10-Q 1 vpfg-2013313x10q.htm 10-Q VPFG-2013.31.3 - 10 Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
R
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2013
OR
£
 
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 o
 
Accelerated filer x
 
 
 
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 April 29, 2013:
 
 
39,948,031



VIEWPOINT FINANCIAL GROUP, INC.
FORM 10-Q
March 31, 2013
INDEX
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 





PART 1 - FINANCIAL INFORMATION        Item 1. Financial Statements
VIEWPOINT FINANCIAL GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
 
March 31,
 
December 31,
 
2013
 
2012
ASSETS
(unaudited)
 
 
Cash and due from financial institutions
$
25,724

 
$
34,227

Short-term interest-bearing deposits in other financial institutions
26,783

 
34,469

Total cash and cash equivalents
52,507

 
68,696

Securities available for sale, at fair value
315,438

 
287,034

Securities held to maturity (fair value: March 31, 2013 — $344,836, December 31, 2012— $376,153)
329,993

 
360,554

Loans held for sale
757,472

 
1,060,720

Loans held for investment (net of allowance for loan losses of $18,642 at March 31, 2013 and $18,051 at December 31, 2012)
1,727,455

 
1,673,204

FHLB and Federal Reserve Bank stock, at cost
31,607

 
45,025

Bank-owned life insurance
35,078

 
34,916

Foreclosed assets, net
1,505

 
1,901

Premises and equipment, net
53,050

 
53,160

Goodwill
29,650

 
29,650

Accrued interest receivable
9,026

 
9,900

Prepaid FDIC assessment
4,660

 
4,809

Other assets
26,195

 
33,489

Total assets
$
3,373,636

 
$
3,663,058

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Deposits
 
 
 
Non-interest-bearing demand
$
392,759

 
$
357,800

Interest-bearing demand
481,966

 
488,748

Savings and money market
888,874

 
880,924

Time
449,491

 
450,334

Total deposits
2,213,090

 
2,177,806

FHLB advances (net of prepayment penalty of $2,937 at March 31, 2013 and $3,193 at December 31, 2012)
564,221

 
892,208

Repurchase agreement
25,000

 
25,000

Accrued interest payable
1,148

 
1,216

Other liabilities
39,210

 
45,957

Total liabilities
2,842,669

 
3,142,187

Commitments and contingent liabilities
—

 
—

Shareholders’ equity
 
 
 
Preferred stock, $.01 par value; 10,000,000 shares authorized; 0 shares issued — March 31, 2013 and December 31, 2012
—

 
—

Common stock, $.01 par value; 90,000,000 shares authorized; 39,948,031 shares issued — March 31, 2013 and 39,612,911 shares issued — December 31, 2012
399

 
396

Additional paid-in capital
373,492

 
372,168

Retained earnings
172,386

 
164,328

Accumulated other comprehensive income, net
2,239

 
1,895

Unearned Employee Stock Ownership Plan (ESOP) shares; 1,871,991 shares at March 31, 2013 and 1,918,039 shares at December 31, 2012
(17,549
)
 
(17,916
)
Total shareholders’ equity
530,967

 
520,871

Total liabilities and shareholders’ equity
$
3,373,636

 
$
3,663,058

 
 
 
 
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 March 31,
 
2013
 
2012
Interest and dividend income
 
 
 
Loans, including fees
$
30,378

 
$
24,320

Taxable securities
2,403

 
4,458

Nontaxable securities
474

 
473

Interest-bearing deposits in other financial institutions
31

 
19

FHLB and Federal Reserve Bank stock
133

 
106

 
33,419

 
29,376

Interest expense
 
 
 
Deposits
2,432

 
3,229

FHLB advances
2,261

 
2,454

Repurchase agreement
201

 
203

 
4,894

 
5,886

Net interest income
28,525

 
23,490

Provision for loan losses
883

 
895

Net interest income after provision for loan losses
27,642

 
22,595

Non-interest income
 
 
 
Service charges and fees
4,291

 
4,238

Other charges and fees
212

 
128

Net gain on sale of mortgage loans
—

 
2,232

Bank-owned life insurance income
162

 
109

Gain (loss) on sale of available for sale securities (reclassified from accumulated other comprehensive income for unrealized gains (losses) on available-for-sale securities)
(177
)
 
—

Gain (loss) on sale and disposition of assets
230

 
(81
)
Other
1,141

 
104

 
5,859

 
6,730

Non-interest expense
 
 
 
Salaries and employee benefits
12,915

 
11,724

Acquisition costs
—

 
144

Advertising
513

 
285

Occupancy and equipment
1,790

 
1,470

Outside professional services
684

 
483

Regulatory assessments
579

 
581

Data processing
1,518

 
1,245

Office operations
1,648

 
1,545

Other
1,226

 
975

 
20,873

 
18,452

Income before income tax expense
12,628

 
10,873

Income tax expense (includes $62 and $0 income tax benefit from items reclassified from accumulated other comprehensive income for the three months ended March 31, 2013 and 2012, respectively)
4,570

 
3,801

Net income
$
8,058

 
$
7,072

Earnings per share:
 
 
 
Basic
$
0.21

 
$
0.22

Diluted
$
0.21

 
$
0.22

 
 
 
 
See accompanying notes to consolidated financial statements.

4

VIEWPOINT FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
(Dollars in thousands)
 
Three Months Ended
 
March 31,
 
2013
 
2012
Net income
$
8,058

 
$
7,072

Change in unrealized gains (losses) on securities available for sale
326

 
331

Reclassification of amount realized through sale of securities
177

 
—

Tax effect
(159
)
 
(118
)
Other comprehensive income (loss), net of tax
344

 
213

Comprehensive income
$
8,402

 
$
7,285

 
 
 
 
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 three months ended March 31, 2012
Common
Stock
 
Additional
Paid-In
Capital
 
Unearned
ESOP Shares
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income, Net
 
Total
Shareholders’
Equity
Balance at January 1, 2012
$
337

 
$
279,473

 
$
(19,383
)
 
$
144,535

 
$
1,347

 
$
406,309

ESOP shares earned, 46,049 shares
—

 
299

 
367

 
—

 
—

 
666

Share-based compensation expense
—

 
333

 
—

 
—

 
—

 
333

Net issuance of common stock under employee stock plans (2,681 shares)
—

 
34

 
—

 
—

 
—

 
34

Dividends declared ($0.06 per share)
—

 
—

 
—

 
(2,022
)
 
—

 
(2,022
)
Net income
—

 
—

 
—

 
7,072

 
—

 
7,072

Other comprehensive income
—

 
—

 
—

 
—

 
213

 
213

Total comprehensive income


 


 


 


 


 
7,285

Balance at March 31, 2012
$
337

 
$
280,139

 
$
(19,016
)
 
$
149,585

 
$
1,560

 
$
412,605

For the three months ended March 31, 2013
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2013
$
396

 
$
372,168

 
$
(17,916
)
 
$
164,328

 
$
1,895

 
$
520,871

ESOP shares earned, 46,048 shares
—

 
598

 
367

 
—

 
—

 
965

Share-based compensation expense
—

 
572

 
—

 
—

 
—

 
572

Net issuance of common stock under employee stock plans (335,120 shares)
3

 
154

 
—

 
—

 
—

 
157

Net income
—

 
—

 
—

 
8,058

 
—

 
8,058

Other comprehensive income
—

 
—

 
—

 
—

 
344

 
344

Total comprehensive income
 
 
 
 
 
 
 
 
 
 
8,402

Balance at March 31, 2013
$
399

 
$
373,492

 
$
(17,549
)
 
$
172,386

 
$
2,239

 
$
530,967


See accompanying notes to consolidated financial statements

6

VIEWPOINT FINANCIAL GROUP, INC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(Dollars in thousands)
 
Three Months Ended March 31,
 
2013
 
2012
Cash flows from operating activities
 
 
 
Net income
$
8,058

 
$
7,072

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Provision for loan losses
883

 
895

Depreciation and amortization
1,140

 
916

Deferred tax expense (benefit)
246

 
(507
)
Premium amortization and accretion of securities, net
1,778

 
1,044

Accretion related to acquired loans
(945
)
 
—

Loss on sale of available for sale securities
177

 
—

ESOP compensation expense
965

 
666

Share-based compensation expense
572

 
333

Net gain on loans held for sale
—

 
(2,232
)
Loans originated or purchased for sale
(3,431,487
)
 
(2,886,917
)
Proceeds from sale of loans held for sale
3,734,735

 
2,989,093

FHLB stock dividends
(34
)
 
(32
)
Bank-owned life insurance (BOLI) income
(162
)
 
(109
)
Gain (loss) on sale and disposition of assets
(230
)
 
81

Net change in deferred loan fees
126

 
120

Net change in accrued interest receivable
874

 
937

Net change in other assets
7,111

 
2,653

Net change in other liabilities
(6,974
)
 
(2,123
)
Net cash provided by operating activities
316,833

 
111,890

Cash flows from investing activities
 
 
 
Available-for-sale securities:
 
 
 
Maturities, prepayments and calls
126,337

 
222,281

Purchases
(165,941
)
 
(200,000
)
Proceeds from sale of AFS securities
10,614

 
—

Held-to-maturity securities:
 
 
 
Maturities, prepayments and calls
31,049

 
33,768

Purchases
(1,354
)
 
—

Net change in loans held for investment
(54,905
)
 
(29,084
)
Purchase of FHLB and Federal Reserve Bank stock
13,452

 
4,698

Purchases of premises and equipment
(910
)
 
(394
)
Proceeds from sale of assets
1,182

 
746

Net cash provided by (used in) investing activities
(40,476
)
 
32,015


7
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Dollars in thousands)


Cash flows from financing activities
 
 
 
Net change in deposits
35,284

 
(29,872
)
Proceeds from FHLB advances
230,000

 
345,500

Repayments on FHLB advances
(557,987
)
 
(459,386
)
Payment of dividends
—

 
(2,022
)
Proceeds from stock option exercises
157

 
34

Net cash used in financing activities
(292,546
)
 
(145,746
)
Net change in cash and cash equivalents
(16,189
)
 
(1,841
)
Beginning cash and cash equivalents
68,696

 
46,348

Ending cash and cash equivalents
$
52,507

 
$
44,507

Supplemental cash flow information:
 
 
 
Interest paid
$
4,962

 
$
5,935

Income taxes paid
7

 
506

Supplemental noncash disclosures:
 
 
 
Transfers from loans to other real estate owned
590

 
640

 
 
 
 
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 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 ViewPoint Financial Group, Inc.'s 2012 Annual Report on Form 10-K (“2012 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 2012 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, National Association (the “Bank”). Prior to its sale during the third quarter of 2012, the Bank's operations included its wholly owned subsidiary, ViewPoint Bankers Mortgage, Inc., doing business as ViewPoint Mortgage (“VPM”). The Bank's operations include the impact of the acquisition of Highlands Bancshares, Inc., which was completed on April 2, 2012. All significant intercompany transactions and balances are eliminated in consolidation.
NOTE 2 — 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 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 months ended March 31, 2013 and 2012 is as follows:

9
VIEWPOINT FINANCIAL GROUP, INC.
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
NOTE 2 — EARNINGS PER COMMON SHARE (Continued)

 
Three Months Ended March 31,
 
2013
 
2012
Basic earnings per share:
 
 
 
Numerator:
 
 
 
Net income
$
8,058

 
$
7,072

Distributed and undistributed earnings to participating securities
(64
)
 
(15
)
Income available to common shareholders
$
7,994

 
$
7,057

Denominator:
 
 
 
Weighted average common shares outstanding
39,732,156

 
33,700,929

Less: Average unallocated ESOP shares
(1,902,178
)
 
(2,086,378
)
  Average unvested restricted stock awards
(300,185
)
 
(68,803
)
Average shares for basic earnings per share
37,529,793

 
31,545,748

Basic earnings per common share
$
0.21

 
$
0.22

Diluted earnings per share:
 
 
 
Numerator:
 
 
 
Income available to common shareholders
$
7,994

 
$
7,057

Denominator:
 
 
 
Average shares for basic earnings per share
37,529,793

 
31,545,748

Dilutive effect of share-based compensation plan
151,609

 
120,607

Average shares for diluted earnings per share
37,681,402

 
31,666,355

Diluted earnings per common share
$
0.21

 
0.22

877,500 and 80,000 stock options outstanding at March 31, 2013 and March 31, 2012, respectively, 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.


