Viewpoint Financial 10-Q 2009 Q3 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2009

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                    to                    

Commission file number001-32992

VIEWPOINT FINANCIAL GROUP

(Exact name of registrant as specified in its charter)

United States	6035	20-4484783
(State or other jurisdiction of incorporation or organization)	(Primary Standard Industrial Classification Code Number)	(I.R.S. Employer Identification No.)

1309 W. 15^th Street, Plano, Texas 75075
(972) 578-5000
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such requirements for the past 90 days. Yesþ Noo

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yeso Noo

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filero	Accelerated filerþ	Non-accelerated filero	Smaller reporting companyo
		(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso Noþ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common Stock	24,929,157
Class	Shares Outstanding as of November 3, 2009

	Page
	Number
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets at September 30, 2009, (unaudited) and December 31, 2008		3
Unaudited Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2009 and 2008		4
Unaudited Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2009 and 2008		5
Unaudited Consolidated Statements of Changes in Shareholders’ Equity for the Nine Months Ended September 30, 2009 and 2008		6
Unaudited Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2009 and 2008		8
Condensed Notes to Unaudited Consolidated Interim Financial Statements		10
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		26
Item 3. Quantitative and Qualitative Disclosures about Market Risk		48
Item 4. Controls and Procedures		51
PART II — OTHER INFORMATION
Item 1. Legal Proceedings		52
Item 1.A. Risk Factors		52
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		52
Item 3. Defaults Upon Senior Securities		52
Item 4. Submission of Matters to a Vote of Security Holders		52
Item 5. Other Information		52
Item 6. Exhibits		53
SIGNATURE PAGE		55
EXHIBIT INDEX		56
Exhibit 31.1
Exhibit 31.2
Exhibit 32

Page 2 of 56

PART 1 – FINANCIAL INFORMATION

Item 1. Financial Statements

VIEWPOINT FINANCIAL GROUP AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(Dollar amounts in thousands, except share and per share data)

	September 30,			December 31,
	2009			2008
	(Unaudited)
ASSETS
Cash and due from financial institutions	$	16,244		$	20,886
Short-term interest-bearing deposits in other financial institutions		15,846			11,627
Total cash and cash equivalents		32,090			32,513
Securities available for sale		471,178			483,016
Securities held to maturity (fair value September 30, 2009 — $262,764, December 31, 2008 — $176,579)		254,103			172,343
Loans held for sale		350,116			159,884
Loans, net of allowance of $10,955 — September 30, 2009, $9,068 — December 31, 2008		1,117,012			1,239,708
Federal Home Loan Bank stock, at cost		15,469			18,069
Bank-owned life insurance		28,022			27,578
Mortgage servicing rights		1,037			1,372
Foreclosed assets, net		1,201			1,644
Premises and equipment, net		50,455			45,937
Goodwill		1,089			1,089
Accrued interest receivable		7,575			8,519
Other assets		20,480			21,743
Total assets	$	2,349,827		$	2,213,415
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits
Non-interest-bearing demand		184,869			172,395
Interest-bearing demand		207,223			98,884
Savings and money market		687,084			635,243
Time		658,905			641,568
Total deposits		1,738,081			1,548,090
Federal Home Loan Bank advances		344,735			410,841
Repurchase agreement		25,000			25,000
Accrued interest payable		1,972			1,769
Other liabilities		38,486			33,576
Total liabilities		2,148,274			2,019,276
Commitments and contingent liabilities		—			—
Shareholders’ equity
Common stock, $.01 par value; 75,000,000 shares authorized; 26,208,958 shares issued — September 30, 2009; 26,208,958 shares issued — December 31, 2008		262			262
Additional paid-in capital		117,491			115,963
Retained earnings		109,547			108,332
Accumulated other comprehensive income (loss)		2,354			(1,613	)
Unearned Employee Stock Ownership Plan (ESOP) shares; 634,083 shares — September 30, 2009; 704,391 shares — December 31, 2008		(6,393	)		(7,097	)
Treasury stock, at cost; 1,279,801 shares — September 30, 2009; 1,279,801 shares — December 31, 2008		(21,708	)		(21,708	)
Total shareholders’ equity		201,553			194,139
Total liabilities and shareholders’ equity	$	2,349,827		$	2,213,415

See accompanying notes to unaudited consolidated financial statements.

Page 3 of 56

VIEWPOINT FINANCIAL GROUP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(Dollar amounts in thousands, except per share data)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2009			2008			2009			2008
Interest and dividend income
Loans, including fees	$	21,031		$	17,602		$	62,993		$	47,208
Taxable securities		4,911			7,551			17,766			22,300
Nontaxable securities		128			50			300			60
Interest-bearing deposits in other financial institutions		315			176			543			967
Federal Home Loan Bank stock		7			44			10			225
		26,392			25,423			81,612			70,760
Interest expense
Deposits		8,545			8,647			26,404			26,637
Federal Home Loan Bank advances		3,421			2,900			10,782			6,341
Federal Reserve Bank borrowings		—			—			29			—
Repurchase agreement		206			104			502			196
		12,172			11,651			37,717			33,174
Net interest income		14,220			13,772			43,895			37,586
Provision for loan losses		1,775			1,867			4,711			4,505
Net interest income after provision for loan losses		12,445			11,905			39,184			33,081
Noninterest income
Service charges and fees		4,798			5,034			14,063			14,918
Brokerage fees		90			144			229			364
Net gain on sale of loans		3,797			2,352			12,834			6,520
Loan servicing fees		82			69			183			196
Bank-owned life insurance income		103			301			444			849
Gain on redemption of Visa, Inc. shares		—			—			—			771
Valuation adjustment on mortgage servicing rights		109			—			(102	)		—
Impairment of collateralized debt obligations (all credit)		—			—			(12,246	)		—
Gain on sale of available for sale securities		—			—			2,377			—
Gain (loss) on sale of foreclosed assets		495			(8	)		219			(33	)
Gain (loss) on disposition of assets		(96	)		(1	)		(1,038	)		11
Other		353			90			1,005			622
		9,731			7,981			17,968			24,218
Noninterest expense
Salaries and employee benefits		11,451			11,427			35,655			31,786
Advertising		286			529			975			1,899
Occupancy and equipment		1,474			1,491			4,538			4,113
Outside professional services		460			832			1,425			1,588
Regulatory assessments		844			317			3,250			916
Data processing		1,085			1,040			3,127			3,110
Office operations		1,456			1,488			4,424			4,497
Deposit processing charges		203			245			666			755
Lending and collection		326			344			1,001			941
Other		485			493			1,579			1,438
		18,070			18,206			56,640			51,043
Income before income tax expense		4,106			1,680			512			6,256
Income tax expense		1,213			491			206			2,168
Net income	$	2,893		$	1,189		$	306		$	4,088
Earnings per share:
Basic	$	0.12		$	0.05		$	0.01		$	0.17
Diluted	$	0.12		$	0.05		$	0.01		$	0.17

See accompanying notes to unaudited consolidated financial statements.

Page 4 of 56

VIEWPOINT FINANCIAL GROUP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(Dollar amounts in thousands)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2009			2008			2009			2008
Net income	$	2,893		$	1,189		$	306		$	4,088
Other comprehensive income (loss):
Change in unrealized gains (losses) on securities available for sale		633			254			(955	)		(6,404	)
Reclassification of amount realized through impairment charges		—			—			12,246			—
Reclassification of amount realized through sale of securities		—			—			(2,377	)		—
Tax effect		(219	)		(88	)		(2,104	)		2,220
Other comprehensive income (loss), net of tax		414			166			6,810			(4,184	)
Comprehensive income (loss)	$	3,307		$	1,355		$	7,116		$	(96	)

See accompanying notes to unaudited consolidated financial statements.

Page 5 of 56

VIEWPOINT FINANCIAL GROUP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

(Dollar amounts in thousands, except per share data)

												Accumulated
			Additional			Unearned						Other						Total
	Common		Paid-In			ESOP			Retained			Comprehensive			Treasury			Shareholders’
For the nine months ended September 30, 2008	Stock		Capital			Shares			Earnings			Income (Loss)			Stock			Equity
Balance at January 1, 2008	$	262	$	113,612		$	(8,176	)	$	114,801		$	861		$	(17,566	)	$	203,794
ESOP shares earned, 80,966 shares		—		477			809			—			—			—			1,286
Treasury stock purchased at cost, 289,346 shares		—		—			—			—			—			(4,312	)		(4,312	)
Share-based compensation expense		—		1,292			—			—			—			—			1,292
Adjustment to deferred tax asset for difference between fair value of vested restricted stock and expense booked		—		(79	)		—			—			—			—			(79	)
Restricted stock granted (10,000 shares)		—		(170	)		—			—			—			170			—
Dividends declared ($0.21 per share)		—		—			—			(2,294	)		—			—			(2,294	)
Comprehensive income:
Net income		—		—			—			4,088			—			—			4,088
Change in unrealized gains (losses) on securities available for sale, net of reclassifications and taxes		—		—			—			—			(4,184	)		—			(4,184	)
Total comprehensive income (loss)																			(96	)
Balance at September 30, 2008	$	262	$	115,132		$	(7,367	)	$	116,595		$	(3,323	)	$	(21,708	)	$	199,591

See accompanying notes to unaudited consolidated financial statements.

Page 6 of 56

VIEWPOINT FINANCIAL GROUP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Unaudited)
(Dollar amounts in thousands, except per share data)

												Accumulated
			Additional			Unearned						Other						Total
	Common		Paid-In			ESOP			Retained			Comprehensive			Treasury			Shareholders’
For the nine months ended September 30, 2009	Stock		Capital			Shares			Earnings			Income (Loss)			Stock			Equity
Balance at December 31, 2008, as previously reported	$	262	$	115,873		$	(7,248	)	$	108,491		$	(1,613	)	$	(21,708	)	$	194,057
ESOP adjustment (see Note 2)		—		90			151			(159	)		—			—			82
Balance at January 1, 2009, as adjusted		262		115,963			(7,097	)		108,332			(1,613	)		(21,708	)		194,139
Cumulative effect of change in accounting principle, adoption of ASC 320-10-65 (net of tax)		—		—			—			2,843			(2,843	)		—			—
ESOP shares earned, 70,308 shares		—		277			704			—			—			—			981
Share-based compensation expense		—		1,387			—			—			—			—			1,387
Adjustment to deferred tax asset for difference between fair value of vested restricted stock and expense booked		—		(136	)		—			—			—			—			(136	)
Dividends declared ($0.18 per share)		—		—			—			(1,934	)		—			—			(1,934	)
Comprehensive income:
Net income		—		—			—			306			—			—			306
Change in unrealized gains (losses) on securities available for sale for which a portion of an other-than-temporary impairment has been recognized in earnings, net of reclassifications and taxes		—		—			—			—			7,101			—			7,101
Change in unrealized gains (losses) on securities available for sale, net of reclassifications and taxes		—		—			—			—			(291	)		—			(291	)
Total comprehensive income																			7,116
Balance at September 30, 2009	$	262	$	117,491		$	(6,393	)	$	109,547		$	2,354		$	(21,708	)	$	201,553

See accompanying notes to unaudited consolidated financial statements.

Page 7 of 56

VIEWPOINT FINANCIAL GROUP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollar amounts in thousands)

	Nine Months Ended
	September 30,
	2009			2008
Cash flows from operating activities
Net income	$	306		$	4,088
Adjustments to reconcile net income to net cash from operating activities
Provision for loan losses		4,711			4,505
Depreciation and amortization		2,949			3,230
Premium amortization and accretion of securities, net		438			(613	)
Gain on sale of available for sale securities		(2,377	)		—
Impairment of collateralized debt obligations		12,246			—
ESOP compensation expense		981			1,286
Share-based compensation expense		1,387			1,292
Amortization of mortgage servicing rights		233			214
Net gain on loans held for sale		(12,834	)		(6,520	)
Loans originated or purchased for sale		(4,118,117	)		(205,447	)
Proceeds from sale of loans held for sale		3,940,719			202,532
FHLB stock dividends		(10	)		(225	)
Increase in bank-owned life insurance		(444	)		(849	)
Loss (gain) on disposition of property and equipment		2			(11	)
Write off of leasehold improvements related to in-store closings		217			—
Net loss (gain) on sales of other real estate owned		(226	)		109
Impairment of mortgage servicing rights		102			—
Net change in deferred loan fees		(13	)		1,901
Net change in accrued interest receivable		944			(1,529	)
Net change in other assets		(2,389	)		1,470
Net change in other liabilities		5,113			10,857
Net cash from operating activities		(166,062	)		16,290
Cash flows from investing activities
Contribution to new markets equity fund		—			(640	)
Available-for-sale securities:
Maturities, prepayments and calls		276,110			89,041
Purchases		(337,759	)		(15,075	)
Proceeds from sale of AFS securities		73,785			—
Held-to-maturity securities:
Maturities, prepayments and calls		38,881			14,768
Purchases		(120,825	)		(148,587	)
Proceeds from member capital account		—			1,000
Net change in loans		116,137			(297,756	)
Redemption/(purchase) of FHLB stock		2,636			(11,042	)
Purchases of premises and equipment		(7,695	)		(6,079	)
Proceeds from sale of fixed assets		9			28
Proceeds on sale of other real estate owned		2,409			832
Net cash from investing activities		43,688			(373,510	)

See accompanying notes to unaudited consolidated financial statements.

Page 8 of 56

VIEWPOINT FINANCIAL GROUP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollar amounts in thousands)

	Nine Months Ended
	September 30,
	2009			2008
Cash flows from financing activities
Net change in deposits		189,991			58,402
Proceeds from Federal Home Loan Bank advances		—			261,000
Repayments on Federal Home Loan Bank advances		(66,106	)		(19,356	)
Proceeds from repurchase agreement		—			25,000
Treasury stock purchased		—			(4,312	)
Payment of dividends		(1,934	)		(2,294	)
Net cash from financing activities		121,951			318,440
Net change in cash and cash equivalents		(423	)		(38,780	)
Beginning cash and cash equivalents		32,513			73,478
Ending cash and cash equivalents	$	32,090		$	34,698
Supplemental cash flow information:
Interest paid	$	37,514		$	32,852
Income taxes paid	$	1,790		$	1,917
Supplemental noncash disclosures:
Transfers from loans to other real estate owned	$	1,861		$	896

See accompanying notes to unaudited consolidated financial statements.

Page 9 of 56

VIEWPOINT FINANCIAL GROUP AND SUBSIDIARY

CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(Dollar amounts in thousands, except per share data)

1. Basis of Financial Statement Presentation

The accompanying consolidated financial statements of ViewPoint Financial Group (the “Company”) have been prepared in accordance with U.S. generally accepted accounting principles and with the rules and regulations of the Securities and Exchange Commission for interim financial reporting. Accordingly, they do not include all of the information and footnotes required for complete financial statements. In the opinion of management, all normal and recurring adjustments which are considered necessary to fairly present the results for the interim periods presented have been included. These statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s 2008 Annual Report on 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 Company’s 2008 Annual Report on Form 10-K.

The accompanying Unaudited Consolidated Interim Financial Statements include the accounts of ViewPoint Financial Group, whose business currently consists of the operations of its wholly owned subsidiary, ViewPoint Bank (the “Bank”). The Bank’s operations include its wholly owned subsidiary, ViewPoint Bankers Mortgage, Inc. (“VPBM”). All significant intercompany transactions and balances are eliminated in consolidation. Some items in prior years have been reclassified to conform to current presentation.

As of September 30, 2009, ViewPoint MHC (the “MHC”) was the majority (57%) shareholder of the Company. The MHC is a mutual institution, whose members are the depositors of the Bank. The financial statements included in this Form 10-Q do not include the transactions and balances of the MHC.

