues are derived principally from interest earnings on interest-earning assets including loans and investment securities, service charges and fees on deposits, and gains on the sale of loans. Our primary sources of funds are deposits, FHLB advances and other borrowings, and payments received on loans and securities. We offer a variety of deposit accounts that provide a wide range of interest rates and terms, generally including savings, money market, term certificate and demand accounts.

 

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At June 30, 2011, the Company operated 23 community bank offices in the Dallas/Fort Worth Metroplex and 12 loan production offices located in Texas, Oklahoma and Ohio. The Company plans to open new community bank offices in Carrollton and Flower Mound during the third quarter of 2011. The Company acquired these two bank offices after they were closed as a result of the combination of two national banks that each had bank locations in the same immediate market area. During the fourth quarter of 2011, the Company plans to relocate its grocery store banking center located in the Lake Highlands neighborhood of Dallas to a full-service community bank office.
In May 2011, the Company announced that Garold Base, who currently serves as the Company’s President and Chief Executive Officer, notified the Company of his intention to retire, effective as of December 31, 2011. The Company has begun the process of identifying Mr. Base’s successor, as outlined in its succession plan, through a search which will include both internal and external candidates. The timeframe for Mr. Base’s announced retirement will permit the Board of Directors of the Company and the Bank to consider and determine a successor in an orderly and deliberate process.
Performance Highlights
   
Quarterly net income increased by $1.7 million, or 52.0%: The $1.7 million increase in net income for the quarter ended June 30, 2011, compared to the same period last year, was driven by higher net interest income and a lower provision for loan losses.
   
Basic and diluted EPS increased by $0.04: Basic and diluted earnings per share for the quarter ended June 30, 2011, was $0.15, up $0.04 from the quarter ended June 30, 2010.
   
Lower net charge-offs for both the three and six month periods: Net charge-offs declined by $102,000 during the quarter ended June 30, 2011, compared to the same period in 2010, while net charge-offs for the six months ended June 30, 2011, declined by $181,000 compared to the same period last year.
   
Lower deposit and borrowing rates fueled a 12 basis point increase in net interest margin to 2.82%: The net interest margin increased 12 basis points to 2.82% for the six months ended June 30, 2011, from 2.70% for the six months ended June 30, 2010.
   
Loan growth year-to-date: During the six months ended June 30, 2011, loans increased in all categories except for mortgage loans held for sale and the consumer portfolio. This increase includes a $33.6 million jump in commercial real estate loans and $5.2 million of growth in commercial non-mortgage loans.
   
Deposit growth of $53.3 million: Deposits increased by $53.3 million from December 31, 2010, primarily due to growth of $43.8 million in interest-bearing demand accounts.
Critical Accounting Policies
Certain of our accounting policies 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 associated with these policies 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 policies 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 our 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 charge-offs and non-performing loan trends. Generally, one- to four-family residential real estate lending has a lower credit risk profile compared to consumer lending (such as automobile or personal line of credit loans). Commercial real estate and non-mortgage lending, however, have higher credit risk profiles than consumer and one- to four- family residential real estate loans due to these loans being larger in amount and non-homogenous in structure and term. 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 credit losses in the loan portfolio. While management uses available information to recognize losses on loans, future additions to the allowance for loan losses may be necessary based on changes in economic conditions. 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.

 

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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. For permanently 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. 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 and then to interest income.
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.
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.
Business Strategy
Our principal objective is to remain an independent, community-oriented financial institution serving customers in our primary market area. Our Board of Directors has sought to accomplish this objective through the adoption of a strategy designed to maintain profitability, a strong capital position and high asset quality. This strategy primarily involves:
 
Continuing the growth and diversification of our loan portfolio.
   
During the past six years, we have successfully transitioned our lending activities from a predominantly consumer-driven model to become a more diversified consumer and business lender by emphasizing three key lending initiatives: our Warehouse Purchase Program, through which we fund third party mortgage bankers; residential mortgage lending through our own mortgage banking company; and commercial real estate lending. Additionally, we are diversifying our loan portfolio by increasing secured commercial and industrial lending to small to mid-size businesses in our market area. Loan diversification improves our earnings because commercial real estate and commercial and industrial loans generally have higher interest rates than residential mortgage loans. Another benefit of commercial lending is that it improves the sensitivity of our interest-earning assets because commercial loans typically have shorter terms than residential mortgage loans and in some cases have variable interest rates.
 
Maintaining our historically high asset quality.
   
We believe that strong asset quality is a key to long-term financial success. We have sought to maintain high asset quality and moderate credit risk by strictly adhering to our strong lending policies, as evidenced by our low charge-off ratios and non-performing assets. Although we intend to continue our efforts to grow our loan portfolio, including through commercial real estate and commercial and industrial lending, we intend to continue our philosophy of managing credit exposures through our conservative approach to lending.

 

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Capturing our customers’ full relationship.
   
We offer a wide range of products and services that provide diversification of revenue sources and solidify our relationship with our customers. We focus on core retail and business deposits, including savings and checking accounts, that lead to long-term customer retention. For example, our Absolute Checking account product, which offers a higher rate of interest when electronic transaction volume and other requirements are satisfied, provides cost savings and drives fee revenue while creating what we believe to be a stable customer relationship. As part of our commercial lending process we cross-sell the entire business banking relationship, including non-interest-bearing deposits and business banking products, such as online cash management, treasury management, wires, and direct deposit /payment processing.
 
Expanding our reach.
   
In addition to deepening our relationships with existing customers, we intend to expand our business to new customers by leveraging our well-established involvement in the community and by selectively emphasizing products and services designed to meet their banking needs. We also intend to continue to pursue expansion in our market area by growing our branch network. We may also consider the acquisition of other financial institutions or branches of other banks in or contiguous to our market area, although currently no specific transactions are planned.
Comparison of Financial Condition at June 30, 2011, and December 31, 2010
General. Total assets increased by $21.9 million, or 0.74%, to $2.96 billion at June 30, 2011, from $2.94 billion at December 31, 2010. The increase in total assets was primarily due to a $112.4 million increase in securities held to maturity and a $38.2 million increase in net loans held for investment. This increase was partially offset by a $71.4 million decrease in loans held for sale and a $33.6 million decrease in securities available for sale.
Loans. Gross loans (including $420.6 million in mortgage loans held for sale) decreased by $32.2 million, or 2.0%, to $1.57 billion at June 30, 2011, from $1.60 billion at December 31, 2010. Loan growth in our residential real estate, commercial real estate and commercial non-mortgage portfolios partially offset decreases in mortgage loans held for sale and consumer loans.
                                 
    June 30,     December 31,     Dollar     Percent  
    2011     2010     Change     Change  
    (Dollars in thousands)  
Real estate loans:
                               
One-to four-family
  $ 376,618     $ 370,149     $ 6,469       1.7 %
Commercial real estate
    512,636       479,071       33,565       7.0  
One-to four-family construction
    8,840       11,435       (2,595 )     (22.7 )
Commercial construction
    9,212       569       8,643       1,519.0  
Home equity/home improvement
    142,328       139,165       3,163       2.3  
Mortgage loans held for sale
    420,617       491,985       (71,368 )     (14.5 )
 
                         
Total real estate loans
    1,470,251       1,492,374       (22,123 )     (1.5 )
Automobile loans
    33,800       42,550       (8,750 )     (20.6 )
Other consumer loans
    18,315       24,816       (6,501 )     (26.2 )
Commercial non-mortgage loans
    44,441       39,279       5,162       13.1  
 
                         
Total other loans
    96,556       106,645       (10,089 )     (9.5 )
 
                         
 
                               
Gross loans
  $ 1,566,807     $ 1,599,019     $ (32,212 )     (2.0 %)
 
                         

 

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At June 30, 2011, mortgage loans held for sale consisted of $405.0 million in Warehouse Purchase Program loans and $15.6 million in loans originated for sale by our mortgage banking subsidiary, VPM. Mortgage loans held for sale decreased by $71.4 million, or 14.5%, from December 31, 2010, with $55.9 million of this variance attributable to a reduction in Warehouse Purchase Program loans purchased for sale under our standard loan participation agreement. The remaining $15.5 million of the decline was associated with loans originated for sale by VPM. Our Warehouse Purchase Program enables our mortgage banking company customers to close conforming and some jumbo one- to four-family real estate loans in their own name and temporarily finance their inventory of these closed loans until the loans are sold to investors approved by the Company. The Warehouse Purchase Program had 30 clients with approved maximum borrowing amounts ranging from $10.0 million to $35.0 million at June 30, 2011, compared to 29 clients at December 31, 2010 and 24 clients at June 30, 2010. During the six months ended June 30, 2011, the average outstanding balance per client was $14.5 million. During the six months ended June 30, 2011, the Warehouse Purchase Program generated $1.3 million in fee income and $6.5 million in interest income, compared to $1.2 million in fee income and $6.9 million in interest income for the six months ended June 30, 2010. Compared to the quarter ended March 31, 2011, Warehouse Purchase Program loans increased by $104.5 million, or 34.8%.
VPM originated $167.6 million in one- to four-family mortgage loans during the six months ended June 30, 2011, compared to $223.0 million during the six months ended June 30, 2010. Of the $167.6 million originated during the six months ended June 30, 2011, $115.0 million were sold or committed to be sold to investors, generating a net gain on sale of loans of $3.8 million during that period. The remaining $52.6 million of VPM production was retained in the Company’s loan portfolio. For asset/liability and interest rate risk management purposes, the Company follows guidelines set forth by the Company’s Asset/Liability Management Committee to determine whether to keep loans in portfolio or sell them with a servicing release premium. The Company evaluates price, yield, duration and credit when determining the amount of loans sold or retained. The decrease in mortgage production seen in the Warehouse Purchase Program and VPM compared to December 31, 2010, is primarily attributable to an overall decline in the mortgage market as refinance volume has dropped industry-wide.
In 2010, the Company established a mortgage repurchase liability for loans sold by VPM related to various representations and warranties that reflect management’s estimate of losses for loans for which the Company could have repurchase obligations based on historical investor repurchase and indemnification demand and historical loss ratios. Although investors may demand repurchase at any time, the Company has generally received such demands within 12 months of the investor purchase. The Company had one repurchase and four indemnifications during the six months ended June 30, 2011, compared to two repurchases and five indemnifications during the six months ended June 30, 2010. Actual losses totaled $30,000 and $47,000 for the six months ended June 30, 2011 and 2010, respectively. This mortgage repurchase liability, included in “Other Liabilities” in the consolidated balance sheet, was $51,000 at June 30, 2011, compared to $38,000 at December 31, 2010. Additions to the liability reduced net gains on mortgage loan origination/sales.
Commercial real estate loans increased by $33.6 million, or 7.0%, from December 31, 2010. Our commercial real estate portfolio consists almost exclusively of loans secured by existing, multi-tenanted commercial buildings. 91% 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 below table illustrates the geographic concentration of our commercial real estate portfolio at June 30, 2011:
         
