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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 September 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 þ   Non-accelerated filer o   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 October 27, 2011: 33,906,691
 
 

 

 


 

         
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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)
                 
    September 30,     December 31,  
    2011     2010  
    (unaudited)        
ASSETS
               
Cash and due from financial institutions
  $ 16,374     $ 16,465  
Short-term interest-bearing deposits in other financial institutions
    37,786       52,185  
 
           
Total cash and cash equivalents
    54,160       68,650  
Securities available for sale, at fair value
    655,925       717,497  
Securities held to maturity (fair value: September 30, 2011 – $557,586, December 31, 2010 – $434,296)
    539,257       432,519  
Loans held for sale (includes $9,899 and $16,877 carried at fair value at September 30, 2011 and December 31, 2010)
    691,204       491,985  
Loans held for investment (net of allowance for loan losses of $16,535 at September 30, 2011 and $14,847 at December 31, 2010)
    1,149,626       1,092,114  
FHLB stock, at cost
    29,210       20,569  
Bank-owned life insurance
    28,904       28,501  
Foreclosed assets, net
    2,098       2,679  
Premises and equipment, net
    48,595       48,731  
Goodwill
    818       1,089  
Accrued interest receivable
    8,159       9,248  
Prepaid FDIC assessment
    5,325       6,606  
Other assets
    21,997       21,807  
 
           
Total assets
  $ 3,235,278     $ 2,941,995  
 
           
 
               
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
Deposits
               
Non-interest-bearing demand
  $ 207,940     $ 201,998  
Interest-bearing demand
    496,269       438,719  
Savings and money market
    762,238       711,911  
Time
    607,180       664,922  
 
           
Total deposits
    2,073,627       2,017,550  
FHLB advances (net of prepayment penalty of $4,481 at September 30, 2011 and $5,259 at December 31, 2010)
    671,761       461,219  
Repurchase agreement
    25,000       25,000  
Other borrowings
    10,000       10,000  
Accrued interest payable
    1,506       1,541  
Other liabilities
    46,698       30,096  
 
           
Total liabilities
    2,828,592       2,545,406  
 
               
Commitments and contingent liabilities
           
 
               
Shareholders’ equity
               
Common stock, $.01 par value; 90,000,000 shares authorized; 34,262,491 shares issued September 30, 2011 and 34,839,491 shares issued December 31, 2010
    342       349  
Additional paid-in capital
    284,974       289,591  
Retained earnings
    136,454       125,125  
Accumulated other comprehensive income, net
    4,665       2,373  
Unearned Employee Stock Ownership Plan (ESOP) shares; 2,148,282 shares at September 30, 2011 and 2,286,428 shares at December 31, 2010
    (19,749 )     (20,849 )
 
           
Total shareholders’ equity
    406,686       396,589  
 
           
Total liabilities and shareholders’ equity
  $ 3,235,278     $ 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     Nine Months Ended  
    September 30,     September 30,  
    2011     2010     2011     2010  
    (unaudited)     (unaudited)  
Interest and dividend income
                               
Loans, including fees
  $ 21,838     $ 22,953     $ 63,132     $ 64,921  
Taxable securities
    6,633       6,656       20,140       17,642  
Nontaxable securities
    473       410       1,419       1,073  
Interest-bearing deposits in other financial institutions
    44       67       144       344  
FHLB stock
    18       15       52       47  
 
                       
 
    29,006       30,101       84,887       84,027  
 
                       
 
                               
Interest expense
                               
Deposits
    5,702       8,316       18,045       23,834  
FHLB advances
    2,467       2,910       7,360       9,071  
Repurchase agreement
    206       205       611       610  
Other borrowings
    152       151       450       449  
 
                       
 
    8,527       11,582       26,466       33,964  
 
                       
 
                               
Net interest income
    20,479       18,519       58,421       50,063  
Provision for loan losses
    581       756       2,741       3,790  
 
                       
Net interest income after provision for loan losses
    19,898       17,763       55,680       46,273  
 
                       
 
                               
Non-interest income
                               
Service charges and fees
    4,659       4,694       14,027       13,838  
Other charges and fees
    144       171       544       509  
Net gain on sale of mortgage loans
    1,710       3,697       5,538       9,517  
Bank-owned life insurance income
    118       135       403       305  
Gain on sale of available for sale securities
                3,415        
Loss on sale and disposition of assets
    (533 )     (24 )     (749 )     (365 )
Impairment of goodwill
                (271 )      
Other
    109       381       1,403       975  
 
                       
 
    6,207       9,054       24,310       24,779  
 
                       
 
                               
Non-interest expense
                               
Salaries and employee benefits
    11,751       11,843       35,147       34,476  
Advertising
    351       280       1,217       878  
Occupancy and equipment
    1,511       1,520       4,333       4,467  
Outside professional services
    769       648       2,126       1,591  
Regulatory assessments
    409       819       1,866       2,409  
Data processing
    1,168       1,036       3,366       3,081  
Office operations
    1,521       1,458       4,452       4,337  
Other
    1,087       1,096       3,189       2,980  
 
                       
 
    18,567       18,700       55,696       54,219  
 
                       
 
                               
Income before income tax expense
    7,538       8,117       24,294       16,833  
Income tax expense
    2,395       2,709       7,740       5,524  
 
                       
 
                               
Net income
  $ 5,143     $ 5,408     $ 16,554     $ 11,309  
 
                       
Earnings per share:
                               
Basic
  $ 0.16     $ 0.17     $ 0.51     $ 0.38  
 
                       
 
                               
Diluted
  $ 0.16     $ 0.17     $ 0.51     $ 0.38  
 
                       
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     Nine Months Ended  
    September 30,     September 30,  
    2011     2010     2011     2010  
Net income
  $ 5,143     $ 5,408     $ 16,554     $ 11,309  
Change in unrealized gains on securities available for sale
    2,982       1,469       6,977       3,325  
Reclassification of amount realized through sale of securities
                (3,415 )      
Tax effect
    (1,063 )     (509 )     (1,270 )     (1,152 )
 
                       
Other comprehensive income, net of tax
    1,919       960       2,292       2,173  
 
                       
 
                               
Comprehensive income
  $ 7,062     $ 6,368     $ 18,846     $ 13,482  
 
                       
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     Treasury     Shareholders’  
    Stock     Capital     Earnings     Income (Loss)     Shares     Stock     Equity  
For the Nine Months ended September 30, 2010
                                                       
Balance at January 1, 2010
  $ 305     $ 118,254     $ 111,188     $ 3,802     $ (6,159 )   $ (21,708 )   $ 205,682  
ESOP shares earned, 111,343 shares
          321                   832             1,153  
Share-based compensation expense
          1,367                               1,367  
Restricted stock forfeiture
          334                         (334 )      
Treasury stock purchased at cost, 25,634 shares
                                  (407 )     (407 )
Dividends declared ($0.12 per share)
                (2,468 )                       (2,468 )
Items relating to Conversion and stock offering:
                                                       
Merger of ViewPoint MHC pursuant to reorganization
          207                               207  
Treasury stock retired pursuant to reorganization (1,305,435 shares)
    (13 )     (22,102 )                       22,115        
Cancellation of ViewPoint MHC shares (14,183,812 shares)
    (142 )     142                                
Proceeds from stock offering (19,857,337 shares), net of expense of $7,773
    199       190,602                               190,801  
Purchase of shares by ESOP pursuant to reorganization (1,588,587 shares)
                            (15,886 )           (15,886 )
Comprehensive income:
                                                       
Net income
                11,309                         11,309  
Change in unrealized gains (losses) on securities available for sale, net of reclassifications and taxes
                      2,173                   2,173  
 
                                         
Total comprehensive income
                                                    13,482  
 
                                                     
Balance at September 30, 2010
  $ 349     $ 289,125     $ 120,029     $ 5,975     $ (21,213 )   $ (334 )   $ 393,931  
 
                                         
 
                                                       
For the Nine Months ended September 30, 2011
                                                       
Balance at January 1, 2011
  $ 349     $ 289,591     $ 125,125     $ 2,373     $ (20,849 )   $     $ 396,589  
ESOP shares earned, 138,146 shares
          652                   1,100             1,752  
Share-based compensation expense
          1,399                               1,399  
Dividends declared ($0.15 per share)
                (5,225 )                       (5,225 )
Share repurchase, 577,000 shares
    (7 )     (6,668 )                                     (6,675 )
Comprehensive income:
                                                       
Net income
                16,554                         16,554  
Change in unrealized gains (losses) on securities available for sale, net of reclassifications and taxes
                      2,292                   2,292  
 
                                         
Total comprehensive income
                                                    18,846  
 
                                                     
Balance at September 30, 2011
  $ 342     $ 284,974     $ 136,454     $ 4,665     $ (19,749 )   $     $ 406,686  
 
                                         
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)
                 
    Nine Months Ended  
    September 30,  
    2011     2010  
Operating activities
               
Net income
  $ 16,554     $ 11,309  
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
               
Provision for loan losses
    2,741       3,790  
Depreciation and amortization
    2,625       2,689  
Deferred tax expense (benefit)
    (189 )     (712 )
Premium amortization and accretion of securities, net
    3,406       2,761  
Gain on sale of available for sale securities
    (3,415 )      
ESOP compensation expense
    1,752       1,153  
Share-based compensation expense
    1,399       1,367  
Net gain on loans held for sale
    (5,538 )     (9,517 )
Loans originated or purchased for sale
    (5,471,076 )     (5,455,990 )
Proceeds from sale of loans held for sale
    5,277,395       5,217,496  
FHLB stock dividends
    (52 )     (47 )
Bank owned life insurance (BOLI) income
    (403 )     (305 )
Loss on sale and disposition of assets
    609       553  
Impairment of goodwill
    271        
Net change in deferred loan fees
    (623 )     (556 )
Net change in accrued interest receivable
    1,089       (1,334 )
Net change in other assets
    1,957       1,084  
Net change in other liabilities
    15,297       23,227  
 
           
Net cash provided by (used in) operating activities
    (156,201 )     (203,032 )
Investing activities
               
Available-for-sale securities:
               
Maturities, prepayments and calls
    103,124       171,251  
Purchases
    (129,232 )     (475,665 )
Proceeds from sale of securities
    93,008        
Held-to-maturity securities:
               
Maturities, prepayments and calls
    75,642       46,030  
Purchases
    (184,137 )     (60,472 )
Net change in loans held for investment
    (60,707 )     992  
Redemption (purchase) of FHLB stock, net
    (8,589 )     (6,755 )
Purchases of premises and equipment
    (2,623 )     (1,359 )
Proceeds from sale of assets
    506       3,516  
 
           
Net cash (used in) investing activities
    (113,008 )     (322,462 )
Financing activities
               
Net change in deposits
    56,077       232,292  
Proceeds from FHLB advances
    422,000       200,000  
Repayments on FHLB advances
    (211,458 )     (36,860 )
Share repurchase
    (6,675 )      
Net proceeds from stock offering
          190,801  
Merger of ViewPoint MHC pursuant to reorganization
          207  
Purchase of shares by ESOP pursuant to reorganization
          (15,886 )
Payment of dividends
    (5,225 )     (2,468 )
Treasury stock purchased
          (407 )
 
           
Net cash provided by financing activities
    254,719       567,679  
 
           
Net change in cash and cash equivalents
    (14,490 )     42,185  
Beginning cash and cash equivalents
    68,650       55,470  
 
           
Ending cash and cash equivalents
  $ 54,160     $ 97,655  
 
           
Supplemental cash flow information:
               
Interest paid
  $ 26,501     $ 33,862  
Income taxes paid
  $ 8,480     $ 4,310  
Supplemental noncash disclosures:
               
Transfers from loans to other real estate owned
  $ 1,077     $ 3,417  
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 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.
On August 26, 2011, the Company announced its intention to repurchase up to 5% of its total common shares outstanding, or approximately 1,741,975 shares of its common stock, in the open market at prevailing market prices over a period beginning on August 30, 2011, and continuing until the earlier of the completion of the repurchase or the next twelve months, depending upon market conditions. As of September 30, 2011, the Company had repurchased 577,000 shares of its common stock at an average price of $11.70 per share.

