ViewPoint Financial Group Management Discusses Q4 2013 Results - Earnings Call Transcript

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 |  About: LegacyTexas Financial Group Inc. (LTXB)
by: SA Transcripts

ViewPoint Financial Group (VPFG) Q4 2013 Earnings Call February 5, 2014 9:00 AM ET

Executives

Scott A. Almy - Chief Risk Officer, Executive Vice President and General Counsel

Kevin J. Hanigan - Chief Executive Officer, President, Director, Member of Lending Committee, Chief Executive Officer of Viewpoint Bank, President of Viewpoint Bank and Director of Viewpoint Bank

Kari Anderson - Principal Financial Officer, Chief Accounting Officer and Senior Vice President

Analysts

Scott Valentin - FBR Capital Markets & Co., Research Division

Brad J. Milsaps - Sandler O'Neill + Partners, L.P., Research Division

Robert Madsen - Stephens Inc., Research Division

Frank Barlow - Keefe, Bruyette, & Woods, Inc., Research Division

Brett D. Rabatin - Sterne Agee & Leach Inc., Research Division

Andrew W. Stapp - Merion Capital Group

Operator

Good morning, and welcome to the ViewPoint Financial Group Fourth Quarter 2013 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded.

I would now like to turn the conference over to Scott Almy, EVP, General Counsel and Chief Risk Officer. Please go ahead.

Scott A. Almy

Thank you, Gary, and good morning, everyone. Welcome to the ViewPoint Financial Group Fourth Quarter 2013 Earnings Call. At this time, if you're logged in to our webcast, please refer to the slide presentation available online, including our Safe Harbor Statement on Slide 2. For those of you joining by phone, please note that the Safe Harbor Statement and presentation are available on our website at viewpointfinancialgroup.com. All comments made during today's call are subject to that Safe Harbor Statement.

I'm joined today by ViewPoint President and CEO, Kevin Hanigan; and Interim Chief Financial Officer, Kari Anderson. After the presentation, we'll be happy to address questions that you may have as time permits.

And with that, I'll turn over to Kevin.

Kevin J. Hanigan

Thanks, Scott. Good morning, everyone, and thanks for joining us on the call. I will cover the first few pages of our presentation, and then Kari will take us through the remainder of our slide deck. Time permitting, as Scott said, we can then entertain your questions.

2013 was a very good year for our company. In short, we had very solid earnings, improvements in our net interest margin, we made outstanding progress in our transformation to a commercial bank and most recently, we announced the merger with Legacy Texas Bank, an in-market, 50-year-old, very attractive commercial franchise.

My remarks will begin on Slide 3. Our merger with Legacy will create one of the largest independent banks in Texas, with 51 branches and pro forma assets of over $5 billion. The merger not only accelerates our transition to a commercial bank, it also leverages a good portion of our excess capital in a financially attractive transaction.

In terms of our commercial banking strategy, we continue to hire people, shift our earning asset mix and substantially grow our commercial loans.

In the fourth quarter, C&I and CRE loans grew $119 million or 8.3% on a linked-quarter basis. It's worth noting, this is the third consecutive quarter where C&I and CRE loans grew by more than $100 million.

For the year, our commercial loan portfolio grew a little over 39% to a total of $1.6 billion. Quarterly net income was $7.2 million. GAAP EPS for the quarter was $0.19, and core EPS was $0.21. Our net interest margin for the quarter hit an all-time high, up 3.83%. Annual net income totaled $31.7 million, and NIM for 2013 was 3.71%, up 10 basis points over 2012.

Our asset quality, which has always been strong, improved in the fourth quarter, and non-performing loans now total just $22.6 million. Slide 4 speaks to our progress towards becoming a premier Texas-based commercial bank.

To summarize, for 2013 we hired 15 highly talented commercial bankers. Our commercial loan portfolio experienced exceptional growth. In June we started our energy lending group, and the early success of this unit has been outstanding. C&I lending, which was just $71 million at year-end 2011, is now $439 million. Our overall deposit funding cost has improved, and non-interest-bearing commercial deposits and treasury management fee income is growing. And finally the Legacy merger accelerates this transformation.

