ViewPoint's (VPFG) Kevin Hanigan Q2 2014 Results - Earnings Call Transcript

Jul.23.14 | About: LegacyTexas Financial (LTXB)

ViewPoint Financial Group Inc (VPFG) Q2 2014 Results Conference Call July 23, 2014 ET


Scott Almy – EVP, CRO, General Counsel

Kevin Hanigan – President and CEO

Kari Anderson – CAO and Interim CFO


Michael Rose – Raymond James & Associates

Brady Gailey – Keefe, Bruyette & Woods

Brad Milsaps – Sandler O'Neill & Partners

Matt Olney – Stephens Inc.

Gary Tenner – D.A. Davidson & Co. - Analyst


Good morning and welcome to the ViewPoint Financial Group's second-quarter 2014 earnings release conference call. (Operator Instructions) Please note this event is being recorded.

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

Scott Almy

Thanks, Gary, and good morning, everyone. Welcome to the ViewPoint Financial Group second-quarter 2014 earnings call. At this time, if you're logged into our webcast, please refer to the slide presentation available online, which includes our Safe Harbor statement on slide 2.

For those of you joining by phone, please note that the Safe Harbor statement and the presentation are available on our website at 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 the interim Chief Financial Officer, Kari Anderson. After the presentation, we will be happy to answer questions that you may have as time permits.

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

Kevin Hanigan

Thanks, Scott, and thank you all for joining us on the call this morning. As we traditionally do, I will make some comments on the quarter and cover the first couple of pages of the slide deck. Kari will then cover the rest of the slide deck and then, time permitting, we will entertain your questions.

That said, we were very pleased with the quarterly results. Once again, our loan growth was very good. Earnings were solid, and most importantly, we continue to execute on our strategy.

Last call, we talked about the two-year remixing of our earning assets. Initially, this remixing consisted of moving out of low yielding securities and into commercial loans. Then, as our mortgage purchase program slowed with the slowdown of the refi boom, we moved out of MPP balances and into commercial loans.

All in all, we moved some $700 million out of these two asset classes and into commercial loans, but our overall level of earning assets remained relatively flat. On the last call, we suggested that our securities portfolio and MPP balances may be approaching their lows and further growth in our loan portfolios may result in growth in our overall levels of earning assets.

This is exactly what happened in the second quarter. During the quarter, our gross loans increased some $321 million and average earning assets increased by $279 million.

Let me now turn our attention to page 3 of the slide deck. As I mentioned, our loan growth was once again strong for the quarter. Loans held for investment, excluding our warehouse purchase program, grew $142 million or 6.4% on a linked quarter basis. Our warehouse loans grew by nearly $179 million or 30% on a linked quarter basis.

Net income for the quarter totaled $8.8 million, an increase of 14.8% over the prior quarter. GAAP EPS was $0.23 and core EPS was $0.26, up $0.05 over the first quarter. Net interest margin stood at 3.76%, up 3 basis points on a linked quarter basis.

Our nonperforming assets remain benign at $23.8 million or 60 basis points of total assets. Capital levels remain strong, with our TCA to total assets at 13.4% on a premerger basis. As we have previously indicated, post the planned merger with Legacy, our TCA should – TCE should remain at approximately 10%, providing ample room for future growth.

Slides 3 and 4 provide information on our announced merger with LegacyTexas Group. Briefly recapping both of these slides. The merger was overwhelmingly approved by the Legacy shareholders on May 19.

The merger agreement was recently extended until August 31 as we await the final approval needed, which is from the Federal Reserve. Legacy will add approximately $1.8 billion to our asset base, bringing pro forma assets to approximately $5.8 billion.

Our integration and conversion plans are going extremely, extremely well. The merger is very strategic and provides significant size and scale throughout Dallas and Fort Worth. Combined, we will have a total of 51 branches.

Slide 6 provides an update on our commercial bank transformation and shareholder return since December 2011, when we announced the merger with Highlands Bank, the bank that I was running at the time. Overall, we now look and act like a traditional commercial bank and over the time period measured, our shareholder return has been 137%, far outpacing the S&P and traditional bank indices over the same period of time.