 

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VIEWPOINT FINANCIAL GROUP, INC.
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)
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 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 nine months ended September 30, 2011 and 2010 is as follows.
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2011     2010     2011     2010  
Basic earnings per share:
                               
Numerator:
                               
Net income
  $ 5,143     $ 5,408     $ 16,554     $ 11,309  
Distributed and undistributed earnings to participating securities
    (17 )     (39 )     (83 )     (115 )
 
                       
Income available to common shareholders
  $ 5,126     $ 5,369     $ 16,471     $ 11,194  
 
                       
Denominator:
                               
Weighted average common shares outstanding
    34,757,882       34,555,356       34,811,989       31,012,378  
Less: Average unallocated ESOP shares
    (2,178,647 )     (2,275,964 )     (2,224,243 )     (1,315,369 )
Average unvested restricted stock awards
    (110,595 )     (234,074 )     (164,825 )     (301,227 )
 
                       
Average shares for basic earnings per share
    32,468,640       32,045,318       32,422,921       29,395,782  
 
                       
 
                               
Basic earnings per common share
  $ 0.16     $ 0.17     $ 0.51     $ 0.38  
 
                       
 
                               
Diluted earnings per share:
                               
Numerator:
                               
Income available to common shareholders
  $ 5,126     $ 5,369     $ 16,471     $ 11,194  
 
                       
Denominator:
                               
Average shares for basic earnings per share
    32,468,640       32,045,318       32,422,921       29,395,782  
Dilutive effect of share-based compensation plan
    28,643             56,171       9,740  
 
                       
Average shares for diluted earnings per share
    32,497,283       32,045,318       32,479,092       29,405,522  
 
                       
 
                               
Diluted earnings per common share
  $ 0.16     $ 0.17     $ 0.51     $ 0.38  
 
                       
All of the stock options outstanding for the three and nine months ended September 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 per share. The dividend was paid on August 18, 2011, to the Company’s shareholders of record as of August 4, 2011. The Company’s Board of Directors meeting to declare the dividend for the fourth quarter of 2011 will be held on October 27 and the dividend will be announced thereafter.

 

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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        
September 30, 2011   Cost     Gains     Losses     Fair Value  
Agency residential mortgage-backed securities
  $ 251,665     $ 3,496     $ (232 )   $ 254,929  
Agency residential collateralized mortgage obligations
    392,617       4,223       (298 )     396,542  
SBA pools
    4,393       61             4,454  
 
                       
Total available for sale securities
  $ 648,675     $ 7,780     $ (530 )   $ 655,925  
 
                       
                                 
            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        
September 30, 2011   Cost     Gains     Losses     Fair Value  
Agency residential mortgage-backed securities
    189,892       8,533       (24 )   $ 198,401  
Agency commercial mortgage-backed securities
    9,437       644             10,081  
Agency residential collateralized mortgage obligations
    289,452       5,415       (171 )     294,696  
Municipal bonds
    50,476       3,932             54,408  
 
                       
Total held to maturity securities
  $ 539,257     $ 18,524     $ (195 )   $ 557,586  
 
                       
                                 
            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 September 30, 2011, by contractual maturity are set forth in the table below. 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
  $ 3,663     $ 3,951     $  
Due from five to ten years
    11,215       12,198       4,454  
Due after ten years
    35,598       38,259        
Agency residential mortgage-backed securities
    189,892       198,401       254,929  
Agency commercial mortgage-backed securities
    9,437       10,081        
Agency residential collateralized mortgage obligations
    289,452       294,696       396,542  
 
                 
Total
  $ 539,257     $ 557,586     $ 655,925  
 
                 
Proceeds from the sale of available for sale securities during the three and nine months ended September 30, 2011, totaled $0 and $93,008, respectively. Gross gains from those sales totaled $0 and $3,415 for the three and nine months ended September 30, 2011, respectively. There was no sales activity during the nine months ended September 30, 2010. The specific identification method was used to determine cost in order to compute the realized gains.
Public fund certificates totaled $298.0 million at September 30, 2011, and were secured by securities pledged by the Company with a carrying value of $333.9 million as of September 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 September 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  
September 30, 2011   Fair Value     Unrealized Loss     Number     Fair Value     Unrealized Loss     Number     Fair Value     Unrealized Loss     Number  
Agency residential mortgage-backed securities
  $ 37,890     $ (160 )     6     $ 8,758     $ (72 )     2     $ 46,648     $ (232 )     8  
Agency residential collateralized mortgage obligations
    16,948       (93 )     3       32,917       (205 )     12       49,865       (298 )     15  
 
                                                     
Total temporarily impaired
  $ 54,838     $ (253 )     9     $ 41,675     $ (277 )     14     $ 96,513     $ (530 )     23  
 
                                                     
HTM
                                                                         
    Less than 12 Months     12 Months or More     Total  
September 30, 2011   Fair Value     Unrealized Loss     Number     Fair Value     Unrealized Loss     Number     Fair Value     Unrealized Loss     Number  
Agency residential mortgage-backed securities
  $ 6,360     $ (24 )     1     $     $           $ 6,360     $ (24 )     1  
Agency residential collateralized mortgage obligations
    20,385       (171 )     3                         20,385       (171 )     3  
 
                                                     
Total temporarily impaired
  $ 26,745     $ (195 )     4     $     $           $ 26,745     $ (195 )     4  
 
                                                     
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  
December 31, 2010   Fair Value     Unrealized Loss     Number     Fair Value     Unrealized Loss     Number     Fair Value     Unrealized 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  
December 31, 2010   Fair Value     Unrealized Loss     Number     Fair Value     Unrealized Loss     Number     Fair Value     Unrealized 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  
 
                                                     

 

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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 unrealized losses at September 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. The Company does not intend to sell the securities and it is not more likely than not that the Company will be required to sell the securities before recovery of their amortized cost bases, which may be maturity.

 

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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:
                 
    September 30,     December 31,  
    2011     2010  
Real estate loans:
               
One- to four-family
  $ 372,949     $ 370,149  
Commercial
    531,729       479,071  
One- to four-family construction
    9,870       11,435  
Commercial construction
    15,185       569  
Home equity/home improvement
    140,945       139,165  
 
           
Total real estate loans
    1,070,678       1,000,389  
 
               
Consumer loans:
               
Automobile loans
    32,525       42,550  
Government-guaranteed student loans
          4,557  
Consumer lines of credit and unsecured loans
    11,918       14,197  
Other consumer loans, secured
    6,476       6,062  
 
           
Total consumer loans
    50,919       67,366  
 
           
 
               
Commercial and industrial loans
    44,014       39,279  
 
               
Gross loans
    1,165,611       1,107,034  
Deferred loan origination fees/costs, net
    550       (73 )
Allowance for loan losses
    (16,535 )     (14,847 )
 
           
Net loans held for investment
  $ 1,149,626     $ 1,092,114  
 
           
 
               
Mortgage loans held for sale:
               
ViewPoint Mortgage
  $ 27,410     $ 31,073  
Warehouse Purchase Program
    663,794       460,912  
 
           
Total mortgage loans held for sale
  $ 691,204     $ 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 nine months ended September 30, 2011 and 2010, segregated by portfolio segment and evaluation for impairment is as follows:
                                                 
            Home                          
    One- to Four-     Equity/Home     Commercial     Commercial and              
Quarter to date September 30, 2011   Family     Improvement     Real Estate     Industrial     Consumer     Total  
Allowance for loan losses:
                                               
Beginning balance – July 1, 2011
  $ 3,023     $ 873     $ 9,559     $ 1,897     $ 807     $ 16,159  
Charge-offs
          (23 )           (128 )     (163 )     (314 )
Recoveries
    4       14       2       3       86       109  
Provision expense (benefit)
    (51 )     180       320       109       23       581  
 
                                   
Ending balance – September 30, 2011
  $ 2,976     $ 1,044     $ 9,881     $ 1,881     $ 753     $ 16,535  
 
                                   
                                                 
            Home                          
    One- to Four-     Equity/Home     Commercial     Commercial and              
Year to date September 30, 2011   Family     Improvement     Real Estate     Industrial     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 )     (161 )     (15 )     (470 )     (694 )     (1,414 )
Recoveries
    27       14       29       20       271       361  
Provision expense (benefit)
    (284 )     255       1,918       679       173       2,741  
 
                                   
Ending balance – September 30, 2011
  $ 2,976     $ 1,044     $ 9,881     $ 1,881     $ 753     $ 16,535  
 
                                   
Ending balance: individually evaluated for impairment
  $ 755     $ 304     $ 1,731     $ 25     $ 3     $ 2,818  
Ending balance: collectively evaluated for impairment
    2,221       740       8,150       1,856       750       13,717  
Loans:
                                               
Ending balance
  $ 382,819     $ 140,945     $ 546,914     $ 44,014     $ 50,919     $ 1,165,611  
Ending balance: individually evaluated for impairment
    5,176       1,330       13,629       445       47       20,627  
Ending balance: collectively evaluated for impairment
    377,643       139,615       533,285       43,569       50,872       1,144,984  

 

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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 Four-     Equity/Home     Commercial     Commercial and              
Quarter to date September 30, 2010   Family     Improvement     Real Estate     Industrial     Consumer     Total  
Allowance for loan losses:
                                               
Beginning balance – July 1, 2010
  $ 2,440     $ 802     $ 8,357     $ 1,614     $ 1,102     $ 14,315  
Charge-offs
    (14 )     (94 )           (142 )     (313 )     (563 )
Recoveries
    3       2             25       53       83  
Provision expense
    175       89       62       196       234       756  
 
                                   
Ending balance – September 30, 2010
  $ 2,604     $ 799     $ 8,419     $ 1,693     $ 1,076     $ 14,591  
 
                                   
                                                 
            Home                          
    One- to Four-     Equity/Home     Commercial     Commercial and              
Year to date September 30, 2010   Family     Improvement     Real Estate     Industrial     Consumer     Total  
Allowance for loan losses:
                                               
Beginning balance – January 1, 2010
  $ 2,379     $ 730     $ 6,457     $ 1,382     $ 1,362     $ 12,310  
Charge-offs
    (174 )     (122 )           (455 )     (1,058 )     (1,809 )
Recoveries
    11       4             26       259       300  
Provision expense
    388       187       1,962       740       513       3,790  
 
                                   
Ending balance – September 30, 2010
  $ 2,604     $ 799     $ 8,419     $ 1,693     $ 1,076     $ 14,591  
 
                                   
Ending balance: individually evaluated for impairment
  $ 491     $ 57     $ 1,060     $ 158     $ 18     $ 1,784  
Ending balance: collectively evaluated for impairment
    2,113       742       7,359       1,535       1,058       12,807  
Loans:
                                               
Ending balance
  $ 380,914     $ 138,444     $ 486,927     $ 36,492     $ 72,934     $ 1,115,711  
Ending balance: individually evaluated for impairment
    5,569       567       10,674       452       359       17,621  
Ending balance: collectively evaluated for impairment
    375,345       137,877       476,253       36,040       72,575       1,098,090  

 

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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 but not limited to 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 commercial and industrial 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 impaired loans, the amount of the impairment can be adjusted, based on current data, until such time as the actual basis is established by acquisition of the collateral or collected. Impairment losses are reflected in the allowance for loan losses through a charge to the provision for loan losses. Subsequent recoveries are credited to the allowance for loan losses. Cash receipts for accruing loans are applied to principal and interest under the contractual terms of the loan agreement. Cash receipts on impaired loans for which the accrual of interest has been discontinued are applied first to principal 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 a percentage of net annual loan losses to average loans outstanding. Qualitative loss factors are based on management’s judgment of company-specific data and external economic indicators, which may not yet be reflected 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 mortgage and commercial and industrial 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 September 30, 2011, and December 31, 2010, were as follows:
                                                         
    September 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
  $ 1,795     $ 1,795     $     $ 1,880     $ 1,867     $ 21     $ 50  
Home equity/home improvement
    859       859             1,085       974       5       19  
Commercial
    2,860       2,860             1,052       865       15       41  
 
                                         
Total real estate loans
    5,514       5,514             4,017       3,706       41       110  
 
                                         
 
                                                       
Impaired loans with no related allowance recorded
    5,514       5,514             4,017       3,706       41       110  
 
                                         
 
                                                       
With an allowance recorded :
                                                       
Real estate loans:
                                                       
One- to four- family
    3,381       3,381       755       3,697       3,215       19       43  
Home equity/home improvement
    471       471       304       295       291             2  
Commercial
    10,769       10,769       1,731       10,775       10,401       111       327  
 
                                           
Total real estate loans
    14,621       14,621       2,790       14,767       13,907       130       372  
 
                                         
 
                                                       
Consumer loans:
                                                       
Automobile
    44       44       2       137       154              
Other secured
    3       3       1       4       9              
Lines of credit/unsecured
                      8       36              
 
                                           
Total consumer loans
    47       47       3       149       199              
 
                                         
 
                                                       
Commercial and industrial
    445       445       25       421       371       4       9  
 
                                         
 
                                                       
Impaired loans with allowance recorded
    15,113       15,113       2,818       15,337       14,477       134       381  
 
                                         
 
                                                       
Total:
                                                       
Residential real estate
    6,506       6,506       1,059       6,957       6,347       45       114  
Commercial real estate
    13,629       13,629       1,731       11,827       11,266       126       368  
Consumer
    47       47       3       149       199              
Commercial and industrial
    445       445       25       421       371       4       9  
 
                                         
 
  $ 20,627     $ 20,627     $ 2,818     $ 19,354     $ 18,183     $ 175     $ 491  
 
                                         

 

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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 and industrial
                      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
    205       205       16       286        
Other secured
    13       13       2       8        
Lines of credit/unsecured
    108       108       5       120        
 
                             
Total consumer loans
    326       326       23       414        
 
                             
 
                                       
Commercial and industrial
    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 and industrial
    272       272       8       353       14  
 
                             
 
  $ 18,915     $ 18,915     $ 2,007     $ 15,938     $ 535  
 
                             
Average impaired loans outstanding during the three and nine months ended September 30, 2010, totaled $17,946 and $14,951, 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 status. 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 September 30, 2011, or December 31, 2010.
                 
