NOTE 1 - BASIS OF FINANCIAL STATEMENT PRESENTATION
The accompanying consolidated financial statements of ViewPoint Financial Group, Inc. (the “Company”) have been prepared in accordance with U.S. generally accepted accounting principles ("US GAAP") and with the rules and regulations of the Securities and Exchange Commission for interim financial reporting. Accordingly, they do not include all of the information and footnotes required for complete financial statements. In the opinion of management, all normal and recurring adjustments which are considered necessary to fairly present the results for the interim periods presented have been included. Certain items in prior periods were reclassified to conform to the current presentation. These statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2013 (“2013 Form 10-K”). Interim results are not necessarily indicative of results for a full year.
In preparing the financial statements, management is required to make estimates and assumptions that affect the recorded amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses for the period. Actual results could differ from those estimates. For further information with respect to significant accounting policies followed by the Company in preparation of its consolidated financial statements, refer to the 2013 Form 10-K.
The accompanying Unaudited Consolidated Interim Financial Statements include the accounts of the Company, whose business primarily consists of the operations of its wholly owned subsidiary, ViewPoint Bank, N.A. (the “Bank”). All significant intercompany transactions and balances are eliminated in consolidation.
VIEWPOINT FINANCIAL GROUP, INC.
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
NOTE 2 - ADJUSTMENTS TO FINANCIAL STATEMENTS
Prior to the December 31, 2013 reporting period, the Company reported Warehouse Purchase Program loans as held for sale as we believed that was the most meaningful presentation to our financial statement users given that the collection of the loan was based upon the sale of the loan. Effective December 31, 2013, the Company concluded that, under US GAAP, these loans should be accounted for as held for investment. This correction changed the accounting for Warehouse Purchase Program loans from a lower-of-cost-or-market accounting method to accounting for the loans under Accounting Standards Codification ("ASC") 310, with any credit losses incurred as of the balance sheet date recognized in the allowance for loan losses. As we had not reported any valuation decreases below cost in prior periods, and we have experienced no credit losses on these loans, this correction had no impact on net income, comprehensive income, earnings per share or income taxes. Additionally, total assets and shareholders' equity remained unchanged. However, this correction did impact the statement of cash flows by moving cash flows associated with the Warehouse Purchase Program from operating cash flows to investing cash flows.
The table below illustrates the impact of this change on the Company's Consolidated Statement of Cash Flows for the
six months ended June 30, 2013
. There was no impact to the Company's Consolidated Statements of Income for the three or
six months ended June 30, 2013
.
|
|
|
|
|
|
|
|
|
|
Impact to the Consolidated Statement of Cash Flows
|
|
|
Six Months Ended June 30, 2013
|
|
|
As Originally Presented
|
|
As Adjusted
|
Cash flows from operating activities
|
|
|
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
Loans originated or purchased for sale
|
|
$
|
(7,710,481
|
)
|
|
$
|
—
|
|
Proceeds from sale of loans held for sale
|
|
7,866,973
|
|
|
—
|
|
Net cash provided by operating activities
|
|
192,776
|
|
|
36,284
|
|
Cash flows from investing activities
|
|
|
|
|
Originations of Warehouse Purchase Program loans
|
|
N/A
|
|
1
|
(7,710,481
|
)
|
Proceeds from pay-offs of Warehouse Purchase Program loans
|
|
N/A
|
|
1
|
7,866,973
|
|
Net change in loans held for investment, excluding Warehouse Purchase Program loans
|
|
(145,566
|
)
|
|
(145,566
|
)
|
Net cash provided by (used in) investing activities
|
|
(117,738
|
)
|
|
38,754
|
|
Cash flows from financing activities
|
|
|
|
|
Net cash used in financing activities
|
|
(85,950
|
)
|
|
(85,950
|
)
|
Net change in cash and cash equivalents
|
|
(10,912
|
)
|
|
(10,912
|
)
|
Beginning cash and cash equivalents
|
|
68,696
|
|
|
68,696
|
|
Ending cash and cash equivalents
|
|
$
|
57,784
|
|
|
$
|
57,784
|
|
1
Not applicable
VIEWPOINT FINANCIAL GROUP, INC.
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
NOTE 3 - EARNINGS PER COMMON SHARE
Basic earnings per common share is computed by dividing net income (which has been adjusted for distributed and undistributed earnings to participating securities) by the weighted-average number of common shares outstanding for the period, reduced for average unallocated ESOP shares and average unvested restricted stock awards. Unvested share-based awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method described in ASC 260-10-45-60B. Diluted earnings per common share reflects the potential dilution that could occur if securities or other contracts to issue common stock (such as stock awards and options) were exercised or converted to common stock, or resulted in the issuance of common stock that then shared in the Company’s earnings. Diluted earnings per common share is computed by dividing net income by the weighted-average number of common shares outstanding for the period increased for the dilutive effect of unexercised stock options and unvested restricted stock awards. The dilutive effect of the unexercised stock options and unvested restricted stock awards is calculated under the treasury stock method utilizing the average market value of the Company’s stock for the period. A reconciliation of the numerator and denominator of the basic and diluted earnings per common share computation for the
three and six
months ended
June 30, 2014
and
2013
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2014
|
|
2013
|
|
2014
|
|
2013
|
Basic earnings per share:
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
Net income
|
$
|
8,818
|
|
|
$
|
8,174
|
|
|
$
|
16,500
|
|
|
$
|
16,232
|
|
Distributed and undistributed earnings to participating securities
|
(97
|
)
|
|
(116
|
)
|
|
(187
|
)
|
|
(180
|
)
|
Income available to common shareholders
|
$
|
8,721
|
|
|
$
|
8,058
|
|
|
$
|
16,313
|
|
|
$
|
16,052
|
|
Denominator:
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
39,966,568
|
|
|
39,940,712
|
|
|
39,954,509
|
|
|
39,837,010
|
|
Less: Average unallocated ESOP shares
|
(1,671,941
|
)
|
|
(1,856,135
|
)
|
|
(1,694,835
|
)
|
|
(1,879,030
|
)
|
Average unvested restricted stock awards
|
(420,956
|
)
|
|
(539,527
|
)
|
|
(434,729
|
)
|
|
(420,517
|
)
|
Average shares for basic earnings per share
|
37,873,671
|
|
|
37,545,050
|
|
|
37,824,945
|
|
|
37,537,463
|
|
Basic earnings per common share
|
$
|
0.23
|
|
|
$
|
0.21
|
|
|
$
|
0.43
|
|
|
$
|
0.43
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
Income available to common shareholders
|
$
|
8,721
|
|
|
$
|
8,058
|
|
|
$
|
16,313
|
|
|
$
|
16,052
|
|
Denominator:
|
|
|
|
|
|
|
|
Average shares for basic earnings per share
|
37,873,671
|
|
|
37,545,050
|
|
|
37,824,945
|
|
|
37,537,463
|
|
Dilutive effect of share-based compensation plan
|
247,703
|
|
|
147,463
|
|
|
247,786
|
|
|
147,231
|
|
Average shares for diluted earnings per share
|
38,121,374
|
|
|
37,692,513
|
|
|
38,072,731
|
|
|
37,684,694
|
|
Diluted earnings per common share
|
$
|
0.23
|
|
|
$
|
0.21
|
|
|
$
|
0.43
|
|
|
0.43
|
|
Share awards excluded in the computation of diluted earnings per share because the exercise price was greater than the common stock average market price and were therefore antidilutive
|
86,910
|
|
|
1,212,900
|
|
|
134,790
|
|
|
1,235,050
|
|
VIEWPOINT FINANCIAL GROUP, INC.
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
NOTE 4 - SECURITIES
The fair value of available-for-sale securities and the related gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
Gross
Unrealized
|
|
Gross
Unrealized
|
|
|
June 30, 2014
|
Cost
|
|
Gains
|
|
Losses
|
|
Fair Value
|
Agency residential mortgage-backed securities
1
|
$
|
160,143
|
|
|
$
|
1,666
|
|
|
$
|
812
|
|
|
$
|
160,997
|
|
Agency residential collateralized mortgage obligations
2
|
60,524
|
|
|
338
|
|
|
65
|
|
|
60,797
|
|
SBA pools
|
2,332
|
|
|
58
|
|
|
—
|
|
|
2,390
|
|
Total securities
|
$
|
222,999
|
|
|
$
|
2,062
|
|
|
$
|
877
|
|
|
$
|
224,184
|
|
|
|
|
|
|
|
|
|
December 31, 2013
|
|
|
|
|
|
|
|
Agency residential mortgage-backed securities
1
|
$
|
175,693
|
|
|
$
|
1,322
|
|
|
$
|
2,306
|
|
|
$
|
174,709
|
|
Agency residential collateralized mortgage obligations
2
|
70,257
|
|
|
423
|
|
|
105
|
|
|
70,575
|
|
SBA pools
|
2,652
|
|
|
76
|
|
|
—
|
|
|
2,728
|
|
Total securities
|
$
|
248,602
|
|
|
$
|
1,821
|
|
|
$
|
2,411
|
|
|
$
|
248,012
|
|
1
Residential mortgage-backed securities issued and/or guaranteed by U.S. government agencies or U.S. government-sponsored enterprises.
2
Collateralized mortgage obligations issued and/or guaranteed by U.S. government agencies or U.S. government-sponsored enterprises.
The carrying amount, unrecognized gains and losses, and fair value of securities held to maturity were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
Gross
Unrealized
|
|
Gross
Unrealized
|
|
|
June 30, 2014
|
Cost
|
|
Gains
|
|
Losses
|
|
Fair Value
|
Agency residential mortgage-backed securities
1
|
$
|
72,740
|
|
|
$
|
3,731
|
|
|
$
|
28
|
|
|
$
|
76,443
|
|
Agency commercial mortgage-backed securities
2
|
25,518
|
|
|
991
|
|
|
119
|
|
|
26,390
|
|
Agency residential collateralized mortgage obligations
3
|
102,297
|
|
|
2,635
|
|
|
37
|
|
|
104,895
|
|
Municipal bonds
|
67,059
|
|
|
3,537
|
|
|
411
|
|
|
70,185
|
|
Total securities
|
$
|
267,614
|
|
|
$
|
10,894
|
|
|
$
|
595
|
|
|
$
|
277,913
|
|
|
|
|
|
|
|
|
|
December 31, 2013
|
|
|
|
|
|
|
|
Agency residential mortgage-backed securities
1
|
$
|
83,177
|
|
|
$
|
3,523
|
|
|
$
|
130
|
|
|
$
|
86,570
|
|
Agency commercial mortgage-backed securities
2
|
24,828
|
|
|
523
|
|
|
310
|
|
|
25,041
|
|
Agency residential collateralized mortgage obligations
3
|
118,757
|
|
|
2,772
|
|
|
107
|
|
|
121,422
|
|
Municipal bonds
|
67,821
|
|
|
2,292
|
|
|
1,407
|
|
|
68,706
|
|
Total securities
|
$
|
294,583
|
|
|
$
|
9,110
|
|
|
$
|
1,954
|
|
|
$
|
301,739
|
|
1
Residential mortgage-backed securities issued and/or guaranteed by U.S. government agencies or U.S. government-sponsored enterprises.
2
Commercial mortgage-backed securities issued and /or guaranteed by U.S. government agencies or government-sponsored enterprises.
3
Collateralized mortgage obligations issued and/or guaranteed by U.S. government agencies or U.S. government-sponsored enterprises.
VIEWPOINT FINANCIAL GROUP, INC.
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
The carrying amount and fair value of held to maturity debt securities and the fair value of available for sale debt securities at
June 30, 2014
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
|
$
|
145
|
|
|
$
|
148
|
|
|
$
|
—
|
|
Due after one to five years
|
7,659
|
|
|
8,124
|
|
|
2,390
|
|
Due after five to ten years
|
28,464
|
|
|
30,570
|
|
|
—
|
|
Due after ten years
|
30,791
|
|
|
31,343
|
|
|
—
|
|
Agency residential mortgage-backed securities
1
|
72,740
|
|
|
76,443
|
|
|
160,997
|
|
Agency commercial mortgage-backed securities
2
|
25,518
|
|
|
26,390
|
|
|
—
|
|
Agency residential collateralized mortgage obligations
3
|
102,297
|
|
|
104,895
|
|
|
60,797
|
|
Total
|
$
|
267,614
|
|
|
$
|
277,913
|
|
|
$
|
224,184
|
|
1
Residential mortgage-backed securities issued and/or guaranteed by U.S. government agencies or U.S. government-sponsored enterprises.
2
Commercial mortgage-backed securities issued and /or guaranteed by U.S. government agencies or government-sponsored enterprises.
3
Collateralized mortgage obligations issued and/or guaranteed by U.S. government agencies or U.S. government-sponsored enterprises.
Information regarding pledged securities is summarized below:
|
|
|
|
|
|
|
|
|
|
June 30, 2014
|
|
December 31, 2013
|
Public fund certificates of deposit
|
$
|
148,310
|
|
|
$
|
156,731
|
|
Public fund demand deposit accounts
|
13,781
|
|
|
15,068
|
|
Commercial demand deposit accounts
|
3,058
|
|
|
4,439
|
|
Repurchase agreements
|
25,000
|
|
|
25,000
|
|
Federal Reserve Bank primary credit - collateral value
|
60,016
|
|
|
68,686
|
|
Carrying value of securities pledged on above funds
|
281,005
|
|
|
308,652
|
|
Sales activity of securities for the three and six months ended
June 30,
2014 and 2013, was as follows. All securities sold were classified as available for sale.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2014
|
|
2013
|
|
2014
|
|
2013
|
Proceeds
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
10,614
|
|
Gross losses
|
—
|
|
|
—
|
|
|
—
|
|
|
177
|
|
Gains and losses on the sale of securities classified as available for sale are recorded on the trade date using the specific-identification method.
VIEWPOINT FINANCIAL GROUP, INC.
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
Securities with unrealized losses at
June 30, 2014
and
December 31, 2013
, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AFS
|
Less than 12 Months
|
|
12 Months or More
|
|
Total
|
June 30, 2014
|
Fair Value
|
|
Unrealized Loss
|
|
Number
|
|
Fair Value
|
|
Unrealized Loss
|
|
Number
|
|
Fair Value
|
|
Unrealized Loss
|
|
Number
|
Agency residential mortgage-backed securities
1
|
$
|
4,929
|
|
|
$
|
6
|
|
|
3
|
|
|
$
|
58,392
|
|
|
$
|
806
|
|
|
10
|
|
|
$
|
63,321
|
|
|
$
|
812
|
|
|
13
|
|
Agency residential collateralized mortgage obligations
2
|
5,360
|
|
|
5
|
|
|
2
|
|
|
6,568
|
|
|
60
|
|
|
5
|
|
|
11,928
|
|
|
65
|
|
|
7
|
|
Total temporarily impaired
|
$
|
10,289
|
|
|
$
|
11
|
|
|
5
|
|
|
$
|
64,960
|
|
|
$
|
866
|
|
|
15
|
|
|
$
|
75,249
|
|
|
$
|
877
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency residential mortgage-backed securities
1
|
$
|
83,461
|
|
|
$
|
2,306
|
|
|
19
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
83,461
|
|
|
$
|
2,306
|
|
|
19
|
|
Agency residential collateralized mortgage obligations
2
|
13,975
|
|
|
50
|
|
|
6
|
|
|
6,780
|
|
|
55
|
|
|
5
|
|
|
20,755
|
|
|
105
|
|
|
11
|
|
Total temporarily impaired
|
$
|
97,436
|
|
|
$
|
2,356
|
|
|
25
|
|
|
$
|
6,780
|
|
|
$
|
55
|
|
|
5
|
|
|
$
|
104,216
|
|
|
$
|
2,411
|
|
|
30
|
|
1
Residential mortgage-backed securities issued and/or guaranteed by U.S. government agencies or U.S. government-sponsored enterprises.
2
Collateralized mortgage obligations issued and/or guaranteed by U.S. government agencies or U.S. government-sponsored enterprises.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HTM
|
Less than 12 Months
|
|
12 Months or More
|
|
Total
|
June 30, 2014
|
Fair Value
|
|
Unrealized Loss
|
|
Number
|
|
Fair Value
|
|
Unrealized Loss
|
|
Number
|
|
Fair Value
|
|
Unrealized Loss
|
|
Number
|
Agency residential mortgage-backed securities
1
|
$
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
3,556
|
|
|
$
|
28
|
|
|
1
|
|
|
$
|
3,556
|
|
|
$
|
28
|
|
|
1
|
|
Agency commercial mortgage-backed securities
2
|
—
|
|
|
—
|
|
|
—
|
|
|
3,860
|
|
|
119
|
|
|
1
|
|
|
3,860
|
|
|
119
|
|
|
1
|
|
Agency residential collateralized mortgage obligations
3
|
—
|
|
|
—
|
|
|
—
|
|
|
5,905
|
|
|
37
|
|
|
3
|
|
|
5,905
|
|
|
37
|
|
|
3
|
|
Municipal bonds
|
6,546
|
|
|
58
|
|
|
11
|
|
|
11,895
|
|
|
353
|
|
|
17
|
|
|
18,441
|
|
|
411
|
|
|
28
|
|
Total temporarily impaired
|
$
|
6,546
|
|
|
$
|
58
|
|
|
11
|
|
|
$
|
25,216
|
|
|
$
|
537
|
|
|
22
|
|
|
$
|
31,762
|
|
|
$
|
595
|
|
|
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency residential mortgage-backed securities
1
|
$
|
5,779
|
|
|
$
|
130
|
|
|
2
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
5,779
|
|
|
$
|
130
|
|
|
2
|
|
Agency commercial mortgage-backed securities
2
|
4,940
|
|
|
310
|
|
|
2
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4,940
|
|
|
310
|
|
|
2
|
|
Agency residential collateralized mortgage obligations
3
|
10,453
|
|
|
91
|
|
|
2
|
|
|
1,679
|
|
|
16
|
|
|
3
|
|
|
12,132
|
|
|
107
|
|
|
5
|
|
Municipal bonds
|
17,784
|
|
|
1,406
|
|
|
29
|
|
|
280
|
|
|
1
|
|
|
1
|
|
|
18,064
|
|
|
1,407
|
|
|
30
|
|
Total temporarily impaired
|
$
|
38,956
|
|
|
$
|
1,937
|
|
|
35
|
|
|
$
|
1,959
|
|
|
$
|
17
|
|
|
4
|
|
|
$
|
40,915
|
|
|
$
|
1,954
|
|
|
39
|
|
1
Residential mortgage-backed securities issued and/or guaranteed by U.S. government agencies or U.S. government-sponsored enterprises.