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

Kari Anderson

Thank you, Kevin. The chart on slide 7 shows commercial interest income and that makes up 60% of our earning asset mix as we successfully diversified from the consumer and securities portfolios. The last bar on the chart shows the pro forma of ViewPoint and Legacy, with further improvement of commercial revenue to 63% and a reduction in the warehouse purchase program mix from 14% to 9%.

Slide 8 shows the change in average balances between the commercial portfolio and securities portfolio over the past year. Compared to second quarter 2013, commercial averages grew $482 million or 38%, while securities declined $135 million or 20%.

Slide 9 presents the commercial growth, broken out between C&I and CRE. C&I grew $67 million linked quarter, while CRE grew $38 million linked quarter. Energy lending, which is shown in the green bar, now makes up $222 million of our $611 million C&I portfolio.

Slide 10 shows the mix of deposits as we've transitioned to a commercial bank, improving our non-interest bearing demand deposits to 18% compared to just 10% in 2010. We've also declined our time deposits from 33% to 20%. Diversifying this mix has helped to reduce our cost to deposit from 1.60% in 2010 to 34 basis points currently.

Turning to slide 11, our NIM has expanded 4 basis points over the same time last year, as we've increased volume and higher-yielding commercial loans as well as lower time and demand deposit rates. The net interest income graph shows our year-over-year growth with a compounded average growth rate of 19%.

Return on average assets and efficiency ratios, in the bottom graph, show improvements over prior year, although you can see they were impacted in 2013 and 2014 by our investments in our growth strategy and cost to increase our franchise value.

Slide 12 shows our continued strong credit quality and our favorable comparison to the industry, with just 1% in NPAs to loans and OREO and only 5 basis points in net charge offs to average loans. With only $23.8 million in NPAs, our NPAs to equity is 4.28%.

With that, I'll turn it back over to Kevin.

Kevin Hanigan

Thanks, Kari. Looking ahead, we look forward to integrating with LegacyTexas and rebranding the combined franchise. Our focus will be on growing our franchise and levering our excess capital. We intend to diversify our income sources and focus on expense management and maintain strong asset quality.

With that, let's open it up for questions.

Question- and-Answer Session


(Operator Instructions) At this time, we will pause momentarily to assemble our roster.

The first question comes from Michael Rose with Raymond James. Please go ahead.

Michael Rose – Raymond James & Associates

Hey. Good morning, guys. How are you?

Kevin Hanigan

Hey, Michael.

Michael Rose – Raymond James & Associates

Hey, just on the closing of the deal, we obviously saw another bank get hit pretty hard yesterday because their deals were delayed due to BSA and AML concerns. Is there any issues there and could you comment on if you still expect the deal to actually close by the 31st?

Kevin Hanigan

Yes, let me just comment generally on it. First of all, we're in really good shape from a BSA and AML perspective here. So we don't have that issue. We are well aware of what was announced earlier in the week and the impact it had on that company's share price.

The extension of the time period between June and August was a one-time extension that was allowed for in the definitive agreement. And the way that was crafted was either company could extend the agreement by that sixty-day period of time, if the only delay was a regulatory delay.

It didn't take either of us. We both decided we wanted to extend it. So that wasn't to say that we thought or didn't think it was going to close by either before or after August 31, it was just the terms of the agreement.

We still await the Fed and we are on their timetable. So we don't have any further feedback, Michael, on where they stand, other than they are evaluating our approval and are going to let us know just as soon as they are ready to move forward.

Michael Rose – Raymond James & Associates

Okay. And then switching gears a little bit, the energy loan growth this quarter was maybe a little bit less than maybe some were expecting. Obviously realizing it's been very strong since you started the group.

But was there any sort of dynamics in there that kind of masked the point-to-point growth in terms of paydowns or anything like that? Thanks.

Kevin Hanigan

Yes, really good observation, Michael. First of all, we feel really good about the energy program – where it's going, and its long-term success and growth prospects. During the quarter, we had a couple of paydowns – I wouldn't say payoffs.