2. ESOP Adjustment

The Company revised its consolidated balance sheet as of December 31, 2008, and the beginning balance in the consolidated statement of changes in shareholders’ equity for the nine months ended September 30, 2009, to reflect an adjustment made in accordance with Accounting Standards Codification (“ASC”) 250-10-S99 during the first quarter of 2009. This adjustment related to a correction of the Company’s allocation of ESOP shares. For 2008, the Company allocated 15,116 shares more than scheduled under the ESOP plan as a result of an additional principal payment, causing an understatement of compensation expense for 2008. Due to this correction, retained earnings was decreased by $159, income taxes payable (disclosed under other liabilities) was decreased by $82, additional paid-in capital was increased by $90 and unearned ESOP shares was decreased by $151.

The relevant information included in the consolidated statements of income for the three and nine months ended September 30, 2008, the consolidated statement of changes in shareholders’ equity for the nine months ended September 30, 2008, and the consolidated statement of cash flows for the nine months ended September 30, 2008, were revised in this Quarterly Report on Form 10-Q to reflect the above correction. As a result, for the three months ended September 30, 2008, salaries and employee benefits expense was increased by $61, which had a net effect of decreasing net income by $40. For the nine months ended September 30, 2008, salaries and employee benefits expense was increased by $180, which had a net effect of decreasing net income by $119. The adjustment decreased basic and diluted earnings per share by $0.01 to $0.05 for the three months ended September 30, 2008, which also decreased basic and diluted earnings per share for the nine months ended September 30, 2008 by $0.01 to $0.17.

Page 10 of 56

VIEWPOINT FINANCIAL GROUP AND SUBSIDIARY
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)

The relevant information included in the consolidated statements of income, the consolidated statement of changes in shareholders’ equity, and the consolidated statement of cash flows for the twelve month period of 2008 will be revised in future filings to reflect the above correction. The ESOP adjustment is not material to prior periods. The below table illustrates the impact of this adjustment on the Company’s December 31, 2008 balance sheet and the statements of income for the three and nine months ended September 30, 2008.

				ESOP
BALANCE SHEET- DECEMBER 31, 2008	As reported			adjustment			As adjusted
Other liabilities	$	33,658		$	(82	)	$	33,576
Total liabilities		2,019,358			(82	)		2,019,276
Additional paid-in capital		115,873			90			115,963
Retained earnings		108,491			(159	)		108,332
Unearned ESOP shares		(7,248	)		151			(7,097	)
Total shareholders’ equity		194,057			82			194,139

			ESOP
STATEMENTS OF INCOME	As reported		adjustment			As adjusted
Three months ended September 30, 2008
Net income		1,229		(40	)		1,189
Earnings per share (basic and diluted)		0.06		(0.01	)		0.05
Nine months ended September 30, 2008
Net income		4,207		(119	)		4,088
Earnings per share (basic and diluted)		0.18		(0.01	)		0.17

3. Earnings per Common Share

Basic earnings per common share is computed by dividing net income by the weighted-average number of common shares outstanding for the period, reduced for average unallocated ESOP shares and average unearned restricted stock awards. Diluted earnings per common share reflects the potential dilution that could occur if securities or other contracts to issue common stock (such as stock awards and options) were exercised or converted to common stock, or resulted in the issuance of common stock that then shared in the Company’s earnings. Diluted earnings per common share is computed by dividing net income by the weighted-average number of common shares outstanding for the period increased for the dilutive effect of unexercised stock options and unearned restricted stock awards. The dilutive effect of the unexercised stock options and unearned restricted stock awards is calculated under the treasury stock method utilizing the average market value of the Company’s stock for the period.

Page 11 of 56

VIEWPOINT FINANCIAL GROUP AND SUBSIDIARY
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)

According to ASC 260-10-45-61A, unvested share-based payments 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. The two-class method of earnings per share calculation is described in ASC 260-10-45-60B. The two-class method calculation for the three and nine months ended September 30, 2009, and September 30, 2008, had no impact on the earnings per common share for these periods. A reconciliation of the numerator and denominator of the basic and diluted earnings per common share computation for the three and nine month periods ended September 30, 2009, and September 30, 2008, follows:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2009		2008		2009		2008
Basic
Net income	$	2,893	$	1,189	$	306	$	4,088
Weighted average common shares outstanding		24,929,157		24,958,368		24,929,157		25,128,775
Less: Average unallocated ESOP shares		649,537		749,177		672,743		776,000
Average unvested restricted stock awards		260,118		346,161		303,525		389,718
Average shares		24,019,502		23,863,030		23,952,889		23,963,057
Basic earnings per common share	$	0.12	$	0.05	$	0.01	$	0.17
Diluted
Net income	$	2,893	$	1,189	$	306	$	4,088
Weighted average common shares outstanding for basic earnings per common share		24,019,502		23,863,030		23,952,889		23,963,057
Add: Dilutive effects of assumed exercises of stock options		—		—		—		—
Dilutive effects of full vesting of stock awards		—		—		—		—
Average shares and dilutive potential common shares		24,019,502		23,863,030		23,952,889		23,963,057
Diluted earnings per common share	$	0.12	$	0.05	$	0.01	$	0.17

Stock options for 298,140 shares of common stock outstanding were not considered in computing diluted earnings per share for the three and nine months ended September 30, 2009, because the options’ exercise prices were greater than the average market price of the common stock and were, therefore, anti-dilutive.

Stock options for 252,901 shares of common stock outstanding were not considered in computing diluted earnings per share for the three and nine months ended September 30, 2008, because the options’ exercise prices were greater than the average market price of the common stock and were, therefore, anti-dilutive.

4. Dividends

On January 20, 2009, the Company’s Board of Directors declared a quarterly cash dividend of $0.08 per share. The dividend was payable on February 17, 2009, to shareholders of record as of February 3, 2009. On April 23, 2009, the Company’s Board of Directors declared a quarterly cash dividend of $0.05 per share. The dividend was payable on May 21, 2009, to shareholders of record as of May 7, 2009. On July 21, 2009, the Company’s Board of Directors declared a quarterly cash dividend of $0.05 per share. The dividend was payable on August 18, 2009, to shareholders of record as of August 4, 2009. ViewPoint MHC, which owns 57% of the common stock of ViewPoint Financial Group, elected to waive these dividends after filing a notice with and receiving no objection from the Office of Thrift Supervision.

Page 12 of 56

VIEWPOINT FINANCIAL GROUP AND SUBSIDIARY
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)

5. Share-Based Compensation

At its annual meeting held May 22, 2007, the Company’s shareholders approved the ViewPoint Financial Group 2007 Equity Incentive Plan. The Company is accounting for this plan under ASC 718,Compensation – Stock Compensation, which requires companies to record compensation cost for share-based payment transactions with employees in return for employment service. Under this plan, 1,160,493 options to purchase shares of common stock and 464,198 restricted shares of common stock were made available.

The compensation cost that has been charged against income for the restricted stock portion of the Equity Incentive Plan was $400 and $1,186, respectively, for the three and nine months ended September 30, 2009. The compensation cost that has been charged against income for the stock option portion of the Equity Incentive Plan was $79 and $201, respectively, for the three and nine months ended September 30, 2009. The total income tax benefit recognized in the income statement for share-based compensation was $163 and $472, respectively, for the three and nine months ended September 30, 2009.

The compensation cost that has been charged against income for the restricted stock portion of the Equity Incentive Plan was $400 and $1,183, respectively, for the three and nine months ended September 30, 2008. The compensation cost that has been charged against income for the stock option portion of the Equity Incentive Plan was $65 and $109, respectively, for the three and nine months ended September 30, 2008. The total income tax benefit recognized in the income statement for share-based compensation was $158 and $439, respectively, for the three and nine months ended September 30, 2008.

A summary of the status of the non-vested shares of the restricted stock portion of the Equity Incentive Plan at September 30, 2009, is presented below:

			Weighted-
			Average
			Grant Date
	Shares		Fair Value
Outstanding at December 31, 2008		346,161	$	18.41
Granted		—		—
Vested		86,043		18.42
Forfeited		—		—
Non-vested at September 30, 2009		260,118	$	18.41

The weighted-average grant date fair value is the last sale price as quoted on the NASDAQ Stock Market on the grant date. As of September 30, 2009, there was $4,207 of total unrecognized compensation expense related to non-vested shares awarded under the restricted stock portion of the Equity Incentive Plan. That expense is expected to be recognized over a weighted-average period of 2.7 years.

A summary of the activity under the stock option portion of the Equity Incentive Plan as of September 30, 2009, and changes for the nine months then ended is presented below. All of the stock option forfeitures occurred in the current year.

					Weighted-
			Weighted-		Average
			Average		Remaining		Aggregate
			Exercise		Contractual		Intrinsic
Options	Shares		Price		Term		Value
Outstanding at December 31, 2008		235,661		17.91		8.7		—
Granted		78,500		15.04		10.0		—
Exercised		—		—		—		—
Forfeited		16,021		16.84		—		—
Outstanding at September 30, 2009		298,140	$	17.21		8.3	$	—
Fully vested and expected to vest		294,764	$	17.33		8.2	$	—
Exercisable at September 30, 2009		29,419	$	18.40		7.4	$	—

As of September 30, 2009, there was $640 of total unrecognized compensation expense related to non-exercisable shares awarded under the stock option portion of the Equity Incentive Plan. That expense is expected to be recognized over a weighted-average period of 2.6 years. At September 30, 2009, the Company used a forfeiture rate of 11% that is based on historical activity.

Page 13 of 56

VIEWPOINT FINANCIAL GROUP AND SUBSIDIARY
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)

The Compensation Committee may grant stock appreciation rights, which give the recipient of the award the right to receive the excess of the market value of the shares represented by the stock appreciation rights on the date exercised over the exercise price. As of September 30, 2009, the Company has not granted any stock appreciation rights.

6. Loans

Loans consist of the following:

	September 30,			December 31,
	2009			2008
Mortgage loans:
One- to four-family	$	453,892		$	498,961
Commercial real estate		442,626			436,483
One- to four-family construction		3,860			503
Commercial construction		757			—
Home equity		98,917			101,021
Total mortgage loans		1,000,052			1,036,968
Automobile indirect loans		15,208			38,837
Automobile direct loans		61,572			73,033
Government-guaranteed student loans		5,604			7,399
Commercial non-mortgage loans		24,601			18,574
Warehouse lines of credit		—			53,271
Consumer lines of credit and unsecured loans		15,050			15,192
Other consumer loans, secured		7,073			6,708
Total non-mortgage loans		129,108			213,014
Gross loans		1,129,160			1,249,982
Deferred net loan origination fees		(1,193	)		(1,206	)
Allowance for loan losses		(10,955	)		(9,068	)
Net loans	$	1,117,012		$	1,239,708

Activity in the allowance for loan losses was as follows:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2009			2008			2009			2008
Beginning balance	$	9,996		$	7,278		$	9,068		$	6,165
Provision for loan losses		1,775			1,867			4,711			4,505
Loans charged-off		(950	)		(802	)		(3,300	)		(2,760	)
Recoveries		134			171			476			604
Ending balance	$	10,955		$	8,514		$	10,955		$	8,514

Page 14 of 56

VIEWPOINT FINANCIAL GROUP AND SUBSIDIARY
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)

7. Securities

The amortized cost and 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:

			Gross		Gross
	Amortized		Unrealized		Unrealized
September 30, 2009	Cost		Gains		Losses			Fair Value
U.S. government and federal agency	$	34,487	$	25	$	(44	)	$	34,468
Agency residential mortgage-backed securities		197,125		3,646		(544	)		200,227
Agency residential collateralized mortgage obligations		229,048		3,760		(3,141	)		229,667
SBA pools		6,914		—		(98	)		6,816
Total securities	$	467,574	$	7,431	$	(3,827	)	$	471,178

			Gross		Gross
	Amortized		Unrealized		Unrealized
December 31, 2008	Cost		Gains		Losses			Fair Value
U.S. government and federal agency	$	18,502	$	238	$	—		$	18,740
Agency residential mortgage-backed securities		137,338		1,492		(659	)		138,171
Agency residential collateralized mortgage obligations		313,391		4,199		(7,525	)		310,065
SBA pools		8,313		—		(213	)		8,100
Collateralized debt obligations		7,940		—		—			7,940
Total securities	$	485,484	$	5,929	$	(8,397	)	$	483,016

The amortized cost, unrecognized gains and losses, and fair value of securities held to maturity were as follows:

			Gross		Gross
	Amortized		Unrealized		Unrealized
September 30, 2009	Cost		Gains		Losses			Fair Value
U.S. government and federal agency	$	14,990	$	184	$	—		$	15,174
Agency residential mortgage-backed securities		162,771		6,237		—			169,008
Agency residential collateralized mortgage obligations		58,665		1,154		(5	)		59,814
Municipal bonds		17,677		1,091		—			18,768
Total securities	$	254,103	$	8,666	$	(5	)	$	262,764

			Gross		Gross
	Amortized		Unrealized		Unrealized
December 31, 2008	Cost		Gains		Losses			Fair Value
U.S. government and federal agency	$	9,992	$	151	$	—		$	10,143
Agency residential mortgage-backed securities		140,663		3,491		(56	)		144,098
Agency residential collateralized mortgage obligations		12,304		417		(25	)		12,696
Municipal bonds		9,384		258		—			9,642
Total securities	$	172,343	$	4,317	$	(81	)	$	176,579

Page 15 of 56

VIEWPOINT FINANCIAL GROUP AND SUBSIDIARY
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)

Sales activity of securities for the three and nine months ended September 30, 2009, and September 30, 2008 was as follows:

	September 30, 2009			September 30, 2008
Proceeds	$	73,785		$	—
Gross gains		2,377			—
Gross losses		—			—
Net impairment loss recognized in earnings		(12,246	)		—

There was no sale activity for the three months ended September 30, 2009, and 2008. The tax provision related to these realized gains for the nine months ended September 30, 2009, and September 30, 2008, was $808 and $0, respectively (using a 34% tax rate).

The sale of 22 agency residential collateralized mortgage obligations and two agency residential mortgage-backed securities, with a cost basis of $71.2 million, resulted in a $1.6 million after-tax increase to earnings, which occurred during the second quarter of 2009.

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 cost, the financial condition and near-term prospects of the issuer(s), 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.

During the nine months ended September 30, 2009, the Company recognized a $12,246 pre-tax charge for the other-than-temporary decline in the fair value of collateralized debt obligations, which occurred prior to their sale. This charge was determined by applying an ASC 325-40 discounted cash flow analysis, which included estimates based on current sales price data, to the securities and reduced their value to fair value. As required by ASC 325-40, when an adverse change in estimated cash flows has occurred, the credit component of the unrealized loss must be recognized as a charge to earnings. The analysis of all collateralized debt obligations included a review of the financial condition of each of the issuers, with issuer specific and non-specific estimates of future deferrals, defaults, recoveries, and prepayments of principal being factored into the analysis. Prior to the date of sale, no actual loss of principal or interest had occurred.

The decision to sell all of the Company’s collateralized debt obligations was made after considering the following: (1) June 2009 valuation reports from the trustee showed significantly higher levels of new defaults among the underlying issuers than previously reported, further reducing collateral coverage ratios; (2) an analysis of underlying issuers’ current return on assets ratios, Tier One capital ratios, leverage ratios, change in leverage ratios, and non-performing loans ratios showed ongoing and worsening credit deterioration, suggesting probable and possible future defaults; (3) the modeling of Level 3 projections of future cash flows, using internally defined assumptions for future deferrals, defaults, recoveries, and prepayments, showed no expected future cash flows; and (4) a ratings downgrade from BBB to C for each of the securities during the second quarter.

The sale of the collateralized debt obligation securities occurred in the second quarter. It generated proceeds of $224 with no gain or loss recognized on the sale.

Page 16 of 56

VIEWPOINT FINANCIAL GROUP AND SUBSIDIARY
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)

The table below presents a reconciliation of the credit portion of other-than-temporary impairment charges relating to the collateralized debt obligations.