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

NOTE 3 - SECURITIES

The fair value of available-for-sale securities and the related gross unrealized gains and losses recognized in accumulated other comprehensive income (loss), net of tax, were as follows:
 
Amortized
 
Gross
Unrealized
 
Gross
Unrealized
 
 
March 31, 2013
Cost
 
Gains
 
Losses
 
Fair Value
Agency residential mortgage-backed securities
$
212,119

 
$
2,599

 
$
124

 
$
214,594

Agency residential collateralized mortgage obligations
96,693

 
920

 
50

 
97,563

SBA pools
3,177

 
104

 
—

 
3,281

Total securities
$
311,989

 
$
3,623

 
$
174

 
$
315,438

 
Amortized
 
Gross
Unrealized
 
Gross
Unrealized
 
 
December 31, 2012
Cost
 
Gains
 
Losses
 
Fair Value
Agency residential mortgage-backed securities
$
164,023

 
$
2,195

 
$
118

 
$
166,100

Agency residential collateralized mortgage obligations
116,723

 
996

 
233

 
117,486

SBA pools
3,342

 
106

 
—

 
3,448

Total securities
$
284,088

 
$
3,297

 
$
351

 
$
287,034

The carrying amount, unrecognized gains and losses, and fair value of securities held to maturity were as follows:
 
Amortized
 
Gross
Unrealized
 
Gross
Unrealized
 
 
March 31, 2013
Cost
 
Gains
 
Losses
 
Fair Value
Agency residential mortgage-backed securities
$
102,710

 
$
5,741

 
$
—

 
$
108,451

Agency commercial mortgage-backed securities
9,203

 
1,140

 
—

 
10,343

Agency residential collateralized mortgage obligations
166,274

 
3,588

 
78

 
169,784

Municipal bonds
51,806

 
4,499

 
47

 
56,258

Total securities
$
329,993

 
$
14,968

 
$
125

 
$
344,836

 
Amortized
 
Gross
Unrealized
 
Gross
Unrealized
 
 
December 31, 2012
Cost
 
Gains
 
Losses
 
Fair Value
Agency residential mortgage-backed securities
$
114,388

 
$
6,324

 
$
—

 
$
120,712

Agency commercial mortgage-backed securities
9,243

 
1,303

 
—

 
10,546

Agency residential collateralized mortgage obligations
186,467

 
3,129

 
173

 
189,423

Municipal bonds
50,456

 
5,018

 
2

 
55,472

Total securities
$
360,554

 
$
15,774

 
$
175

 
$
376,153



11

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

NOTE 3 — SECURITIES (Continued)

The carrying amount and fair value of held to maturity debt securities and the fair value of available for sale debt securities at March 31, 2013 by contractual maturity were as follows. Securities with contractual payments not due at a single maturity date, including mortgage backed securities and collateralized mortgage obligations, are shown separately.
 
 
 
Available
 
Held to maturity
 
for sale
 
Carrying
Amount
 
Fair Value
 
Fair Value
Due in one year or less
$
1,481

 
$
1,495

 
$
—

Due after one to five years
6,685

 
7,226

 
465

Due after five to ten years
14,835

 
16,326

 
2,816

Due after ten years
28,805

 
31,211

 
—

Agency residential mortgage-backed securities
102,710

 
108,451

 
214,594

Agency commercial mortgage-backed securities
9,203

 
10,343

 
—

Agency residential collateralized mortgage obligations
166,274

 
169,784

 
97,563

Total
$
329,993

 
$
344,836

 
$
315,438

Information regarding pledged securities is summarized below:
 
March 31, 2013
 
December 31, 2012
Public fund certificates of deposit
$
136,419

 
$
134,846

Repurchase agreements
25,000

 
25,000

Carrying value of securities pledged on above funds
142,811

 
176,508

Sales activity of securities for the three months ended March 31, 2013 and March 31, 2012 was as follows:
 
March 31,
 
2013
 
2012
Proceeds
$
10,614

 
$
—

Gross losses
177

 
—


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

Securities with unrealized losses at March 31, 2013 and December 31, 2012, 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
March 31, 2013
Fair Value
 
Unrealized Loss
 
Number
 
Fair Value
 
Unrealized Loss
 
Number
 
Fair Value
 
Unrealized Loss
 
Number
Agency residential mortgage-backed securities
$
41,511

 
$
124

 
8

 
$
—

 
$
—

 
—

 
$
41,511

 
$
124

 
8

Agency residential collateralized mortgage obligations
3,358

 
4

 
2

 
5,296

 
46

 
3

 
8,654

 
50

 
5

Total temporarily impaired
$
44,869

 
$
128

 
10

 
$
5,296

 
$
46

 
3

 
$
50,165

 
$
174

 
13


12

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

NOTE 3 — SECURITIES (Continued)

HTM
Less than 12 Months
 
12 Months or More
 
Total
March 31, 2013
Fair Value
 
Unrealized Loss
 
Number
 
Fair Value
 
Unrealized Loss
 
Number
 
Fair Value
 
Unrealized Loss
 
Number
Agency residential collateralized mortgage obligations
$
4,696

 
$
24

 
2

 
$
3,662

 
$
54

 
3

 
$
8,358

 
$
78

 
5

Municipal bonds
1,589

 
47

 
5

 
—

 
—

 
—

 
1,589

 
47

 
5

Total temporarily impaired
$
6,285


$
71


7

 
$
3,662

 
$
54

 
3

 
$
9,947


$
125

 
10

AFS
Less than 12 Months
 
12 Months or More
 
Total
December 31, 2012
Fair Value
 
Unrealized Loss
 
Number
 
Fair Value
 
Unrealized Loss
 
Number
 
Fair Value
 
Unrealized Loss
 
Number
Agency residential mortgage-backed securities
$
24,462

 
$
118

 
4

 
$
—

 
$
—

 
—

 
$
24,462

 
$
118

 
4

Agency residential collateralized mortgage obligations
2

 
—

 
1

 
16,912

 
233

 
6

 
16,914

 
233

 
7

Total temporarily impaired
$
24,464

 
$
118

 
5

 
$
16,912

 
$
233

 
6

 
$
41,376

 
$
351

 
11

HTM
Less than 12 Months
 
12 Months or More
 
Total
December 31, 2012
Fair Value
 
Unrealized Loss
 
Number
 
Fair Value
 
Unrealized Loss
 
Number
 
Fair Value
 
Unrealized Loss
 
Number
Agency residential collateralized mortgage obligations
$
19,311

 
$
62

 
5

 
$
4,972

 
$
111

 
4

 
$
24,283

 
$
173

 
9

Municipal bonds
281

 
2

 
1

 
—

 
—

 
—

 
281

 
2

 
1

Total temporarily impaired
$
19,592

 
$
64

 
6

 
$
4,972

 
$
111

 
4

 
$
24,564

 
$
175

 
10

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 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 to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. The Company does not believe these unrealized losses to be other-than-temporary.


13

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

NOTE 4 — LOANS

Loans consist of the following:
 
March 31, 2013
 
December 31, 2012
Commercial real estate
$
897,534

 
$
839,908

Commercial and industrial loans:
 
 
 
Commercial
271,605

 
245,799

Warehouse lines of credit
30,861

 
32,726

Total commercial and industrial loans
302,466

 
278,525

Consumer:
 
 
 
One- to four-family real estate
358,823

 
378,255

Home equity/home improvement
131,776

 
135,001

Other consumer loans
55,138

 
59,080

Total consumer
545,737

 
572,336

Gross loans held for investment
1,745,737

 
$
1,690,769

Net of:
 
 
 
Deferred fees and discounts, net
360

 
486

Allowance for loan losses
(18,642
)
 
(18,051
)
Net loans held for investment
$
1,727,455

 
$
1,673,204

Loans held for sale
$
757,472

 
$
1,060,720

Activity in the allowance for loan losses for the three months ended March 31, 2013 and 2012, segregated by portfolio segment and evaluation for impairment, was as follows. At March 31, 2013, $330 of the allowance for loan losses individually evaluated for impairment was allocated to purchase credit impaired ("PCI") loans, and at March 31 2012, no portion of the allowance for loan losses individually evaluated for impairment was allocated to PCI loans.
March 31, 2013
Commercial Real Estate
 
Commercial and Industrial
 
One- to Four-Family Real Estate
 
Home
Equity/Home Improvement
 
Other Consumer
 
Total
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
Beginning balance - January 1, 2013
$
11,304

 
$
2,574

 
$
2,356

 
$
1,199

 
$
618

 
$
18,051

Charge-offs
(87
)
 
(210
)
 
(29
)
 
—

 
(150
)
 
(476
)
Recoveries
—

 
38

 
6

 
—

 
140

 
184

Provision expense (benefit)
(312
)
 
1,166

 
192

 
(125
)
 
(38
)
 
883

Ending balance - March 31, 2013
$
10,905

 
$
3,568

 
$
2,525

 
$
1,074

 
$
570

 
$
18,642

Allowance ending balance:
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
2,513

 
$
1,405

 
$
996

 
$
198

 
$
73

 
$
5,185

Collectively evaluated for impairment
8,392

 
2,163

 
1,529

 
876

 
497

 
13,457

Loans:
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
16,067

 
$
7,009

 
$
7,748

 
$
1,055

 
$
440

 
$
32,319

Collectively evaluated for impairment
873,428

 
294,256

 
350,115

 
130,510

 
54,505

 
1,702,814

  PCI Loans
8,039

 
1,201

 
960

 
211

 
193

 
10,604

Ending balance
$
897,534

 
$
302,466

 
$
358,823

 
$
131,776

 
$
55,138

 
$
1,745,737


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

NOTE 4 — LOANS (Continued)

March 31, 2012
Commercial Real Estate
 
Commercial and Industrial
 
One- to Four-Family Real Estate
 
Home
Equity/Home Improvement
 
Other Consumer
 
Total
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
Beginning balance - January 1, 2012
$
10,621

 
$
2,090

 
$
3,027

 
$
1,043

 
$
706

 
$
17,487

Charge-offs
—

 
(215
)
 
(84
)
 
—

 
(197
)
 
(496
)
Recoveries
—

 
23

 
7

 
—

 
107

 
137

Provision expense (benefit)
561

 
266

 
59

 
(29
)
 
38

 
895

Ending balance - March 31, 2012
$
11,182

 
$
2,164

 
$
3,009

 
$
1,014

 
$
654

 
$
18,023

Allowance ending balance:
 
 
 
 
 
 
 
 
 
 

Individually evaluated for impairment
$
2,346

 
$
135

 
$
607

 
$
209

 
$
12

 
$
3,309

Collectively evaluated for impairment
8,836

 
2,029

 
2,402

 
805

 
642

 
14,714

Loans:
 
 
 
 
 
 
 
 
 
 

Individually evaluated for impairment
$
18,861

 
$
489

 
$
5,361

 
$
1,275

 
$
150

 
$
26,136

Collectively evaluated for impairment
605,196

 
69,827

 
366,709

 
138,064

 
50,181

 
1,229,977

Ending balance
$
624,057

 
$
70,316

 
$
372,070

 
$
139,339

 
$
50,331

 
$
1,256,113


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-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.
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.
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 utilizing a 24 month rolling average. 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 regularly 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.

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

NOTE 4 — LOANS (Continued)

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.
Impaired loans at March 31, 2013, and December 31, 2012, were as follows 1:
March 31, 2013
 
Unpaid
Contractual Principal
Balance
 
Recorded
Investment With No Allowance
 
Recorded
Investment With Allowance
 
Total Recorded Investment
 
Related
Allowance
Commercial real estate
 
$
16,786

 
$
4,089

 
$
11,978

 
$
16,067

 
$
2,302

Commercial and industrial
 
9,127

 
3,218

 
3,791

 
7,009

 
1,349

Consumer:
 
 
 
 
 
 
 
 
 
 
One- to four- family real estate
 
7,359

 
5,028

 
2,720

 
7,748

 
934

Home equity/home improvement
 
1,087

 
835

 
220

 
1,055

 
197

Other consumer
 
465

 
—

 
440

 
440

 
73

Total
 
$
34,824

 
$
13,170

 
$
19,149

 
$
32,319

 
$
4,855

December 31, 2012
 
 
 
 
 
 
 
 
 
 
Commercial real estate
 
$
17,768

 
$
4,383

 
$
12,609

 
$
16,992

 
$
2,756

Commercial and industrial
 
7,632

 
3,284

 
2,325

 
5,609

 
630

Consumer:
 
 
 
 
 
 
 
 
 
 
One- to four- family real estate
 
7,515

 
4,472

 
2,891

 
7,363

 
722

Home equity/home improvement
 
1,157

 
819

 
307

 
1,126

 
238

Other consumer
 
338

 
28

 
301

 
329

 
23

Total
 
$
34,410

 
$
12,986

 
$
18,433

 
$
31,419

 
$
4,369

1 Loans reported do not include PCI loans.

Income on impaired loans at March 31, 2013 and 2012 was as follows1:
 
March 31, 2013
 
March 31, 2012
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 
Average
Recorded
Investment
 
Interest
Income
Recognized
Commercial real estate
$
16,169

 
$
62

 
$
19,086

 
$
52

Commercial and industrial
5,808

 
3

 
538

 
—

Consumer:
 
 
 

 
 
 
 
One- to four- family real estate
7,607

 
13

 
5,096

 
20

Home equity/home improvement
1,009

 
1

 
1,281

 
2

Other consumer
379

 
—

 
164

 
—

Total
$
30,972

 
$
79

 
$
26,165

 
$
74

1 Loans reported do not include PCI loans.

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

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

NOTE 4 — LOANS (Continued)

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 status, is reversed against interest income. Interest received on such loans is accounted for on the cost recovery or cash-basis 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.
Loans past due over 90 days that were still accruing interest totaled $499 at March 31, 2013 and $593 at December 31, 2012, which consisted entirely of PCI loans. At March 31, 2013 and December 31, 2012, no PCI loans were considered non-performing loans. Purchased performing loans that were non-performing totaled $6,321 and $5,364 at March 31, 2013 and December 31, 2012, respectively. Those loans included $3,020 and $3,159 at March 31, 2013 and December 31, 2012, respectively, of commercial lines of credit that did not qualify for PCI accounting due to their revolving nature. Non-performing (nonaccrual) loans were as follows:
 
March 31, 2013
 
December 31, 2012
Commercial real estate
$
12,696

 
$
13,609

Commercial and industrial
6,807

 
5,401

Consumer:
 
 
 
One- to four- family real estate
6,833

 
6,854

Home equity/home improvement
1,007

 
1,077

Other consumer
378

 
262

Total
$
27,721

 
$
27,203


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.
The outstanding balances of troubled debt restructurings ("TDRs") are shown below:
 
March 31, 2013
 
December 31, 2012
Nonaccrual TDRs(1)
$
14,136

 
$
13,760

Performing TDRs (2)
4,599

 
4,216

Total
$
18,735

 
$
17,976

Specific reserves on TDRs
$
2,217

 
$
2,643

Outstanding commitments to lend additional funds to borrowers with TDR loans
—

 
—

1 Nonaccrual TDR loans are included in the nonaccrual loan totals.
2 Performing TDR loans are loans that have been performing under the restructured terms for at least six months and the Company is accruing interest on these loans.