    September 30,     December 31,  
    2011     2010  
Real estate loans:
               
One- to four- family
  $ 4,896     $ 5,938  
Commercial
    10,768       9,812  
Home equity/home improvement
    1,330       1,306  
 
           
Total real estate loans
    16,994       17,056  
 
               
Consumer loans:
               
Automobile
          179  
Consumer other secured
          13  
Consumer lines of credit/unsecured
          108  
 
           
Total consumer loans
          300  
 
               
Commercial and industrial
    445       272  
 
           
Total
  $ 17,439     $ 17,628  
 
           
A modified loan is considered a troubled debt restructuring (“TDR”) when two conditions are met: 1) the borrower is experiencing financial difficulty and 2) concessions are made by the Company that would not otherwise be considered for a borrower or collateral with similar credit risk characteristics. Modifications to loan terms may include a modification of the contractual interest rate to a below-market rate (even if the modified rate is higher than the original rate), forgiveness of accrued interest, forgiveness of a portion of principal, an extended repayment period or a deed in lieu of foreclosure or other transfer of assets other than cash to fully or partially satisfy a debt. The Company’s policy is to place all TDRs on nonaccrual for a minimum period of six months. Loans qualify for return to accrual status once they have demonstrated performance with the restructured terms of the loan agreement for a minimum of six months and the collection of principal and interest under the revised terms is deemed probable. TDR classification may be removed if the borrower demonstrates compliance with the modified terms and the restructuring agreement specifies a market rate of interest equal to that which would be provided to a borrower with similar credit risk at the time of the restructuring.
At September 30, 2011, $10,333 of the $17,439 nonaccrual loans reported were TDRs. An additional $3,188 of performing TDRs were not included as non-performing loans at September 30, 2011. These loans have been performing under the restructured terms 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 were TDRs. An additional $1,287 of performing TDRs were not included as non-performing loans at December 31, 2010.

 

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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 Company set aside $1,530 and $947 of specific reserves on non-performing TDRs at September 30, 2011, and December 31, 2010, respectively. All TDRs are individually analyzed for impairment. 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. There were no outstanding commitments to lend additional funds to borrowers with loans whose terms have been modified in TDRs. The following table provides information on loans modified as a TDR during the three and nine months ended September 30, 2011. This table does not reflect the end of period recorded investment.
                                                 
    Three Months Ended September 30, 2011     Nine Months Ended September 30, 2011  
            Pre-     Post-             Pre-     Post-  
            Modification     Modification             Modification     Modification  
            Outstanding     Outstanding             Outstanding     Outstanding  
    Number of     Recorded     Recorded     Number of     Recorded     Recorded  
    Contracts     Investment     Investment     Contracts     Investment     Investment  
Real estate loans:
                                               
One- to four- family
    2     $ 269     $ 273       3     $ 333     $ 339  
 
                                               
Consumer loans:
                                               
Automobile
                      2       7       9  
 
                                   
Total
    2     $ 269     $ 273       5     $ 340     $ 348  
 
                                   
The following table provides information on how loans were modified as a TDR during the three and nine months ended September 30, 2011:
                 
    Three Months Ended     Nine Months Ended  
    September 30, 2011     September 30, 2011  
Extended maturity – automobile
  $     $ 6  
Combination of rate and principal adjustment – one- to four- family real estate
    273       339  
Other – automobile
          3  
 
           
Total
  $ 273     $ 348  
 
           
There were no loans modified as a TDR within the previous 12 months that had a payment default during the three and nine months ended September 30, 2011. For disclosure purposes a payment default is defined as a loan that was 90 days or more past 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)
Below is an analysis of the age of recorded investment in loans that were past due at September 30, 2011, and December 31, 2010:
                                                 
                    90 Days     Total              
    30-59 Days     60-89 Days     and Greater     Loans Past              
September 30, 2011   Past Due     Past Due     Past Due     Due     Current Loans     Total Loans  
Real estate loans:
                                               
One- to four- family
  $ 7     $ 2,364     $ 3,269     $ 5,640     $ 377,179     $ 382,819  
Commercial
                899       899       546,015       546,914  
Home equity/home improvement
    9       132       1,167       1,308       139,637       140,945  
 
                                   
Total real estate loans
    16       2,496       5,335       7,847       1,062,831       1,070,678  
 
                                   
 
                                               
Consumer loans:
                                               
Consumer loans:
                                               
Automobile
    112                   112       32,413       32,525  
Other secured
    3       29             32       6,444       6,476  
Lines of credit/unsecured
    50       14             64       11,854       11,918  
 
                                   
Total consumer loans
    165       43             208       50,711       50,919  
 
                                   
 
                                               
Commercial and industrial
    34       230             264       43,750       44,014  
 
                                   
Total
  $ 215     $ 2,769     $ 5,335     $ 8,319     $ 1,157,292     $ 1,165,611  
 
                                   
                                                 
                    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  
 
                                   
 
                                               
Consumer loans:
                                               
Consumer loans:
                                               
Automobile
    249       18       142       409       42,141       42,550  
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 and industrial
    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 September 30, 2011, or December 31, 2010.
For loans collateralized by real property and commercial and industrial 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 September 30, 2011, and December 31, 2010 are as follows:
Real Estate and Commercial and Industrial Credit Exposure
Credit Risk Profile by Internally Assigned Grade
                                 
    One- to Four-     Commercial Real     Commercial and     Home Equity/Home  
September 30, 2011   Family     Estate     Industrial     Improvement  
Grade:
                               
Pass
  $ 374,440     $ 513,241     $ 43,519     $ 138,074  
Special Mention
    1,482       21,980       50       142  
Substandard
    3,693       10,794       215       1,628  
Doubtful
    3,204       899       230       1,101  
 
                       
Total
  $ 382,819     $ 546,914     $ 44,014     $ 140,945  
 
                       
                                 
    One- to Four-     Commercial Real     Commercial and     Home Equity/Home  
December 31, 2010   Family     Estate     Industrial     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  
September 30, 2011   Automobile     Other Secured     Credit/Unsecured  
Performing
  $ 32,525     $ 6,476     $ 11,918  
Non-performing
                 
 
                 
Total
  $ 32,525     $ 6,476     $ 11,918  
 
                 
                         
                    Lines of  
December 31, 2010   Automobile     Other Secured     Credit/Unsecured  
Performing
  $ 42,371     $ 10,606     $ 14,089  
Non-performing
    179       13       108  
 
                 
Total
  $ 42,550     $ 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.

 

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VIEWPOINT FINANCIAL GROUP, INC.
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)
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.
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 September 30, 2011, certain loans held for sale for which the fair value option was elected had an aggregate fair value of $9,899 and an aggregate outstanding principal balance of $9,714 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 $591 and $964 resulting from changes in fair value of these loans were recorded in mortgage income during the three and nine months ended September 30, 2011, respectively, offset by economic hedging losses in the amounts of $655 and $915, respectively.
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 September 30, 2011, Using  
            Quoted Prices in              
            Active Markets for     Significant Other     Significant  
    September 30,     Identical Assets     Observable Inputs     Unobservable Inputs  
    2011     (Level 1)     (Level 2)     (Level 3)  
Assets:
                               
Agency residential mortgage-backed securities
  $ 254,929     $     $ 254,929     $  
Agency residential collateralized mortgage obligations
    396,542             396,542        
SBA pools
    4,454             4,454        
 
                       
Total securities available for sale
  $ 655,925     $     $ 655,925     $  
 
                       
 
                               
Loans held for sale
  $ 9,899     $     $ 9,899     $  
Derivative instruments
  $ (49 )   $     $ (49 )   $  
                                 
            Fair Value Measurements at December 31, 2010, Using  
            Quoted Prices in              
            Active Markets for     Significant Other     Significant  
    December 31,     Identical Assets     Observable Inputs     Unobservable Inputs  
    2010     (Level 1)     (Level 2)     (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 September 30, 2011, Using  
            Quoted Prices in              
            Active Markets for     Significant Other     Significant  
    September 30,     Identical Assets     Observable Inputs     Unobservable  
    2011     (Level 1)     (Level 2)     Inputs (Level 3)  
Assets:
                               
Impaired loans
  $ 12,295     $     $     $ 12,295  
Other real estate owned
    2,098             392       1,706  
                                 
            Fair Value Measurements at December 31, 2010, Using  
            Quoted Prices in              
            Active Markets for     Significant Other     Significant  
    December 31,     Identical Assets     Observable Inputs     Unobservable  
    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 and one- to four-family real estate, home equity/home improvement and commercial and industrial 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 September 30, 2011, had a carrying amount of $12,295, which is made up of the outstanding balance of $15,113, net of a valuation allowance of $2,818. 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 September 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 $2,098, which is made up of the outstanding balance of $3,139, net of a valuation allowance of $1,041. Other real estate owned that was valued using third party appraisals less costs to sell is classified as Level 2, while other real estate owned that was valued using third party appraisals less costs to sell and other Level 3 valuation inputs is classified as Level 3. These Level 3 valuation inputs include discounts of the appraised value based on real estate market activity. Of the $1,041, $666 resulted from write-downs during the nine months ended September 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 nine months ended September 30, 2011 and 2010, and the related valuation allowance follows:
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2011     2010     2011     2010  
Beginning balance
  $ 2,326     $ 4,436     $ 2,668     $ 3,917  
Transfers in at fair value
    556       253       1,077       3,274  
Change in valuation allowance
    (550 )     (141 )     (589 )     (408 )
Sale of property (gross)
    (234 )     (1,678 )     (1,058 )     (3,913 )
 
                       
Ending balance
  $ 2,098     $ 2,870     $ 2,098     $ 2,870  
 
                       
 
                               
Valuation allowance:
                               
Beginning balance
  $ 491     $ 304     $ 452     $ 37  
Sale of property
          (2 )     (77 )     (62 )
Valuation adjustment
    550       143       666       470  
 
                       
Ending balance
  $ 1,041     $ 445     $ 1,041     $ 445  
 
                       

 

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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:
                                 
    September 30, 2011     December 31, 2010  
    Carrying             Carrying        
    Amount     Fair Value     Amount     Fair Value  
 
                               
Financial assets
                               
Cash and cash equivalents
  $ 54,160     $ 54,160     $ 68,650     $ 68,650  
Securities available for sale
    655,925       655,925       717,497       717,497  
Securities held to maturity
    539,257       557,586       432,519       434,296  
Loans held for sale
    691,204       691,795       491,985       492,367  
Loans held for investment, net
    1,149,626       1,181,871       1,092,114       1,107,640  
FHLB stock
    29,210       N/A       20,569       N/A  
Bank-owned life insurance
    28,904       28,904       28,501       28,501  
Accrued interest receivable
    8,159       8,159       9,248       9,248  
Derivative instruments
    (49 )     (49 )     116       116  
 
                               
Financial liabilities
                               
Deposits
  $ (2,073,627 )   $ (2,008,954 )   $ (2,017,550 )   $ (2,087,160 )
FHLB advances
    (671,761 )     (690,235 )     (461,219 )     (470,729 )
Repurchase agreement
    (25,000 )     (28,300 )     (25,000 )     (27,255 )
Other borrowings
    (10,000 )     (10,000 )     (10,000 )     (10,000 )
Accrued interest payable
    (1,506 )     (1,506 )     (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 fair 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 nine months ended September 30, 2011, and the twelve months ended December 31, 2010.
                                 