	September 30, 2009
Beginning balance, January 1, 2009	$	9,408
Additional credit losses not recorded previously		12,246
Reductions for securities sold		(21,654	)
Reductions for securities that are planned to be sold		—
Additional credit losses on previous other-than-temporary impairment reported in accumulated other comprehensive loss		—
Reductions for increases in cash flows		—
Ending balance, September 30, 2009	$	—

The fair value of debt securities and carrying amount, if different, at September 30, 2009, by contractual maturity were as follows. Securities not due at a single maturity date, primarily 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	$	—	$	—	$	6,519
Due from one to five years		16,301		16,569		—
Due from five to ten years		8,567		9,134		34,765
Due after ten years		7,799		8,239		—
Agency residential mortgage-backed securities		162,771		169,008		200,227
Agency residential collateralized mortgage obligations		58,665		59,814		229,667
Total	$	254,103	$	262,764	$	471,178

Securities with unrealized losses at September 30, 2009, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, are as follows:

	Less than 12 Months					12 Months or More					Total
			Unrealized					Unrealized					Unrealized
Description of Securities	Fair Value		Loss			Fair Value		Loss			Fair Value		Loss
SBA pools	$	—	$	—		$	6,816	$	(98	)	$	6,816	$	(98	)
Agency residential mortgage-backed and collateralized mortgage obligations		110,518		(902	)		97,372		(2,788	)		207,890		(3,690	)
U.S. Government and federal agency		9,953		(44	)		—		—			9,953		(44	)
Total temporarily impaired	$	120,471	$	(946	)	$	104,188	$	(2,886	)	$	224,659	$	(3,832	)

The Company’s SBA pools are guaranteed as to principal and interest by the U.S. government. The agency residential mortgage-backed securities and agency collateralized mortgage obligations were issued and are backed by the Government National Mortgage Association (GNMA), a U.S. government agency, or by the Federal National Mortgage Association (FNMA) or the Federal Home Loan Mortgage Corporation (FHLMC), both U.S. government sponsored agencies. They carry the explicit or implicit guarantee of the U.S. government. There are no current or expected credit concerns with these agencies as related to these securities. The Company does not own any non-agency mortgage-backed securities or collateralized mortgage obligations.

Page 17 of 56

VIEWPOINT FINANCIAL GROUP AND SUBSIDIARY
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)

The Company conducts regular reviews of the municipal bond agency ratings of securities. These reviews focus on the underlying rating of the issuer and also include the insurance rating of securities that have an insurance component. The ratings and financial condition of the issuers are monitored as well, including reviews of official statements and other available municipal reports. The ratings of the Company’s municipal bonds, which include both the ratings of the underlying issuers and the ratings with credit support, continue to be of strong or higher investment grade. At September 30, 2009, there were no unrealized losses in this investment category.

8. 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 available data, some of which is internally developed and reflects a reporting entity’s own assumptions, and considers risk premiums that market participants would generally require.

The fair values of securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs) or matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs).

Prior to their sale in June 2009, the Level 3 investments consisted of five collateralized debt obligations known as trust preferred securities. Depository institutions comprised at least 75% of the underlying issuers in each of these securities, with the remainder being insurance companies. No one entity represented more than 5% of the underlying issuers in any of the securities. Once priced using Level 2 inputs, the decline in the level of observable inputs and market activity in this class of investments became significant and resulted in unreliable external pricing. Broker pricing and bid/ask spreads, when available, varied widely. The once active market was comparatively inactive.

During the nine months ended September 30, 2009, the Company recognized a $12,246 pre-tax charge for the other-than-temporary decline in the fair value of the collateralized debt obligations, reducing their value to fair value. This occurred prior to sale. This charge was determined by applying a discounted cash flow model analysis under ASC 325-40 to the securities. The analysis included a review of the financial condition of each of the underlying issuers, with issuer specific and non-specific estimates of future deferrals, defaults, recoveries, and prepayments of principal being factored into the model, resulting in a waterfall distribution of estimated future cash flows to each tranche of the collateralized debt obligation. Prior to the June 2009 sale date, no actual loss of principal or interest had occurred.

Page 18 of 56

VIEWPOINT FINANCIAL GROUP AND SUBSIDIARY
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollar amounts 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:

			Fair Value Measurements at September 30, 2009, Using
			Quoted Prices in				Significant
			Active Markets for		Significant Other		Unobservable
			Identical Assets		Observable Inputs		Inputs
	September 30, 2009		(Level 1)		(Level 2)		(Level 3)
Assets:
U.S. government and federal agency	$	34,468	$	—	$	34,468	$	—
Agency residential mortgage-backed securities		200,227		—		200,227		—
Agency residential collateralized mortgage obligations		229,667		—		229,667		—
SBA pools		6,816		—		6,816		—
Total securities available for sale	$	471,178	$	—	$	471,178	$	—

			Fair Value Measurements at December 31, 2008, Using
			Quoted Prices in				Significant
			Active Markets for		Significant Other		Unobservable
			Identical Assets		Observable Inputs		Inputs
	December 31, 2008		(Level 1)		(Level 2)		(Level 3)
Assets:
U.S. government and federal agency	$	18,740	$	—	$	18,740	$	—
Agency residential mortgage-backed securities		138,171		—		138,171		—
Agency residential collateralized mortgage obligations		310,065		—		310,065		—
SBA pools		8,100		—		8,100		—
Collateralized debt obligations		7,940		—		—		7,940
Total securities available for sale	$	483,016	$	—	$	475,076	$	7,940

The table below presents a reconciliation and income statement classification of gains and losses for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the nine months ended September 30, 2009:

	Securities
	available for
	sale
Beginning balance, January 1, 2009	$	7,940
Adjustment due to adoption of ASC 320-10-65, non-credit portion of impairment previously recorded		4,351
Proceeds from sale of securities		(224	)
Total gains or losses (realized /unrealized)
Included in earnings
Interest income on securities		159
Impairment of collateralized debt obligations (all credit)		(12,246	)
Other changes in fair value		—
Gains (losses) on sales of securities		20
Included in other comprehensive income		—
Ending balance, September 30, 2009	$	—

Page 19 of 56

VIEWPOINT FINANCIAL GROUP AND SUBSIDIARY
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)

Assets and Liabilities Measured on a Non-Recurring Basis

Assets and liabilities measured at fair value on a non-recurring basis are summarized below:

			Fair Value Measurements at September 30, 2009, Using
			Quoted Prices in				Significant
			Active Markets for		Significant Other		Unobservable
			Identical Assets		Observable Inputs		Inputs
	September 30, 2009		(Level 1)		(Level 2)		(Level 3)
Assets:
Impaired loans	$	6,116	$	—	$	6,116	$	—
Mortgage servicing rights		1,037		—		1,037		—
Other real estate owned		1,178		—		1,178		—

			Fair Value Measurements at December 31, 2008, Using
			Quoted Prices in				Significant
			Active Markets for		Significant Other		Unobservable
			Identical Assets		Observable Inputs		Inputs
	December 31, 2008		(Level 1)		(Level 2)		(Level 3)
Assets:
Impaired loans	$	1,269	$	—	$	1,269	$	—

Impaired loans, which primarily consist of one- to four-family residential, home equity, commercial real estate and commercial non-mortgage loans are measured for impairment using the fair value of the collateral (as determined by third party appraisals using recent comparative sales data) for collateral dependent loans. Impaired loans with allocated allowance for loan losses at September 30, 2009, had a carrying amount of $6,116, which is made up of the outstanding balance of $7,477, net of a valuation allowance of $1,361. This resulted in an additional provision for loan losses of $1,273 that is included in the amount reported on the income statement. Impaired loans with allocated allowance for loan losses at December 31, 2008, had a carrying amount of $1,269, which is made up of the outstanding balance of $1,597, net of a valuation allowance of $328. This resulted in an additional provision for loan losses of $55.

Other real estate owned had a carrying amount of $1,178, which is made up of the outstanding balance of $1,372, net of a valuation allowance of $194.

Mortgage servicing rights, which are carried at lower of cost or fair value, were carried at their fair value of $1.0 million at September 30, 2009. Mortgage servicing rights were carried at cost at December 31, 2008 and accordingly are not included in this disclosure.

Activity for capitalized mortgage servicing rights for the nine months ended September 30, 2009, and the related valuation allowance follows:

Mortgage servicing rights:
Balance at January 1, 2009	$	1,372
Amortized to expense		(233	)
Change in valuation allowance		(102	)
Balance at September 30, 2009	$	1,037
Valuation allowance:
Balance at January 1, 2009	$	—
Additions expensed		211
Valuation adjustment		(109	)
Balance at September 30, 2009	$	102

Page 20 of 56

VIEWPOINT FINANCIAL GROUP AND SUBSIDIARY
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)

Carrying amount and estimated fair values of financial instruments were as follows:

	September 30, 2009						December 31, 2008
	Carrying						Carrying
	Amount			Fair Value			Amount			Fair Value
Financial assets
Cash and cash equivalents	$	32,090		$	32,090		$	32,513		$	32,513
Securities available for sale		471,178			471,178			483,016			483,016
Securities held to maturity		254,103			262,764			172,343			176,579
Loans held for sale		350,116			350,740			159,884			159,884
Loans, net		1,117,012			1,106,430			1,239,708			1,247,457
Federal Home Loan Bank stock		15,469			N/A			18,069			N/A
Accrued interest receivable		7,575			7,575			8,519			8,519
Financial liabilities
Deposits	$	(1,738,081	)	$	(1,739,261	)	$	(1,548,090	)	$	(1,558,107	)
Federal Home Loan Bank advances		(344,735	)		(359,781	)		(410,841	)		(427,243	)
Repurchase agreement		(25,000	)		(25,000	)		(25,000	)		(24,980	)
Accrued interest payable		(1,972	)		(1,972	)		(1,769	)		(1,769	)

The methods and assumptions used to estimate fair value are described as follows:

Carrying amount is the estimated fair value for cash and cash equivalents, bank-owned life insurance and accrued interest receivable and payable. For loans, fair value is based on discounted cash flows using current market rates applied to the estimated life and credit risk. Fair value of loans held for sale approximates cost. For deposits and borrowings, fair value is based on discounted cash flows using the FHLB advance curve to the estimated life. Fair value of debt is based on discounting the estimated cash flows using the current rate at which similar borrowings would be made with similar rates and maturities. It was not practicable to determine the fair value of FHLB stock due to restrictions on its transferability. The fair value of off-balance-sheet items is based on the current fees or cost that would be charged to enter into or terminate such arrangements and are not considered significant to this presentation.

9. Repurchase Agreement

In April 2008, the Company entered into a ten-year term structured repurchase callable agreement with Credit Suisse Securities (U.S.A.) LLC for $25.0 million to leverage the balance sheet and increase liquidity. The interest rate was fixed at 1.62% for the first year of the agreement. After the first year, the interest rate adjusts quarterly to 6.25% less the three month Libor rate, subject to a lifetime cap of 3.22%. The rate was 3.22% at September 30, 2009. The securities sold under agreements to repurchase had an average balance of $32.2 million and an average interest rate of 1.90% during the three months ended September 30, 2009. The maximum month-end balance during the three months ended September 30, 2009 was $32.4 million. The securities sold under agreements to repurchase had an average balance of $32.4 million and an average interest rate of 2.29% during the nine months ended September 30, 2009. The maximum month-end balance during the nine months ended September 30, 2009 was $33.7 million. At maturity, the securities underlying the agreement are returned to the Company. The fair value of these securities sold under agreements to repurchase was $31.2 million at September 30, 2009. The Company retains the right to substitute securities under the terms of the agreements.

Page 21 of 56

VIEWPOINT FINANCIAL GROUP AND SUBSIDIARY
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)

10. Segment Information

The reportable segments are determined by the products and services offered, primarily distinguished between banking and VPBM, our mortgage banking subsidiary. Loans, investments and deposits generate the revenues in the banking segment; secondary marketing sales generate the revenue in the VPBM segment. Segment performance is evaluated using segment profit (loss). Information reported internally for performance assessment for the three and nine months ended September 30, 2009, and 2008, follows:

	Three Months Ended
	September 30, 2009
										Total
							Eliminations			Segments
							and			(Consolidated
	Banking			VPBM			Adjustments1			Total)
Results of Operations:
Total interest income	$	26,242		$	653		$	(503	)	$	26,392
Total interest expense		12,270			462			(560	)		12,172
Provision for loan losses		1,775			—			—			1,775
Net interest income after provision for loan losses		12,197			191			57			12,445
Other revenue		5,961			(2	)		(25	)		5,934
Net gain (loss) on sale of loans		(127	)		3,924			—			3,797
Total noninterest expense		13,882			4,122			66			18,070
Income (loss) before income tax expense		4,149			(9	)		(34	)		4,106
Income tax expense		1,199			14			—			1,213
Net income	$	2,950		$	(23	)	$	(34	)	$	2,893
Segment assets	$	2,351,590		$	35,946		$	(37,709	)	$	2,349,827
Net gain (loss) on sale of loans		(127	)		3,924			—			3,797
Noncash items:
Depreciation		869			59			—			928
Provision for loan losses		1,775			—			—			1,775

	Three Months Ended
	September 30, 2008
									Total
						Eliminations			Segments
						and			(Consolidated
	Banking		VPBM			Adjustments1			Total)
Results of Operations:
Total interest income	$	25,209	$	333		$	(119	)	$	25,423
Total interest expense		11,762		153			(264	)		11,651
Provision for loan losses		1,867		—			—			1,867
Net interest income after provision for loan losses		11,580		180			145			11,905
Other revenue		5,649		—			(20	)		5,629
Net gain on sale of loans		23		3,555			(1,226	)		2,352
Total noninterest expense		15,621		3,764			(1,179	)		18,206
Income before income tax expense		1,631		(29	)		78			1,680
Income tax expense		472		4			15			491
Net income	$	1,159	$	(33	)	$	63		$	1,189
Segment assets	$	1,989,891	$	25,839		$	(26,386	)	$	1,989,344
Net gain on sale of loans		23		3,555			(1,226	)		2,352
Noncash items:
Depreciation		1,022		50			—			1,072
Provision for loan losses		1,867		—			—			1,867

¹ Includes eliminating entries for intercompany transactions and stand-alone expenses of ViewPoint Financial Group.

Page 22 of 56

VIEWPOINT FINANCIAL GROUP AND SUBSIDIARY
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)

	Nine Months Ended
	September 30, 2009
										Total
							Eliminations			Segments
							and			(Consolidated
	Banking			VPBM			Adjustments1			Total)
Results of Operations:
Total interest income	$	82,013		$	1,815		$	(2,216	)	$	81,612
Total interest expense		38,010			1,233			(1,526	)		37,717
Provision for loan losses		4,711			—			—			4,711
Net interest income after provision for loan losses		39,292			582			(690	)		39,184
Other revenue		17,469			(3	)		(86	)		17,380
Net gain (loss) on sale of loans		(814	)		13,648			—			12,834
Impairment of collateralized debt obligations (all credit)		(12,246	)		—			—			(12,246	)
Total noninterest expense		43,700			12,766			174			56,640
Income before income tax expense		1			1,461			(950	)		512
Income tax expense (benefit)		(281	)		479			8			206
Net income	$	282		$	982		$	(958	)	$	306
Segment assets	$	2,351,590		$	35,946		$	(37,709	)	$	2,349,827
Net gain (loss) on sale of loans		(814	)		13,648			—			12,834
Noncash items:
Depreciation		2,695			169			—			2,864
Provision for loan losses		4,711			—			—			4,711

	Nine Months Ended
	September 30, 2008
								Total
					Eliminations			Segments
					and			(Consolidated
	Banking		VPBM		Adjustments1			Total)
Results of Operations:
Total interest income	$	70,883	$	905	$	(1,028	)	$	70,760
Total interest expense		33,507		414		(747	)		33,174
Provision for loan losses		4,505		—		—			4,505
Net interest income after provision for loan losses		32,871		491		(281	)		33,081
Other revenue		17,754		—		(56	)		17,698
Net gain on sale of loans		61		9,664		(3,205	)		6,520
Total noninterest expense		44,881		9,166		(3,004	)		51,043
Income before income tax expense		5,805		989		(538	)		6,256
Income tax expense		1,769		374		25			2,168
Net income	$	4,036	$	615	$	(563	)	$	4,088
Segment assets	$	1,989,891	$	25,839	$	(26,386	)	$	1,989,344
Net gain on sale of loans		61		9,664		(3,205	)		6,520
Noncash items:
Depreciation		3,115		115		—			3,230
Provision for loan losses		4,505		—		—			4,505

¹ Includes eliminating entries for intercompany transactions and stand-alone expenses of ViewPoint Financial Group.