From time to time in that business, you're going to get folks who operate in several fields and may decide they want to concentrate on one field or one or two fields and sell off some assets in another field. And when they do that, they tend to pay down their debt, refocus their drilling activity on fields of expertise, and generally fund up over a period of time.

We had that happen in one case. And in another case, a company is in a very attractive area for drilling, they are growing pretty fast, and they went out to get some secondary source of capital and pay down about $17 million in attracting that secondary source of capital.

And really didn't fund back up much at all from that $17 million by the end of the quarter. We expect them to continue drilling and to fund up on the credit facility going forward into this quarter and in the future quarters.

So overall, maybe you have a better data point for you is we added a couple of customers during the quarter. I think we had 17 or 18 last quarter. We now have 20, so we did add a couple of customers.

The mix of those customers – if you can recall back to when we first got in the business and talked about where we thought we would be long term, we had indicated – we thought about half of our business or half of our customers would be direct for us leading credit facilities and other half would be us buying into somebody else's credit facility.

Out of the – let's call it 20 customers, I think that was the right number the end of the quarter – 12 of those are us buying into somebody else's credit facility and 8 are direct clients or deals where we lead the credit facility. As I look at the pipeline, which is active and is very active as we going into the remainder of the year, I would say the preponderance of deals in the pipeline are direct or deals that we're going to lead.

So I would think by the end of the year, we will be right on top of that 50-50 mix we thought we would be at when we got into the business in June of last year.

Michael Rose – Raymond James & Associates

Okay, that's helpful. I will let somebody else take the warehouse question. Thanks, guys.


The next question comes from Brady Gailey with KBW. Please go ahead.

Brady Gailey – Keefe, Bruyette & Woods

Hey, thanks, guys. One more question on the deal delay. It doesn't sound like it's BSA or AML. Is there anything else that the Fed is keeping a close eye on that would be the cause of this delay or would you consider this delay to be just a general, typical regulatory delay?

Kevin Hanigan

I think it's a general, typical regulatory delay. And I think, as you all who follow this day-to-day is closer – more closely than we do – there have been a number of instances where just the timeframes have taken longer than they have traditionally taken.

So most of us that announced deals at some point in the fourth quarter last year thought they would close in the second quarter of this of year and most of us are not on that timeframe anymore. I think the timeframe for approvals, just in general, seems to have extended. I don't have a data point to list 20 deals and how that is the case, but there's been much written and reviewed on this.

So I think it's just a general delay. We're very confident we're going to get there. Both sides are really pleased with where we're going. The integration plans are well ahead where we thought they would be at this stage of the game.

We have tested systems. We have backtested systems, so we are planning to convert the systems in mid-October, over the Columbus Day weekend. All the planning and metrics around that are going really well. We did some pretesting last week, we will do some more next week, and generally with the first pretesting, there's a lot of bugs.

We came out of last week's pretesting in really, really good shape. We feel good about where we are and the fact that this is going to get done.

Brady Gailey – Keefe, Bruyette & Woods

Okay. So the merger agreement allows for an extension to August 31. What if we get to that date and we don't have regulatory approval? Is it just you extend it again?

Kevin Hanigan

Yes, it requires both parties to agree to extend it. I can tell you we don't want that to be the case that we have to have that conversation, but we have had the conversation. And I think if George Fisk, who is the CEO of Legacy, was here, he would tell you we both intend to close this deal, one way the other.

We really – if anything, we see more benefits to the deal than when we announced it last November. We feel great about the cost saves and we feel great about the team we're assembling and we really feel as though the switch of systems – and we are on Fiserv and we're moving to Jack Henry. We think it's going to make us a more efficient bank going forward. So just across the board, we feel good about it.

Brady Gailey – Keefe, Bruyette & Woods

Okay. And then finally, the warehouse had some nice, impressive growth, which we've seen kind of industry-wide this quarter. How are you thinking about warehouse volumes in the back half of the year?

Kevin Hanigan

You know, Brady, I think we're kind of going into that – what is traditional. With the refi boom gone, we're back to what the business has always been, which is pretty soft in the first quarter, pretty good in the second and third, and softer in the fourth.