2
Commercial mortgage-backed securities issued and /or guaranteed by U.S. government agencies or government-sponsored enterprises.
3
Collateralized mortgage obligations issued and/or guaranteed by U.S. government agencies or U.S. government-sponsored enterprises.
Other-than-Temporary Impairment
In determining other-than-temporary impairment for debt securities, management considers many factors, including: (1) the length of time and the extent to which the fair value has been less than amortized cost, (2) the financial condition and near-term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions, and (4) whether the Company has the intent and ability to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. The Company does not believe these unrealized losses are other-than-temporary. All principal and interest payments are being received on time and in full.
VIEWPOINT FINANCIAL GROUP, INC.
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
NOTE 5 - LOANS
Loans consist of the following:
|
|
|
|
|
|
|
|
|
|
June 30, 2014
|
|
December 31, 2013
|
Commercial real estate
|
$
|
1,162,035
|
|
|
$
|
1,091,200
|
|
Commercial and industrial loans:
|
|
|
|
Commercial
|
579,561
|
|
|
425,030
|
|
Warehouse lines of credit
|
31,426
|
|
|
14,400
|
|
Total commercial and industrial loans
|
610,987
|
|
|
439,430
|
|
Construction and land loans
|
|
|
|
Commercial construction and land
|
28,496
|
|
|
27,619
|
|
Consumer construction and land
|
3,445
|
|
|
2,628
|
|
Total construction and land loans
|
31,941
|
|
|
30,247
|
|
Consumer:
|
|
|
|
Consumer real estate
|
501,328
|
|
|
441,226
|
|
Other consumer loans
|
43,218
|
|
|
47,799
|
|
Total consumer
|
544,546
|
|
|
489,025
|
|
Gross loans held for investment, excluding Warehouse Purchase Program
|
2,349,509
|
|
|
2,049,902
|
|
Net of:
|
|
|
|
Deferred fees and discounts, net
|
(1,699
|
)
|
|
(1,267
|
)
|
Allowance for loan losses
|
(20,440
|
)
|
|
(19,358
|
)
|
Net loans held for investment, excluding Warehouse Purchase Program
|
2,327,370
|
|
|
2,029,277
|
|
Warehouse Purchase Program
|
769,566
|
|
|
673,470
|
|
Total loans held for investment
|
$
|
3,096,936
|
|
|
$
|
2,702,747
|
|
VIEWPOINT FINANCIAL GROUP, INC.
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
Activity in the allowance for loan losses for the
three and six
months ended
June 30, 2014
and
2013
, segregated by portfolio segment and evaluation for impairment, was as follows. All Warehouse Purchase Program loans are collectively evaluated for impairment and are purchased under several contractual requirements, providing safeguards to the Company. These safeguards include the requirement that our mortgage company customers have a takeout commitment for each loan and multiple investors identified for purchases. To date, the Company has never experienced a loss on these loans and no allowance for loan losses has been allocated to them. At
June 30, 2014
and
2013
,
$272
and
$228
, respectively, of the allowance for loan losses individually evaluated for impairment was allocated to purchased credit impaired ("PCI") loans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended June 30, 2014
|
Commercial Real Estate
|
|
Commercial and Industrial
|
|
Construction and Land
|
|
Consumer Real Estate
|
|
Other Consumer
|
|
Total
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance - April 1, 2014
|
$
|
10,668
|
|
|
$
|
4,802
|
|
|
$
|
243
|
|
|
$
|
3,327
|
|
|
$
|
362
|
|
|
$
|
19,402
|
|
Charge-offs
|
—
|
|
|
(92
|
)
|
|
—
|
|
|
(74
|
)
|
|
(128
|
)
|
|
(294
|
)
|
Recoveries
|
—
|
|
|
39
|
|
|
—
|
|
|
20
|
|
|
76
|
|
|
135
|
|
Provision expense (benefit)
|
518
|
|
|
536
|
|
|
9
|
|
|
66
|
|
|
68
|
|
|
1,197
|
|
Ending balance - June 30, 2014
|
$
|
11,186
|
|
|
$
|
5,285
|
|
|
$
|
252
|
|
|
$
|
3,339
|
|
|
$
|
378
|
|
|
$
|
20,440
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the six months ended June 30, 2014
|
Commercial Real Estate
|
|
Commercial and Industrial
|
|
Construction and Land
|
|
Consumer Real Estate
|
|
Other Consumer
|
|
Total
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance - January 1, 2014
|
$
|
10,944
|
|
|
$
|
4,536
|
|
|
$
|
212
|
|
|
$
|
3,280
|
|
|
$
|
386
|
|
|
$
|
19,358
|
|
Charge-offs
|
—
|
|
|
(302
|
)
|
|
—
|
|
|
(156
|
)
|
|
(307
|
)
|
|
(765
|
)
|
Recoveries
|
—
|
|
|
57
|
|
|
—
|
|
|
25
|
|
|
192
|
|
|
274
|
|
Provision expense (benefit)
|
242
|
|
|
994
|
|
|
40
|
|
|
190
|
|
|
107
|
|
|
1,573
|
|
Ending balance - June 30, 2014
|
$
|
11,186
|
|
|
$
|
5,285
|
|
|
$
|
252
|
|
|
$
|
3,339
|
|
|
$
|
378
|
|
|
$
|
20,440
|
|
Allowance ending balance:
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
$
|
964
|
|
|
$
|
1,535
|
|
|
$
|
—
|
|
|
$
|
189
|
|
|
$
|
1
|
|
|
$
|
2,689
|
|
Collectively evaluated for impairment
|
10,222
|
|
|
3,750
|
|
|
252
|
|
|
3,150
|
|
|
377
|
|
|
17,751
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
8,052
|
|
|
6,407
|
|
|
52
|
|
|
5,152
|
|
|
453
|
|
|
20,116
|
|
Collectively evaluated for impairment
|
1,149,741
|
|
|
604,396
|
|
|
31,889
|
|
|
495,083
|
|
|
42,597
|
|
|
2,323,706
|
|
PCI loans
|
4,242
|
|
|
184
|
|
|
—
|
|
|
1,093
|
|
|
168
|
|
|
5,687
|
|
Ending balance
|
$
|
1,162,035
|
|
|
$
|
610,987
|
|
|
$
|
31,941
|
|
|
$
|
501,328
|
|
|
$
|
43,218
|
|
|
$
|
2,349,509
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended June 30, 2013
|
Commercial Real Estate
|
|
Commercial and Industrial
|
|
Construction and Land
|
|
Consumer Real Estate
|
|
Other Consumer
|
|
Total
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance - April 1, 2013
|
$
|
10,824
|
|
|
$
|
3,568
|
|
|
$
|
114
|
|
|
$
|
3,566
|
|
|
$
|
570
|
|
|
$
|
18,642
|
|
Charge-offs
|
(716
|
)
|
|
(124
|
)
|
|
—
|
|
|
(326
|
)
|
|
(228
|
)
|
|
(1,394
|
)
|
Recoveries
|
—
|
|
|
60
|
|
|
—
|
|
|
6
|
|
|
105
|
|
|
171
|
|
Provision expense (benefit)
|
417
|
|
|
1,235
|
|
|
5
|
|
|
217
|
|
|
(16
|
)
|
|
1,858
|
|
Ending balance - June 30, 2013
|
$
|
10,525
|
|
|
$
|
4,739
|
|
|
$
|
119
|
|
|
$
|
3,463
|
|
|
$
|
431
|
|
|
$
|
19,277
|
|
VIEWPOINT FINANCIAL GROUP, INC.
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the six months ended June 30, 2013
|
Commercial Real Estate
|
|
Commercial and Industrial
|
|
Construction and Land
|
|
Consumer Real Estate
|
|
Other Consumer
|
|
Total
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance - January 1, 2013
|
$
|
11,182
|
|
|
$
|
2,574
|
|
|
$
|
149
|
|
|
$
|
3,528
|
|
|
$
|
618
|
|
|
$
|
18,051
|
|
Charge-offs
|
(772
|
)
|
|
(334
|
)
|
|
(31
|
)
|
|
(355
|
)
|
|
(378
|
)
|
|
(1,870
|
)
|
Recoveries
|
—
|
|
|
98
|
|
|
—
|
|
|
12
|
|
|
245
|
|
|
355
|
|
Provision expense (benefit)
|
115
|
|
|
2,401
|
|
|
1
|
|
|
278
|
|
|
(54
|
)
|
|
2,741
|
|
Ending balance - June 30, 2013
|
$
|
10,525
|
|
|
$
|
4,739
|
|
|
$
|
119
|
|
|
$
|
3,463
|
|
|
$
|
431
|
|
|
$
|
19,277
|
|
Allowance ending balance:
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
$
|
1,313
|
|
|
$
|
1,736
|
|
|
$
|
—
|
|
|
$
|
1,043
|
|
|
$
|
32
|
|
|
$
|
4,124
|
|
Collectively evaluated for impairment
|
9,212
|
|
|
3,003
|
|
|
119
|
|
|
2,420
|
|
|
399
|
|
|
15,153
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
8,625
|
|
|
7,045
|
|
|
4
|
|
|
8,657
|
|
|
466
|
|
|
24,797
|
|
Collectively evaluated for impairment
|
977,407
|
|
|
304,916
|
|
|
18,836
|
|
|
449,279
|
|
|
51,727
|
|
|
1,802,165
|
|
PCI loans
|
4,195
|
|
|
1,070
|
|
|
1,631
|
|
|
1,140
|
|
|
189
|
|
|
8,225
|
|
Ending balance
|
$
|
990,227
|
|
|
$
|
313,031
|
|
|
$
|
20,471
|
|
|
$
|
459,076
|
|
|
$
|
52,382
|
|
|
$
|
1,835,187
|
|
The allowance for loan losses and related provision expense are susceptible to change if the credit quality of our loan portfolio changes, which is evidenced by many factors, including but not limited to charge-offs and non-performing loan trends. Generally, consumer real estate lending has a lower credit risk profile compared to other consumer lending (such as automobile loans). Commercial real estate and commercial and industrial lending, however, can have higher risk profiles than consumer loans due to these loans being larger in amount and non-homogeneous in structure and term. Changes in economic conditions, the mix and size of the loan portfolio, and individual borrower conditions can dramatically impact our level of allowance for loan losses in relatively short periods of time.
The allowance for loan losses is maintained to cover losses that are estimated in accordance with US GAAP. It is our estimate of credit losses inherent in our loan portfolio at each balance sheet date. Our methodology for analyzing the allowance for loan losses consists of general and specific components. For the general component, we stratify the loan portfolio into homogeneous groups of loans that possess similar loss potential characteristics and apply a loss ratio to these groups of loans to estimate the credit losses in the loan portfolio. We use both historical loss ratios and qualitative loss factors assigned to major loan collateral types to establish general component loss allocations. Qualitative loss factors are based on management's judgment of company, market, industry or business specific data and external economic indicators, which may not yet be reflected in the historical loss ratios, and that could impact the Company's specific loan portfolios. The Allowance for Loan Loss Committee sets and adjusts qualitative loss factors by regularly reviewing changes in underlying loan composition and the seasonality of specific portfolios. The Allowance for Loan Loss Committee also considers credit quality and trends relating to delinquency, non-performing and/or classified loans and bankruptcy within the Company's loan portfolio when evaluating qualitative loss factors. Additionally, the Allowance for Loan Loss Committee adjusts qualitative factors to account for the potential impact of external economic factors, including the unemployment rate, housing price, vacancy rates and inventory levels specific to our primary market area.
Management evaluates current information and events regarding a borrower's ability to repay its obligations and considers a loan to be impaired when the ultimate collectability of amounts due, according to the contractual terms of the loan agreement, is in doubt. If an impaired loan is collateral-dependent, the fair value of the collateral, less the estimated cost to sell, is used to determine the amount of impairment. If an impaired loan is not collateral-dependent, the impairment amount is determined using the negative difference, if any, between the estimated discounted cash flows and the loan amount due. For impaired loans, the amount of the impairment can be adjusted, based on current data, until such time as the actual basis is established by acquisition of the collateral or until the basis is collected. Impairment losses are reflected in the allowance for loan losses through a charge to the provision for loan losses. Subsequent recoveries are credited to the allowance for loan losses. Cash receipts for accruing loans are applied to principal and interest under the contractual terms of the loan agreement. Cash receipts on impaired loans for which the accrual of interest has been discontinued are applied first to principal.
For the specific component, the allowance for loan losses includes loans where management has concerns about the borrower's ability to repay and on individually analyzed loans found to be impaired by definition. For example, all troubled debt restructurings are considered to be impaired. Loss estimates include the negative difference, if any, between the estimated
VIEWPOINT FINANCIAL GROUP, INC.
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
discounted cash flows of the loan, or if the loan is collateral dependent the current fair value of the collateral, and the loan amount due.
Impaired loans at
June 30, 2014
, and
December 31, 2013
, were as follows
1
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2014
|
|
Unpaid
Contractual Principal
Balance
|
|
Recorded
Investment With No Allowance
|
|
Recorded
Investment With Allowance
|
|
Total Recorded Investment
|
|
Related
Allowance
|
Commercial real estate
|
|
$
|
8,911
|
|
|
$
|
4,755
|
|
|
$
|
3,297
|
|
|
$
|
8,052
|
|
|
$
|
793
|
|
Commercial and industrial
|
|
7,380
|
|
|
3,152
|
|
|
3,255
|
|
|
6,407
|
|
|
1,461
|
|
Construction and land
|
|
52
|
|
|
52
|
|
|
—
|
|
|
52
|
|
|
—
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
Consumer real estate
|
|
5,436
|
|
|
4,027
|
|
|
1,125
|
|
|
5,152
|
|
|
163
|
|
Other consumer
|
|
501
|
|
|
453
|
|
|
—
|
|
|
453
|
|
|
—
|
|
Total
|
|
$
|
22,280
|
|
|
$
|
12,439
|
|
|
$
|
7,677
|
|
|
$
|
20,116
|
|
|
$
|
2,417
|
|
December 31, 2013
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
$
|
8,328
|
|
|
$
|
3,619
|
|
|
$
|
3,986
|
|
|
$
|
7,605
|
|
|
$
|
2,016
|
|
Commercial and industrial
|
|
6,058
|
|
|
539
|
|
|
4,786
|
|
|
5,325
|
|
|
550
|
|
Construction and land
|
|
2
|
|
|
2
|
|
|
—
|
|
|
2
|
|
|
—
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
Consumer real estate
|
|
5,050
|
|
|
3,725
|
|
|
1,087
|
|
|
4,812
|
|
|
155
|
|
Other consumer
|
|
579
|
|
|
550
|
|
|
—
|
|
|
550
|
|
|
—
|
|
Total
|
|
$
|
20,017
|
|
|
$
|
8,435
|
|
|
$
|
9,859
|
|
|
$
|
18,294
|
|
|
$
|
2,721
|
|
1
No Warehouse Purchase Program loans were impaired at
June 30, 2014
or
December 31, 2013
. Loans reported do not include PCI loans.
VIEWPOINT FINANCIAL GROUP, INC.
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
Income on impaired loans at
June 30, 2014
and
2013
was as follows
1
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2014
|
|
Current Quarter Average
Recorded
Investment
|
|
Year-to-Date Average
Recorded
Investment
|
|
Current Quarter Interest
Income
Recognized
|
|
Year-to-Date Interest
Income
Recognized
|
Commercial real estate
|
|
$
|
8,067
|
|
|
$
|
8,021
|
|
|
$
|
3
|
|
|
$
|
3
|
|
Commercial and industrial
|
|
6,163
|
|
|
5,973
|
|
|
3
|
|
|
6
|
|
Construction and land
|
|
13
|
|
|
9
|
|
|
—
|
|
|
—
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
Consumer real estate
|
|
4,759
|
|
|
4,675
|
|
|
11
|
|
|
23
|
|
Other consumer
|
|
482
|
|
|
510
|
|
|
1
|
|
|
2
|
|
Total
|
|
$
|
19,484
|
|
|
$
|
19,188
|
|
|
$
|
18
|
|
|
$
|
34
|
|
June 30, 2013
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
$
|
13,340
|
|
|
$
|
14,740
|
|
|
$
|
62
|
|
|
$
|
124
|
|
Commercial and industrial
|
|
6,924
|
|
|
6,366
|
|
|
3
|
|
|
6
|
|
Construction and land
|
|
4
|
|
|
79
|
|
|
—
|
|
|
—
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
Consumer real estate
|
|
8,513
|
|
|
8,502
|
|
|
19
|
|
|
33
|
|
Other consumer
|
|
433
|
|
|
406
|
|
|
—
|
|
|
—
|
|
Total
|
|
$
|
29,214
|
|
|
$
|
30,093
|
|
|
$
|
84
|
|
|
$
|
163
|
|
1
Loans reported do not include PCI loans.