Page 23 of 56

VIEWPOINT FINANCIAL GROUP AND SUBSIDIARY
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)

11. Subsequent Events

As defined in ASC 855,Subsequent Events, subsequent events are events or transactions that occur after the balance sheet date but before financial statements are issued or available to be issued. Financial statements are considered issued when they are widely distributed to shareholders and other financial statement users for general use and reliance in a form and format that complies with GAAP. The Company has evaluated subsequent events through November 5, 2009, which is the date that the Company’s financial statements are being issued. Based on this evaluation, the below paragraph describes a subsequent event.

On October 16, 2009, the Company executed four promissory notes for unsecured loans totaling $10 million obtained from four local, private investors. The lenders are all members of the same family and long-time customers of the Bank. One of the notes had an original principal amount of $7 million and the other three notes had principal amounts of $1 million each. Each of the four promissory notes initially bears interest at 6% per annum, thereafter being adjusted quarterly to a rate equal to the national average 2-year jumbo CD rate plus 2%, with a floor of 6% and a ceiling of 9%. Interest-only payments under the notes are due quarterly. The unpaid principal balance and all accrued but unpaid interest under each of the notes are due and payable on October 15, 2014. Upon at least 180 days notice to the Company, the lender under each note may require the Company to prepay the note in part or in full as of the second and/or fourth anniversaries of the note. Each lender also has a limited call option (not to exceed $2 million in the aggregate among the four lenders) upon at least 90 days notice to the Company for the purpose of purchasing shares of the Company’s stock in a subscription or community stock offering. The notes cannot be prepaid by the Company during the first two years of the loan term, but thereafter can be prepaid in whole or in part at any time without fee or penalty. The Company will use the proceeds from the loans for general working capital and to support the growth of the Bank.

12. Recent Accounting Developments

In June 2009, the FASB issued Statement of Financial Accounting Standards No. 166, Accounting for Transfers of Financial Assets, an Amendment of FASB Statement No. 140. This standard has not yet been codified in the FASB Accounting Standards Codification. FAS 166 improves the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance and cash flows; and a transferor’s continuing involvement. This Statement must be applied as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. This Statement must be applied to transfers occurring on or after the effective date. Additionally, on and after the effective date, the concept of a qualifying special-purpose entity is no longer relevant for accounting purposes. Therefore, formerly qualifying special-purpose entities should be evaluated for consolidation by reporting entities on and after the effective date in accordance with the applicable consolidation guidance. Additionally, the disclosure provisions of this Statement should be applied to transfers that occurred both before and after the effective date of this Statement. The Company does not expect the adoption of this Statement to have a significant impact to the Company’s financial statements.

In June 2009, the FASB issued Statement of Financial Accounting Standards No. 167, Amendmentsto FASB Interpretation No. 46(R), which improves financial reporting by enterprises involved with variable interest entities. This standard has not yet been codified in the FASB Accounting Standards Codification. FAS 167 amends Interpretation No. 46(R),Consolidation of Variable Interest Entities, to replace the quantitative-based risks and rewards calculation for determining which enterprise, if any, has a controlling financial interest in a variable interest entity with an approach focused on identifying which enterprise has the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance and (1) the obligation to absorb losses of the entity or (2) the right to receive benefits from the entity. This Statement also requires additional disclosures about an enterprise’s involvement in variable interest entities. FAS 167 will be effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. Early adoption is prohibited. The Company does not expect the adoption of this Statement to have a significant impact to the Company’s financial statements.

Page 24 of 56

VIEWPOINT FINANCIAL GROUP AND SUBSIDIARY
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)

In June 2009, the FASB issued Statement of Financial Accounting Standards No. 168,The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, which is codified as ASC 105,Generally Accepted Accounting Principles. The objective of this Statement is to replace Statement 162, The Hierarchy of Generally Accepted Accounting Principles, and to establish theFASB Accounting Standards Codification^TMas the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP. Rules and interpretive releases of the Securities and Exchange Commission under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. This Statement is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The adoption of this Statement will not impact the Company’s financial condition. Beginning with this Quarterly Report on Form 10-Q for September 30, 2009, and in all filings thereafter, references to Financial Accounting Standards that have been codified in the FASB Accounting Standards Codification have been replaced with references to the appropriate guidance in the Codification.

In August 2009, the FASB issued Accounting Standards Update (“ASU”) No. 2009-05,Measuring Liabilities at Fair Value, which is codified as ASC 820,Fair Value Measurements and Disclosures. This Update provides amendments to Topic 820-10, Fair Value Measurements and Disclosures – Overall, for the fair value measurement of liabilities. This Update provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using a valuation technique that uses the quoted price of the identical liability when traded as an asset, quoted prices for similar liabilities or similar liabilities when traded as assets, or that is consistent with the principles of Topic 820. The amendments in this Update also clarify that when estimating the fair value of a liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents transfer of the liability. The amendments in this Update also clarify that both a quoted price in an active market for the identical liability at the measurement date and the quoted price for the identical liability when traded as an asset in an active market when no adjustments to the quoted price of the asset are required are Level 1 fair value measurements. The guidance provided in this Update is effective for the first reporting period (including interim periods) beginning after issuance. The adoption of this Update did not have a significant impact to the Company’s financial statements.

Page 25 of 56

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 (“the Company”) with the Securities and Exchange Commission (the “SEC”) in the Company’s press releases or other public or shareholder communications, and in oral statements made with the approval of an authorized executive officer, the words or phrases “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “project,” “intends” or similar expressions are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks and uncertainties, including, among other things, changes in economic conditions, legislative changes, changes in policies by regulatory agencies, fluctuations in interest rates, the risks of lending and investing activities, including changes in the level and direction of loan delinquencies and write-offs and changes in estimates of the adequacy of the allowance for loan losses, the Company’s ability to access cost-effective funding, fluctuations in real estate values and both residential and commercial real estate market conditions, demand for loans and deposits in the Company’s market area, competition, changes in management’s business strategies and other factors set forth under Risk Factors in our Form 10-K, that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. The Company wishes to advise readers that the factors listed above could materially affect the Company’s financial performance and could cause the Company’s actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements.

The Company does not undertake – and specifically declines any obligation – to publicly release the result of any revisions 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 is a federally chartered stock holding company and is subject to regulation by the Office of Thrift Supervision (“OTS”). The Company was organized on September 29, 2006, as part of ViewPoint Bank’s reorganization into the mutual holding company form of organization. As part of the reorganization, ViewPoint Bank (i) converted to a stock savings bank as the successor to the Bank in its mutual form (which was originally chartered as a credit union in 1952); (ii) organized ViewPoint Financial Group, which owns 100% of the common stock of ViewPoint Bank; and (iii) organized ViewPoint MHC, which currently owns 57% of the common stock of ViewPoint Financial Group. ViewPoint MHC has no other activities or operations other than its ownership of ViewPoint Financial Group. ViewPoint Bank succeeded to the business and operations of the Bank in its mutual form and ViewPoint Financial Group sold a minority interest in its common stock in a public stock offering.

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 permanent loans secured by first and second mortgages on owner-occupied, one- to four-family residences and commercial real estate, as well as by first liens on commercial non-mortgage assets and automobiles. Additionally, our Purchase Program enables our mortgage banking company clients to close one- to four-family real estate loans in their own name and temporarily finance their inventory of these closed loans until the loans are sold to investors approved by the Company. 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 earnings on interest-earning assets, service charges and fees, and gains on the sale of loans. Our primary sources of funds are deposits, Federal Home Loan Bank (“FHLB”) advances and other borrowings, and payments received on loans and securities. We offer a variety of deposit accounts which provide a wide range of interest rates and terms, generally including savings, money market, term certificate and demand accounts.

At September 30, 2009, the Company operated 24 community bank offices in the Dallas/Fort Worth Metroplex and 16 loan production offices throughout Texas. During the past quarter, we opened a new community bank office in Wylie and a new loan production office in Houston. Our Wylie in-store banking center was closed on October 2, 2009, as a result of the opening of the new community bank office.

Page 26 of 56

Third Quarter Highlights

• Quarterly EPS more than doubled from this time last year:Basic and diluted earnings per share of $0.12, up $0.07 from the same period last year.

• Quarterly net income increased by 143.3%:Net income for the quarter ended September 30, 2009, was $2.9 million, an increase of $1.7 million, or 143.3%, from the quarter ended September 30, 2008.

• Purchase Program continued to fuel loan growth:$322.9 million of Purchase Program loans helped gross loans (including loans held for sale) to increase by $69.4 million, or 4.9%, from December 31, 2008.

• Deposit growth in all categories:Deposits increased by $190.0 million, or 12.3%, from December 31, 2008.

• Continued capital strength:The Company’s equity to total assets was 8.58%, and the Bank’s tier one capital ratio was 7.65%, exceeding the regulatory minimum of 5% for a well-capitalized institution.

Critical Accounting Policies

Certain of our accounting policies 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 associated with these policies 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 policies include determining the allowance for loan losses and other-than-temporary impairments in our securities portfolio.

Allowance for Loan Loss.We believe that the allowance for loan losses and related provision expense are susceptible to change if credit quality changes, which is evidenced by charge-offs and non-performing loan trends. Our loan mixture is also changing as we increase our residential and commercial real estate loan portfolios after discontinuing our indirect automobile lending program in 2006. Generally, one- to four-family residential real estate lending has a lower credit risk profile compared to consumer lending (such as automobile or personal line of credit loans). Commercial real estate and non-mortgage lending, however, have higher credit risk profiles than consumer and one- to four- family residential real estate loans due to these loans being larger in amount and non-homogenous in structure and term. Changes in economic conditions, the mixture and size of the loan portfolio and individual borrower conditions can dramatically impact our level of allowance for loan losses in relatively short periods of time. Management believes that the allowance for loan losses is maintained at a level that represents our best estimate of probable losses in the loan portfolio. While management uses available information to recognize losses on loans, future additions to the allowance for loan losses may be necessary based on changes in economic conditions. In addition, our banking regulators, as an integral part of their examination process, periodically review our allowance for loan losses. These regulatory agencies may require us to recognize additions to the allowance for loan losses based on their judgments about information available to them at the time of their examination. 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 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 cost to acquire and sell, is used to determine the amount of impairment. 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. Impairment losses are included 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 and then to interest income.

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 cost, the financial condition and near-term prospects of the issuer(s), 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.

Page 27 of 56

The Company conducts regular reviews of the bond agency ratings of securities and considers whether the securities were issued by or have principal and interest payments guaranteed by the federal government or its agencies. These reviews focus on the underlying rating of the issuer and also include the insurance rating of securities that have an insurance component. The ratings and financial condition of the issuers are monitored as well.

For periods in which other-than-temporary impairment of a debt security is recognized, the credit portion of the amount is determined by subtracting the present value of the stream of estimated cash flows as calculated in the discounted cash flow model and discounted at book yield from the prior period’s ending carrying value. The non-credit portion of the amount is determined by subtracting the credit portion of the impairment from the difference between the book value and fair value of the security.

During the nine months ended September 30, 2009, the Company recognized a $12.2 million pre-tax charge for the other-than-temporary decline in the fair value of the collateralized debt obligations, which occurred prior to sale. This charge was determined by applying an ASC 325-40 discounted cash flow analysis, which included estimates based on current sales price data, to the securities and reduced their value to fair value. As required by ASC 325-40, when an adverse change in estimated cash flows has occurred, the credit component of the unrealized loss must be recognized as a charge to earnings. The analysis of all collateralized debt obligations in our portfolio included a review of the financial condition of each of the issuers, with issuer specific and non-specific estimates of future deferrals, defaults, recoveries, and prepayments of principal being factored into the analysis. Prior to the date of sale, no actual loss of principal or interest had occurred.

Business Strategy

Our principal objective is to remain an independent, community-oriented financial institution serving customers in our primary market area. Our Board of Directors has sought to accomplish this objective through the adoption of a strategy designed to maintain profitability, a strong capital position and high asset quality. This strategy primarily involves:

• Controlling operating expenses while continuing to provide quality personal service to our customers;

• Growing and diversifying our loan portfolio by emphasizing the origination of one- to four-family residential mortgage loans, commercial real estate loans, Purchase Program loans, and secured commercial non-mortgage loans;

• Selectively emphasizing products and services to provide diversification of revenue sources and to capture our customers’ full relationship. We intend to continue to expand our business by cross-selling our loan and deposit products and services to our customers;

• Enhancing our focus on core retail and business deposits, including savings and checking accounts;

• Borrowing from the Federal Home Loan Bank of Dallas for interest rate risk management and liquidity purposes; and

• Maintaining a high level of asset quality.

As a community bank, we strive to make banking feel more like a partnership with our customers than simply providing an account or loan. We offer the wide variety of resources that customers typically expect from a large bank while giving the personal attention found at community banks. We support the communities we serve by donating thousands of volunteer hours to a multitude of worthy causes; in fact, our community reinvestment activities received the highest rating of “Outstanding” from the OTS.

Comparison of Financial Condition at September 30, 2009, and December 31, 2008

General. Total assets increased by $136.4 million, or 6.2%, to $2.35 billion at September 30, 2009, from $2.21 billion at December 31, 2008. The rise in total assets was primarily due to a $69.4 million, or 4.9%, increase in gross loans (including loans held for sale) and an $81.8 million, or 47.4%, increase in securities held to maturity. This increase was partially offset by an $11.8 million, or 2.5%, reduction in securities available for sale.

Page 28 of 56

Loans. Gross loans (including $350.1 million in mortgage loans held for sale) increased by $69.4 million, or 4.9%, from $1.41 billion at December 31, 2008 to $1.48 billion at September 30, 2009.

	September 30,		December 31,		Dollar			Percent
	2009		2008		Change			Change
	(Dollars in Thousands)
Mortgage loans:
One- to four-family	$	453,892	$	498,961	$	(45,069	)		-9.0	%
Commercial real estate		442,626		436,483		6,143			1.4	%
One- to four-family construction		3,860		503		3,357			667.4	%
Commercial construction		757		—		757			100.0	%
Mortgage loans held for sale		350,116		159,884		190,232			119.0	%
Home equity		98,917		101,021		(2,104	)		-2.1	%
Total mortgage loans		1,350,168		1,196,852		153,316			12.8	%
Automobile loans		76,780		111,870		(35,090	)		-31.4	%
Other consumer loans		27,727		29,299		(1,572	)		-5.4	%
Commercial non-mortgage loans		24,601		18,574		6,027			32.4	%
Warehouse lines of credit		—		53,271		(53,271	)		-100.0	%
Total non-mortgage loans		129,108		213,014		(83,906	)		-39.4	%
Gross loans	$	1,479,276	$	1,409,866	$	69,410			4.9	%

At September 30, 2009, mortgage loans held for sale consisted of $27.2 million of loans originated for sale by our mortgage banking subsidiary, VPBM, and $322.9 million of Purchase Program loans purchased for sale under our standard loan participation agreement. Our Purchase Program currently serves 20 clients and disbursed $1.42 billion in loans during the third quarter of 2009. The $190.2 million, or 119.0%, increase in mortgage loans held for sale over the last nine months was attributable to a $185.4 million increase in the volume of Purchase Program loans held under our standard loan participation agreement and VPBM’s increased real estate production.

We have also expanded our one- to four-family construction lending, which led to a $3.4 million increase from December 31, 2008. At September 30, 2009, we had $2.7 million in unfunded commitments on these construction loans. Our one- to four-family construction loans generally provide for the payment of interest only during the construction phase, which is typically limited to 12 months. At the end of the construction phase, the construction loan generally either converts to a longer-term mortgage loan or is paid off through a permanent loan from another lender. Residential construction loans, which are only made directly to consumers, not to builders, can be made with a maximum loan-to-value of 90% and are expected to comprise a small portion of our loan portfolio. These loans are underwritten to Fannie Mae/Freddie Mac guidelines.