            Outstanding                
    Expiration     Notional             Recorded  
September 30, 2011   Dates     Balance     Fair Value     Gains/(Losses)  
Other Assets
                               
IRLCs
    2011     $ 12,651     $ 120     $ 109  
Loan sale commitments
    2011       3,216       51       964  
Forward mortgage-backed securities trades
    2011       12,000       (168 )     (915 )
                                 
            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 September 30, 2011, and December 31, 2010. The securities sold under agreement to repurchase had an average balance of $31,818 and an average interest rate of 1.76% during the nine months ended September 30, 2011. The maximum month-end balance during the nine months ended September 30, 2011 was $32,501. 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 $32,179 at September 30, 2011. The Company retains the right to substitute securities under the terms of the agreement.
10. FHLB Advances
At September 30, 2011, advances from the FHLB totaled $671,761, net of a restructuring prepayment penalty of $4,481, and had interest rates ranging from 0.08% to 5.99% with a weighted average rate of 1.32%. 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 September 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 is then 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 $618,310 and $654,913 under a blanket lien arrangement at September 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 $665,896 and $756,432 at September 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 $1,342,263 and $1,223,035 at September 30, 2011, and December 31, 2010, respectively.
At September 30, 2011, the advances are structured to contractually pay down as follows:
                 
        Weighted  
        Average  
    Balance     Rate  
2011
  $ 378,121       0.14 %
2012
    36,720     2.25  
2013
    67,134     1.70  
2014
    36,517     2.86  
2015
    61,742     3.66  
Thereafter
    96,008     3.27  
 
           
 
    676,242       1.32 %
Restructruing prepayment penalty
    (4,481 )        
 
             
Total
  $ 671,761          
 
             
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 $356 and $340 for the three months ended September 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 $105 and $102 for the three months ended September 30, 2011 and 2010, respectively. The total income tax benefit recognized in the income statement for share-based compensation was $162 and $155 for the three months ended September 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 $1,059 and $1,126 for the nine months ended September 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 $340 and $241 for the nine months ended September 30, 2011 and 2010, respectively. The total income tax benefit recognized in the income statement for share-based compensation was $490 and $478 for the nine months ended September 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 September 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 September 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 September 30, 2011, there was $931 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 0.67 year.
A summary of the activity under the stock option portion of the Equity Incentive Plan as of September 30, 2011, and changes for the nine 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        
Exercised
                       
Forfeited
    (17,164 )     11.36             6  
 
                             
Outstanding at September 30, 2011
    548,891     $ 12.17       7.3     $ 116  
 
                       
Fully vested and expected to vest
    528,035     $ 12.19       7.1     $ 94  
 
                       
Exercisable at September 30, 2011
    131,764     $ 12.24       6.4     $ 26  
 
                       
As of September 30, 2011, there was $692 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 2.3 years.
12. Income Taxes
The net deferred tax assets totaled $5,498 and $6,580 at September 30, 2011, and December 31, 2010, respectively. No valuation allowance was provided on deferred tax assets as of September 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 nine months ended September 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 nine months ended September 30, 2011 and 2010 follows:

 

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VIEWPOINT FINANCIAL GROUP, INC.
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)
                                 
    Three Months Ended  
    September 30, 2011  
                            Total  
                    Eliminations     Segments  
                    and     (Consolidated  
    Banking     VPM     Adjustments1     Total)  
Results of Operations:
                               
Total interest income
  $ 28,953     $ 368     $ (315 )   $ 29,006  
Total interest expense
    8,581       315       (369 )     8,527  
Provision (benefit) for loan losses
    582       (1 )           581  
 
                       
Net interest income after provision for loan losses
    19,790       54       54       19,898  
Other revenue
    3,851       (3 )     649       4,497  
Net gain (loss) on sale of mortgage loans
    (682 )     2,392             1,710  
Total noninterest expense
    14,895       3,411       261       18,567  
 
                       
Income before income tax expense (benefit)
    8,064       (968 )     442       7,538  
Income tax expense (benefit)
    2,770       (305 )     (70 )     2,395  
 
                       
Net income (loss)
  $ 5,294     $ (663 )   $ 512     $ 5,143  
 
                       
Segment assets
  $ 3,234,538     $ 42,939     $ (42,199 )   $ 3,235,278  
Noncash items:
                               
Net gain (loss) on sale of mortgage loans
    (682 )     2,392             1,710  
Depreciation
    797       72             869  
Provision (benefit) for loan losses
    582       (1 )           581  
                                 
    Three Months Ended  
    September 30, 2010  
                            Total  
                    Eliminations     Segments  
                    and     (Consolidated  
    Banking     VPM     Adjustments1     Total)  
Results of Operations:
                               
Total interest income
  $ 30,014     $ 693     $ (606 )   $ 30,101  
Total interest expense
    11,645       606       (669 )     11,582  
Provision for loan losses
    748       8             756  
 
                       
Net interest income after provision for loan losses
    17,621       79       63       17,763  
Other revenue
    5,788             (431 )     5,357  
Net gain (loss) on sale of mortgage loans
    (761 )     4,458             3,697  
Total noninterest expense
    14,561       3,917       222       18,700  
 
                       
Income before income tax expense (benefit)
    8,087       620       (590 )     8,117  
Income tax expense (benefit)
    2,480       209       20       2,709  
 
                       
Net income (loss)
  $ 5,607     $ 411     $ (610 )   $ 5,408  
 
                       
Segment assets
  $ 2,986,322     $ 65,743     $ (65,653 )   $ 2,986,412  
Noncash items:
                               
Net gain (loss) on sale of mortgage loans
    (761 )     4,458             3,697  
Depreciation
    683       78             761  
Provision for loan losses
    748       8             756  
1Includes 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)
                                 
    Nine Months Ended  
    September 30, 2011  
                            Total  
                    Eliminations     Segments  
                    and     (Consolidated  
    Banking     VPM     Adjustments1     Total)  
Results of Operations:
                               
Total interest income
  $ 84,698     $ 1,227     $ (1,038 )   $ 84,887  
Total interest expense
    26,632       1,038       (1,204 )     26,466  
Provision (benefit) for loan losses
    2,761       (20 )           2,741  
 
                       
Net interest income after provision for loan losses
    55,305       209       166       55,680  
Other revenue
    17,446       (275 )     1,601       18,772  
Net gain (loss) on sale of mortgage loans
    (1,574 )     7,112             5,538  
Total noninterest expense
    45,416       9,457       823       55,696  
 
                       
Income before income tax expense (benefit)
    25,761       (2,411 )     944       24,294  
Income tax expense (benefit)
    8,734       (771 )     (223 )     7,740  
 
                       
Net income (loss)
  $ 17,027     $ (1,640 )   $ 1,167     $ 16,554  
 
                       
Segment assets
  $ 3,234,538     $ 42,939     $ (42,199 )   $ 3,235,278  
Noncash items:
                               
Net gain (loss) on sale of mortgage loans
    (1,574 )     7,112             5,538  
Depreciation
    2,401       225             2,626  
Provision (benefit) for loan losses
    2,761       (20 )           2,741  
 
                               
                                 
    Nine Months Ended  
    September 30, 2010  
                            Total  
                    Eliminations     Segments  
                    and     (Consolidated  
    Banking     VPM     Adjustments1     Total)  
Results of Operations:
                               
Total interest income
  $ 83,751     $ 1,699     $ (1,423 )   $ 84,027  
Total interest expense
    33,903       1,424       (1,363 )     33,964  
Provision for loan losses
    3,725       65             3,790  
 
                       
Net interest income after provision for loan losses
    46,123       210       (60 )     46,273  
Other revenue
    15,216             46       15,262  
Net gain (loss) on sale of mortgage loans
    (1,228 )     10,745             9,517  
Total noninterest expense
    42,714       11,106       399       54,219  
 
                       
Income before income tax expense (benefit)
    17,397       (151 )     (413 )     16,833  
Income tax expense (benefit)
    5,666       (46 )     (96 )     5,524  
 
                       
Net income (loss)
  $ 11,731     $ (105 )   $ (317 )   $ 11,309  
 
                       
Segment assets
  $ 2,986,322     $ 65,743     $ (65,653 )   $ 2,986,412  
Noncash items:
                               
Net gain (loss) on sale of mortgage loans
    (1,228 )     10,745             9,517  
Depreciation
    2,100       219             2,319  
Provision for loan losses
    3,725       65             3,790  
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. In September 2011, and without admitting liability, the parties agreed to a mediated settlement of the matter for $350, which is recorded in Other Liabilities on the consolidated balance sheet and in Outside Professional Services expense on the consolidated statement of income.
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 during the nine months ended September 30, 2011. There was no goodwill impairment recognized during the three months ended September 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)
Deterioration in economic market conditions, changes in key personnel, 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 value 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. Subsequent Events
In October 2011, the Company prepaid the four promissory notes for unsecured loans totaling $10,000 obtained from four local, private investors in October 2009. The notes could not be prepaid by the Company during the first two years of the loan term, but thereafter could be prepaid in whole or in part at any time without fee or penalty. Each of the four promissory notes had an interest rate of 6% per annum.
17. Recent Accounting Developments
In September 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-08, Intangibles–Goodwill and Other (Topic 350): Testing Goodwill for Impairment. This ASU simplifies how entities test goodwill for impairment by permitting an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in Topic 350. The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent. Previous guidance under Topic 350 required an entity to test goodwill for impairment on at least an annual basis, by comparing the fair value of a reporting unit with its carrying amount, including goodwill (step one). If the fair value of a reporting unit is less than its carrying amount, then the second step of the test must be performed to measure the amount of the impairment loss, if any. Under the amendments in this Update, an entity is not required to calculate the fair value of a reporting unit unless the entity determines that it is more likely than not that its fair value is less than its carrying amount. This ASU is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted, including for interim goodwill impairment tests performed as of a date before September 15, 2011, if an entity’s financial statements for the most recent annual or interim period have not yet been issued. 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 the Bank’s charter to that of a national bank and the Company’s charter to that of a bank holding company. Both applications 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 properties, as well as in secured and unsecured commercial and industrial and consumer loans. Additionally, we have an active program with mortgage banking companies that allows them to close one- to four-family mortgage 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 earned 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 September 30, 2011, the Company operated 25 community bank offices in the Dallas/Fort Worth Metroplex and 10 loan production offices located in Texas and Oklahoma. The Company opened new community bank offices in Carrollton and Flower Mound during the third quarter of 2011. The Company purchased these two bank office locations 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.
Performance Highlights
   
Lower deposit and borrowing rates fueled a ten basis point increase in net interest margin to 2.84%: A $5.8 million reduction in deposit cost improved the net interest margin by ten basis points to 2.84% for the nine months ended September 30, 2011, from 2.74% for the nine months ended September 30, 2010.
   
Loan growth year-to-date: During the nine months ended September 30, 2011, loans increased by $257.8 million, or 16.1%. This increase was driven by a $202.9 million increase in Warehouse Purchase Program loans held for sale and a $52.7 million increase in commercial real estate loan balances.
   
$44.1 million in business lending production in 2011: By adding experienced business lenders and enabling local loan decisioning, $44.1 million of business loans (including small to mid-size business real estate and commercial and industrial loans) have been originated during the nine months ended September 30, 2011.
   
Lower net charge-offs led to decrease in provision expense: The provision for loan losses decreased by $1.0 million, or 27.7%, during the nine months ended September 30, 2011, compared to the same period last year.
   
Year-to-date net income increased by $5.3 million, or 46.4%: The $5.3 million increase in net income was driven by higher net interest income, a gain on the sale of available for sale securities and a lower provision for loan losses.
   
Basic and diluted EPS increased by $0.13: Basic and diluted earnings per share for the nine months ended September 30, 2011, was $0.51, up $0.13 from the nine months ended September 30, 2010.
   
