LegacyTexas Financial Group, Inc. - FORM 10-Q - October 28, 2014

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2014
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
 
6021
 
27-2176993
(State or other jurisdiction of incorporation or organization)
 
(Primary Standard Industrial Classification Code Number)
 
(I.R.S. Employer Identification No.)
 
 
 
 
 
1309 W. 15th Street, Plano, Texas
 
 
 
75075
(Address of Principal Executive Offices)
 
 
 
(Zip Code)
Registrant’s telephone number, including area code: (972) 578-5000
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 filing requirements for the past 90 days. Yes x 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 x 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 x
 
Accelerated filer o
 
 
 
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 Act). Yes o No x
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, 2014:
 
 
40,006,941



VIEWPOINT FINANCIAL GROUP, INC.
FORM 10-Q
September 30, 2014
INDEX
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 





PART 1 - FINANCIAL INFORMATION        Item 1. Financial Statements
VIEWPOINT FINANCIAL GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
 
September 30,
 
December 31,
 
2014
 
2013
ASSETS
(unaudited)
 
 
Cash and due from financial institutions
$
27,669

 
$
30,012

Short-term interest-bearing deposits in other financial institutions
62,616

 
57,962

Total cash and cash equivalents
90,285

 
87,974

Securities available for sale, at fair value
211,364

 
248,012

Securities held to maturity (fair value: September 30, 2014 — $264,105, December 31, 2013— $301,739)
254,665

 
294,583

Loans held for investment:
 
 
 
Loans held for investment (net of allowance for loan losses of $22,585 at September 30, 2014 and $19,358 at December 31, 2013)
2,464,290

 
2,029,277

Loans held for investment - Warehouse Purchase Program
736,624

 
673,470

Total loans held for investment
3,200,914

 
2,702,747

FHLB and Federal Reserve Bank stock, at cost
41,473

 
34,883

Bank-owned life insurance
36,010

 
35,565

Premises and equipment, net
51,118

 
53,272

Goodwill
29,650

 
29,650

Other assets
35,045

 
38,546

Total assets
$
3,950,524

 
$
3,525,232

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Deposits
 
 
 
Non-interest-bearing demand
$
483,784

 
$
410,933

Interest-bearing demand
454,416

 
474,515

Savings and money market
1,057,912

 
904,576

Time
500,356

 
474,615

Total deposits
2,496,468

 
2,264,639

FHLB advances
799,704

 
639,096

Repurchase agreement
25,000

 
25,000

Other liabilities
65,225

 
52,037

Total liabilities
3,386,397

 
2,980,772

Commitments and contingent liabilities
—

 
—

Shareholders’ equity
 
 
 
Preferred stock, $.01 par value; 10,000,000 shares authorized; 0 shares issued — September 30, 2014 and December 31, 2013
—

 
—

Common stock, $.01 par value; 90,000,000 shares authorized; 40,006,941 shares issued — September 30, 2014 and 39,938,816 shares issued — December 31, 2013
400

 
399

Additional paid-in capital
383,779

 
377,657

Retained earnings
194,663

 
183,236

Accumulated other comprehensive income (loss), net
635

 
(383
)
Unearned Employee Stock Ownership Plan (ESOP) shares; 1,595,699 shares at September 30, 2014 and 1,733,845 shares at December 31, 2013
(15,350
)
 
(16,449
)
Total shareholders’ equity
564,127

 
544,460

Total liabilities and shareholders’ equity
$
3,950,524

 
$
3,525,232

 
 
 
 
See accompanying notes to consolidated financial statements.

3

VIEWPOINT FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(Dollars in thousands, except per share data)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Interest and dividend income
 
 
 
 
 
 
 
Loans, including fees
$
35,872

 
$
30,805

 
$
100,148

 
$
93,334

Taxable securities
2,225

 
2,337

 
7,243

 
7,197

Nontaxable securities
562

 
568

 
1,687

 
1,571

Interest-bearing deposits in other financial institutions
57

 
32

 
185

 
88

FHLB and Federal Reserve Bank stock
139

 
133

 
405

 
400

 
38,855

 
33,875

 
109,668

 
102,590

Interest expense
 
 
 
 
 
 
 
Deposits
2,021

 
2,411

 
6,047

 
7,293

FHLB advances
1,957

 
2,066

 
5,832

 
6,530

Repurchase agreement
205

 
206

 
610

 
610

Other borrowings
2

 
4

 
2

 
6

 
4,185

 
4,687

 
12,491

 
14,439

Net interest income
34,670

 
29,188

 
97,177

 
88,151

Provision (benefit) for loan losses
2,511

 
(158
)
 