We saw increases in both our commercial real estate and commercial non-mortgage portfolios, while warehouse lines of credit, which are participations in warehouse lines extended by other financial institutions or multi-bank warehouse lending syndications originated in conjunction with other banks, decreased by $53.3 million. We have decided to discontinue warehouse lines of credit and focus on our Purchase Program due to the added benefits associated with direct relationship lending. Consumer loans, including direct and indirect automobile, other secured installment loans, and unsecured lines of credit, decreased by $36.7 million, or 26.0%, from December 31, 2008. We have continued to reduce our emphasis on consumer lending and are focused on originating residential and commercial loans. Nevertheless, we remain committed to meeting all of the banking needs of our customers, which includes offering them competitive consumer lending products.

ViewPoint Bankers Mortgage.At September 30, 2009, VPBM had total assets of $35.9 million, which primarily consisted of $27.2 million in one- to four- family mortgage loans held for sale. VPBM’s net income for the three and nine months ended September 30, 2009, was $42,000 and $982,000, respectively, which primarily consisted of gains on sales of mortgage loans. VPBM operates 15 loan production offices in Texas and has 130 employees.

Allowance for Loan Losses. The allowance for loan losses is maintained to cover losses that are probable and can be estimated on the date of the evaluation in accordance with U.S. generally accepted accounting principles. It is our estimate of probable incurred credit losses in our loan portfolio.

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Our methodology for analyzing the allowance for loan losses consists of specific and general components. For the general component, we stratify the loan portfolio into homogeneous groups of loans that possess similar loss potential characteristics and apply an appropriate loss ratio to these groups of loans to estimate the probable incurred losses in the loan portfolio. The amount of probable loan losses incurred in our consumer portfolio is estimated by using historical loss ratios for major loan collateral types adjusted for current factors. We use historical loss ratios, as well as qualitative factors such as industry and economic indicators, to establish loss allocations on our commercial non-mortgage loans and one- to four-family and commercial real estate loans due to the less-seasoned nature of this portion of our loan portfolio. The historical loss ratio is generally defined as an average percentage of net loan losses to loans outstanding. These factors allow for losses that may result from economic indicators, seasonality and increased origination volume in these areas of lending. We also utilize a qualitative factor on purchased real estate loans based on peer group averages, as well as the same economic, seasonal and volume factors applied to the originated real estate portfolio. A separate valuation of known losses for individually classified, large-balance, non-homogeneous loans is also conducted in accordance with ASC 310-10.

For the specific component, the allowance for loan losses on individually analyzed loans includes commercial non-mortgage loans and one- to four-family and commercial real estate loans where management has concerns about the borrower’s ability to repay. Loss estimates include the negative difference, if any, between the current fair value of the collateral and the loan amount due.

As we continue to expand our loan portfolio, we are focused on maintaining our solid asset quality by applying stringent underwriting guidelines to all loans that we originate. The majority of our residential real estate loans are full-documentation, standard “A” type products. Our mortgage lending subsidiary, VPBM, does not offer any subprime loan products. VPBM has been originating mortgage loans since 1988, while performing in-house underwriting and closing for all loans originated.

Impaired loans related to ASC 310-10 were as follows:

	September 30, 2009		June 30, 2009		December 31, 2008
	(Dollars in Thousands)
Period-end loans with no allocated allowance for loan losses	$	8,151	$	2,939	$	3,068
Period-end loans with allocated allowance for loan losses		7,477		4,436		1,597
Total	$	15,628	$	7,375	$	4,665
Amount of the allowance for loan losses allocated to impaired loans at period-end	$	1,361	$	690	$	328

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2009		2008		2009		2008
	(Dollars in Thousands)
Average of individually impaired loans during the period	$	12,208	$	4,219	$	8,344	$	4,058

Non-performing loans were as follows:

	September 30, 2009		June 30, 2009		December 31, 2008
	(Dollars in Thousands)
Loans past due over 90 days still on accrual	$	—	$	—	$	—
Nonaccrual loans		13,833		6,464		2,217
Troubled debt restructurings		807		873		2,528
Total	$	14,640	$	7,337	$	4,745

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At September 30, 2009, nonaccrual loans consisted of the following loan types:

	(Dollars in Thousands)
	Amount		Percent of Total
Mortgage loans:
One- to four-family	$	3,962		28.64	%
Commercial real estate		9,026		65.25	%
Home equity		400		2.89	%
Total mortgage loans		13,388		96.78	%
Indirect automobile loans		126		0.91	%
Direct automobile loans		75		0.54	%
Commercial non-mortgage loans		179		1.29	%
Consumer secured loans		9		0.07	%
Consumer lines of credit and unsecured loans		56		0.41	%
Total non-mortgage loans		445		3.22	%
Total nonaccrual loans	$	13,833		100.00	%

At September 30, 2009, troubled debt restructurings consisted of the following loan types:

	(Dollars in Thousands)
	Amount		Percent of Total
Mortgage loans:
One- to four-family	$	115		1.76	%
Commercial real estate		5,577		85.56	%
Home equity		114		1.75	%
Total mortgage loans		5,806		89.07	%
Indirect automobile loans		265		4.07	%
Direct automobile loans		281		4.31	%
Commercial non-mortgage loans		52		0.80	%
Consumer secured loans		4		0.06	%
Consumer lines of credit and unsecured loans		110		1.69	%
Total non-mortgage loans		712		10.93	%
Total troubled debt restructurings	$	6,518		100.00	%

Included in the $6.5 million troubled debt restructurings listed above, $5.7 million are on nonaccrual status at September 30, 2009 and are therefore disclosed in the nonaccrual loans number in the non-performing loans table.

Our non-performing loans, which consist of nonaccrual loans and troubled debt restructurings, include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans. Troubled debt restructurings, which are accounted for under ASC 310-40, are loans which have renegotiated loan terms to assist borrowers who are unable to meet the original terms of their loans. These modifications to loan terms may include a lower interest rate, a reduction in principal, or an extended term to maturity.

Our non-performing loans to total loans ratio at September 30, 2009, was 1.30% compared to 0.38% at December 31, 2008. Non-performing loans increased by $9.9 million, from $4.7 million at December 31, 2008, to $14.6 million at September 30, 2009. The increase in non-performing loans was primarily due to three commercial real estate loans totaling $7.2 million that moved to non-performing during the nine months ended September 30, 2009. We have set aside a total of $955,000 in specific valuation allowances for these three loans. One loan, with an outstanding balance of $3.4 million, is secured by an office/flex building and is currently in the process of foreclosure. It is rated “doubtful” and has a specific valuation allowance in the amount of $799,000 based on a current appraisal. At September 30, 2009, this loan was 91 days delinquent. The second loan, with an outstanding balance of $2.9 million, is not delinquent and is secured by three office buildings. It is rated “substandard” and was placed on nonaccrual when it was classified as a troubled debt restructuring. Based on a current appraisal, there is no anticipated loss for this loan and no specific reserve required. The third is a $907,000 loan in which the Company is a participant that is collateralized by a hotel property experiencing financial difficulties. This loan is also a troubled debt restructuring. A $156,000 specific valuation allowance was set aside for this loan based on a current appraisal. At September 30, 2009, this loan was 61 days delinquent.

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Also, non-performing loans increased due to a $2.5 million increase in one- to four-family real estate loans on nonaccrual status, with $1.5 million of this increase being attributable to one loan. This loan is in the process of foreclosure and there is no estimated loss based on a current appraisal.

Our allowance for loan losses at September 30, 2009, was $11.0 million, or 0.97% of gross loans, compared to $9.1 million, or 0.73% of gross loans, at December 31, 2008. The $1.9 million, or 20.8%, increase in our allowance for loan losses was primarily due to an increase in the general reserve caused by higher loss factors adjusted for current economic conditions and other relevant data. Also, specific reserve increased by $1.0 million as impaired loans with allocated allowance for loan losses increased by $5.9 million, from $1.6 million at December 31, 2008, to $7.5 million at September 30, 2009. This increase in impaired loans with allocated allowance for loan losses was primarily attributable to the addition of three commercial real estate loans with outstanding principal balances totaling $5.3 million at September 30, 2009 and an $843,000 increase in one- to four-family mortgage loans. Impaired loans with no allocated allowance for loan losses increased by $5.1 million, from $3.1 million at December 31, 2008, to $8.2 million at September 30, 2009. This increase was due to the addition of one commercial real estate loan with an outstanding principal balance of $2.9 million and a $2.8 million increase in one- to four-family mortgage loans.

Net charge-offs for the three months ended September 30, 2009, were $816,000, compared to $631,000 for the three months ended September 30, 2008, while net charge-offs for the nine months ended September 30, 2009, were $2.8 million, compared to $2.2 million for the nine months ended September 30, 2008. One- to four-family mortgages charged-off increased by $306,000, while commercial non-mortgage loans charged-off increased by $355,000 from the nine months ended September 2008 to the same period in September 2009.

Securities. Our securities portfolio increased by $69.9 million, or 10.7%, to $725.3 million at September 30, 2009, from $655.4 million at December 31, 2008. The increase in our securities portfolio was primarily caused by $458.6 million of securities purchased and was partially offset by maturities and paydowns totaling $315.0 million and sales proceeds totaling $73.8 million. The purchases consisted of $337.8 million of securities deemed available-for-sale and $120.8 million of securities that were marked held-to-maturity. The sale of 22 agency residential collateralized mortgage obligations and two agency residential mortgage-backed securities, with a cost basis of $71.2 million, resulted in a $1.6 million after-tax increase to earnings. We no longer have any collateralized debt obligations in our securities portfolio.

The decision to sell all of the Company’s collateralized debt obligations was made after considering the following: (1) June valuation reports from the trustee showed significantly higher levels of new defaults among the underlying issuers than previously reported, further reducing collateral coverage ratios; (2) an analysis of underlying issuers’ current return on assets ratios, Tier One capital ratios, leverage ratios, change in leverage ratios, and non-performing loans ratios showed ongoing and worsening credit deterioration, suggesting probable and possible future defaults; (3) the modeling of Level 3 projections of future cash flows, using internally defined assumptions for future deferrals, defaults, recoveries, and prepayments, showed no expected future cash flows; and (4) a ratings downgrade from BBB to C for each of the securities during the quarter. The sale of the collateralized debt obligation securities generated proceeds of $224,000. Please see Note 7 — Securities for more information.

Deposits. Total deposits increased by $190.0 million, or 12.3%, to $1.74 billion at September 30, 2009, from $1.55 billion at December 31, 2008.

	September 30,		December 31,		Dollar		Percent
	2009		2008		Change		Change
	(Dollars in Thousands)
Non-interest-bearing demand	$	184,869	$	172,395	$	12,474		7.2	%
Interest-bearing demand		207,223		98,884		108,339		109.6	%
Savings		144,580		144,530		50		0.0	%
Money Market		533,755		482,525		51,230		10.6	%
IRA savings		8,749		8,188		561		6.9	%
Time		658,905		641,568		17,337		2.7	%
Total deposits	$	1,738,081	$	1,548,090	$	189,991		12.3	%

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We saw increases in all deposit categories, with the largest being a $108.3 million, or 109.6%, increase in interest-bearing demand accounts. This was primarily attributable to our Absolute Checking product, which currently provides a 4.0% annual percentage yield on account balances up to $50,000. This product encourages relationship accounts with required electronic transactions. Money market deposits increased by $51.2 million, or 10.6%, due to a $50.8 million, or 11.8%, increase in consumer money market accounts. Additionally, time accounts increased by $17.3 million, or 2.7%, primarily due to our participation in the CDARS^® network. Through CDARS^®, the Company can provide depositors the ability to place up to $50.0 million on deposit with the Company while receiving FDIC insurance on the entire deposit by virtue of the Company placing customer funds in excess of FDIC deposit insurance limits with other financial institutions in the CDARS^® network. In return, these financial institutions place customer funds with the Company on a reciprocal basis. We have an opportunity to further improve our costs on deposits due to lowered certificate of deposit costs, which were 3.02% for the nine months ended September 30, 2009, compared to 4.03% for the nine months ended September 30, 2008. 68% of these balances will mature in the next year, of which 28% will mature in the fourth quarter of 2009. Non-interest-bearing demand accounts include $27.8 million of growth in our Purchase Program checking account, which is a non-interest-bearing demand account opened by our mortgage banking company clients who participate in the Purchase Program.

Borrowings. Federal Home Loan Bank advances decreased by $66.1 million, or 16.1%, from $410.8 million at December 31, 2008, to $344.7 million at September 30, 2009. The outstanding balance of borrowings has decreased due to monthly principal paydowns. During the nine months ended September 30, 2009, the Company used deposit growth to fund loans more often than utilizing borrowings as a funding source. At September 30, 2009, the Company was eligible to borrow an additional $620.4 million from the Federal Home Loan Bank. Additionally, the Company is eligible to borrow from the Federal Reserve Bank discount window and has two available federal funds lines of credit with other financial institutions totaling $66.0 million.

Shareholders’ Equity. Total shareholders’ equity increased by $7.4 million, or 3.8%, from $194.1 million at December 31, 2008, to $201.5 million at September 30, 2009.

	September 30,			December 31,			Dollar		Percent
	2009			2008			Change		Change
	(Dollars in Thousands)
Common stock	$	262		$	262		$	—		0.0	%
Additional paid-in capital		117,491			115,963			1,528		1.3	%
Retained Earnings		109,547			108,332			1,215		1.1	%
Accumulated other comprehensive income (loss)		2,354			(1,613	)		3,967		245.9	%
Unearned ESOP shares		(6,393	)		(7,097	)		704		9.9	%
Treasury stock		(21,708	)		(21,708	)		—		0.0	%
Total shareholders’ equity	$	201,553		$	194,139		$	7,414		3.8	%

This increase was primarily caused by a $4.0 million, or 245.9%, change in unrealized gains and losses on securities available for sale. This change was primarily attributable to the sale of our collateralized debt obligations in June 2009, which removed our loss position in accumulated other comprehensive income. Please see Note 7 — Securities for more information. On April 9, the FASB issued ASC 320-10-65, which allowed the Company to reverse the non-credit portion of an impairment charge booked to earnings relating to the Company’s collateralized debt obligations in December 2008. The $2.8 million after-tax amount was reflected as a cumulative effect adjustment that increased retained earnings and increased accumulated other comprehensive loss. This reclassification had a positive impact on regulatory capital and no impact on tangible common equity. The payment of dividends totaling $0.18 per share so far this year resulted in a $1.9 million reduction to shareholders’ equity.

Page 33 of 56

Comparison of Results of Operations for the Three Months Ended September 30, 2009 and 2008

General.Net income for the three months ended September 30, 2009, was $2.9 million, an increase of $1.7 million, or 143.3%, from $1.2 million for the three months ended September 30, 2008. This increase in net income was driven by higher gain on sale of loans and net interest income, as well as operating expense reductions in advertising and outside professional services expense. Our basic and diluted earnings per share for the three months ended September 30, 2009, increased by $0.07 to $0.12.

Interest Income.Interest income increased by $969,000, or 3.8%, from $25.4 million for the three months ended September 30, 2008, to $26.4 million for the three months ended September 30, 2009.

	Three Months Ended
	September 30,				Dollar			Percent
	2009		2008		Change			Change
	(Dollars in Thousands)
Interest and dividend income
Loans, including fees	$	21,031	$	17,602	$	3,429			19.5	%
Securities		5,039		7,601		(2,562	)		-33.7	%
Interest-bearing deposits in other financial institutions		315		176		139			79.0	%
Federal Home Loan Bank stock		7		44		(37	)		-84.1	%
	$	26,392	$	25,423	$	969			3.8	%

This increase was primarily due to a $3.4 million, or 19.5%, increase in interest income on loans as the average balance of loans (including loans held for sale) increased by $237.9 million, or 20.4%, from the three months ended September 30, 2008. This increase was driven by higher average balances in residential real estate (primarily a result of our Purchase Program that was introduced in July 2008) and commercial real estate loans. This increase in interest income earned on loans was partially offset by lower interest income on securities, which declined by $2.6 million, or 33.7%, from the three months ended September 30, 2008. This decrease was primarily attributable to lower yields earned on securities and lower balances of collateralized mortgage obligations and other investment securities. Additionally, the yield earned on interest-earning deposits in other financial institutions declined by 146 basis points. Overall, the yield on interest-earning assets for the three months ended September 30, 2009 decreased by 63 basis points, from 5.52% for the three months ended September 30, 2008, to 4.89%; this decrease was due to lower yields earned on assets and was partially offset by a $315.5 million, or 17.1%, increase in average interest-earning assets.