Past due status is based on the contractual terms of the loan. Loans that are past due
30
days are considered delinquent. A loan is moved to nonaccrual status in accordance with the Company's policy, typically after
90
days of non-payment. 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. Non-mortgage consumer loans are typically charged off no later than
120
days past due. In all cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful. Nonaccrual loans include both smaller balance homogeneous loans that are collectively evaluated for impairment and larger individually classified impaired loans.
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 cash-basis or cost recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
VIEWPOINT FINANCIAL GROUP, INC.
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
Loans past due over 90 days that were still accruing interest totaled
$981
at
June 30, 2014
and
$266
at
December 31, 2013
, which consisted entirely of PCI loans. At
June 30, 2014
and
December 31, 2013
,
no
PCI loans were considered non-performing loans. Purchased performing loans that were non-performing as of
June 30, 2014
and
December 31, 2013
totaled
$3,335
and
$4,201
, respectively. Those loans included
$1,358
and
$1,698
at
June 30, 2014
and
December 31, 2013
, respectively, of commercial lines of credit that did not qualify for PCI accounting due to their revolving nature. No Warehouse Purchase Program loans were non-performing at
June 30, 2014
or
December 31, 2013
. Non-performing (nonaccrual) loans were as follows:
|
|
|
|
|
|
|
|
|
|
June 30, 2014
|
|
December 31, 2013
|
Commercial real estate
|
$
|
7,386
|
|
|
$
|
7,604
|
|
Commercial and industrial
|
6,245
|
|
|
5,141
|
|
Construction and land
|
213
|
|
|
—
|
|
Consumer:
|
|
|
|
Consumer real estate
|
9,304
|
|
|
8,812
|
|
Other consumer
|
457
|
|
|
567
|
|
Total
|
$
|
23,605
|
|
|
$
|
22,124
|
|
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 for the borrower's benefit that would not otherwise be considered for a borrower or transaction 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. All TDRs are considered to be impaired loans.
Large groups of smaller-balance homogeneous loans are collectively evaluated for impairment. As a result, the Company does not separately identify consumer real estate loans less than
$417
or individual consumer non-real estate secured loans for impairment disclosures.
VIEWPOINT FINANCIAL GROUP, INC.
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
The outstanding balances of troubled debt restructurings ("TDRs") are shown below:
|
|
|
|
|
|
|
|
|
|
June 30, 2014
|
|
December 31, 2013
|
Nonaccrual TDRs
(1)
|
$
|
12,498
|
|
|
$
|
11,368
|
|
Performing TDRs
(2)
|
1,600
|
|
|
971
|
|
Total
|
$
|
14,098
|
|
|
$
|
12,339
|
|
Specific reserves on TDRs
|
$
|
1,048
|
|
|
$
|
1,191
|
|
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.
The following tables provide the recorded balances of loans modified as a TDR during the three and
six months ended June 30, 2014
and
2013
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2014
|
|
Six Months Ended June 30, 2014
|
|
|
Principal Deferrals
(1)
|
|
Combination of Rate Reduction and Principal Deferral
|
|
Other
|
|
Total
|
|
Principal Deferrals
(1)
|
|
Combination of Rate Reduction and Principal Deferral
|
|
Other
|
|
Total
|
Commercial and industrial
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,913
|
|
|
$
|
1,913
|
|
Consumer real estate
|
|
130
|
|
|
—
|
|
|
113
|
|
|
243
|
|
|
130
|
|
|
269
|
|
|
113
|
|
|
512
|
|
Other consumer
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
13
|
|
|
6
|
|
|
—
|
|
|
19
|
|
Total
|
|
$
|
130
|
|
|
$
|
—
|
|
|
$
|
113
|
|
|
$
|
243
|
|
|
$
|
143
|
|
|
$
|
275
|
|
|
$
|
2,026
|
|
|
$
|
2,444
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2013
|
|
Six Months Ended June 30, 2013
|
|
|
Principal Deferrals
(1)
|
|
Combination of Rate Reduction and Principal Deferral
|
|
Other
|
|
Total
|
|
Principal Deferrals
(1)
|
|
Combination of Rate Reduction and Principal Deferral
|
|
Other
|
|
Total
|
Commercial real estate
|
|
$
|
62
|
|
|
$
|
47
|
|
|
$
|
—
|
|
|
$
|
109
|
|
|
$
|
752
|
|
|
$
|
47
|
|
|
$
|
—
|
|
|
$
|
799
|
|
Commercial and industrial
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
8
|
|
|
31
|
|
|
—
|
|
|
39
|
|
Consumer real estate
|
|
41
|
|
|
73
|
|
|
223
|
|
|
337
|
|
|
41
|
|
|
73
|
|
|
223
|
|
|
337
|
|
Other consumer
|
|
71
|
|
|
68
|
|
|
—
|
|
|
139
|
|
|
130
|
|
|
68
|
|
|
—
|
|
|
198
|
|
Total
|
|
$
|
174
|
|
|
$
|
188
|
|
|
$
|
223
|
|
|
$
|
585
|
|
|
$
|
931
|
|
|
$
|
219
|
|
|
$
|
223
|
|
|
$
|
1,373
|
|
1
Principal deferrals include Chapter 7 bankruptcy loans for which the court has discharged the borrower's obligation and the borrower has not reaffirmed the debt. Such loans are placed on non-accrual status.
TDRs modified during the three and
six months ended
June 30, 2014
and
2013
which experienced a subsequent default during the periods are shown below. A payment default is defined as a loan that was
90 days
or more past due.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
2014
|
|
2013
|
|
2014
|
|
2013
|
Commercial and industrial
|
|
$
|
66
|
|
|
$
|
—
|
|
|
$
|
66
|
|
|
$
|
—
|
|
Consumer real estate
|
|
210
|
|
|
359
|
|
|
210
|
|
|
584
|
|
Total
|
|
$
|
276
|
|
|
$
|
359
|
|
|
$
|
276
|
|
|
$
|
584
|
|
VIEWPOINT FINANCIAL GROUP, INC.
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
Below is an analysis of the age of recorded investment in loans that were past due at
June 30, 2014
and
December 31, 2013
. No Warehouse Purchase Program loans were delinquent at
June 30, 2014
or
December 31, 2013
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2014
|
|
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
|
|
$
|
2,731
|
|
|
$
|
—
|
|
|
$
|
1,342
|
|
|
$
|
4,073
|
|
|
$
|
1,157,962
|
|
|
$
|
1,162,035
|
|
Commercial and industrial
|
|
142
|
|
|
2,632
|
|
|
875
|
|
|
3,649
|
|
|
607,338
|
|
|
610,987
|
|
Construction and land
|
|
—
|
|
|
—
|
|
|
213
|
|
|
213
|
|
|
31,728
|
|
|
31,941
|
|
Consumer loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer real estate
|
|
481
|
|
|
2,149
|
|
|
4,268
|
|
|
6,898
|
|
|
494,430
|
|
|
501,328
|
|
Other consumer
|
|
161
|
|
|
102
|
|
|
27
|
|
|
290
|
|
|
42,928
|
|
|
43,218
|
|
Total
|
|
$
|
3,515
|
|
|
$
|
4,883
|
|
|
$
|
6,725
|
|
|
$
|
15,123
|
|
|
$
|
2,334,386
|
|
|
$
|
2,349,509
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 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
|
|
$
|
552
|
|
|
$
|
1,315
|
|
|
$
|
57
|
|
|
$
|
1,924
|
|
|
$
|
1,089,276
|
|
|
$
|
1,091,200
|
|
Commercial and industrial
|
|
4,518
|
|
|
129
|
|
|
2,835
|
|
|
7,482
|
|
|
431,948
|
|
|
439,430
|
|
Construction and land
|
|
152
|
|
|
—
|
|
|
—
|
|
|
152
|
|
|
30,095
|
|
|
30,247
|
|
Consumer loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer real estate
|
|
6,579
|
|
|
3,295
|
|
|
3,651
|
|
|
13,525
|
|
|
427,701
|
|
|
441,226
|
|
Other consumer
|
|
460
|
|
|
106
|
|
|
53
|
|
|
619
|
|
|
47,180
|
|
|
47,799
|
|
Total
|
|
$
|
12,261
|
|
|
$
|
4,845
|
|
|
$
|
6,596
|
|
|
$
|
23,702
|
|
|
$
|
2,026,200
|
|
|
$
|
2,049,902
|
|
1
Includes acquired PCI loans with a total carrying value of
$2,295
and
$5,218
at
June 30, 2014
and
December 31, 2013
, 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. A loan is considered “special mention” when management has determined that there is a potential weakness that deserves management's close attention. Loans rated as "special mention" are not adversely classified according to regulatory classifications and do not expose the Company to sufficient risk to warrant adverse classification. 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, and the loan may or may not meet the criteria for impairment. 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.
VIEWPOINT FINANCIAL GROUP, INC.
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
The recorded investment in loans by credit quality indicators at
June 30, 2014
and
December 31, 2013
, was as follows.
Real Estate and Commercial and Industrial Credit Exposure
Credit Risk Profile by Internally Assigned Grade
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2014
|
|
Commercial Real Estate
|
|
Commercial and Industrial
|
|
Construction and Land
|
|
Consumer Real Estate
|
Grade:
1
|
|
|
|
|
|
|
|
|
Pass
|
|
$
|
1,133,080
|
|
|
$
|
596,508
|
|
|
$
|
31,430
|
|
|
$
|
484,590
|
|
Special Mention
|
|
10,542
|
|
|
5,223
|
|
|
163
|
|
|
4,125
|
|
Substandard
|
|
17,574
|
|
|
9,191
|
|
|
348
|
|
|
8,911
|
|
Doubtful
|
|
839
|
|
|
65
|
|
|
—
|
|
|
3,702
|
|
Total
|
|
$
|
1,162,035
|
|
|
$
|
610,987
|
|
|
$
|
31,941
|
|
|
$
|
501,328
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2013
|
|
Commercial Real Estate
|
|
Commercial and Industrial
|
|
Construction and Land
|
|
Consumer Real Estate
|
Grade:
1
|
|
|
|
|
|
|
|
|
Pass
|
|
$
|
1,055,872
|
|
|
$
|
424,110
|
|
|
$
|
28,146
|
|
|
$
|
424,174
|
|
Special Mention
|
|
16,030
|
|
|
1,672
|
|
|
161
|
|
|
3,661
|
|
Substandard
|
|
18,444
|
|
|
13,492
|
|
|
1,940
|
|
|
9,110
|
|
Doubtful
|
|
854
|
|
|
156
|
|
|
—
|
|
|
4,281
|
|
Total
|
|
$
|
1,091,200
|
|
|
$
|
439,430
|
|
|
$
|
30,247
|
|
|
$
|
441,226
|
|
1
PCI loans are included in the substandard or doubtful categories. These categories are consistent with the "substandard" and "doubtful" categories as defined by regulatory authorities.
Warehouse Purchase Program Credit Exposure
All Warehouse Purchase Program loans were graded pass as of
June 30, 2014
and
December 31, 2013
.
Consumer Other Credit Exposure
Credit Risk Profile Based on Payment Activity
|
|
|
|
|
|
|
|
|
|
June 30, 2014
|
|
December 31, 2013
|
Performing
|
$
|
42,761
|
|
|
$
|
47,232
|
|
Non-performing
|
457
|
|
|
567
|
|
Total
|
$
|
43,218
|
|
|
$
|
47,799
|
|
VIEWPOINT FINANCIAL GROUP, INC.
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
NOTE 6 - 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 matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities' relationship to other benchmark quoted securities (Level 2 inputs).
The estimated fair value of interest rate swaps are obtained from a pricing service that provides the swaps' unwind value (Level 2 inputs). In September 2013, we entered into certain interest rate derivative positions that are not designated as hedging instruments. The fair value of these derivative positions outstanding are included in other assets and other liabilities in the accompanying consolidated balance sheets. Please see Note 7 - Derivative Financial Instruments for more information.
VIEWPOINT FINANCIAL GROUP, INC.
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
Assets and Liabilities Measured on a Recurring Basis
Assets and liabilities measured at fair value on a recurring basis are summarized below.
|
|
|
|
|
|
June 30, 2014
|
|
Fair Value Measurements Using Significant Other Observable Inputs (Level 2)
|
Assets:
|
|
|
Agency residential mortgage-backed securities
|
|
$
|
160,997
|
|
Agency residential collateralized mortgage obligations
|
|
60,797
|
|
SBA pools
|
|
2,390
|
|
Total securities available for sale
|
|
$
|
224,184
|
|
Derivative asset
1
|
|
$
|
79
|
|
Derivative liability
1
|
|
$
|
79
|
|
|
|
|
|
|
|
December 31, 2013
|
|
|
Assets:
|
|
|
Agency residential mortgage-backed securities
|
|
$
|
174,709
|
|
Agency residential collateralized mortgage obligations
|
|
70,575
|
|
SBA pools
|
|
2,728
|
|
Total securities available for sale
|
|
$
|
248,012
|
|
Derivative asset
1
|
|
$
|
33
|
|
Derivative liability
1
|
|
$
|
33
|
|
1
Derivative assets and liabilities are measured at fair value on a recurring basis, generally quarterly. Please see Note 7 - Derivative Financial Instruments for more information.
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 at
June 30, 2014
or
December 31, 2013
.
|
|
|
|
|
|
June 30, 2014
|
|
Fair Value Measurements Using Significant Unobservable
Inputs (Level 3)
|
Assets:
|
|
|
Impaired loans
|
|
$
|
5,260
|
|
Foreclosed assets
|
|
240
|
|
December 31, 2013
|
|
|
Assets:
|
|
|
Impaired loans
|
|
$
|
7,138
|
|
Foreclosed assets
|
|
480
|
|
Impaired loans that are collateral dependent are measured for impairment using the fair value of the collateral adjusted by additional Level 3 inputs, such as discounts of market value, estimated marketing costs and estimated legal expenses. At
June 30, 2014
, impaired loans secured by real estate had an average discount of
5%
applied to the appraised value of the collateral, and impaired loans secured by receivables or inventory had discounts determined by management on an individual loan basis. Impaired loans that are not collateral dependent are measured for impairment
by a discounted cash flow analysis using a net present value calculation that utilizes data from the loan file before and after the modification.
Foreclosed assets are measured at the lower of book or fair value less costs to sell using third party appraisals, listing
VIEWPOINT FINANCIAL GROUP, INC.
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
agreements or sale contracts, which may be adjusted by additional Level 3 inputs, such as discounts of market value, estimated marketing costs and estimated legal expenses. Management may also consider additional adjustments on specific properties due to the age of the appraisal, expected holding period, lack of comparable sales, or if the other real estate owned is a special use property. The market value discounts on foreclosed assets at
June 30, 2014
, ranged from
0%
to
77%
, with an average of
19%
.
The Credit Administration department evaluates the valuations on impaired loans and foreclosed assets at least quarterly. The valuations on impaired loans are reviewed at least quarterly by the Allowance for Loan Loss Committee and are considered in the calculation of the allowance for loan losses. Unobservable inputs, such as discounts to collateral, are monitored and adjusted if market conditions change.
The carrying amount and fair value information of financial instruments not recorded at fair value in their entirety on a recurring basis on the Company's consolidated balance sheets at
June 30, 2014
and at
December 31, 2013
, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
June 30, 2014
|
|
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
|
|
$
|
165,908
|
|
|
$
|
165,908
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Securities held to maturity
|
|
267,614
|
|
|
—
|
|
|
277,913
|
|
|
—
|
|
Loans held for investment, net
|
|
2,327,370
|
|
|
—
|
|
|
—
|
|
|
2,345,041
|
|
Loans held for investment - Warehouse Purchase Program
|
|
769,566
|
|
|
—
|
|
|
—
|
|
|
769,877
|
|
FHLB and Federal Reserve Bank stock
|
|
44,532
|
|
|
—
|
|
|
44,532
|
|
|
—
|
|
Accrued interest receivable
|
|
10,620
|
|
|
10,620
|
|
|
—
|
|
|
—
|
|
Financial liabilities
|
|
|
|
|
|
|
|
|
Deposits
|
|
$
|
2,435,726
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,307,105
|
|
FHLB advances
|
|
874,866
|
|
|
—
|
|
|
—
|
|
|
884,707
|
|
Repurchase agreement
|
|
25,000
|
|
|
—
|
|
|
—
|
|
|
27,149
|
|
Accrued interest payable
|
|
1,075
|
|
|
1,075
|
|
|
—
|
|
|
—
|
|
VIEWPOINT FINANCIAL GROUP, INC.