Texas
    91 %
Louisiana
    2  
Oklahoma
    2  
California
    2  
Illinois
    1  
Other*
    2  
 
     
 
    100 %
 
     
     
*  
“Other” consists of Arizona, Georgia, Nevada, New Mexico, Oregon, Kansas, Missouri and Washington
Commercial construction loans increased by $8.6 million, which primarily relates to fundings pursuant to a $19 million construction loan facility provided to an experienced retail developer to construct approximately 20 freestanding locations for a nationwide, publicly-traded retail chain. The retailer signs a 15-year lease for each location prior to commencement of construction. Our commercial non-mortgage portfolio increased by $5.2 million, or 13.1%, from December 31, 2010, as we continue to focus on developing this portfolio by adding experienced commercial lenders and applying local loan decisioning and a sophisticated loan pricing model. During the six months ended June 30, 2011, we originated $14.3 million in commercial non-mortgage loans, with the average balance of this portfolio increasing by $4.6 million during the six months ended June 30, 2011, compared to the same time period last year.

 

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Consumer loans, including direct and indirect automobile, other secured installment loans, and unsecured lines of credit, decreased by $15.3 million, or 22.6%, from December 31, 2010. In March 2011, we sold the remainder of our government-guaranteed student loan portfolio, which totaled $4.6 million at December 31, 2010. This portfolio was sold due to the increasing costs of maintaining and servicing the declining portfolio balance compared to the comparatively low portfolio yield. The sale of this portfolio resulted in a net loss on sale of $146,000.
ViewPoint Mortgage. At June 30, 2011, VPM had total assets of $34.8 million, which primarily consisted of $15.6 million in one- to four-family mortgage loans held for sale and $8.8 million in one- to four-family construction loans. VPM recorded a net loss of $584,000 for the three months ended June 30, 2011, compared to a net loss of $131,000 for the same period in 2010. For the six months ended June 30, 2011, VPM recorded a net loss of $978,000, compared to a net loss of $515,000 for the same period in 2010. The net loss primarily resulted from lower mortgage origination volume, which primarily attributable to an overall decline in the mortgage market as refinance volume has dropped industry-wide. VPM’s operating results for the three and six months ended June 30, 2011, included a goodwill impairment charge of $271,000 due to the downturn in current mortgage market conditions and the loss of key production personnel. VPM operates nine loan production offices in Texas, one loan production office in Broken Arrow, Oklahoma and one loan production office in Girard, Ohio, which was opened during the first quarter of 2011.
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 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 non-mortgage 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 real estate 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. Troubled debt restructurings, which are accounted for under ASC 310-40, are loans which have renegotiated loan terms to assist borrowers who are unable to meet the original terms of their loans. Modifications to loan terms may include a lower interest rate, a reduction in principal, or a longer term to maturity. All troubled debt restructurings are initially classified as nonaccruing loans, regardless of whether the loan was performing at the time it was restructured. Once a troubled debt restructuring has performed according to its modified terms for six months and the collection of principal and interest under the revised terms is deemed probable, the Company places the loan back on accruing status.

 

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At June 30, 2011, $265,000 in troubled debt restructurings were accruing interest. When the loan has performed according to its modified terms for one year and meets other criteria, it is no longer considered a troubled debt restructuring. At June 30, 2011, $9.9 million of troubled debt restructurings were classified as nonaccrual, including $9.3 million attributable to five commercial real estate loans. Of the $10.1 million of total troubled debt restructurings, $8.9 million were performing under the revised terms, while $1.2 million were past due.
Our non-performing loans to total loans ratio at June 30, 2011, was 1.56%, compared to 1.59% at December 31, 2010. Non-performing loans increased by $238,000, from $17.6 million at December 31, 2010, to $17.9 million at June 30, 2011. Compared to March 31, 2011, non-performing loans increased by $1.8 million, primarily due to increases of $1.3 million and $711,000 in one- to four-family and commercial real estate non-performing loans, respectively.
Our allowance for loan losses at June 30, 2011, was $16.2 million, or 1.41% of total loans, compared to $14.8 million, or 1.34% of total loans, at December 31, 2010. Our allowance for loan losses to non-performing loans was 90.45% at June 30, 2011, compared to 84.22% as of December 31, 2010.
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 non-mortgage 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. Excluding non-performing loans, as of June 30, 2011, there was an aggregate of $16.3 million of these potential problem loans, compared to $3.5 million at December 31, 2010. Of the $16.3 million, $15.1 million is comprised of three commercial real estate loans that were not delinquent at June 30, 2011, but are being monitored due to circumstances such as a decline in the occupancy rate or debt service coverage. Two of these loans, totaling $13.4 million, were downgraded to “special mention” during the second quarter.
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 problem assets in our portfolio to determine whether any assets require classification. The total amount classified represented 5.2% of our equity capital and 0.71% of our assets at June 30, 2011, compared to 5.4% of our equity capital and 0.73% of our assets at December 31, 2010. The aggregate amount of classified assets at the dates indicated was as follows:
                 
    June 30, 2011     December 31, 2010  
    (Dollars in thousands)  
Loss
  $     $  
Doubtful
    4,610       4,185  
Substandard
    16,524       17,410  
 
           
Total
  $ 21,134     $ 21,595  
 
           
Securities. Our securities portfolio increased by $78.8 million, or 6.9%, to $1.23 billion at June 30, 2011, from $1.15 billion at December 31, 2010. The increase in our securities portfolio was funded in part by increased deposit volume, as well as decreased mortgage production primarily resulting from an overall decline in the mortgage market. During the six months ended June 30, 2011, $284.5 million of securities purchased was partially offset by proceeds from securities sales totaling $93.0 million and maturities and paydowns totaling $114.3 million. The purchases consisted of $129.2 million of securities deemed available for sale and $155.3 million of securities that were recorded as held to maturity. The classification of these purchased securities was determined in accordance with ASC 320-10. The available for sale securities purchased consisted of floating rate U.S. government agency collateralized mortgage obligations and fixed rate agency mortgage backed securities. The held to maturity securities purchased consisted of fixed rate agency mortgage backed securities, fixed rate government and agency collateralized mortgage obligations, and ascending rate government and agency collateralized mortgage obligations. This mix was determined due to its strong cash flow characteristics in various interest rate environments.

 

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In February 2011, the Company sold 17 mortgage-backed securities and six collateralized mortgage obligations at a face value totaling $89.0 million, which resulted in a pre-tax gain on sale of $3.4 million. These securities had a fair value of $99.8 million and an amortized cost of $96.0 million at December 31, 2010. The securities sale, along with the securities purchased with sales proceeds, was part of an asset/ liability management strategy to lower asset duration and better position the Company for a rise in market interest rates. The proceeds from the sale were reinvested into government agency floaters, which are securities with coupons that adjust monthly at a positive spread to the one month London Interbank Offered Rate (“LIBOR”.) Since the coupon rate adjusts monthly, these securities have a duration of less than one month and better position us for upward movement in the interest rate cycle because if interest rates rise, the coupons on these securities will increase as well.
Deposits. Total deposits increased by $53.3 million, or 2.6%, to $2.07 billion at June 30, 2011, from $2.02 billion at December 31, 2010.
                                 
    June 30,     December 31,     Dollar     Percent  
    2011     2010     Change     Change  
    (Dollars in thousands)  
Non-interest-bearing demand
  $ 194,704     $ 201,998     $ (7,294 )     (3.6 %)
Interest-bearing demand
    482,552       438,719       43,833       10.0  
Savings
    156,659       148,399       8,260       5.6  
Money Market
    575,041       554,261       20,780       3.7  
IRA
    10,023       9,251       772       8.3  
Time
    651,915       664,922       (13,007 )     (2.0 )
 
                         
Total deposits
  $ 2,070,894     $ 2,017,550     $ 53,344       2.6 %
 
                         
The increase in deposits was primarily attributable to a $43.8 million, or 10.0%, increase in interest-bearing demand deposits, which was principally in our Absolute Checking product, which increased by $46.4 million during the six months ended June 30, 2011. This product currently provides a 4.0% annual percentage yield (APY) on account balances up to $25,000 if certain conditions are met. These conditions include using direct deposit or online bill pay, receiving statements online and having at least 15 Visa Check Card transactions per month for purchases. Absolute Checking encourages relationship accounts with required electronic transactions that are intended to reduce the expense of maintaining this product. At June 30, 2011, the rate paid was 0.95% for balances between $25,000 and $100,000 and 0.04% for balances greater than $100,000 and for non-qualifying accounts. Effective July 1, 2011, the rate paid decreases to 0.65% for balances between $25,000 and $100,000. The average rate paid on Absolute Checking accounts during the six months ended June 30, 2011 was 2.22%, compared to 2.77% for the year ended December 31, 2010.
Money market balances increased by $20.8 million, or 3.7%, primarily due to a $30.3 million increase in business money market deposits, while time balances decreased by $13.0 million, or 2.0%.
Borrowings. FHLB advances, net of a $4.7 million restructuring prepayment penalty, decreased by $54.6 million, or 11.8%, from $461.2 million at December 31, 2010, to $406.6 million at June 30, 2011. The decrease was primarily due to reduced funding needs for the Warehouse Purchase Program as a result of an overall decline in the mortgage market. The Company has made a strategic decision to fund a portion of Warehouse Purchase Program average balances with short-term advances.
At June 30, 2011, the Company was eligible to borrow an additional $799.0 million from the FHLB. Additionally, the Company has sufficient collateral to borrow $38.6 million from the Federal Reserve Bank discount window and has three available federal funds lines of credit with other financial institutions totaling $76.0 million.