Turning to Slide 5, we highlight the footprint of ViewPoint and Legacy combined. The map reflects our 51 combined branches and the great density we will have in one of the best markets in Texas. This slide also highlights our pro forma deposit market shares statistics. We become the third largest independent bank in Dallas/Fort Worth, the largest independent bank in the highly affluent Collin County and the third largest market share among all banks in Collin County, with #1 and #2 being JPMorgan and Bank of America.

Turning to Slide 6, we highlight the dramatic shift we have made in the composition of our revenue and the success of our commercial bank strategy. Looking across the columns, in the far right-hand column, we also highlight on a pro forma basis how the Legacy transaction helps lessen the impact of the swings in the mortgage warehouse business.

With that, let me turn the call over to Kari.

Kari Anderson

Thank you, Kevin. Slide 7 displays the change in average balances over the last year between the commercial portfolio and the Warehouse Purchase Program. As the Warehouse Purchase Program has declined due to the increase in the 10-year Treasury, the commercial portfolio growth has surpassed its decline. Compared to the fourth quarter of 2012, the commercial average grew $386 million, while the Warehouse average declined $367 million.

Slide 8 displays the strong growth in the commercial portfolio throughout the year. C&I grew $49 million linked-quarter or $161 million for the year, while CRE grew $71 million linked-quarter and $279 million for the year. C&I and CRE increased a combined 8.3% and 39.3% annualized growth. The green section of the C&I graph represents the energy portfolio, which ended at $166.5 million for the year.

The average balances on the Warehouse Purchase Program decreased $367 million or 40% from the fourth quarter of 2012 and decreased $144 million or 21% linked-quarter. Although we have increased 43 clients -- from 43 clients to 45 clients from the fourth quarter of 2012, the decrease has been anticipated with the dramatic shift from the refinanced towards purchase.

For the fourth quarter of 2013, the mix was 79% purchased and 21% refinanced, compared to the mix in the fourth quarter of 2012 with 53% purchase and 47% refinanced. The yield on this portfolio was 3.79% for the fourth quarter, compared to 3.86% for the third quarter.

Slide 10 shows some profitability indicators. With our NIM on the left-hand side, has expanded to 3.71% for the year, which is up 10 basis points over 2012 and 80 basis points over 2011. Net interest income shows continued growth year-over-year for a compounded average growth rate of 18%. Return on average assets and efficiency ratio in the bottom graph show improvement over prior years. However, you can see that they were impacted in 2013 by the investments in our growth strategy and cost to increase our franchise value.

Slide 11 shows our strong credit quality and how we compare favorably to the industry. With just $22.6 million in NPAs at the end of 2013, our NPAs to loan have improved from 1.72 to 1.10 at 2013, and our net charge-offs remain minimal at 0.10. NPAs to equity have also improved from 5.59 to 4.15.

And with that, I will turn it back over to Kevin.

Kevin J. Hanigan

Thanks, Kari. Slide 12 summarizes many of the comments we've made so far this morning. With that, let me turn it back over to Gary, our moderator, and take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] The first question comes from Scott Valentin with FBR Capital Markets.

Scott Valentin - FBR Capital Markets & Co., Research Division

With regard to the margin, it had a pretty sharp increase during the quarter. I'm just wondering if you could maybe point out or highlight, was it securities portfolio driven or loan growth driven? Which -- What the components were?

Kevin J. Hanigan

I'd say it was broad-based. Securities portfolio yields have obviously been better this quarter as we've reinvested cash flows off of the securities into higher yielding securities. We continue to do pretty well in terms of our loan spreads. We can talk about that in a minute, when we talk about loans. And then the margin was also impacted by a credit event. So that credit event, just from a credit side, impacted margin about 5 basis points. I think as you read it in the earnings release, many would calculate it at 7 basis points, but actually the credit event and the amount of the credit event we reported in the earnings release has got some accretion related to that credit as well. So there's about 2 bps of accretion and 5 bps related to the collection of some nonaccrual interest. And then the last thing to keep in mind is we still have overall purchase accretion. So overall purchase accretion was about 10 bps related to the Highlands portfolio.