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
December 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
|
|
$
|
87,974
|
|
|
$
|
87,974
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Securities held to maturity
|
|
294,583
|
|
|
—
|
|
|
301,739
|
|
|
—
|
|
Loans held for investment, net
|
|
2,029,277
|
|
|
—
|
|
|
—
|
|
|
2,054,460
|
|
Loans held for investment - Warehouse Purchase Program
|
|
673,470
|
|
|
—
|
|
|
—
|
|
|
673,785
|
|
FHLB and Federal Reserve Bank stock
|
|
34,883
|
|
|
—
|
|
|
34,883
|
|
|
—
|
|
Accrued interest receivable
|
|
9,904
|
|
|
9,904
|
|
|
—
|
|
|
—
|
|
Financial liabilities
|
|
|
|
|
|
|
|
|
Deposits
|
|
$
|
2,264,639
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,123,846
|
|
FHLB advances
|
|
639,096
|
|
|
—
|
|
|
—
|
|
|
650,976
|
|
Repurchase agreement
|
|
25,000
|
|
|
—
|
|
|
—
|
|
|
27,430
|
|
Accrued interest payable
|
|
1,066
|
|
|
1,066
|
|
|
—
|
|
|
—
|
|
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 and accrued interest receivable and payable. The fair values of securities held to maturity are determined by 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). For loans held for investment, 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 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 is 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.
VIEWPOINT FINANCIAL GROUP, INC.
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
NOTE 7 - DERIVATIVE FINANCIAL INSTRUMENTS
In September 2013, we entered into certain interest rate derivative positions that are not designated as hedging instruments. These derivative positions related to transactions in which we entered into an interest rate swap with a customer, while at the same time entering into an offsetting interest rate swap with another financial institution. In connection with each swap transaction, we agree to pay interest to the customer on a notional amount at a variable interest rate and receive interest from the customer on a similar notional amount at a fixed interest rate. At the same time, we agree to pay another financial institution the same fixed interest rate on the same notional amount and receive the same variable interest rate on the same notional amount. The transaction allows our customer to effectively convert a variable rate loan to a fixed rate. Because we act as an intermediary for our customer, changes in the fair value of the underlying derivative contracts substantially offset each other and do not have a material impact on our results of operations. The Company presents derivative instruments at fair value in other assets and other liabilities in the accompanying consolidated balance sheets.
The notional amounts and estimated fair values of interest rate derivative positions outstanding and weighted-average receive and pay interest rates at
June 30, 2014
and
December 31, 2013
are presented in the following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
Notional Amount
|
|
Estimated Fair Value
|
|
Weighted-Average Interest Rate
|
Non-hedging interest rate contracts - commercial loan interest rate swaps:
|
|
|
|
Received
|
|
Paid
|
June 30, 2014
|
|
|
|
|
|
|
|
|
Loan customer counterparty
|
|
$
|
6,304
|
|
|
$
|
79
|
|
|
4.38
|
%
|
|
2.90
|
%
|
Financial institution counterparty
|
|
(6,304
|
)
|
|
(79
|
)
|
|
2.90
|
|
|
4.38
|
|
|
|
|
|
|
|
|
|
|
December 31, 2013
|
|
|
|
|
|
|
|
|
Loan customer counterparty
|
|
$
|
6,406
|
|
|
$
|
33
|
|
|
4.38
|
%
|
|
2.92
|
%
|
Financial institution counterparty
|
|
(6,406
|
)
|
|
(33
|
)
|
|
2.92
|
|
|
4.38
|
|
Our credit exposure on interest rate swaps is limited to the net favorable value of all swaps by each counterparty. In some cases, collateral may be required from the counterparties involved if the net value of the swaps exceed a nominal amount considered to be immaterial. Collateral levels are monitored and adjusted on a regular basis for changes in interest rate swap values. At
June 30, 2014
, our cash collateral pledged for these derivatives totaled
$150
, which was in excess of our credit exposure. This collateral is reported in our interest-bearing deposits in other financial institutions in the accompanying consolidated balance sheets.
VIEWPOINT FINANCIAL GROUP, INC.
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
NOTE 8 - SHARE-BASED COMPENSATION
Compensation cost charged to income for share-based compensation is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2014
|
|
2013
|
|
2014
|
|
2013
|
Restricted stock
|
$
|
640
|
|
|
$
|
595
|
|
|
$
|
1,295
|
|
|
$
|
1,025
|
|
Stock options
|
276
|
|
|
255
|
|
|
540
|
|
|
397
|
|
Income tax benefit
|
320
|
|
|
298
|
|
|
642
|
|
|
498
|
|
A summary of activity in the restricted stock portion of the Company's stock plans is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2014
|
|
Time-Vested Shares
|
|
Performance-Based Shares
|
|
Shares
|
|
Weighted-Average Grant Date Fair Value
1
|
|
Shares
|
|
Weighted-Average Grant Date Fair Value
2
|
Non-vested at December 31, 2013
|
381,402
|
|
|
$
|
20.39
|
|
|
82,400
|
|
|
$
|
27.45
|
|
Granted
|
20,000
|
|
|
24.69
|
|
|
—
|
|
|
—
|
|
Vested
|
(63,000
|
)
|
|
21.61
|
|
|
—
|
|
|
—
|
|
Forfeited
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Non-vested at June 30, 2014
|
338,402
|
|
|
$
|
20.57
|
|
|
82,400
|
|
|
$
|
27.06
|
|
1
For restricted stock awards with time-based vesting conditions, the grant date fair value is based on the closing stock price as quoted on the NASDAQ Stock Market on the grant date.
2
For restricted stock awards with performance-based vesting conditions, the value of the award is based upon the closing stock price as quoted on the NASDAQ Stock Market on the date of vesting. Until the final value is determined on the vesting date, the Company estimates the fair value quarterly based upon the closing stock price as quoted on the NASDAQ Stock Market near the last business day of each calendar quarter end.
As of
June 30, 2014
, there was
$7,924
of total unrecognized compensation expense related to non-vested shares awarded under the restricted stock plans. That expense is expected to be recognized over a weighted-average period of
2.77 years
.
A summary of activity in the stock option portion of the Company's stock plans as of
June 30, 2014
, is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
Average
Exercise Price
|
|
Weighted-
Average
Remaining
Contractual Term
|
|
Aggregate
Intrinsic Value
|
|
Shares
|
|
Outstanding at December 31, 2013
|
1,173,618
|
|
|
$
|
18.16
|
|
|
8.4
|
|
$
|
10,903
|
|
Granted
|
8,500
|
|
|
28.51
|
|
|
10.0
|
|
—
|
|
Exercised
|
(36,904
|
)
|
|
13.30
|
|
|
0.0
|
|
421
|
|
Forfeited
|
(21,420
|
)
|
|
16.74
|
|
|
0.0
|
|
—
|
|
Outstanding at June 30, 2014
|
1,123,794
|
|
|
18.42
|
|
|
8.1
|
|
9,549
|
|
Fully vested and expected to vest
|
1,116,799
|
|
|
18.42
|
|
|
8.1
|
|
9,497
|
|
Exercisable at June 30, 2014
|
342,458
|
|
|
$
|
16.19
|
|
|
7.0
|
|
$
|
3,671
|
|
As of
June 30, 2014
, there was
$3,886
of total unrecognized compensation expense related to non-vested stock options. That expense is expected to be recognized over a weighted-average period of
3.50 years
.
VIEWPOINT FINANCIAL GROUP, INC.
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
NOTE 9 - INCOME TAXES
A summary of the net deferred tax assets as of
June 30, 2014
and
December 31, 2013
, is presented below:
|
|
|
|
|
|
|
|
|
|
June 30, 2014
|
|
December 31, 2013
|
Net deferred tax assets
|
$
|
10,656
|
|
|
$
|
12,320
|
|
Estimated annual effective tax rate
|
36
|
%
|
|
|
VIEWPOINT FINANCIAL GROUP, INC.
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
NOTE 10 - COMMITMENTS AND CONTINGENT LIABILITIES
In the normal course of business, the Company enters into various transactions which, in accordance with US GAAP, are not included in its consolidated balance sheets. The Company enters into these transactions to meet the financing needs of its customers. These transactions include commitments to extend credit and standby letters of credit which involve, to varying degrees, elements of credit and interest rate risk. Credit losses up to the face amount of these instruments could occur, although material losses are not anticipated. The Company's credit policies applied to loan originations are also applied to these commitment requests, including obtaining collateral at the exercise of the commitment.
The Company enters into contractual commitments to extend credit, normally with fixed expiration dates or termination clauses, at specified rates and for specific purposes. Since many commitments expire without being drawn upon, the total contractual amount of commitments does not necessarily represent future cash requirements of the Company. Substantially all of the Company's commitments to extend credit are contingent upon customers maintaining specific credit standards at the time of future loan funding. Standby letters of credit are written conditional commitments issued by the Company to guarantee the performance of a customer to a third party. In the event the customer does not perform in accordance with the terms of the agreement with the third party, the Company would be required to fund the commitment. The maximum potential amount of future payments the Company could be required to make is represented by the contractual amount of the commitment. If the commitment were funded, the Company would seek payment from the customer under pre-arranged terms. The Company's policies generally require that standby letter of credit arrangements contain security and debt covenants similar to those contained in loan agreements.
The contractual amounts of financial instruments with off‑balance sheet risk at
June 30, 2014
and
December 31, 2013
, are summarized below. Please see Part I-Item 2-"Off-Balance Sheet Arrangements, Contractual Obligation and Commitments" of this Form 10-Q for information related to commitment maturities.
|
|
|
|
|
|
|
|
|
|
June 30, 2014
|
|
December 31, 2013
|
Unused commitments to extend credit
|
$
|
399,229
|
|
|
$
|
425,324
|
|
Unused capacity on Warehouse Purchase Program loans
|
344,434
|
|
|
562,030
|
|
Standby letters of credit
|
1,192
|
|
|
1,354
|
|
Total unused commitments/capacity
|
$
|
744,855
|
|
|
$
|
988,708
|
|
In addition to the commitments above, the Company guarantees the credit card debt of certain customers to the merchant bank that issues the credit cards. These guarantees are in place for as long as the guaranteed credit card is open. At
June 30, 2014
and December 31, 2013, these credit card guarantees totaled
$1,099
and
$1,307
, respectively. This amount represents the maximum potential amount of future payments under the guarantee. At
June 30, 2014
, the Company had set aside a reserve of
$28
for its credit card guarantees.
Also, the Company had overdraft protection available in the amounts of
$74,608
and
$87,772
for
June 30, 2014
and December 31, 2013, respectively.
In regards to unused capacity on Warehouse Purchase Program loans, the Company has established maximum purchase facility amounts, but reserves the right, at any time, to refuse to buy any mortgage loans offered for sale with each customer, for any reason in the Company's sole and absolute discretion.
At
June 30, 2014
, the Company had
$3,480
of unfunded commitments recorded in other liabilities in its consolidated balance sheet related to investments in community development -oriented private equity funds used for Community Reinvestment Act purposes.
VIEWPOINT FINANCIAL GROUP, INC.
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
NOTE 11 - RECENT ACCOUNTING DEVELOPMENTS
In January 2014, the FASB issued ASU 2014-01,
Accounting for Investments in Qualified Affordable Housing Projects.
This ASU permits reporting entities to make an accounting policy election to account for their investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. For public entities, the amendments are effective, with retrospective application, for annual periods, and interim periods within those years, beginning after December 15, 2014. Early adoption is permitted. The adoption of this ASU is not expected to have a significant impact on the Company's financial statements.
In January 2014, the FASB issued ASU 2014-04,
Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure.
This ASU is intended to clarify when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan should be derecognized and the real estate recognized. For public entities, the amendments are effective for annual periods, and interim periods within those years, beginning after December 15, 2014. An entity can elect to adopt the amendments in this update using either a modified retrospective transition method or a prospective transition method. Early adoption is permitted. The adoption of this ASU is not expected to have a significant impact on the Company's financial statements.
In April 2014, the FASB issued ASU 2014-08,
Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity
. This ASU states that only disposals representing a strategic shift in operations should be presented as discontinued operations. Those strategic shifts should have a major effect on the organization's operations and financial results. In addition, this ASU requires expanded disclosures about discontinued operations and disclosure of the pre-tax income attributable to a disposal of a significant part of an organization that does not qualify for discontinued operations reporting. For public entities, the amendments are effective prospectively for annual periods, and interim periods within those years, beginning on or after December 15, 2014. Early adoption is permitted, but only for disposals that have not been reported in financial statements previously issued. The adoption of this ASU is not expected to have a significant impact on the Company's financial statements.
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers
. This ASU states that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This ASU affects entities that enter into contracts with customers to transfer goods or services or enter into contracts for the transfer of nonfinancial assets, unless those contracts are within the scope of other standards. For public entities, the amendments are effective for annual reporting periods, and interim periods within those years, beginning after December 15, 2016. Early adoption is not permitted. The adoption of this ASU is not expected to have a significant impact on the Company's financial statements.
In June 2014, the FASB issued ASU 2014-11,
Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures
. This ASU aligns the accounting for repurchase-to-maturity transactions and repurchase agreements executed as a repurchase financing with the accounting for other typical repurchase agreements by accounting for these transactions as secured borrowings. This ASU also requires a new disclosure for transactions economically similar to repurchase agreements in which the transferor retains substantially all of the exposure to the economic return of the transferred financial assets throughout the term of the transaction. For public entities, the amendments are effective for annual periods, and interim periods within those years, beginning after December 15, 2014. Early adoption is not permitted. The adoption of this ASU is not expected to have a significant impact on the Company's financial statements.
In June 2014, the FASB issued ASU 2014-12, A
ccounting for Share-Based Payments When the Terms of an Award Provide that a Performance Target Could Be Achieved after the Requisite Service Period
. This ASU requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. The amendments are effective for annual periods, and interim periods within those years, beginning after December 15, 2015. Early adoption is permitted. The adoption of this ASU is not expected to have a significant impact on the Company's financial statements.
VIEWPOINT FINANCIAL GROUP, INC.
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
NOTE 12 — SUBSEQUENT EVENTS
The Company evaluated events from the date of the consolidated financial statements on
June 30, 2014
, through the issuance of those consolidated financial statements included in this Quarterly Report on Form 10-Q dated July 29, 2014. No additional events were identified requiring recognition in and/or disclosures in the consolidated financial statements.
|
|
|
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. (“ViewPoint”) with the Securities and Exchange Commission (the “SEC”), in ViewPoint’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 that could cause actual results to differ materially from historical earnings and those presently anticipated or projected, including, among other things: the expected cost savings, synergies and other financial benefits from the ViewPoint-LegacyTexas merger (the “Merger”) might not be realized within the expected time frames or at all and costs or difficulties relating to integration matters might be greater than expected; the requisite regulatory approvals might not be obtained or other conditions to completion of the merger set forth in the merger agreement might not be satisfied or waived; 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; ViewPoint’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 ViewPoint’s market area; the industry-wide decline in mortgage production; competition; changes in management’s business strategies and other factors set forth in ViewPoint’s filings with the SEC.
ViewPoint does not undertake - and specifically declines any obligation - to publicly release the result of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.
Overview
The Company, a Maryland corporation, is a full stock holding company for its wholly owned subsidiary, ViewPoint Bank, N.A. (the “Bank”). Unless the context otherwise requires, references in this document to the “Company” refer to ViewPoint Financial Group, Inc. and references to the “Bank” refer to ViewPoint Bank, N.A. References to “we,” “us,” and “our” means ViewPoint Financial Group, Inc. or ViewPoint Bank, N.A. , as the context requires. The Company is regulated by the Board of Governors of the Federal Reserve System ("FRB") and the Bank is regulated by the Office of the Comptroller of the Currency (“OCC”) with certain back-up oversight by the Federal Deposit Insurance Corporation (“FDIC”). The Bank is required to have certain reserves and stock set by the FRB and is a member of the Federal Home Loan Bank of Dallas, which is one of the 12 regional banks in the Federal Home Loan Bank (“FHLB”) System.
On November 25, 2013, the Company and LegacyTexas Group, Inc. (“LegacyTexas”) announced that they had entered into a definitive merger agreement whereby LegacyTexas will merge into the Company and, immediately thereafter, the Bank will merge into LegacyTexas’ subsidiary bank, LegacyTexas Bank. The merger was approved by LegacyTexas' shareholders on May 19, 2014, and will result in one of the largest independent banks in the state of Texas, with 51 branches and pro forma assets of over $5 billion. On June 17, 2014, the Company and LegacyTexas announced that additional time will be required to obtain regulatory approvals and to satisfy customary closing conditions necessary to complete the merger, and have jointly extended the agreement to August 31, 2014, pursuant to its terms.
Our principal business consists of attracting retail deposits from the general public and the business community and investing those funds, along with borrowed funds, in commercial real estate loans, secured and unsecured commercial and industrial loans, as well as permanent loans secured by first and second mortgages on owner-occupied, one- to four-family residences and consumer loans. Additionally, the Warehouse Purchase Program allows mortgage banking company customers to close one- to four-family real estate loans in their own name and manage its cash flow needs until the loans are sold to investors. We also offer brokerage services for the purchase and sale of non-deposit investment and insurance products through a third party brokerage arrangement. Our operating revenues are derived principally from interest earned on interest-earning assets including loans and investment securities and service charges and fees on deposits and other account services. Our primary sources of funds are deposits, FHLB advances and other borrowings, and payments received on loans and securities. We offer a variety of deposit accounts that provide a wide range of interest rates and terms, generally including savings, money market, term certificate and demand accounts. Our principal objective is to remain an independent, community-oriented financial institution, providing outstanding service and innovative products to customers in our primary market area.