 

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Shareholders’ Equity. Total shareholders’ equity increased by $10.4 million, or 2.6%, from $396.6 million at December 31, 2010, to $407.0 million at June 30, 2011.
                                 
    June 30,     December 31,     Dollar     Percent  
    2011     2010     Change     Change  
    (Dollars in thousands)  
Common stock
  $ 349     $ 349     $       %
Additional paid-in capital
    290,975       289,591       1,384       0.5  
Retained earnings
    133,052       125,125       7,927       6.3  
Accumulated other comprehensive income
    2,746       2,373       373       15.7  
Unearned ESOP shares
    (20,116 )     (20,849 )     733       3.5  
 
                         
Total shareholders’ equity
  $ 407,006     $ 396,589     $ 10,417       2.6 %
 
                         
The increase in shareholders’ equity was primarily due to net income of $11.4 million recognized during the six months ended June 30, 2011, which was partially offset by the payment of two dividends totaling $0.10 per common share. These dividends reduced retained earnings by $3.5 million during the six months ended June 30, 2011.
Comparison of Results of Operations for the Three Months Ended June 30, 2011 and 2010
General. Net income for the three months ended June 30, 2011, was $4.9 million, an increase of $1.7 million, or 52.0%, from net income of $3.2 million for the three months ended June 30, 2010. The increase in net income was driven by higher net interest income and a reduction in the provision for loan losses and was partially offset by lower non-interest income and higher non-interest expense. Our basic and diluted earnings per share for the three months ended June 30, 2011, was $0.15, a $0.04 increase from $0.11 for the three months ended June 30, 2010.
Interest Income. Interest income increased by $268,000, or 1.0%, from $27.7 million for the three months ended June 30, 2010, to $28.0 million for the three months ended June 30, 2011.
                                 
    Three Months Ended              
    June 30,     Dollar     Percent  
    2011     2010     Change     Change  
    (Dollars in thousands)  
Interest and dividend income
                               
Loans, including fees
  $ 20,833     $ 21,643     $ (810 )     (3.7 %)
Securities
    7,112       5,931       1,181       19.9  
Interest-bearing deposits in other financial institutions
    28       129       (101 )     (78.3 )
FHLB stock
    13       15       (2 )     (13.3 )
 
                         
 
  $ 27,986     $ 27,718     $ 268       1.0 %
 
                         
The increase in interest income was driven by a $1.2 million, or 19.9%, increase in the interest income earned on securities. The average balances of agency collateralized mortgage obligations increased by $405.9 million from the three months ended June 30, 2010, compared to the same period in 2011. The increase in interest income caused by the growth in this investment portfolio was partially offset by a lower yield earned, as the yield earned on agency collateralized mortgage obligations decreased by 68 basis points for the three months ended June 30, 2011, compared to the same period last year, due to lower rates earned on new purchases. Interest income on loans decreased by $810,000 during the three months ended June 30, 2011, compared to the same period last year, primarily due to a $976,000 decrease in the interest earned on mortgage loans held for sale and a $421,000 decline in interest earned on consumer loans. Both of these declines were driven by lower loan volume in these portfolios. Lower interest earned on residential real estate and consumer loans was partially offset by a $865,000 increase in interest earned on commercial real estate loans, which was driven by a $41.2 million increase in the average balance during the three months ended June 30, 2011, compared to the same period last year, and a 13 basis point increase in the average yield earned on these loans. During the second quarter of 2011, the pre-payment of four commercial real estate loans with balances totaling $34.5 million resulted in a $258,000 credit to interest income from the accelerated amortization of origination fees. We also earned $224,000 in early termination fees resulting from these payoffs. Overall, the yield on interest-earning assets for the three months ended June 30, 2011, decreased by 42 basis points, from 4.60% for the three months ended June 30, 2010, to 4.18%.

 

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Interest Expense. Interest expense decreased by $2.3 million, or 19.9%, from $11.3 million for the three months ended June 30, 2010, to $9.0 million for the three months ended June 30, 2011.
                                 
    Three Months Ended              
    June 30,     Dollar     Percent  
    2011     2010     Change     Change  
    (Dollars in thousands)  
Interest expense
                               
Deposits
  $ 6,260     $ 7,889     $ (1,629 )     (20.6 %)
FHLB advances
    2,407       3,022       (615 )     (20.4 )
Repurchase agreement
    204       204              
Other borrowings
    150       150              
 
                         
 
  $ 9,021     $ 11,265     $ (2,244 )     (19.9 %)
 
                         
The decrease was primarily caused by a $1.6 million, or 20.6%, decrease in the interest expense paid on deposits. Although volume increased in interest-bearing demand, savings and money market accounts during the three months ended June 30, 2011 compared to the same time last year, lower rates paid on all deposit categories offset the increase in balances. Effective November 1, 2010, the maximum balance that could qualify for the 4.0% APY paid on our Absolute Checking product was reduced from $50,000 to $25,000. Interest expense paid on Absolute Checking accounts only increased by $184,000 during the three months ended June 30, 2011, compared to the same time last year, but the average balance in this product increased by $115.0 million during the second quarter of 2011 compared to the same time last year. Also, on November 1, 2010, the Company decreased the rate paid on certain money market accounts. These accounts, which are not open to new accounts or additional deposits, previously paid APYs ranging from 4.50% to 5.50%. Effective November 1, the APYs ranged from 1.05% to 1.25%.
Interest expense on FHLB advances decreased by $615,000, or 20.4%, as the average balance of borrowings declined by $50.0 million during the three months ended June 30, 2011, compared to the same time last year. In November 2010, $91.6 million in fixed-rate FHLB advances were modified. These advances, which had a weighted average rate of 4.15%, were prepaid and restructured with $91.6 million of new, lower-cost FHLB advances with a weighted average rate of 1.79%, which contributed to the reduction in interest expense paid on FHLB advances. Overall, the cost of interest-bearing liabilities decreased 48 basis points, from 2.14% for the three months ended June 30, 2010, to 1.66% for the three months ended June 30, 2011.
Net Interest Income. Net interest income increased by $2.5 million, or 15.3%, to $19.0 million for the three months ended June 30, 2011, from $16.5 million for the three months ended June 30, 2010. The net interest rate spread increased six basis points to 2.52% for the three months ended June 30, 2011, from 2.46% for the same period last year. The net interest margin increased ten basis points to 2.83% for the three months ended June 30, 2011, from 2.73% for the same period last year. The increase in the net interest rate spread and margin was primarily attributable to lower deposit and borrowing rates.

 

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Average Balances, Net Interest Income, Yields Earned and Rates Paid
The following table presents, for the periods indicated, the total dollar amount of interest income from average interest-earning assets and the resultant yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates. Also presented is the weighted average yield on interest-earning assets, rates paid on interest-bearing liabilities and the resultant spread. All average balances are daily average balances. Non-accruing loans have been included in the table as loans carrying a zero yield.
                                                 
    Three Months Ended June 30,  
    2011     2010  
    Average                     Average              
    Outstanding     Interest             Outstanding     Interest        
    Balance     Earned/Paid     Yield/Rate     Balance     Earned/Paid     Yield/Rate  
    (Dollars in thousands)  
Interest-earning assets:
                                               
One- to four- family real estate
  $ 380,152     $ 5,111       5.38 %   $ 387,354     $ 5,376       5.55 %
Mortgage loans held for sale
    303,160       3,535       4.66       368,159       4,511       4.90  
Commercial real estate
    505,290       8,634       6.83       464,069       7,769       6.70  
Home equity/home improvement
    141,349       2,047       5.79       133,732       2,034       6.08  
Consumer
    53,903       884       6.56       83,204       1,305       6.27  
Commercial non-mortgage
    38,523       622       6.46       39,517       648       6.56  
Less: deferred fees and allowance for loan loss
    (15,264 )                 (14,042 )            
 
                                       
Loans receivable 1
    1,407,113       20,833       5.92       1,461,993       21,643       5.92  
Agency mortgage-backed securities
    456,791       3,181       2.79       468,583       3,248       2.77  
Agency collateralized mortgage obligations
    692,189       3,350       1.94       286,244       1,874       2.62  
Investment securities
    65,283       581       3.56       95,627       809       3.38  
FHLB stock
    13,803       13       0.38       15,227       15       0.39  
Interest-earning deposit accounts
    41,969       28       0.27       81,941       129       0.63  
 
                                       
Total interest-earning assets
    2,677,148       27,986       4.18       2,409,615       27,718       4.60  
 
                                           
 
                                               
Non-interest-earning assets
    145,043                       145,042                  
 
                                           
 
                                               
Total assets
  $ 2,822,191                     $ 2,554,657                  
 
                                           
 
                                               
Interest-bearing liabilities:
                                               
Interest-bearing demand
  $ 468,964       2,366       2.02     $ 356,062       2,196       2.47  
Savings and money market
    733,517       1,037       0.57       723,955       2,470       1.36  
Time
    654,852       2,857       1.75       662,117       3,223       1.95  
Borrowings
    316,518       2,761       3.49       366,509       3,376       3.68  
 
                                       
Total interest-bearing liabilities
    2,173,851       9,021       1.66       2,108,643       11,265       2.14  
 
                                           
 
                                               
Non-interest-bearing checking
    195,765                       178,561                  
 
                                           
 
                                               
Non-interest-bearing liabilities
    38,399                       50,311                  
 
                                           
 
                                               
Total liabilities
    2,408,015                       2,337,515                  
 
                                           
 
                                               
Total shareholders’ equity
    414,176                       217,142                  
 
                                           
 
                                               
Total liabilities and shareholders’ equity
  $ 2,822,191                     $ 2,554,657                  
 
                                           
 
                                               
Net interest income and margin
          $ 18,965       2.83 %           $ 16,453       2.73 %
 
                                           
Net interest income and margin (tax-equivalent basis)2
          $ 19,139       2.86 %           $ 16,584       2.75 %
 
                                           
Net interest rate spread
                    2.52 %                     2.46 %
Net earning assets
  $ 503,297                     $ 300,972                  
 
                                           
Average interest-earning assets to average interest-bearing liabilities
    123.15 %                     114.27 %                
     
1  
Calculated net of deferred fees, loan discounts, loans in process and allowance for loan losses. Construction loans have been included in the one- to four- family and commercial real estate line items, as appropriate.
 