4,084

 
2,583

Net interest income after provision (benefit) for loan losses
32,159

 
29,346

 
93,093

 
85,568

Non-interest income
 
 
 
 
 
 
 
Service charges and fees
4,571

 
4,460

 
13,743

 
13,519

Other charges and fees
227

 
300

 
676

 
691

Bank-owned life insurance income
147

 
148

 
445

 
463

Loss on sale of available-for-sale securities (reclassified from accumulated other comprehensive income for unrealized losses on available-for-sale securities)
—

 
—

 
—

 
(177
)
Gain (loss) on sale and disposition of assets
(85
)
 
41

 
643

 
715

Other
198

 
277

 
(58
)
 
1,617

 
5,058

 
5,226

 
15,449

 
16,828

Non-interest expense
 
 
 
 
 
 
 
Salaries and employee benefits
13,661

 
13,546

 
41,920

 
38,989

Merger and acquisition costs
1,188

 
—

 
2,009

 
—

Advertising
262

 
666

 
1,110

 
1,930

Occupancy and equipment
1,807

 
1,830

 
5,518

 
5,558

Outside professional services
569

 
682

 
1,580

 
1,936

Regulatory assessments
698

 
629

 
2,013

 
1,858

Data processing
1,739

 
1,733

 
5,109

 
4,980

Office operations
1,566

 
1,603

 
4,963

 
5,002

Other
1,301

 
1,484

 
4,074

 
4,496

 
22,791

 
22,173

 
68,296

 
64,749

Income before income tax expense
14,426

 
12,399

 
40,246

 
37,647

Income tax expense (items reclassified from accumulated other comprehensive income include an income tax benefit of $62 for the nine months ended September 30, 2013)
5,114

 
4,187

 
14,434

 
13,203

Net income
$
9,312

 
$
8,212

 
$
25,812

 
$
24,444

Earnings per share:
 
 
 
 
 
 
 
Basic
$
0.24

 
$
0.22

 
$
0.67

 
$
0.64

Diluted
$
0.24

 
$
0.21

 
$
0.67

 
$
0.64

Dividends declared per share 1
$
0.12

 
$
0.10

 
$
0.36

 
$
0.20

 
 
 
 
 
 
 
 
See accompanying notes to consolidated financial statements.
1 In 2012, the Company prepaid the quarterly dividend for the first quarter of 2013 in December 2012, distributing an additional $0.10 per common share.

4

VIEWPOINT FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
(Dollars in thousands)
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
Net income
$
9,312

 
$
8,212

 
$
25,812

 
$
24,444

Change in unrealized gains (losses) on securities available for sale
(206
)
 
(179
)
 
1,569

 
(2,884
)
Reclassification of amount realized through sale of securities
—

 
—

 
—

 
177

Tax effect
71

 
63

 
(551
)
 
967

Other comprehensive income (loss), net of tax
(135
)
 
(116
)
 
1,018

 
(1,740
)
Comprehensive income
$
9,177

 
$
8,096

 
$
26,830

 
$
22,704

 
 
 
 
 
 
 
 
See accompanying notes to consolidated financial statements.


5

 
VIEWPOINT FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(unaudited)
(Dollars in thousands, except per share data)
For the nine months ended September 30, 2013
Common
Stock
 
Additional
Paid-In
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income, Net
 
Unearned
ESOP Shares
 
Total
Shareholders’
Equity
Balance at January 1, 2013
$
396

 
$
372,168

 
$
164,328

 
$
1,895

 
$
(17,916
)
 
$
520,871

Net income
—

 
—

 
24,444

 
—

 
—

 
24,444

Other comprehensive income (loss), net of tax
—

 
—

 
—

 
(1,740
)
 
—

 
(1,740
)
Share repurchase (83,800 shares)
(1
)
 
(1,553
)
 
—

 
—

 
—

 
(1,554
)
Dividends declared ($0.20 per share)
—

 
—

 
(7,985
)
 
—

 
—

 
(7,985
)
ESOP shares earned (138,146 shares)
—

 
1,721

 
—

 
—

 
1,100

 
2,821

Share-based compensation expense
—

 
2,325

 
—

 
—

 
—

 
2,325

Net issuance of common stock under employee stock plans (422,773 shares)
5

 
902

 
—

 
—

 
—

 
907

Balance at September 30, 2013
$
400

 
$
375,563

 
$
180,787

 
$
155

 
$
(16,816
)
 
$
540,089

For the nine months ended September 30, 2014
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2014
$
399

 
$
377,657

 
$
183,236

 
$
(383
)
 
$
(16,449
)
 
$
544,460

Net income
—

 
—

 
25,812

 
—

 
—

 
25,812

Other comprehensive income, net of tax
—

 
—

 
—

 
1,018

 
—

 
1,018

Dividends declared ($0.36 per share)
—

 
—

 
(14,385
)
 
—

 
—

 
(14,385
)
ESOP shares earned (138,146 shares)
—

 
2,482

 
—

 
—

 
1,099

 
3,581

Share-based compensation expense
—

 
2,698

 
—

 
—

 
—

 
2,698

Net issuance of common stock under employee stock plans (68,125 shares)
1

 
942

 
—

 
—

 
—

 
943

Balance at September 30, 2014
$
400

 
$
383,779

 
$
194,663

 
$
635

 
$
(15,350
)
 
$
564,127


See accompanying notes to consolidated financial statements.