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

NOTE 4 — LOANS (Continued)

The following table provides the recorded balances of loans modified as a TDR during the three months ended March 31, 2013 and 2012.
Three Months Ended March 31, 2013
 
Principal Deferrals
 
Combination of Rate Reduction and Principal Deferral
 
Other
 
Total
Commercial real estate
 
$
690

 
$
—

 
$
—

 
$
690

Commercial and industrial
 
—

 
33

 
—

 
33

Consumer:
 
 
 
 
 
 
 
 
 
Other consumer
 
75

 
—

 
—

 
75

 
Total
 
$
765

 
$
33

 
$
—

 
$
798

Three Months Ended March 31, 2012
 
 
 
 
 
 
 
 
Commercial and industrial
 
$
—

 
$
—

 
$
82

 
$
82

Consumer:
 
 
 
 
 
 
 
 
 
One- to four- family real estate
 
—

 
383

 
250

 
633

 
Total
 
$
—

 
$
383

 
$
332

 
$
715


TDRs modified within the last twelve months which experienced a subsequent default during the three months ended March 31, 2013 are shown below. There were no loans modified as a TDR within the previous 12 months that had a payment default during the three months ended March 31, 2012. A payment default is defined as a loan that was 90 days or more past due.
 
Three Months Ended March 31, 2013
Consumer:
 
One- to four- family real estate
$
558

Home equity/home improvement
40

Total
$
598

    
Below is an analysis of the age of recorded investment in loans that were past due at March 31, 2013 and December 31, 2012.
March 31, 2013
30-59 Days Past Due
 
60-89 Days Past Due
 
90 Days and Greater Past Due
 
Total Loans Past Due
 
Current Loans 1
 
Total Loans
Commercial real estate
$
1,418

 
$
1,589

 
$
267

 
$
3,274

 
$
894,260

 
$
897,534

Commercial and industrial
1,045

 
141

 
4,200

 
5,386

 
297,080

 
302,466

Consumer loans:
 
 
 
 
 
 
 
 
 
 
 
One- to four- family real estate
7,925

 
854

 
3,134

 
11,913

 
346,910

 
358,823

Home equity/home improvement
1,014

 
160

 
437

 
1,611

 
130,165

 
131,776

Other consumer
641

 
87

 
69

 
797

 
54,341

 
55,138

Total
$
12,043

 
$
2,831

 
$
8,107

 
$
22,981

 
$
1,722,756

 
$
1,745,737




18
VIEWPOINT FINANCIAL GROUP, INC.
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)

NOTE 4 — LOANS (Continued)

December 31, 2012
30-59 Days Past Due
 
60-89 Days Past Due
 
90 Days and Greater Past Due
 
Total Loans Past Due
 
Current Loans 1
 
Total Loans
Commercial real estate
$
2,243

 
$
1,182

 
$
1,128

 
$
4,553

 
$
835,355

 
$
839,908

Commercial and industrial
2,066

 
530

 
2,867

 
5,463

 
273,062

 
278,525

Consumer loans:
 
 
 
 
 
 
 
 
 
 
 
One- to four- family real estate
7,099

 
1,867

 
3,845

 
12,811

 
365,444

 
378,255

Home equity/home improvement
1,046

 
107

 
624

 
1,777

 
133,224

 
135,001

Other consumer
563

 
151

 
49

 
763

 
58,317

 
59,080

Total
$
13,017

 
$
3,837

 
$
8,513

 
$
25,367

 
$
1,665,402

 
$
1,690,769


1 Includes acquired PCI loans with a total carrying value of $7,224 and $11,206 at March 31, 2013 and December 31, 2012, respectively.
For loans collateralized by real property and commercial and industrial loans, credit exposure is monitored by internally assigned grades used for classification of loans and other assets. 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 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.
For consumer loans, credit exposure is monitored by payment history of the loans. Non-performing consumer loans are on nonaccrual and are generally greater than 90 days past due.

19
VIEWPOINT FINANCIAL GROUP, INC.
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)

NOTE 4 — LOANS (Continued)

The recorded investment in loans by credit quality indicators at March 31, 2013 and December 31, 2012, was as follows.
Real Estate and Commercial and Industrial Credit Exposure
Credit Risk Profile by Internally Assigned Grade
March 31, 2013
Commercial Real Estate
 
Commercial and Industrial
 
One- to Four-Family Real Estate
 
Home Equity/Home Improvement
Grade: 1
 
 
 
 
 
 
 
Pass
$
853,452

 
$
290,279

 
$
345,197

 
$
128,699

Special Mention
17,070

 
354

 
3,041

 
384

Substandard
26,027

 
11,808

 
6,882

 
1,875

Doubtful
985

 
25

 
3,703

 
818

Total
$
897,534

 
$
302,466

 
$
358,823

 
$
131,776

 
Commercial Real Estate
 
Commercial and Industrial
 
One- to Four-Family Real Estate
 
Home Equity/Home Improvement
December 31, 2012
 
 
 
Grade: 1
 
 
 
 
 
 
 
Pass
$
793,507

 
$
264,528

 
$
365,858

 
$
131,889

Special Mention
17,504

 
645

 
2,219

 
398

Substandard
27,669

 
13,227

 
7,092

 
1,850

Doubtful
1,228

 
125

 
3,086

 
864

Total
$
839,908

 
$
278,525

 
$
378,255

 
$
135,001

1 PCI loans are included in the substandard or doubtful categories. These categories are consistent with "substandard" categories as defined by regulatory authorities.
Consumer Credit Exposure
Credit Risk Profile Based on Payment Activity
 
March 31, 2013
 
December 31, 2012
 
Performing
$
54,760

 
$
58,818

 
Non-performing
378

 
262

 
Total
$
55,138

 
$
59,080

 


20

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

NOTE 5 — FAIR VALUE
ASC 820, “Fair Value Measurements and Disclosures”, establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3: Prices or valuation techniques that require inputs that are both significant and unobservable in the market. These instruments are valued using the best information available, some of which is internally developed, and reflects a reporting entity’s own assumptions about the risk premiums that market participants would generally require and the assumptions they would use.
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.)
Prior to the Company's sale of VPM in the third quarter of 2012, interest income on certain mortgage loans held for sale was recognized based on contractual rates and reflected in interest income on mortgage loans held for sale in the consolidated income statement. A net gain of $371 resulting from changes in fair value of these loans was recorded in mortgage income during the three months ended March 31, 2012, offset by economic hedging losses in the amount of $211.
Assets and Liabilities Measured on a Recurring Basis

Assets measured at fair value on a recurring basis are summarized below. There were no liabilities measured at fair value on a recurring basis as of March 31, 2013 or December 31, 2012.
March 31, 2013
Fair Value Measurements Using Significant Other Observable Inputs (Level 2)
Assets:
 
Agency residential mortgage-backed securities
$
214,594

Agency residential collateralized mortgage obligations
97,563

SBA pools
3,281

Total securities available for sale
$
315,438

December 31, 2012
 
Assets:
 
Agency residential mortgage-backed securities
$
166,100

Agency residential collateralized mortgage obligations
117,486

SBA pools
3,448

Total securities available for sale
$
287,034


21
VIEWPOINT FINANCIAL GROUP, INC.
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)

NOTE 5 - FAIR VALUE (Continued)

Assets and Liabilities Measured on a Non-Recurring Basis

Assets measured at fair value on a non-recurring basis are summarized below. There were no liabilities measured at fair value on a non-recurring basis as of March 31, 2013 or December 31, 2012.

 
 
Fair Value Measurements Using
 
March 31, 2013
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable
Inputs (Level 3)
Assets:
 
 
 
 
 
Impaired loans
$
14,294

 
$
—

 
$
14,294

Other real estate owned
1,505

 
965

 
540

 
 
 
Fair Value Measurements Using
 
December 31, 2012
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable
Inputs (Level 3)
Assets:
 
 
 
 
 
Impaired loans
$
14,064

 
$
—

 
$
14,064

Other real estate owned
1,886

 
416

 
1,470


Unobservable inputs used in nonrecurring Level 3 fair value measurements at March 31, 2013 and December 31, 2012, are summarized below:
Quantitative Information about Level 3 Fair Value Measurements
 
Fair Value
 
 
Range (Average)
 
March 31, 2013
December 31, 2012
Valuation Technique
Unobservable Input
Impaired loans
$
11,235

$
10,986

Third party appraisal
Discount of market value
0%-20% (7%)
 
 
 
 
Estimated marketing costs
0%-7% (6%)
 
 
 
 
Estimated legal expenses
$0-$7 ($2)
 
3,059

3,078

Discounted cash flow analysis
Interest rate
2.4%-5.4% (3.8%)
 
 
 
 
Loan term (in months)
10-251 (107)
Other real estate owned
540

1,470

Third party appraisal
Discount of market value
0%-70% (17%)
 
 
 
 
Estimated marketing costs
0%-7% (6%)
Impaired loans that are collateral dependent are measured for impairment using the fair value of the collateral as determined by third party appraisals using recent comparative sales data. The fair value of the collateral is then adjusted for the Level 3 inputs described above. Impaired loans that are not collateral dependent are measured for impairment by a discounted cash flow analysis using a net present value calculation utilizing data from the loan file before and after the modification.
Other real estate owned is measured at the lower of book or fair value less costs to sell. Other real estate owned that was valued using third party appraisals, listing agreements or sales contracts less actual costs to sell is classified as Level 2, while other real estate owned that was valued using third party appraisals, listing agreements or sales contracts less costs to sell and other Level 3 valuation inputs described in the above table is classified as Level 3.


22
VIEWPOINT FINANCIAL GROUP, INC.
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)

NOTE 5 - FAIR VALUE (Continued)

The Credit Administration department evaluates the valuations on impaired loans and other real estate owned at least monthly. These valuations are reviewed at least monthly by the Allowance for Loan Loss Committee and are considered in the calculation of the allowance for loan losses. Unobservable inputs are monitored and adjusted if market conditions change.
Activity for other real estate owned for the three months ended March 31, 2013 and 2012, and the related valuation allowances was as follows:
 
Three Months Ended March 31,
 
2013
 
2012
Balance at January 1
$
1,886

 
$
2,286

Transfers in at fair value
590

 
640

Change in valuation allowance
(2
)
 
(80
)
Sale of property (gross)
(969
)
 
(825
)
Balance at March 31
$
1,505

 
$
2,021

Valuation allowance:
 
 
 
Balance at January 1
$
57

 
$
1,076

Sale of property
(32
)
 
(15
)
Valuation adjustment
34

 
95

Balance at March 31
$
59

 
$
1,156


Carrying amount and fair value information of financial instruments at March 31, 2013 and at December 31, 2012, were as follows:
 
 
 
Fair Value
March 31, 2013
Carrying
Amount
 
Quoted Prices in Active Markets for Identical Assets (Level 1)
 
Significant Other Observable Inputs (Level 2)
 
Significant Unobservable Inputs (Level 3)
Financial assets
 
 
 
 
 
 
 
Cash and cash equivalents
$
52,507

 
$
52,507

 
$
—

 
$
—

Securities available for sale
315,438

 
—

 
315,438

 
—

Securities held to maturity
329,993

 
—

 
344,836

 
—

Loans held for sale
757,472

 
—

 
—

 
757,835

Loans held for investment, net
1,727,455

 
—

 
—

 
1,756,608

FHLB and Federal Reserve Bank stock
31,607

 
N/A

 
N/A

 
N/A

Bank-owned life insurance
35,078

 
35,078

 
—

 
—

Accrued interest receivable
9,026

 
9,026

 
—

 
—

Financial liabilities
 
 
 
 
 
 
 
Deposits
2,213,090

 
—

 
—

 
2,123,362

FHLB advances
564,221

 
—

 
—

 
581,798

Repurchase agreement
25,000

 
—

 
—

 
28,266

Accrued interest payable
1,148

 
1,148

 
—

 
—


23
VIEWPOINT FINANCIAL GROUP, INC.
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)

NOTE 5 - FAIR VALUE (Continued)

 
 
 
Fair Value
December 31, 2012
Carrying
Amount
 
Quoted Prices in Active Markets for Identical Assets (Level 1)
 
Significant Other Observable Inputs (Level 2)
 
Significant Unobservable Inputs (Level 3)
Financial assets
 
 
 
 
 
 
 
Cash and cash equivalents
$
68,696

 
$
68,696

 
$
—

 
$
—

Securities available for sale
287,034

 
—

 
287,034

 
—

Securities held to maturity
360,554

 
—

 
376,153

 
—

Loans held for sale
1,060,720

 
—

 
—

 
1,061,334

Loans held for investment, net
1,673,204

 
—

 
—

 
1,696,060

FHLB and Federal Reserve Bank stock
45,025

 
N/A

 
N/A

 
N/A

Bank-owned life insurance
34,916

 
34,916

 
—

 
—

Accrued interest receivable
9,900

 
9,900

 
—

 
—

Financial liabilities
 
 
 
 
 
 
 
Deposits
$
2,177,806

 
$
—

 
$
—

 
$
2,097,063

FHLB advances
892,208

 
—

 
—

 
912,817

Repurchase agreement
25,000

 
—

 
—

 
28,501

Accrued interest payable
1,216

 
1,216

 
—

 
—

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 FHLB advances, fair value is calculated using the March 31, 2013 FHLB advance curve to discount cash flows for the estimated life for deposits and according to the contractual repayment schedule for FHLB advances. Fair value of the repurchase agreement 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 and Federal Reserve Bank 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.