Performance Highlights
|
|
•
|
Loans held for investment, excluding Warehouse Purchase Program loans, grew
$299.6 million
, or
14.6%
, from December 31, 2013, with commercial loans increasing by $243.3 million, or 15.6%, to $1.80 billion at June 30, 2014.
|
|
|
•
|
Warehouse Purchase Program loans increased by
$96.1 million
, or
14.3%
, from December 31, 2013, to
$769.6 million
at June 30, 2014.
|
|
|
•
|
The
$644,000
, or
7.9%
, increase in net income for the quarter ended June 30, 2014, compared to the quarter ended June 30, 2013, was driven by a
$1.7 million
, or
5.4%
, increase in interest income on loans and a
$671,000
, or
13.8%
, decrease in interest expense.
|
|
|
•
|
Deposits increased by
$171.1 million
, or
7.6%
, from December 31, 2013.
|
|
|
•
|
Net interest margin for the quarter ended June 30, 2014, was
3.76%
, a four basis point increase from the quarter ended June 30, 2013.
|
Critical Accounting Estimates
Certain of our accounting estimates are important to the portrayal of our financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Estimates are susceptible to material changes as a result of changes in facts and circumstances. Facts and circumstances which could affect these judgments include, but are not limited to, changes in interest rates, changes in the performance of the economy and changes in the financial condition of borrowers. Management believes that its critical accounting estimates include determining the allowance for loan losses and other-than-temporary impairments in our securities portfolio. Our accounting policies are discussed in detail in Note 1 of the Notes to Consolidated Financial Statements contained in Item 8 of our 2013 Form 10-K.
Allowance for Loan Loss.
The allowance for loan losses and related provision expense are susceptible to change if the credit quality of our loan portfolio changes, which is evidenced by many factors, including but not limited to charge-offs and non-performing loan trends. Generally, consumer real estate lending has a lower risk profile compared to other consumer lending (such as automobile loans). Commercial real estate and commercial and industrial lending, however, can have higher risk profiles than consumer loans due to these loans being larger in amount and more susceptible to fluctuations in industry, market and economic conditions. While management uses available information to recognize losses on loans, changes, in economic conditions, the mix and size of the loan portfolio and individual borrower conditions can dramatically impact our level of allowance for loan losses in relatively short periods of time. Management believes that the allowance for loan losses is maintained at a level that represents coverage of our best estimate of inherent credit losses in the loan portfolio as of June 30, 2014.
Management evaluates current information and events regarding a borrower's ability to repay its obligations and considers a loan to be impaired when the ultimate collectability of amounts due, according to the contractual terms of the loan agreement, is in doubt. If an impaired loan is collateral-dependent, the fair value of the collateral, less the estimated cost to sell, is used to determine the amount of impairment. If an impaired loan is not collateral-dependent, the impairment amount is determined using the negative difference, if any, between the estimated discounted cash flows and the loan amount due. For impaired loans, the amount of the impairment can be adjusted, based on current data, until such time as the actual basis is established by acquisition of the collateral or until the basis is collected. Impairment losses are reflected in the allowance for loan losses through a charge to the provision for loan losses. Subsequent recoveries are credited to the allowance for loan losses. Cash receipts for accruing loans are applied to principal and interest under the contractual terms of the loan agreement. Cash receipts on impaired loans for which the accrual of interest has been discontinued are applied first to principal.
Other-than-Temporary Impairments.
The Company evaluates securities for other-than-temporary impairment on at least a quarterly basis and more frequently when economic, market, or security specific concerns warrant such evaluation. Consideration is given to the length of time and the extent to which the fair value has been less than amortized cost, the financial condition and near-term prospects of the issuer, adverse conditions specifically related to the security, issuer, or geographic area, and the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. In analyzing an issuer’s financial condition, the Company may consider whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuer’s financial condition. The Company conducts regular reviews of the bond agency ratings of securities and considers whether the securities were issued by or have principal and interest payments
guaranteed by the federal government or its agencies. These reviews focus on the underlying rating of the issuer and also include the insurance or guarantee rating of securities that have an insurance or guarantee component. The ratings and financial condition of the issuers are monitored, as well as the financial condition and ratings of the insurers and guarantors.
Comparison of Financial Condition at
June 30, 2014
and
December 31, 2013
General
. Total assets increased by
$426.0 million
, or
12.1%
, to
$3.95 billion
at
June 30, 2014
, from
$3.53 billion
at
December 31, 2013
, primarily due to an increase of
$171.6 million
, or
39.0%
, in commercial and industrial loans, a
$70.8 million
, or
6.5%
, increase in commercial real estate loans, a
$60.1 million
, or
13.6%
, increase in consumer real estate loans and a
$96.1 million
, or
14.3%
, increase in Warehouse Purchase Program loans. These increases were partially offset by a
$50.8 million
, or
9.4%
, decrease in the securities portfolio.
Loans.
Gross loans increased by
$395.7 million
, or
14.5%
, to
$3.12 billion
at
June 30, 2014
, from
$2.72 billion
at December 31, 2013.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2014
|
|
December 31, 2013
|
|
Dollar
Change
|
|
Percent
Change
|
|
(Dollars in thousands)
|
Commercial real estate
|
$
|
1,162,035
|
|
|
$
|
1,091,200
|
|
|
$
|
70,835
|
|
|
6.5
|
%
|
Commercial and industrial loans:
|
|
|
|
|
|
|
|
Commercial
|
579,561
|
|
|
425,030
|
|
|
154,531
|
|
|
36.4
|
|
Warehouse lines of credit
|
31,426
|
|
|
14,400
|
|
|
17,026
|
|
|
118.2
|
|
Total commercial and industrial loans
|
610,987
|
|
|
439,430
|
|
|
171,557
|
|
|
39.0
|
|
Construction and land loans
|
|
|
|
|
|
|
|
Commercial construction and land
|
28,496
|
|
|
27,619
|
|
|
877
|
|
|
3.2
|
|
Consumer construction and land
|
3,445
|
|
|
2,628
|
|
|
817
|
|
|
31.1
|
|
Total construction and land loans
|
31,941
|
|
|
30,247
|
|
|
1,694
|
|
|
5.6
|
|
Consumer:
|
|
|
|
|
|
|
|
Consumer real estate
|
501,328
|
|
|
441,226
|
|
|
60,102
|
|
|
13.6
|
|
Other consumer
|
43,218
|
|
|
47,799
|
|
|
(4,581
|
)
|
|
(9.6
|
)
|
Total consumer loans
|
544,546
|
|
|
489,025
|
|
|
55,521
|
|
|
11.4
|
|
Gross loans held for investment, excluding Warehouse Purchase Program loans
|
2,349,509
|
|
|
2,049,902
|
|
|
299,607
|
|
|
14.6
|
|
Warehouse Purchase Program loans
|
769,566
|
|
|
673,470
|
|
|
96,096
|
|
|
14.3
|
|
Gross loans
|
$
|
3,119,075
|
|
|
$
|
2,723,372
|
|
|
$
|
395,703
|
|
|
14.5
|
%
|
During the six months ended June 30, 2014, the increase in gross loans, excluding Warehouse Purchase Program loans, was primarily driven by growth in our commercial lending portfolio, as commercial loans (essentially commercial real estate and commercial and industrial loans) increased a combined
$243.3 million
, or
15.6%
, from
December 31, 2013
. Our commercial real estate portfolio consists almost exclusively of loans secured by well-established, multi-tenanted commercial real estate properties. Approximately
91%
of our commercial real estate loan balances are secured by properties located in Texas.
The Company has historically participated in several energy loan transactions, but to further develop this line of business, in May 2013, the Company announced the formation of a new energy lending group. The Energy Finance group focuses on providing loans to private and public oil and gas companies throughout the United States, with an emphasis on reserve-based transactions for development drilling, capital expenditures to enhance oil and gas reserves, and acquisitions of oil and gas reserves. The group's offerings also include the Bank's full array of commercial services, including Treasury Management and letters of credit. Energy loans, which are reported as commercial and industrial loans, totaled
$222.2 million
at
June 30, 2014
, up $55.7 million from $166.5 million at December 31, 2013.
Warehouse Purchase Program loans increased by
$96.1 million
, or
14.3%
, to
$769.6 million
at
June 30, 2014
, from
$673.5 million
at
December 31, 2013
. The Company purchases a 100% participation interest in the loans originated by our mortgage banking company customers, which are then held as one- to four- family mortgage loans. The mortgage banking company has no obligation to offer to sell to us and we have no obligation to purchase participation interests in these loans. The
mortgage banking company closes mortgage loans consistent with underwriting standards established by approved investors and once the loan closes, the participation interest is delivered by the Company to the investor selected by the originator and approved by the Company. Loans funded by the Warehouse Purchase Program during the
second quarter
of
2014
consisted of 57% conforming, 42% government and 1% Home Affordable Refinance Program (HARP) loans.
Prior to the December 31, 2013 reporting period, the Company reported Warehouse Purchase Program loans as held for sale, as the Company believed that was the most meaningful presentation to our financial statement users given that the collection of the loan was based upon the sale of the loan. Effective December 31, 2013, the Company concluded that, under US GAAP, these loans should be accounted for as held for investment. This correction changed the accounting for Warehouse Purchase Program loans from a lower of cost or market accounting method to accounting for the loans under ASC 310, with any credit losses incurred as of the balance sheet date recognized in the allowance for loan losses. As we had not reported any valuation decreases below cost in prior periods and we have experienced no credit losses on these loans, this correction had no impact on net income, comprehensive income, earnings per share or income taxes. Additionally, total assets and shareholders' equity remained unchanged. However, this correction did impact the statement of cash flows by moving cash flows associated with the Warehouse Purchase Program from operating cash flows to investing cash flows.
Consumer real estate loans increased by
$60.1 million
, or
13.6%
, to
$501.3 million
at
June 30, 2014
, from
$441.2 million
at
December 31, 2013
.
The Company does not originate one- to four- family real estate loans but does periodically purchase these loans from correspondents on both a servicing retained and servicing released basis. Also, the Company originates consumer home equity and home improvement loans.
Mortgage reform rules mandated by the Dodd-Frank Act became effective in January 2014, requiring lenders to make a reasonable, good faith determination of a borrower’s ability to repay any consumer closed-end credit transaction secured by a dwelling and to limit prepayment penalties. Increased risks of legal challenge, private right of action and regulatory enforcement are presented by these rules. The Company originates and purchases loans that do not meet the definition of a “qualified mortgage” (“QM”). At June 30, 2014, the Company had $25.2 million in non-QM loans, consisting of home equity and home improvement loans totaling $18.1 million and residential mortgage loans totaling $7.1 million. To mitigate the risks involved with non-QM loans, the Company has implemented systems, processes, procedural and product changes, and maintains its underwriting standards, to ensure that the “ability-to-repay” requirements of the new rules are adequately addressed.
Allowance for Loan Losses
. The allowance for loan losses is maintained to cover losses that are estimated in accordance with US GAAP. It is our estimate of credit losses in our loan portfolio at each balance sheet date. Our methodology for analyzing the allowance for loan losses consists of general and specific components.
For the general component, we stratify the loan portfolio into homogeneous groups of loans that possess similar loss potential characteristics and apply a loss ratio to these groups of loans to estimate the credit losses in the loan portfolio. We use both historical loss ratios and qualitative loss factors assigned to major loan collateral types to establish loss allocations. Qualitative loss factors are based on management's judgment of company, market, industry or business specific data and external economic indicators which may not yet be reflective in the historical loss ratios and that could impact the Company's specific loan portfolios. The Allowance for Loan Loss Committee sets and adjusts qualitative loss factors by reviewing changes in loan composition and the seasonality of specific portfolios. The Allowance for Loan Loss Committee also considers credit quality and trends relating to delinquency, non-performing and/or classified loans and bankruptcy within the Company's loan portfolio when evaluating qualitative loss factors. Additionally, the Allowance for Loan Loss Committee adjusts qualitative factors periodically to account for the potential impact of external economic factors, including the unemployment rate, housing price, vacancy rates and inventory levels specific to our primary market area.
For the specific component, the allowance for loan losses includes loans where management has concerns about the borrower's ability to repay and on individually analyzed loans found to be impaired by definition. For example, all troubled debt restructurings are considered to be impaired, regardless of collateral type or note amount. This impairment analysis includes all loans secured by commercial real estate and all commercial and industrial loans, as well as certain residential real estate loans. Loss estimates include the negative difference, if any, between the current fair value of the collateral, or the estimated discounted cash flows, and the loan amount due.
Acquired loans are initially recorded at fair value, which includes an estimate of credit losses expected to be realized over the remaining lives of the loans, and therefore no corresponding allowance for loan losses is recorded for these loans at acquisition. Methods utilized to estimate the required allowance for loan losses for acquired loans not deemed credit−impaired at acquisition are similar to originated loans; however, the estimate of loss is based on the unpaid principal balance less the remaining purchase discount.
Purchased credit impaired (PCI) loans are not considered nonperforming loans, and accordingly, are not included in the non-performing loans to total loans ratio as a numerator, but are included in total loans reflected in the denominator. The result is a downward trend in the ratio when compared to prior periods, assuming all other factors stay the same. Similarly, other asset quality ratios, such as the allowance for loan losses to total loans ratio will reflect a downward trend, assuming all other factors stay the same, due to the impact of PCI loans on the denominator with no corresponding impact in the numerator.
Our non-performing loans, which consist of nonaccrual loans, include both smaller balance homogeneous loans that are collectively evaluated for impairment and larger 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 for the borrower's benefit that would not otherwise be considered for a borrower or transaction with similar credit risk characteristics. Modifications to loan terms may include a modification of the contractual interest rate to a below-market rate (even if the modified rate is higher than the original rate), forgiveness of accrued interest, forgiveness of a portion of principal, an extended repayment period or a deed in lieu of foreclosure or other transfer of assets other than cash to fully or partially satisfy a debt. The Company's policy is to place all TDRs on nonaccrual for a minimum period of six months. Loans qualify for a return to accrual status once they have demonstrated performance with the restructured terms of the loan agreement for a minimum of six months and the collection of principal and interest under the revised terms is deemed probable. All TDRs are considered to be impaired loans. At
June 30, 2014
, of our
$14.1 million
in TDRs,
$1.6 million
were accruing interest and
$12.5 million
were classified as nonaccrual. Nonaccrual TDRs included
$6.7 million
attributable to four commercial real estate loans, $6.6 million of which were performing in accordance with their restructured terms at
June 30, 2014
.
Non-performing loans to total loans held for investment, excluding Warehouse Purchase Program loans, was
1.00%
at
June 30, 2014
, compared to
1.08%
at December 31, 2013. Including Warehouse Purchase Program loans, non-performing loans to total loans held for investment was
0.76%
at
June 30, 2014
, compared to
0.81%
at
December 31, 2013
. Non-performing loans increased by
$1.5 million
to
$23.6 million
at
June 30, 2014
, from
$22.1 million
at
December 31, 2013
. This increase was primarily attributable to a commercial and industrial loan totaling $1.9 million that was placed on nonaccrual status in 2014. The $1.9 million commercial and industrial loan, which was not past due at June 30, 2014, was placed on nonaccrual solely due to its designation as a troubled debt restructuring. Also, non-performing consumer real estate loans increased by $492,000 during the six months ended June 30, 2014, primarily due to a $606,000 loan that was past due and rated as Substandard at June 30, 2014.
Our allowance for loan losses was
$20.4 million
at
June 30, 2014
, compared to
$19.4 million
at December 31, 2013, or
0.66%
of total loans held for investment (including Warehouse Purchase Program loans) at
June 30, 2014
, compared to
0.71%
at
December 31, 2013
. Our allowance for loan losses to non-performing loans was
86.59%
at
June 30, 2014
, compared to
87.50%
at
December 31, 2013
.
Classified Assets.
Loans and other assets, such as securities and foreclosed assets that are considered by management to be of lesser quality, are classified as "substandard," "doubtful" or "loss." An asset is considered "substandard" if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. "Substandard" assets include those characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Assets classified as "doubtful" have all of the weaknesses of those classified as "substandard," with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. Assets classified as "loss" are those considered uncollectible and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted. Purchased credit impaired loans are included in the "substandard" and "doubtful" categories.
We regularly review the assets in our portfolio to determine whether any should be considered as classified. The total amount of classified assets represented
7.5%
of our total equity and
1.1%
of our total assets at
June 30, 2014
, compared to
9.1%
of our total equity and
1.4%
of our total assets at
December 31, 2013
. The aggregate amount of classified assets at the dates indicated was as follows:
|
|
|
|
|
|
|
|
|
|
June 30, 2014
|
|
December 31, 2013
|
|
(Dollars in thousands)
|
Doubtful
|
$
|
4,611
|
|
|
$
|
5,307
|
|
Substandard
|
36,711
|
|
|
43,827
|
|
Total classified loans
|
41,322
|
|
|
49,134
|
|
Foreclosed assets
|
240
|
|
|
480
|
|
Total classified assets
|
$
|
41,562
|
|
|
$
|
49,614
|
|
The Company has potential problem loans, considered "other loans of concern," that are currently performing and do not meet the criteria for impairment, but where there is the distinct possibility that we could sustain some loss if credit deficiencies are not corrected. These possible credit problems may result in the future inclusion of these loans in the non-performing asset categories and consisted of
$11.7 million
in loans that were classified as "substandard" but were still accruing interest and were not considered impaired at
June 30, 2014
.
These loans have been considered in management's analysis of potential loan losses.