Deposit growth of $56.1 million: Deposits increased by $56.1 million from December 31, 2010, primarily due to growth of $57.6 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 but not limited to charge-offs and non-performing loan trends. Generally, one- to four-family residential mortgage lending has a lower credit risk profile compared to consumer lending (such as automobile or personal line of credit loans). Commercial real estate and commercial and industrial lending, however, have higher credit risk profiles than consumer and one- to four- family residential mortgage loans due to these loans being larger in amount and non-homogenous in structure and term. 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 impaired loans, the amount of the impairment can be adjusted, based on current data, until such time as the actual basis is established by acquisition of the collateral or collected. Impairment losses are reflected in the allowance for loan losses through a charge to the provision for loan losses. Subsequent recoveries are credited to the allowance for loan losses. Cash receipts for accruing loans are applied to principal and interest under the contractual terms of the loan agreement. Cash receipts on impaired loans for which the accrual of interest has been discontinued are applied first to principal 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 banks; 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 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.
Comparison of Financial Condition at September 30, 2011, and December 31, 2010
General. Total assets increased by $293.3 million, or 10.0%, to $3.24 billion at September 30, 2011, from $2.94 billion at December 31, 2010. The increase in total assets, which was primarily due to a $257.8 million increase in gross loans and a $45.2 million increase in the securities portfolio, was funded by a $210.6 million increase in net FHLB advances and a $56.1 million increase in deposits.
Loans. Gross loans (including $691.2 million in mortgage loans held for sale) increased by $257.8 million, or 16.1%, to $1.86 billion at September 30, 2011, from $1.60 billion at December 31, 2010. Loan growth in our Warehouse Purchase Program and commercial real estate portfolio drove the majority of this increase.
                                 
    September 30,     December 31,     Dollar     Percent  
    2011     2010     Change     Change  
    (Dollars in thousands)  
Real estate loans:
                               
One- to four- family
  $ 372,949     $ 370,149     $ 2,800       0.8 %
Commercial
    531,729       479,071       52,658       11.0  
One- to four- family construction
    9,870       11,435       (1,565 )     (13.7 )
Commercial construction
    15,185       569       14,616       2,568.7  
Home equity/home improvement
    140,945       139,165       1,780       1.3  
Mortgage loans held for sale
    691,204       491,985       199,219       40.5  
 
                         
Total real estate loans
    1,761,882       1,492,374       269,508       18.1  
 
                               
Automobile loans
    32,525       42,550       (10,025 )     (23.6 )
Other consumer loans
    18,394       24,816       (6,422 )     (25.9 )
 
                         
Total consumer loans
    50,919       67,366       (16,447 )     (24.4 )
 
                               
Commercial and industrial
    44,014       39,279       4,735       12.1  
 
                         
 
                               
Gross loans
  $ 1,856,815     $ 1,599,019     $ 257,796       16.1 %
 
                         
At September 30, 2011, mortgage loans held for sale consisted of $663.8 million in Warehouse Purchase Program loans and $27.4 million in loans originated for sale by our mortgage banking subsidiary, VPM. Mortgage loans held for sale increased by $199.2 million, or 40.5%, from December 31, 2010, which was due to a $202.9 million increase in Warehouse Purchase Program loans purchased for sale under our standard loan participation agreement. Loans held for sale that were originated for sale by VPM declined by $3.7 million. Our Warehouse Purchase Program enables our mortgage banking company customers to close conforming and some jumbo and second lien one- to four-family mortgage 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 31 clients with approved maximum borrowing amounts ranging from $10.0 million to $38.5 million at September 30, 2011, compared to 29 clients at December 31, 2010, and 26 clients at September 30, 2010. During the nine months ended September 30, 2011, the average outstanding balance per client was $10.8 million. During the nine months ended September 30, 2011, the Warehouse Purchase Program generated $2.1 million in fee income and $10.8 million in interest income, compared to $1.9 million in fee income and $12.1 million in interest income for the nine months ended September 30, 2010. Compared to the quarter ended June 30, 2011, Warehouse Purchase Program loans increased by $258.8 million, or 63.9%, during the quarter ended September 30, 2011. The recent increase in Warehouse Purchase Program loan balances is primarily due to the current low interest rate environment, the industry-wide increase in refinance activity, seasonal fluctuations and the addition of one new client during the third quarter of 2011.

 

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VPM originated $262.8 million in one- to four-family mortgage loans during the nine months ended September 30, 2011, compared to $358.5 million during the nine months ended September 30, 2010. Of the $262.8 million originated during the nine months ended September 30, 2011, $187.0 million was sold or committed to be sold to investors, generating a net gain on sale of loans of $5.5 million during that period. The remaining $75.8 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.
In 2010, the Company established a mortgage repurchase liability for loans sold by VPM to third parties 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 five indemnifications during the nine months ended September 30, 2011, compared to two repurchases and five indemnifications during the nine months ended September 30, 2010. Actual losses totaled $91,000 and $47,000 for the nine months ended September 30, 2011 and 2010, respectively. This mortgage repurchase liability, included in “Other Liabilities” in the consolidated balance sheet, was $65,000 at September 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 $52.7 million, or 11.0%, from December 31, 2010, with $17.1 million of this growth coming from business real estate lending to small and mid-size businesses operating in the communities we serve. Our commercial real estate portfolio consists almost exclusively of loans secured by existing, multi-tenanted commercial real estate. 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 September 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 $14.6 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 and industrial portfolio increased by $4.7 million, or 12.1%, 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 nine months ended September 30, 2011, we originated $17.1 million in commercial and industrial loans, with the average balance of this portfolio increasing by $5.4 million during the nine months ended September 30, 2011, compared to the same time period last year.

 

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Consumer loans, including automobile, other secured installment loans, and unsecured lines of credit, decreased by $16.4 million, or 24.4%, 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 of $146,000.
ViewPoint Mortgage. At September 30, 2011, VPM had total assets of $42.9 million, which primarily consisted of $27.4 million in one- to four- family mortgage loans held for sale to outside investors and $9.9 million in one- to four-family construction loans. VPM recorded a net loss of $663,000 for the three months ended September 30, 2011, compared to net income of $411,000 for the same period in 2010. For the nine months ended September 30, 2011, VPM recorded a net loss of $1.6 million, compared to a net loss of $105,000 for the same period in 2010. The net loss primarily resulted from lower mortgage origination volume, which was primarily attributable to an overall decline in the mortgage market this year. VPM’s operating results for the nine months ended September 30, 2011, included a goodwill impairment charge of $271,000 due to the downturn in current mortgage market conditions and the loss of some of our most productive loan officers, as well as $421,000 in settlement and estimated legal expenses related to a lawsuit filed against VPM. VPM operates eight loan production offices in Texas and one loan production office in Broken Arrow, Oklahoma.
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 and industrial and one- to four-family and commercial real estate loans where management has concerns about the borrower’s ability to repay. Loss estimates include the negative difference, if any, between the current fair value of the collateral or the estimated discounted cash flows and the loan amount due.
We are focused on maintaining our asset quality by applying strong underwriting guidelines to all loans that we originate. Substantially all of our residential mortgage loans are full-documentation, standard “A” type products. We do not offer any sub-prime loan products.
Our non-performing loans, which consist of nonaccrual loans, include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans. Loans are placed on nonaccrual status when the collection of principal and/or interest becomes doubtful or other factors involving the loan warrant placing the loan on nonaccrual status.
A modified loan is considered a troubled debt restructuring (“TDR”) when two conditions are met: 1) the borrower is experiencing financial difficulty and 2) concessions are made by the Company that would not otherwise be considered for a borrower or collateral with similar credit risk characteristics. Modifications to loan terms may include a modification of the contractual interest rate to a below-market rate (even if the modified rate is higher than the original rate), forgiveness of accrued interest, forgiveness of a portion of principal, an extended repayment period or a deed in lieu of foreclosure or other transfer of assets other than cash to fully or partially satisfy a debt. The Company’s policy is to place all TDRs on nonaccrual for a minimum period of six months. Loans qualify for a return to accrual status once they have demonstrated performance with the restructured terms of the loan agreement for a minimum of six months and the collection of principal and interest under the revised terms is deemed probable. TDR classification may be removed if the borrower demonstrates compliance with the modified terms and the restructuring agreement specifies a market rate of interest equal to that which would be provided to a borrower with similar credit risk at the time of the restructuring. At September 30, 2011, $3.2 million in TDRs were accruing interest and $10.3 million of TDRs were classified as nonaccrual, including $9.3 million attributable to five commercial real estate loans. Of those loans, $8.4 million were performing in accordance with their restructured terms at September 30, 2011.

 

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Our non-performing loans to total loans ratio at September 30, 2011, was 1.50%, compared to 1.59% at December 31, 2010. Non-performing loans decreased by $189,000, from $17.6 million at December 31, 2010, to $17.4 million at September 30, 2011. Compared to June 30, 2011, non-performing loans decreased by $427,000, primarily due to a $441,000 decrease in one- to four-family non-performing loans.
Our allowance for loan losses at September 30, 2011, was $16.5 million, or 1.42% 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 94.82% at September 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 and industrial loans that are classified as “special mention,” meaning that these loans have potential weaknesses that deserve management’s close attention. These loans are not adversely classified according to regulatory classifications and do not expose the Company to sufficient risk to warrant adverse classification. These loans have been considered in management’s determination of our allowance for loan losses. As of September 30, 2011, there was an aggregate of $23.7 million of these potential problem loans, compared to $3.5 million at December 31, 2010. Of the $23.7 million, $22.0 million is comprised of five commercial real estate loans that were not delinquent at September 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 $7.0 million, were downgraded to “special mention” during the third quarter of 2011.
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. At September 30, 2011, there were $4.4 million of substandard loans that were performing and were not considered impaired; $1.9 million of these loans are one- to four- family and home equity/home improvement loans that are classified due to the borrower filing for bankruptcy.
We regularly review the problem assets in our portfolio to determine whether any assets require classification. The total amount classified represented 5.9% of our equity capital and 0.75% of our assets at September 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:
                 
    September 30, 2011     December 31, 2010  
    (Dollars in thousands)  
Loss
  $     $  
Doubtful
    5,434       4,185  
Substandard
    18,701       17,410  
 
           
Total
  $ 24,135     $ 21,595  
 
           
Securities. Our securities portfolio increased by $45.2 million, or 3.9%, to $1.20 billion at September 30, 2011, from $1.15 billion at December 31, 2010. The increase in our securities portfolio was funded by increased deposit volume. During the nine months ended September 30, 2011, $313.4 million of securities purchased was partially offset by proceeds from securities sales totaling $93.0 million and maturities and paydowns totaling $178.8 million. The purchases consisted of $129.2 million of securities deemed available for sale and $184.2 million of securities that were recorded as held to maturity, resulting in a $61.5 million reduction in available for sale securities and a $106.7 million increase in held to maturity securities. 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 and adjustable rate government and 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 $56.1 million, or 2.8%, to $2.07 billion at September 30, 2011, from $2.02 billion at December 31, 2010.
                                 
    September 30,     December 31,     Dollar     Percent  
    2011     2010     Change     Change  
    (Dollars in thousands)  
Non-interest-bearing demand
  $ 207,940     $ 201,998     $ 5,942       2.9 %
Interest-bearing demand
    496,269       438,719       57,550       13.1  
Savings
    155,476       148,399       7,077       4.8  
Money Market
    596,561       554,261       42,300       7.6  
IRA
    10,201       9,251       950       10.3  
Time
    607,180       664,922       (57,742 )     (8.7 )
 
                         
Total deposits
  $ 2,073,627     $ 2,017,550     $ 56,077       2.8 %
 
                         
The increase in deposits was primarily attributable to a $57.6 million, or 13.1%, increase in interest-bearing demand deposits, principally in our Absolute Checking product which increased by $59.8 million during the nine months ended September 30, 2011. Effective September 1, 2011, the Absolute Checking annual percentage yield (APY) was reduced from 4.0% to 3.0% 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 September 30, 2011, 55% of Absolute Checking account holders met the requirements to earn the 3.0% APY. Since Absolute Checking was introduced in May 2008, the balance has increased $436.5 million, from $5.4 million at the product’s inception to $441.9 million at September 2011. At September 30, 2011, the rate paid was 0.30% for balances between $25,001 to $100,000 and 0.03% for balances above $100,000 and for non-qualifying accounts. The average rate paid on Absolute Checking accounts during the nine months ended September 30, 2011 was 2.14%, compared to 2.90% for the nine months ended September 30, 2010.
Money market balances increased by $42.3 million, or 7.6%, with $25.6 million of this increase attributable to our new Insured Cash Sweep money market product, through which customer funds are swept from a transaction account at the Company into money market accounts at multiple banks to allow access to FDIC insurance coverage through multiple accounts. Time balances decreased by $57.7 million, or 8.7%, primarily due to an $82.6 million decline in public funds certificates, as these certificates matured and were placed into more liquid assets.