24

VIEWPOINT FINANCIAL GROUP, INC.
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
NOTE 6 — SHARE-BASED COMPENSATION

Compensation cost charged to income for share-based compensation is presented below:
 
Three Months Ended March 31, 2013
Restricted stock
$
430

Stock options
142

 
 
Income tax benefit
200


A combined summary of changes in the nonvested shares for the Company's stock plans follows:
 
Three Months Ended March 31, 2013
 
Shares
 
Weighted-
Average
Grant Date
Fair Value
Non-vested at January 1
185,296

 
$
17.60

Granted
331,000

 
20.85

Vested
(2,800
)
 
11.81

Forfeited
—

 
—

Non-vested at March 31
513,496

 
$
19.73


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 March 31, 2013, there was $9,234 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 3.71 years.

A summary of activity in the stock option portion of the plans as of March 31, 2013, is presented below:
 
 
 
Weighted-
Average
Exercise Price
 
Weighted-
Average
Remaining
Contractual Term
 
Aggregate
Intrinsic Value
Options
Shares
 
 
 
Outstanding at December 31, 2012
500,049

 
$
13.70

 
7.6
 
$
3,619

Granted
507,000

 
20.85

 
10.0
 
—

Exercised
(4,120
)
 
11.02

 
0.0
 
41

Forfeited
(1,500
)
 
14.77

 
0.0
 
—

Outstanding at March 31, 2013
1,001,429

 
$
17.33

 
8.7
 
$
3,164

Fully vested and expected to vest
969,663

 
$
17.25

 
8.6
 
$
3,132

Exercisable at March 31, 2013
149,569

 
$
12.33

 
5.3
 
$
1,163


As of March 31, 2013, there was $3,953 of total unrecognized compensation expense related to non-vested stock options. That expense is expected to be recognized over a weighted-average period of 4.07 years.

25
VIEWPOINT FINANCIAL GROUP, INC.
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)

NOTE 7 — INCOME TAXES

A summary of the net deferred tax assets as of March 31, 2013 and December 31, 2012, is presented below:
 
March 31, 2013
 
December 31, 2012
Net deferred tax assets
$
13,333

 
$
14,026

Valuation allowance
—

 
—

 
 
 
 
Estimated annual effective tax rate
35% to 36%
 
 

The actual effective tax rate for the three months ended March 31, 2013 is different than the estimated annual effective tax rate due to various immaterial adjustments to income tax expense recorded during the quarter.

NOTE 8 — SEGMENT INFORMATION
On June 5, 2012, the Bank and VPM, our former mortgage banking subsidiary, entered into a definitive agreement with Highlands Residential Mortgage, Ltd. (“HRM”) to sell substantially all of the assets of VPM to HRM, subject to certain closing conditions. The transaction closed in the third quarter of 2012.
The reportable segments are determined by the products and services offered, primarily distinguished between banking and VPM, our former mortgage banking subsidiary. Loans, investments and deposits generate the revenues in the banking segment; secondary marketing sales generated the revenue in the VPM segment. Segment performance is evaluated using segment profit (loss). Information reported internally for performance assessment for the three months ended March 31, 2012, was as follows:
 
Three Months Ended March 31, 2012
 
Banking
 
VPM
 
Eliminations and
Adjustments1
 
Total Segments
(Consolidated
Total)
Results of Operations:
 
 
 
 
 
 
 
Total interest income
$
29,356

 
$
410

 
$
(390
)
 
$
29,376

Total interest expense
6,077

 
390

 
(581
)
 
5,886

Provision (credit) for loan losses
899

 
(4
)
 
—

 
895

Net interest income after provision for loan losses
22,380

 
24

 
191

 
22,595

Other revenue
4,561

 
—

 
(63
)
 
4,498

Net gain (loss) on sale of loans
(571
)
 
2,803

 
—

 
2,232

Total non-interest expense
15,266

 
2,748

 
438

 
18,452

Income before income tax expense (benefit)
11,104

 
79

 
(310
)
 
10,873

Income tax expense (benefit)
3,857

 
27

 
(83
)
 
3,801

Net income
$
7,247

 
$
52

 
$
(227
)
 
$
7,072

Segment assets
$
3,041,234

 
$
37,159

 
$
(37,281
)
 
$
3,041,112

Noncash items:
 
 
 
 
 
 
 
Net gain (loss) on sale of loans
(571
)
 
2,803

 
—

 
2,232

Depreciation
851

 
64

 
—

 
915

Provision (credit) for loan losses
899

 
(4
)
 
—

 
895

1 Includes eliminating entries for intercompany transactions and stand-alone expenses of the Company.



26
VIEWPOINT FINANCIAL GROUP, INC.
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)

NOTE 9 — RECENT ACCOUNTING DEVELOPMENTS

In February 2013, the FASB issued ASU 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. This ASU requires companies to report information about significant amounts reclassified out of accumulated other comprehensive income either on the face of the financial statements or in the notes. If an entity is unable to identify the line item of net income affected by any significant amount reclassified out of accumulated other comprehensive income during a reporting period (including when all reclassifications for the period are not to net income in their entirety), a company must present information about items reclassified out of accumulated other comprehensive income in the notes. Companies that qualify for and present information about significant items reclassified out of accumulated other comprehensive income on the face of the statement where net income is presented must present parenthetically: 1). the effect of significant reclassification items on the respective line items of net income by component of other comprehensive income and 2.) the aggregate tax effect of all significant reclassifications on the line item for income tax benefit/expense in the statement where net income is presented. For public entities, the amendments are effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2012. Early adoption is permitted. The Company adopted this ASU for the three months ended March 31, 2013, and has included the required disclosures in the unaudited Consolidated Statements of Income included in this Form 10-Q.
NOTE 10 — SUBSEQUENT EVENTS
The Company evaluated events from the date of the consolidated financial statements on March 31, 2013, through the issuance of those consolidated financial statements included in this Quarterly Report on Form 10-Q dated April 30, 2013. No additional events were identified requiring recognition in and/or disclosures in the consolidated financial statements.

27

Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

Private Securities Litigation Reform Act Safe Harbor Statement
When used in filings by ViewPoint Financial Group, Inc. (the “Company,” “we,” or “our”) with the Securities and Exchange Commission (the “SEC”), in the Company's press releases or other public or shareholder communications, and in oral statements made with the approval of an authorized executive officer, the words or phrases “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “project,” “intends” or similar expressions are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks and uncertainties, including, among other things: changes in economic conditions; legislative changes; changes in policies by regulatory agencies; fluctuations in interest rates; the risks of lending and investing activities, including changes in the level and direction of loan delinquencies and write-offs and changes in estimates of the adequacy of the allowance for loan losses; the Company's ability to access cost-effective funding; fluctuations in real estate values and both residential and commercial real estate market conditions; demand for loans and deposits in the Company's market area; the industry-wide decline in mortgage production; competition; changes in management's business strategies; our ability to successfully integrate any assets, liabilities, customers, systems and management personnel we have acquired or may acquire into our operations and our ability to realize related revenue synergies and cost savings within expected time frames and any goodwill charges related thereto; changes in regulatory policy, including how certain assets are risk-weighted; and other factors set forth under Risk Factors in the Company's Form 10-K that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. The factors listed above could materially affect the Company's financial performance and could cause the Company's actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements.

The Company does not undertake - and specifically declines any obligation - to publicly release the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances occurring after the date of such statements.

Overview
The Company, a Maryland corporation, is a full stock holding company for its wholly owned subsidiary, ViewPoint Bank, N.A. (the “Bank”). Unless the context otherwise requires, references in this document to the “Company” refer to ViewPoint Financial Group, Inc. and references to the “Bank” refer to ViewPoint Bank, N.A. References to “we,” “us,” and “our” means ViewPoint Financial Group, Inc. or ViewPoint Bank, N.A. , as the context requires. The Company is regulated by the Board of Governors of the Federal Reserve System ("FRB") and the Bank is regulated by the Office of the Comptroller of the Currency (“OCC”) with certain back-up oversight by the Federal Deposit Insurance Corporation (“FDIC”). The Bank is required to have certain reserves and stock set by the FRB and is a member of the Federal Home Loan Bank of Dallas, which is one of the 12 regional banks in the Federal Home Loan Bank (“FHLB”) System.
    
Our principal business consists of attracting retail deposits from the general public and the business community and investing those funds, along with borrowed funds, in commercial real estate loans, secured and unsecured commercial and industrial loans, as well as permanent loans secured by first and second mortgages on owner-occupied, one- to four-family residences and consumer loans. Additionally, the Warehouse Purchase Program allows mortgage banking company customers to close one- to four-family real estate loans in their own name and manage its cash flow needs until the loans are sold to investors. We also offer brokerage services for the purchase and sale of non-deposit investment and insurance products through a third party brokerage arrangement. Our operating revenues are derived principally from interest earned on interest-earning assets including loans and investment securities and service charges and fees on deposits and other account services. Our primary sources of funds are deposits, FHLB advances and other borrowings, and payments received on loans and securities. We offer a variety of deposit accounts, generally including savings, money market, term certificate and demand accounts, that provide a wide range of interest rates and terms.







28

Performance Highlights
•
Continued success in commercial loan growth strategy: Our commercial loan portfolio, consisting of commercial real estate and commercial and industrial loans, provided solid growth as we continue to shift our focus to commercial lending. The commercial loan portfolio totaled $1.20 billion at March 31, 2013, up $81.6 million, or 7.3%, from December 31, 2012.

•
Net interest margin increased by 34 basis points compared to first quarter 2012: Due to changes in the earning asset mix and lower deposit and borrowing rates, the net interest margin increased by 34 basis points to 3.64% for the three months ended March 31, 2013, compared to 3.30% for the same period in 2012.

•
Net charge-offs decline: Net charge-offs totaled $292,000 for the first quarter of 2013, down from $1.8 million and $359,000, respectively, for the quarters ended December 31, 2012 and March 31, 2012.

•
Net income increased by $986,000, or 13.9%: Net income for the three months ended March 31, 2013 was $8.1 million, an increase of $986,000, or 13.9%, from net income of $7.1 million for the three months ended March 31, 2012. The increase in net income was driven by an increase in net interest income and was partially offset by higher non-interest expense and lower non-interest income. Basic and diluted earnings per share for the three months ended March 31, 2013, were $0.21, a $0.01 decrease from $0.22 for the three months ended March 31, 2012.
Critical Accounting Estimates
Certain of our accounting estimates are important to the portrayal of our financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Estimates are susceptible to material changes as a result of changes in facts and circumstances. Facts and circumstances which could affect these judgments include, but are not limited to, changes in interest rates, changes in the performance of the economy and changes in the financial condition of borrowers. Management believes that its critical accounting estimates include determining the allowance for loan losses and other-than-temporary impairments in our securities portfolio. Our accounting policies are discussed in detail in Note 1 of the Notes to Consolidated Financial Statements contained in Item 8 of our 2012 Annual Report on Form 10-K.
Allowance for Loan Loss. The allowance for loan losses and related provision expense are susceptible to change if the credit quality of our loan portfolio changes, which is evidenced by many factors, including but not limited to charge-offs and non-performing loan trends. Generally, 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. While management uses available information to recognize losses on loans, changes, in economic conditions, the mix and size of the loan portfolio and individual borrower conditions can dramatically impact our level of allowance for loan losses in relatively short periods of time. Management believes that the allowance for loan losses is maintained at a level that represents our best estimate of inherent credit losses in the loan portfolio as of March 31, 2013.