2  
In order to make pretax income and resultant yields on tax-exempt investments and loans comparable to those on taxable investments and loans, a tax-equivalent adjustment has been computed using a federal income tax rate of 35% for 2011 and 34% for 2010. Tax-exempt investments and loans had average balances of $52.7 million and $39.7 million for the three months ended June 30, 2011 and 2010, respectively.

 

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Rate/Volume Analysis
The following schedule presents the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities. It distinguishes between the changes related to outstanding balances and those due to changes in interest rates. The change in interest attributable to rate has been determined by applying the change in rate between periods to average balances outstanding in the prior period. The change in interest due to volume has been determined by applying the rate from the earlier period to the change in average balances outstanding between periods. Changes attributable to both rate and volume which cannot be segregated have been allocated proportionately based on the changes due to rate and the changes due to volume.
                         
    Three Months Ended June 30,  
    2011 versus 2010  
    Increase (Decrease) Due to  
                    Total  
                    Increase  
    Volume     Rate     (Decrease)  
    (Dollars in thousands)  
Interest-earning assets:
                       
One- to four- family real estate
  $ (99 )   $ (166 )   $ (265 )
Mortgage loans held for sale
    (766 )     (210 )     (976 )
Commercial real estate
    702       163       865  
Home equity/home improvement
    113       (100 )     13  
Consumer
    (478 )     57       (421 )
Commercial non-mortgage
    (16 )     (10 )     (26 )
 
                 
Loans receivable
    (544 )     (266 )     (810 )
Agency mortgage-backed securities
    (82 )     15       (67 )
Agency collateralized mortgage obligations
    2,072       (596 )     1,476  
Investment securities
    (268 )     40       (228 )
FHLB stock
    (1 )     (1 )     (2 )
Interest-earning deposit accounts
    (46 )     (55 )     (101 )
 
                 
Total interest-earning assets
    1,131       (863 )     268  
 
                 
 
                       
Interest-bearing liabilities:
                       
Interest-bearing demand
    616       (446 )     170  
Savings and money market
    32       (1,465 )     (1,433 )
Time
    (35 )     (331 )     (366 )
Borrowings
    (443 )     (172 )     (615 )
 
                 
Total interest-bearing liabilities
    170       (2,414 )     (2,244 )
 
                 
 
                       
Net interest income
  $ 961     $ 1,551     $ 2,512  
 
                 
Provision for Loan Losses. We establish provisions for loan losses, which are charged to earnings, at a level required to reflect estimated credit losses in the loan portfolio. In evaluating the level of the allowance for loan losses, management considers historical loss experience, the types of loans and the amount of loans in the loan portfolio, adverse situations that may affect borrowers’ ability to repay, estimated value of any underlying collateral, prevailing economic conditions, and current factors.
The provision for loan losses was $1.1 million for the three months ended June 30, 2011, a decrease of $823,000, or 43.6%, from the three months ended June 30, 2010. The balance of the allowance for loan losses increased by $1.8 million from June 30, 2010, to June 30, 2011, as management increased qualitative factors due to increased non-performing loans in the Company’s loan portfolio and due to the continued weak economic conditions. Despite these trends, the Company has not seen an increase in charge-offs, as net charge-offs declined by $102,000 during the second quarter of 2011 compared to the same period last year.

 

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Non-interest Income. Non-interest income decreased by $533,000, or 6.5%, from $8.2 million for the three months ended June 30, 2010, to $7.6 million for the three months ended June 30, 2011.
                                 
    Three Months Ended              
    June 30,     Dollar     Percent  
    2011     2010     Change     Change  
    (Dollars in thousands)  
Non-interest income
                               
Service charges and fees
  $ 4,721     $ 4,724     $ (3 )     (0.1 %)
Other charges and fees
    225       170       55       32.4  
Net gain on sale of mortgage loans
    1,879       3,165       (1,286 )     (40.6 )
Bank-owned life insurance income
    167       112       55       49.1  
Gain (loss) on sale and disposition of assets
    (6 )     (228 )     222       97.4  
Impairment of goodwill
    (271 )           (271 )     N/M  
Other
    921       226       695       307.5  
 
                         
 
  $ 7,636     $ 8,169     $ (533 )     (6.5 %)
 
                         
The decrease in non-interest income was primarily due to a $1.3 million, or 40.6%, decline in the net gain on sale of mortgage loans, as VPM sold $62.5 million in loans to outside investors during the three months ended June 30, 2011, compared to $92.4 million during the same period in 2010. The decrease in sales can be attributed to the lower volume of one- to four-family loan originations in 2011 compared to the volume experienced during the prior year. The decrease in mortgage production is primarily attributable to an overall decline in the mortgage market as refinance volume has dropped industry-wide.
In June 2011, the Company impaired its goodwill by $271,000, reducing the goodwill balance from $1.1 million at December 31, 2010, to $818,000 at June 30, 2011. The goodwill resulted from the Bank’s 2007 purchase of the assets of Bankers Financial Mortgage Group, Ltd (now VPM). Due to the downturn in mortgage market conditions, reduced earnings and loan production personnel changes, the Company performed an evaluation of its goodwill outside of the normal annual review cycle which showed a $271,000 excess of carrying value of the goodwill over its fair value.
A $310,000 increase in debit card income and a $220,000 increase in commercial fee income, which resulted from pre-payment penalties on commercial real estate loans, partially offset a $622,000 decline in non-sufficient funds fees caused by lower volume. Other non-interest income increased by $695,000, primarily due to a $792,000 increase in the value of equity investments in two community development-oriented venture capital funds used for Community Reinvestment Act purposes.
On June 29, 2011, the Federal Reserve issued a set of rules implementing the Durbin interchange amendment to the Dodd-Frank Act. The final rule set a base interchange rate of $0.21 cents per transaction, plus an additional five basis points of the transaction cost for fraud charges. The Federal Reserve also approved an interim final rule that allows for an upward adjustment of no more than $0.01 on the debit interchange fee for implementing certain fraud prevention standards. Additionally, the Federal Reserve adopted requirements that issuers include two unaffiliated networks for routing debit transactions, one that is signature-based and one that is PIN-based. The rules are effective on October 1, 2011 and banks with less than $10.0 billion in assets are considered exempt. At this time, the impact on debit card income for community banks that are exempt from the new interchange rules is unknown.

 

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Non-interest Expense. Non-interest expense increased by $260,000, or 1.4%, from $18.0 million for the three months ended June 30, 2010, to $18.3 million for the three months ended June 30, 2011.
                                 
    Three Months Ended              
    June 30,     Dollar     Percent  
    2011     2010     Change     Change  
    (Dollars in thousands)  
Non-interest expense
                               
Salaries and employee benefits
  $ 11,542     $ 11,450     $ 92       0.8 %
Advertising
    510       321       189       58.9  
Occupancy and equipment
    1,399       1,458       (59 )     (4.0 )
Outside professional services
    704       454       250       55.1  
Regulatory assessments
    498       795       (297 )     (37.4 )
Data processing
    1,129       1,043       86       8.2  
Office operations
    1,477       1,433       44       3.1  
Other
    1,009       1,054       (45 )     (4.3 )
 
                         
 
  $ 18,268     $ 18,008     $ 260       1.4 %  
 
                         
The increase in non-interest expense was primarily due to a $250,000, or 55.1%, increase in outside professional services expense, primarily due to a $147,000 accrual for estimated expenses related to pending litigation. The majority is attributable to a class action lawsuit alleging that the Company, the Bank and VPM improperly classified VPM’s mortgage loan officers as exempt employees under the FLSA, and thereby failed to properly compensate them for overtime. To date, six former employees have opted in to the class action, including the two named plaintiffs. The litigation is presently set for mediation in August 2011.
Advertising expense increased by $189,000, or 58.9%, during the three months ended June 30, 2011, compared to the same period in 2010, primarily due to increased product marketing during the quarter. These increases in non-interest expense were partially offset by a $297,000, or 37.4%, decline in regulatory assessments, due to the new FDIC fee structure and a lower than expected deposit base and assessment rate.
Income Tax Expense. During the three months ended June 30, 2011, we recognized income tax expense of $2.4 million on our pre-tax income, which was an effective tax rate of 33.2%, compared to income tax expense of $1.5 million for the three months ended June 30, 2010, which was an effective tax rate of 32.4%. The increase in the effective tax rate was primarily due various immaterial adjustments to income tax expense recorded during the first and second quarters.
Comparison of Results of Operations for the Six Months Ended June 30, 2011 and 2010
General. Net income for the six months ended June 30, 2011, was $11.4 million, an increase of $5.5 million, or 93.4%, from net income of $5.9 million for the six months ended June 30, 2010. Net income for the six months ended June 30, 2011, included a $2.2 million net of tax gain on the sale of available for sale securities. The increase in net income, which was also driven by higher net interest income and a lower provision for loan losses, was partially offset by a $2.0 million decline in the net gain on sales of loans. Our basic and diluted earnings per share for the six months ended June 30, 2011, was $0.35, a $0.14 increase from $0.21 for the six months ended June 30, 2010.
Interest Income. Interest income increased by $2.0 million, or 3.6%, from $53.9 million for the six months ended June 30, 2010, to $55.9 million for the six months ended June 30, 2011.
                                 