Interest Expense.Interest expense increased by $521,000, or 4.5%, from $11.7 million for the three months ended September 30, 2008, to $12.2 million for the three months ended September 30, 2009.

	Three Months Ended
	September 30,				Dollar			Percent
	2009		2008		Change			Change
	(Dollars in Thousands)
Interest expense
Deposits	$	8,545	$	8,647	$	(102	)		-1.2	%
Federal Home Loan Bank advances		3,421		2,900		521			18.0	%
Repurchase agreement		206		104		102			98.1	%
	$	12,172	$	11,651	$	521			4.5	%

This increase was primarily caused by a $521,000, or 18.0%, increase in interest expense on Federal Home Loan Bank advances and a $102,000, or 98.1%, increase in interest expense on our $25.0 million repurchase agreement with Credit Suisse after the agreement repriced to 3.22% from 1.62% in April 2009. The average balance of borrowings increased by $36.8 million, or 11.6%, from the three months ended September 30, 2008, and the average rate paid on borrowings increased by 31 basis points. We utilized Federal Home Loan Bank advances and the $25.0 million repurchase agreement to leverage our balance sheet and to more closely match the duration of our assets to our liabilities. A $102,000, or 1.2%, decrease in interest expense on deposits partially offset the increase in borrowing interest expense. While volume increased in all of our deposit categories, lower rates paid on our savings, money market, and time accounts contributed to lower interest expense on deposit accounts. Overall, the cost of interest-bearing liabilities decreased 46 basis points, from 3.06% for the three months ended September 30, 2008, to 2.60%.

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Net Interest Income.Net interest income increased by $448,000, or 3.3%, to $14.2 million for the three months ended September 30, 2009, from $13.8 million for the three months ended September 30, 2008. The net interest rate spread decreased 17 basis points to 2.29% for the three months ended September 30, 2009, from 2.46% for the same period last year. The net interest margin decreased 36 basis points to 2.63% for the three months ended September 30, 2009, from 2.99% for the three months ended September 30, 2008. The decrease in the net interest margin was primarily attributable to Purchase Program loans with an average balance of $237.4 million that were added to our loan portfolio at an average rate of 4.96%. Also, our average balance maintained in interest-earning deposit accounts increased by $103.7 million from the three months ended September 30, 2008, to the same period this year. Additionally, we have purchased an increased amount of variable-rate securities over the past year, which will better position us for a rising rate environment.

Analysis of Net Interest Income — Three Months Ended September 30, 2009, and 2008

Net interest income, the primary contributor to earnings, represents the difference between income on interest-earning assets and expenses on interest-bearing liabilities. Net interest income depends upon the volume of interest-earning assets and interest-bearing liabilities and the interest rates earned or paid on them.

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Average Balances, Net Interest Income, Yields Earned and Rates Paid

The following table presents, for the periods indicated, the total dollar amount of interest income from average interest-earning assets and the resultant yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates. Also presented are the weighted average yield 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 September 30,
	2009								2008
	Average								Average
	Outstanding			Interest		Yield/			Outstanding			Interest		Yield/
	Balance			Earned/Paid		Rate			Balance			Earned/Paid		Rate
	(Dollars in Thousands)
Interest-earning assets:
Loans receivable (including loans held for sale)	$	1,406,372		$	21,031		5.98	%	$	1,168,465		$	17,602		6.03	%
Agency mortgage-backed securities		298,319			2,904		3.89	%		238,101			2,876		4.83	%
Agency collateralized mortgage obligations		261,125			1,849		2.83	%		325,480			3,712		4.56	%
Investment securities		45,085			286		2.54	%		68,667			1,013		5.90	%
FHLB stock		14,830			7		0.19	%		13,185			44		1.33	%
Interest-earning deposit accounts		132,937			315		0.95	%		29,270			176		2.41	%
Total interest-earning assets		2,158,668			26,392		4.89	%		1,843,168			25,423		5.52	%
Noninterest -earning assets		131,331								106,597
Total assets	$	2,289,999							$	1,949,765
Interest-bearing liabilities:
Interest-bearing demand		180,997			978		2.16	%		83,742			257		1.23	%
Savings and money market		674,768			2,913		1.73	%		615,787			3,754		2.44	%
Time		659,951			4,654		2.82	%		503,943			4,636		3.68	%
Borrowings		354,095			3,627		4.10	%		317,296			3,004		3.79	%
Total interest-bearing liabilities		1,869,811			12,172		2.60	%		1,520,768			11,651		3.06	%
Noninterest- bearing liabilities		220,134								231,659
Total liabilities		2,089,945								1,752,427
Total capital		200,054								197,338
Total liabilities and capital	$	2,289,999							$	1,949,765
Net interest income				$	14,220							$	13,772
Net interest rate spread							2.29	%							2.46	%
Net earning assets	$	288,857							$	322,400
Net interest margin							2.63	%							2.99	%
Average interest-earning assets to average interest-bearing liabilities		115.45	%							121.20	%

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Rate/Volume Analysis

The following schedule presents the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities. It distinguishes between the changes related to outstanding balances and those due to changes in interest rates. The change in interest attributable to rate has been determined by applying the change in rate between periods to average balances outstanding in the later 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 September 30,
	2009 versus 2008
							Total
	Increase (Decrease) Due to						Increase
	Volume			Rate			(Decrease)
	(Dollars in Thousands)
Interest-earning assets:
Loans receivable	$	3,559		$	(130	)	$	3,429
Agency mortgage-backed securities		647			(619	)		28
Agency collateralized mortgage obligations		(639	)		(1,224	)		(1,863	)
Investment securities		(273	)		(454	)		(727	)
FHLB stock		5			(42	)		(37	)
Interest-earning deposit accounts		301			(162	)		139
Total interest-earning assets		3,600			(2,631	)		969
Interest-bearing liabilities:
Interest-bearing demand		436			285			721
Savings and money market		334			(1,175	)		(841	)
Time		1,244			(1,226	)		18
Borrowings		365			258			623
Total interest-bearing liabilities		2,379			(1,858	)		521
Net interest income	$	1,221		$	(773	)	$	448

Provision for Loan Losses.We establish provisions for loan losses, which are charged to earnings, at a level required to reflect probable incurred credit losses in the loan portfolio. In evaluating the level of the allowance for loan losses, management considers historical loss experience, the types of loans and the amount of loans in the loan portfolio, adverse situations that may affect borrowers’ ability to repay, estimated value of any underlying collateral, peer group data, prevailing economic conditions, and current factors.

Large groups of smaller balance homogeneous loans, such as residential real estate, small commercial real estate, home equity and consumer loans, are evaluated in the aggregate using historical loss factors adjusted for current economic conditions and other relevant data. Larger non-homogeneous loans, such as large commercial loans, are evaluated individually, and specific loss allocations are provided for these loans when management has concerns about the borrowers’ ability to repay.

The provision for loan losses was $1.8 million for the three months ended September 30, 2009, a decrease of $92,000 from the three months ended September 30, 2008. While net charge-offs have increased by $185,000 from the three months ended September 30, 2008, the provision for loan losses for the three months ended September 30, 2009, decreased from the same period last year due to lower loan balances. Loans held for sale are carried at the lower of cost or market and do not require a reserve. Our allowance for loan loss as a percentage of loans increased from 0.70% at September 30, 2008, to 0.97% at September 30, 2009.

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Noninterest Income.Noninterest income increased by $1.7 million, or 21.9%, from $8.0 million for the three months ended September 30, 2008, to $9.7 million for the three months ended September 30, 2009.

	Three Months Ended
	September 30,						Dollar			Percent
	2009			2008			Change			Change
	(Dollars in Thousands)
Noninterest income
Service charges and fees	$	4,798		$	5,034		$	(236	)		-4.7	%
Brokerage fees		90			144			(54	)		-37.5	%
Net gain on sale of loans		3,797			2,352			1,445			61.4	%
Loan servicing fees		82			69			13			18.8	%
Bank-owned life insurance income		103			301			(198	)		-65.8	%
Valuation adjustment on mortgage servicing rights		109			—			109			100.0	%
Gain (loss) on sale of foreclosed assets		495			(8	)		503			6287.5	%
Gain (loss) on disposition of assets		(96	)		(1	)		(95	)		9500.0	%
Other		353			90			263			292.2	%
	$	9,731		$	7,981		$	1,750			21.9	%

Net gain on sale of loans increased by $1.4 million, or 61.4%, as VPBM sold $162.1 million in loans to outside investors during the three months ended September 30, 2009, compared to $67.6 million for the same period in 2008. The increase in sales can be attributed to a higher volume of one- to four-family loan originations partially due to increased refinance volume resulting from lower market interest rates. Gain on sale of foreclosed assets increased by $503,000 primarily due to a $440,000 recovery recognized in September 2009 on an REO property; this recovery offset losses recognized on this property throughout 2008 and 2009. Fees of $563,000 generated by our Purchase Program partially offset the decrease in service charges and fees, which was primarily attributable to a $565,000 decrease in non-sufficient funds fees and a $122,000 decline in debit card income. The decrease in non-sufficient funds fees and debit card income is primarily due to a trend of lower volume in these types of transactions.

Noninterest Expense. Noninterest expense decreased by $136,000, or 0.74%, from $18.2 million for the three months ended September 30, 2008, to $18.1 million for the three months ended September 30, 2009.

	Three Months Ended
	September 30,				Dollar			Percent
	2009		2008		Change			Change
	(Dollars in Thousands)
Noninterest expense
Salaries and employee benefits	$	11,451	$	11,427	$	24			0.2	%
Advertising		286		529		(243	)		-45.9	%
Occupancy and equipment		1,474		1,491		(17	)		-1.1	%
Outside professional services		460		832		(372	)		-44.7	%
Regulatory assessments		844		317		527			166.2	%
Data processing		1,085		1,040		45			4.3	%
Office operations		1,456		1,488		(32	)		-2.2	%
Deposit processing charges		203		245		(42	)		-17.1	%
Lending and collection		326		344		(18	)		-5.2	%
Other		485		493		(8	)		-1.6	%
	$	18,070	$	18,206	$	(136	)		-0.7	%

The decrease in noninterest expense was primarily attributable to a $372,000 decline in outside professional services expense, which was lower for the three months ended September 30, 2009, due to a $268,000 decrease in consulting expense. In 2008, we employed consulting firms to streamline our processes and assist in meeting our staffing needs as we expanded our community and mortgage banking network and introduced our Purchase Program. We did not incur similar expenses during the same time period in 2009. Also, during the three months ended September 30, 2008, we recorded a litigation liability of $127,000 related to Visa, Inc.’s settlement with Discover Financial Services, which was covered litigation under Visa’s retrospective responsibility plan-we had no similar transactions during the same time period in 2009. Advertising expense decreased by $243,000, or 45.9%, as we shifted our focus to emphasize community marketing efforts rather than mass branding campaigns. The decline in noninterest expense was partially offset by a $527,000, or 166.2% increase in regulatory assessments expense, as FDIC deposit insurance assessment rates have increased along with an increase in assessable deposits.

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The slight increase in salaries and employee benefits was primarily due to organic growth, as we had $300,000 of increased salary expense in 2009 related to five new community bank offices opened in 2008 and 2009 and the addition of our Purchase Program division in July 2008. Also, salaries increased by $230,000 due to a higher number of salaried VPBM employees, as the headcount of employees paid on a salaried basis increased from 44 employees at August 31, 2008, to 60 employees at August 31, 2009. These increases were partially offset by salary expense savings due to the closure of nine in-store banking centers in 2009.

Income Tax Expense.During the three months ended September 30, 2009, we recognized income tax expense of $1.2 million on our pre-tax income compared to income tax expense of $491,000 for the three months ended September 30, 2008. Our effective tax rate for the three months ended September 30, 2009 was 29.5% compared to 29.2% for the same time period in 2008.

Comparison of Results of Operations for the Nine Months Ended September 30, 2009 and 2008

General.The Company reported net income of $306,000 for the nine months ended September 30, 2009, a decrease of $3.8 million, or 92.5%, from net income of $4.1 million for the nine months ended September 30, 2008. This decline in net income was primarily due to an $8.1 million (net of tax, using a tax rate of 34%) impairment charge on the Company’s collateralized debt obligations. We no longer have any collateralized debt obligations on our books. Net income before this impairment charge was $8.4 million, an increase of $4.3 million, or 105.2%, from the nine months ended September 30, 2008.

Interest Income.Interest income increased by $10.8 million, or 15.3%, from $70.8 million for the nine months ended September 30, 2008, to $81.6 million for the nine months ended September 30, 2009.

	Nine Months Ended
	September 30,				Dollar			Percent
	2009		2008		Change			Change
	(Dollars in Thousands)
Interest and dividend income
Loans, including fees	$	62,993	$	47,208	$	15,785			33.4	%
Securities		18,066		22,360		(4,294	)		-19.2	%
Interest-bearing deposits in other financial institutions		543		967		(424	)		-43.8	%
Federal Home Loan Bank stock		10		225		(215	)		-95.6	%
	$	81,612	$	70,760	$	10,852			15.3	%

This increase was primarily due to a $15.8 million, or 33.4%, increase in interest income on loans as the average balance of loans (including loans held for sale) increased by $380.0 million, or 36.1%, from the nine months ended September 30, 2008. This increase was driven by higher average balances in residential real estate (primarily a result of our Purchase Program) and commercial real estate loans. This increase in interest income earned on loans was partially offset by lower interest income on securities, which declined by $4.3 million, or 19.2%, from the nine months ended September 30, 2008. This decrease was primarily attributable to lower yields earned on securities and lower balances of collateralized mortgage obligations and other investment securities. Additionally, the yield earned on interest-earning deposits in other financial institutions declined by 182 basis points. Overall, the yield on interest-earning assets for the nine months ended September 30, 2009, decreased by 39 basis points, from 5.47% for the nine months ended September 30, 2008, to 5.08%; this decrease was due to lower yields earned on assets and was partially offset by a $417.0 million, or 24.2%, increase in average interest-earning assets.

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Interest Expense.Interest expense increased by $4.5 million, or 13.7%, from $33.2 million for the nine months ended September 30, 2008, to $37.7 million for the nine months ended September 30, 2009.

	Nine Months Ended
	September 30,				Dollar			Percent
	2009		2008		Change			Change
	(Dollars in Thousands)
Interest expense
Deposits	$	26,404	$	26,637	$	(233	)		-0.87	%
Federal Home Loan Bank advances		10,782		6,341		4,441			70.0	%
Federal Reserve Bank borrowings		29		—		29			100.0	%
Repurchase agreement		502		196		306			156.1	%
	$	37,717	$	33,174	$	4,543			13.7	%

This increase was primarily caused by a $4.4 million, or 70.0%, increase in interest expense on Federal Home Loan Bank advances and a $306,000, or 156.1%, increase in interest expense on our repurchase agreement with Credit Suisse after the agreement repriced to 3.22% from 1.62% in April 2009. The repurchase agreement was entered into in April 2008; therefore, only six months of interest expense is reflected in the nine months ended September 30, 2008, compared to nine months of interest expense reflected in the nine months ended September 30, 2009. The average balance of borrowings increased by $162.6 million, or 75.0%, from the nine months ended September 30, 2008, which was partially offset by a four basis point decrease in the average rate paid for borrowings from the nine months ended September 30, 2008. We utilized Federal Home Loan Bank advances and our $25.0 million repurchase agreement to leverage our balance sheet and to more closely match the duration of our assets to our liabilities. We also incurred $29,000 of interest expense on Federal Reserve Bank borrowings during the nine months ended September 30, 2009; we had no Federal Reserve Bank borrowings outstanding at September 30, 2009 due to the short-term nature of these borrowings.