Management evaluates current information and events regarding a borrower's ability to repay its obligations and considers a loan to be impaired when the ultimate collectability of amounts due, according to the contractual terms of the loan agreement, is in doubt. If an impaired loan is collateral-dependent, the fair value of the collateral, less the estimated cost to sell, is used to determine the amount of impairment. If an impaired loan is not collateral-dependent, the impairment amount is determined using the negative difference, if any, between the estimated discounted cash flows and the loan amount due. For impaired loans, the amount of the impairment can be adjusted, based on current data, until such time as the actual basis is established by acquisition of the collateral or until the basis is collected. Impairment losses are reflected in the allowance for loan losses through a charge to the provision for loan losses. Subsequent recoveries are credited to the allowance for loan losses. Cash receipts for accruing loans are applied to principal and interest under the contractual terms of the loan agreement. Cash receipts on impaired loans for which the accrual of interest has been discontinued are applied first to principal.
Other-than-Temporary Impairments. The Company evaluates securities for other-than-temporary impairment on at least a quarterly basis and more frequently when economic, market, or security specific concerns warrant such evaluation. Consideration is given to the length of time and the extent to which the fair value has been less than amortized cost, the financial condition and near-term prospects of the issuer, and the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. In analyzing an issuer’s financial condition, the Company may consider whether the securities are issued by the federal government or its agencies, whether

29

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.
Comparison of Financial Condition at March 31, 2013 and December 31, 2012
General. Total assets decreased by $289.4 million, or 7.9%, to $3.37 billion at March 31, 2013, from $3.66 billion at December 31, 2012, primarily due to a $303.2 million, or 28.6%, decrease in loans held for sale and a $26.6 million, or 4.6%, decline in consumer loans. The decline in loans held for sale and consumer loans was partially offset by an increase of $57.6 million, or 6.9%, in commercial real estate loans, as well as a $23.9 million, or 8.6%, increase in commercial and industrial loans.
Loans. Gross loans (including $757.5 million in mortgage loans held for sale at March 31, 2013) decreased by $248.3 million, or 9.0%, to $2.50 billion at March 31, 2013, from $2.75 billion at December 31, 2012.
 
March 31, 2013
 
December 31, 2012
 
Dollar
Change

 
Percent
Change

 
(Dollars in thousands)
 
 
 
 
 
 
 
 
Commercial real estate
$
897,534

 
$
839,908

 
$
57,626

 
6.86
 %
 
 
 
 
 
 
 
 
Commercial and industrial loans:
 
 
 
 
 
 
 
Commercial
271,605

 
245,799

 
25,806

 
10.50

Warehouse lines of credit
30,861

 
32,726

 
(1,865
)
 
(5.70
)
Total commercial and industrial loans
302,466

 
278,525

 
23,941

 
8.60

 
 
 
 
 
 
 
 
Consumer:
 
 
 
 
 
 
 
One- to four-family real estate
358,823

 
378,255

 
(19,432
)
 
(5.14
)
Home equity/home improvement
131,776

 
135,001

 
(3,225
)
 
(2.39
)
Other consumer
55,138

 
59,080

 
(3,942
)
 
(6.67
)
Total consumer loans
545,737

 
572,336

 
(26,599
)
 
(4.65
)
 
 
 
 
 
 
 
 
Gross loans held for investment
1,745,737

 
1,690,769

 
54,968

 
3.25

 
 
 
 
 
 
 
 
Loans held for sale
757,472

 
1,060,720

 
(303,248
)
 
(28.59
)
 
 
 
 
 
 
 
 
Gross loans
$
2,503,209

 
$
2,751,489

 
$
(248,280
)
 
(9.02
)%
    
The commercial real estate portfolio increased by $57.6 million, or 6.9%, to $897.5 million at March 31, 2013, from $839.9 million at December 31, 2012. Our commercial real estate portfolio consists almost exclusively of loans secured by existing, multi-tenanted commercial real estate. 93% of our commercial real estate loan balances are secured by properties located in Texas. Commercial and industrial (“C&I”) loans increased by $23.9 million, or 8.6%, to $302.5 million at March 31, 2013, from $278.5 million at December 31, 2012. In 2013, the Company will continue to emphasize growth in the C&I line of business, which is supported by the experienced lenders both from the Highlands acquisition and new hires added in 2012. Warehouse lines of credit decreased by $1.9 million, or 5.7%, from $32.7 million at December 31, 2012, to $30.9 million at March 31, 2013.

Loans held for sale decreased by $303.2 million, or 28.6%, to $757.5 million at March 31, 2013, from $1.06 billion at December 31, 2012, and consisted of Warehouse Purchase Program loans purchased for sale under our standard loan participation agreement. The Company purchases a 100% participation interest in the loans originated by our mortgage banking company customers, which are then held as one- to four- family mortgage loans held for sale on a short-term basis. The mortgage banking company has no obligation to offer and we have no obligation to purchase these participation interests. The mortgage banking company closes mortgage loans consistent with underwriting standards established by approved

30

investors and once the loan closes, the participation interest is delivered by the Company to the investor selected by the originator and approved by the Company. Loans funded by the Warehouse Purchase Program during the first quarter of 2013 consisted of 59% conforming, 38% government and 3% Home Affordable Refinance Program (HARP) loans, and the number of Warehouse Purchase Program clients totaled 47 at March 31, 2013, compared to 43 at December 31, 2012 and 38 at March 31, 2012. Compared to the first quarter of 2012, Warehouse Purchase Program balances increased by $44.3 million.

One- to four-family real estate loans decreased by $19.4 million, or 5.1%, to $358.8 million at March 31, 2013, from $378.3 million at December 31, 2012. The Company does not originate one- to four- family real estate loans, but does periodically purchase these loans from correspondents on both a servicing retained and servicing released basis.
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 periodically to account for the potential impact of external economic factors, including the unemployment rate, housing price, vacancy rates and inventory levels specific to our primary market area.
For the specific component, the allowance for loan losses on individually analyzed impaired loans includes commercial and industrial and one- to four-family and commercial real estate loans where management has concerns about the borrower's ability to repay. Loss estimates include the negative difference, if any, between the current fair value of the collateral or the estimated discounted cash flows and the loan amount due.
Loans acquired from Highlands were initially recorded at fair value, which included an estimate of credit losses expected to be realized over the remaining lives of the loans, and therefore no corresponding allowance for loan losses was recorded for these loans at acquisition. Methods utilized to estimate the required allowance for loan losses for acquired loans not deemed credit−impaired at acquisition are similar to originated loans; however, the estimate of loss is based on the unpaid principal balance less the remaining purchase discount.
Purchased credit impaired (PCI) loans, which totaled $10.6 million and $12.8 million at March 31, 2013 and December 31, 2012, respectively, are not considered nonperforming loans, and accordingly, are not included in the non-performing loans to total loans ratio as a numerator, but are included in total loans reflected in the denominator. The result is a downward trend in the ratio when compared to prior periods, assuming all other factors stay the same. Similarly, other asset quality ratios, such as the allowance for loan losses to total loans ratio will reflect a downward trend, assuming all other factors stay the same, due to the impact of PCI loans on the denominator with no corresponding impact in the numerator.
Our non-performing loans, which consist of nonaccrual loans, include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans. Loans are placed on nonaccrual status when the collection of principal and/or interest becomes doubtful or other factors involving the loan warrant placing the loan on nonaccrual status.
A modified loan is considered a troubled debt restructuring (“TDR”) when two conditions are met: 1) the borrower is experiencing financial difficulty and 2) concessions are made by the Company that would not otherwise be considered for a borrower or collateral with similar credit risk characteristics. Modifications to loan terms may include a modification of the contractual interest rate to a below-market rate (even if the modified rate is higher than the original rate), forgiveness of accrued interest, forgiveness of a portion of principal, an extended repayment period or a deed in lieu of foreclosure or other transfer of assets other than cash to fully or partially satisfy a debt. The Company's policy is to place all TDRs on nonaccrual for a minimum period of six months. Loans qualify for a return to accrual status once they have demonstrated performance with the restructured terms of the loan agreement for a minimum of six months and the collection of principal and interest under the revised terms is deemed probable. At March 31, 2013, of our $18.7 million in TDRs, $4.6 million were accruing interest and

31

$14.1 million were classified as nonaccrual. Nonaccrual TDRs included $11.8 million attributable to seven commercial real estate loans, all of which were performing in accordance with their restructured terms at March 31, 2013.
Our non-performing loans to total loans ratio at March 31, 2013, was 1.59%, compared to 1.61% at December 31, 2012. Non-performing loans increased by $518,000 to $27.7 million at March 31, 2013, from $27.2 million at December 31, 2012. This increase was primarily due to a $1.4 million increase in C&I non-performing loans, which was driven by two C&I loans acquired from Highlands totaling $1.8 million that were moved to non-performing status during the first quarter of 2013 (neither loan is considered purchased credit impaired).
Our allowance for loan losses at March 31, 2013, was $18.6 million, or 1.07% of total loans, compared to $18.1 million, or 1.07% of total loans, at December 31, 2012. Our allowance for loan losses to non-performing loans ratio was 67.25% at March 31, 2013, compared to 66.36% as of December 31, 2012.
Other Loans of Concern. The Company has other potential problem loans that are currently performing and do not meet the criteria for impairment, but where some concern exists. These possible credit problems may result in the future inclusion of these items in the non-performing asset categories. These loans consist of residential and commercial real estate and commercial and industrial loans that are classified as “special mention,” meaning that these loans have potential weaknesses that deserve management's close attention. These loans are not adversely classified according to regulatory classifications and do not expose the Company to sufficient risk to warrant adverse classification. These loans have been considered in management's determination of our allowance for loan losses. As of March 31, 2013, there was an aggregate of $20.8 million of these potential problem loans, no change from the $20.8 million at December 31, 2012. Of the $20.8 million, three commercial real estate loans totaling $14.6 million were not delinquent at March 31, 2013, but are being monitored due to circumstances such as low occupancy rate, low debt service coverage or prior payment history problems.
Classified Assets. Loans and other assets, such as securities and foreclosed assets that are considered by management to be of lesser quality, are classified as "substandard," "doubtful" or "loss." An asset is considered "substandard" if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. "Substandard" assets include those characterized by the distinct possibility that the insured institution will sustain some loss if the deficiencies are not corrected. Assets classified as "doubtful" have all of the weaknesses of those classified "substandard," with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. Assets classified as "loss" are those considered uncollectible and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted.
We regularly review the assets in our portfolio to determine whether any assets require classification. The total amount of assets classified represented 10.2% of our equity capital and 1.6% of our total assets at March 31, 2013, compared to 11.1% of our equity capital and 1.6% of our total assets at December 31, 2012. The aggregate amount of classified assets at the dates indicated was as follows:
 
March 31, 2013
 
December 31, 2012
 
(Dollars in thousands)
Loss
$
—

 
$
—

Doubtful
5,558

 
5,334

Substandard
47,229

 
50,351

Total classified loans
52,787

 
55,685

Foreclosed assets
1,505

 
1,901

Total classified assets
$
54,292

 
$
57,586


Securities. Our securities portfolio decreased by $2.2 million, or 0.33%, to $645.4 million at March 31, 2013, from $647.6 million at December 31, 2012. The decrease in our securities portfolio primarily resulted from paydowns and maturities totaling $157.4 million and sales of $10.6 million, which were partially offset by purchases totaling $167.3 million. The majority of these purchases were done for tax strategy purposes. The securities were sold as their increasing prepayment speeds were no longer consistent with portfolio requirements.

32

Deposits. Total deposits increased by $35.3 million, or 1.6%, to $2.21 billion at March 31, 2013, from $2.18 billion at December 31, 2012.
 
March 31, 2013
 
December 31, 2012
 
Dollar
Change
 
Percent
Change
 
(Dollars in thousands)
Non-interest-bearing demand
$
392,759

 
$
357,800

 
$
34,959

 
9.8
 %
Interest-bearing demand
481,966

 
488,748

 
(6,782
)
 
(1.4
)
Savings and money market
888,874

 
880,924

 
7,950

 
0.9

Time
449,491

 
450,334

 
(843
)
 
(0.2
)
Total deposits
$
2,213,090

 
$
2,177,806

 
$
35,284

 
1.6
 %

The increase in deposits was primarily due to a $35.0 million increase in non-interest-bearing demand deposits compared to December 31, 2012, which was driven by higher balances in commercial and Warehouse Purchase Program products, and an $8.0 million increase in savings and money market deposits. These increases were partially offset by a $6.8 million decline in interest-bearing demand deposits. Time deposits remained relatively flat compared to December 31, 2012, decreasing by $843,000.
Borrowings. FHLB advances, net of a $2.9 million restructuring prepayment penalty, decreased by $328.0 million, or 36.8%, to $564.2 million at March 31, 2013, from $892.2 million at December 31, 2012. The outstanding balance of FHLB advances decreased due to a lower Warehouse Purchase Program balance at March 31, 2013, of which a portion was strategically funded with short term advances. At March 31, 2013, the Company was eligible to borrow an additional $1.03 billion from the FHLB, which includes $558.9 million of the blanket lien on Warehouse Purchase Program loans. The FHLB is currently reviewing the eligibility of inclusion of Warehouse Purchase Program loans under the blanket lien due the risk-weighting change from 50% to 100%. If the FHLB determines that Warehouse Purchase Program loans are ineligible for inclusion under the blanket lien, the Company's borrowing availability with FHLB at March 31, 2013, would have been $492.4 million. See "Capital Resources." Additionally, the Company has six available federal funds lines of credit with other financial institutions totaling $165.0 million and was eligible to borrow $95.2 million from the Federal Reserve Bank discount window. In addition to FHLB advances, at March 31, 2013, the Company had a $25.0 million outstanding repurchase agreement with Credit Suisse.
The below table shows FHLB advances by maturity and weighted average rate at March 31, 2013:
 
Balance
 
Weighted Average Rate
 
(Dollars in thousands)
Less than 90 days
$
364,269

 
0.30
%
90 days to less than one year
12,976

 
4.47

One to three years
97,304

 
3.35

After three to five years
78,047

 
2.91

After five years
14,562

 
4.89

 
567,158

 
1.40
%
Restructuring prepayment penalty
(2,937
)
 
 
Total
$
564,221

 
 

33

Shareholders’ Equity. Total shareholders' equity increased by $10.1 million, or 1.9% , to $531.0 million at March 31, 2013, from $520.9 million at December 31, 2012.
 