6

VIEWPOINT FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(Dollars in thousands)

 
Nine Months Ended September 30,
 
2014
 
2013
Cash flows from operating activities
 
 
 
Net income
$
25,812

 
$
24,444

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Provision for loan losses
4,084

 
2,583

Depreciation and amortization
3,301

 
3,383

Deferred tax expense
2,042

 
289

Premium amortization and accretion of securities, net
2,653

 
4,781

Accretion related to acquired loans
(1,198
)
 
(2,294
)
Loss on sale of available for sale securities
—

 
177

ESOP compensation expense
3,581

 
2,821

Share-based compensation expense
2,698

 
2,325

FHLB stock dividends
(70
)
 
(88
)
Bank-owned life insurance income
(445
)
 
(463
)
Gain (loss) on sale and disposition of assets
134

 
(715
)
Net change in deferred loan fees
921

 
1,130

Net change in accrued interest receivable
(284
)
 
658

Net change in other assets
1,279

 
11,934

Net change in other liabilities
12,638

 
13,204

Net cash provided by operating activities
57,146

 
64,169

Cash flows from investing activities
 
 
 
Available-for-sale securities:
 
 
 
Maturities, prepayments and calls
1,176,311

 
847,353

Purchases
(1,139,501
)
 
(840,941
)
Proceeds from sale of AFS securities
—

 
10,614

Held-to-maturity securities:
 
 
 
Maturities, prepayments and calls
44,590

 
85,871

Purchases
(5,919
)
 
(35,453
)
Originations of Warehouse Purchase Program loans
(8,708,357
)
 
(11,249,770
)
Proceeds from pay-offs of Warehouse Purchase Program loans
8,645,203

 
11,670,462

Net change in loans held for investment, excluding Warehouse Purchase Program loans
(439,229
)
 
(243,776
)
Redemption (purchase) of FHLB and Federal Reserve Bank stock
(6,520
)
 
15,481

Purchases of premises and equipment
(916
)
 
(2,631
)
Proceeds from sale of assets
508

 
3,489

Net cash provided by (used in) investing activities
(433,830
)
 
260,699


7

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Dollars in thousands)

 
Nine Months Ended September 30,
 
2014
 
2013
Cash flows from financing activities
 
 
 
Net change in deposits
231,829

 
70,136

Proceeds from FHLB advances
620,000

 
315,000

Repayments on FHLB advances
(459,392
)
 
(696,042
)
Share repurchase
—

 
(1,554
)
Payment of dividends
(14,385
)
 
(7,985
)
Proceeds from stock option exercises
943

 
907

Net cash provided by (used in) financing activities
378,995

 
(319,538
)
Net change in cash and cash equivalents
2,311

 
5,330

Beginning cash and cash equivalents
87,974

 
68,696

Ending cash and cash equivalents
$
90,285

 
$
74,026

Supplemental noncash disclosures:
 
 
 
Transfers from loans to other real estate owned
$
409

 
$
1,405

See accompanying notes to consolidated financial statements.

8
VIEWPOINT FINANCIAL GROUP, INC.
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)


NOTE 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 ("US GAAP") 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. Certain items in prior periods were reclassified to conform to the current presentation. These statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2013 (“2013 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 2013 Form 10-K.
The accompanying Unaudited Consolidated Interim Financial Statements include the accounts of the Company, whose business primarily consists of the operations of its wholly owned subsidiary, ViewPoint Bank, N.A. (the “Bank”). All significant intercompany transactions and balances are eliminated in consolidation.