A $233,000, or 0.87%, decrease in interest expense on deposits partially offset the increase in borrowing interest expense. While volume increased in all of our deposit categories, lower rates paid on our savings, money market, and time accounts contributed to lower interest expense on deposit accounts. Overall, the cost of interest-bearing liabilities decreased 45 basis points, from 3.17% for the nine months ended September 30, 2008, to 2.72%.

Net Interest Income.Net interest income increased by $6.3 million, or 16.8%, to $43.9 million for the nine months ended September 30, 2009, from $37.6 million for the nine months ended September 30, 2008. The net interest rate spread increased six basis points to 2.36% for the nine months ended September 30, 2009, from 2.30% for the same period last year. The net interest margin decreased 17 basis points to 2.73% for the nine months ended September 30, 2009, from 2.90% for the nine months ended September 30, 2008. The decrease in the net interest margin was primarily attributable to Purchase Program loans with an average balance of $186.2 million that were added to our loan portfolio at an average rate of 4.84%. Additionally, we have purchased an increased amount of variable-rate securities over the past year, which will better position us for a rising rate environment.

Analysis of Net Interest Income — Nine Months Ended September 30, 2009, and 2008

Net interest income, the primary contributor to earnings, represents the difference between income on interest-earning assets and expenses on interest-bearing liabilities. Net interest income depends upon the volume of interest-earning assets and interest-bearing liabilities and the interest rates earned or paid on them.

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Average Balances, Net Interest Income, Yields Earned and Rates Paid

The following table presents, for the periods indicated, the total dollar amount of interest income from average interest-earning assets and the resultant yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates. Also presented are the weighted average yield 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.

	Nine Months Ended September 30,
	2009								2008
	Average								Average
	Outstanding			Interest		Yield/			Outstanding			Interest		Yield/
	Balance			Earned/Paid		Rate			Balance			Earned/Paid		Rate
	(Dollars in Thousands)
Interest-earning assets:
Loans receivable (including loans held for sale)	$	1,432,004		$	62,993		5.87	%	$	1,052,031		$	47,208		5.98	%
Agency mortgage-backed securities		278,871			8,959		4.28	%		220,692			8,073		4.88	%
Agency collateralized mortgage obligations		292,738			7,707		3.51	%		336,502			11,898		4.71	%
Investment securities		44,654			1,400		4.18	%		59,717			2,389		5.33	%
FHLB stock		15,576			10		0.08	%		9,321			225		3.22	%
Interest-earning deposit accounts		78,449			543		0.92	%		47,061			967		2.74	%
Total interest-earning assets		2,142,292			81,612		5.08	%		1,725,324			70,760		5.47	%
Noninterest -earning assets		118,463								111,032
Total assets	$	2,260,755							$	1,836,356
Interest-bearing liabilities:
Interest-bearing demand		140,893			2,023		1.91	%		74,216			543		0.98	%
Savings and money market		662,120			9,303		1.87	%		594,464			10,671		2.39	%
Time		665,050			15,078		3.02	%		509,980			15,423		4.03	%
Borrowings		379,399			11,313		3.98	%		216,757			6,537		4.02	%
Total interest-bearing liabilities		1,847,462			37,717		2.72	%		1,395,417			33,174		3.17	%
Noninterest- bearing liabilities		216,481								238,625
Total liabilities		2,063,943								1,634,042
Total capital		196,812								202,314
Total liabilities and capital	$	2,260,755							$	1,836,356
Net interest income				$	43,895							$	37,586
Net interest rate spread							2.36	%							2.30	%
Net earning assets	$	294,830							$	329,907
Net interest margin							2.73	%							2.90	%
Average interest-earning assets to average interest-bearing liabilities		115.96	%							123.64	%

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Rate/Volume Analysis

The following schedule presents the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities. It distinguishes between the changes related to outstanding balances and those due to changes in interest rates. The change in interest attributable to rate has been determined by applying the change in rate between periods to average balances outstanding in the later 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.

	Nine Months Ended September 30,
	2009 versus 2008
							Total
	Increase (Decrease) Due to						Increase
	Volume			Rate			(Decrease)
	(Dollars in Thousands)
Interest-earning assets:
Loans receivable	$	16,732		$	(947	)	$	15,785
Agency mortgage-backed securities		1,951			(1,065	)		886
Agency collateralized mortgage obligations		(1,414	)		(2,777	)		(4,191	)
Investment securities		(532	)		(457	)		(989	)
FHLB stock		91			(306	)		(215	)
Interest-earning deposit accounts		430			(854	)		(424	)
Total interest-earning assets		17,258			(6,406	)		10,852
Interest-bearing liabilities:
Interest-bearing demand		715			765			1,480
Savings and money market		1,124			(2,492	)		(1,368	)
Time		4,046			(4,391	)		(345	)
Borrowings		4,851			(75	)		4,776
Total interest-bearing liabilities		10,736			(6,193	)		4,543
Net interest income	$	6,522		$	(213	)	$	6,309

Provision for Loan Losses.We establish provisions for loan losses, which are charged to earnings, at a level required to reflect probable incurred credit losses in the loan portfolio. In evaluating the level of the allowance for loan losses, management considers historical loss experience, the types of loans and the amount of loans in the loan portfolio, adverse situations that may affect borrowers’ ability to repay, estimated value of any underlying collateral, peer group data, prevailing economic conditions, and current factors.

Large groups of smaller balance homogeneous loans, such as residential real estate, small commercial real estate, home equity and consumer loans, are evaluated in the aggregate using historical loss factors adjusted for current economic conditions and other relevant data. Larger non-homogeneous loans, such as large commercial loans, are evaluated individually, and specific loss allocations are provided for these loans when management has concerns about the borrowers’ ability to repay.

The provision for loan losses was $4.7 million for the nine months ended September 30, 2009, an increase of $206,000 from the nine months ended September 30, 2008. This increase was primarily due to a $668,000 increase in net charge-offs and a $875,000 increase in specific valuation allowances on impaired loans; this increase was partially offset by lower loan balances as compared to the prior period. Loans held for sale are carried at the lower of cost or market and do not require a reserve.

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Noninterest Income.Noninterest income decreased by $6.2 million, or 25.8%, from $24.2 million for the nine months ended September 30, 2008, to $18.0 million for the nine months ended September 30, 2009, mostly due to a $12.2 million impairment of collateralized debt obligations. All collateralized debt obligations were sold in June 2009.

	Nine Months Ended
	September 30,						Dollar			Percent
	2009			2008			Change			Change
	(Dollars in Thousands)
Noninterest income
Service charges and fees	$	14,063		$	14,918		$	(855	)		-5.7	%
Brokerage fees		229			364			(135	)		-37.1	%
Net gain on sale of loans		12,834			6,520			6,314			96.8	%
Loan servicing fees		183			196			(13	)		-6.6	%
Bank-owned life insurance income		444			849			(405	)		-47.7	%
Gain on redemption of Visa, Inc. shares		—			771			(771	)		-100.0	%
Valuation adjustment on mortgage servicing rights		(102	)		—			(102	)		-100.0	%
Impairment of collateralized debt obligation (all credit)		(12,246	)		—			(12,246	)		-100.0	%
Gain on sale of available for sale securities		2,377			—			2,377			100.0	%
Gain (loss) on sale of foreclosed assets		219			(33	)		252			763.6	%
Gain (loss) on disposition of assets		(1,038	)		11			(1,049	)		-9536.4	%
Other		1,005			622			383			61.6	%
	$	17,968		$	24,218		$	(6,250	)		-25.8	%

Net gain on sale of loans increased by $6.3 million, or 96.8%, as VPBM sold $518.3 million in loans to outside investors during the nine months ended September 30, 2009, compared to $193.0 million for the same period in 2008. The increase in sales can be attributed to a higher volume of one- to four-family loan originations partially due to increased refinance volume resulting from lower market interest rates. Non-interest income for the nine months ended September 30, 2009, included a $12.2 million impairment on the remaining collateralized debt obligations, which were impaired to their fair value and sold in June 2009. Also, noninterest income for the period included $993,000 in lease termination fees and leasehold improvement write-offs for in-store banking centers closed during the nine months ended September 30, 2009, which are reported as losses on disposition of assets.

In the first quarter of 2009, we recognized a valuation adjustment of $211,000 to write down our mortgage servicing rights due to industry-wide increased prepayment speeds and lower interest rates. In the third quarter of 2009, we reversed $109,000 of this valuation adjustment as prepayment speeds slowed and interest rates increased. This resulted in a net valuation adjustment of $102,000 for the nine months ended September 30, 2009. Comparatively, in March 2008, we recognized a gain of $771,000 resulting from the redemption of 18,029 shares of Visa, Inc. Class B stock in association with Visa’s initial public offering, with no similar transactions in 2009.

In June 2009, we recognized $2.4 million in gain on the sale of 22 agency residential collateralized mortgage obligations and two agency residential mortgage-backed securities, with a cost basis of $71.2 million. Fees of $1.2 million generated by our Purchase Program partially offset the decrease in service charges and fees, which was primarily attributable to a $1.4 million decrease in non-sufficient funds fees and a $308,000 decline in debit card income. The decrease in non-sufficient funds fees and debit card income is primarily due to a trend of lower volume in these types of transactions. Excluding the impairment related to collateralized debt obligations and the gain on sale of securities, non-interest income would have been $24.5 million, a 1.1% increase over the same time period in 2008.

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Noninterest Expense. Noninterest expense increased by $5.6 million, or 11.0%, from $51.0 million for the nine months ended September 30, 2008, to $56.6 million for the nine months ended September 30, 2009.

	Nine Months Ended
	September 30,				Dollar			Percent
	2009		2008		Change			Change
	(Dollars in Thousands)
Noninterest expense
Salaries and employee benefits	$	35,655	$	31,786	$	3,869			12.2	%
Advertising		975		1,899		(924	)		-48.7	%
Occupancy and equipment		4,538		4,113		425			10.3	%
Outside professional services		1,425		1,588		(163	)		-10.3	%
Regulatory assessments		3,250		916		2,334			254.8	%
Data processing		3,127		3,110		17			0.5	%
Office operations		4,424		4,497		(73	)		-1.6	%
Deposit processing charges		666		755		(89	)		-11.8	%
Lending and collection		1,001		941		60			6.4	%
Other		1,579		1,438		141			9.8	%
	$	56,640	$	51,043	$	5,597			11.0	%

This increase in noninterest expense was primarily due to organic growth as we have opened multiple new locations over the past year and paid additional mortgage loan production incentives due to higher mortgage originations. Commissions and other bonuses paid to VPBM employees increased by $1.2 million from the nine months ended September 30, 2008, compared to the same period this year due to a $186.8 million increase in mortgage loans closed by VPBM. The increase in salary expense due to these commissions is more than offset by a $6.3 million increase in the net gain on sale of loans, which is reported in noninterest income.

Over the past year, the Company opened five new community bank offices in Northeast Tarrant County, Oak Cliff, Grapevine, West Frisco, and Wylie and added a new Purchase Program division in July 2008, resulting in additional salary expense of $1.1 million. This was offset by salary expense savings of $1.2 million due to the closure of nine in-store banking centers and a reduction in administrative staff during the nine months ended September 30, 2009. Since August 2008, VPBM has increased its salaried headcount by 16 employees, resulting in increased salary expense of $1.0 million.

Advertising expense decreased by $924,000, or 48.7%, as we shifted our focus to emphasize community marketing efforts rather than mass branding campaigns. Regulatory assessments expense increased by $2.3 million, or 254.8%, due to increased regulatory fees, which included a $1.1 million FDIC special assessment booked as expense in the second quarter of 2009. This special assessment, adopted in May 2009, assessed FDIC-insured banks five basis points on a base of total assets less Tier One capital. Occupancy and equipment expense increased by $425,000, or 10.3%, primarily due to increased rental expense of $341,000 attributable to additional loan production offices and five community bank offices opened over the past year.

Income Tax Expense.During the nine months ended September 30, 2009, we recognized income tax expense of $206,000 on our pre-tax income compared to income tax expense of $2.2 million for the nine months ended September 30, 2008. The variance in pre-tax income for the nine months ended September 30, 2009, compared to the same time period last year, caused the decline in income tax expense.

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.

In addition to these primary sources of funds, management has several secondary sources available to meet potential funding requirements. As of September 30, 2009, the Company had an additional borrowing capacity of $620.4 million with the Federal Home Loan Bank of Dallas (FHLB). In addition to FHLB advances, 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 collateral pledged to the discount window line. Also, at September 30, 2009, the Company had $66.0 million in federal funds lines of credit available with other financial institutions.

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The Company has classified 65.0% of its securities portfolio as available for sale, 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. In addition, we have historically sold mortgage loans in the secondary market to reduce interest rate risk and to create still another source of liquidity.

Liquidity management is both a daily and long-term function of business management. Excess liquidity is generally invested in short-term investments, such as overnight deposits and federal funds. On a longer term basis, we maintain a strategy of investing in various lending products and investment securities, including mortgage-backed securities. Participations in loans we originate, including portions of commercial real estate loans, are sold to manage borrower concentration risk as well as interest rate risk. The Company uses its sources of funds primarily to meet its ongoing commitments, pay maturing deposits and fund withdrawals, and to fund loan commitments. At September 30, 2009, the total approved loan commitments (including Purchase Program commitments) and unused lines of credit outstanding amounted to $209.8 million and $77.3 million, respectively, as compared to $127.7 million and $102.5 million, respectively, as of December 31, 2008. Certificates of deposit scheduled to mature in one year or less at September 30, 2009, totaled $448.1 million.

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.

In September 2009, the FDIC proposed a Deposit Insurance Fund restoration plan that requires banks to prepay, on December 30, 2009, their estimated quarterly risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011, and 2012. Under the plan, which would apply to all banks except those with liquidity problems, banks would be assessed through 2010 according to the risk-based premium schedule adopted earlier this year. However, beginning January 1, 2011, the base rate would increase by three basis points. The Company has the necessary liquidity to accommodate this prepayment of premiums and does not anticipate any material impact on its liquidity as a result of this change.

For the nine months ended September 30, 2009, cash and cash equivalents decreased by $423,000, or 1.3%, from $32.5 million as of December 31, 2008, to $32.1 million as of September 30, 2009. Cash used for operating activities of $166.1 million more than offset cash provided by investing activities of $43.7 million and cash provided by financing activities of $122.0 million. Primary sources of cash for the nine months ended September 30, 2009 included proceeds from the sale of loans held for sale of $3.94 billion (primarily related to our Purchase Program), increased deposits of $190.0 million, and maturities, prepayments and calls of available for sale securities of $276.1 million. Primary uses of cash for the nine months ended September 30, 2009, included loans originated or purchased for sale of $4.12 billion and purchases of securities totaling $458.6 million.

During the nine months ended September 30, 2008, cash and cash equivalents decreased by $38.8 million, or 52.8%, from $73.5 million at December 31, 2007, to $34.7 million at September 30, 2008. Cash used for investing activities of $373.5 million more than offset cash provided by operating activities of $16.3 million and cash provided by financing activities of $318.4 million. Primary sources of cash for the nine months ended September 30, 2008, included an increase in deposits of $58.4 million, proceeds from sales of loans held for sale of $202.5 million and proceeds from Federal Home Loan Bank advances of $261.0 million. Primary uses of cash included loans originated or purchased for sale of $205.4 million, purchases of held-to-maturity securities of $148.6 million and a net change in loans of $297.8 million.

Please see Item 1A (Risk Factors) under Part 1 of the Company’s 2008 Annual Report on Form 10-K for information regarding liquidity risk.

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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 the aggregate and by payment due dates.