Clearly we ended the quarter with pretty robust volumes. And you could – since we typically say those volume stick around on our books for about 17 days and maybe a little longer in July because of the 4th holiday, and there were – maybe it sticks around for 18 or 20 days. So July was – you could expect the volumes to hold up pretty well.

The pipelines look pretty good – so I think that the third quarter is probably good. If I was a guessing man, I would say September might be a little lighter than July and August, but that's just because we're getting towards the tail end of the season. And then I expect the fourth quarter to be lighter.

Just to give you guys another data point, I was looking at this last night. While our volumes are up, at the end of the year, we had 45 clients in the warehouse business and we're down 38. And that down to 38 was largely us looking at deals where the coupons just got so low that we decided not to participate or be a provider of credit to those companies anymore.

And as a result of that, I think our weighted average coupons held up reasonably well. We'll see as others report how – that break this line of business out, anyhow, how that holds up, but I think we went down from 3.63% or 3.64% as a weighted average coupon to 3.56%.

So I do think there is continued pressure on pricing, but at some point, we're willing to walk away.

Brady Gailey – Keefe, Bruyette & Woods

Okay, great. Thanks, Kevin.


The next question comes from Brad Milsaps with Sandler O'Neill. Please go ahead.

Brad Milsaps – Sandler O'Neill & Partners

Hey, good morning.

Kevin Hanigan

Good morning, Brad.

Brad Milsaps – Sandler O'Neill & Partners

Hey, Kevin, maybe just talk a little bit about loan pricing. Looks like the – your C&I yields held up relatively well. CRE yield was up – you talked a little about the warehouse pricing. Just any additional color there that you typically give would be great.

Kevin Hanigan

Yes, it is still competitive out there. Don't – I'm sure you hear that from everybody, but we're holding our own. As you saw, the weighted average coupons in CRE were actually up for the quarter.

As I just look at new originations, which should typically run right at about 5% – low 5%s, for this quarter, new originations were actually at 5.13%, so it was a little bit better than that. Some of the weighted average coupon increase across the portfolio was related to some early payoffs – and it wasn't pre-pays, because those pre-pays going to non-interest income, but it would be the pull forward of FAS 91 fees – upfront fees that are accreted over the life of the loan.

So if a deal pays off in year three and it was a five-year deal, we have two years' worth of that upfront fee that we pull forward into NII. So some of that was a result of some pre-pays.

On C&I and oil and gas, those have remained about what they were. I think we were – we've generally been right at 4%. We were a tick under 4%, with most of our C&I deals being a little over 4% and most of the oil and gas deals being under 4%.

So that tends to flow predicated on how much traditional C&I we have versus oil and gas. And since there was less oil and gas, net increase of only $9 million, they held up closer to 4%.

Brad Milsaps – Sandler O'Neill & Partners

That's great. And just to follow-up on that sort of – excluding Legacy, you still expect the NIM to kind of stay sort of in this range, plus or minus, three or four basis points, either way, depending upon accretion income, payoffs, etc.?

Kevin Hanigan

Yes, I think -- we have four basis points of accretion this quarter, Kari? Yes. Yes, I think we've generally been a 3.68% to 3.72%, 3.73% kind of – minus accretion, right? Or having already backed out accretion.

And I think that's kind of where we are. Things that could change that would be maybe a shift in where the 10 year is, which has some impact on our commercial real estate pricing on the fixed-rate basis and obviously has an impact on our securities portfolio. But it seems inextricably stuck in the – where it is.

So I think stable is probably where we're at, Brad. We're picking up maybe a basis point or two a quarter on deposit pricing as we change, and it's mostly mix related rather than pricing related. It's just our C&I strategy and our strategy of driving that kind of business is increasing our non-interest bearing deposits and that's helping our overall cost.

Brad Milsaps – Sandler O'Neill & Partners

Got it, thank you. And just one final housekeeping question. The tax rate – it's been closer to 36% the last few quarters, maybe a little lower last year. Is that a level you anticipate it remaining…

Kevin Hanigan


Brad Milsaps – Sandler O'Neill & Partners

With Legacy – okay. Got it. Thank you very much.