So think of it as 5 bps for credit and 10 for accretion.

Scott Valentin - FBR Capital Markets & Co., Research Division

And do you know if that 10 bps -- how did it compare to last quarter?

Kevin J. Hanigan

It was 7 of accretion last quarter.

Scott Valentin - FBR Capital Markets & Co., Research Division

And that should come down over time, I guess, right? As the Highlands acquisition, as we get further from that acquisition date?

Kevin J. Hanigan

It does, but recall it can get a little lumpy from time to time and as you get prepayments. If somebody refis like in the case this year we had a refi of a nonaccrual credit that we got taken out of that power [ph] plus the interest, that's always a good event. But if something pays off either through sale of the company or refi, it pulls forward the accretion related to that credit. So just be aware, I'm sure you are, that it can be a little lumpy quarter-to-quarter.

Scott Valentin - FBR Capital Markets & Co., Research Division

Okay. So think about, so if we back out the, say, 7 basis points kind of unpredictable non-recurring margin, do you think the margin can expand modestly from current levels if we take off that 7 basis points and get kind of a -- from the core margin level?

Kevin J. Hanigan

I think we're better off keeping it where it is. Who knows, the 10 year's backed up, so who knows what that means for securities gains going forward. And as we just look forward into the year, we'll complete the Legacy transaction at some point and their NIM, if you just look at it historically, it's pretty close to ours, it's click or 2 better. So I think holding it stable less the 7 bps, if you would, would be a better spot to be.

Scott Valentin - FBR Capital Markets & Co., Research Division

Okay. And then one final question, I'll get back in the queue, but on the loan yield, just curious as to the origination yields versus the portfolio yields if you're seeing an uptick there?

Kevin J. Hanigan

Yes, pretty good news when we look at commercial real estate. So in terms of just new fundings in commercial real estate for the quarter, we funded $114 million with a weighted average coupon of 5.13. So if we look back at last quarter, I think, I reported whatever our new fundings were 4.99 because I remember the team was a little upset with me for not rounding up to 5, but I'm sure they're on the phone as well. So I guess, it lit a fire under you because now we're 5.13. Pretty good on the commercial real estate side. On the C&I side, again, net new fundings were solid, but skewed towards oil and gas, which tends to be a skinnier margins. If -- so if we look just at kind of middle market and small business, there's about $17 million in new fundings in that division. Believe it or not, there's a 4.69 coupon, which is -- we've been really running between a 4.11 and 4.25 for the last several quarters. So there's one very high-yielding deal in that mix. And on the Energy side, we did $54 million of new fundings, and that was sub-4. Since we have so few clients in the energy space, I don't want to get too granular in terms of what the margin is for competitive reasons until that portfolio gets a little bigger, but it was at sub-4, which is what we had anticipated.

Operator

Our next question comes from Brad Milsaps with Sandler O'Neill.

Brad J. Milsaps - Sandler O'Neill + Partners, L.P., Research Division

Kevin, just to follow up on the C&I fundings in the quarter. Obviously a very strong energy quarter. Just can you talk about sort of demand outside of energy, kind of what you're seeing? And maybe it was a little bit of a slowdown and compared to what you have been seeing? So just kind of curious if there's any kind of a payoff in the quarter? Or just maybe some things that were supposed to close got pushed into the first quarter?

Kevin J. Hanigan

You hit it on the head. I don't -- surely it was slowdown relative to what we have been funding in the traditional C&I space. But I relate that slowdown more to -- we had a bunch of deals that didn't fund at the end of the year, people out on vacations, customers not in a hurry to get things done. So we entered January with a really strong pipeline of deals that had been approved, that have been through documentation, that just had not funded yet. So what that means is the early part of the year was pretty good for C&I in terms of fundings. Just some pent-up fundings that didn't get done at the end of the year. Pipeline looks good. Again, it was all timing, but we don't see any real slowdown in the pipeline or anything else. That was just a timing difference.