	September 30, 2009
			One
			through		Four
	Less than		Three		through		After Five
	One Year		Years		Five Years		Years		Total
	(Dollars in Thousands)
Contractual obligations:
Federal Home Loan Bank advances	$	69,091	$	116,593	$	66,958	$	92,093	$	344,735
Repurchase agreement		—		—		—		25,000		25,000
Operating leases (premises)		1,104		1,795		938		3,302		7,139
Total advances and operating leases	$	70,195	$	118,388	$	67,896	$	120,395		376,874
Off-balance sheet loan commitments:
Undisbursed portions of loans closed		—		—		—		—		19,034
Commitments to originate loans		—		—		—		—		63,533
Unused commitment on Purchase Program loans		—		—		—		—		127,228
Unused lines of credit		—		—		—		—		77,287
Total loan commitments		—		—		—		—		287,082
Total contractual obligations and loan commitments									$	663,956

Capital Resources

ViewPoint Bank is subject to minimum capital requirements imposed by the OTS. Based on its capital levels at September 30, 2009, the Bank exceeded these requirements as of that date. Consistent with our goal to operate a sound and profitable organization, our policy is for the Bank to maintain a “well-capitalized” status under the capital categories of the OTS. Based on capital levels at September 30, 2009, the Bank was considered to be well-capitalized.

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At September 30, 2009, the Bank’s GAAP equity totaled $182.8 million. Management monitors the capital levels of the Bank to provide for current and future business opportunities and to meet regulatory guidelines for “well-capitalized” institutions. The Company’s equity totaled $201.6 million, or 8.6% of total assets, at September 30, 2009. The Company is not subject to any specific capital requirements; however, the OTS expects the Company to support the Bank, including providing additional capital to the Bank when appropriate. During the nine months ended September 30, 2009, the Company contributed $12.0 million in capital to the Bank. The Company completed the capital contribution to ensure that the Bank remained well-capitalized to support continued growth. The following table displays the Bank’s capital position relative to its OTS capital requirements at September 30, 2009, and December 31, 2008. The definitions of the terms used in the table are those provided in the capital regulations issued by the OTS.

											To Be Well-Capitalized
						Required for Capital					Under Prompt Corrective
	Actual					Adequacy Purposes					Action Regulations
	Amount		Ratio			Amount		Ratio			Amount		Ratio
	(Dollars in Thousands)
As of September 30, 2009:
Total capital (to risk weighted assets)	$	188,999		14.33	%	$	105,543		8.00	%	$	131,929		10.00	%
Tier 1 (core) capital (to risk weighted assets)		179,404		13.60	%		52,772		4.00	%		79,157		6.00	%
Tier 1 (core) capital (to adjusted total assets)		179,404		7.65	%		93,805		4.00	%		117,257		5.00	%
As of December 31, 2008:
Total capital (to risk weighted assets)	$	163,596		11.17	%	$	117,146		8.00	%	$	146,432		10.00	%
Tier 1 (core) capital (to risk weighted assets)		154,856		10.58	%		58,573		4.00	%		87,859		6.00	%
Tier 1 (core) capital (to adjusted total assets)		154,856		7.02	%		88,258		4.00	%		110,323		5.00	%

Impact of Inflation

The effects of price changes and inflation can vary substantially for most financial institutions. While management believes that inflation affects the growth of total assets, it believes that it is difficult to assess the overall impact. Management believes this to be the case due to the fact that generally neither the timing nor the magnitude of the inflationary changes in the consumer price index (“CPI”) coincides with changes in interest rates. The price of one or more of the components of the CPI may fluctuate considerably and thereby influence the overall CPI without having a corresponding affect on interest rates or upon the cost of those goods and services normally purchased by the Bank. In years of high inflation and high interest rates, intermediate and long-term interest rates tend to increase, thereby adversely impacting the market values of some investment securities, mortgage loans and other long-term fixed rate loans. In addition, higher short-term interest rates caused by inflation tend to increase the cost of funds. In other years, the opposite may occur.

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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. Market rates change over time. Like other financial institutions, our results of operations are impacted by changes in interest rates and the interest rate sensitivity of our assets and liabilities. The risk associated with changes in 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 interest rates and comply with applicable regulations, we 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 and Federal Home Loan Bank advances and other borrowings, reprice more rapidly or at different rates than its interest-earning assets, primarily loans and investment securities. In order to minimize the potential for adverse effects of material prolonged increases or decreases in interest rates on our results of operations, the Bank has adopted an asset and liability management policy. 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 communicate, coordinate, and control asset/liability management consistent with our business plan and board-approved policies. The committee establishes 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, growth, risk, and profitability goals.

The Committee generally 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 the policy implementations 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 plan is to protect net earnings by managing the inherent maturity and repricing mismatches between its interest-earning assets and interest-bearing liabilities. The Bank manages earnings exposure by entering into appropriate term Federal Home Loan Bank advance agreements, through the addition of adjustable rate loans and investment securities, and through the sale of certain fixed rate loans in the secondary market.

As part of its efforts to monitor and manage interest rate risk, the Bank uses the net portfolio value (“NPV”) methodology adopted by the OTS as part of its capital regulations. In essence, this approach calculates the difference between the present value of expected cash flows from assets and liabilities. Management and the Board of Directors review NPV measurements on a quarterly basis 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 to the percentage change in NPV given changes in interest rates. For instantaneous, parallel, and sustained interest rate increases and decreases of 100 and 200 basis points, the Bank’s policy indicates that the NPV ratio should not fall below 7.00% and 6.00%, respectively, and for an increase of 300 basis points the NPV ratio should not fall below 5.00%. As illustrated in the tables below, the Bank was within policy limits for all scenarios tested. The tables presented below, as of September 30, 2009, and December 31, 2008, are internal analyses of our interest rate risk as measured by changes in NPV for instantaneous, parallel, and sustained shifts in the yield curve, in 100 basis point increments, up 300 basis points and down 200 basis points.

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As illustrated in the tables below, our NPV would be negatively impacted by a parallel, instantaneous, and sustained increase in market rates. Such an increase in rates would negatively impact NPV as a result of the duration of assets, including fixed rate residential mortgage loans, extending longer than the duration of liabilities, primarily deposit accounts and Federal Home Loan Bank borrowings. As interest rates rise, the market value of fixed rate loans declines due to both higher discount rates and anticipated slowing loan prepayments.

We have implemented a strategic plan to mitigate interest rate risk. This plan includes the ongoing review of our mix of fixed rate versus variable rate loans, investments, deposits, and borrowings. When available, high quality adjustable rate assets are purchased. These assets reduce our sensitivity to upward interest rate shocks. On the liability side of the balance sheet, term borrowings are added as appropriate. These borrowings will be of a size and term so as to impact and mitigate 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 sacrificing earnings requirements.

September 30, 2009
Change in
Interest
Rates in
Basis			Net Portfolio Value								NPV
Points			$ Amount		$ Change			% Change			Ratio %
(Dollars in Thousands)
	300			131,442		(43,974	)		(25.07	)		5.96
	200			149,504		(25,912	)		(14.77	)		6.63
	100			165,335		(10,081	)		(5.75	)		7.17
	—			175,416		—			—			7.47
	(100	)		177,141		1,725			0.98			7.43
	(200	)		186,424		11,008			6.28			7.70

December 31, 2008
Change in
Interest
Rates in
Basis			Net Portfolio Value								NPV
Points			$ Amount		$ Change			% Change			Ratio %
(Dollars in Thousands)
	300			116,243		(55,211	)		(32.20	)		5.61
	200			138,395		(33,059	)		(19.28	)		6.51
	100			158,694		(12,760	)		(7.44	)		7.28
	—			171,454		—			—			7.70
	(100	)		173,147		1,693			0.99			7.65
	(200	)		171,964		510			0.30			7.48

The Bank’s NPV was $175.4 million, or 7.47%, of the market value of portfolio assets as of September 30, 2009, a $3.9 million increase from $171.5 million, or 7.70%, of the market value of portfolio assets as of December 31, 2008. Based upon the assumptions utilized, an immediate 200 basis point increase in market interest rates would result in a $25.9 million decrease in our NPV at September 30, 2009, a decrease from $33.1 million at December 31, 2008, and would result in an 84 basis point decrease in our NPV ratio to 6.63% at September 30, 2009, as compared to a 119 basis point decrease to 6.51% at December 31, 2008. An immediate 200 basis point decrease in market interest rates would result in a $11.0 million increase in our NPV at September 30, 2009, compared to $510,000 at December 31, 2008, and would result in a 23 basis point increase in our NPV ratio to 7.70% at September 30, 2009, as compared to a 22 basis point decrease in our NPV ratio to 7.48% at December 31, 2008.

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In addition to monitoring selected measures of NPV, management also calculates and monitors effects on net interest income resulting from increases or decreases in rates. This process is used in conjunction with NPV measures to identify interest rate risk on both a global and account level basis. 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 an acceptable mismatch in the actual maturity or repricing of its asset and liability portfolios can provide sufficient returns to justify the increased exposure to sudden and unexpected increases 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 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 interest rates. Additionally, certain assets, such as adjustable rate mortgages, have features which restrict changes in interest rates on a short-term basis and over the life of the asset (initial, periodic, and lifetime caps and floors). Further, in the event of a significant change in interest rates, prepayment and early withdrawal levels may deviate significantly from those assumed above. 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. The current historically low interest rate environment has resulted in asymmetrical interest rate risk. Certain repricing liabilities cannot be fully shocked downward. Assets with prepayment options are being monitored. Market and customer behavior are being considered in the management of interest rate risk.

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 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 and selling originated fixed rate residential mortgage loans. In addition, the Bank borrows at various maturities from the Federal Home Loan Bank 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.

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Item 4. Controls and Procedures

An evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of September 30, 2009. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this quarterly report. There has been no change in the Company’s internal controls over financial reporting during the quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

While the Company believes the present design of its disclosure controls and procedures is effective to achieve its goals, future events affecting its business may cause the Company to modify its disclosure controls and procedures. The Company does not expect that its disclosure controls and procedures and internal control over financial reporting will prevent all error and fraud. A control procedure, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control procedure are met. Because of the inherent limitations in all control procedures, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns in controls or procedures can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual actions of some persons, by collusion of two or more people, or by management override of the control. The design of any control procedure is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control procedure, misstatements due to error or fraud may occur and not be detected.

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PART 2 — OTHER INFORMATION

Item 1. Legal Proceedings

In the normal course of business the Company may be involved in various legal proceedings from time to time. The Company does not believe it is currently involved in any claim or action the ultimate disposition of which would have a material adverse effect on the Company’s financial statements.

Item 1.A. Risk Factors

Set forth below are updates and additions to the market risk information provided in Item 1.A. of the Company’s Annual Report on Form 10-K for the year ended December 31, 2008. These updates and additions should be read in conjunction with the 2008 Form 10-K information.

Our loan portfolio possesses increased risk due to our increasing percentage of commercial real estate and commercial non-mortgage loans. At September 30, 2009, our loan portfolio included $468.0 million of commercial real estate loans and commercial non-mortgage loans, equal to approximately 41.4% of our total loan portfolio. We have been increasing, and intend to continue to increase, our origination of these types of loans throughout the remainder of 2009. The credit risk related to these types of loans is considered to be greater than the risk related to one- to four-family residential loans because the repayment of commercial real estate loans and commercial non-mortgage loans typically is dependent on the successful operation and income stream of the borrowers’ business and the real estate securing the loans as collateral, which can be significantly affected by economic conditions.

Several of our borrowers have more than one commercial real estate loan outstanding with us, although our loan policy limits loans to one borrower or group of affiliated borrowers to $20 million. Consequently, an adverse development with respect to one loan or one credit relationship can expose us to significantly greater risk of loss compared to an adverse development with respect to an one- to four-family residential mortgage loan. Finally, if we foreclose on a commercial real estate loan, our holding period for the collateral, if any, typically is longer than for one- to four-family residential mortgage loans because there are fewer potential purchasers of the collateral. Since we plan to continue to increase our originations of these loans, it may be necessary to increase the level of our allowance for loan losses due to the increased risk characteristics associated with these types of loans. Any increase to our allowance for loan losses would adversely affect our earnings. In addition, these loans generally carry larger balances to single borrowers or related groups of borrowers than one- to four-family loans. Any delinquent payments or the failure to repay these loans could hurt our earnings.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Not applicable.

Item 3. Defaults upon Senior Securities

Not applicable.

Item 4. Submission of Matters to a Vote of Security Holders

Not applicable.

Item 5. Other Information

Not applicable.

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Item 6. Exhibits

Exhibit
Number		Description
	3.1	Charter of the Registrant (incorporated herein by reference to Exhibit 3.1 to the Registrant’s Registration Statement on Form S-1, as amended (File No. 0-24566-01))
	3.2	Bylaws of the Registrant (incorporated herein by reference to Exhibit 3.2 to the Registrant’s Current Report on Form 8-K filed with the SEC on November 24, 2008 (File No. 001-32992))
	4.1	Certificate of Registrant’s Common Stock (incorporated herein by reference to Exhibit 4.0 to the Registrant’s Registration Statement on Form S-1, as amended (File No. 0-24566-01))
	10.1	Employment Agreement by and between the Registrant and Garold R. Base (incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on October 4, 2006 (File No. 001-32992))
	10.2	Amendment to Employment Agreement by and between the Registrant and Garold R. Base (incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on January 10, 2008 (File No. 001-32992))
	10.3	Employment Agreement by and between ViewPoint Bank, the Registrant’s wholly owned operating subsidiary, and Garold R. Base (incorporated herein by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed with the SEC on October 4, 2006 (File No. 001-32992))
	10.4	Amendment to Employment Agreement by and between ViewPoint Bank, the Registrant’s wholly owned operating subsidiary, and Garold R. Base (incorporated herein by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed with the SEC on January 10, 2008 (File No. 001-32992))
	10.5	Amendment to Employment Agreement by and between ViewPoint Bank, the Registrant’s wholly owned operating subsidiary, and Garold R. Base (incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on March 6, 2008 (File No. 001-32992))
	10.6	Form of Severance Agreement (incorporated herein by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed with the SEC on October 1, 2007 (File No. 001-32992))
	10.7	Summary of Director Board Fee Arrangements (incorporated herein by reference to Exhibit 3.2 to the Registrant’s Quarterly Report on Form 10-Q filed with the SEC on August 9, 2007 (File No. 001-32992))
	10.8	ViewPoint Bank Deferred Compensation Plan (incorporated herein by reference to Exhibit 10.7 to the Registrant’s Registration Statement on Form S-1, as amended (File No. 0-24566-01))

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Exhibit
Number		Description
	10.9	Amended and Restated ViewPoint Bank Supplemental Executive Retirement Plan (incorporated herein by reference to Exhibit 10.8 to the Registrant’s Registration Statement on Form S-1, as amended (File No. 0-24566-01))
	10.10	ViewPoint Bank 2007 Executive Officer Incentive Plan (incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on July 31, 2007 (File No. 001-32992))
	10.11	Amendment to ViewPoint Bank 2007 Executive Officer Incentive Plan (incorporated herein by reference to the Registrant’s Current Report on Form 8-K filed with the SEC on March 6, 2008 (File No. 001-32992))
	10.12	Form of promissory note between ViewPoint Financial Group and four lenders, totaling $10 million (incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on October 22, 2009 (File No. 001-32992))
	11	Statement regarding computation of per share earnings (See Note 3 of the Condensed Notes to Unaudited Consolidated Interim Financial Statements included in this Form 10-Q).
	31.1	Rule 13a — 14(a)/15d — 14(a) Certification (Chief Executive Officer)
	31.2	Rule 13a — 14(a)/15d — 14(a) Certification (Chief Financial Officer)
	32	Section 1350 Certifications

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SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

ViewPoint Financial Group (Registrant)
Date: November 3, 2009	/s/ Garold R. Base
	Garold R. Base
	President and Chief Executive Officer (Duly Authorized Officer)
Date: November 3, 2009	/s/ Pathie E. McKee
	Pathie E. McKee
	Executive Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer)

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EXHIBIT INDEX

Exhibits:
	31.1	Certification of the Chief Executive Officer
	31.2	Certification of the Chief Financial Officer
	32	Section 1350 Certifications

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