Securities
. Our securities portfolio decreased by
$50.8 million
, or
9.4%
, to
$491.8 million
at
June 30, 2014
, from
$542.6 million
at
December 31, 2013
. The decrease in our securities portfolio primarily resulted from paydowns and maturities totaling
$337.7 million
, which were partially offset by purchases totaling
$286.9 million
. The majority of these purchases were done for tax strategy purposes. A portion of these proceeds from the securities paydowns were maintained in cash accounts to build liquidity in preparation for the cash payment portion of the pending merger with LegacyTexas.
Deposits.
Total deposits increased by
$171.1 million
, or
7.6%
, to
$2.44 billion
at
June 30, 2014
, from
$2.26 billion
at
December 31, 2013
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2014
|
|
December 31, 2013
|
|
Dollar
Change
|
|
Percent
Change
|
|
(Dollars in thousands)
|
Non-interest-bearing demand
|
$
|
433,194
|
|
|
$
|
410,933
|
|
|
$
|
22,261
|
|
|
5.4
|
%
|
Interest-bearing demand
|
476,203
|
|
|
474,515
|
|
|
1,688
|
|
|
0.4
|
|
Savings and money market
|
1,032,496
|
|
|
904,576
|
|
|
127,920
|
|
|
14.1
|
|
Time
|
493,833
|
|
|
474,615
|
|
|
19,218
|
|
|
4.0
|
|
Total deposits
|
$
|
2,435,726
|
|
|
$
|
2,264,639
|
|
|
$
|
171,087
|
|
|
7.6
|
%
|
The increase in deposits from
December 31, 2013
, was primarily due to a
$127.9 million
, or
14.1%
, increase in savings and money market deposits. In the second quarter of 2014, the Company began offering a savings deposit account to other financial institutions and added $71.8 million in deposits to this product, which drove the increase in savings and money market deposit balances. Non-interest-bearing demand deposits increased by
$22.3 million
, or
5.4%
, to
$433.2 million
at
June 30, 2014
, which was driven by higher balances in commercial checking products, while time deposits increased by
$19.2 million
, or
4.0%
.
Borrowings
. FHLB advances, net of a
$1.7 million
restructuring prepayment penalty, increased by
$235.8 million
, or
36.9%
, to $
874.9 million
at
June 30, 2014
, from
$639.1 million
at
December 31, 2013
. The outstanding balance of FHLB advances increased due to higher Warehouse Purchase Program balances at
June 30, 2014
, of which a portion had been strategically funded with short-term advances. At
June 30, 2014
, the Company was eligible to borrow an additional
$146.7 million
from the FHLB. Additionally, the Company has
five
available federal funds lines of credit with other financial institutions totaling
$125.0 million
and was eligible to borrow
$60.0 million
from the Federal Reserve Bank discount window. In addition to FHLB advances, at
June 30, 2014
, 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
June 30, 2014
:
|
|
|
|
|
|
|
|
|
Balance
|
|
Weighted Average Rate
|
|
(Dollars in thousands)
|
Less than 90 days
|
$
|
695,415
|
|
|
0.15
|
%
|
90 days to less than one year
|
38,000
|
|
|
2.46
|
|
One to three years
|
116,421
|
|
|
3.17
|
|
After three to five years
|
21,928
|
|
|
4.42
|
|
After five years
|
4,765
|
|
|
5.49
|
|
|
876,529
|
|
|
0.79
|
%
|
Restructuring prepayment penalty
|
(1,663
|
)
|
|
|
Total
|
$
|
874,866
|
|
|
|
Shareholders’ Equity
. Total shareholders' equity increased by
$13.0 million
, or
2.4%
, to
$557.4 million
at
June 30, 2014
, from
$544.5 million
at
December 31, 2013
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2014
|
|
December 31, 2013
|
|
Dollar
Change
|
|
Percent
Change
|
|
(Dollars in thousands)
|
Common stock
|
$
|
400
|
|
|
$
|
399
|
|
|
$
|
1
|
|
|
0.3
|
%
|
Additional paid-in capital
|
381,808
|
|
|
377,657
|
|
|
4,151
|
|
|
1.1
|
|
Retained earnings
|
190,150
|
|
|
183,236
|
|
|
6,914
|
|
|
3.8
|
|
Accumulated other comprehensive income (loss), net
|
770
|
|
|
(383
|
)
|
|
1,153
|
|
|
N/M
1
|
|
Unearned ESOP shares
|
(15,716
|
)
|
|
(16,449
|
)
|
|
733
|
|
|
(4.5
|
)
|
Total shareholders’ equity
|
$
|
557,412
|
|
|
$
|
544,460
|
|
|
$
|
12,952
|
|
|
2.4
|
%
|
1
N/M - not meaningful
Retained earnings were increased by net income of
$16.5 million
recognized during the
six months ended June 30, 2014
. The increase due to net income was partially offset by the payment of two quarterly dividends totaling $0.24 per common share, or
$9.6 million
, during the six months ended June 30, 2014.
Comparison of Results of Operation for the Three Months Ended
June 30, 2014
and
2013
General.
Net income for the
three months ended June 30, 2014
, was
$8.8 million
, an increase of
$644,000
, or
7.9%
, from net income of
$8.2 million
for the
three months ended June 30, 2013
. The increase in net income was driven by a
$2.5 million
increase in net interest income and a
$661,000
decrease in the provision for loan losses, partially offset by a decrease in non-interest income of
$314,000
and a
$1.6 million
increase in non-interest expense. Basic and diluted earnings per share for the
three months ended June 30, 2014
, was
$0.23
, a
$0.02
increase from
$0.21
for the
three months ended June 30, 2013
.
Interest Income.
Interest income increased by
$1.8 million
, or
5.1%
, to
$37.1 million
for the
three months ended June 30, 2014
, from
$35.3 million
for the
three months ended June 30, 2013
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Dollar
|
|
Percent
|
|
2014
|
|
2013
|
|
Change
|
|
Change
|
|
(Dollars in thousands)
|
Interest and dividend income
|
|
|
|
|
|
|
|
Loans, including fees
|
$
|
33,888
|
|
|
$
|
32,151
|
|
|
$
|
1,737
|
|
|
5.4
|
%
|
Securities
|
3,014
|
|
|
2,986
|
|
|
28
|
|
|
0.9
|
|
Interest-bearing deposits in other financial institutions
|
71
|
|
|
25
|
|
|
46
|
|
|
184.0
|
|
FHLB and Federal Reserve Bank stock
|
136
|
|
|
134
|
|
|
2
|
|
|
1.5
|
|
|
$
|
37,109
|
|
|
$
|
35,296
|
|
|
$
|
1,813
|
|
|
5.1
|
%
|
The increase in interest income for the
three months ended June 30, 2014
, compared to the same period in
2013
, was primarily due to a
$1.7 million
, or
5.4%
, increase in interest income on loans, which was driven by higher commercial loan volume. For the
three months ended June 30, 2014
, the average balance of commercial and industrial loans increased by $274.2 million, or 86.7%, compared to the
three months ended June 30, 2013
, which resulted in a
$2.3 million
increase in interest income. Additionally, the average balance of commercial real estate loans increased by $207.9 million, or 21.6%, for the
three months ended June 30, 2014
, compared to the same period in
2013
, contributing
$1.9 million
of the increase in interest income. The increases in interest income related to commercial loan volume were partially offset by a $183.7 million, or 24.3%, decrease in the average balance of Warehouse Purchase Program loans for the
three months ended June 30, 2014
, compared to the same period in
2013
, as well as reductions in yields on all commercial and real estate loan portfolios. The average yield on earning assets for the
three months ended June 30, 2014
was
4.24%
, a decrease of
eight
basis points from
4.32%
for the
three months ended June 30, 2013
.
Interest Expense.
Interest expense decreased by
$671,000
, or
13.8%
, to
$4.2 million
for the
three months ended June 30, 2014
, from
$4.9 million
for the
three months ended June 30, 2013
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Dollar
|
|
Percent
|
|
2014
|
|
2013
|
|
Change
|
|
Change
|
|
(Dollars in thousands)
|
Interest expense
|
|
|
|
|
|
|
|
Deposits
|
$
|
2,035
|
|
|
$
|
2,450
|
|
|
$
|
(415
|
)
|
|
(16.9
|
)%
|
FHLB advances
|
1,948
|
|
|
2,205
|
|
|
(257
|
)
|
|
(11.7
|
)
|
Repurchase agreement
|
204
|
|
|
203
|
|
|
1
|
|
|
0.5
|
|
|
$
|
4,187
|
|
|
$
|
4,858
|
|
|
$
|
(671
|
)
|
|
(13.8
|
)%
|
The decrease in interest expense for the
three months ended June 30, 2014
, compared to the same period in
2013
, was primarily due to a
$415,000
, or
16.9%
, decrease in interest expense on deposits, as well as a
$257,000
, or
11.7%
, decrease in interest expense on FHLB advances. While volume was up in all deposit categories, a 54 basis point reduction in the average rate paid on time deposits, as well as a four basis point decline in the average rate paid on interest-bearing demand deposits, drove the decrease in interest expense on deposits for the
three months ended June 30, 2014
, compared to the
three months ended June 30, 2013
. The average rate paid on borrowings decreased by 15 basis points for the
three months ended June 30, 2014
, compared to the same period in
2013
, while volume remained relatively flat. The average cost of interest-bearing liabilities decreased by
16
basis points to
0.63%
for the
three months ended June 30, 2014
, compared to
0.79%
for the same period in 2013.
Net Interest Income.
Net interest income increased by
$2.5 million
, or
8.2%
, to
$32.9 million
for the
three months ended June 30, 2014
, from
$30.4 million
for the
three months ended June 30, 2013
. The net interest margin increased by
four
basis points to
3.76%
for the
three months ended June 30, 2014
, from
3.72%
for the same period last year. The net interest rate spread increased by
eight
basis points to
3.61%
for the
three months ended June 30, 2014
, from
3.53%
for the same period last year. The increases in the net interest margin and spread were primarily attributable to changes in the earning asset mix, as we increased volume in higher-yielding commercial loans, as well as lowered time and interest-bearing demand deposit rates. Accretion of interest related to the 2012 Highlands acquisition contributed four basis points to the net interest margin for the
three months ended June 30, 2014
, compared to nine basis points for the
three months ended June 30, 2013
.
Provision for Loan Losses.
The provision for loan losses was
$1.2 million
for the
three months ended June 30, 2014
, a decrease of
$661,000
, or
35.6%
, from
$1.9 million
for the
three months ended June 30, 2013
. Non-performing loans totaled
$23.6 million
at
June 30, 2014
, compared to
$23.8 million
at
June 30, 2013
. Net charge-offs totaled
$159,000
for the
three months ended June 30, 2014
, compared to
$1.2 million
for the
three months ended June 30, 2013
.
Non-interest Income.
Non-interest income decreased by
$314,000
, or
5.5%
, to
$5.4 million
for the
three months ended June 30, 2014
, from
$5.7 million
for the
three months ended June 30, 2013
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Dollar
|
|
Percent
|
|
2014
|
|
2013
|
|
Change
|
|
Change
|
|
(Dollars in thousands)
|
Non-interest income
|
|
|
|
|
|
|
|
Service charges and fees
|
$
|
4,874
|
|
|
$
|
4,768
|
|
|
$
|
106
|
|
|
2.2
|
%
|
Other charges and fees
|
239
|
|
|
179
|
|
|
60
|
|
|
33.5
|
|
Bank-owned life insurance income
|
145
|
|
|
153
|
|
|
(8
|
)
|
|
(5.2
|
)
|
Gain on sale and disposition of assets
|
727
|
|
|
444
|
|
|
283
|
|
|
63.7
|
|
Other
|
(556
|
)
|
|
199
|
|
|
(755
|
)
|
|
N/M
1
|
|
|
$
|
5,429
|
|
|
$
|
5,743
|
|
|
$
|
(314
|
)
|
|
(5.5
|
)%
|
1
N/M - not meaningful
The
$314,000
decrease in non-interest income from the
three months ended June 30, 2013
, was primarily attributable to a
$755,000
decrease in other non-interest income, caused by the $610,000 net decrease in the value of an investment in a community development-oriented private equity fund used for Community Reinvestment Act purposes recognized in the second quarter of 2014, compared to no value change recognized in the second quarter of 2013. This decrease was partially offset by a
$283,000
, or
63.7%
, increase in the gain on sale and disposition of assets, which was primarily attributable to $777,000 in gains recognized on payoffs of purchased credit impaired loans during the second quarter of 2014, compared to $331,000 in similar gains recognized during the second quarter of 2013.
Non-interest Expense.
Non-interest expense increased by
$1.6 million
, or
7.6%
, to
$23.4 million
for the
three months ended June 30, 2014
, from
$21.7 million
for the
three months ended June 30, 2013
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Dollar
|
|
Percent
|
|
2014
|
|
2013
|
|
Change
|
|
Change
|
|
(Dollars in thousands)
|
Non-interest expense
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
$
|
14,127
|
|
|
$
|
12,528
|
|
|
$
|
1,599
|
|
|
12.8
|
%
|
Merger and acquisition costs
|
652
|
|
|
—
|
|
|
652
|
|
|
N/M
1
|
|
Advertising
|
493
|
|
|
751
|
|
|
(258
|
)
|
|
(34.4
|
)
|
Occupancy and equipment
|
1,819
|
|
|
1,938
|
|
|
(119
|
)
|
|
(6.1
|
)
|
Outside professional services
|
486
|
|
|
570
|
|
|
(84
|
)
|
|
(14.7
|
)
|
Regulatory assessments
|
687
|
|
|
650
|
|
|
37
|
|
|
5.7
|
|
Data processing
|
1,708
|
|
|
1,729
|
|
|
(21
|
)
|
|
(1.2
|
)
|
Office operations
|
1,717
|
|
|
1,751
|
|
|
(34
|
)
|
|
(1.9
|
)
|
Other
|
1,661
|
|
|
1,786
|
|
|
(125
|
)
|
|
(7.0
|
)
|
|
$
|
23,350
|
|
|
$
|
21,703
|
|
|
$
|
1,647
|
|
|
7.6
|
%
|
1
N/M - not meaningful
The increase in non-interest expense from the
three months ended June 30, 2013
was primarily attributable to a
$1.6 million
, or
12.8%
, increase in salaries and employee benefits expense, resulting from increased performance-based incentive accruals due to higher loan production, as well as increased ESOP and share-based compensation expense due to the rise in the Company's stock price. Also contributing to the
$1.6 million
increase in salaries and employee benefits expense was a $247,000 increase in health care costs for the
three months ended June 30, 2014
, compared to the
three months ended June 30, 2013
. The Company incurred merger and acquisition costs related to the pending merger with LegacyTexas totaling
$652,000
during the
three months ended June 30, 2014
, with no comparable costs recognized during the
three months ended June 30, 2013
. Reductions in advertising, occupancy and equipment and other non-interest expense for the
three months ended June 30, 2014
, compared to the same period in 2013, partially offset these increases in non-interest expense.
Income Tax Expense.
For the
three months ended June 30, 2014
, we recognized income tax expense of
$5.0 million
on our pre-tax income, which was an effective tax rate of
36.1%
, compared to income tax expense of
$4.4 million
for the
three months ended June 30, 2013
, which was an effective tax rate of
35.2%
. The difference in the effective tax rate was primarily due to permanent book-tax differences.
Comparison of Results of Operation for the
Six Months Ended
June 30, 2014
and
2013
General.
Net income for the
six months ended June 30, 2014
, was
$16.5 million
, an increase of
$268,000
, or
1.7%
, from net income of
$16.2 million
for the
six months ended June 30, 2013
. The increase in net income was driven by a
$3.5 million
increase in net interest income and a
$1.2 million
decrease in the provision for loan losses, partially offset by a decrease in non-interest income of
$1.2 million
and a
$2.9 million
increase in non-interest expense. Basic and diluted earnings per share for the
six months ended June 30, 2014
, was
$0.43
, unchanged from the
six months ended June 30, 2013
.
Interest Income.
Interest income increased by
$2.1 million
, or
3.1%
, to
$70.8 million
for the
six months ended June 30, 2014
, from
$68.7 million
for the
six months ended June 30, 2013
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
Dollar
|
|
Percent
|
|
2014
|
|
2013
|
|
Change
|
|
Change
|
|
(Dollars in thousands)
|
Interest and dividend income
|
|
|
|
|
|
|
|
Loans, including fees
|
$
|
64,276
|
|
|
$
|
62,529
|
|
|
$
|
1,747
|
|
|
2.8
|
%
|
Securities
|
6,143
|
|
|
5,863
|
|
|
280
|
|
|
4.8
|
|
Interest-bearing deposits in other financial institutions
|
128
|
|
|
56
|
|
|
72
|
|
|
128.6
|
|
FHLB and Federal Reserve Bank stock
|
266
|
|
|
267
|
|
|
(1
|
)
|
|
(0.4
|
)
|
|
$
|
70,813
|
|
|
$
|
68,715
|
|
|
$
|
2,098
|
|
|
3.1
|
%
|
The increase in interest income for the
six months ended June 30, 2014
, compared to the same period in
2013
, was primarily due to a
$1.7 million
, or
2.8%
, increase in interest income on loans, which was driven by higher commercial loan volume. For the
six months ended June 30, 2014
, the average balance of commercial and industrial loans increased by $229.5 million, or 76.5%, compared to the
six months ended June 30, 2013
, which resulted in a
$4.0 million
increase in interest income. Additionally, the average balance of commercial real estate loans increased by
$249.3 million
, or 27.7%, for the
six months ended June 30, 2014
, compared to the same period in
2013
, contributing
$4.8 million
of the increase in interest income. The increases in interest income related to commercial loan volume were partially offset by a
$237.2 million
, or 31.8%, decrease in the average balance of Warehouse Purchase Program loans for the
six months ended June 30, 2014
, compared to the same period in
2013
, as well as reductions in yields on all commercial and real estate loan portfolios.