    Six Months Ended              
    June 30,     Dollar     Percent  
    2011     2010     Change     Change  
    (Dollars in thousands)  
Interest and dividend income
                               
Loans, including fees
  $ 41,294     $ 41,969     $ (675 )     (1.6 %)
Securities
    14,453       11,649       2,804       24.1  
Interest-bearing deposits in other financial institutions
    100       277       (177 )     (63.9 )
FHLB stock
    34       32       2       6.3  
 
                         
 
  $ 55,881     $ 53,927     $ 1,954       3.6 %
 
                         

 

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The increase in interest income was driven by a $2.8 million, or 24.1%, increase in the interest income earned on securities. The average balances of agency mortgage-backed securities and agency collateralized mortgage obligations increased by $45.0 million and $381.9 million, respectively, from the six months ended June 30, 2010, compared to the same period in 2011. The increase in interest income caused by the growth in these two investment portfolios was partially offset by lower yields earned, as the yields earned on agency mortgage-backed securities and agency collateralized mortgage obligations decreased by 19 basis points and 54 basis points, respectively, for the six months ended June 30, 2011, compared to the same period last year. Interest income on loans decreased by $675,000 during the six months ended June 30, 2011, compared to the same period last year, primarily due to a $857,000 decrease in the interest earned on one- to four- family mortgage loans, a $638,000 decrease in interest earned on mortgage loans held for sale and a $804,000 decline in interest earned on consumer loans. These declines were driven by lower loan volume in these portfolios. Lower interest earned on residential real estate and consumer loans was partially offset by a $1.3 million increase in interest earned on commercial real estate loans and a $218,000 increase in interest earned on commercial non-mortgage loans. The average balances of these portfolios increased by $31.7 million and $4.6 million, respectively, during the six months ended June 30, 2011, compared to the same period last year, and average yields increased by 11 basis points and 38 basis points, respectively, on commercial real estate and commercial non-mortgage loans. Overall, the yield on interest-earning assets for the six months ended June 30, 2011, decreased by 47 basis points, from 4.62% for the six months ended June 30, 2010, to 4.15%.
Interest Expense. Interest expense decreased by $4.5 million, or 19.9%, from $22.4 million for the six months ended June 30, 2010, to $17.9 million for the six months ended June 30, 2011.
                                 
    Six Months Ended              
    June 30,     Dollar     Percent  
    2011     2010     Change     Change  
    (Dollars in thousands)  
Interest expense
                               
Deposits
  $ 12,343     $ 15,518     $ (3,175 )     (20.5 %)
FHLB advances
    4,893       6,161       (1,268 )     (20.6 )
Repurchase agreement
    405       405              
Other borrowings
    298       298              
 
                         
 
  $ 17,939     $ 22,382     $ (4,443 )     (19.9 %)
 
                         
The decrease was primarily caused by a $3.2 million, or 20.5%, decrease in the interest expense paid on deposits. Although volume increased in interest-bearing demand, savings and money market accounts during the six months ended June 30, 2011, compared to the same time last year, lower rates paid on all deposit categories offset the increase in balances. Effective November 1, 2010, the maximum balance that could qualify for the 4.0% APY paid on our Absolute Checking product was reduced from $50,000 to $25,000. Interest expense paid on Absolute Checking accounts only increased by $699,000 during the six months ended June 30, 2011, compared to the same time last year, although the average balance in this product increased by $135.6 million during the six months ended June 30, 2011, compared to the same time last year. Also, on November 1, 2010, the Company decreased the rate paid on certain money market accounts. These accounts, which are not open to new accounts or additional deposits, previously paid APYs ranging from 4.50% to 5.50%. Effective November 1, the APYs ranged from 1.05% to 1.25%.
Interest expense on FHLB advances decreased by $1.3 million, or 20.6%. Although the average balance of borrowings increased by $12.2 million during the six months ended June 30, 2011, compared to the same time last year, an 82 basis point reduction in the average rate paid led to the lower interest expense. In November 2010, $91.6 million in fixed-rate FHLB advances were modified. These advances, which had a weighted average rate of 4.15%, were prepaid and restructured with $91.6 million of new, lower-cost FHLB advances with a weighted average rate of 1.79%, which contributed to the reduction in interest expense paid on FHLB advances. Overall, the cost of interest-bearing liabilities decreased 56 basis points, from 2.19% for the six months ended June 30, 2010, to 1.63% for the six months ended June 30, 2011.
Net Interest Income. Net interest income increased by $6.4 million, or 20.3%, to $37.9 million for the six months ended June 30, 2011, from $31.5 million for the six months ended June 30, 2010. The net interest rate spread increased nine basis points to 2.52% for the six months ended June 30, 2011, from 2.43% for the same period last year. The net interest margin increased 12 basis points to 2.82% for the six months ended June 30, 2011, from 2.70% for the same period last year. The increase in the net interest rate spread and margin was primarily attributable to lower deposit and borrowing rates.

 

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Average Balances, Net Interest Income, Yields Earned and Rates Paid
The following table presents, for the periods indicated, the total dollar amount of interest income from average interest-earning assets and the resultant yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates. Also presented is the weighted average yield on interest-earning assets, rates paid on interest-bearing liabilities and the resultant spread. All average balances are daily average balances. Non-accruing loans have been included in the table as loans carrying a zero yield.
                                                 
    Six Months Ended June 30,  
    2011     2010  
    Average                     Average              
    Outstanding     Interest             Outstanding     Interest        
    Balance     Earned/Paid     Yield/Rate     Balance     Earned/Paid     Yield/Rate  
    (Dollars in thousands)  
Interest-earning assets:
                                               
One- to four- family real estate
  $ 377,931     $ 10,152       5.37 %   $ 397,761     $ 11,009       5.54 %
Mortgage loans held for sale
    299,956       7,095       4.73       316,268       7,733       4.89  
Commercial real estate
    494,089       16,764       6.79       462,431       15,455       6.68  
Home equity/home improvement
    140,684       4,070       5.79       129,342       3,973       6.14  
Consumer
    58,334       1,919       6.58       87,196       2,723       6.25  
Commercial non-mortgage
    39,085       1,294       6.62       34,462       1,076       6.24  
Less: deferred fees and allowance for loan loss
    (15,241 )                 (13,614 )            
 
                                       
Loans receivable 1
    1,394,838       41,294       5.92       1,413,846       41,969       5.94  
Agency mortgage-backed securities
    471,131       6,563       2.79       426,105       6,358       2.98  
Agency collateralized mortgage obligations
    667,788       6,728       2.02       285,905       3,658       2.56  
Investment securities
    65,400       1,162       3.55       97,477       1,633       3.35  
FHLB stock
    15,663       34       0.43       14,961       32       0.43  
Interest-earning deposit accounts
    77,660       100       0.26       97,600       277       0.57  
 
                                       
Total interest-earning assets
    2,692,480       55,881       4.15       2,335,894       53,927       4.62  
 
                                           
 
                                               
Non-interest-earning assets
    141,473                       141,480                  
 
                                           
 
                                               
Total assets
  $ 2,833,953                     $ 2,477,374                  
 
                                           
 
                                               
Interest-bearing liabilities:
                                               
Interest-bearing demand
  $ 453,758       4,468       1.97     $ 320,331       3,805       2.38  
Savings and money market
    720,999       2,030       0.56       712,147       5,068       1.42  
Time
    659,020       5,845       1.77       659,559       6,645       2.01  
Borrowings
    366,672       5,596       3.05       354,510       6,864       3.87  
 
                                       
Total interest-bearing liabilities
    2,200,449       17,939       1.63       2,046,547       22,382       2.19  
 
                                           
 
                                               
Non-interest-bearing checking
    191,401                       178,688                  
 
                                           
 
                                               
Non-interest-bearing liabilities
    33,681                       40,762                  
 
                                           
 
                                               
Total liabilities
    2,425,531                       2,265,997                  
 
                                           
 
                                               
Total shareholders’ equity
    408,422                       211,377                  
 
                                           
 
                                               
Total liabilities and shareholders’ equity
  $ 2,833,953                     $ 2,477,374                  
 
                                           
 
                                               
Net interest income and margin
          $ 37,942       2.82 %           $ 31,545       2.70 %
 
                                           
Net interest income and margin (tax-equivalent basis)2
          $ 38,291       2.84 %           $ 31,782       2.72 %
 
                                           
Net interest rate spread
                    2.52 %                     2.43 %
Net earning assets
  $ 492,031                     $ 289,347                  
 
                                           
Average interest-earning assets to average interest-bearing liabilities
    122.36 %                     114.14 %                
     
1  
Calculated net of deferred fees, loan discounts, loans in process and allowance for loan losses. Construction loans have been included in the one- to four- family and commercial real estate line items, as appropriate.
 
2  
In order to make pretax income and resultant yields on tax-exempt investments and loans comparable to those on taxable investments and loans, a tax-equivalent adjustment has been computed using a federal income tax rate of 35% for 2011 and 34% for 2010. Tax-exempt investments and loans had average balances of $52.7 million and $36.0 million for the six months ended June 30, 2011 and 2010, respectively.

 

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Rate/Volume Analysis
The following schedule presents the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities. It distinguishes between the changes related to outstanding balances and those due to changes in interest rates. The change in interest attributable to rate has been determined by applying the change in rate between periods to average balances outstanding in the prior period. The change in interest due to volume has been determined by applying the rate from the earlier period to the change in average balances outstanding between periods. Changes attributable to both rate and volume which cannot be segregated have been allocated proportionately based on the changes due to rate and the changes due to volume.
                         