9
VIEWPOINT FINANCIAL GROUP, INC.
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)

NOTE 2 - ADJUSTMENTS TO FINANCIAL STATEMENTS
The Company previously reported Warehouse Purchase Program loans as held for sale as we believed that was the most meaningful presentation to our financial statement users given that the collection of the loan was based upon the sale of the loan. Effective December 31, 2013, the Company concluded that, under US GAAP, these loans should be accounted for as held for investment. This correction changed the accounting for Warehouse Purchase Program loans from a lower-of-cost-or-market accounting method to accounting for the loans under Accounting Standards Codification ("ASC") 310, with any credit losses incurred as of the balance sheet date recognized in the allowance for loan losses. As we had not reported any valuation decreases below cost in prior periods, and we have experienced no credit losses on these loans, this correction had no impact on net income, comprehensive income, earnings per share or income taxes. Additionally, total assets and shareholders' equity remained unchanged. However, this correction did impact the statement of cash flows by moving cash flows associated with the Warehouse Purchase Program from operating cash flows to investing cash flows.

The table below illustrates the impact of this change on the Company's Consolidated Statement of Cash Flows for the nine months ended September 30, 2013. There was no impact to the Company's Consolidated Statements of Income for the three or nine months ended September 30, 2013.

Impact to the Consolidated Statement of Cash Flows
 
 
Nine Months Ended September 30, 2013
 
 
As Originally Presented
 
As Adjusted
Cash flows from operating activities
 
 
 
 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Loans originated or purchased for sale
 
$
(11,249,770
)
 
$
—

Proceeds from sale of loans held for sale
 
11,670,462

 
—

Net cash provided by operating activities
 
484,861

 
64,169

Cash flows from investing activities
 
 
 
 
Originations of Warehouse Purchase Program loans
 
N/A

1 
(11,249,770
)
Proceeds from pay-offs of Warehouse Purchase Program loans
 
N/A

1 
11,670,462

Net change in loans held for investment, excluding Warehouse Purchase Program loans
 
(243,776
)
 
(243,776
)
Net cash provided by (used in) investing activities
 
(159,993
)
 
260,699

Cash flows from financing activities
 
 
 
 
Net cash used in financing activities
 
(319,538
)
 
(319,538
)
Net change in cash and cash equivalents
 
5,330

 
5,330

Beginning cash and cash equivalents
 
68,696

 
68,696

Ending cash and cash equivalents
 
$
74,026

 
$
74,026

1 Not applicable

10
VIEWPOINT FINANCIAL GROUP, INC.
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)

NOTE 3 - EARNINGS PER COMMON SHARE
Basic earnings per common share is computed by dividing net income (which has been adjusted for distributed and undistributed earnings to participating securities) by the weighted-average number of common shares outstanding for the period, reduced for average unallocated ESOP shares and average unvested restricted stock awards. 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 ASC 260-10-45-60B. 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. 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, 2014 and 2013 is as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Basic earnings per share:
 
 
 
 
 
 
 
Numerator:
 
 
 
 
 
 
 
Net income
$
9,312

 
$
8,212

 
$
25,812

 
$
24,444

Distributed and undistributed earnings to participating securities
(97
)
 
(116
)
 
(285
)
 
(296
)
Income available to common shareholders
$
9,215

 
$
8,096

 
$
25,527

 
$
24,148

Denominator:
 
 
 
 
 
 
 
Weighted average common shares outstanding
39,998,205

 
39,943,555

 
39,969,234

 
39,872,915

Less: Average unallocated ESOP shares
(1,626,065
)
 
(1,810,259
)
 
(1,671,660
)
 
(1,855,854
)
  Average unvested restricted stock awards
(400,350
)
 
(538,595
)
 
(423,144
)
 
(460,309
)
Average shares for basic earnings per share
37,971,790

 
37,594,701

 
37,874,430

 
37,556,752

Basic earnings per common share
$
0.24

 
$
0.22

 
$
0.67

 
$
0.64

Diluted earnings per share:
 
 
 
 
 
 
 
Numerator:
 
 
 
 
 
 
 
Income available to common shareholders
$
9,215

 
$
8,096

 
$
25,527

 
$
24,148

Denominator:
 
 
 
 
 
 
 
Average shares for basic earnings per share
37,971,790

 
37,594,701

 
37,874,430

 
37,556,752

Dilutive effect of share-based compensation plan
231,718

 
179,699

 
246,667

 
149,709

Average shares for diluted earnings per share
38,203,508

 
37,774,400

 
38,121,097

 
37,706,461

Diluted earnings per common share
$
0.24

 
$
0.21

 
$
0.67

 
$
0.64

Share awards excluded in the computation of diluted earnings per share because the exercise price was greater than the common stock average market price and were therefore antidilutive
367,780

 
870,130

 
416,890

 
1,203,050




11
VIEWPOINT FINANCIAL GROUP, INC.
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)

NOTE 4 - SECURITIES
The fair value of available-for-sale securities and the related gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) were as follows:
September 30, 2014
Amortized Cost
 