The
$280,000
increase in interest income on securities for the
six months ended June 30, 2014
, compared to the same period in
2013
, was primarily due to a 93 basis point increase in the average yield earned on agency collateralized mortgage obligations, which increased to
2.22%
for the
six months ended June 30, 2014
, from
1.29%
for the
six months ended June 30, 2013
. The average yield on earning assets for the
six months ended June 30, 2014
was
4.25%
, a decrease of four basis points from
4.29%
for the
six months ended June 30, 2013
.
Interest Expense.
Interest expense decreased by
$1.4 million
, or
14.8%
, to
$8.3 million
for the
six months ended June 30, 2014
, from
$9.8 million
for the
six months ended June 30, 2013
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
Dollar
|
|
Percent
|
|
2014
|
|
2013
|
|
Change
|
|
Change
|
|
(Dollars in thousands)
|
Interest expense
|
|
|
|
|
|
|
|
Deposits
|
$
|
4,026
|
|
|
$
|
4,882
|
|
|
$
|
(856
|
)
|
|
(17.5
|
)%
|
FHLB advances
|
3,875
|
|
|
4,466
|
|
|
(591
|
)
|
|
(13.2
|
)
|
Repurchase agreement
|
405
|
|
|
404
|
|
|
1
|
|
|
0.2
|
|
|
$
|
8,306
|
|
|
$
|
9,752
|
|
|
$
|
(1,446
|
)
|
|
(14.8
|
)%
|
The decrease in interest expense for the
six months ended June 30, 2014
, compared to the same period in
2013
, was primarily due to a
$856,000
, or
17.5%
, decrease in interest expense on deposits, as well as a
$591,000
, or
13.2%
, decrease in interest expense on FHLB advances. While volume was up in all deposit categories, a 50 basis point reduction in the average rate paid on time deposits, as well as a three basis point decline in the average rate paid on interest-bearing demand deposits, drove the decrease in interest expense on deposits for the
six months ended June 30, 2014
, compared to the
six months ended June 30, 2013
. The average balance of borrowings decreased by
$62.9 million
for the
six months ended June 30, 2014
, compared to the same period in
2013
, due to lower average Warehouse Purchase Program balances, of which a portion had been strategically funded with short-term advances. The average cost of interest-bearing liabilities decreased by 13 basis points to
0.67%
for the
six months ended June 30, 2014
, compared to
0.80%
for the same period in 2013.
Net Interest Income.
Net interest income increased by
$3.5 million
, or
6.0%
, to
$62.5 million
for the
six months ended June 30, 2014
, from
$59.0 million
for the
six months ended June 30, 2013
. The net interest margin increased by
seven
basis points to
3.75%
for the
six months ended June 30, 2014
, from
3.68%
for the same period last year. The net interest rate spread increased by
nine
basis points to
3.58%
for the
six months ended June 30, 2014
, from
3.49%
for the same period last year. The increases in the net interest margin and spread were primarily attributable to changes in the earning asset mix, as we increased volume in higher-yielding commercial loans, as well as lowered time and interest-bearing demand deposit rates.
Provision for Loan Losses.
The provision for loan losses was
$1.6 million
for the
six months ended June 30, 2014
, a decrease of
$1.2 million
, or
42.6%
, from
$2.7 million
for the
six months ended June 30, 2013
. Non-performing loans totaled
$23.6 million
at
June 30, 2014
, compared to
$23.8 million
at June 30, 2013. Net charge-offs totaled
$491,000
for the
six months ended June 30, 2014
, compared to
$1.5 million
for the
six months ended June 30, 2013
.
Non-interest Income.
Non-interest income decreased by
$1.2 million
, or
10.4%
, to
$10.4 million
for the
six months ended June 30, 2014
, from
$11.6 million
for the
six months ended June 30, 2013
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
Dollar
|
|
Percent
|
|
2014
|
|
2013
|
|
Change
|
|
Change
|
|
(Dollars in thousands)
|
Non-interest income
|
|
|
|
|
|
|
|
Service charges and fees
|
$
|
9,172
|
|
|
$
|
9,059
|
|
|
$
|
113
|
|
|
1.2
|
%
|
Other charges and fees
|
449
|
|
|
391
|
|
|
58
|
|
|
14.8
|
|
Bank-owned life insurance income
|
298
|
|
|
315
|
|
|
(17
|
)
|
|
(5.4
|
)
|
Loss on sale of available for sale securities
|
—
|
|
|
(177
|
)
|
|
177
|
|
|
(100.0
|
)
|
Gain on sale and disposition of assets
|
728
|
|
|
674
|
|
|
54
|
|
|
8.0
|
|
Other
|
(256
|
)
|
|
1,340
|
|
|
(1,596
|
)
|
|
N/M
1
|
|
|
$
|
10,391
|
|
|
$
|
11,602
|
|
|
$
|
(1,211
|
)
|
|
(10.4
|
)%
|
1
N/M - not meaningful
The
$1.2 million
decrease in non-interest income from the
six months ended June 30, 2013
, was primarily attributable to a
$1.6 million
decrease in other non-interest income, caused by the $571,000 net decrease in the value of an investment in a community development-oriented private equity fund used for Community Reinvestment Act purposes recognized during the
six months ended June 30, 2014
, compared to a $784,000 net increase recognized on this investment during the
six months
ended June 30, 2013
. This decrease was partially offset by a $177,000 loss on the sale of available-for-sale securities recorded in the 2013 period with no comparable loss recorded in the 2014 period.
Non-interest Expense.
Non-interest expense increased by
$2.9 million
, or
6.9%
, to
$45.5 million
for the
six months ended June 30, 2014
, from
$42.6 million
for the
six months ended June 30, 2013
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
Dollar
|
|
Percent
|
|
2014
|
|
2013
|
|
Change
|
|
Change
|
|
(Dollars in thousands)
|
Non-interest expense
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
$
|
28,259
|
|
|
$
|
25,443
|
|
|
$
|
2,816
|
|
|
11.1
|
%
|
Merger and acquisition costs
|
821
|
|
|
—
|
|
|
821
|
|
|
N/M
1
|
|
Advertising
|
848
|
|
|
1,264
|
|
|
(416
|
)
|
|
(32.9
|
)
|
Occupancy and equipment
|
3,711
|
|
|
3,728
|
|
|
(17
|
)
|
|
(0.5
|
)
|
Outside professional services
|
1,011
|
|
|
1,254
|
|
|
(243
|
)
|
|
(19.4
|
)
|
Regulatory assessments
|
1,315
|
|
|
1,229
|
|
|
86
|
|
|
7.0
|
|
Data processing
|
3,370
|
|
|
3,247
|
|
|
123
|
|
|
3.8
|
|
Office operations
|
3,397
|
|
|
3,399
|
|
|
(2
|
)
|
|
(0.1
|
)
|
Other
|
2,773
|
|
|
3,012
|
|
|
(239
|
)
|
|
(7.9
|
)
|
|
$
|
45,505
|
|
|
$
|
42,576
|
|
|
$
|
2,929
|
|
|
6.9
|
%
|
1
N/M - not meaningful
The increase in non-interest expense from the
six months ended June 30, 2013
was primarily attributable to a
$2.8 million
, or
11.1%
, increase in salaries and employee benefits expense, resulting from increased performance-based incentive accruals due to higher loan production, as well as increased ESOP and share-based compensation expense due to the rise in the Company's stock price. Also contributing to the
$2.8 million
increase in salaries and employee benefits expense was a $374,000 increase in health care costs for the
six months ended June 30, 2014
, compared to the
six months ended June 30, 2013
. The Company incurred merger and acquisition costs related to the pending merger with LegacyTexas totaling
$821,000
during the
six months ended June 30, 2014
, with no comparable costs recognized during the
six months ended June 30, 2013
. Reductions in advertising, outside professional services and other non-interest expense for the
six months ended June 30, 2014
, compared to the same period in 2013, partially offset these increases in non-interest expense.
Income Tax Expense.
For the
six months ended June 30, 2014
, we recognized income tax expense of
$9.3 million
on our pre-tax income, which was an effective tax rate of
36.1%
, compared to income tax expense of
$9.0 million
for the
six months ended June 30, 2013
, which was an effective tax rate of
35.7%
. The difference in the effective tax rate was primarily due to permanent book-tax differences.
Average Balances, Net Interest Income, Yields Earned and Rates Paid
The following tables present, 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
2014
|
|
2013
|
|
|
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
|
$
|
1,169,484
|
|
|
$
|
15,989
|
|
|
5.47
|
%
|
|
$
|
961,631
|
|
|
$
|
14,074
|
|
|
5.85
|
%
|
|
Warehouse Purchase Program
|
571,922
|
|
|
5,094
|
|
|
3.56
|
|
|
755,577
|
|
|
7,307
|
|
|
3.87
|
|
|
Commercial and industrial
|
590,353
|
|
|
6,168
|
|
|
4.18
|
|
|
316,151
|
|
|
3,829
|
|
|
4.84
|
|
|
Consumer real estate
|
480,512
|
|
|
5,967
|
|
|
4.97
|
|
|
476,226
|
|
|
6,143
|
|
|
5.16
|
|
|
Other consumer
|
44,162
|
|
|
670
|
|
|
6.07
|
|
|
53,759
|
|
|
798
|
|
|
5.94
|
|
|
Less: deferred fees and allowance for loan loss
|
(21,683
|
)
|
|
—
|
|
|
—
|
|
|
(18,649
|
)
|
|
—
|
|
|
—
|
|
|
Loans receivable
1
|
2,834,750
|
|
|
33,888
|
|
|
4.78
|
|
|
2,544,695
|
|
|
32,151
|
|
|
5.05
|
|
|
Agency mortgage-backed securities
|
267,218
|
|
|
1,493
|
|
|
2.23
|
|
|
321,548
|
|
|
1,565
|
|
|
1.95
|
|
|
Agency collateralized mortgage obligations
|
171,330
|
|
|
943
|
|
|
2.20
|
|
|
253,741
|
|
|
872
|
|
|
1.37
|
|
|
Investment securities
|
69,582
|
|
|
578
|
|
|
3.32
|
|
|
67,925
|
|
|
549
|
|
|
3.23
|
|
|
FHLB and FRB stock
|
37,814
|
|
|
136
|
|
|
1.44
|
|
|
37,717
|
|
|
134
|
|
|
1.42
|
|
|
Interest-earning deposit accounts
|
118,529
|
|
|
71
|
|
|
0.24
|
|
|
45,810
|
|
|
25
|
|
|
0.22
|
|
Total interest-earning assets
|
3,499,223
|
|
|
37,109
|
|
|
4.24
|
|
|
3,271,436
|
|
|
35,296
|
|
|
4.32
|
|
Non-interest-earning assets
|
183,819
|
|
|
|
|
|
|
182,263
|
|
|
|
|
|
Total assets
|
$
|
3,683,042
|
|
|
|
|
|
|
$
|
3,453,699
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand
|
$
|
468,283
|
|
|
428
|
|
|
0.37
|
|
|
$
|
459,433
|
|
|
466
|
|
|
0.41
|
|
|
Savings and money market
|
1,000,243
|
|
|
738
|
|
|
0.30
|
|
|
883,507
|
|
|
601
|
|
|
0.27
|
|
|
Time
|
503,035
|
|
|
869
|
|
|
0.69
|
|
|
451,110
|
|
|
1,383
|
|
|
1.23
|
|
|
Borrowings
|
678,817
|
|
|
2,152
|
|
|
1.27
|
|
|
679,693
|
|
|
2,408
|
|
|
1.42
|
|
Total interest-bearing liabilities
|
2,650,378
|
|
|
4,187
|
|
|
0.63
|
|
|
2,473,743
|
|
|
4,858
|
|
|
0.79
|
|
Non-interest-bearing demand
|
414,746
|
|
|
|
|
|
|
393,815
|
|
|
|
|
|
Non-interest-bearing liabilities
|
63,417
|
|
|
|
|
|
|
53,244
|
|
|
|
|
|
Total liabilities
|
3,128,541
|
|
|
|
|
|
|
2,920,802
|
|
|
|
|
|
Total shareholders’ equity
|
554,501
|
|
|
|
|
|
|
532,897
|
|
|
|
|
|
Total liabilities and shareholders’ equity
|
$
|
3,683,042
|
|
|
|
|
|
|
$
|
3,453,699
|
|
|
|
|
|
Net interest income and margin
|
|
|
$
|
32,922
|
|
|
3.76
|
%
|
|
|
|
$
|
30,438
|
|
|
3.72
|
%
|
Net interest income and margin (tax-equivalent basis)
2
|
|
|
$
|
33,120
|
|
|
3.79
|
%
|
|
|
|
$
|
30,628
|
|
|
3.74
|
%
|
Net interest rate spread
|
|
|
|
|
3.61
|
%
|
|
|
|
|
|
3.53
|
%
|
Net earning assets
|
$
|
848,845
|
|
|
|
|
|
|
$
|
797,693
|
|
|
|
|
|
Average interest-earning assets to average interest-bearing liabilities
|
132.03
|
%
|
|
|
|
|
|
132.25
|
%
|
|
|
|
|
1
|
Calculated net of deferred fees, loan discounts, loans in process and allowance for loan losses.
|
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 2014 and 2013. Tax-exempt investments and loans had an average balance of $67.5 million and $62.0 million for the three months ended June 30, 2014 and 2013, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
2014
|
|
2013
|
|
|
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
|
$
|
1,150,004
|
|
|
$
|
31,203
|
|
|
5.43
|
%
|
|
$
|
900,732
|
|
|
$
|
26,410
|
|
|
5.86
|
%
|
|
Warehouse Purchase Program
|
509,773
|
|
|
9,156
|
|
|
3.59
|
|
|
746,954
|
|
|
14,549
|
|
|
3.90
|
|
|
Commercial and industrial
|
529,441
|
|
|
11,099
|
|
|
4.19
|
|
|
299,939
|
|
|
7,102
|
|
|
4.74
|
|
|
Consumer real estate
|
460,698
|
|
|
11,457
|
|
|
4.97
|
|
|
490,516
|
|
|
12,835
|
|
|
5.23
|
|
|
Other consumer
|
45,301
|
|
|
1,361
|
|
|
6.01
|
|
|
55,452
|
|
|
1,633
|
|
|
5.89
|
|
|
Less: deferred fees and allowance for loan loss
|
(21,228
|
)
|
|
—
|
|
|
—
|
|
|
(17,949
|
)
|
|
—
|
|
|
—
|
|
|
Loans receivable
1
|
2,673,989
|
|
|
64,276
|
|
|
4.81
|
|
|
2,475,644
|
|
|
62,529
|
|
|
5.05
|
|
|
Agency mortgage-backed securities
|
271,368
|
|
|
3,012
|
|
|
2.22
|
|
|
308,345
|
|
|
3,066
|
|
|
1.99
|
|
|
Agency collateralized mortgage obligations
|
177,751
|
|
|
1,972
|
|
|
2.22
|
|
|
271,252
|
|
|
1,752
|
|
|
1.29
|
|
|
Investment securities
|
71,449
|
|
|
1,159
|
|
|
3.24
|
|
|
61,561
|
|
|
1,045
|
|
|
3.40
|
|
|
FHLB and FRB stock
|
33,661
|
|
|
266
|
|
|
1.58
|
|
|
36,381
|
|
|
267
|
|
|
1.47
|
|
|
Interest-earning deposit accounts
|
107,472
|
|
|
128
|
|
|
0.24
|
|
|
49,930
|
|
|
56
|
|
|
0.22
|
|
Total interest-earning assets
|
3,335,690
|
|
|
70,813
|
|
|
4.25
|
|
|
3,203,113
|
|
|
68,715
|
|
|
4.29
|
|
Non-interest-earning assets
|
184,072
|
|
|
|
|
|
|
185,548
|
|
|
|
|
|
Total assets
|
$
|
3,519,762
|
|
|
|
|
|
|
$
|
3,388,661
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand
|
$
|
464,535
|
|
|
850
|
|
|
0.37
|
|
|
$
|
462,393
|
|
|
936
|
|
|
0.40
|
|
|
Savings and money market
|
959,665
|
|
|
1,387
|
|
|
0.29
|
|
|
880,614
|
|
|
1,189
|
|
|
0.27
|
|
|
Time
|
498,142
|
|
|
1,789
|
|
|
0.72
|
|
|
450,594
|
|
|
2,757
|
|
|
1.22
|
|
|
Borrowings
|
572,362
|
|
|
4,280
|
|
|
1.50
|
|
|
635,212
|
|
|
4,870
|
|
|
1.53
|
|
Total interest-bearing liabilities
|
2,494,704
|
|
|
8,306
|
|
|
0.67
|
|
|
2,428,813
|
|
|
9,752
|
|
|
0.80
|
|
Non-interest-bearing demand
|
414,832
|
|
|
|
|
|
|
380,589
|
|
|
|
|
|
Non-interest-bearing liabilities
|
59,355
|
|
|
|
|
|
|
48,817
|
|
|
|
|
|
Total liabilities
|
2,968,891
|
|
|
|
|
|
|
2,858,219
|
|
|
|
|
|
Total shareholders’ equity
|
550,871
|
|
|
|
|
|
|
530,442
|
|
|
|
|
|
Total liabilities and shareholders’ equity
|
$
|
3,519,762
|
|
|
|
|
|
|
$
|
3,388,661
|
|
|
|
|
|
Net interest income and margin
|
|
|
$
|
62,507
|
|
|
3.75
|
%
|
|
|
|
$
|
58,963
|
|
|
3.68
|
%
|
Net interest income and margin (tax-equivalent basis)
2
|
|
|
$
|
62,904
|
|
|
3.77
|
%
|
|
|
|
$
|
59,322
|
|
|
3.70
|
%
|
Net interest rate spread
|
|
|
|
|
3.58
|
%
|
|
|
|
|
|
3.49
|
%
|
Net earning assets
|
$
|
840,986
|
|
|
|
|
|
|
$
|
774,300
|
|
|
|
|
|
Average interest-earning assets to average interest-bearing liabilities
|
133.71
|
%
|
|
|
|
|
|
131.88
|
%
|
|
|
|
|
1
|
Calculated net of deferred fees, loan discounts, loans in process and allowance for loan losses.