    Six Months Ended June 30,  
    2011 versus 2010  
    Increase (Decrease) Due to  
                    Total  
                    Increase  
    Volume     Rate     (Decrease)  
    (Dollars in thousands)  
Interest-earning assets:
                       
One- to four- family real estate
  $ (539 )   $ (318 )   $ (857 )
Mortgage loans held for sale
    (391 )     (247 )     (638 )
Commercial real estate
    1,071       238       1,309  
Home equity/home improvement
    336       (239 )     97  
Consumer
    (943 )     139       (804 )
Commercial non-mortgage
    150       68       218  
 
                 
Loans receivable
    (316 )     (359 )     (675 )
Agency mortgage-backed securities
    644       (439 )     205  
Agency collateralized mortgage obligations
    3,990       (920 )     3,070  
Investment securities
    (565 )     94       (471 )
FHLB stock
    2             2  
Interest-earning deposit accounts
    (48 )     (129 )     (177 )
 
                 
Total interest-earning assets
    3,707       (1,753 )     1,954  
 
                 
 
                       
Interest-bearing liabilities:
                       
Interest-bearing demand
    1,393       (730 )     663  
Savings and money market
    62       (3,100 )     (3,038 )
Time
    (5 )     (795 )     (800 )
Borrowings
    229       (1,497 )     (1,268 )
 
                 
Total interest-bearing liabilities
    1,679       (6,122 )     (4,443 )
 
                 
 
                       
Net interest income
  $ 2,028     $ 4,369     $ 6,397  
 
                 
Provision for Loan Losses. We establish provisions for loan losses, which are charged to earnings, at a level required to reflect estimated credit losses in the loan portfolio. In evaluating the level of the allowance for loan losses, management considers historical loss experience, the types of loans and the amount of loans in the loan portfolio, adverse situations that may affect borrowers’ ability to repay, estimated value of any underlying collateral, prevailing economic conditions, and current factors.
The provision for loan losses was $2.2 million for the six months ended June 30, 2011, a decrease of $874,000, or 28.8%, from the six months ended June 30, 2010. The balance of the allowance for loan losses increased by $1.8 million from June 30, 2010, to June 30, 2011, as management increased qualitative factors due to increased non-performing loans in the Company’s loan portfolio and due to the continued weak economic conditions. Despite these trends, the Company has not seen an increase in charge-offs, as net charge-offs declined by $181,000 during the first six months of 2011 compared to the same period last year.

 

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Non-interest Income. Non-interest income increased by $2.4 million, or 15.1%, from $15.7 million for the six months ended June 30, 2010, to $18.1 million for the six months ended June 30, 2011.
                                 
    Six Months Ended              
    June 30,     Dollar     Percent  
    2011     2010     Change     Change  
    (Dollars in thousands)  
Non-interest income
                               
Service charges and fees
  $ 9,368     $ 9,144     $ 224       2.4 %
Other charges and fees
    400       338       62       18.3  
Net gain on sale of mortgage loans
    3,828       5,820       (1,992 )     (34.2 )
Bank-owned life insurance income
    285       170       115       67.6  
Gain on sale of available for sale securities
    3,415             3,415       N/M  
Gain (loss) on sale and disposition of assets
    (216 )     (341 )     125       36.7  
Impairment of goodwill
    (271 )           (271 )      
Other
    1,294       594       700       117.8  
 
                         
 
  $ 18,103     $ 15,725     $ 2,378       15.1 %
 
                         
The increase in non-interest income for the six months ended June 30, 2011, compared to the same period last year was primarily due to a $3.4 million gain on the sale of 17 mortgage-backed securities and six collateralized mortgage obligations in February 2011. Net gain on the sale of mortgage loans decreased by $2.0, or 34.2%, as VPM sold $135.5 million in loans to outside investors during the six months ended June 30, 2011, compared to $180.9 million during the same period in 2010. The decrease in sales can be attributed to the lower volume of one- to four-family loan originations in 2011 compared to the volume experienced during the prior year. The decrease in mortgage production is primarily attributable to an overall decline in the mortgage market as refinance volume has dropped industry-wide.
In June 2011, the Company impaired its goodwill by $271,000, reducing the goodwill balance from $1.1 million at December 31, 2010, to $818,000 at June 30, 2011. The goodwill resulted from the Bank’s 2007 purchase of the assets of Bankers Financial Mortgage Group, Ltd (now VPM). Due to the downturn in mortgage market conditions, reduced earnings and loan production personnel changes, the Company performed an evaluation of its goodwill outside of the normal annual review cycle which showed a $271,000 excess of carrying value of the goodwill over its fair value.
A $740,000 increase in debit card income and a $480,000 increase in commercial fee income, which resulted from pre-payment penalties on commercial real estate loans, offset a $1.2 million decline in non-sufficient funds fees caused by lower volume. Other non-interest income increased by $700,000 primarily due to an $803,000 increase in the value of equity investments in two community development-oriented venture capital funds used for Community Reinvestment Act purposes.
On June 29, 2011, the Federal Reserve issued a set of rules implementing the Durbin interchange amendment to the Dodd-Frank Act. The final rule set a base interchange rate of $0.21 cents per transaction, plus an additional five basis points of the transaction cost for fraud charges. The Federal Reserve also approved an interim final rule that allows for an upward adjustment of no more than $0.01 on the debit interchange fee for implementing certain fraud prevention standards. Additionally, the Federal Reserve adopted requirements that issuers include two unaffiliated networks for routing debit transactions, one that is signature-based and one that is PIN-based. The rules are effective on October 1, 2011 and banks with less than $10.0 billion in assets are considered exempt. At this time, the impact on debit card income for community banks that are exempt from the new interchange rules is unknown.

 

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Non-interest Expense. Non-interest expense increased by $1.6 million, or 4.5%, from $35.5 million for the six months ended June 30, 2010, to $37.1 million for the six months ended June 30, 2011.
                                 
    Six Months Ended              
    June 30,     Dollar     Percent  
    2011     2010     Change     Change  
    (Dollars in thousands)  
Non-interest expense
                               
Salaries and employee benefits
  $ 23,396     $ 22,633     $ 763       3.4 %
Advertising
    866       598       268       44.8  
Occupancy and equipment
    2,822       2,947       (125 )     (4.2 )
Outside professional services
    1,357       943       414       43.9  
Regulatory assessments
    1,457       1,590       (133 )     (8.4 )
Data processing
    2,198       2,045       153       7.5  
Office operations
    2,931       2,879       52       1.8  
Other
    2,102       1,885       217       11.5  
 
                         
 
  $ 37,129     $ 35,520     $ 1,609       4.5 %
 
                         
The increase in non-interest expense was primarily due to a $763,000, or 3.4%, increase in salaries and employee benefits expense during the six months ended June 30, 2011, compared to the same period in 2010, which increased primarily due to higher average merit increases and staffing increases. A staff reduction at VPM due to the decline in loan production partially offset salary increases by $185,000. Over the past year, we continued to hire new community bank presidents with experience in commercial and industrial lending, as well as additional compliance and back-office staff to assist in meeting our business strategies and to comply with increased regulatory requirements. Additionally, ESOP expense increased by $455,000 due to the shares purchased by the ESOP in the Conversion on July 6, 2010. Outside professional services expense increased by $414,000, or 43.9%, during the first six months of 2011 compared to the first six months of 2010, primarily due to a $265,000 accrual for estimated expenses related to pending litigation. The majority is attributable to a class action lawsuit alleging that the Company, the Bank and VPM improperly classified VPM’s mortgage loan officers as exempt employees under the FLSA, and thereby failed to properly compensate them for overtime. To date, six former employees have opted in to the class action, including the two named plaintiffs. The litigation is presently set for mediation in August 2011.
Income Tax Expense. During the six months ended June 30, 2011, we recognized income tax expense of $5.3 million on our pre-tax income, which was an effective tax rate of 31.9%, compared to income tax expense of $2.8 million for the six months ended June 30, 2010, which was an effective tax rate of 32.3%. The decline in the effective tax rate was primarily due to tax-exempt income generated from municipal bonds and higher pre-tax income during the six months ended June 30, 2011 compared to the same period in 2010.
Liquidity
Management maintains a liquidity position that it believes will adequately provide funding for loan demand and deposit run-off that may occur in the normal course of business. The Company relies on a number of different sources in order to meet its potential liquidity demands. The primary sources are increases in deposit accounts and cash flows from loan payments and the securities portfolio.
Planning for the Company’s normal business liquidity needs, both expected and unexpected, is done on a daily and short-term basis through the cash management function. On a longer-term basis it is accomplished through the budget and strategic planning functions, with support from internal asset/liability management software model projections.
The Liquidity Committee adds liquidity contingency planning to the process by focusing on possible scenarios that would stress liquidity beyond the Bank’s normal business liquidity needs. These scenarios may include local/regional adversity and national adversity situations while focusing on high probability-high impact, high probability-low impact, and low probability-high impact stressors.
Management recognizes that the events and their severity of liquidity stress leading up to and occurring during a liquidity stress event cannot be precisely defined or listed. Nevertheless, management believes that liquidity stress events can be categorized into sources and levels of severity, with responses that apply to various situations.

 