Gross Unrealized Gains
 
Gross
Unrealized
Losses
 
Fair Value
Agency residential mortgage-backed securities 1
$
151,524

 
$
1,591

 
$
1,020

 
$
152,095

Agency residential collateralized mortgage obligations 2
55,209

 
320

 
46

 
55,483

US government and agency securities
3,652

 
134

 
—

 
3,786

Total securities
$
210,385

 
$
2,045

 
$
1,066

 
$
211,364

December 31, 2013
 
 
 
 
 
 
 
Agency residential mortgage-backed securities 1
$
175,693

 
$
1,322

 
$
2,306

 
$
174,709

Agency residential collateralized mortgage obligations 2
70,257

 
423

 
105

 
70,575

US government and agency securities
2,652

 
76

 
—

 
2,728

Total securities
$
248,602

 
$
1,821

 
$
2,411

 
$
248,012

1 Residential mortgage-backed securities issued and/or guaranteed by U.S. government agencies or U.S. government-sponsored enterprises.
2 Collateralized mortgage obligations issued and/or guaranteed by U.S. government agencies or U.S. government-sponsored enterprises.
The carrying amount, unrecognized gains and losses, and fair value of securities held to maturity were as follows:
September 30, 2014
Amortized Cost
 
Gross Unrealized Gains
 
Gross
Unrealized
Losses
 
Fair Value
Agency residential mortgage-backed securities 1
$
67,547

 
$
3,198

 
$
40

 
$
70,705

Agency commercial mortgage-backed securities 2
25,412

 
900

 
129

 
26,183

Agency residential collateralized mortgage obligations 3
94,682

 
2,134

 
43

 
96,773

Municipal bonds
67,024

 
3,676

 
256

 
70,444

Total securities
$
254,665

 
$
9,908

 
$
468

 
$
264,105

 
 
 
 
 
 
 
 
December 31, 2013
 
 
 
 
 
 
 
Agency residential mortgage-backed securities 1
$
83,177

 
$
3,523

 
$
130

 
$
86,570

Agency commercial mortgage-backed securities 2
24,828

 
523

 
310

 
25,041

Agency residential collateralized mortgage obligations 3
118,757

 
2,772

 
107

 
121,422

Municipal bonds
67,821

 
2,292

 
1,407

 
68,706

Total securities
$
294,583

 
$
9,110

 
$
1,954

 
$
301,739

1 Residential mortgage-backed securities issued and/or guaranteed by U.S. government agencies or U.S. government-sponsored enterprises.
2 Commercial mortgage-backed securities issued and /or guaranteed by U.S. government agencies or government-sponsored enterprises.
3 Collateralized mortgage obligations issued and/or guaranteed by U.S. government agencies or U.S. government-sponsored enterprises.


12
VIEWPOINT FINANCIAL GROUP, INC.
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)

The carrying amount and fair value of held to maturity debt securities and the fair value of available for sale debt securities at September 30, 2014 by contractual maturity are set forth in the table below. Securities with contractual payments not due at a single maturity date, including mortgage backed securities and collateralized mortgage obligations, are shown separately.
 
Held to maturity
 
Available for sale
 
Carrying
Amount
 
Fair Value
 
Fair Value
Due in one year or less
$
145

 
$
146

 
$
—

Due after one to five years
7,913

 
8,461

 
2,214

Due after five to ten years
34,835

 
37,510

 
1,572

Due after ten years
24,131

 
24,327

 
—

Agency residential mortgage-backed securities 1
67,547

 
70,705

 
152,095

Agency commercial mortgage-backed securities 2
25,412

 
26,183

 
—

Agency residential collateralized mortgage obligations 3
94,682

 
96,773

 
55,483

Total
$
254,665

 
$
264,105

 
$
211,364

1 Residential mortgage-backed securities issued and/or guaranteed by U.S. government agencies or U.S. government-sponsored enterprises.
2 Commercial mortgage-backed securities issued and /or guaranteed by U.S. government agencies or government-sponsored enterprises.
3 Collateralized mortgage obligations issued and/or guaranteed by U.S. government agencies or U.S. government-sponsored enterprises.
Information regarding pledged securities is summarized below:
 
September 30, 2014
 
December 31, 2013
Public fund certificates of deposit
$
139,923

 
$
156,731

Public fund demand deposit accounts
6,387

 
15,068

Commercial demand deposit accounts
2,579

 
4,439

Repurchase agreements
25,000

 
25,000

Federal Reserve Bank primary credit - collateral value
55,292

 
68,686

Carrying value of securities pledged on above funds
265,989

 
308,652

Sales activity of securities for the three and nine months ended September 30, 2014 and 2013, was as follows. All securities sold were classified as available for sale.
    