Brad J. Milsaps - Sandler O'Neill + Partners, L.P., Research Division

Got it. That's great color. And just one other follow-up on the Legacy Texas. It looks like they had a good quarter at the end of the year. Any change in sort of the timing on when you anticipate that's going to close? Still kind of second -- sometime in the second quarter?

Kevin J. Hanigan

Yes, I mean, we're still -- we still have a couple of hurdles. Obviously we got to get the Legacy shareholder approval, which we don't anticipate any issues with, and we got to get regulatory approval, which we don't anticipate any issues with. Our best guess, Brad, is end of May or end of June. I think it's pretty unlikely it's end of April. So we think it's still a second quarter event. I would modify that only to say, if it was the end of June, we will probably officially close on July 1 just to keep it clean, which would technically be the start of the third quarter.

Operator

Your next question comes from Matt Olney with Stephens, Inc.

Robert Madsen - Stephens Inc., Research Division

This is Robert Madsen on for Matt. I had a question about M&A. And I'm just curious how long the Legacy acquisition will take you out of the game. Or could you potentially be announcing something in the back half of 2014?

Kevin J. Hanigan

Well, that's a good question. Let me tell you how I think about it. I think Legacy is so important to us and it's big, and it was our #1 partner. We want to make sure we do it right. So we are maybe myopically focused on making sure that we execute and integrate well on Legacy. I would never rule anything out, let me put it that way too. It's not like we've totally turned ourselves off, but it would have to be something particularly unique for us to be doing something on the heels of Legacy. So what would be really unique, it would be a tuck in of something small in a market we just feel like there's an opportunity to get into, so it would be a smaller institution. If it was bigger, it would have to be something special. It would have to be our next -- our new #1 target. And our fear of if we don't get it now, it's going to go away from us. Take away from this that we're really focused on executing and integrating the Legacy transaction because it is such a game-changer for the company. We just can't take our eye off the ball. That said, we're always going to do what we think is in the best long-term interest of the shareholders. We're going to come out of the Legacy transaction with low 10s, PC 10.2, 10.3. We'll see where it finally comes out when we close it, but we're going to be in a very strong capital position. Our credits stats are remarkably good. And we have lots of options with that excess capital available to us. And we will trade off those options every time we have a thought process about them, but we'll think mergers, we'll think share repurchases, we'll think increased dividends, and we're going to weigh all of those options off against each other and do what we think is in the best long-term interest of the company.

Robert Madsen - Stephens Inc., Research Division

Okay. That's helpful. And then just a quick question on the tax rate, looks like it was a little bit lower in 4Q. Was there some noise there and maybe what's a good tax rate to use in 2014?

Kevin J. Hanigan

Yes, a little noisy. That was a true-up as well as an amended return from a prior year was the bulk of that. So I think you're best off -- or we're all best off thinking about us as a 35%, maybe a shade lower than 35% but not much, taxpayer.

Operator

The next question comes from Frank Barlow with KBW.

Frank Barlow - Keefe, Bruyette, & Woods, Inc., Research Division

Turning to the Warehouse, were there any participations at the end of that quarter? And how should we be looking at forecasting the Warehouse from here?

Kevin J. Hanigan

I wish I knew. Let me -- no, there were no participations. We had a couple that we had purchased back, but we no longer have any participations out there. I will -- I would say we've got one kind of teed up just because we're out of the limit with somebody and we're taking them a little higher. So that's more of a limit issue than managing the exposure to the Warehouse. I think the business, I'm not talking about our business but just the business, is going to go back to what it was long ago. We've been through an unusually good period and we've benefited greatly from the unusually good period of the refis and everything else. But if we roll back to the time that -- before '08 when things really -- a lot of folks left the business, a lot of folks entered the business because you could get floors and floors back then were 4.25 and 4.5. It's hard to believe. I think it's going to return to what it's always been, a business that is seasonal. It will be slower in the third and first quarter. It will pick up in the second and third quarter, and they'll be pretty good. Floors will be gone, and pricing pressure will remain. There's overcapacity in the business, and I think it returns to even lower margins than we've experienced. We held our own pretty well in terms of margins. I think we were maybe 3.86 or 3.87 last quarter, 3.86, I think, they're nodding. And with 3.79 weighted average coupon this quarter. So we had a little bit of drop. As I listen to other calls, I can see others had more of a drop, but probably did more of volume. And we report that we're up year-over-year in terms of number of clients. We're down over the last quarter because we had a few of them that just came in here at rates that we just couldn't stomach. And I fear the business is going to drift lower in terms of coupons from where we are today.