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In addition to the primary sources of funds, management has several secondary sources available to meet potential funding requirements. As of June 30, 2011, the Company had an additional borrowing capacity of $799.0 million with the FHLB. The Company may also use the discount window at the Federal Reserve Bank as a source of short-term funding. Federal Reserve Bank borrowing capacity varies based upon collateral pledged to the discount window line. As of June 30, 2011, collateral pledged had a market value of $38.6 million. Also, at June 30, 2011, the Company had $76.0 million in federal funds lines of credit available with other financial institutions.
As of June 30, 2011, the Company had classified 55.7% of its securities portfolio as available for sale, providing an additional source of liquidity. Management believes that because active markets exist and our securities portfolio is of high quality, our available for sale securities are marketable. In addition, we have historically sold mortgage loans in the secondary market to reduce interest rate risk and to create still another source of liquidity.
Liquidity management is both a daily and long-term function of business management. Excess liquidity is generally invested in short-term investments, such as overnight deposits and federal funds. On a longer term basis, we maintain a strategy of investing in various lending products and investment securities, including mortgage-backed securities. Participations in loans we originate, including portions of commercial real estate loans, are sold to manage borrower concentration risk as well as interest rate risk.
The Company is a separate legal entity from the Bank and must provide for its own liquidity. In addition to its operating expenses, the Company is responsible for paying any dividends declared to its shareholders and interest and principal on outstanding debt. The Company’s primary source of funds consists of the net proceeds retained by the Company from our initial public offering in 2006 and our 2010 Conversion and offering. We also have the ability to receive dividends or capital distributions from the Bank, although we are subject to regulatory rules governing the ability of the Bank to pay dividends. At June 30, 2011, the Company (on an unconsolidated basis) had liquid assets of $87.5 million.
The Company uses its sources of funds primarily to meet its ongoing commitments, pay maturing deposits and fund withdrawals, and to fund loan commitments. At June 30, 2011, the total approved but unfunded loan commitments (including Warehouse Purchase Program commitments) and unused lines of credit outstanding amounted to $480.9 million and $84.6 million, respectively, as compared to $395.8 million and $79.2 million, respectively, as of December 31, 2010. It is management’s policy to offer deposit rates that are competitive with other local financial institutions. Based on this management strategy, we believe that a majority of maturing deposits will remain with the Company. Certificates of deposit at June 30, 2011, scheduled to mature in one year or less totaled $510.7 million with a weighted average rate of 1.40%.
During the six months ended June 30, 2011, cash and cash equivalents decreased by $17.9 million, or 26.0%, from $68.7 million as of December 31, 2010, to $50.8 million as of June 30, 2011. Cash provided by operating activities of $102.7 million was offset by cash used for investing activities of $115.8 million and cash used for financing activities of $4.8 million. Primary sources of cash for the six months ended June 30, 2011, included proceeds from the sale of loans held for sale of $3.48 billion (primarily related to our Warehouse Purchase Program), proceeds from the sale of available for sale securities of $93.0 million, proceeds from FHLB advances of $153.0 million, maturities, prepayments and calls of securities totaling $114.3 million and an increase in deposits of $53.3 million. Primary uses of cash for the six months ended June 30, 2011, included loans originated or purchased for sale of $3.40 billion (primarily related to our Warehouse Purchase Program), purchases of securities totaling $284.5 million and repayments on FHLB advances of $207.6 million.
Please see Item 1A (Risk Factors) under Part 1 of the 2010 Form 10-K for information regarding liquidity risk.

 

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Off-Balance Sheet Arrangements, Contractual Obligations and Commitments
The following table presents our longer term, non-deposit related contractual obligations and commitments to extend credit to our borrowers, in the aggregate and by payment due dates (not including any interest amounts).
                                         
    June 30, 2011  
    Less than     One through     Four through     After Five        
    One Year     Three Years     Five Years     Years     Total  
    (Dollars in thousands)  
Contractual obligations:
                                       
FHLB advances (gross of restructruing prepayment penalty of $4,740)
  $ 133,532     $ 92,281     $ 96,343     $ 89,186     $ 411,342  
Repurchase agreement
                      25,000       25,000  
Other borrowings
                10,000             10,000  
Operating leases (premises)
    1,351       2,216       1,496       4,083       9,146  
 
                             
Total advances and operating leases
  $ 134,883     $ 94,497     $ 107,839     $ 118,269       455,488  
 
                             
 
                                       
Off-balance sheet loan commitments: (1)
                                       
Undisbursed portions of loans closed
  $ 45,070     $     $     $       45,070  
Commitments to originate loans
    55,834                         55,834  
Unused commitment on Warehouse Purchase Program loans
    380,013                         380,013  
Unused lines of credit
    84,580                         84,580  
 
                             
Total loan commitments
  $ 565,497     $     $     $       565,497  
 
                             
Total contractual obligations and loan commitments
                                  $ 1,020,985  
 
                                     
     
(1)  
Loans having no stated maturity are reported in the “Less than One Year” category
In addition, the Company had overdraft protection available in the amounts of $72.7 million and $72.4 million at June 30, 2011 and December 31, 2010, respectively.
Capital Resources
The Bank has been subject to minimum capital requirements imposed by the OTS. Consistent with our goal to operate a sound and profitable organization, our policy is for the Bank to maintain a “well-capitalized” status under the capital categories of our regulators. Based on capital levels at June 30, 2011, and December 31, 2010, the Bank was considered to be well-capitalized.
At June 30, 2011, the Bank’s equity totaled $306.2 million. Management monitors the capital levels of the Bank to provide for current and future business opportunities and to meet regulatory guidelines for “well-capitalized” institutions.
The Company’s equity totaled $407.0 million, or 13.7% of total assets, at June 30, 2011. The Company is not subject to any specific capital requirements; however, our regulators expect the Company to support the Bank, including providing additional capital to the Bank when appropriate.

 

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At June 30, 2011 and December 31, 2010, actual and required capital levels and ratios were as follows for the Bank only:
                                                 
                                    To Be Well-Capitalized  
                    Required for Capital     Under Prompt Corrective  
    Actual     Adequacy Purposes     Action Regulations  
    Amount     Ratio     Amount     Ratio     Amount     Ratio  
    (Dollars in Thousands)  
As of June 30, 2011:
                                               
Total capital (to risk-weighted assets)
    311,741       19.50 %     127,923       8.00 %     159,904       10.00 %
Tier 1 (core) capital (to risk-weighted assets)
    297,952       18.63 %     63,962       4.00 %     95,942       6.00 %
Tier 1 (core) capital (to adjusted total assets)
    297,952       10.09 %     118,145       4.00 %     147,681       5.00 %
 
                                               
As of December 31, 2010:
                                               
Total capital (to risk-weighted assets)
    298,739       18.42 %     129,717       8.00 %     162,147       10.00 %
Tier 1 (core) capital (to risk-weighted assets)
    285,494       17.61 %     64,859       4.00 %     97,288       6.00 %
Tier 1 (core) capital (to adjusted total assets)
    285,494       9.73 %     117,320       4.00 %     146,650       5.00 %
Impact of Inflation
The effects of price changes and inflation can vary substantially for most financial institutions. While management believes that inflation affects the economic value of total assets, it believes that it is difficult to assess the overall impact. Management believes this to be the case due to the fact that generally neither the timing nor the magnitude of changes in the consumer price index (“CPI”) coincides with changes in interest rates or asset values. For example, the price of one or more of the components of the CPI may fluctuate considerably, influencing composite CPI, without having a corresponding effect on interest rates, asset values, or the cost of those goods and services normally purchased by the Bank. In years of high inflation, intermediate and long-term interest rates tend to increase, adversely impacting the market values of investment securities, mortgage loans and other long-term fixed rate loans. In addition, short-term interest rates tend to increase, impacting the cost of funds. In other years, the opposite may occur.

 

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Item 3.  
Quantitative and Qualitative Disclosures about Market Risk
Asset/Liability Management
Our Risk When Interest Rates Change. The rates of interest we earn on assets and pay on liabilities generally are established contractually for a period of time. Market rates change over time. Like other financial institutions, our results of operations are impacted by changes in interest rates and the interest rate sensitivity of our assets and liabilities. The risk associated with changes in interest rates and our ability to adapt to these changes is known as interest rate risk and is our most significant market risk.
How We Measure Our Risk of Interest Rate Changes. As part of our attempt to manage our exposure to changes in interest rates and comply with applicable regulations, we monitor our interest rate risk. In doing so, we analyze and manage assets and liabilities based on their interest rates and contractual cash flows, timing of maturities, prepayment potential, repricing opportunities, and sensitivity to actual or potential changes in market interest rates.
The Company is subject to interest rate risk to the extent that its interest bearing liabilities, primarily deposits and FHLB advances and other borrowings, reprice more rapidly or slowly, or at different rates than its interest earning assets, primarily loans and investment securities. The Bank calculates interest rate risk by entering relevant contractual and projected information into the asset/liability management software simulation model. Data required by the model includes balance, rate, pay down schedule, and maturity. For items that contractually reprice, the repricing index, spread, and frequency are entered, including any initial, periodic, and lifetime interest rate caps and floors.
In order to monitor and manage the potential for adverse effects of material prolonged increases or decreases in interest rates on our results of operations, the Bank has adopted an asset and liability management policy. The Board of Directors sets the asset and liability policy for the Bank, which is implemented by the Asset/Liability Management Committee.
The purpose of the Asset/Liability Management Committee is to monitor, communicate, coordinate, and direct asset/liability management consistent with our business plan and board-approved policies. The committee directs and monitors the volume and mix of assets and funding sources, taking into account relative costs and spreads, interest rate sensitivity and liquidity needs. The objectives are to manage assets and funding sources to produce results that are consistent with liquidity, capital adequacy, growth, risk, and profitability goals.
The Committee generally meets on a bimonthly basis to, among other things, protect capital through earnings stability over the interest rate cycle; maintain our well-capitalized status; and provide a reasonable return on investment. The Committee recommends appropriate strategy changes based on this review. The Committee is responsible for reviewing and reporting the effects of the policy implementations and strategies to the Board of Directors at least quarterly. In addition, two outside members of the Board of Directors are on the Asset/Liability Management Committee. Senior managers oversee the process on a daily basis.
A key element of the Bank’s asset/liability management strategy is to protect net earnings by managing the inherent maturity and repricing mismatches between its interest earning assets and interest bearing liabilities. The Bank manages earnings exposure through the addition of adjustable rate loans and investment securities, through the sale of certain fixed rate loans in the secondary market, and by entering into appropriate term FHLB advance agreements.
As part of its efforts to monitor and manage interest rate risk, the Bank uses the net portfolio value (“NPV”) methodology adopted by the OTS as part of its capital regulations. In essence, this approach calculates the difference between the present value of expected cash flows from assets and liabilities. Management and the Board of Directors review NPV measurements at least quarterly to determine whether the Bank’s interest rate exposure is within the limits established by the Board of Directors.
The Bank’s asset/liability management strategy sets acceptable limits for the percentage change in NPV given changes in interest rates. For instantaneous, parallel, and sustained interest rate increases and decreases of 100 and 200 basis points, the Bank’s policy indicates that the NPV ratio should not fall below 7.00% and 6.00%, respectively, and for an increase of 300 basis points the NPV ratio should not fall below 5.00%. As illustrated in the tables below, the Bank was within policy limits for all scenarios tested. The tables presented below, as of June 30, 2011, and December 31, 2010, are internal analyses of our interest rate risk as measured by changes in NPV for instantaneous, parallel, and sustained shifts for all market rates and yield curves, in 100 basis point increments, up 300 basis points and down 200 basis points.