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Proceeds
$
—

 
$
—

 
$
—

 
$
10,614

Gross losses
—

 
—

 
—

 
177


Gains and losses on the sale of securities classified as available for sale are recorded on the trade date using the specific-identification method.
    

13
VIEWPOINT FINANCIAL GROUP, INC.
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)

Securities with unrealized losses at September 30, 2014 and December 31, 2013, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, were as follows:
AFS
Less than 12 Months
 
12 Months or More
 
Total
September 30, 2014
Fair Value
 
Unrealized Loss
 
Number
 
Fair Value
 
Unrealized Loss
 
Number
 
Fair Value
 
Unrealized Loss
 
Number
Agency residential mortgage-backed securities 1
$
6,717

 
$
18

 
6

 
$
55,642

 
$
1,002

 
10

 
$
62,359

 
$
1,020

 
16

Agency residential collateralized mortgage obligations 2
3,999

 
5

 
1

 
5,203

 
41

 
4

 
9,202

 
46

 
5

Total temporarily impaired
$
10,716

 
$
23

 
7

 
$
60,845

 
$
1,043

 
14

 
$
71,561

 
$
1,066

 
21

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Agency residential mortgage-backed securities 1
$
83,461

 
$
2,306

 
19

 
$
—

 
$
—

 
—

 
$
83,461

 
$
2,306

 
19

Agency residential collateralized mortgage obligations 2
13,975

 
50

 
6

 
6,780

 
55

 
5

 
20,755

 
105

 
11

Total temporarily impaired
$
97,436

 
$
2,356

 
25

 
$
6,780

 
$
55

 
5

 
$
104,216

 
$
2,411

 
30

1 Residential mortgage-backed securities issued and/or guaranteed by U.S. government agencies or U.S. government-sponsored enterprises.
2 Collateralized mortgage obligations issued and/or guaranteed by U.S. government agencies or U.S. government-sponsored enterprises.
HTM
Less than 12 Months
 
12 Months or More
 
Total
September 30, 2014
Fair Value
 
Unrealized Loss
 
Number
 
Fair Value
 
Unrealized Loss
 
Number
 
Fair Value
 
Unrealized Loss
 
Number
Agency residential mortgage-backed securities 1
$
—

 
$
—

 
—

 
$
3,471

 
$
40

 
1

 
$
3,471

 
$
40

 
1

Agency commercial mortgage-backed securities 2
—

 
—

 
—

 
3,833

 
129

 
1

 
3,833

 
129

 
1

Agency residential collateralized mortgage obligations 3
4,635

 
21

 
2

 
5,306

 
22

 
3

 
9,941

 
43

 
5

Municipal bonds
3,710

 
5

 
4

 
11,982

 
251

 
17

 
15,692

 
256

 
21

Total temporarily impaired
$
8,345


$
26


6

 
$
24,592

 
$
442

 
22

 
$
32,937


$
468

 
28

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Agency residential mortgage-backed securities 1
$
5,779

 
$
130

 
2

 
$
—

 
$
—

 
—

 
$
5,779

 
$
130

 
2

Agency commercial mortgage-backed securities 2
4,940

 
310

 
2

 
—

 
—

 
—

 
4,940

 
310

 
2

Agency residential collateralized mortgage obligations 3
10,453

 
91

 
2

 
1,679

 
16

 
3

 
12,132

 
107

 
5

Municipal bonds
17,784

 
1,406

 
29

 
280

 
1

 
1

 
18,064

 
1,407

 
30

Total temporarily impaired
$
38,956

 
$
1,937

 
35

 
$
1,959

 
$
17

 
4

 
$
40,915

 
$
1,954

 
39

1 Residential mortgage-backed securities issued and/or guaranteed by U.S. government agencies or U.S. government-sponsored enterprises.
2 Commercial mortgage-backed securities issued and /or guaranteed by U.S. government agencies or government-sponsored enterprises.
3 Collateralized mortgage obligations issued and/or guaranteed by U.S. government agencies or U.S. government-sponsored enterprises.
Other-than-Temporary Impairment
In determining other-than-temporary impairment for debt securities, management considers many factors, including: (1) the length of time and the extent to which the fair value has been less than amortized cost, (2) the financial condition and near-term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions, and (4) whether the Company has the intent and ability to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. The Company does not believe these unrealized losses are other-than-temporary. All principal and interest payments are being received on time and in full.
   