March 31, 2013
 
December 31, 2012
 
Dollar
Change
 
Percent
Change
 
(Dollars in thousands)
Common stock
$
399

 
$
396

 
$
3

 
0.8
 %
Additional paid-in capital
373,492

 
372,168

 
1,324

 
0.4

Retained earnings
172,386

 
164,328

 
8,058

 
4.9

Accumulated other comprehensive income, net
2,239

 
1,895

 
344

 
18.2

Unearned ESOP shares
(17,549
)
 
(17,916
)
 
367

 
(2.0
)
Total shareholders’ equity
$
530,967

 
$
520,871

 
$
10,096

 
1.9
 %
Retained earnings was increased by net income of $8.1 million recognized during the three months ended March 31, 2013. The Company made two dividend payments during the fourth quarter of 2012, with the December 2012 dividend payment of $0.10 per common share representing the dividend payment that the Company would typically pay in the first quarter of 2013.
Comparison of Results of Operation for the Three Months Ended March 31, 2013 and 2012
    
General. Net income for the three months ended March 31, 2013 was $8.1 million, an increase of $986,000, or 13.9%, from net income of $7.1 million for the three months ended March 31, 2012. The increase in net income was driven by an increase in net interest income of $5.0 million, partially offset by a $2.4 million increase in non-interest expense and an $871,000 decrease in non-interest income. Basic and diluted earnings per share for the three months ended March 31, 2013, were $0.21, a $0.01 decrease from $0.22 for the three months ended March 31, 2012.
  
Interest Income. Interest income increased by $4.0 million, or 13.8%, to $33.4 million for the three months ended March 31, 2013 from $29.4 million for the three months ended March 31, 2012.
 
Three Months Ended March 31,
 
Dollar
 
Percent
 
2013
 
2012
 
Change
 
Change
 
(Dollars in thousands)
Interest and dividend income
 
 
 
 
 
 
 
Loans, including fees
$
30,378

 
$
24,320

 
$
6,058

 
24.9
 %
Securities
2,877

 
4,931

 
(2,054
)
 
(41.7
)
Interest-bearing deposits in other financial institutions
31

 
19

 
12

 
63.2

FHLB and Federal Reserve Bank stock
133

 
106

 
27

 
25.5

 
$
33,419

 
$
29,376

 
$
4,043

 
13.8
 %

The increase in interest income for the three months ended March 31, 2013, compared to the same period in 2012, was primarily due to a $6.1 million, or 24.9%, increase in interest income on loans. Accretion associated with the Highlands acquisition contributed $945,000 to the increase for the comparable periods. The average balance of commercial real estate loans increased by $256.4 million at March 31, 2013, compared to March 31, 2012, contributing a $3.3 million increase in interest income. The average balance of C&I loans for the three months ended March 31, 2013, increased by $214.0 million from the same period in 2012, contributing a $2.4 million increase in interest income. Additionally, the average balance of loans held for sale increased by $76.5 million for the comparable periods ended March 31, 2013 and 2012, leading to a $326,000 increase in interest income.

These increases were partially offset by a $2.1 million, or 41.7%, decline in interest on securities, which resulted primarily from the sale of securities and normal paydowns, as well as a reduction in the yield on securities. Overall, the yield on interest-earning assets increased by 14 basis points, to 4.27% for the three months ended March 31, 2013, from 4.13% for the three months ended March 31, 2012, as a result of the shift of funds from lower yielding securities to higher yielding loans.


34

    Interest Expense. Interest expense decreased by $992,000, or 16.9%, to $4.9 million for the three months ended March 31, 2013, from $5.9 million for the three months ended March 31, 2012.

 
Three Months Ended March 31,
 
Dollar
 
Percent
 
2013
 
2012
 
Change
 
Change
 
(Dollars in thousands)
Interest expense
 
 
 
 
 
 
 
Deposits
$
2,432

 
$
3,229

 
$
(797
)
 
(24.7
)%
FHLB advances
2,261

 
2,454

 
(193
)
 
(7.9
)
Repurchase agreement
201

 
203

 
(2
)
 
(1.0
)
 
$
4,894

 
$
5,886

 
$
(992
)
 
(16.9
)%

The decrease was primarily caused by a $797,000, or 24.7%, decrease in the interest expense paid on deposits. The average rate paid on interest-bearing demand deposits declined by 54 basis points to 0.40% for the three months ended March 31, 2013, from 0.94% for the three months ended March 31, 2012, which primarily resulted in the $638,000 decrease in interest expense paid on interest-bearing demand deposits. Additionally, interest expense on time accounts decreased by $261,000, resulting from a $22.0 million decline in the average balance during the three months ended March 31, 2013, compared to the same period in 2012, and a 17 basis point decline in the average rate for the comparable periods. Deposit costs have continued to decline due to rate reductions in Absolute Checking and other interest-bearing accounts.

Net Interest Income. Net interest income increased by $5.0 million, or 21.4%, to $28.5 million for the three months ended March 31, 2013, from $23.5 million for the three months ended March 31, 2012. The net interest margin increased 34 basis points to 3.64% for the three months ended March 31, 2013, from 3.30% for the same period last year. The net interest rate spread increased 34 basis points to 3.45% for the three months ended March 31, 2013, from 3.11% for the same period last year. The increases in the net interest rate margin and spread were primarily attributable to changes in the earning asset mix, lower deposit and borrowing rates, and the impact of the Highlands acquisition. Net of the impact of the Highlands acquisition, the net interest margin for the three months ended March 31, 2013 was 3.53%.

Provision for Loan Losses. The provision for loan losses was $883,000 for the three months ended March 31, 2013, a decrease of $12,000, or 1.3%, from $895,000 for the three months ended March 31, 2012. Credit quality has improved due to continued improvement in economic conditions, enhancements in loan underwriting and oversight, as well as the addition of highly experienced commercial lending staff over the past year, both through the Highlands acquisition and new hires. Net charge-offs totaled $292,000 for the first quarter of 2013, compared to $359,000 for the first quarter of 2012.

Non-interest Income. Non-interest income decreased by $871,000, or 12.9%, to $5.9 million for the three months ended March 31, 2013, from $6.7 million for the three months ended March 31, 2012.
 
Three Months Ended March 31,
 
Dollar
 
Percent
 
2013
 
2012
 
Change
 
Change
 
(Dollars in thousands)
Non-interest income
 
 
 
 
 
 
 
Service charges and fees
$
4,291

 
$
4,238

 
$
53

 
1.3
 %
Other charges and fees
212

 
128

 
84

 
65.6

Net gain on sale of mortgage loans
—

 
2,232

 
(2,232
)
 
(100.0
)
Bank-owned life insurance income
162

 
109

 
53

 
48.6

Gain (loss) on sale of available for sale securities
(177
)
 
—

 
(177
)
 
N/M 1

Gain (loss) on sale and disposition of assets
230

 
(81
)
 
311

 
N/M 1

Other
1,141

 
104

 
1,037

 
997.1

 
$
5,859

 
$
6,730

 
$
(871
)
 
(12.9
)%
¹ N/M - not meaningful


35

The decrease in non-interest income for the three months ended March 31, 2013, compared to the three months ended March 31, 2012, was primarily attributable to a $2.2 million gain on the sale of mortgage loans in the 2012 period, with no comparable gain in the 2013 period due to the sale of VPM in the third quarter of 2012. This decrease was partially offset by a $1.0 million increase in other non-interest income, related to a $784,000 increase in the value of an equity investment in a community development-oriented private equity fund used for Community Reinvestment Act purposes in 2013, with no comparable gain in the 2012 period. Loss on sale and disposition of assets improved $311,000, primarily due to gains recognized in the 2013 period related to the early pay-offs of purchased credit impaired loans. The $177,000 loss on sale of available for sale securities was related to securities sold during the 2013 period because their increasing prepayment speeds were no longer consistent with portfolio requirements.
Non-interest Expense. Non-interest expense increased by $2.4 million, or 13.1%, to $20.9 million for the three months ended March 31, 2013, from $18.5 million for the three months ended March 31, 2012.
 
Three Months Ended March 31,
 
Dollar
 
Percent
 
2013
 
2012
 
Change
 
Change
 
(Dollars in thousands)
Non-interest expense
 
 
 
 
 
 
 
Salaries and employee benefits
$
12,915

 
$
11,724

 
$
1,191

 
10.2
 %
Acquisition costs
—

 
144

 
(144
)
 
N/M 1
Advertising
513

 
285

 
228

 
80.0

Occupancy and equipment
1,790

 
1,470

 
320

 
21.8

Outside professional services
684

 
483

 
201

 
41.6

Regulatory assessments
579

 
581

 
(2
)
 
(0.3
)
Data processing
1,518

 
1,245

 
273

 
21.9

Office operations
1,648

 
1,545

 
103

 
6.7

Other
1,226

 
975

 
251

 
25.7

 
$
20,873

 
$
18,452

 
$
2,421

 
13.1
 %
¹ N/M - not meaningful

The increase in non-interest expense for the three months ended March 31, 2013, compared to the three months ended March 31, 2012, was primarily due to a $1.2 million increase in salary and benefits expense. During 2012, we added experienced staff through the Highlands acquisition, as well as new hires. This increase was partially offset by salary and benefits savings resulting from the sale of VPM. Compared to the three months ended March 31, 2012, occupancy and equipment expense increased primarily due to the impact of the Highlands acquisition, while data processing and advertising expense increased as we continue to improve our franchise by investing in marketing, branding awareness and technology.
Income Tax Expense. For the three months ended March 31 2013, we recognized income tax expense of $4.6 million on our pre-tax income, which was an effective tax rate of 36.2%, compared to income tax expense of $3.8 million, which was an effective tax rate of 35.0%, for the three months ended March 31, 2012. The increase in the effective tax rate was primarily due to various individually immaterial adjustments to income tax expense recorded during the period.
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 are the weighted average yields 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.

36

 
 
Three Months Ended March 31,
 
 
2013
 
2012
 
 
Average
Outstanding
Balance
 
Interest
Earned/Paid
 
Yield/
Rate
 
Average
Outstanding
Balance
 
Interest
Earned/Paid
 
Yield/
Rate
 
 
(Dollars in thousands)
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
$
839,155

 
$
12,336

 
5.88
%
 
$
582,710

 
$
9,054

 
6.22
%
 
Commercial and industrial
283,547

 
3,274

 
4.62

 
69,519

 
908

 
5.22

 
One- to four- family real estate
371,674

 
4,868

 
5.24

 
371,257

 
4,711

 
5.08

 
Home equity/home improvement
133,291

 
1,824

 
5.47

 
140,754

 
1,955

 
5.56

 
Other consumer
57,164

 
834

 
5.84

 
50,635

 
776

 
6.13

 
Loans held for sale
738,234

 
7,242

 
3.92

 
661,688

 
6,916

 
4.18

 
Less: deferred fees and allowance for loan loss
(17,240
)
 
—

 
—

 
(16,812
)
 
—

 
—

 
Loans receivable 1
2,405,825

 
30,378

 
5.05

 
1,859,751

 
24,320

 
5.23

 
Agency mortgage-backed securities
294,995

 
1,501

 
2.04

 
308,324

 
2,125

 
2.76

 
Agency collateralized mortgage obligations
288,958

 
881

 
1.22

 
552,215

 
2,308

 
1.67

 
Investment securities
55,126

 
495

 
3.59

 
56,813

 
498

 
3.51

 
FHLB and FRB stock
35,030

 
133

 
1.52

 
33,554

 
106

 
1.26

 
Interest-earning deposit accounts
54,096

 
31

 
0.23

 
33,809

 
19

 
0.22

Total interest-earning assets
3,134,030

 
33,419

 
4.27

 
2,844,466

 
29,376

 
4.13

Non-interest-earning assets
188,869

 
 
 
 
 
131,352

 
 
 
 
Total assets
$
3,322,899

 
 
 
 
 
$
2,975,818

 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing demand
$
465,385

 
470

 
0.40

 
$
473,687

 
1,108

 
0.94

 
Savings and money market
877,690

 
588

 
0.27

 
759,590

 
486

 
0.26

 
Time
450,071

 
1,374

 
1.22

 
472,097

 
1,635

 
1.39

 
Borrowings
590,238

 
2,462

 
1.67

 
610,255

 
2,657

 
1.74

Total interest-bearing liabilities
2,383,384

 
4,894

 
0.82

 
2,315,629

 
5,886

 
1.02

Non-interest-bearing demand
367,217

 
 
 
 
 
213,220

 
 
 
 
Non-interest-bearing liabilities
44,340

 
 
 
 
 
35,920

 
 
 
 
Total liabilities
2,794,941

 
 
 
 
 
2,564,769

 
 
 
 
Total shareholders’ equity
527,958

 
 
 
 
 
411,049

 
 
 
 
Total liabilities and shareholders’ equity
$
3,322,899

 
 
 
 
 
$
2,975,818

 
 
 
 
Net interest income and margin
 
 
$
28,525

 
3.64
%
 
 
 
$
23,490

 
3.30
%
Net interest income and margin (tax-equivalent basis) 2
 
 
$
28,696

 
3.66
%
 
 
 
$
23,663

 
3.33
%
Net interest rate spread
 
 
 
 
3.45
%
 
 
 
 
 
3.11
%
Net earning assets
$
750,646

 
 
 
 
 
$
528,837

 
 
 
 
Average interest-earning assets to average interest-bearing liabilities
131.49
%
 
 
 
 
 
122.84
%
 
 
 
 
1 
Calculated net of deferred fees, loan discounts, loans in process and allowance for loan losses. Includes loans held for sale.
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 2013 and 2012. Tax-exempt investments and loans had an average balance of $51.9 million and $52.6 million for the three months ended March 31, 2013 and 2012, respectively.