 

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Borrowings. FHLB advances, net of a $4.5 million restructuring prepayment penalty, increased by $210.6 million, or 45.7%, from $461.2 million at December 31, 2010, to $671.8 million at September 30, 2011. The increase was primarily due to funding needs for the Warehouse Purchase Program, as the balance of loans in the Program increased by $202.9 million from December 31, 2010. The Company has made a strategic decision to fund a portion of Warehouse Purchase Program balances, which are typically on the Company’s books for less than 30 days, with short-term advances. At September 30, 2011, the Company had short-term FHLB advances totaling $372.0 million that are due to mature in 30 days or less with a weighted average rate of 0.09%.
At September 30, 2011, the Company was eligible to borrow an additional $1.34 billion from the FHLB. Additionally, the Company has sufficient collateral to borrow $35.1 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.
In October 2011, the Company prepaid the four promissory notes for unsecured loans totaling $10 million obtained from four local, private investors in October 2009. The notes could not be prepaid by the Company during the first two years of the loan term, but thereafter could be prepaid in whole or in part at any time without fee or penalty. Each of the four promissory notes had an interest rate of 6% per annum.
Shareholders’ Equity. Total shareholders’ equity increased by $10.1 million, or 2.5%, from $396.6 million at December 31, 2010, to $406.7 million at September 30, 2011.
                                 
    September 30,     December 31,     Dollar     Percent  
    2011     2010     Change     Change  
    (Dollars in thousands)  
Common stock
  $ 342     $ 349     $ (7 )     (2.0 %)
Additional paid-in capital
    284,974       289,591       (4,617 )     (1.6 )
Retained earnings
    136,454       125,125       11,329       9.1  
Accumulated other comprehensive income
    4,665       2,373       2,292       96.6  
Unearned ESOP shares
    (19,749 )     (20,849 )     1,100       5.3  
 
                         
Total shareholders’ equity
  $ 406,686     $ 396,589     $ 10,097       2.5 %
 
                         
The increase in shareholders’ equity was primarily due to net income of $16.6 million recognized during the nine months ended September 30, 2011, which was partially offset by the payment of three quarterly dividends totaling $0.15 per common share. These dividends reduced retained earnings by $5.2 million during the nine months ended September 30, 2011. On August 26, 2011, the Company announced its intention to repurchase up to 5% of its total common shares outstanding, or approximately 1,741,975 shares of its common stock in the open market, at prevailing market prices, over a period beginning on August 30, 2011, continuing until the earlier of the completion of the repurchase or the next twelve months, depending upon market conditions. At September 30, 2011, 577,000 shares had been repurchased by the Company at an average price of $11.70, resulting in reductions in common stock and additional paid-in capital.
Comparison of Results of Operations for the Three Months Ended September 30, 2011 and 2010
General. Net income for the three months ended September 30, 2011, was $5.1 million, a decrease of $265,000, or 4.9%, from net income of $5.4 million for the three months ended September 30, 2010. The decrease in net income was primarily due to lower non-interest income, which was driven by a $2.0 million reduction in the net gain on sale of mortgage loans. The decrease was partially offset by higher net interest income and reductions in the provision for loan losses and noninterest expense. Our basic and diluted earnings per share for the three months ended September 30, 2011, was $0.16, a $0.01 decrease from $0.17 for the three months ended September 30, 2010.

 

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Interest Income. Interest income decreased by $1.1 million, or 3.6%, from $30.1 million for the three months ended September 30, 2010, to $29.0 million for the three months ended September 30, 2011.
                                 
    Three Months Ended              
    September 30,     Dollar     Percent  
    2011     2010     Change     Change  
    (Dollars in thousands)  
Interest and dividend income
                               
Loans, including fees
  $ 21,838     $ 22,953     $ (1,115 )     (4.9 %)
Securities
    7,106       7,066       40       0.6  
Interest-bearing deposits in other financial institutions
    44       67       (23 )     (34.3 )
FHLB stock
    18       15       3       20.0  
 
                       
 
  $ 29,006     $ 30,101     $ (1,095 )     (3.6 %)
 
                       
The decrease in interest income was driven by a $1.1 million, or 4.9%, decrease in the interest income earned on loans, which was primarily attributable to a reduction in the volume and rate earned on Warehouse Purchase Program loans. The average balance of Warehouse Purchase Program loans decreased by $27.9 million from the three months ended September 30, 2010, compared to the same period this year. Also, the rate earned on Warehouse Purchase Program loans decreased by 55 basis points, from 4.91% for the third quarter of 2010 to 4.36% for the third quarter in 2011. Declines in the interest earned on loans held for sale, one- to four-family mortgages, home equity/home improvement loans and consumer loans were partially offset by a $593,000 increase in the interest earned on commercial real estate loans. Although the rate earned on commercial real estate loans declined by 11 basis points during the quarter ended September 30, 2011, compared to the same period in 2010, as new volume in 2011 had lower rates than loans being paid off, the average balance of commercial real estate loans increased by $43.3 million. Interest earned on commercial and industrial loans increased by $93,000 due to a $7.1 million increase in volume during the quarter ended September 30, 2011, compared to the same period last year.
Interest Expense. Interest expense decreased by $3.1 million, or 26.4%, from $11.6 million for the three months ended September 30, 2010, to $8.5 million for the three months ended September 30, 2011.
                                 
    Three Months Ended              
    September 30,     Dollar     Percent  
    2011     2010     Change     Change  
    (Dollars in thousands)  
Interest expense
                               
Deposits
  $ 5,702     $ 8,316     $ (2,614 )     (31.4 %)
FHLB advances
    2,467       2,910       (443 )     (15.2 )
Repurchase agreement
    206       205       1        
Other borrowings
    152       151       1        
 
                         
 
  $ 8,527     $ 11,582     $ (3,055 )     (26.4 %)
 
                       
The decrease was primarily caused by a $2.6 million, or 31.4%, decrease in the interest expense paid on deposits. Although the average balance of interest-bearing demand, savings and money market accounts increased during the three months ended September 30, 2011, compared to the same time last year, lower rates paid on all deposit categories and a decrease in the average balance of time deposits offset the increase in all other balances. Interest expense paid on Absolute Checking decreased by $607,000 during the three months ended September 30, 2011, compared to the same period last year, due to gradual rate reductions throughout the past year. Effective on September 1, 2011, interest was paid on Absolute Checking balances at 3.00% APY on balances up to $25,000, 0.30% for balances between $25,001 to $100,000 and 0.03% on balances greater than $100,000 and non-qualifying accounts, compared to 4.00% APY on balances up to $50,000, 0.95% on balances between $50,001 and $100,000 and 0.04% on balances greater than $100,000 and non-qualifying accounts in September 2010. Also, over the past year the Company has decreased the rate paid on certain money market accounts from a range of 0.95% to 5.50% at September 30, 2010, to a range of 0.30% to 1.25% at September 30, 2011.

 

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Interest expense on FHLB advances decreased by $443,000, or 15.2%, as the average rate paid on borrowings decreased by 98 basis points, from 3.44% for the quarter ended September 30, 2010, to 2.46% for the same period in 2011. 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. The average rate paid on borrowings was further impacted by the strategic decision to fund a portion of the Warehouse Purchase Program loans with short-term advances. At September 30, 2011, the Company had short-term advances totaling $372.0 million that are due to mature in 30 days or less with a weighted average rate of 0.09%. Overall, the cost of interest-bearing liabilities decreased 68 basis points, from 2.14% for the three months ended September 30, 2010, to 1.46% for the three months ended September 30, 2011.
Net Interest Income. Net interest income increased by $2.0 million, or 10.6%, to $20.5 million for the three months ended September 30, 2011, from $18.5 million for the three months ended September 30, 2010. The net interest rate spread increased 18 basis points to 2.60% for the three months ended September 30, 2011, from 2.42% for the same period last year. The net interest margin increased six basis points to 2.87% for the three months ended September 30, 2011, from 2.81% 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 September 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
  $ 381,322     $ 5,047       5.29 %   $ 382,238     $ 5,295       5.54 %
Warehouse Purchase Program loans held for sale
    395,711       4,310       4.36       423,567       5,195       4.91  
ViewPoint Mortgage loans held for sale
    21,213       230       4.34       49,883       557       4.47  
Commercial real estate
    524,516       8,660       6.60       481,178       8,067       6.71  
Home equity/home improvement
    141,483       2,019       5.71       135,776       2,026       5.97  
Consumer
    51,246       875       6.83       76,978       1,209       6.28  
Commercial and industrial
    43,806       697       6.36       36,738       604       6.58  
Less: deferred fees and allowance for loan loss
    (16,135 )                 (14,926 )            
 
                                       
Loans receivable 1
    1,543,162       21,838       5.66       1,571,432       22,953       5.84  
Agency mortgage-backed securities
    463,480       3,233       2.79       490,285       3,789       3.09  
Agency collateralized mortgage obligations
    695,367       3,336       1.92       364,323       2,336       2.56  
Investment securities
    59,577       537       3.61       110,858       941       3.40  
FHLB stock
    19,429       18       0.37       16,032       15       0.37  
Interest-earning deposit accounts
    73,236       44       0.24       87,549       67       0.31  
 
                                       
Total interest-earning assets
    2,854,251       29,006       4.06       2,640,479       30,101       4.56  
 
                                           
 
                                               
Non-interest-earning assets
    128,364                       203,688                  
 
                                           
 
                                               
Total assets
  $ 2,982,615                     $ 2,844,167                  
 
                                           
 
                                               
Interest-bearing liabilities:
                                               
Interest-bearing demand
  $ 484,926       2,155       1.78     $ 419,770       2,781       2.65  
Savings and money market
    753,252       871       0.46       724,333       2,407       1.33  
Time
    634,754       2,676       1.69       641,021       3,128       1.95  
Borrowings
    458,620       2,825       2.46       379,422       3,266       3.44  
 
                                       
Total interest-bearing liabilities
    2,331,552       8,527       1.46       2,164,546       11,582       2.14  
 
                                           
 
                                               
Non-interest-bearing checking
    193,725                       187,639                  
 
                                           
 
                                               
Non-interest-bearing liabilities
    47,260                       75,317                  
 
                                           
 
                                               
Total liabilities
    2,572,537                       2,427,502                  
 
                                           
 
                                               
Total shareholders’ equity
    410,078                       416,665                  
 
                                           
 
                                               
Total liabilities and shareholders’ equity
  $ 2,982,615                     $ 2,844,167                  
 
                                           
 
                                               
Net interest income and margin
          $ 20,479       2.87 %           $ 18,519       2.81 %
 
                                           
 
                                               
Net interest income and margin (tax-equivalent basis)2
          $ 20,653       2.89 %           $ 18,669       2.83 %
 
                                           
Net interest rate spread
                    2.60 %                     2.42 %
Net earning assets
  $ 522,699                     $ 475,933                  
 
                                           
Average interest-earning assets to average interest-bearing liabilities
    122.42 %                     121.99 %                
     
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 2010. Tax-exempt investments and loans had average balances of $52.6 million and $44.3 million for the three months ended September 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 September 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
  $ (13 )   $ (235 )   $ (248 )
Warehouse Purchase Program loans held for sale
    (327 )     (558 )     (885 )
ViewPoint Mortgage loans held for sale
    (311 )     (16 )     (327 )
Commercial real estate
    717       (124 )     593  
Home equity/home improvement
    83       (90 )     (7 )
Consumer
    (432 )     98       (334 )
Commercial and industrial
    113       (20 )     93  
 
                 
Loans receivable
    (170 )     (945 )     (1,115 )
Agency mortgage-backed securities
    (200 )     (356 )     (556 )
Agency collateralized mortgage obligations
    1,704       (704 )     1,000  
Investment securities
    (459 )     55       (404 )
FHLB stock
    3             3  
Interest-earning deposit accounts
    (10 )     (13 )     (23 )
 
                 
Total interest-earning assets
    868       (1,963 )     (1,095 )
 
                 
 
                       
Interest-bearing liabilities:
                       
Interest-bearing demand
    386       (1,012 )     (626 )
Savings and money market
    92       (1,628 )     (1,536 )
Time
    (30 )     (422 )     (452 )
Borrowings
    600       (1,041 )     (441 )
 
                 
Total interest-bearing liabilities
    1,048       (4,103 )     (3,055 )
 
                 
 
                       
Net interest income
  $ (180 )   $ 2,140     $ 1,960  
 
                 

 

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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 $581,000 for the three months ended September 30, 2011, a decrease of $175,000, or 23.1%, from the three months ended September 30, 2010. The balance of the allowance for loan losses increased by $1.9 million from September 30, 2010, to September 30, 2011, as management increased qualitative factors 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 $275,000 during the third quarter of 2011 compared to the same period last year.