14
VIEWPOINT FINANCIAL GROUP, INC.
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)

NOTE 5 - LOANS
Loans consist of the following:
 
September 30, 2014
 
December 31, 2013
Commercial real estate
$
1,219,436

 
$
1,091,200

Commercial and industrial loans:
 
 
 
Commercial
668,421

 
425,030

Warehouse lines of credit
27,122

 
14,400

Total commercial and industrial loans
695,543

 
439,430

Construction and land loans
 
 
 
Commercial construction and land
13,206

 
27,619

Consumer construction and land
3,694

 
2,628

Total construction and land loans
16,900

 
30,247

Consumer:
 
 
 
Consumer real estate
515,706

 
441,226

Other consumer loans
41,478

 
47,799

Total consumer
557,184

 
489,025

Gross loans held for investment, excluding Warehouse Purchase Program
2,489,063

 
2,049,902

Net of:
 
 
 
Deferred fees and discounts, net
(2,188
)
 
(1,267
)
Allowance for loan losses
(22,585
)
 
(19,358
)
Net loans held for investment, excluding Warehouse Purchase Program
2,464,290

 
2,029,277

Warehouse Purchase Program
736,624

 
673,470

Total loans held for investment
$
3,200,914

 
$
2,702,747




15
VIEWPOINT FINANCIAL GROUP, INC.
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)

Activity in the allowance for loan losses for the three and nine months ended September 30, 2014 and 2013, segregated by portfolio segment and evaluation for impairment, is set forth below. All Warehouse Purchase Program loans are collectively evaluated for impairment and are purchased under several contractual requirements, providing safeguards to the Company. These safeguards include the requirement that our mortgage company customers have a takeout commitment for each loan and multiple investors identified for purchases. To date, the Company has never experienced a loss on these loans and no allowance for loan losses has been allocated to them. At September 30, 2014 and 2013, $182 and $239, respectively, of the allowance for loan losses individually evaluated for impairment was allocated to purchased credit impaired ("PCI") loans.
For the three months ended September 30, 2014
Commercial Real Estate
 
Commercial and Industrial
 
Construction and Land
 
Consumer Real Estate
 
Other Consumer
 
Total
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
Beginning balance - July 1, 2014
$
11,186

 
$
5,285

 
$
252

 
$
3,339

 
$
378

 
$
20,440

Charge-offs
—

 
(171
)
 
(51
)
 
(81
)
 
(190
)
 
(493
)
Recoveries
—

 
19

 
1

 
12

 
95

 
127

Provision expense (benefit)
488

 
1,058

 
(59
)
 
910

 
114

 
2,511

Ending balance - September 30, 2014
$
11,674

 
$
6,191

 
$
143

 
$
4,180

 
$
397

 
$
22,585

For the nine months ended September 30, 2014
Commercial Real Estate
 
Commercial and Industrial
 
Construction and Land
 
Consumer Real Estate
 
Other Consumer
 
Total
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
Beginning balance - January 1, 2014
$
10,944

 
$
4,536

 
$
212

 
$
3,280

 
$
386

 
$
19,358

Charge-offs
—

 
(473
)
 
(51
)
 
(237
)
 
(497
)
 
(1,258
)
Recoveries
—

 
76

 
1

 
37

 
287

 
401

Provision expense (benefit)
730

 
2,052

 
(19
)
 
1,100

 
221

 
4,084

Ending balance - September 30, 2014
$
11,674

 
$
6,191

 
$
143

 
$
4,180

 
$
397

 
$
22,585

Allowance ending balance:
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
835

 
$
1,595

 
$
—

 
$
416

 
$
4

 
$
2,850

Collectively evaluated for impairment
10,839

 
4,596

 
143

 
3,764

 
393

 
19,735

Loans:
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
8,158

 
6,485

 
104

 
5,393

 
340

 
20,480

Collectively evaluated for impairment
1,206,151

 
688,868

 
16,796

 
509,206

 
40,973

 
2,461,994

PCI loans
5,127

 
190

 
—

 
1,107

 
165

 
6,589

Ending balance
$
1,219,436

 
$
695,543

 
$
16,900

 
$
515,706

 
$
41,478

 
$
2,489,063

For the three months ended September 30, 2013
Commercial Real Estate
 
Commercial and Industrial
 
Construction and Land
 
Consumer Real Estate
 
Other Consumer
 
Total
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
Beginning balance - July 1, 2013
$
10,525

 
$
4,739

 
$
119

 
$
3,463

 
$
431

 
$
19,277

Charge-offs
(34
)
 
(221
)
 
—

 
—

 
(101
)
 
(356
)
Recoveries
—

 
17

 
—

 
18

 
71

 
106

Provision expense (benefit)
(21
)
 
(72
)
 
(28
)
 
11

 
(48
)
 