Frank Barlow - Keefe, Bruyette, & Woods, Inc., Research Division

Okay. That's great color. And turning to the reserve, it's up on an aggregate basis, but it looks like it was down a few basis points to 94 basis points of loans in the quarter. I know that something is -- you -- probably your models spits out based on your level of classified NPAs and historical losses, but do you expect to see that ratio fall much further from here prior to the Legacy?

Kevin J. Hanigan

No, not really. I think we're comfortable in where we are obviously, and I don't anticipate drifting a whole lot lower. I mean, we certainly -- if you look at how we're now reporting because the Warehouse loans are now going to be held-for-investment loans, we're going to break those out. So the numbers don't look too squarely to us in terms of our ALLL to kind of our traditional held-for-investment loans. But I think as we book new loans, we're going to put up provisions related to the risk of those loans.

Operator

The next question comes from Brett Rabatin with Sterne Agee.

Brett D. Rabatin - Sterne Agee & Leach Inc., Research Division

I joined a few minutes late, but you may have covered this, but wanted to just talk about expenses and just thinking about 2014, excluding Legacy. And I guess, first, just excluding the merger-related costs with the run rate in the fourth quarter be pretty good in terms of thinking about the first part of 2014. And then obviously big deal pending, but any thoughts around hires and just what you're seeing from that pipeline?

Kevin J. Hanigan

Sure. Yes, so if we just look at linked-quarter, I think our non-interest expense was up about $2 million and call it roughly $800,000 of that, I think, were deal -- $700,000 deal-related expenses, just under $700,000. Salary as in benefits were the bulk of the reminder of that, let's call that about an $800,000 linked-quarter increase. That was several things that was hiring some folks, and when we hire folks, we typically do one of 2 things or both. We give them some upfront money and a guaranteed minimum bonus probably, and the other part of it was true-up on bonus accruals. We have some shares out there that are part of compensation. When stock price goes up, we adjust for those unvested restricted shares that are sitting out there. So that's part of it. So if share price goes up, we'll always have that. I guess it's hard to apologize for that one. And the rest of it was largely true-up of incentives.

Brett D. Rabatin - Sterne Agee & Leach Inc., Research Division

Okay. And then so it might dip some in the first quarter? And then just was curious on the pipeline for hires.

Kevin J. Hanigan

Yes, pipeline is good. We're out talking to folks. It's -- while we have a very large part of the team focused on integration and transformation and everything related to the partnership with Legacy, our lending team is out there still talking to folks. The pipeline is as good as it's ever been with talented folks, it's competitive. And I would tell you in general, good lenders are getting more in demand and more expensive.

Operator

Your next question comes from Andy Stapp with Merion Capital Group.

Andrew W. Stapp - Merion Capital Group

How much of the lift in security yields was related to lower premium amortization?

Kevin J. Hanigan

Not a whole lot. As we look at our bond portfolio and where we paid premiums, we didn't pay big premiums. So we didn't have big reversals on that, so it's small enough that it's immeasurable.

Operator

[Operator Instructions] The next question comes from Kyle Oliver [ph] with Raymond James.

Unknown Analyst

All my questions been asked and answered.

Operator

[Operator Instructions] As we have no further questions this concludes our question-and-answer session. I would like to turn the conference back over to Kevin Hanigan for any closing remarks.

Kevin J. Hanigan

Thank you all for joining us. We look forward to seeing you as we get out on the road here for the rest of the quarter. And we'll talk to you all next quarter to the extent we don't see you during the quarter.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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