|
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 2014 and 2013. Tax-exempt investments and loans had an average balance of $67.8 million and $56.9 million for the six months ended June 30, 2014 and 2013, respectively.
|
Rate/Volume Analysis
The following tables present 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 June 30,
|
|
2014 versus 2013
|
|
Increase (Decrease) Due to
|
|
Total Increase
|
|
Volume
|
|
Rate
|
|
(Decrease)
|
|
(Dollars in thousands)
|
Interest-earning assets:
|
|
|
|
|
|
Commercial real estate
|
$
|
2,889
|
|
|
$
|
(974
|
)
|
|
$
|
1,915
|
|
Warehouse Purchase Program
|
(1,670
|
)
|
|
(543
|
)
|
|
(2,213
|
)
|
Commercial and industrial
|
2,927
|
|
|
(588
|
)
|
|
2,339
|
|
Consumer real estate
|
55
|
|
|
(231
|
)
|
|
(176
|
)
|
Other consumer
|
(145
|
)
|
|
17
|
|
|
(128
|
)
|
Loans receivable
|
4,056
|
|
|
(2,319
|
)
|
|
1,737
|
|
Agency mortgage-backed securities
|
(285
|
)
|
|
213
|
|
|
(72
|
)
|
Agency collateralized mortgage obligations
|
(343
|
)
|
|
414
|
|
|
71
|
|
Investment securities
|
14
|
|
|
15
|
|
|
29
|
|
FHLB and FRB stock
|
—
|
|
|
2
|
|
|
2
|
|
Interest-earning deposit accounts
|
43
|
|
|
3
|
|
|
46
|
|
Total interest-earning assets
|
3,485
|
|
|
(1,672
|
)
|
|
1,813
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
Interest-bearing demand
|
9
|
|
|
(47
|
)
|
|
(38
|
)
|
Savings and money market
|
84
|
|
|
53
|
|
|
137
|
|
Time
|
145
|
|
|
(659
|
)
|
|
(514
|
)
|
Borrowings
|
(3
|
)
|
|
(253
|
)
|
|
(256
|
)
|
Total interest-bearing liabilities
|
235
|
|
|
(906
|
)
|
|
(671
|
)
|
Net interest income
|
$
|
3,250
|
|
|
$
|
(766
|
)
|
|
$
|
2,484
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
2014 versus 2013
|
|
Increase (Decrease) Due to
|
|
Total Increase
|
|
Volume
|
|
Rate
|
|
(Decrease)
|
|
(Dollars in thousands)
|
Interest-earning assets:
|
|
|
|
|
|
Commercial real estate
|
$
|
6,879
|
|
|
$
|
(2,086
|
)
|
|
$
|
4,793
|
|
Warehouse Purchase Program
|
(4,331
|
)
|
|
(1,062
|
)
|
|
(5,393
|
)
|
Commercial and industrial
|
4,892
|
|
|
(895
|
)
|
|
3,997
|
|
Consumer real estate
|
(759
|
)
|
|
(619
|
)
|
|
(1,378
|
)
|
Other consumer
|
(304
|
)
|
|
32
|
|
|
(272
|
)
|
Loans receivable
|
6,377
|
|
|
(4,630
|
)
|
|
1,747
|
|
Agency mortgage-backed securities
|
(389
|
)
|
|
335
|
|
|
(54
|
)
|
Agency collateralized mortgage obligations
|
(745
|
)
|
|
965
|
|
|
220
|
|
Investment securities
|
162
|
|
|
(48
|
)
|
|
114
|
|
FHLB and FRB stock
|
(21
|
)
|
|
20
|
|
|
(1
|
)
|
Interest-earning deposit accounts
|
68
|
|
|
4
|
|
|
72
|
|
Total interest-earning assets
|
5,452
|
|
|
(3,354
|
)
|
|
2,098
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
Interest-bearing demand
|
4
|
|
|
(90
|
)
|
|
(86
|
)
|
Savings and money market
|
111
|
|
|
87
|
|
|
198
|
|
Time
|
266
|
|
|
(1,234
|
)
|
|
(968
|
)
|
Borrowings
|
(472
|
)
|
|
(118
|
)
|
|
(590
|
)
|
Total interest-bearing liabilities
|
(91
|
)
|
|
(1,355
|
)
|
|
(1,446
|
)
|
Net interest income
|
$
|
5,543
|
|
|
$
|
(1,999
|
)
|
|
$
|
3,544
|
|
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-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. At
June 30, 2014
, the Company had an additional borrowing capacity of
$146.7 million
with the FHLB. Also, at
June 30, 2014
, the Company had
$125.0 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. At
June 30, 2014
,
securities pledged had a collateral value of
$60.0 million
.
At
June 30, 2014
, the Company had classified
45.6%
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 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. 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
June 30, 2014
, the Company (on an unconsolidated basis) had liquid assets of $47.3 million.
On November 25, 2013, the Company and LegacyTexas announced that they had entered into a definitive merger agreement whereby LegacyTexas will merge into the Company and, immediately thereafter, the Bank will merge into LegacyTexas’ subsidiary bank, LegacyTexas Bank. Under the terms of the agreement, the Company will issue 7.85 million shares of the Company's common stock plus approximately $115 million in cash for all the outstanding stock of LegacyTexas. In anticipation of the merger with LegacyTexas, the Company is strategically increasing its cash position in order to accommodate the approximate $115 million cash merger consideration. LegacyTexas' shareholders approved the merger on May 19, 2014, and on June 17, 2014, the Company and LegacyTexas announced that additional time will be required to obtain regulatory approvals and to satisfy customary closing conditions necessary to complete the merger, and have jointly extended the agreement to August 31, 2014, pursuant to its terms.
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
$744.9 million
and
$988.7 million
at
June 30, 2014
, and
December 31, 2013
, 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
June 30, 2014
totaled
$287.9 million
with a weighted average rate of 0.54%.
During the
six months ended June 30, 2014
, cash and cash equivalents increased by
$77.9 million
, or
88.6%
, to
$165.9 million
at
June 30, 2014
, from
$88.0 million
at
December 31, 2013
. Operating activities provided cash of
$34.8 million
and financing activities provided cash of
$397.9 million
, which was partially offset by cash used in investing activities of
$354.8 million
. Primary sources of cash for the
six months ended June 30, 2014
included pay-offs of Warehouse Purchase Program loans totaling
$5.3 billion
, proceeds from FHLB advances of
$691.0 million
and maturities, prepayments and calls of available-for-sale securities of
$305.7 million
. Primary uses of cash for the
six months ended June 30, 2014
, included originations of Warehouse Purchase Program loans totaling
$5.4 billion
, repayments on FHLB advances of
$455.2 million
and purchases of available-for-sale securities of
$281.0 million
.
Please see Item 1A (Risk Factors) under Part 1 of the Company's 2013 Form 10-K for information regarding liquidity risk.
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
$74.6 million
and credit card guarantees outstanding in the amount of
$1.1 million
at
June 30, 2014
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2014
|
|
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
|
$
|
1,941,893
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,941,893
|
|
Certificates of deposit
|
287,855
|
|
|
192,125
|
|
|
11,921
|
|
|
1,932
|
|
|
493,833
|
|
FHLB advances (gross of restructuring prepayment penalty of $1,663)
|
733,415
|
|
|
116,421
|
|
|
21,928
|
|
|
4,765
|
|
|
876,529
|
|
Repurchase agreement
|
—
|
|
|
—
|
|
|
25,000
|
|
|
—
|
|
|
25,000
|
|
Private equity fund for Community Reinvestment Act purposes
|
3,480
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3,480
|
|
Operating leases (premises)
|
2,455
|
|
|
4,267
|
|
|
1,809
|
|
|
4,826
|
|
|
13,357
|
|
Total contractual obligations
|
$
|
2,969,098
|
|
|
$
|
312,813
|
|
|
$
|
60,658
|
|
|
$
|
11,523
|
|
|
3,354,092
|
|
Off-balance sheet loan commitments:
1
|
|
|
|
|
|
|
|
|
|
Unused commitments to extend credit
|
$
|
133,769
|
|
|
$
|
111,256
|
|
|
$
|
123,492
|
|
|
$
|
30,712
|
|
|
399,229
|
|
Unused capacity on Warehouse Purchase Program loans
|
344,434
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
344,434
|
|
Standby letters of credit
|
901
|
|
|
51
|
|
|
—
|
|
|
240
|
|
|
1,192
|
|
Total loan commitments
|
$
|
479,104
|
|
|
$
|
111,307
|
|
|
$
|
123,492
|
|
|
$
|
30,952
|
|
|
744,855
|
|
Total contractual obligations and loan commitments
|
|
|
|
|
|
|
|
|
$
|
4,098,947
|
|
1
Loans having no stated maturity are reported in the “Less than One Year” category.
|
|
|
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
June 30, 2014
, and
December 31, 2013
, the Bank and the Company were considered to be well-capitalized.
At
June 30, 2014
, the Bank's equity totaled
$454.4 million
. The Company's consolidated equity totaled
$557.4 million
, or
14.1%
of total assets, at
June 30, 2014
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual
|
|
Required for Capital Adequacy Purposes
|
|
To Be Well-Capitalized Under Prompt Corrective Action Regulations
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
June 30, 2014
|
(Dollars in Thousands)
|
Total risk-based capital
|
|
|
|
|
|
|
|
|
|
|
|
the Company
|
$
|
546,458
|
|
|
17.06
|
%
|
|
$
|
256,298
|
|
|
8.00
|
%
|
|
$
|
320,372
|
|
|
10.00
|
%
|
the Bank
|
443,412
|
|
|
13.84
|
|
|
256,246
|
|
|
8.00
|
|
|
320,308
|
|
|
10.00
|
|
Tier 1 risk-based capital
|
|
|
|
|
|
|
|
|
|
|
|
the Company
|
526,018
|
|
|
16.42
|
|
|
128,149
|
|
|
4.00
|
|
|
192,223
|
|
|
6.00
|
|
the Bank
|
422,972
|
|
|
13.21
|
|
|
128,123
|
|
|
4.00
|
|
|
192,185
|
|
|
6.00
|
|
Tier 1 leverage
|
|
|
|
|
|
|
|
|
|
|
|
the Company
|
526,018
|
|
|
14.43
|
|
|
145,811
|
|
|
4.00
|
|
|
182,264
|
|
|
5.00
|
|
the Bank
|
422,972
|
|
|
11.61
|
|
|
145,750
|
|
|
4.00
|
|
|
182,188
|
|
|
5.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2013
|
|
|
|
|
|
|
|
|
|
|
|
Total risk-based capital
|
|
|
|
|
|
|
|
|
|
|
|
the Company
|
$
|
533,266
|
|
|
18.85
|
%
|
|
$
|
226,316
|
|
|
8.00
|
%
|
|
$
|
282,895
|
|
|
10.00
|
%
|
the Bank
|
431,442
|
|
|
15.26
|
|
|
226,181
|
|
|
8.00
|
|
|
282,727
|
|
|
10.00
|
|
Tier 1 risk-based capital
|
|
|
|
|
|
|
|
|
|
|
|
the Company
|
513,908
|
|
|
18.17
|
|
|
113,158
|
|
|
4.00
|
|
|
169,737
|
|
|
6.00
|
|
the Bank
|
412,084
|
|
|
14.58
|
|
|
113,091
|
|
|
4.00
|
|
|
169,636
|
|
|
6.00
|
|
Tier 1 leverage
|
|
|
|
|
|
|
|
|
|
|
|
the Company
|
513,908
|
|
|
15.67
|
|
|
131,197
|
|
|
4.00
|
|
|
163,996
|
|
|
5.00
|
|
the Bank
|
412,084
|
|
|
12.56
|
|
|
131,217
|
|
|
4.00
|
|
|
164,021
|
|
|
5.00
|
|
|
|
|
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 review historical trends, projected measurements, and to determine whether the Bank's interest rate exposure is within the limits established by the Board of Directors.
The Bank's asset/liability management strategy sets acceptable limits for the percentage change in EVE 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
June 30, 2014
, and
December 31, 2013
, 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 negatively impacted by a parallel, instantaneous, and sustained increase in market rates. Such an increase in rates would negatively impact EVE as a result of the duration of assets, including loans and investments, being longer than the duration of liabilities, primarily deposit accounts and FHLB borrowings. As illustrated in the table below at
June 30, 2014
, 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2014
|
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
|
|
|
548,067
|
|
|
(51,116
|
)
|
|
(8.53
|
)
|
|
14.86
|
|
152,958
|
|
|
16,905
|
|
|
12.43
|
|
300
|
|
|
566,681
|
|
|
(32,502
|
)
|
|
(5.42
|
)
|
|
15.06
|
|
147,080
|
|
|
11,027
|
|
|
8.10
|
|
200
|
|
|
576,779
|
|
|
(22,404
|
)
|
|
(3.74
|
)
|
|
15.06
|
|
141,252
|
|
|
5,199
|
|
|
3.82
|
|
100
|
|
|
589,211
|
|
|
(9,972
|
)
|
|
(1.66
|
)
|
|
15.09
|
|
135,302
|
|
|
(751
|
)
|
|
(0.55
|
)
|
—
|
|
|
599,183
|
|
|
—
|
|
|
—
|
|
|
15.06
|
|
136,053
|
|
|
—
|
|
|
—
|
|
(100
|
)
|
|
613,013
|
|
|
13,830
|
|
|
2.31
|
|
|
15.08
|
|
133,689
|
|
|
(2,364
|
)
|
|
(1.74
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 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
|
|
|
549,795
|
|
|
(51,978
|
)
|
|
(8.64
|
)
|
|
16.73
|
|
133,556
|
|
|
11,026
|
|
|
9.00
|
|
300
|
|
|
567,418
|
|
|
(34,355
|
)
|
|
(5.71
|
)
|
|
16.92
|
|
129,170
|
|
|
6,640
|
|
|
5.42
|
|
200
|
|
|
580,197
|
|
|
(21,576
|
)
|
|
(3.59
|
)
|
|
16.96
|
|
124,779
|
|
|
2,249
|
|
|
1.84
|
|
100
|
|
|
592,724
|
|
|
(9,049
|
)
|
|
(1.50
|
)
|
|
16.99
|
|
120,245
|
|
|
(2,285
|
)
|
|
(1.86
|
)
|
—
|
|
|
601,773
|
|
|
—
|
|
|
—
|
|
|
16.92
|
|
122,530
|
|
|
—
|
|
|
—
|
|
(100
|
)
|
|
604,473
|
|
|
2,700
|
|
|
0.45
|
|
|
16.67
|
|
120,556
|
|
|
(1,974
|
)
|
|
(1.61
|
)
|
The Bank's EVE was
$599.2 million
, or
15.06%
, of the market value of portfolio assets as of
June 30, 2014
, a
$2.6 million
decrease from
$601.8 million
, or
16.92%
, of the market value of portfolio assets as of
December 31, 2013
. Based upon
the assumptions utilized, an immediate 200 basis point increase in market interest rates would result in a
$22.4 million
decrease in our EVE at
June 30, 2014
, compared to a
$21.6 million
decrease at
December 31, 2013
, and would result in no change in our EVE ratio at
June 30, 2014
, as compared to a
four
basis point increase to
16.96%
at
December 31, 2013
. An immediate 100 basis point decrease in market interest rates would result in a
$13.8 million
increase in our EVE at
June 30, 2014
, compared to a
$2.7 million
increase at
December 31, 2013
, and would result in a
two
basis point increase in our EVE ratio to
15.08%
at
June 30, 2014
, as compared to a
25
basis point decrease in our EVE ratio to
16.67%
at
December 31, 2013
.
The Bank's projected EAR for the twelve months ending
June 30,
2015 is measured at
$136.1 million
, compared to
$122.5 million
for the twelve months ending December 31, 2014. Based on the assumptions utilized, an immediate 200 basis point increase in market rates would result in a
$5.2 million
, or
3.82%
, increase in net interest income for the twelve months ending
June 30,
2015, compared to a
$2.2 million
, or
1.84%
, increase for the twelve months ending December 31, 2014. An immediate 100 basis point decrease in market rates would result in a
$2.4 million
decrease in net interest income for the twelve months ending
June 30,
2015, compared to a
$2.0 million
decrease for the twelve months ending December 31, 2014.
We have implemented a strategic plan to mitigate interest rate risk. This plan includes the ongoing review of our current and projected 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, with assumptions stress tested on a regular basis. 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 investment securities portfolio is used as a primary interest rate risk management tool through the duration and repricing targeting of purchases and sales.