(158
)
Ending balance - September 30, 2013
$
10,470

 
$
4,463

 
$
91

 
$
3,492

 
$
353

 
$
18,869


16
VIEWPOINT FINANCIAL GROUP, INC.
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)

For the nine months ended September 30, 2013
Commercial Real Estate
 
Commercial and Industrial
 
Construction and Land
 
Consumer Real Estate
 
Other Consumer
 
Total
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
Beginning balance - January 1, 2013
$
11,182

 
$
2,574

 
$
149

 
$
3,528

 
$
618

 
$
18,051

Charge-offs
(806
)
 
(555
)
 
(31
)
 
(355
)
 
(479
)
 
(2,226
)
Recoveries
—

 
115

 
—

 
30

 
316

 
461

Provision expense (benefit)
94

 
2,329

 
(27
)
 
289

 
(102
)
 
2,583

Ending balance - September 30, 2013
$
10,470

 
$
4,463

 
$
91

 
$
3,492

 
$
353

 
$
18,869

Allowance ending balance:
 
 
 
 
 
 
 
 
 
 

Individually evaluated for impairment
$
1,030

 
$
1,877

 
$
—

 
$
289

 
$
1

 
$
3,197

Collectively evaluated for impairment
9,440

 
2,586

 
91

 
3,203

 
352

 
15,672

Loans:
 
 
 
 
 
 
 
 
 
 

Individually evaluated for impairment
7,770

 
5,979

 
3

 
4,401

 
521

 
18,674

Collectively evaluated for impairment
1,023,373

 
384,088

 
13,724

 
436,521

 
49,418

 
1,907,124

PCI loans
4,240

 
679

 
1,625

 
1,151

 
176

 
7,871

Ending balance
$
1,035,383

 
$
390,746

 
$
15,352

 
$
442,073

 
$
50,115

 
$
1,933,669


The allowance for loan losses and related provision expense are susceptible to change if the credit quality of our loan portfolio changes, which is evidenced by many factors, including but not limited to charge-offs and non-performing loan trends. Generally, consumer real estate lending has a lower credit risk profile compared to other consumer lending (such as automobile loans). Commercial real estate and commercial and industrial lending, however, can have higher risk profiles than consumer loans due to these loans being larger in amount and non-homogeneous 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.
The allowance for loan losses is maintained to cover losses that are estimated in accordance with US GAAP. It is our estimate of credit losses 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 general component loss allocations. Qualitative loss factors are based on management's judgment of company, market, industry or business specific data and external economic indicators, which may not yet be reflected in the historical loss ratios, and that could impact the Company's specific loan portfolios. The Allowance for Loan Loss Committee sets and adjusts qualitative loss factors by regularly reviewing changes in underlying 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 prices, vacancy rates and inventory levels specific to our primary market area.
Management evaluates current information and events regarding a borrower's ability to repay its obligations and considers a loan to be impaired when the ultimate collectability of amounts due, according to the contractual terms of the loan agreement, is in doubt. If an impaired loan is collateral-dependent, the fair value of the collateral, less the estimated cost to sell, is used to determine the amount of impairment. If an impaired loan is not collateral-dependent, the impairment amount is determined using the negative difference, if any, between the estimated discounted cash flows and the loan amount due. For impaired loans, the amount of the impairment can be adjusted, based on current data, until such time as the actual basis is established by acquisition of the collateral or until the basis is collected. Impairment losses are reflected in the allowance for loan losses through a charge to the provision for loan losses. Subsequent recoveries are credited to the allowance for loan losses. Cash receipts for accruing loans are applied to principal and interest under the contractual terms of the loan agreement. Cash receipts on impaired loans for which the accrual of interest has been discontinued are applied first to principal.
For the specific component, the allowance for loan losses includes loans where management has concerns about the borrower's ability to repay and on individually analyzed loans found to be impaired (as that term is defined.) For example, all troubled debt restructurings are considered to be impaired. Loss estimates include the negative difference, if any, between the

17
VIEWPOINT FINANCIAL GROUP, INC.
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)

estimated discounted cash flows of the loan, or, if the loan is collateral dependent, the current fair value of the collateral and the loan amount due.
Impaired loans at September 30, 2014, and December 31, 2013, were as follows 1:
September 30, 2014
 
Unpaid
Contractual Principal
Balance
 
Recorded
Investment With No Allowance
 
Recorded
Investment With Allowance
 
Total Recorded Investment
 
Related
Allowance
Commercial real estate
 
$
9,083

 
$
4,882

 
$
3,276

 
$
8,158

 
$
793

Commercial and industrial
 
7,514

 
2,824

 
3,661

 
6,485

 
1,529

Construction and land
 
109

 
104

 
—

 
104

 
—

Consumer:
 
 
 
 
 
 
 
 
 
 
Consumer real estate
 
5,746

 
4,337

 
1,056

 
5,393

 
344