 

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As illustrated in the tables below, our NPV would be negatively impacted by a parallel, instantaneous, and sustained increase in market rates. Such an increase in rates would negatively impact NPV as a result of the duration of assets, including fixed rate residential mortgage loans, extending longer than the duration of liabilities, primarily deposit accounts and FHLB borrowings. As interest rates rise, the market value of fixed rate loans declines due to both higher discount rates and anticipated slowing loan prepayment rates.
We have implemented a strategic plan to mitigate interest rate risk. This plan includes the ongoing review of our mix of fixed rate versus variable rate loans, investments, deposits, and borrowings. When available and appropriate, high quality adjustable rate assets are purchased. These assets reduce our sensitivity to upward interest rate shocks. On the liability side of the balance sheet, term borrowings are added as appropriate. These borrowings will be of a size and term so as to mitigate the impact of duration mismatches, reducing our sensitivity to upward interest rate shocks. These strategies are implemented as needed and as opportunities arise to mitigate interest rate risk without materially sacrificing earnings.
                                 
June 30, 2011  
Change in Interest                           NPV  
Rates in Basis Points   Net Portfolio Value     Ratio %  
    $ Amount     $ Change     % Change          
    (Dollars in Thousands)          
300
    382,935       (27,258 )     (6.65 )     13.72  
200
    398,945       (11,248 )     (2.74 )     13.94  
100
    409,809       (384 )     (0.09 )     13.98  
    410,193                   13.71  
(100)
    389,456       (20,737 )     (5.06 )     12.83  
(200)
    355,531       (54,662 )     (13.33 )     11.61  
                                 
December 31, 2010  
Change in Interest                           NPV  
Rates in Basis Points   Net Portfolio Value     Ratio %  
    $ Amount     $ Change     % Change          
    (Dollars in Thousands)          
300
    244,653       (80,376 )     (24.73 )     8.84  
200
    276,441       (48,588 )     (14.95 )     9.75  
100
    304,179       (20,850 )     (6.41 )     10.48  
    325,029                   10.96  
(100)
    327,497       2,468       0.76       10.89  
(200)
    326,489       1,460       0.45       10.74  
The Bank’s NPV was $410.2 million, or 13.71%, of the market value of portfolio assets as of June 30, 2011, an $85.2 million increase from $325.0 million, or 10.96%, of the market value of portfolio assets as of December 31, 2010. Based upon the assumptions utilized, an immediate 200 basis point increase in market interest rates would result in an $11.2 million decrease in our NPV at June 30, 2011, as compared to a decrease of $48.6 million at December 31, 2010, and would result in a 23 basis point increase in our NPV ratio to 13.94% at June 30, 2011, as compared to a 121 basis point decrease to 9.75% at December 31, 2010. An immediate 200 basis point decrease in market interest rates would result in a $54.7 million decrease in our NPV at June 30, 2011, compared to a $1.5 million increase at December 31, 2010, and would result in a 210 basis point decrease in our NPV ratio to 11.61% at June 30, 2011, as compared to a 22 basis point decrease in our NPV ratio to 10.74% at December 31, 2010.

 

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Between the June 30, 2011, and December 31, 2010, NPV measurements, a research study of the bank’s non-maturity deposit accounts was completed. In this study, decay rates, repricing betas, and customer behavior were analyzed over time on an individual account level basis. The results were aggregated by product, with recommendations which were subsequently implemented. The updated account assumptions resulted in an increase to the overall duration of the non-maturity deposit account portfolio.
In addition to monitoring selected measures of NPV, management also calculates and monitors potential effects on net interest income resulting from increases or decreases in rates. This process is used in conjunction with NPV measures to identify interest rate risk on both a global and account level basis. In managing our mix of assets and liabilities, while considering the relationship between long and short term interest rates, market conditions, and consumer preferences, we may place somewhat greater emphasis on maintaining or increasing the Bank’s net interest margin than on strictly matching the interest rate sensitivity of its assets and liabilities.
Management also believes that at times the increased net income which may result from an acceptable mismatch in the actual maturity or repricing of its asset and liability portfolios can provide sufficient returns to justify the increased exposure to sudden and unexpected changes in interest rates which may result from such a mismatch. Management believes that the Bank’s level of interest rate risk is acceptable under this approach.
In evaluating the Bank’s exposure to interest rate movements, certain shortcomings inherent in the method of analysis presented in the foregoing table must be considered. For example, although certain assets and liabilities may have similar maturities or repricing characteristics, their interest rate drivers may react in different degrees to changes in market interest rates (basis risk). Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market interest rates. Additionally, certain assets, such as adjustable rate mortgages, have features which restrict changes in interest rates on a short-term basis and over the life of the asset (initial, periodic, and lifetime caps and floors). Further, in the event of a significant change in interest rates, prepayment and early withdrawal levels may deviate significantly from those assumed above. Finally, the ability of many borrowers to service their debt may decrease in the event of an interest rate increase. The Bank considers all of these factors in monitoring its exposure to interest rate risk. Also of note, the current historically low interest rate environment has resulted in asymmetrical interest rate risk. Certain repricing liabilities cannot be fully shocked downward. Assets with prepayment options are being monitored. Current and historical market rates and customer behavior are being considered in the management of interest rate risk.
The Board of Directors and management believe that the Bank’s ability to successfully manage and mitigate its exposure to interest rate risk is strengthened by several key factors. For example, the Bank manages its balance sheet duration and overall interest rate risk by placing a preference on originating and retaining adjustable rate loans and selling originated fixed rate residential mortgage loans. In addition, the Bank borrows at various maturities from the FHLB to mitigate mismatches between the asset and liability portfolios. Furthermore, the investment securities portfolio is used as a primary interest rate risk management tool through the duration and repricing targeting of purchases and sales.

 

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Item 4.  
Controls and Procedures
An evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of June 30, 2011. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this quarterly report. There has been no change in the Company’s internal controls over financial reporting during the quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
While the Company believes the present design of its disclosure controls and procedures is effective to achieve its goals, future events affecting its business may cause the Company to modify its disclosure controls and procedures. The Company does not expect that its disclosure controls and procedures and internal control over financial reporting will prevent all error and fraud. A control procedure, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control procedure are met. Because of the inherent limitations in all control procedures, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns in controls or procedures can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual actions of some persons, by collusion of two or more people, or by management override of the control. The design of any control procedure is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control procedure, misstatements due to error or fraud may occur and not be detected.

 

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PART 2 — OTHER INFORMATION
Item 1.  
Legal Proceedings
We are involved from time to time as plaintiff or defendant in various legal actions arising in the normal course of our businesses. While the ultimate outcome of pending proceedings cannot be predicted with certainty, it is the opinion of management, after consultation with counsel representing us in such proceedings, that the resolution of these proceedings should not have a material adverse effect on our consolidated financial position or results of operations.
Item 1.A.  
Risk Factors
There have been no material changes from risk factors as previously disclosed in the Company’s 2010 Annual Report on Form 10-K.
Item 2.  
Unregistered Sales of Equity Securities and Use of Proceeds
Not applicable.
Item 3.  
Defaults upon Senior Securities
Not applicable.
Item 4.  
(Removed and Reserved)
Item 5.  
Other Information
Not applicable.

 

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Item 6.  
Exhibits
         
Exhibit    
Number   Description
       
 
  2.1    
Amended and Restated Plan of Conversion and Reorganization of ViewPoint MHC (incorporated herein by reference to Exhibit 2.1 to the Registrant’s Annual Report on Form 10-K filed with the SEC on March 4, 2010 (File No. 001-32992))
       
 
  3.1    
Charter of the Registrant (incorporated herein by reference to Exhibit 3.1 to the Registrant’s Registration Statement on Form S-1, as amended (File No. 333-165509))
       
 
  3.2    
Bylaws of the Registrant (incorporated herein by reference to Exhibit 3.2 to the Registrant’s Registration Statement on Form S-1 (File No. 333-165509))
 
  4.0    
Certificate of Registrant’s Common Stock (incorporated herein by reference to Exhibit 4.0 to the Registrant’s Registration Statement on Form S-1, as amended (File No. 333-165509))
 
  10.1    
Employment Agreement by and between the Registrant and Garold R. Base (incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on October 4, 2006 (File No. 001-32992))
       
 
  10.2    
Amendment to Employment Agreement by and between the Registrant and Garold R. Base (incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on January 10, 2008 (File No. 001-32992))
       
 
  10.3    
Employment Agreement by and between ViewPoint Bank, the Registrant’s wholly owned operating subsidiary, and Garold R. Base (incorporated herein by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed with the SEC on October 4, 2006 (File No. 001-32992))
       
 
  10.4    
Amendment to Employment Agreement by and between ViewPoint Bank, the Registrant’s wholly owned operating subsidiary, and Garold R. Base (incorporated herein by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed with the SEC on January 10, 2008 (File No. 001-32992))
       
 
  10.5    
Amendment to Employment Agreement by and between ViewPoint Bank, the Registrant’s wholly owned operating subsidiary, and Garold R. Base (incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on March 6, 2008 (File No. 001-32992))
       
 
  10.6    
Form of Severance Agreement between ViewPoint Bank and the following executive officers: Pathie E. McKee, Mark E. Hord, James C. Parks and Mark L. Williamson (incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on February 17, 2011 (File No. 001-34737))
       
 
  10.7    
Summary of Director Board Fee Arrangements (incorporated herein by reference to Exhibit 10.4 to the Registrant’s Quarterly Report on Form 10-Q filed with the SEC on August 9, 2007 (File No. 001-32992))
       
 
  10.8    
ViewPoint Bank Deferred Compensation Plan (incorporated herein by reference to Exhibit 10.7 to the Registrant’s Registration Statement on Form S-1, as amended (File No. 0-24566-01))
       
 
  10.9    
Amended and Restated ViewPoint Bank Supplemental Executive Retirement Plan (incorporated herein by reference to Exhibit 10.8 to the Registrant’s Registration Statement on Form S-1, as amended (File No. 0-24566-01))

 

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Exhibit    
Number   Description
       
 
  10.10    
Executive Officer Incentive Plan (incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on January 26, 2011 (File No. 001-34737))