 

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Non-interest Income. Non-interest income decreased by $2.9 million, or 31.4%, from $9.1 million for the three months ended September 30, 2010, to $6.2 million for the three months ended September 30, 2011.
                                 
    Three Months Ended                  
    September 30,     Dollar     Percent  
    2011     2010     Change     Change  
    (Dollars in thousands)  
Non-interest income
                               
Service charges and fees
  $ 4,659     $ 4,694     $ (35 )     (0.7 %)
Other charges and fees
    144       171       (27 )     (15.8 )
Net gain on sale of mortgage loans
    1,710       3,697       (1,987 )     (53.7 )
Bank-owned life insurance income
    118       135       (17 )     (12.6 )
Loss on sale and disposition of assets
    (533 )     (24 )     (509 )     (2,120.8 )
Other
    109       381       (272 )     (71.4 )
 
                         
 
  $ 6,207     $ 9,054     $ (2,847 )     (31.4 %)
 
                         
The decrease in non-interest income was primarily due to a $2.0 million, or 53.7%, decline in the net gain on sale of mortgage loans, as VPM sold $62.2 million in loans to outside investors during the three months ended September 30, 2011, compared to $107.0 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 the third quarter of 2011 compared to the volume experienced during the same period last year.
Loss on sale and disposition of assets increased by $509,000 during the three months ended September 30, 2011, compared to the same period in 2010, primarily due to value declines related to a commercial real estate foreclosed asset. In addition, non-sufficient funds fees declined by $493,000 caused by lower volume, partially offset by a $229,000 increase in debit card income due to increased debit card usage and a $99,000 increase in commercial fee income, which resulted from a pre-payment penalty on a $4.9 million commercial real estate loan.
Non-interest Expense. Non-interest expense decreased by $133,000, or 0.7%, from $18.7 million for the three months ended September 30, 2010, to $18.6 million for the three months ended September 30, 2011.
                                 
    Three Months Ended                  
    September 30,     Dollar     Percent  
    2011     2010     Change     Change  
    (Dollars in thousands)  
Non-interest expense
                               
Salaries and employee benefits
  $ 11,751     $ 11,843     $ (92 )     (0.8 %)
Advertising
    351       280       71       25.4  
Occupancy and equipment
    1,511       1,520       (9 )     (0.6 )
Outside professional services
    769       648       121       18.7  
Regulatory assessments
    409       819       (410 )     (50.1 )
Data processing
    1,168       1,036       132       12.7  
Office operations
    1,521       1,458       63       4.3  
Other
    1,087       1,096       (9 )     (0.8 )
 
                         
 
  $ 18,567     $ 18,700     $ (133 )     (0.7 %)
 
                         
The decrease in non-interest expense was primarily due to a $410,000, or 50.1%, decline in regulatory assessments, due to the new FDIC fee structure, which uses assets less Tier One capital as an assessment base and resulted in a lower rate. Outside professional services expense increased primarily due to an accrual for the settlement and estimated legal expenses related to litigation. The accrual is attributable to expenses related 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. At a mediation in September 2011 and without admitting liability, the parties agreed to settle the matter for $350,000. A $132,000 increase in data processing expense was primarily attributable to increased software license renewal costs.
Partially offsetting these increases was a $92,000 decrease in salaries and employee benefits expense, as the Company paid $820,000 less in bonuses during the third quarter of 2011 compared to the same period in 2010, which was partially offset by a $656,000 increase in salary expense primarily due to higher average merit increases and staffing increases, as well as new community bank offices opened in Carrollton and Flower Mound. 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. The decline in bonus expense is due to a reduction in the payment of variable incentives that are tied to mortgage production; this decrease offsets the decline in the net gain on sale of mortgage loans.

 

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Income Tax Expense. During the three months ended September 30, 2011, we recognized income tax expense of $2.4 million on our pre-tax income, which was an effective tax rate of 31.8%, compared to income tax expense of $2.7 million for the three months ended September 30, 2010, which was an effective tax rate of 33.4%. The decrease in the effective tax rate was primarily due to various immaterial adjustments to income tax expense recorded during the period.
Comparison of Results of Operations for the Nine months Ended September 30, 2011 and 2010
General. Net income for the nine months ended September 30, 2011, was $16.6 million, an increase of $5.3 million, or 46.4%, from net income of $11.3 million for the nine months ended September 30, 2010. Net income for the nine months ended September 30, 2011, included a $2.2 million net of tax gain on the sale of available for sale securities. The increase in net income was driven by higher net interest income, the gain on sale of securities and a lower provision for loan losses and was partially offset by a $4.0 million decline in the net gain on sales of loans and a $1.5 million increase in noninterest expense. Our basic and diluted earnings per share for the nine months ended September 30, 2011, was $0.51, a $0.13 increase from $0.38 for the nine months ended September 30, 2010.
Interest Income. Interest income increased by $860,000, or 1.0%, from $84.0 million for the nine months ended September 30, 2010, to $84.9 million for the nine months ended September 30, 2011.
                                 
    Nine Months Ended              
    September 30,     Dollar     Percent  
    2011     2010     Change     Change  
    (Dollars in thousands)  
Interest and dividend income
                               
Loans, including fees
  $ 63,132     $ 64,921     $ (1,789 )     (2.8 %)
Securities
    21,559       18,715       2,844       15.2  
Interest-bearing deposits in other financial institutions
    144       344       (200 )     (58.1 )
FHLB stock
    52       47       5       10.6  
 
                         
 
  $ 84,887     $ 84,027     $ 860       1.0 %
 
                         
The increase in interest income was driven by a $2.8 million, or 15.2%, increase in the interest income earned on securities, which was primarily attributable to a $4.1 million increase in the interest earned on agency collateralized mortgage obligations. Although the average rate on collateralized mortgage obligations declined by 58 basis points from the nine months ended September 30, 2010, compared to the same period in 2011, the average balance increased by $364.8 million. This increase in interest income from securities was partially offset by a $1.8 million decline in interest income earned from loans. The average balance of Warehouse Purchase Program loans decreased by $12.6 million from the nine months ended September 30, 2010, to the same period this year. Also, the rate earned on Warehouse Purchase Program loans decreased by 36 basis points, from 4.89% for the nine months ended September 30, 2010 to 4.53% for the nine months ended September 30, 2011. Declines in the interest earned on loans held for sale, one-to four-family mortgages and consumer loans were partially offset by a $1.9 million increase in the interest earned on commercial real estate loans. The average balance of commercial real estate loans increased by $35.6 million during the nine months ended September 30, 2011, compared to the same period last year, and the average rate increased by three basis points. Interest earned on commercial and industrial loans increased by $310,000 due to a $5.4 million increase in volume and a 17 basis point increase in average rate during the nine months ended September 30, 2011, compared to the same period last year. Overall, the yield on interest-earning assets for the nine months ended September 30, 2011, decreased by 47 basis points, from 4.59% for the nine months ended September 30, 2010, to 4.12%.

 

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Interest Expense. Interest expense decreased by $7.5 million, or 22.1%, from $34.0 million for the nine months ended September 30, 2010, to $26.5 million for the nine months ended September 30, 2011.
                                 
    Nine Months Ended                  
    September 30,     Dollar     Percent  
    2011     2010     Change     Change  
    (Dollars in thousands)  
Interest expense
                               
Deposits
  $ 18,045     $ 23,834     $ (5,789 )     (24.3 %)
FHLB advances
    7,360       9,071       (1,711 )     (18.9 )
Repurchase agreement
    611       610       1        
Other borrowings
    450       449       1        
 
                         
 
  $ 26,466     $ 33,964     $ (7,498 )     (22.1 %)
 
                         
The decrease was primarily caused by a $5.8 million, or 24.3%, decrease in the interest expense paid on deposits. Although volume increased in interest-bearing demand, savings and money market accounts and remained relatively constant in time deposits during the nine months ended September 30, 2011, compared to the same time last year, lower rates paid on all deposit categories offset the increase in balances. Interest expense paid on Absolute Checking only increased by $92,000 during the nine months ended September 30, 2011, compared to the same period last year, although the average balance in this product increased by $111.6 million. Interest cost on this product was reduced through gradual rate reductions throughout the past year. Effective on September 1, 2011, interest was paid on Absolute Checking balances at 3.00% APY on balances up to $25,000, 0.30% for balances between $25,001 to $100,000 and 0.03% on balances greater than $100,000 and non-qualifying accounts, compared to 4.00% APY on balances up to $50,000, 0.95% on balances between $50,001 and $100,000 and 0.04% on balances greater than $100,000 and non-qualifying accounts in September 2010. Also, over the past year, the Company has decreased the rate paid on certain money market accounts from a range of 0.95% to 5.50% at September 30, 2010 to a range of 0.30% to 1.25% at September 30, 2011.
Interest expense on FHLB advances decreased by $1.7 million, or 18.9%, as the average rate paid on borrowings decreased by 90 basis points, from 3.72% for the nine months ended September 30, 2010, to 2.82% for the same period in 2011. 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. The average rate paid on borrowings was further impacted by the strategic decision to fund a portion of the Warehouse Purchase Program loans with short-term advances. Overall, the cost of interest-bearing liabilities decreased 60 basis points, from 2.17% for the nine months ended September 30, 2010, to 1.57% for the nine months ended September 30, 2011.
Net Interest Income. Net interest income increased by $8.3 million, or 16.7%, to $58.4 million for the nine months ended September 30, 2011, from $50.1 million for the nine months ended September 30, 2010. The net interest rate spread increased 13 basis points to 2.55% for the nine months ended September 30, 2011, from 2.42% for the same period last year. The net interest margin increased ten basis points to 2.84% for the nine months ended September 30, 2011, from 2.74% 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.
                                                 
    Nine Months Ended September 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
  $ 379,074     $ 15,198       5.35 %   $ 392,530     $ 16,303       5.54 %
Warehouse Purchase Program loans held for sale
    317,630       10,801       4.53       330,197       12,115       4.89  
ViewPoint Mortgage loans held for sale
    21,744       835       5.12       39,041       1,370       4.68  
Commercial real estate
    504,343       25,424       6.72       468,749       23,522       6.69  
Home equity/home improvement
    140,953       6,089       5.76       131,511       5,998       6.08  
Consumer
    55,946       2,794       6.66       83,752       3,932       6.26  
Commercial and industrial
    40,676       1,991       6.53       35,229       1,681       6.36  
Less: deferred fees and allowance for loan loss
    (15,543 )                 (14,056 )            
 
                                       
Loans receivable 1
    1,444,823       63,132       5.83       1,466,953       64,921       5.90  
Agency mortgage-backed securities
    468,553       9,796       2.79       447,733       10,148       3.02  
Agency collateralized mortgage obligations
    677,082       10,064       1.98       312,331       5,993       2.56  
Investment securities
    63,437       1,699       3.57       101,986       2,574       3.37  
FHLB stock
    16,932       52       0.41       15,322       47       0.41  
Interest-earning deposit accounts
    76,170       144       0.25       94,213       344       0.49  
 
                                       
Total interest-earning assets
    2,746,997       84,887       4.12       2,438,538       84,027       4.59  
 
                                           
 
                                               
Non-interest-earning assets
    137,055                       162,444                  
 
                                           
 
                                               
Total assets
  $ 2,884,052                     $ 2,600,982                  
 
                                           
 
                                               
Interest-bearing liabilities:
                                               
Interest-bearing demand
  $ 464,261       6,623       1.90     $ 353,841       6,590       2.48  
Savings and money market
    731,869       2,901       0.53       716,254       7,472       1.39  
Time
    650,843       8,521       1.75       653,312       9,772       1.99  
Borrowings
    397,658       8,421       2.82       362,905       10,130       3.72  
 
                                       
Total interest-bearing liabilities
    2,244,631       26,466       1.57       2,086,312       33,964       2.17  
 
                                           
 
                                               
Non-interest-bearing checking
    192,184                       181,705                  
 
                                           
 
                                               
Non-interest-bearing liabilities
    38,257                       52,407                  
 
                                           
 
                                               
Total liabilities
    2,475,072                       2,320,424                  
 
                                           
 
                                               
Total shareholders’ equity
    408,980                       280,558                  
 
                                           
 
                                               
Total liabilities and shareholders’ equity
  $ 2,884,052                     $ 2,600,982                  
 
                                           
 
                                               
Net interest income and margin
          $ 58,421       2.84 %           $ 50,063       2.74 %
 
                                           
 
                                               
Net interest income and margin (tax-equivalent basis)2
          $ 58,944       2.86 %           $ 50,457       2.76 %
 
                                           
Net interest rate spread
                    2.55 %                     2.42 %
Net earning assets
  $ 502,366                     $ 352,226                  
 
                                           
Average interest-earning assets to average interest-bearing liabilities
    122.38 %                     116.88 %                
     
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 2010. Tax-exempt investments and loans had average balances of $52.7 million and $38.8 million for the nine months ended September 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.
                         