The next question comes from Matt Olney with Stephens. Please go ahead.

Matt Olney – Stephens Inc.

Hey, going back to the pending acquisition, can you let us know if both banks are up to date on all the scheduled routine regulatory exams?

Kevin Hanigan

Yes. As you know, we're switching from an OCC charter to a state charter, so that required both the state and the Fed to do an examination of us. And they came in and did an exam over the last – course of the last couple of months. And I would tell you that exam went reasonably well – very well, from our perspective.

They left here and did a quick exam over at Legacy, I think maybe a week or two after they left here, so we're up to date with all of the examinations. And we've heard back – both Boards have heard back on the results of the exam. Obviously, we can't disclose the results, but we think the exams went very well.

Matt Olney – Stephens Inc.

Okay, that's helpful. And then over on the securities portfolio, the size continues to shrink here. I keep thinking we're at the end of the line. How much smaller can you bring down the securities portfolio?

Kevin Hanigan

Yes, you know, I've been saying just historically, I guess, we were close to 40% of our earning assets were in the securities portfolio when I got here two and half years ago or not quite two and half years ago. And I said let's target to get it down to 20% and we got to 20% and I said let's target 12% to 15%, which is where I think we need to be, because we do consider the securities portfolio kind of a secondary source of liquidity in terms of managing the balance sheet.

So we are down approaching those levels. And when you back out – when you add in the Legacy securities portfolio and then back out $115 million, roughly, in cash that we've got to deliver at the closing of the deal, I think we are modeled out to be at between 13.5% and 14%.

So you're right. We are about where we need to be. I think you could look for us to kind of hold these levels, all other things being equal.

Matt Olney – Stephens Inc.

Okay, thanks, Kevin.


(Operator Instructions) The next question comes from Gary Tenner with DA Davidson. Please go ahead.

Gary Tenner – D.A. Davidson & Co.

Thanks, good morning. Question on the deposit side. It looks like you had pretty good success on your new product out to other banks. I wonder if you could just comment on the number of banks you've gotten involved with that, the pricing, etc.?

Kevin Hanigan

Yes, the way we've done that, Gary, is we set an upper tier to our money market account and it requires a minimum deposit of something larger than all the other tiers. So it attracts – it is designed to attract money from banks.

And we put a max on there of no one bank can put more than $25 million with us, so we don't want to get too lumpy, if you will. And just as we look across – we don't have to go far. We can look across the state and while there is robust loan growth in Dallas and Houston and some of the bigger cities, I think as a state, we're probably running closer to 55% loan to deposit ratio.

So there are a lot of banks in the state, many of which we know the management teams at fairly well, that are sitting on big levels of cash, generally invested at the Fed at about 25 basis points. So by offering them slightly above that level, we're able to attract some deposits in from – to some friendly bankers who are in our backyard.

We haven't gone full scale with that program. We tested it in the second quarter and had some very good results. I think we probably had about a 90% hit rate for all the ones we called who made some of former deposit with us. So I think we will continue the program as just another leg of the stool to drive deposits.

Gary Tenner – D.A. Davidson & Co.

Okay, thanks for that. And then just one quick question. On the prepayment penalty on the health maturity securities, that was a benefit to you guys, right? I just want to make sure I'm not looking at it backwards.

Kevin Hanigan

No, you're looking at right. It's a benefit

Gary Tenner – D.A. Davidson & Co.

Okay, all right, just checking. All right, thank you.


This concludes our question-and-answer session. I would like to turn the conference back over to Kevin Hanigan for any closing remarks.

Kevin Hanigan

Great. Thank you all and again, thanks for joining us. Really good quarter for us. The last thing we didn't talk about is management. And then on interest expense, I should have probably thrown something about that, but outside of some one-time issues, I think our noninterest expense was basically flat quarter over quarter while we're driving revenue, which I think is a good sign for the future.

So with that, thank you all again, hope to see you when we're out on the road.


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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to All other use is prohibited.


If you have any additional questions about our online transcripts, please contact us at: Thank you!