37

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 earlier 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 March 31,
 
2013 versus 2012
 
Increase (Decrease) Due to
 
Total Increase
 
Volume
 
Rate
 
(Decrease)
 
(Dollars in thousands)
Interest-earning assets:
 
 
 
 
 
Commercial real estate
$
3,793

 
$
(511
)
 
$
3,282

Commercial and industrial
2,483

 
(117
)
 
2,366

One- to four- family real estate
5

 
152

 
157

Home equity/home improvement
(102
)
 
(29
)
 
(131
)
Other consumer
97

 
(39
)
 
58

Loans held for sale
768

 
(442
)
 
326

Loans receivable
7,044

 
(986
)
 
6,058

Agency mortgage-backed securities
(88
)
 
(536
)
 
(624
)
Agency collateralized mortgage obligations
(910
)
 
(517
)
 
(1,427
)
Investment securities
(15
)
 
12

 
(3
)
FHLB and FRB stock
5

 
22

 
27

Interest-earning deposit accounts
12

 
—

 
12

Total interest-earning assets
6,048

 
(2,005
)
 
4,043

Interest-bearing liabilities:
 
 
 
 
 
Interest-bearing demand
(19
)
 
(619
)
 
(638
)
Savings and money market
78

 
24

 
102

Time
(74
)
 
(187
)
 
(261
)
Borrowings
(86
)
 
(109
)
 
(195
)
Total interest bearing liabilities
(101
)
 
(891
)
 
(992
)
Net interest income
$
6,149

 
$
(1,114
)
 
$
5,035


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 monitors liquidity positions and projections, and 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 macro economic and bank specific situations focusing on high probability-high impact, high probability-

38

low impact, low probability-high impact, and low probability-low 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 uses of liquidity, 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 March 31, 2013, the Company had an additional borrowing capacity of $1.03 billion with the FHLB, which includes $558.9 million of the blanket lien on Warehouse Purchase Program loans. The FHLB is currently reviewing the eligibility of inclusion of Warehouse Purchase Program loans under the blanket lien due the risk-weighting change from 50% to 100%. Also, at March 31, 2013, the Company had $165.0 million in federal funds lines of credit available with other financial institutions. 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 securities pledged to the discount window line. As of March 31, 2013, securities pledged had a collateral value of $95.2 million.
As of March 31, 2013, the Company had classified 48.9% of its securities portfolio as available for sale (including pledged securities), 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. Participations in loans we originate, including portions of commercial real estate loans, are sold to create another source of liquidity and to manage borrower concentration risk as well as interest rate risk.
Liquidity management is both a daily and long-term function of business management. Short term excess liquidity is generally placed in short-term investments, such as overnight deposits at the Federal Reserve Bank and correspondent banks. On a longer term basis, we maintain a strategy of investing in various lending products and investment securities, including mortgage-backed securities.
The Company on a stand-alone level 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. 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 “second-step” offering in July 2010. We also have the ability to receive dividends or capital distributions from the Bank, although there are regulatory restrictions on the ability of the Bank to pay dividends. At March 31, 2013, the Company (on an unconsolidated basis) had liquid assets of $47.5 million.
The Company uses its sources of funds primarily to meet its expenses, pay maturing deposits and fund withdrawals, and to fund loan commitments. Total approved loan commitments (including Warehouse Purchase Program commitments, unused lines of credit and letters of credit) amounted to $907.9 million and $500.2 million at March 31, 2013, and December 31, 2012, respectively. 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 scheduled to mature in one year or less at March 31, 2013 totaled $315.5 million with a weighted average rate of 1.22%.
During the three months ended March 31, 2013, cash and cash equivalents decreased by $16.2 million, or 23.6%, to $52.5 million as of March 31, 2013, from $68.7 million as of December 31, 2012. Cash used in investing activities of $40.5 million and cash used in financing activities of $292.5 million offset cash provided by operating activities of $316.8 million. Primary sources of cash for the three months ended March 31, 2013 included proceeds from the sale of loans held for sale of $3.73 billion (related to our Warehouse Purchase Program), maturities, prepayments and calls of available-for-sale securities of $126.3 million and proceeds from FHLB advances of $230.0 million. Primary uses of cash for the three months ended March 31, 2013, included loans originated or purchased for sale of $3.43 billion (related to our Warehouse Purchase Program), purchases of available-for-sale securities of $165.9 million and repayments on FHLB advances of $558.0 million.
Please see Item 1A (Risk Factors) under Part 1 of the Company's 2012 Form 10-K for information regarding liquidity risk.




39

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 aggregate and by payment due dates (not including any interest amounts). In addition to the commitments below, the Company had overdraft protection available to its depositors in the amount of $80.8 million at March 31, 2013.
 
March 31, 2013
 
Less than
One Year
 
One
through
Three
Years
 
Four
through
Five Years
 
After Five
Years
 
Total
 
(Dollars in thousands)
Contractual obligations:
 
 
 
 
 
 
 
 
 
Deposits without a stated maturity
$
1,763,599

 
$
—

 
$
—

 
$
—

 
$
1,763,599

Certificates of deposit
315,548

 
114,542

 
17,545

 
1,856

 
449,491

FHLB advances (gross of restructuring prepayment penalty of $2,937)
377,245

 
97,304

 
78,047

 
14,562

 
567,158

Repurchase agreement
—

 
—

 
—

 
25,000

 
25,000

Private equity fund for Community Reinvestment Act purposes
1,800

 
—

 
—

 
—

 
1,800

Operating leases (premises)
2,402

 
4,606

 
3,057

 
5,679

 
15,744

Total contractual obligations
$
2,460,594

 
$
216,452

 
$
98,649

 
$
47,097

 
$
2,822,792

Off-balance sheet loan commitments: 1
 
 
 
 
 
 
 
 
 
Unused commitments to extend credit
$
300,367

 
$
—

 
$
—

 
$
—

 
$
300,367

Unused commitment on Warehouse Purchase Program loans
605,528

 
—

 
—

 
—

 
605,528

Letters of credit
2,042

 
—

 
—

 
—

 
2,042

Total loan commitments
$
907,937

 
$
—

 
$
—

 
$
—

 
$
907,937

Total contractual obligations and loan commitments
 
 
 
 
 
 
 
 
$
3,730,729

1 Loans having no stated maturity are reported in the “Less than One Year” category.
 
 



40

Capital Resources

The Bank and the Company are subject to minimum capital requirements imposed by the OCC and the FRB. Consistent with our goal to operate a sound and profitable organization, our policy is for the Bank and the Company to maintain “well-capitalized” status under the capital categories of the OCC and the FRB. Based on capital levels at March 31, 2013, and December 31, 2012, the Bank and the Company were considered to be well-capitalized.

At March 31, 2013, the Bank's equity totaled $429.4 million. The Company's consolidated equity totaled $531.0 million, or 15.7% of total assets, at March 31, 2013. The March 2013 information reflects a risk weighting change from 50% to 100% on our Warehouse Purchase Program loans. In April 2013, the Federal Financial Institutions Examination Council issued Supplemental Instructions for the March 31, 2013 Call Report, which clarified the regulators' position on the risk-weighting of these types of loans.
 
Actual
 
Required for Capital Adequacy Purposes
 
To Be Well-Capitalized Under Prompt Corrective Action Regulations
 
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio
March 31, 2013
(Dollars in Thousands)
Total risk-based capital
 
 
 
 
 
 
 
 
 
 
 
the Company
$
516,036

 
20.29
%
 
$
203,464

 
8.00
%
 
254,331

 
10.00
%
the Bank
414,419

 
16.30

 
203,376

 
8.00

 
254,221

 
10.00

Tier 1 risk-based capital
 
 
 
 
 
 
 
 
 
 
 
the Company
497,393

 
19.56

 
101,732

 
4.00

 
152,598

 
6.00

the Bank
395,777

 
15.57

 
101,688

 
4.00

 
152,532

 
6.00

Tier 1 leverage
 
 
 
 
 
 
 
 
 
 
 
the Company
497,393

 
15.16

 
131,207

 
4.00

 
164,008

 
5.00

the Bank
395,777

 
12.07

 
131,156

 
4.00

 
163,945

 
5.00

 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2012
 
 
 
 
 
 
 
 
 
 
 
Total risk-based capital
 
 
 
 
 
 
 
 
 
 
 
the Company
$
505,566

 
22.47
%
 
$
179,957

 
8.00
%
 
$
224,947

 
10.00
%
the Bank
404,562

 
18.00

 
179,847

 
8.00

 
224,809

 
10.00

Tier 1 risk-based capital
 
 
 
 
 
 
 
 
 
 
 
the Company
487,515

 
21.67

 
89,979

 
4.00

 
134,968

 
6.00

the Bank
386,511

 
17.19

 
89,923

 
4.00

 
134,885

 
6.00

Tier 1 leverage
 
 
 
 
 
 
 
 
 
 
 
the Company
487,515

 
13.97

 
139,620

 
4.00

 
174,525

 
5.00

the Bank
386,511

 
11.08

 
139,595

 
4.00

 
174,493

 
5.00


41

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. However, market rates change over time. Like other financial institutions, our results of operations are impacted by changes in market interest rates and the interest rate sensitivity of our assets and liabilities. The risk associated with changes in market 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 market interest rates and comply with applicable regulations, we calculate and 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, FHLB advances and other borrowings, reprice more rapidly or slowly, or at different rates (basis risk) 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.
The Bank has adopted an asset and liability management policy. This policy sets the foundation for monitoring and managing the potential for adverse effects of material prolonged increases or decreases in interest rates on our results of operations. 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, interest rate risk, growth, and profitability goals.
The Committee 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 policy implementation 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 earnings by managing the inherent maturity and repricing mismatches between its interest earning assets and interest bearing liabilities. The Bank generally manages such earnings exposure through the addition of loans, investment securities and deposits with risk mitigating characteristics 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, the EVE approach calculates the difference between the present value of expected cash flows from assets and liabilities. In addition to monitoring selected measures of EVE, management also calculates and monitors potential effects on net interest income resulting from increases or decreases in market interest rates. This approach uses the earnings at risk (“EAR”) methodology adopted by the OCC as part of its capital regulations. EAR calculates estimated net interest income using a flat balance sheet approach over a twelve month time horizon. The EAR process is used in conjunction with EVE measures to identify interest rate risk on both a global and account level basis. Management and the Board of Directors review EVE and EAR measurements at least quarterly to determine whether the Bank's interest rate exposure is within the limits established by the Board of Directors.

42

The Bank's asset/liability management strategy sets acceptable limits for the percentage change in EVE and EAR given changes in interest rates. For an instantaneous, parallel, and sustained interest rate increase or decrease of 100 basis points, the Bank's policy indicates that the EVE ratio should not fall below 7.00%, and for increases of 200, 300 and 400 basis points, the EVE ratio should not fall below 6.00%, 5.25% and 5.00%, respectively. For an instantaneous, parallel, and sustained interest rate increase or decrease of 100 basis points, the Bank's policy indicates that EAR should not decrease by more than 7%, and for increases of 200, 300, and 400 basis points, EAR should not decrease by more than 10%, 13%, and 15%, respectively.
As illustrated in the tables below, the Bank was within policy limits for all scenarios tested. The tables presented below, as of March 31, 2013, and December 31, 2012, are internal analyses of our interest rate risk as measured by changes in EVE and EAR for instantaneous, parallel, and sustained shifts for all market rates and yield curves, in 100 basis point increments, up 400 basis points and down 100 basis points.
As illustrated in the tables below, our EVE would be positively impacted by a parallel, instantaneous, and sustained increase in market rates. Such an increase in rates would positively impact EVE as a result of the duration of assets, including loans and investments, being shorter than the duration of liabilities, primarily deposit accounts and FHLB borrowings. As interest rates rise, the market value of FHLB borrowings and deposits decline more due to longer maturities and fixed rates. As illustrated in the table below at March 31, 2013, our EAR would be positively impacted by a parallel, instantaneous, and sustained increase in market rates of 200, 300, or 400 basis points. As market interest rates rise and variable loan rates move above their floors, the interest rate repricing of variable rate and maturing loans and securities increases net interest income.
March 31, 2013
Change in Interest Rates in Basis Points
 
Economic Value of Equity
 
Earnings at Risk (12 months)
 
Estimated EVE
 
Estimated Increase / (Decrease) in EVE
 
 EVE Ratio %
 
Estimated Net Interest Income
 
Increase / (Decrease) in Estimated Net Interest Income
 
 
$ Amount
 
$ Change
 
% Change
 
 
 