    Nine Months Ended September 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
  $ (549 )   $ (556 )   $ (1,105 )
Warehouse Purchase Program loans held for sale
    (450 )     (864 )     (1,314 )
ViewPoint Mortgage loans held for sale
    (654 )     119       (535 )
Commercial real estate
    1,794       108       1,902  
Home equity/home improvement
    418       (327 )     91  
Consumer
    (1,375 )     237       (1,138 )
Commercial and industrial
    266       44       310  
 
                 
Loans receivable
    (550 )     (1,239 )     (1,789 )
Agency mortgage-backed securities
    458       (810 )     (352 )
Agency collateralized mortgage obligations
    5,677       (1,606 )     4,071  
Investment securities
    (1,024 )     149       (875 )
FHLB stock
    5             5  
Interest-earning deposit accounts
    (57 )     (143 )     (200 )
 
                 
Total interest-earning assets
    4,509       (3,649 )     860  
 
                 
 
                       
Interest-bearing liabilities:
                       
Interest-bearing demand
    1,781       (1,748 )     33  
Savings and money market
    159       (4,730 )     (4,571 )
Time
    (37 )     (1,214 )     (1,251 )
Borrowings
    904       (2,613 )     (1,709 )
 
                 
Total interest-bearing liabilities
    2,807       (10,305 )     (7,498 )
 
                 
 
                       
Net interest income
  $ 1,702     $ 6,656     $ 8,358  
 
                 

 

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Provision for Loan Losses. The provision for loan losses was $2.7 million for the nine months ended September 30, 2011, a decrease of $1.0 million, or 27.7%, from the nine months ended September 30, 2010. The balance of the allowance for loan losses increased by $1.9 million from September 30, 2010, to September 30, 2011, as management increased qualitative factors 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 $456,000 during the nine months ended September 30, 2011, compared to the same period last year.

 

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Non-interest Income. Non-interest income decreased by $469,000, or 1.9%, from $24.8 million for the nine months ended September 30, 2010, to $24.3 million for the nine months ended September 30, 2011.
                                 
    Nine Months Ended              
    September 30,     Dollar     Percent  
    2011     2010     Change     Change  
    (Dollars in thousands)  
Non-interest income
                               
Service charges and fees
  $ 14,027     $ 13,838     $ 189       1.4 %
Other charges and fees
    544       509       35       6.9  
Net gain on sale of mortgage loans
    5,538       9,517       (3,979 )     (41.8 )
Bank-owned life insurance income
    403       305       98       32.1  
Gain on sale of available for sale securities
    3,415             3,415       N/M  
Loss on sale and disposition of assets
    (749 )     (365 )     (384 )     (105.2 )
Impairment of goodwill
    (271 )           (271 )      
Other
    1,403       975       428       43.9  
 
                         
 
  $ 24,310     $ 24,779     $ (469 )     (1.9 %)
 
                         
The decrease in non-interest income was primarily due to a $4.0 million, or 41.8%, decline in the net gain on sale of mortgage loans, as VPM sold $197.7 million in loans to outside investors during the nine months ended September 30, 2011, compared to $288.0 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. This decline in non-interest income was partially offset by a $3.4 million gain on the sale of 17 mortgage-backed securities and six collateralized mortgage obligations in February 2011.
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 September 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. This evaluation showed a $271,000 excess of carrying value of the goodwill over its fair value.
Loss on sale and disposition of assets increased by $384,000 primarily due to value declines related to a commercial real estate foreclosed asset. In addition, non-sufficient funds fees declined by $1.3 million caused by lower volume, offset by a $969,000 increase in debit card income, a $579,000 increase in commercial fee income, which resulted from pre-payment penalties on commercial real estate loans, and a $142,000 increase in Warehouse Purchase Program fees. Other non-interest income increased by $428,000 primarily due to an $798,000 increase in the value of equity investments in two community development-oriented venture capital funds used for Community Reinvestment Act purposes.
Non-interest Expense. Non-interest expense increased by $1.5 million, or 2.7%, from $54.2 million for the nine months ended September 30, 2010, to $55.7 million for the nine months ended September 30, 2011.
                                 
    Nine Months Ended              
    September 30,     Dollar     Percent  
    2011     2010     Change     Change  
    (Dollars in thousands)  
Non-interest expense
                               
Salaries and employee benefits
  $ 35,147     $ 34,476     $ 671       1.9 %
Advertising
    1,217       878       339       38.6  
Occupancy and equipment
    4,333       4,467       (134 )     (3.0 )
Outside professional services
    2,126       1,591       535       33.6  
Regulatory assessments
    1,866       2,409       (543 )     (22.5 )
Data processing
    3,366       3,081       285       9.3  
Office operations
    4,452       4,337       115       2.7  
Other
    3,189       2,980       209       7.0  
 
                         
 
  $ 55,696     $ 54,219     $ 1,477       2.7 %
 
                         

 

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The increase in non-interest expense was primarily due to a $671,000, or 1.9%, increase in salaries and employee benefits expense during the nine months ended September 30, 2011, compared to the same period in 2010, which increased primarily due to higher average merit increases and staffing increases, as well as new community bank offices opened in Carrollton and Flower Mound. A staff reduction at VPM due to the decline in loan production offset salary increases by $336,000. 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 $600,000 due to the shares purchased by the ESOP in the Conversion on July 6, 2010.
Outside professional services expense increased by $535,000, or 33.6%, during the first nine months of 2011 compared to the first nine months of 2010, primarily due to settlement and estimated legal expenses related to litigation. The majority is attributable to expenses related 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. At a mediation in September 2011 and without admitting liability, the parties agreed to settle the matter for $350,000. These increases were partially offset by a $543,000 reduction in regulatory assessments due to the new FDIC fee structure, which uses assets less Tier One capital as an assessment base and resulted in a lower rate.
Income Tax Expense. During the nine months ended September 30, 2011, we recognized income tax expense of $7.7 million on our pre-tax income, which was an effective tax rate of 31.9%, compared to income tax expense of $5.5 million for the nine months ended September 30, 2010, which was an effective tax rate of 32.8%. The decline in the effective tax rate was primarily due to various immaterial adjustments to income tax expense recorded during the period.
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.
In addition to the primary sources of funds, management has several secondary sources available to meet potential funding requirements. As of September 30, 2011, the Company had an additional borrowing capacity of $1.34 billion 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 September 30, 2011, collateral pledged had a market value of $35.1 million. Also, at September 30, 2011, the Company had $76.0 million in federal funds lines of credit available with other financial institutions.
As of September 30, 2011, the Company had classified 54.9% 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.

 

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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 limitations governing the ability of the Bank to pay dividends. At September 30, 2011, the Company (on an unconsolidated basis) had liquid assets of $78.7 million.
The Company uses its sources of funds primarily to meet its ongoing commitments, pay maturing deposits and fund withdrawals, and fund loan commitments. At September 30, 2011, the total approved but unfunded loan commitments (including Warehouse Purchase Program commitments) and unused lines of credit outstanding amounted to $371.9 million and $85.2 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 September 30, 2011, scheduled to mature in one year or less totaled $460.0 million with a weighted average rate of 1.34%.
During the nine months ended September 30, 2011, cash and cash equivalents decreased by $14.5 million, or 21.1%, from $68.7 million as of December 31, 2010, to $54.2 million as of September 30, 2011. Cash provided by financing activities of $254.7 million was offset by cash used for operating activities of $156.2 million and cash used for investing activities of $113.0 million. Primary sources of cash for the nine months ended September 30, 2011, included proceeds from the sale of loans held for sale of $5.35 billion (primarily related to our Warehouse Purchase Program), proceeds from FHLB advances of $422.0 million, maturities, prepayments and calls of securities totaling $178.8 million and proceeds from the sale of securities of $93.0 million. Primary uses of cash for the nine months ended September 30, 2011, included loans originated or purchased for sale of $5.55 billion (primarily related to our Warehouse Purchase Program), purchases of securities totaling $313.4 million and repayments on FHLB advances of $211.5 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, by payment due dates (not including any interest amounts).
                                         
    September 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 restructuring prepayment penalty of $4,481)
  $ 410,624     $ 84,504     $ 95,374     $ 85,740     $ 676,242  
Repurchase agreement
                      25,000       25,000  
Other borrowings
                10,000             10,000  
Operating leases (premises)
    1,353       2,183       1,509       4,572       9,617  
 
                             
Total advances and operating leases
  $ 411,977     $ 86,687     $ 106,883     $ 115,312       720,859  
 
                             
 
                                       
Off-balance sheet loan commitments: (1)
                                       
Undisbursed portions of loans closed
  $ 41,082     $     $     $       41,082  
Commitments to originate loans
    114,092                         114,092  
Unused commitment on Warehouse Purchase Program loans
    216,706                         216,706  
Unused lines of credit
    85,169                         85,169  
 
                             
Total loan commitments
  $ 457,049     $     $     $       457,049  
 
                             
Total contractual obligations and loan commitments
                                  $ 1,177,908  
 
                                     
     
(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 $71.5 million and $72.4 million at September 30, 2011, and December 31, 2010, respectively.
Capital Resources
The Bank is subject to minimum capital requirements imposed by the OCC (and our predecessor regulator, 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 September 30, 2011, and December 31, 2010, the Bank was considered to be well-capitalized.
At September 30, 2011, the Bank’s equity totaled $313.9 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 $406.7 million, or 12.6% of total assets, at September 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 September 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 September 30, 2011:
                                               
 
                                               
Total capital (to risk-weighted assets)
    317,546       16.98 %     149,628       8.00 %     187,036       10.00 %
Tier 1 (core) capital (to risk-weighted assets)
    303,829       16.24 %     74,814       4.00 %     112,221       6.00 %
Tier 1 (core) capital (to adjusted total assets)
    303,829       9.43 %     128,880       4.00 %     161,100       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 economic value of equity (“EVE”) methodology adopted by the OCC 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 EVE 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 EVE 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 EVE ratio should not fall below 7.00% and 6.00%, respectively, and for an increase of 300 basis points the EVE 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 September 30, 2011, and December 31, 2010, are internal analyses of our interest rate risk as measured by changes in EVE 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 EVE would be negatively impacted by a parallel, instantaneous, and sustained increase in market rates. Such an increase in rates would negatively impact EVE 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 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.
                                     
September 30, 2011  
Change in                                
Interest                                
Rates in                                
Basis                             EVE  
Points     Economic Value of Equity     Ratio %  
        $ Amount     $ Change     % Change          
(Dollars in Thousands)  
  400       385,884       (17,139 )     (4.25 )     12.90  
  300       395,059       (7,964 )     (1.98 )     12.79  
  200       409,199       6,176       1.53       12.96  
  100       415,562       12,539       3.11       12.89  
        403,023                   12.28  
  (100 )     382,727       (20,296 )     (5.04 )     11.53  
  (200 )     342,153       (60,870 )     (15.10 )     10.26  
                                     
December 31, 2010  
Change in                                
Interest                                
Rates in                                
Basis                             EVE  
Points