$ Amount
 
$ Change
 
% Change
 
 
(Dollars in thousands)
400

 
559,800

 
15,194

 
2.79

 
17.58
 
133,831

 
14,737

 
12.37

300

 
566,212

 
21,606

 
3.97

 
17.43
 
128,134

 
9,040

 
7.59

200

 
566,743

 
22,137

 
4.06

 
17.13
 
122,451

 
3,357

 
2.82

100

 
559,402

 
14,796

 
2.72

 
16.62
 
117,547

 
(1,547
)
 
(1.30
)
—

 
544,606

 
—

 
—

 
15.93
 
119,094

 
—

 
—

(100
)
 
514,270

 
(30,336
)
 
(5.57
)
 
14.86
 
117,257

 
(1,837
)
 
(1.54
)

December 31, 2012
Change in Interest Rates in Basis Points
 
Economic Value of Equity
 
Earnings at Risk (12 months)
 
Estimated EVE
 
Estimated Increase / (Decrease) in EVE
 
 EVE Ratio %
 
Estimated Net Interest Income
 
Increase / (Decrease) in Estimated Net Interest Income
 
 
$ Amount
 
$ Change
 
% Change
 
 
 
$ Amount
 
$ Change
 
% Change
 
 
(Dollars in thousands)
400

 
534,416

 
18,473

 
3.58

 
15.40
 
140,514

 
11,608

 
9.01

300

 
541,071

 
25,128

 
4.87

 
15.31
 
134,215

 
5,309

 
4.12

200

 
541,636

 
25,693

 
4.98

 
15.07
 
127,916

 
(990
)
 
(0.77
)
100

 
534,009

 
18,066

 
3.50

 
14.62
 
125,333

 
(3,573
)
 
(2.77
)
—

 
515,943

 
—

 
—

 
13.94
 
128,906

 
—

 
—

(100
)
 
493,055

 
(22,888
)
 
(4.44
)
 
13.15
 
127,524

 
(1,382
)
 
(1.07
)



43

The Bank's EVE was $544.6 million million, or 15.93%, of the market value of portfolio assets as of March 31, 2013, a $28.7 million increase from $515.9 million, or 13.94%, of the market value of portfolio assets as of December 31, 2012. Based upon the assumptions utilized, an immediate 200 basis point increase in market interest rates would result in a $22.1 million million increase in our EVE at March 31, 2013, compared to a $25.7 million million increase at December 31, 2012, and would result in a 120 basis point increase in our EVE ratio to 17.13% at March 31, 2013, as compared to a 113 basis point increase to 15.07% at December 31, 2012. An immediate 100 basis point decrease in market interest rates would result in a $30.3 million decrease in our EVE at March 31, 2013, compared to $22.9 million decrease at December 31, 2012, and would result in a 107 basis point decrease in our EVE ratio to 14.86% at March 31, 2013, as compared to a 79 basis point decrease in our EVE ratio to 13.15% at December 31, 2012.
A research study of the Bank’s non-maturity deposit accounts has been completed. In this study, decay rates, repricing betas, and customer behavior were analyzed over time on an individual account level basis. The results were aggregated by product, with recommendations which were subsequently implemented. The updated account assumptions resulted in an increase to the overall projected duration of the non-maturity deposit account portfolio.
The Bank's EAR for the twelve months beginning March 31, 2013 is measured at $119.1 million, compared to $128.9 million for the twelve months beginning December 31, 2012. Based on the assumptions utilized, an immediate 200 basis point increase in market rates would result in a $3.4 million, or 2.82%, increase in net interest income for the twelve months beginning March 31, 2013, compared to a $990,000, or 0.77%, decrease for the twelve months beginning December 31, 2012. An immediate 100 basis point decrease in market rates would result in a $1.8 million decrease in net interest income for the twelve months beginning March 31, 2013, compared to a $1.4 million decrease for the twelve months beginning December 31, 2012.
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 or originated. These assets generally may reduce our sensitivity to upward interest rate shocks. On the liability side of the balance sheet, 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.
In managing our mix of assets and liabilities, while considering the relationship between long and short term interest rates, market conditions, and consumer preferences, we may place somewhat greater emphasis on maintaining or increasing the Bank’s net interest margin than on strictly matching the interest rate sensitivity of its assets and liabilities.
Management also believes that at times the increased net income which may result from a mismatch in the actual maturity, repricing, or duration of its asset and liability portfolios can provide sufficient returns to justify the increased exposure to sudden and unexpected increases or decreases in interest rates which may result from such a mismatch. Management believes that the Bank’s level of interest rate risk is acceptable under this approach.
In evaluating the Bank’s exposure to market interest rate movements, certain shortcomings inherent in the method of analysis presented in the foregoing table must be considered. For example, although certain assets and liabilities may have similar maturities or repricing characteristics, their interest rate drivers may react in different degrees to changes in market interest rates (basis risk). Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market interest rates. Additionally, certain assets, such as adjustable rate mortgages, have features which restrict changes in interest rates over the life of the asset (time to initial interest rate reset; interest rate reset frequency; initial, periodic, and lifetime caps and floors). Further, in the event of a significant change in market interest rates, loan and securities prepayment and time deposit early withdrawal levels may deviate significantly from those assumed in the table above. Assets with prepayment options and liabilities with early withdrawal options are being monitored. Current market rates and customer behavior are being considered in the management of interest rate risk. Finally, the ability of many borrowers to service their debt may decrease in the event of an interest rate increase. The Bank considers all of these factors in monitoring its exposure to interest rate risk. Of note, the current historically low interest rate environment has resulted in asymmetrical interest rate risk. The interest rates on certain repricing assets and liabilities cannot be fully shocked downward.
The Board of Directors and management believe that the Bank’s ability to successfully manage and mitigate its exposure to interest rate risk is strengthened by several key factors. For example, the Bank manages its balance sheet duration and overall interest rate risk by placing a preference on originating and retaining adjustable rate loans. In addition, the Bank borrows at various maturities from the FHLB to mitigate mismatches between the asset and liability portfolios. Furthermore, the

44

investment securities portfolio is used as a primary interest rate risk management tool through the duration and repricing targeting of purchases and sales.
Item 4.
Controls and Procedures

An evaluation was performed under the supervision and with the participation of the Company's management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of March 31, 2013. Based on that evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of the end of the period covered by this quarterly report. There has been no change in the Company's internal controls over financial reporting during the quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.
While the Company believes the present design of its disclosure controls and procedures is effective to achieve its goals, future events affecting its business may cause the Company to modify its disclosure controls and procedures. The Company does not expect that its disclosure controls and procedures and internal control over financial reporting will prevent all error and fraud. A control procedure, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control procedure are met. Because of the inherent limitations in all control procedures, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns in controls or procedures can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual actions of some persons, by collusion of two or more people, or by management override of the control. The design of any control procedure is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control procedure, misstatements due to error or fraud may occur and not be detected.     


45

PART II - OTHER INFORMATION
Item 1.
Legal Proceedings
We are involved from time to time as plaintiff or defendant in various legal actions arising in the normal course of our businesses. While the ultimate outcome of pending proceedings cannot be predicted with certainty, it is the opinion of management, after consultation with counsel representing us in such proceedings, that the resolution of these proceedings should not have a material adverse effect on our consolidated financial position or results of operations.
Item 1A.
Risk Factors

There have been no material changes from risk factors as previously disclosed in the Company's 2012 Annual Report on Form 10-K.
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
The Company did not repurchase any of its common stock during the three months ended March 31, 2013.

Item 3.
Defaults upon Senior Securities
Not applicable

Item 4.
Mine Safety Disclosures
Not applicable.
Item 5.
Other Information
Not applicable.

46


Item 6.
 
Exhibits
Exhibit
 
 
Number
 
Description
 

 
 
2.1

 
Agreement and Plan of Merger by and between the Registrant and Highlands Bancshares, Inc. (incorporated herein by reference to Exhibit 2.1 of the Registrant’s Current Report on Form 8-K filed with the SEC on December 9, 2011 (File No. 001-34737))
 

 
 
3.1

 
Charter of the Registrant (incorporated herein by reference to Exhibit 3.1 to the Registrant’s Registration Statement on Form S-1, as amended (File No. 333-165509))
 

 
 
3.2

 
Bylaws of the Registrant (incorporated herein by reference to Exhibit 3.2 to the Registrant’s Registration Statement on Form S-1 (File No. 333-165509))
 

 
 
4.0

 
Certificate of Registrant’s Common Stock (incorporated herein by reference to Exhibit 4.0 to the Registrant’s Registration Statement on Form S-1, as amended (File No. 333-165509))
 

 
 
10.1

 
Form of Severance Agreement between ViewPoint Bank and the following executive officers: Pathie E. McKee and Mark L. Williamson (incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on February 17, 2011 (File No. 001-34737))
 

 
 
10.2

 
Summary of Director Board Fee Arrangements (incorporated herein by reference to Exhibit 3.2 to the Registrant’s Quarterly Report on Form 10-Q filed with the SEC on August 9, 2007 (File No. 001-32992))
 

 
 
10.3

 
ViewPoint Bank Deferred Compensation Plan (incorporated herein by reference to Exhibit 10.7 to the Registrant’s Registration Statement on Form S-1, as amended (File No. 0-24566-01))
 

 
 
10.4

 
Amended and Restated ViewPoint Bank Supplemental Executive Retirement Plan (incorporated herein by reference to Exhibit 10.8 to the Registrant’s Registration Statement on Form S-1, as amended (File No. 0-24566-01))
 

 
 
10.5

 
2013 Executive Annual Incentive Plan (incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on March 6, 2013 (File No. 001-34737))
 

 
 
10.6

 
Resignation, Consulting, Noncompetition, Non-solicitation and Confidentiality Agreement and Release between the Registrant and Garold R. Base (incorporated herein by reference to Exhibit 10.11 to the Registrant's Annual Report on Form 10-K filed with the SEC on February 28, 2012 (File No. 001-34737)

47

Exhibit
 
 
Number
 
Description
 

 
 
10.7

 
Employment Agreement between the Registrant and ViewPoint Bank, N.A. and Kevin Hanigan (incorporated herein by reference to Exhibit 10.1 to the Registrant’s Registration Statement on Form S-4 filed with the SEC on January 17, 2012 (File No. 333-179037))
 

 
 
10.8

 
Form of General Release between the Registrant and Mark E. Hord (incorporated herein by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed with the SEC on July 5, 2012 (File No. 001-34737)
 

 
 
10.9

 
Form of General Release between the Registrant and James C. Parks (incorporated herein by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed with the SEC on August 10, 2012 (File No. 001-34737)
 

 
 
10.10

 
Form of Severance Agreement between ViewPoint Bank and the following executive officers: Scott A. Almy, Charles D. Eikenberg and Thomas S. Swiley (incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on November 1, 2012 (File No. 001-34737))
 

 
 
10.11

 
Form of Director's Agreement between the Registrant and James B. McCarley (incorporated herein by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed with the SEC on March 6, 2013 (File No. 001-34737))
 
 
 
10.12

 
Form of Director's Agreement between the Registrant and Gary D. Basham (incorporated herein by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed with the SEC on March 6, 2013 (File No. 001-34737))
 
 
 
10.13

 
Form of Director's Agreement between the Registrant and Jack D. Ersman (incorporated herein by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed with the SEC on March 6, 2013 (File No. 001-34737))
 
 
 
10.14

 
Form of Director's Agreement between the Registrant and V. Keith Sockwell (incorporated herein by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed with the SEC on March 6, 2013 (File No. 001-34737))
 
 
 
11

 
Statement regarding computation of per share earnings (See Note 2 of the Condensed Notes to Unaudited Consolidated Interim Financial Statements included in this Form 10-Q).
 

 
 
31.1

 
Rule 13a — 14(a)/15d — 14(a) Certification (Chief Executive Officer)
 

 
 
31.2

 
Rule 13a — 14(a)/15d — 14(a) Certification (Chief Financial Officer)
 

 
 
32

 
Section 1350 Certifications
 

 
 
101*

 
The following materials from the ViewPoint Financial Group, Inc. Annual Report on Form 10-Q for the quarter ended March 31, 2013, formatted in eXtensible Business Reporting Language (XBRL): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Changes in Shareholders’ Equity, (vi) the Consolidated Statements of Cash Flows and (vii) related notes.
*
 
This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section, and shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934. As provided in Rule 406T of Regulation S-T, this information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934.



48




SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
ViewPoint Financial Group, Inc.
(Registrant)

Date:
April 30, 2013
 
By:
/s/ Kevin J. Hanigan
 
 
 
 
Kevin J. Hanigan,
 
 
 
 
President and Chief Executive Officer
 
 
 
 
(Duly Authorized Officer)
 
 
 
 
 
Date:
April 30, 2013
 
By:
/s/ Pathie E. McKee
 
 
 
 
Pathie E. McKee,
 
 
 
 
Executive Vice President, Chief Financial Officer and Treasurer
 
 
 
 
(Principal Financial and Accounting Officer)


49

EXHIBIT INDEX
Exhibits:

31.1
Certification of the Chief Executive Officer
31.2
Certification of the Chief Financial Officer
32.0
Section 1350 Certifications
101*
Financial statements from Quarterly Report on Form 10-Q of the Registrant for the quarter ended March 31, 2013, formatted in Extensible Business Reporting Language: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Changes in Shareholders' Equity, (v) the Consolidated Statements of Cash Flows and (vi) the Condensed Notes to Unaudited Consolidated Interim Financial Statements.*
 
* This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section, and shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934. As provided in Rule 406T of Regulation S-T, this information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934.



50